SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
------------------------------------------------
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)
(626) 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 (for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at August 12, 1998
- --------------------------------------- --------------------------------------
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 1
Consolidated Statements of Income -- Three, Six and
Twelve Months Ended June 30, 1998, and 1997 2
Consolidated Statements of Comprehensive Income --
Three, Six and Twelve Months Ended June 30, 1998,
and 1997 2
Consolidated Balance Sheets -- June 30, 1998,
December 31, 1997, and June 30, 1997 3
Consolidated Statements of Cash Flows --
Three, Six and Twelve Months Ended
June 30, 1998, and 1997 5
Consolidated Statements of Retained Earnings --
Three, Six and Twelve Months Ended
June 30, 1998, and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 28
Part II. Other Information:
Item 1. Legal Proceedings 41
Item 6. Exhibits and Reports on Form 8-K 45
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (SCE, a California corporation) and its subsidiaries
as of June 30, 1998, December 31, 1997, and June 30, 1997, and the related
consolidated statements of income, comprehensive income, retained earnings and
cash flows for each of the three-, six- and twelve-month periods ended June 30,
1998, and 1997. These financial statements are the responsibility of SCE's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SCE and its subsidiaries as of
June 30, 1998, December 31, 1997, and June 30, 1997, and the results of their
operations and their cash flows for each of the three-, six- and twelve-month
periods ended June 30, 1998, and 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
August 5, 1998
1
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to ultimate consumers $1,531,452 $1,763,003 $3,077,286 $3,391,417 $7,325,286 $7,438,311
Sales to power exchange 303,685 -- 303,685 -- 303,685 --
Other 87,330 80,992 164,187 148,016 330,138 313,096
- ------------------------------------------------------------------------------------------------------------------
Operating revenue 1,922,467 1,843,995 3,545,158 3,539,433 7,959,109 7,751,407
- -------------------------------------------------------------------------------------------------------------------
Fuel 59,184 146,190 177,868 290,806 768,534 679,964
Purchased power-- contracts 525,355 587,660 1,101,862 1,216,335 2,739,529 2,834,041
Purchased power-- power exchange 343,784 -- 343,784 -- 343,784 --
Provisions for regulatory
adjustment clauses-- net 485,492 (3,850) 247,474 (92,023) (71,438) (214,249)
Other operating expenses 400,055 294,670 687,629 535,398 1,368,546 1,102,402
Maintenance 98,492 116,699 200,362 212,576 393,330 391,258
Depreciation, decommissioning and
amortization 375,919 311,485 758,898 617,068 1,381,705 1,163,688
Income taxes 99,158 133,585 224,762 228,881 577,913 565,255
Property and other taxes 31,246 31,344 70,763 70,220 129,582 157,939
Gains on sale of utility plant (708,154) (3,065) (708,149) (2,836) (709,163) (4,810)
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,710,531 1,614,718 3,105,253 3,076,425 6,922,322 6,675,488
- -------------------------------------------------------------------------------------------------------------------
Operating income 211,936 229,277 439,905 463,008 1,036,787 1,075,919
- -------------------------------------------------------------------------------------------------------------------
Provision for rate phase-in plan -- (11,381) -- (22,690) (25,796) (59,033)
Allowance for equity funds
used during construction 2,908 1,897 5,690 3,900 9,440 12,012
Interest and dividend income 15,411 9,303 33,723 16,159 62,200 36,384
Other nonoperating income
(deductions)-- net (4,310) 5,849 (7,900) 10,498 (41,434) 2,132
- -------------------------------------------------------------------------------------------------------------------
Total other income (deductions)-- net 14,009 5,668 31,513 7,867 4,410 (8,505)
- -------------------------------------------------------------------------------------------------------------------
Income before interest expense 225,945 234,945 471,418 470,875 1,041,197 1,067,414
- -------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 91,511 90,556 215,868 181,744 379,716 370,691
Other interest expense 16,090 18,283 34,109 45,774 89,414 82,957
Allowance for borrowed funds used
during construction (1,979) (2,284) (3,871) (4,696) (8,388) (9,796)
Capitalized interest (125) (735) (282) (2,055) (626) (3,597)
- -------------------------------------------------------------------------------------------------------------------
Total interest expense-- net 105,497 105,820 245,824 220,767 460,116 440,255
- -------------------------------------------------------------------------------------------------------------------
Net income 120,448 129,125 225,594 250,108 581,081 627,159
Dividends on preferred stock 6,648 7,372 13,407 15,971 26,925 33,168
- -------------------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 113,800 $ 121,753 $ 212,187 $ 234,137 $ 554,156 $ 593,991
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net income $120,448 $129,125 $225,594 $250,108 $581,081 $627,159
Unrealized gains on securities-- net 1,332 7,205 12,442 14,448 12,635 18,550
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income $121,780 $136,330 $238,036 $264,556 $593,716 $645,709
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Transmission and distribution:
<S> <C> <C> <C>
Utility plant, at original cost, subject to
cost-based rate regulation $11,454,066 $11,213,352 $11,001,103
Accumulated provision for depreciation (5,796,847) (5,573,742) (5,297,441)
Construction work in progress 481,192 492,614 442,489
- -------------------------------------------------------------------------------------------------------------------
6,138,411 6,132,224 6,146,151
- -------------------------------------------------------------------------------------------------------------------
Generation:
Utility plant, at original cost,
not subject to cost-based rate regulation 2,021,636 9,522,127 9,485,713
Accumulated provision for depreciation and
decommissioning (1,065,888) (4,970,137) (4,635,123)
Construction work in progress 86,043 100,283 86,551
Nuclear fuel, at amortized cost 133,070 154,757 174,216
- -------------------------------------------------------------------------------------------------------------------
1,174,861 4,807,030 5,111,357
- -------------------------------------------------------------------------------------------------------------------
Total utility plant 7,313,272 10,939,254 11,257,508
- -------------------------------------------------------------------------------------------------------------------
Nonutility property -- less accumulated
provision for depreciation of $24,990, $24,730
and $23,942 at respective dates 66,251 67,869 68,054
Nuclear decommissioning trusts 2,056,275 1,831,460 1,670,747
Other investments 237,627 171,399 137,882
- -------------------------------------------------------------------------------------------------------------------
Total other property and investments 2,360,153 2,070,728 1,876,683
- -------------------------------------------------------------------------------------------------------------------
Cash and equivalents 830,942 962,272 239,381
Receivables, including unbilled revenue, less
allowances of $20,754, $26,453 and $21,833
for uncollectible accounts at respective dates 1,030,792 906,388 982,010
Fuel inventory 50,965 58,059 63,046
Materials and supplies, at average cost 116,678 132,980 151,986
Accumulated deferred income taxes-- net 313,360 123,146 193,749
Regulatory balancing accounts-- net 50,234 193,311 --
Prepayments and other current assets 15,140 93,098 17,278
- -------------------------------------------------------------------------------------------------------------------
Total current assets 2,408,111 2,469,254 1,647,450
- -------------------------------------------------------------------------------------------------------------------
Unamortized nuclear investment-- net 2,561,325 -- --
Unamortized debt issuance and reacquisition
expense 362,125 359,304 332,627
Rate phase-in plan -- 3,777 29,119
Income tax-related deferred charges 1,559,336 1,543,380 1,615,930
Other deferred charges 816,595 673,601 541,918
- -------------------------------------------------------------------------------------------------------------------
Total deferred charges 5,299,381 2,580,062 2,519,594
- -------------------------------------------------------------------------------------------------------------------
Total assets $17,380,917 $18,059,298 $17,301,235
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Common shareholder's equity:
<S> <C> <C> <C>
Common stock (434,888,104 shares
outstanding at each date) $2,168,054 $2,168,054 $2,168,054
Additional paid-in capital 334,032 334,031 177,873
Accumulated other comprehensive income 60,465 48,023 47,830
Retained earnings 1,078,982 1,407,834 2,554,389
- ----------------------------------------------------------------------------------------------------------------
3,641,533 3,957,942 4,948,146
- ----------------------------------------------------------------------------------------------------------------
Preferred stock:
Not subject to mandatory redemption 128,755 183,755 183,755
Subject to mandatory redemption 256,700 275,000 275,000
Long-term debt 5,540,461 6,144,597 4,498,782
- ----------------------------------------------------------------------------------------------------------------
Total capitalization 9,567,449 10,561,294 9,905,683
- ----------------------------------------------------------------------------------------------------------------
Other long-term liabilities 495,703 479,637 506,066
- ----------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 610,332 692,875 576,470
Short-term debt 121,555 322,028 145,244
Accounts payable 396,363 406,704 382,952
Accrued taxes 895,472 509,270 650,332
Accrued interest 94,448 85,406 97,525
Dividends payable 92,893 95,146 171,752
Regulatory balancing accounts-- net -- -- 86,516
Deferred unbilled revenue and other
current liabilities 1,049,308 931,856 772,731
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 3,260,371 3,043,285 2,883,522
- ----------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes-- net 2,956,964 2,939,471 3,000,988
Accumulated deferred investment tax credits 308,380 326,728 336,966
Customer advances and other deferred credits 790,980 708,745 668,010
- ----------------------------------------------------------------------------------------------------------------
Total deferred credits 4,056,324 3,974,944 4,005,964
- ----------------------------------------------------------------------------------------------------------------
Minority interest 1,070 138 --
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $17,380,917 $18,059,298 $17,301,235
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 120,448 $ 129,125 $ 225,594 $ 250,108 $ 581,081 $ 627,159
Adjustments for non-cash items:
Depreciation, decommissioning and
amortization 375,919 311,485 758,898 617,068 1,381,705 1,163,686
Other amortization 46,416 19,817 72,572 31,981 121,954 69,323
Rate phase-in plan -- 10,894 3,777 21,584 29,119 54,590
Deferred income taxes and
investment tax credits (308,917) (51,573) (207,025) (8,019) (135,627) (5,939)
Other long-term liabilities 1,333 54,018 16,066 82,141 (10,363) 172,159
Regulatory asset related to sale of
utility plant (9,950) -- (107,991) -- (107,991) --
Net gains on sale of utility plant (702,972) -- (640,339) -- (640,339) --
Other-- net (36,211) (46,314) (54,333) (67,357) (195,596) (225,899)
Changes in working capital:
Receivables (279,473) (149,887) (124,404) (60,927) (48,782) (327,955)
Regulatory balancing accounts 444,844 (19,989) 143,077 (94,972) (136,750) (140,312)
Fuel inventory, materials and supplies 17,099 (2,948) 23,396 11,714 47,389 42,042
Prepayments and other current assets 39,299 42,516 77,958 87,859 2,138 12,207
Accrued interest and taxes 348,291 82,414 395,244 169,806 242,063 176,946
Accounts payable and other
current liabilities 226,755 40,673 107,111 (62,413) 289,988 63,188
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 282,881 420,231 689,601 978,573 1,419,989 1,681,195
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt repaid (150,014) (50) (604,455) (200,055) (1,320,545) (198,938)
Rate reduction notes issued -- -- -- -- 2,444,127 --
Rate reduction notes repaid (65,354) -- (82,465) -- (77,303) --
Preferred stock redeemed (73,300) (100,000) (73,300) (100,000) (73,300) (100,000)
Nuclear fuel financing-- net (10,248) (13,092) (18,871) (7,061) (31,950) 40,199
Short-term debt financing-- net (223,686) 10,418 (200,473) (84,905) (23,689) (247,096)
Capital transferred -- -- -- -- 153,000 --
Dividends paid (451,938) (112,525) (553,022) (298,142) (2,126,825) (693,725)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (974,540) (215,249) (1,532,586) (690,163) (1,056,485) (1,199,560)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and plant (169,068) (132,239) (337,046) (283,646) (738,720) (559,151)
Proceeds from sale of plant 1,115,238 -- 1,145,039 -- 1,145,039 --
Funding of nuclear decommissioning
trusts (37,198) (46,684) (76,881) (74,573) (156,064) (150,100)
Unrealized gain on securities-- net 1,332 7,205 12,442 14,448 12,635 18,550
Other-- net (1,178) (17,166) (31,899) (25,200) (34,833) (66,598)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities 909,126 (188,884) 711,655 (368,971) 228,057 (757,299)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and equivalents 217,467 16,098 (131,330) (80,561) 591,561 (275,664)
Cash and equivalents, beginning
of period 613,475 223,283 962,272 319,942 239,381 515,045
- -------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $ 830,942 $ 239,381 $ 830,942 $ 239,381 $ 830,942 $ 239,381
- -------------------------------------------------------------------------------------------------------------------
Cash payments for interest and taxes:
Interest-- net of amounts capitalized $ 50,859 $ 96,673 $ 125,667 $ 176,300 $ 291,503 $ 351,595
Taxes 416 17,217 426 17,472 420,956 379,376
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $1,408,330 $2,603,439 $1,407,834 $2,665,612 $2,554,389 $2,680,388
Net income 120,448 129,125 225,594 250,108 581,081 627,159
Dividends declared on common stock (442,304) (170,803) (537,868) (345,360) (2,021,547) (719,989)
Dividends declared on preferred stock (6,648) (7,372) (13,407) (15,971) (26,925) (33,168)
Stock option appreciation (844) -- (3,171) -- (3,171) --
Reacquired capital stock expense and other -- -- -- -- (4,845) (1)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $1,078,982 $2,554,389 $1,078,982 $2,554,389 $1,078,982 $2,554,389
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Accounting Principles
Southern California Edison Company's (SCE) 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). As a result of industry restructuring legislation enacted by
the State of California and a related change in the application of accounting
principles for rate-regulated enterprises adopted by the Financial Accounting
Standards Board's Emerging Issues Task Force, during the third quarter of 1997,
SCE began accounting for its investment in generation facilities in accordance
with accounting principles applicable to enterprises in general, and SCE's
balance sheets display a separate caption for its investments in generation.
Application of accounting principles for enterprises in general to SCE's
generation assets did not result in any adjustment of their carrying value;
however, SCE's nuclear investments were reclassified as a regulatory asset in
second quarter 1998.
Competition Transition Charge (CTC)
Beginning January 1, 1998, a non-bypassable charge is being billed to all
customers, which provides SCE the opportunity to recover its costs to transition
to a competitive market.
Consolidation Policy
The consolidated financial statements include SCE and its subsidiaries.
Intercompany transactions have been eliminated.
Estimates
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 to the Consolidated Financial Statements,
respectively.
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.
Nature of Operations
SCE's 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 4.3 million customers in Central and Southern California.
Effective April 1, 1998, SCE sells all electric energy produced to the Power
Exchange (PX), as mandated by state legislation. SCE also purchases electricity
from the PX to supply to its customers. SCE operates in a highly regulated
environment in which it has an obligation to deliver electric service to
customers in return for an exclusive franchise within its service territory.
This regulatory environment is changing, as further discussed in Note 2 to the
Consolidated Financial Statements.
7
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nuclear
CPUC-authorized rate phase-in plans, which deferred collection of revenue for
each unit at the Palo Verde Nuclear Generating Station during the first four
years of operation, ended in February 1996, September 1996 and January 1998 for
Units 1, 2 and 3, respectively.
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 non-bypassable customer rates.
In April 1996, the CPUC authorized 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. Operating costs, including nuclear fuel and nuclear fuel
financing costs, and incremental capital expenditures at San Onofre Units 2 and
3 are recovered through an incentive pricing plan which allows SCE to receive
about 4(cent) 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 accelerated plant recovery and the incentive pricing plan
became part of the 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 an acceleration of the recovery of SCE's
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. The accelerated plant recovery, as well as 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 became 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.
In second quarter 1998, SCE's nuclear investments were reclassified as a
regulatory asset. See discussion under "Accounting for Generation-Related
Assets" in Note 2 to the Consolidated Financial Statements.
Reclassifications
Certain prior-period amounts were reclassified to conform to the June 30, 1998,
financial statement presentation.
Regulatory Balancing Accounts
Prior to January 1, 1998, the differences between CPUC-authorized and actual
base-rate revenue from kilowatt-hour sales and CPUC-authorized and actual energy
costs were accumulated in balancing accounts until they were refunded to, or
recovered from, utility customers through authorized rate adjustments (with
interest). On January 1, 1998, the balances in these balancing accounts were
transferred to a transition cost balancing account. Also, beginning January 1,
1998, the difference between generation-related revenue and generation-related
costs is being accumulated in the transition cost balancing account, effectively
eliminating all other balancing accounts except those used to assist in the
administration of public purpose funds. These transition costs are being
recovered from utility customers (with interest) through the CTC mechanism. For
further details, see discussion under California Electric Utility Industry
Restructuring in Note 2 to the Consolidated Financial Statements. Income tax
effects on all balancing account changes are deferred.
8
<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 were
credited to the transition cost 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
were $0.5 million, $0.9 million and $28 million for the three, six and twelve
months ended June 30, 1998, respectively, and $7 million, $12 million and $24
million for the three, six and twelve months ended June 30, 1997, respectively.
Revenue
Operating revenue includes amounts for services rendered but unbilled at the end
of each period. Effective April 1, 1998, operating revenue also includes amounts
for sales to the PX.
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 3.5%, 5.5% and 5.9%
for the three, six and twelve months ended June 30, 1998, respectively, and
5.3%, 5.3% and 4.9% for the three, six and twelve months ended June 30, 1997,
respectively.
During the third quarter of 1997, SCE discontinued accounting for its investment
in generation facilities using accounting principles applicable to
rate-regulated enterprises and began accounting for such investment using
accounting principles applicable to enterprises in general. The carrying value
of SCE's generation investment was unaffected by this change. However, the
nuclear investments were reclassified as a regulatory asset in the second
quarter 1998.
Note 2. Regulatory Matters
California Electric Utility Industry Restructuring
Restructuring Decision -- The CPUC's December 1995 decision on restructuring
California's electric utility industry started the transition to a new market
structure; competition and customer choice began on April 1, 1998. Key elements
of the CPUC's restructuring decision included: creation of the PX and
independent system operator (ISO); availability of customer choice for
electricity supply and certain billing and metering services; 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 the CTC.
Restructuring Statute -- In September 1996, the State of California enacted
legislation to provide a transition to a competitive market structure. The
Statute substantially adopted 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
are being recovered through the terms of their contracts while most of the
remaining transition costs will be recovered through 2001. The Statute also
9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included provisions to finance a portion of the stranded costs that residential
and small commercial customers would have paid between 1998 and 2001, which
allowed SCE to reduce rates by at least 10% to these customers, effective
January 1, 1998. The Statute included 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 during the 1998-2001 transition period. In addition, the
Statute mandated the implementation of the CTC that provides utilities the
opportunity to recover costs made uneconomic by electric utility restructuring.
Finally, the Statute contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related expenses. A
voter initiative, known as California Proposition 9, seeks to overturn major
portions of the Statute. A more detailed discussion of Proposition 9 is in Note
10 to the Consolidated Financial Statements.
Rate Reduction Notes -- In December 1997, after receiving approval from both the
CPUC and the California Infrastructure and Economic Development Bank, a limited
liability company created by SCE issued approximately $2.5 billion of rate
reduction notes. Residential and small commercial customers, whose 10% rate
reduction began January 1, 1998, are repaying the notes over the expected
10-year term through non-bypassable charges based on electricity consumption.
For further details, see the discussion under Long-Term Debt in Note 3 to the
Consolidated Financial Statements. A voter initiative on the November 1998
ballot seeks to prohibit the collection of these non-bypassable charges, or if
the charges are found enforceable by a court, require SCE to offset such charges
with an equal credit to customers. See Note 10 to the Consolidated Financial
Statements.
Rate-setting -- Beginning January 1, 1998, SCE's rates were unbundled into
separate charges for energy, transmission, distribution, the CTC, public benefit
programs and nuclear decommissioning. The transmission component is being
collected through FERC-approved rates, subject to refund. In August 1997, the
CPUC issued a decision which adopted a methodology for determining CTC
residually (see CTC discussion below) and adopted SCE's revenue requirement
components for public benefit programs and nuclear decommissioning. The decision
also adjusted SCE's proposed distribution revenue requirement (see PBR
discussion below) by reallocating $76 million of it annually to other functions
such as generation and transmission. Under the decision, SCE will be able to
recover most of the reallocated amount through market revenue, other rate-making
mechanisms or operation and maintenance contracts with the new owners of the
divested generation plants.
PX and ISO -- On March 31, 1998, both the PX and ISO began accepting bids and
schedules for April 1, 1998, when the ISO took over operational control of the
transmission system. The hardware and software systems being utilized by the PX
and ISO in their bidding and scheduling activities were financed through loans
of $300 million (backed by utility guarantees) obtained by restructuring trusts
established by a CPUC order in 1996. The PX and ISO will repay the trusts' loans
through charges for service to future PX and ISO customers. The restructuring
implementation costs related to the start-up and development of the PX, which
are paid by the utilities, will be recovered from all retail customers over the
four-year transition period. SCE's share of the charge is $45 million, plus
interest and fees. SCE's share of the ISO's start-up and development costs
(approximately $16 million per year), will be paid over a 10-year period.
Direct Customer Access -- Effective April 1, 1998, customers are now able to
choose to remain utility customers with either bundled electric service or an
hourly PX pricing option from SCE (which is purchasing its power through the
PX), or choose direct access, which means the customer can contract directly
with either independent power producers or energy service providers (ESPs) such
as power brokers, marketers and aggregators. Additionally, all
investor-owned-utility customers are paying the CTC whether or not they choose
to buy power through SCE. Electric utilities are continuing to provide the core
distribution service of delivering energy through their distribution system
regardless of a customer's choice of electricity supplier. The CPUC is
continuing to regulate the prices and service obligations related to
distribution services.
10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Cycle Services -- Effective April 1, 1998, customers have options
regarding metering, billing and related services (referred to as revenue cycle
services) that have been provided by California's investor-owned utilities. Now
ESPs can provide their customers with one consolidated bill for their services
and the utility's services, request the utility to provide a consolidated bill
to the customer or elect to have both the ESP and the utility bill the customer
for their respective charges. In addition, customers with maximum demand above
20 kW (primarily industrial and medium 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 customers who elect to have ESPs provide
them with revenue cycle services, and the amount of any such credit, the CPUC
has indicated that it is appropriate to provide such customers with the
utility's avoided costs net of costs incurred by the utility to facilitate the
provision of such services by a firm other than the utility.
PBR -- In September 1996, the CPUC adopted a transmission and distribution (T&D)
PBR mechanism for SCE which began on January 1, 1997. Beginning in April 1998,
the transmission portion was separated from PBR and subject to ratemaking under
the rules of the FERC. The distribution-only PBR will extend through December
2001. Key elements of 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.
The CPUC is considering unbundling SCE's cost of capital based on major utility
function. On May 8, 1998, SCE filed an application on this issue. A CPUC
decision is expected in early 1999.
Beginning in 1998, SCE's hydroelectric plants are operating under a PBR-type
mechanism. The mechanism sets the hydroelectric revenue requirement and
establishes a formula for extending it through the duration of the electric
industry restructuring transition period, or until market valuation of the
hydroelectric facilities, whichever occurs first. The mechanism provides that
power sales revenue from hydroelectric facilities in excess of the hydroelectric
revenue requirement be credited against the costs to transition to a competitive
market (see CTC discussion below).
Divestiture -- In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its gas- and oil-fueled generation
plants. Under this proposal, SCE would continue to operate and maintain the
divested power plants for at least two years following their sale, as mandated
by the restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be impacted
by divestiture-related job reductions. In September 1997, the CPUC approved
SCE's proposal to auction the 12 plants.
SCE has sold all 12 of its gas- and oil-fueled generation plants. Transfer of
ownership of 11 plants was completed by June 30, 1998, and transfer of ownership
of the 12th plant took place on July 8, 1998. The total sales price of the 12
plants was $1.2 billion, over $500 million more than the combined book value.
Net proceeds of the sales were used to reduce stranded costs, which otherwise
were expected to be collected through the CTC mechanism.
CTC -- The costs to transition to a competitive market are being recovered
through a non-bypassable CTC. This charge applies to all customers who were
using or began using utility services on or after the CPUC's December 20, 1995,
decision date. The CTC is being determined residually by subtracting other rate
components for the PX, T&D, nuclear decommissioning and public benefit programs
from the frozen rate levels. SCE currently estimates its transition costs to be
approximately $10.6 billion (1998 net present value) from 1998 through 2030.
This estimate is based on incurred costs, 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 $6.4
billion from SCE's qualifying
11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facilities contracts, which are the direct result of prior legislative and
regulatory mandates, and $4.2 billion from costs pertaining to certain
generating assets (successful completion of the sale of SCE's gas-fired
generating plants has reduced this estimate of transition costs for SCE-owned
generation) 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 Units 2 and 3 and the Palo Verde units (as discussed in
Note 1 to the Consolidated Financial Statements), and certain other costs. This
issue was separated into two phases; Phase 1 addressed the rate-making issues
and Phase 2 the quantification issues.
Major elements of the CPUC's CTC Phase 1 and Phase 2 decisions were: the
establishment of a transition cost balancing account and annual transition cost
proceedings; the setting of a market rate forecast for 1998 transition costs;
the requirement that generation-related regulatory assets be amortized ratably
over a 48-month period; the establishment of calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the end of
the rate freeze; and the reduction of SCE's authorized rate of return on certain
assets eligible for transition cost recovery (primarily fossil- and
hydroelectric-generation related assets) beginning July 1997, five months
earlier than anticipated. SCE has filed an application for rehearing on the 1997
rate of return issue.
Accounting for Generation-Related Assets -- If the CPUC's electric industry
restructuring plan continues as described above, SCE would be allowed to recover
its CTC through non-bypassable charges to its distribution customers (although
its investment in certain generation assets would be subject to a lower
authorized rate of return). During the third quarter of 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
investment in generation facilities based on a consensus reached by the
Financial Accounting Standards Board's Emerging Issues Task Force (EITF). The
financial reporting effect of this discontinuance was to segregate these assets
on the balance sheet; the EITF consensus did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
EITF did not specifically address the application of asset impairment standards
to these assets. SCE has retained these assets on its balance sheet because the
legislation and restructuring plan referred to above make probable their
recovery through a non-bypassable CTC to distribution customers. The regulatory
assets relate primarily to the recovery of accelerated income tax benefits
previously flowed through to customers, purchased power contract termination
payments and unamortized losses on reacquired debt. The consensus reached by the
EITF also permits the recording of new generation-related regulatory assets
during the transition period that are probable of recovery through the CTC
mechanism.
During the second quarter of 1998, additional guidance was developed relating to
the application of asset impairment standards to these assets. Using this
guidance has resulted in SCE reducing its remaining nuclear plant investment by
$2.6 billion and recording a regulatory asset on its balance sheet for the same
amount. For this impairment assessment, the fair value of the investment was
calculated by discounting future net cash flows. This reclassification had no
effect on SCE's results of operations.
If during the transition period events were to occur that made the recovery of
generation-related regulatory assets no longer probable, SCE would be required
to write off the remaining balance of such assets (approximately $2.4 billion,
after tax, at June 30, 1998) as a one-time, non-cash charge against earnings.
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.
12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Financial Instruments
Cash Equivalents
Cash and equivalents include tax-exempt investments ($632 million at June 30,
1998, $936 million at December 31, 1997, and $215 million at June 30, 1997), and
time deposits and other investments ($199 million at June 30, 1998, $26 million
at December 31, 1997, and $24 million at June 30, 1997) with maturities of three
months or less.
Derivative 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.
SCE uses the hedge accounting method to record its derivative financial
instruments, except for gas call options. Hedge accounting requires an
assessment that the transaction reduces risk, that the derivative be designated
as a hedge at the inception of the derivative contract, and that the changes in
the market value of a hedge move in an inverse direction to the item being
hedged. Under hedge accounting, the derivative itself is not recorded on SCE's
balance sheet. Mark-to-market accounting would be used if the hedge accounting
criteria were not met. Interest rate differentials and amortization of premiums
for interest rate caps are recorded as adjustments to interest expense. If the
derivatives were terminated before the maturity of the corresponding debt
issuance, the realized gain or loss on the transaction would be amortized over
the remaining term of the debt.
SCE uses the mark-to-market accounting method for its gas call options. Gains
and losses from monthly changes in market prices are recorded as income or
expense. However, the costs of the options and the market price changes are
recovered through the transition cost balancing account. As a result, the
mark-to-market gains or losses have no effect on earnings.
SCE has gas call options that mitigate its exposure to increases in natural gas
prices. Increases in natural gas prices tend to increase the price of
electricity purchased from the PX. The options cover various periods from 1998
through 2001.
Interest rate swaps and caps are used to reduce the potential impact of interest
rate fluctuations on floating-rate long-term debt. At the balance sheet dates of
June 30, 1998, December 31, 1997, and June 30, 1997, SCE had an interest rate
swap agreement which fixed the interest rate at 5.585% for $196 million of debt
due 2008; it expires February 28, 2008. The interest rate swap agreement
requires the parties to pledge collateral according to bond rating and market
interest rate changes. At June 30, 1998, SCE had pledged $22 million as
collateral due to a decline in market interest rates. SCE is exposed to credit
loss in the event of nonperformance by the counterparty to the agreement, but
does not expect the counterparty to fail to meet its obligations. At June 30,
1997, SCE had an interest rate cap agreement which fixed the interest rate at 6%
for $30 million of debt due 2027; it expired July 1, 1997.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which will be effective January 1,
2000, requires all derivatives to be recognized on the balance sheet at fair
value. Gains or losses from changes in fair value would be recognized in
earnings in the period of change unless the derivative is designated as a
hedging instrument. Gains or losses from hedges of a forecasted transaction or
foreign currency exposure would be reflected in other comprehensive income.
Gains or losses from hedges of a recognized asset or liability or a firm
commitment would be reflected in earnings for the ineffective portion of the
hedge. SCE anticipates that most of its derivatives under the new standard would
qualify for hedge accounting. SCE expects to
13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recover in rates any market price changes from its derivatives that could
potentially affect earnings. Accordingly, implementation of this new standard is
not expected to affect earnings.
Fair Value of Financial Instruments
Fair values of financial instruments were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Cost Fair Cost Fair Cost Fair
Basis Value Basis Value Basis Value
- -------------------------------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Decommissioning trusts $1,448 $2,056 $1,371 $1,831 $1,292 $1,671
Equity investments 9 110 9 90 11 91
Gas call options 44 56 34 34 -- --
Financial liabilities:
DOE decommissioning and
decontamination fees 50 44 50 43 54 45
Interest rate hedges -- 25 -- 24 -- 17
Long-term debt 5,540 5,708 6,145 6,456 4,499 4,672
Preferred stock subject to
mandatory redemption 257 273 275 293 275 288
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Financial assets are carried at their fair value based on quoted market prices
for decommissioning trusts and equity investments, and on financial models for
gas call options. 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 interest rate
cap; and discounted future cash flows for U.S. Department of Energy (DOE)
decommissioning and decontamination fees. Due to their short maturities, amounts
reported for cash equivalents and short-term debt approximate fair value.
Gross unrealized holding gains on financial assets were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Decommissioning trusts:
<S> <C> <C> <C>
Municipal bonds $163 $131 $ 108
Stocks 311 190 198
U.S. government issues 129 91 68
Short-term and other 5 48 5
- -------------------------------------------------------------------------------------------------------------------
608 460 379
Equity investments 101 81 80
Gas call options 12 -- --
- -------------------------------------------------------------------------------------------------------------------
Total $721 $541 $459
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no unrealized holding losses on financial assets for the periods
presented.
Investments
Net unrealized gains (losses) on equity investments are recorded as a separate
component of shareholder's equity under the caption "Other comprehensive
income." Unrealized gains and losses on decommissioning trust funds are recorded
in the accumulated provision for decommissioning.
All investments are classified as available-for-sale.
14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 1998, are: 1999 -- $610 million; 2000 --
$569 million; 2001 -- $648 million; 2002 -- $246 million; and 2003 -- $572
million.
In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE
is the sole member, issued approximately $2.5 billion of rate reduction notes to
Bankers Trust Company of California, as certificate trustee for the California
Infrastructure and Economic Development Bank Special Purpose Trust SCE-1
(Trust), which is a special purpose entity established by the State of
California. The terms of the rate reduction notes generally mirror the terms of
the pass-through certificates issued by the Trust, which are known as rate
reduction certificates. The proceeds of the rate reduction notes were used by
the SPE to purchase from SCE an enforceable right known as transition property.
Transition property is a current property right created pursuant to the
restructuring legislation and a financing order of the CPUC and consists
generally of the right to be paid a specified amount from a non-bypassable
tariff levied on residential and small commercial customers. Notwithstanding the
legal sale of the transition property by SCE to the SPE, the amounts reflected
as assets on SCE's balance sheet have not been reduced by the amount of the
transition property sold to the SPE, and the liabilities of the SPE for the rate
reduction notes are for accounting purposes reflected as long-term liabilities
on the consolidated balance sheet of SCE. SCE used the proceeds from the sale of
the transition property to retire debt and equity securities. The rate reduction
notes are secured solely by the transition property and certain other assets of
the SPE, and there is no recourse to SCE or Edison International.
Although the SPE is consolidated with SCE in the financial statements, as
required by generally accepted accounting principles, the SPE is legally
separate from SCE, the assets of the SPE are not available to creditors of SCE
or Edison International, and the transition property is legally not an asset of
SCE or Edison International.
A voter initiative, known as California Proposition 9 on the November 1998
ballot, proposes to, among other things, prohibit the collection of any charges
in connection with the financing order for the purpose of making payments on
rate reduction notes. If Proposition 9 is voted into law and is not immediately
overturned or is not stayed pending judicial review of its merits, the
collection of charges necessary to pay the certificates while the litigation is
pending could be precluded, which would adversely affect the certificates and
the secondary market for the certificates, including the pricing, liquidity,
dates of maturity, and weighted-average lives of the certificates. In addition,
if Proposition 9 were to be voted into law and be upheld by the courts, it could
have a further material adverse effect on the certificates and the holders of
the certificates could incur a loss on their investment. A more detailed
discussion is in Note 10 to the Consolidated Financial Statements.
15
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Long-term debt consisted of:
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
First and refunding mortgage bonds:
<S> <C> <C> <C>
1999 - 2026 (5.625% to 7.5%) $1,550 $1,825 $2,525
Rate reduction notes:
1998 - 2007 (5.98% to 6.42%) 2,385 2,463 --
Pollution-control bonds:
1999 - 2027 (5.4% to 7.2% and variable) 1,202 1,202 1,204
Funds held by trustees (2) (2) (2)
Debentures and notes:
1998 - 2006 (5.6% to 8.25%) 870 1,195 1,195
Subordinated debentures:
2044 (8.375%) 100 100 100
Commercial paper for nuclear fuel 73 92 105
Long-term debt due within one year (610) (693) (576)
Unamortized debt discount-- net (28) (37) (52)
- -------------------------------------------------------------------------------------------------------------------
Total $5,540 $6,145 $4,499
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Short-Term Debt
SCE has lines of credit it can use at negotiated or bank index rates. At June
30, 1998, these lines totaled $1.3 billion, with $735 million available for
short-term debt and $515 million available for the long-term refinancing of
certain variable-rate pollution-control debt.
Short-term debt consisted of commercial paper used to finance fuel inventories,
balancing account undercollections and general cash requirements. Commercial
paper outstanding at June 30, 1998, December 31, 1997, and June 30, 1997, was
$196 million, $415 million and $251 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 5.6%, 6.0% and 5.7% at June 30, 1998,
December 31, 1997, and June 30, 1997, respectively.
Note 4. Equity
The CPUC regulates SCE's capital structure, limiting the dividends it may pay
Edison International. At June 30, 1998, SCE had the capacity to pay $1.1 billion
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.
Preferred stock redemption requirements for the five twelve-month periods
following June 30, 1998, are: 1999 through 2001 -- zero; 2002 -- $105 million;
and 2003 -- $9 million.
16
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative preferred stock consisted of:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Dollars in millions, except per share amounts 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
June 30, 1998
---------------------------
Shares Redemption
Outstanding Price
----------- ----------
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 -- -- -- 55 55
- -------------------------------------------------------------------------------------------------------------------
Total $129 $184 $184
- -------------------------------------------------------------------------------------------------------------------
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
7.23 817,000 100.00 82 100 100
- -------------------------------------------------------------------------------------------------------------------
Total $257 $275 $275
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In the second quarter of 1998, 2.2 million shares of Series 5.8% preferred stock
and 183,000 shares of Series 7.23% were redeemed. In the second quarter of 1997,
4 million shares of Series 7.36% preferred stock were redeemed. There were no
preferred stock issuances for the periods presented.
A recently issued accounting standard requires companies to report comprehensive
income starting in 1998. SCE implemented the new accounting standard in the
first quarter of 1998. Implementation of the new standard had no effect on SCE's
results of operations or financial position.
Accumulated other comprehensive income balances were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
In millions 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 59 $ 41 $ 48 $ 33 $ 48 $ 29
Unrealized gains on securities 1 17 20 24 20 31
Tax effect -- (10) (8) (9) (8) (12)
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 60 $ 48 $ 60 $ 48 $ 60 $ 48
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5. Income Taxes
SCE and its subsidiaries will be included in Edison International's consolidated
federal income tax and combined state franchise tax returns. Under income tax
allocation agreements, each subsidiary calculates its own tax liability.
Income tax expense includes the current tax liability from operations and the
change in deferred income taxes during the year. Investment tax credits are
amortized over the lives of the related properties.
17
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 203 $ 227 $ 238
Unrealized gains or losses 326 273 191
Investment tax credits 156 192 198
Regulatory balancing accounts 77 180 123
Decommissioning-related 118 114 107
Other 412 335 342
- -------------------------------------------------------------------------------------------------------------------
Total $1,292 $1,321 $1,199
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property-related $3,102 $3,272 $3,396
Capitalized software costs 156 127 118
Other 678 738 492
- -------------------------------------------------------------------------------------------------------------------
Total $3,936 $4,137 $4,006
- -------------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes-- net $2,644 $2,816 $2,807
- -------------------------------------------------------------------------------------------------------------------
Classification of accumulated deferred income taxes:
Included in deferred credits $2,957 $2,939 $3,001
Included in current assets 313 123 194
</TABLE>
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
In millions June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal $ 331 $ 151 $ 355 $176 $554 $441
State 74 36 78 55 123 132
- -------------------------------------------------------------------------------------------------------------------
405 187 433 231 677 573
- -------------------------------------------------------------------------------------------------------------------
Deferred--federal and state:
Accrued charges 17 (11) (14) (13) (34) (5)
CTC amortization (38) -- (10) -- (10) --
Depreciation (12) (11) (84) (24) (108) (33)
Investment and energy tax credits-- net (12) (5) (16) (10) (26) (21)
Pension reserve (1) (1) (2) (2) (5) 49
Prior year state tax (24) (12) 7 15 (8) --
Regulatory balancing accounts (225) 11 (116) 37 (12) 37
Unbilled revenue (12) (16) 2 (8) 15 (56)
Other (1) (16) 17 (13) 35 (28)
- -------------------------------------------------------------------------------------------------------------------
(308) (61) (216) (18) (153) (57)
Total income tax expense $ 97 $126 $217 $213 $524 $516
- -------------------------------------------------------------------------------------------------------------------
Classification of income taxes:
Included in operating income $ 99 $134 $225 $229 $578 $565
Included in other income (2) (8) (8) (16) (54) (49)
</TABLE>
The composite federal and state statutory income tax rate was 40.551% for the
three, six and twelve months ended June 30, 1998, and 40.551%, for both the
three and six months ended June 30, 1997, and 40.798% for the twelve months
ended June 30, 1997.
18
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The federal statutory income tax rate is reconciled to the effective tax rate
below:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Capitalized software 2.0 (0.7) (1.0) (0.8) (1.0) (0.8)
CTC amortization (17.4) -- (2.2) -- (0.9) --
Depreciation and other 18.6 9.8 12.0 6.4 9.3 5.5
Investment and energy tax credits (2.0) (2.0) (2.0) (2.2) (1.7) (1.9)
State tax-- net of federal deduction 8.2 7.3 6.7 7.6 6.6 7.3
- -------------------------------------------------------------------------------------------------------------------
Effective tax rate 44.4% 49.4% 48.5% 46.0% 47.3% 45.1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6. Employee Compensation and Benefit Plan
Stock Option Plans
On April 16, 1998, Edison International shareholders approved the Edison
International Equity Compensation Plan. The plan replaces the Long-Term
Incentive Compensation Program, consisting of officer, director, and management
plans, which was adopted by Edison International shareholders in 1992. No new
awards will be made under the prior program; however, it will remain in effect
as long as any awards remain outstanding under the prior program.
The prior program participated 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 3.1 million
shares of Edison International common stock are currently outstanding to
officers and senior managers of SCE.
The new plan authorizes the annual issuance of shares equal to one percent of
the issued and outstanding shares of Edison International common stock as of
December 31 of the prior year. This authorization is cumulative so that to the
extent shares are not needed to meet new plan requirements in any year, the
excess authorized shares will carry over to subsequent years until plan
termination. One percent of the issued and outstanding Edison International
common stock on December 31, 1997, was 3.8 million shares. Under the new plan,
options on 1.4 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. For Edison International stock options issued after 1993,
dividend equivalents are subject to reduction unless certain shareholder return
performance criteria are met.
The new plan's stock options have a 10-year term with one-fourth of the total
award vesting after each of the first four years of the award term. The prior
program's 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. If an optionee
retires, dies or is permanently and totally disabled during the vesting period,
the unvested options will vest and be exercisable to the extent of 1/36 (prior
program) or 1/48 (the new plan) 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
19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
SCE measures compensation expense related to stock-based compensation by the
intrinsic value method. Compensation expense recorded under the
stock-compensation program was $1 million, $2 million and $4 million for the
three, six and twelve months ended June 30, 1998, respectively, and $8 million,
$15 million and $21 million for the three, six and twelve months ended June 30,
1997, respectively.
Stock-based compensation expense under the fair-value method of accounting would
have resulted in pro forma earnings of $114 million, $212 million and $553
million for the three, six and twelve months ended June 30, 1998, respectively,
and $123 million, $236 million and $598 million for the three, six and twelve
months ended June 30, 1997, respectively.
The weighted-average fair value of options granted during the twelve months
ended June 30, 1998, and June 30, 1997, was $6.44 per share option and $7.66 per
share option, respectively. The weighted-average remaining life of options
outstanding as of June 30, 1998, December 31, 1997, and June 30, 1997, was 7
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:
12 Months Ended
June 30,
------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Expected life 7 years 7 years
Risk-free interest rate 5.6% 6.5% - 6.8%
Expected volatility 17% 17%
- -------------------------------------------------------------------------------
The application of fair-value accounting to calculate 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. SCE recognizes pension expense as
calculated by the actuarial method used for ratemaking. In 1996, SCE recorded
pension gains from a special voluntary early retirement program. In 1998, SCE
adopted a new accounting standard that revises the disclosure requirements for
pension plans. Prior periods have been restated.
20
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information on plan assets and benefit obligations is shown below:
<TABLE>
<CAPTION>
6 Months Ended Year Ended 6 Months Ended
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
<S> <C> <C> <C>
Benefit obligation at beginning of period $2,094 $2,002 $2,002
Service cost 28 44 22
Interest cost 70 138 70
Actuarial gain -- 198 --
Benefits paid (68) (288) (206)
- -------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $2,124 $2,094 $1,888
- -------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $2,298 $2,165 $2,165
Actual return on plan assets 287 369 232
Employer contributions 30 52 30
Benefits paid (68) (288) (206)
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $2,547 $2,298 $2,221
- -------------------------------------------------------------------------------------------------------------------
Funded status $ 423 $ 204 $ 333
Unrecognized net gain (498) (304) (454)
Unrecognized net obligation (17-year amortization) 36 38 41
Unrecognized prior service cost 174 184 191
- -------------------------------------------------------------------------------------------------------------------
Pension asset (liability) $ 135 $ 122 $ 111
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.0% 7.0% 7.75%
Rate of compensation increase 5.0% 5.0% 5.0%
Expected return on plan assets 8.0% 8.0% 8.0%
</TABLE>
The components of pension expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
In millions 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $14 $11 $28 $22 $50 $38
Interest cost 35 35 70 70 139 161
Expected return on plan assets (45) (40) (90) (80) (170) (180)
Net amortization and deferral 4 4 8 8 13 11
- -------------------------------------------------------------------------------------------------------------------
Pension expense under
accounting standards 8 10 16 20 32 30
Regulatory adjustment-- deferred 5 3 10 6 20 19
- -------------------------------------------------------------------------------------------------------------------
Net pension expense recognized 13 13 26 26 52 49
Settlement gain -- -- -- -- -- (43)
- -------------------------------------------------------------------------------------------------------------------
Total expense $13 $13 $26 $26 $52 $ 6
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55 with at least 10 years of service (or
those eligible under a 1996 special voluntary early retirement program), are
eligible for postretirement health and dental care, life insurance and other
benefits. In 1996, SCE recorded special termination expenses from a special
voluntary early retirement program. In 1998, SCE adopted a new accounting
standard that revises the disclosure requirements for postretirement benefit
plans. Prior periods have been restated.
21
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information on plan assets and benefit obligations is shown below:
<TABLE>
<CAPTION>
6 Months Ended Year Ended 6 Months Ended
June 30, December 31, June 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
<S> <C> <C> <C>
Benefit obligation at beginning of period $ 1,533 $1,349 $1,349
Service cost 18 30 14
Interest cost 52 99 50
Actuarial loss -- 114 --
Benefits paid (32) (59) (29)
- -------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $ 1,571 $1,533 $1,384
- -------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $ 815 $ 617 $ 617
Actual return on plan assets 32 147 26
Employer contributions 54 110 54
Benefits paid (32) (59) (29)
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $ 869 $ 815 $ 668
- -------------------------------------------------------------------------------------------------------------------
Funded status $ (702) $ (718) $ (716)
Unrecognized net loss 242 244 228
Unrecognized transition obligation (20-year
amortization) 389 403 417
- -------------------------------------------------------------------------------------------------------------------
Recorded asset (liability) $ (71) $ (71) $ (71)
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.0% 7.0% 7.75%
Expected return on plan assets 8.0% 8.0% 8.5%
</TABLE>
The components of postretirement benefits other than pensions expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------
In millions 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 9 $ 7 $ 18 $ 14 $ 34 $ 27
Interest cost 26 25 52 50 101 102
Expected return on plan assets (16) (13) (32) (26) (56) (51)
Amortization of loss 1 2 2 4 2 6
Amortization of transition obligation 7 7 14 14 27 27
- -------------------------------------------------------------------------------------------------------------------
Net expense 27 28 54 56 108 111
Special termination expense -- -- -- -- -- 23
- -------------------------------------------------------------------------------------------------------------------
Total expense $ 27 $ 28 $ 54 $ 56 $108 $134
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed rate of future increases in the per-capita cost of health care
benefits is 8.5% for 1998, gradually decreasing to 5.25% for 2004 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated obligation as of June 30, 1998, by $255 million and
annual aggregate service and interest costs by $28 million. Decreasing the
health care cost trend rate by one percentage point would decrease the
accumulated obligation as of June 30, 1998, by $218 million and annual aggregate
service and interest costs by $23 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 $5
million, $8 million and $15 million for the three, six and twelve months ended
June 30, 1998, respectively, and $4 million, $7 million and $22 million for the
three, six and twelve months ended June 30, 1997, respectively.
22
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 1998, was:
<TABLE>
<CAPTION>
Original Accumulated
Cost of Depreciation and Under Ownership
In millions Facility Amortization Construction Interest
- -------------------------------------------------------------------------------------------------------------------
Transmission systems:
<S> <C> <C> <C> <C>
Eldorado $ 31 $ 6 -- 60%
Pacific Intertie 243 77 $ 1 50
Generating stations:
Four Corners Units 4 and 5 (coal) 460 259 1 48
Mohave (coal) 311 156 6 56
Palo Verde (nuclear)(1) 1,604 787 10 16
San Onofre (nuclear)(1) 4,215 2,481 35 75
- -------------------------------------------------------------------------------------------------------------------
Total $6,864 $3,766 $53
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reported as "Unamortized nuclear investment -- net."
Note 8. Leases
SCE has operating leases, primarily for vehicles, with varying terms, provisions
and expiration dates.
Estimated remaining commitments for noncancellable leases at June 30, 1998,
were:
Year ended December 31, In millions
- -------------------------------------------------------------------------------
1998 $ 7
1999 13
2000 11
2001 8
2002 4
Thereafter 6
- -------------------------------------------------------------------------------
Total $49
- -------------------------------------------------------------------------------
Note 9. Commitments
Nuclear Decommissioning
Decommissioning is estimated to cost $2.2 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. SCE planned 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 scheduled to begin in 2013 for San
Onofre Units 2 and 3 and 2027 at Palo Verde. San Onofre Unit 1, which shut down
in 1992, is currently being evaluated for decommissioning and may begin the
process as early as 1999, rather than delaying it to 2013 as previously planned.
Decommissioning costs, which are accrued and recovered through non-bypassable
customer rates over the term of each nuclear facility's operating license, are
recorded as a component of depreciation expense. Decommissioning expense was $37
million, $77 million and $157 million for the three, six and twelve months ended
June 30, 1998, respectively, and $39 million, $75 million and $150 million for
the three, six and twelve months ended June 30, 1997, respectively. The
accumulated provision for
23
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
decommissioning was $1.1 billion at June 30, 1998, $1.1 billion at December 31,
1997, and $1.0 billion at June 30, 1997. 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 June 30, December 31, June 30,
In millions Dates 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds 1998-2029 $ 486 $ 459 $ 439
Stocks -- 535 392 544
U.S. government issues 1999-2027 425 357 300
Short-term and other 2002-2028 2 163 9
- -------------------------------------------------------------------------------------------------------------------
Total $1,448 $1,371 $1,292
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Trust fund earnings (based on specific identification) increase the trust fund
balance and the accumulated provision for decommissioning. Net earnings were $12
million, $27 million and $57 million for the three, six and twelve months ended
June 30, 1998, respectively, and $11 million, $23 million and $51 million for
the three, six and twelve months ended June 30, 1997, respectively. Proceeds
from sales of securities (which are reinvested) were $362 million, $569 million
and $903 million for the three, six and twelve months ended June 30, 1998,
respectively, and $114 million, $261 million and $628 million for the three, six
and twelve months ended June 30, 1997. 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.
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 QFs (cogenerators and small power
producers) and other utilities. The QF 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 $193 million through 2017.
Certain commitments for the years 1998 through 2002 are estimated below:
<TABLE>
<CAPTION>
In millions 1998 1999 2000 2001 2002
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected construction expenditures $841 $704 $685 $684 $656
Fuel supply contracts 241 146 166 154 162
Purchased-power capacity payments 703 706 707 706 703
Unconditional purchase obligations 9 9 10 9 10
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Contingencies
In addition to the matters disclosed in these notes, SCE is involved in other
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 other proceedings will not materially affect its
results of operations or liquidity.
California Proposition 9 -- November 1998 Voter Initiative
In November 1997, individuals representing The Utilities Reform Network, Public
Media Center and the Coalition Against Utility Taxes filed a proposed voter
initiative that seeks to overturn major portions of the electric industry
restructuring legislation enacted in California in September 1996 (Statute). The
voter initiative proposes, among other things, to: (i) impose an additional 10%
rate reduction for residential and small commercial customers beyond the 10%
reduction that went into effect on January 1, 1998; (ii) block stranded-cost
recovery of nuclear investments; (iii) restrict stranded-cost recovery of
non-nuclear investments unless the CPUC finds that the utility would be deprived
of the opportunity to earn a fair rate of return; and (iv) prohibit the
collection of any charges in connection with a financing order for the purpose
of making payments on rate reduction notes, or if the financing order is found
enforceable by a court, require the utility to offset such charges with an equal
credit to customers.
On June 24, 1998, the California Secretary of State announced that the proposed
voter initiative qualified for the November 1998 ballot. On July 17, 1998, the
Secretary of State designated the initiative as Proposition 9 on the ballot.
On May 22, 1998, Californians for Affordable and Reliable Electric Service
(CARES), a coalition of California business organizations and utilities, filed a
petition for writ of mandate with the Court of Appeal of the State of
California. CARES is sponsored by the California Business Roundtable, the
California Chamber of Commerce, San Diego Gas & Electric Company, the California
Manufacturers Association, Pacific Gas & Electric Company, the California
Retailers Association, and SCE, among other groups. The CARES petition
challenged the initiative as illegal and unconstitutional on its face, and
sought to remove the initiative from the November 1998 ballot. On July 2, 1998,
the Court of Appeal denied the CARES petition. On July 6, 1998, CARES filed its
appeal of the denial with the California Supreme Court. On July 15, 1998, the
California Supreme Court denied the CARES petition. In these rulings, the Court
of Appeal of the State of California and the California Supreme Court both
decided, in effect, not to consider the legality and constitutionality of
Proposition 9 prior to the November 1998 election.
If Proposition 9 is voted into law, further litigation would ensue. Under the
terms of a servicing agreement relating to the rate reduction notes, SCE (acting
as the servicer) is required to take such legal or administrative actions as may
be reasonably necessary to block or overturn any attempts to cause a repeal of,
modification of, or supplement to the Statute, the financing order issued by the
CPUC, or the rights of holders of the property right authorized by the Statute
and the financing order by legislative enactment, voter initiative or
constitutional amendment that would be adverse to holders of the rate reduction
notes. The costs of such actions would be payable out of collections of the
non-bypassable charges established by the financing order and the related
issuance advice letter as an operating expense related to the rate reduction
notes. However, SCE may be required to advance its own funds to satisfy its
obligations as servicer to take such legal and administrative actions.
SCE is unable to predict the outcome of this matter, but if Proposition 9 were
to be voted into law, and not immediately stayed and ultimately invalidated by
the courts, it could have a material adverse effect on SCE's results of
operation and financial position. Upon voter approval of Proposition 9, a
write-down
25
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of a portion of SCE's generation-related assets might be required under
applicable accounting principles, depending on SCE's assessment of both the
probability that Proposition 9 would be struck down by the courts and the manner
in which it would be interpreted and applied to SCE. The meaning of many
provisions of Proposition 9 is unclear and, if the courts uphold it in whole or
part, will be subject to judicial and regulatory interpretation. Depending on
how Proposition 9 is interpreted and implemented with respect to SCE, the
potential write-down of SCE's generation-related assets could amount to as much
as $1.9 billion after tax.
Additionally, if Proposition 9 passes and survives legal challenges, SCE could
suffer impacts on its annual earnings, including the possibility of being
required to offset customer charges necessary to pay the principal and interest
on the rate reduction notes. Depending on how this provision and other
provisions of Proposition 9 are interpreted and applied, the annual earnings
reductions could be as large as $210 million in 1999, gradually declining to as
much as $10 million in 2007, and immaterial amounts thereafter.
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).
SCE's recorded estimated minimum liability to remediate its 50 identified sites
is $178 million. 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 $246 million. The upper limit of this range of costs
was estimated using assumptions least favorable to SCE among a range of
reasonably possible outcomes. SCE has sold all of its gas- and oil-fueled power
plants and has retained some liability associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites,
representing $91 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 $148 million for its estimated minimum environmental-cleanup costs
expected to be recovered through customer rates.
26
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30,
1998, were $6 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 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 $26 million per year. Insurance premiums are charged to operating expense.
27
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Earnings
Southern California Edison Company's (SCE) earnings for the three, six and
twelve months ended June 30, 1998, were $114 million, $212 million and $554
million, respectively, compared with $122 million, $234 million and $594 million
for the same periods in 1997. Earnings from the twelve months ended June 30,
1997, include a net one-time gain of $14 million in 1996 for an adjustment to
workforce management costs and reserves. Excluding the one-time gain, earnings
decreased $8 million, $22 million and $26 million, respectively, for the three,
six and twelve months ended June 30, 1998, compared to the year-earlier periods.
The decreases were the result of lower authorized revenue, which was driven by
reduced authorized returns on generating assets and a lower earning asset base
resulting from the accelerated recovery of investments and divestiture of gas-
and oil-fueled generation assets. The decreases were partially offset by San
Onofre Nuclear Generating Station's greater number of operating days in the
current period.
Operating Revenue
Since April 1, 1998, SCE is required to sell all of its generated power to the
power exchange (PX). For more details, see "Competitive Environment -- PX and
ISO." Excluding the sales to the PX, operating revenue decreased 12%, 8% and 1%,
respectively, for the three, six and twelve months ended June 30, 1998, compared
to the year-earlier periods. The decreases reflect lower average residential
rates (mandated by legislation enacted in September 1996). The quarterly
decrease also includes a decrease in sales volume due to milder weather in
second quarter 1998. The twelve-months-ended decrease also reflects a 1%
decrease in sales volume. Over 99% of operating revenue (excluding sales to the
PX) is from retail sales. Retail rates are regulated by the California Public
Utilities Commission (CPUC) and wholesale rates are regulated by the Federal
Energy Regulatory Commission (FERC).
Legislation enacted in September 1996 provided for, among other things, at least
a 10% rate reduction (financed through the issuance of rate reduction notes) for
residential and small commercial customers in 1998 and other rates to remain
frozen at June 1996 levels (system average of 10.1(cent) per kilowatt-hour). See
discussion in "Competitive Environment."
Operating Expenses
Fuel expense decreased 60% and 39%, respectively, for the three and six months
ended June 30, 1998, respectively, compared to the same periods in 1997. The
quarterly and year-to-date decreases resulted from the sale of the gas- and
oil-fueled plants. In addition, the year-to-date decrease also reflects
significantly lower gas prices in the first quarter of 1998. For the twelve
months ended June 30, 1998, fuel expense increased 13%, compared to the
year-earlier period, reflecting the effects of the extended refueling outages at
San Onofre Units 2 and 3 during the third quarter of 1997, as well as a $174
million gas contract termination payment during third quarter 1997.
Since April 1, 1998, SCE is required to purchase all of its power from the PX
for distribution to its customers. The new competitive market has caused SCE to
only make federally required purchases or purchases required under long-term
contracts and to discontinue making economy power purchases. Excluding the power
purchased from the PX, purchased-power expense decreased 11% and 9%,
respectively, for the three and six months ended June 30, 1998, compared to the
year-earlier periods. The decreases are the result of SCE discontinuing economy
purchases. 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. For the twelve months ended June 30, 1998,
SCE paid about $1.5 billion (including energy and capacity payments) more for
these power purchases than the cost of power available from other sources. The
CPUC has mandated the prices for these contracts.
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Provisions for regulatory adjustment clauses increased substantially for the
quarter, six months and twelve months ended June 30, 1998, compared to the same
periods in 1997, primarily due to overcollections in the transition cost
balancing account resulting from the gain on sales of the gas- and oil-fueled
plants in second quarter 1998. The overcollections were partially offset by
undercollections related to direct access activities, the delay in the start-up
of the PX and independent system operator (ISO) and the issuance of the rate
reduction notes in December 1997. Beginning in January 1998, the difference
between generation-related revenue and generation-related costs is being
accumulated in the transition cost balancing account, effectively eliminating
all other balancing accounts except those used in the administration of
public-purpose funds.
Other operating expenses increased for the three, six and twelve months ended
June 30, 1998, compared to the same periods in 1997, primarily due to direct
access activities, must-run reliability services and PX and ISO activities. The
year-to-date increase also reflects storm damage resulting from a harsher winter
in 1998. In addition, the twelve-months-ended increase includes higher costs at
San Onofre related to the Unit 2 and 3 outages.
Maintenance expense decreased 16% for the quarter ended June 30, 1998, compared
to the year-earlier period, reflecting the extended refueling outages at San
Onofre during the second quarter of 1997.
Depreciation, decommissioning and amortization expense increased 21%, 23% and
19%, respectively, for the quarter, six months and twelve months ended June 30,
1998, compared to the same periods in 1997. The increases are primarily due to
the accelerated recovery of the gas- and oil-fueled generation plants and the
further acceleration of the San Onofre and Palo Verde Nuclear Generating Station
units. The accelerated recoveries implemented in 1998 are part of the
competition transition charge (CTC) mechanism (see further discussion under
"California Electric Utility Industry Restructuring"). The twelve-months-ended
increase also reflects the initial accelerated recovery of the Palo Verde units,
which began in January 1997.
Income taxes decreased 26% for the quarter ended June 30, 1998, compared to the
year-earlier period, primarily due to lower pre-tax income, as well as
additional amortization related to the CTC mechanism. Also, the additional
amortization related to the CTC mechanism will continue to cause an increase in
the effective tax rate.
Property and other taxes decreased 18% for the twelve months ended June 30,
1998, compared to the same period in 1997, due to a reclassification of payroll
taxes to operation and maintenance expense, which began in January 1997.
Gains on sale of utility plant are from the sale of 11 of SCE's 12 gas- and
oil-fueled generation plants in the first half of 1998.
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) was collected evenly over the final six years of each unit's plan. The
plan ended in February 1996, September 1996 and January 1998 for Units 1, 2 and
3, respectively. The provision was a non-cash offset to the collection of
deferred revenue.
Interest and dividend income increased 66%, 109% and 71%, respectively, for the
three, six and twelve months ended June 30, 1998, compared to the same periods
in 1997. The increases reflect higher investment balances due to the sale of the
gas- and oil-fueled generation plants. The year-to-date and twelve-months-ended
increases also reflect interest earned on higher balancing account
undercollections.
Other nonoperating income decreased substantially for the three, six and twelve
months ended June 30, 1998, compared to the year-earlier periods, mostly due to
additional accruals for regulatory matters associated with the restructuring of
California's electric utility industry.
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Interest Expense
Interest on long-term debt increased 19% for the six months ended June 30, 1998,
compared to the same period in 1997, primarily due to the issuance of the rate
reduction notes in December 1997. Interest on the rate reduction notes was $38
million, $77 million and $86 million, respectively, for the three, six and
twelve months ended June 30, 1998.
Other interest expense decreased 25% for the six months ended June 30, 1998,
compared to the same period in 1997. The year-to-date decrease reflects a
reduction in balancing account interest expense as a result of higher
undercollections in first quarter 1998.
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
$2.8 billion (increased from $2.3 billion in July 1998) of its outstanding
shares of common stock. Edison International has repurchased 95.3 million shares
($2.3 billion) between January 1995 and August 5, 1998, funded by dividends from
its subsidiaries and the issuance of rate reduction notes.
SCE's cash flow coverage of dividends for the three, six and twelve months ended
June 30, 1998, was 0.6 times, 1.2 times and 0.7 times, respectively, compared to
3.7 times, 3.3 times and 2.4 times for the year-earlier periods. These decreases
reflect a $350 million special dividend SCE paid to Edison International in
second quarter 1998 from the oil- and gas-fueled plant sales proceeds. The
twelve-months-ended decrease reflects the $1.2 billion special dividend SCE paid
to Edison International in December 1997 from rate reduction note proceeds.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $283 million, $690 million and
$1.4 billion, respectively, for the three, six and twelve months ended June 30,
1998, compared with $420 million, $979 million and $1.7 billion, respectively,
for the same periods in 1997. Cash from operations exceeded capital requirements
for all periods presented.
Cash Flows from Financing Activities
At June 30, 1998, SCE had available lines of credit of $1.3 billion, with $735
million for general purpose short-term debt and $515 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.
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 SCE's articles of
incorporation and trust indenture. As of June 30, 1998, SCE could issue
approximately $12.0 billion of additional first and refunding mortgage bonds and
$4.4 billion of preferred stock at current interest and dividend rates.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure,
limiting the dividends it may pay Edison International. At June 30, 1998, SCE
had the capacity to pay $1.1 billion in additional dividends and continue to
maintain its authorized capital structure.
In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE
is the sole member, issued approximately $2.5 billion of rate reduction notes to
Bankers Trust Company of California, as certificate trustee for the California
Infrastructure and Economic Development Bank Special Purpose Trust SCE-1
(Trust), which is a special purpose entity established by the State of
California. The terms of
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the rate reduction notes generally mirror the terms of the pass-through
certificates issued by the Trust, which are known as rate reduction
certificates. The proceeds of the rate reduction notes were used by the SPE to
purchase from SCE an enforceable right known as transition property. Transition
property is a current property right created pursuant to the restructuring
legislation and a financing order of the CPUC and consists generally of the
right to be paid a specified amount from a non-bypassable tariff levied on
residential and small commercial customers. Notwithstanding the legal sale of
the transition property by SCE to the SPE, the amounts reflected as assets on
SCE's balance sheet have not been reduced by the amount of the transition
property sold to the SPE, and the liabilities of the SPE for the rate reduction
notes are for accounting purposes reflected as long-term liabilities on the
consolidated balance sheet of SCE. SCE used the proceeds from the sale of the
transition property to retire debt and equity securities.
The rate reduction notes have maturities ranging from one to 10 years, and bear
interest at rates ranging from 5.98% to 6.42%. The rate reduction notes are
secured solely by the transition property and certain other assets of the SPE,
and there is no recourse to SCE or Edison International.
Although the SPE is consolidated with SCE in the financial statements, as
required by generally accepted accounting principles, the SPE is legally
separate from SCE, the assets of the SPE are not available to creditors of SCE
or Edison International, and the transition property is legally not an asset of
SCE or Edison International.
A voter initiative, known as California Proposition 9 on the November 1998
ballot, proposes to, among other things, prohibit the collection of any charges
in connection with a financing order for the purpose of making payments on rate
reduction notes. If Proposition 9 is voted into law and is not immediately
overturned or is not stayed pending judicial review of its merits, the
collection of charges necessary to pay the certificates while the litigation is
pending could be precluded, which would adversely affect the certificates and
the secondary market for the certificates, including pricing, liquidity, dates
of maturity, and weighted-average lives of the certificates. In addition, if
Proposition 9 is voted into law and upheld by the courts, it could have a
further material adverse effect on the certificates and the holders of the
certificates could incur a loss on their investment. A more detailed discussion
is in "California Proposition 9 -- November 1998 Voter Initiative."
Cash Flows from Investing Activities
Cash flows from investing activities are affected by additions to property and
plant, proceeds from the sale of plant (see discussion in Divestiture) and
funding of nuclear decommissioning trusts. Decommissioning costs are accrued and
recovered in rates over the term of each nuclear generating facility's operating
license through charges to depreciation expense. SCE estimates that it will
spend approximately $12.7 billion between 2013 -- 2070 to decommission its
nuclear facilities. This estimate is based on SCE's current-dollar
decommissioning costs ($2.1 billion), escalated using a 6.65% annual rate. These
costs are expected to be funded from independent decommissioning trusts, which
will receive SCE contributions of approximately $100 million per year until
decommissioning begins. Any plan to decommission San Onofre Unit 1 prior to 2013
is not expected to affect SCE's annual contributions to the decommissioning
trusts.
Market Risk Exposures
SCE's primary market risk exposures arise from fluctuations in energy prices and
interest rates. SCE's risk management policy allows the use of derivative
financial instruments to manage its financial exposures, but prohibits the use
of these instruments for speculative or trading purposes.
SCE has hedged a portion of its exposure to increases in natural gas prices.
Increases in natural gas prices tend to increase the price of electricity
purchased from the PX. SCE's exposure is also limited by regulatory mechanisms
that protect SCE from much of the risk arising from high electricity prices.
A 10% increase in market interest rates would result in a $6 million increase in
the fair value of SCE's interest rate hedge agreements. A 10% decrease in market
interest rates would result in a $6 million decline in the fair market value of
interest rate hedge agreements. A 10% increase in natural gas prices
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would result in a $38 million increase in the fair market value of gas call
options. A 10% decrease in natural gas prices would result in a $26 million
decline in the fair market value of gas call options. A 10% change in market
rates is expected to have an immaterial effect on SCE's other financial
instruments.
Projected Capital Requirements
SCE's projected construction expenditures for the next five years are: 1998--
$841 million; 1999-- $704 million; 2000-- $685 million; 2001-- $684 million; and
2002-- $656 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following June 30, 1998, are: 1999 -- $610 million; 2000 --
$569 million; 2001 -- $648 million; 2002 -- $246 million; and 2003 -- $572
million.
Preferred stock redemption requirements for the five twelve-month periods
following June 30, 1998, are: 1999 through 2001 -- zero; 2002 -- $105 million;
and 2003 -- $9 million.
Regulatory Matters
Legislation enacted in September 1996 provided for, among other things, a 10%
rate reduction for residential and small commercial customers in 1998 and other
rates to remain frozen at June 1996 levels (system average of 10.1(cent) per
kilowatt-hour). See further discussion in "Competitive Environment --
Restructuring Statute."
In 1998, revenue is determined by various mechanisms depending on the utility
operation. Revenue related to distribution operations is determined through a
performance-based rate-making mechanism (PBR) (see discussion in "Competitive
Environment -- PBR") and the distribution assets have the opportunity to earn a
CPUC-authorized 9.49% return. Until the ISO began operation, transmission
revenue was determined by the same mechanism as distribution operations. After
March 31, 1998, transmission revenue is determined through FERC-authorized rates
and transmission assets earn a 9.43% return. These rates are subject to refund.
See discussion in "Competitive Environment -- Rate-setting."
Revenue from generation-related operations is determined through the CTC
mechanism, nuclear rate-making agreements and the competitive market. Revenue
related to fossil and hydroelectric generation operations is recovered from two
sources. The portion that is made uneconomic by electric industry restructuring
is recovered through the CTC mechanism. The portion that is economic is
recovered through the market. In 1998, fossil and hydroelectric generation
assets earn a 7.22% return. A more detailed discussion is in "Competitive
Environment -- CTC."
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 earning an
annual rate of return of 7.35%. In addition, the San Onofre plan authorizes a
fixed rate of approximately 4(cent) per kilowatt-hour generated for 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
incentive pricing portion. Palo Verde's 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. Beginning January 1, 1998, both the San Onofre and Palo
Verde rate-making plans became part of the CTC mechanism.
The changes in revenue from the regulatory mechanisms discussed above, excluding
the effects of other rate actions, are expected to have a minimal impact on 1998
earnings. However, the issuance of the rate reduction notes in December 1997,
which enables the repurchase of debt and equity, will have a negative impact on
1998 earnings of approximately $97 million.
Prior to the restructuring of the electric utility industry, SCE recovered its
non-nuclear capital additions to utility plant through depreciation rates
authorized in the general rate case. As part of the CTC Phase 2
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decision, the CPUC authorized recovery of the December 31, 1995, balances of
non-nuclear generating facilities through the CTC mechanism. The CPUC stated
that rate recovery for capital additions to the non-nuclear generating
facilities should be sought through a separate filing. In October 1997, SCE
filed an application with the CPUC requesting rate recovery of $61 million of
1996 capital additions to its non-nuclear generating facilities. Hearings were
held in early 1998. The CPUC's Office of Ratepayer Advocates and The Utilities
Reform Network recommended a combined total disallowance of $37 million. A CPUC
decision is expected in third quarter 1998. In third quarter 1998, SCE plans to
file an application for rate recovery of capital additions to these same
generating facilities for the period January 1, 1997, through the date of
divestiture.
Competitive Environment
SCE currently operates in a highly regulated environment in which it has an
obligation to deliver 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
Restructuring Decision -- The CPUC's December 1995 decision on restructuring
California's electric utility industry started the transition to a new market
structure; competition and customer choice began on April 1, 1998. Key elements
of the CPUC's restructuring decision included: creation of the PX and ISO;
availability of customer choice for electricity supply and certain billing and
metering services; PBR for those utility services not subject to competition;
voluntary divestiture of at least 50% of utilities' gas-fueled generation; and
implementation of the CTC.
Restructuring Statute -- In September 1996, the State of California enacted
legislation to provide a transition to a competitive market structure. The
Statute substantially adopted 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
are being recovered through the terms of their contracts while most of the
remaining transition costs will be recovered through 2001. The Statute also
included provisions to finance a portion of the stranded costs that residential
and small commercial customers would have paid between 1998 and 2001, which
allowed SCE to reduce rates by at least 10% to these customers, effective
January 1, 1998. The Statute included 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 during the 1998-2001 transition period. In addition, the
Statute mandated the implementation of the CTC that provides utilities the
opportunity to recover costs made uneconomic by electric utility restructuring.
Finally, the Statute contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related expenses. A
voter initiative, known as California Proposition 9, seeks to overturn major
portions of the Statute. A more detailed discussion of Proposition 9 is in
"California Proposition 9 -- November 1998 Voter Initiative."
Rate Reduction Notes -- In December 1997, after receiving approval from both the
CPUC and the California Infrastructure and Economic Development Bank, a limited
liability company created by SCE issued approximately $2.5 billion of rate
reduction notes. Residential and small commercial customers, whose 10% rate
reduction began January 1, 1998, are repaying the notes over the expected
10-year term through non-bypassable charges based on electricity consumption. A
voter initiative on the November 1998 ballot seeks to prohibit the collection of
these non-bypassable charges, or if the charges are found enforceable by a
court, require SCE to offset such charges with an equal credit to customers. See
discussion in "Cash Flows from Financing Activities."
Rate-setting -- Beginning January 1, 1998, SCE's rates were unbundled into
separate charges for energy, transmission, distribution, the CTC, public benefit
programs and nuclear decommissioning. The transmission component is being
collected through FERC-approved rates, subject to refund. In
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August 1997, the CPUC issued a decision which adopted a methodology for
determining CTC residually (see "CTC" discussion below) and adopted SCE's
revenue requirement components for public benefit programs and nuclear
decommissioning. The decision also adjusted SCE's proposed distribution revenue
requirement (see "PBR" discussion below) by reallocating $76 million of it
annually to other functions such as generation and transmission. Under the
decision, SCE will be able to recover most of the reallocated amount through
market revenue, other rate-making mechanisms or operation and maintenance
contracts with the new owners of the divested generation plants.
PX and ISO -- On March 31, 1998, both the PX and ISO began accepting bids and
schedules for April 1, 1998, when the ISO took over operational control of the
transmission system. The hardware and software systems being utilized by the PX
and ISO in their bidding and scheduling activities were financed through loans
of $300 million (backed by utility guarantees) obtained by restructuring trusts
established by a CPUC order in 1996. The PX and ISO will repay the trusts' loans
through charges for service to future PX and ISO customers. The restructuring
implementation costs related to the start-up and development of the PX, which
are paid by the utilities, will be recovered from all retail customers over the
four-year transition period. SCE's share of the charge is $45 million, plus
interest and fees. SCE's share of the ISO's start-up and development costs
(approximately $16 million per year) will be paid over a 10-year period.
Direct Customer Access -- Effective April 1, 1998, customers are now able to
choose to remain utility customers with either bundled electric service or an
hourly PX pricing option from SCE (which is purchasing its power through the
PX), or choose direct access, which means the customer can contract directly
with either independent power producers or energy service providers (ESPs) such
as power brokers, marketers and aggregators. Additionally, all
investor-owned-utility customers are paying the CTC whether or not they choose
to buy power through SCE. Electric utilities are continuing to provide the core
distribution service of delivering energy through their distribution system
regardless of a customer's choice of electricity supplier. The CPUC is
continuing to regulate the prices and service obligations related to
distribution services. As of July 1, 1998, approximately 47,000 of SCE's 4.3
million customers have requested the direct access option.
Revenue Cycle Services -- Effective April 1, 1998, customers have options
regarding metering, billing and related services (referred to as revenue cycle
services) that have been provided by California's investor-owned utilities. Now
ESPs can provide their customers with one consolidated bill for their services
and the utility's services, request the utility to provide a consolidated bill
to the customer or elect to have both the ESP and the utility bill the customer
for their respective charges. In addition, customers with maximum demand above
20 kW (primarily industrial and medium 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 customers who elect to have ESPs provide
them with revenue cycle services, and the amount of any such credit, the CPUC
has indicated that it is appropriate to provide such customers with the
utility's avoided costs net of costs incurred by the utility to facilitate the
provision of such services by a firm other than the utility. The unbundling of
revenue cycle services will expose SCE to the possible loss of revenue and a
reduction in revenue security.
PBR -- In September 1996, the CPUC adopted a transmission and distribution (T&D)
PBR mechanism for SCE which began on January 1, 1997. Beginning in April 1998,
the transmission portion was separated from PBR and subject to ratemaking under
the rules of the FERC. The distribution-only PBR will extend through December
2001. Key elements of 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.
The CPUC is considering unbundling SCE's cost of capital based on major utility
function. On May 8, 1998, SCE filed an application on this issue. A CPUC
decision is expected in early 1999.
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Beginning in 1998, SCE's hydroelectric plants are operating under a PBR-type
mechanism. The mechanism sets the hydroelectric revenue requirement and
establishes a formula for extending it through the duration of the electric
industry restructuring transition period, or until market valuation of the
hydroelectric facilities, whichever occurs first. The mechanism provides that
power sales revenue from hydroelectric facilities in excess of the hydroelectric
revenue requirement be credited against the costs to transition to a competitive
market (see "CTC" discussion below).
Divestiture -- In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its gas- and oil-fueled generation
plants. Under this proposal, SCE would continue to operate and maintain the
divested power plants for at least two years following their sale, as mandated
by the restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be impacted
by divestiture-related job reductions. In September 1997, the CPUC approved
SCE's proposal to auction the 12 plants.
SCE has sold all 12 of its gas- and oil-fueled generation plants. Transfer of
ownership of 11 plants was completed by June 30, 1998, and transfer of ownership
of the 12th plant took place on July 8, 1998. The total sales price of the 12
plants was $1.2 billion, over $500 million more than the combined book value.
Net proceeds of the sales were used to reduce stranded costs, which otherwise
were expected to be collected through the CTC mechanism.
CTC -- The costs to transition to a competitive market are being recovered
through a non-bypassable CTC. This charge applies to all customers who were
using or began using utility services on or after the CPUC's December 20, 1995,
decision date. The CTC is being determined residually by subtracting other rate
components for the PX, T&D, nuclear decommissioning and public benefit programs
from the frozen rate levels. SCE currently estimates its transition costs to be
approximately $10.6 billion (1998 net present value) from 1998 through 2030.
This estimate is based on incurred costs, 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 $6.4
billion from SCE's qualifying facilities contracts, which are the direct result
of prior legislative and regulatory mandates, and $4.2 billion from costs
pertaining to certain generating assets (successful completion of the sale of
SCE's gas-fired generating plants has reduced this estimate of transition costs
for SCE-owned generation) 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 Units 2 and 3 and the Palo Verde units (as
discussed in "Regulatory Matters"), and certain other costs. This issue was
separated into two phases; Phase 1 addressed the rate-making issues and Phase 2
the quantification issues.
Major elements of the CPUC's CTC Phase 1 and Phase 2 decisions were: the
establishment of a transition cost balancing account and annual transition cost
proceedings; the setting of a market rate forecast for 1998 transition costs;
the requirement that generation-related regulatory assets be amortized ratably
over a 48-month period; the establishment of calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the end of
the rate freeze; and the reduction of SCE's authorized rate of return on certain
assets eligible for transition cost recovery (primarily fossil- and
hydroelectric-generation related assets) beginning July 1997, five months
earlier than anticipated. SCE has filed an application for rehearing on the 1997
rate of return issue.
Accounting for Generation-Related Assets -- If the CPUC's electric industry
restructuring plan continues as described above, SCE would be allowed to recover
its CTC through non-bypassable charges to its distribution customers (although
its investment in certain generation assets would be subject to a lower
authorized rate of return). During the third quarter of 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
investment in generation facilities based on a consensus reached by the
Financial Accounting Standards Board's Emerging Issues Task Force (EITF). The
financial reporting effect of this discontinuance was to segregate these assets
on the balance sheet; the EITF consensus did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
EITF did not specifically address the application of asset impairment standards
to these assets. SCE has retained these assets on its balance sheet because the
legislation and restructuring plan referred to above make probable their
recovery through a non-bypassable CTC to
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distribution customers. The regulatory assets relate primarily to the recovery
of accelerated income tax benefits previously flowed through to customers,
purchased power contract termination payments and unamortized losses on
reacquired debt. The consensus reached by the EITF also permits the recording of
new generation-related regulatory assets during the transition period that are
probable of recovery through the CTC mechanism.
During the second quarter of 1998, additional guidance was developed relating to
the application of asset impairment standards to these assets. Using this
guidance has resulted in SCE reducing its remaining nuclear plant investment by
$2.6 billion and recording a regulatory asset on its balance sheet for the same
amount. For this impairment assessment, the fair value of the investment was
calculated by discounting future net cash flows. This reclassification had no
effect on SCE's results of operations.
If during the transition period events were to occur that made the recovery of
these generation-related regulatory assets no longer probable, SCE would be
required to write off the remaining balance of such assets (approximately $2.4
billion, after tax, at June 30, 1998) as a one-time, non-cash charge against
earnings.
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.
California Proposition 9 -- November 1998 Voter Initiative
In November 1997, individuals representing The Utilities Reform Network, Public
Media Center and the Coalition Against Utility Taxes filed a proposed voter
initiative that seeks to overturn major portions of the electric industry
restructuring legislation enacted in California in September 1996 (Statute). The
voter initiative proposes, among other things, to: (i) impose an additional 10%
rate reduction for residential and small commercial customers beyond the 10%
reduction that went into effect on January 1, 1998; (ii) block stranded-cost
recovery of nuclear investments; (iii) restrict stranded-cost recovery of
non-nuclear investments unless the CPUC finds that the utility would be deprived
of the opportunity to earn a fair rate of return; and (iv) prohibit the
collection of any charges in connection with a financing order for the purpose
of making payments on rate reduction notes, or if the financing order is found
enforceable by a court, require the utility to offset such charges with an equal
credit to customers.
On June 24, 1998, the California Secretary of State announced that the proposed
voter initiative qualified for the November 1998 ballot. On July 17, 1998, the
Secretary of State designated the initiative as Proposition 9 on the ballot.
On May 22, 1998, Californians for Affordable and Reliable Electric Service
(CARES), a coalition of California business organizations and utilities, filed a
petition for writ of mandate with the Court of Appeal of the State of
California. CARES is sponsored by the California Business Roundtable, the
California Chamber of Commerce, San Diego Gas & Electric Company, the California
Manufacturers Association, Pacific Gas & Electric Company, the California
Retailers Association, and SCE, among other groups. The CARES petition
challenged the initiative as illegal and unconstitutional on its face, and
sought to remove the initiative from the November 1998 ballot. On July 2, 1998,
the Court of Appeal denied the CARES petition. On July 6, 1998, CARES filed its
appeal of the denial with the California Supreme Court. On July 15, 1998, the
California Supreme Court denied the CARES petition. In these rulings, the Court
of Appeal of the State of California and the California Supreme Court both
decided, in effect, not to consider the legality and constitutionality of
Proposition 9 prior to the November 1998 election.
If Proposition 9 is voted into law, further litigation would ensue. Under the
terms of a servicing agreement relating to the rate reduction notes, SCE (acting
as the servicer) is required to take such legal or administrative actions as may
be reasonably necessary to block or overturn any attempts to cause a repeal of,
modification of, or supplement to the Statute, the financing order issued by the
CPUC, or the rights of holders of the property right authorized by the Statute
and the financing order by legislative
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enactment, voter initiative or constitutional amendment that would be adverse to
holders of the rate reduction notes. The costs of such actions would be payable
out of collections of the non-bypassable charges established by the financing
order and the related issuance advice letter as an operating expense related to
the rate reduction notes. However, SCE may be required to advance its own funds
to satisfy its obligations as servicer to take such legal and administrative
actions.
SCE is unable to predict the outcome of this matter, but if Proposition 9 were
to be voted into law, and not immediately stayed and ultimately invalidated by
the courts, it could have a material adverse effect on SCE's results of
operation and financial position. Upon voter approval of Proposition 9, a
write-down of a portion of SCE's generation-related assets might be required
under applicable accounting principles, depending on SCE's assessment of both
the probability that Proposition 9 would be struck down by the courts and the
manner in which it would be interpreted and applied to SCE. The meaning of many
provisions of Proposition 9 is unclear and, if the courts uphold it in whole or
part, will be subject to judicial and regulatory interpretation. Depending on
how Proposition 9 is interpreted and implemented with respect to SCE, the
potential write-down of SCE's generation-related assets could amount to as much
as $1.9 billion after tax.
Additionally, if Proposition 9 passes and survives legal challenges, SCE could
suffer impacts on its annual earnings, including the possibility of being
required to offset customer charges necessary to pay the principal and interest
on the rate reduction notes. Depending on how this provision and other
provisions of Proposition 9 are interpreted and applied, the annual earnings
reductions could be as large as $210 million in 1999, gradually declining to as
much as $10 million in 2007, and immaterial amounts thereafter.
Environmental Protection
SCE is subject to numerous environmental laws and regulations, which require it
to incur substantial costs to operate existing facilities, construct and operate
new facilities, and mitigate or remove the effect of past operations on the
environment.
As further discussed in Note 10 to the Consolidated Financial Statements, SCE
records its environmental liabilities when site assessments and/or remedial
actions are probable and a range of reasonably likely cleanup costs can be
estimated. SCE reviews its sites and measures the liability quarterly, by
assessing a range of reasonably likely costs for each identified site. Unless
there is a probable amount, SCE records the lower end of this likely range of
costs.
SCE's recorded estimated minimum liability to remediate its 50 identified sites
is $178 million. One of SCE's sites, a former pole-treating facility, is
considered a federal Superfund site and represents 41% 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 $246
million. The upper limit of this range of costs was estimated using assumptions
least favorable to SCE among a range of reasonably possible outcomes. SCE has
sold all of its gas- and oil-fueled power plants and has retained some liability
associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites,
representing $91 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 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 $148 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.
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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 ended June
30, 1998, were $6 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.
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 environmental capital expenditures are $935 million for the
1998-2002 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 has been the subject of scientific research. After many
years of research, scientists have not found that exposure to EMF causes disease
in humans. Research on this topic is continuing. 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.
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 steam
generator tube degradation. However, during the Unit 2 scheduled refueling and
inspection outage, which was completed in Spring 1997, an increased rate of tube
degradation was identified, which resulted in the removal of more tubes from
service than had been expected. The steam generator design allows for the
removal of up to 10% of the tubes before the rated capacity of the unit must be
reduced. As a result of the increased degradation, a mid-cycle inspection outage
was conducted in early 1998 for Unit 2. Continued degradation was found during
this inspection. Monitoring of this degradation will occur at the next scheduled
refueling outage in January 1999. An additional mid-cycle inspection outage may
be required early in 2000. With the results from the February 1998 outage, 7% of
the tubes have now been removed from service.
During Unit 3's refueling outage, which was completed in July 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. A follow-up mid-cycle inspection indicated that the
erosion had been stabilized. Additional monitoring inspections are planned
during the next scheduled refueling outage in 1999. To date, 5% of Unit 3's
tubes have been removed from service. During Unit 2's February 1998 mid-cycle
outage, similar tube supports showed no significant levels of such erosion.
Accounting Rules
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,
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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.
A recently issued accounting rule requires that costs related to start-up
activities be expensed as incurred, effective January 1, 1999. SCE does not
expect this new accounting rule to materially affect its results of operations
or financial position.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which will be effective January 1,
2000, requires all derivatives to be recognized on the balance sheet at fair
value. Gains or losses from changes in fair value would be recognized in
earnings in the period of change unless the derivative is designated as a
hedging instrument. Gains or losses from hedges of a forecasted transaction or
foreign currency exposure would be reflected in other comprehensive income.
Gains or losses from hedges of a recognized asset or liability or a firm
commitment would be reflected in earnings for the ineffective portion of the
hedge. SCE anticipates that most of its derivatives under the new standard would
qualify for hedge accounting. SCE expects to recover in rates any market price
changes from its derivatives that could potentially affect earnings.
Accordingly, implementation of this new standard is not expected to affect
earnings.
Year 2000 Issue
Many of SCE's existing computer systems identify a year by using only two digits
instead of four. If not corrected, these programs could fail or create erroneous
results beginning in 2000. This situation has been referred to generally as the
Year 2000 Issue.
SCE has a comprehensive program in place to remediate potential Year 2000
impacts. SCE divides its Year 2000 Issue activities into five phases: inventory,
impact assessment, remediation, testing and implementation. SCE's plan for
critical systems is to be 75% complete by year-end 1998, and 100% complete by
July 1999. A critical system is defined as those applications and systems,
including embedded processor technology, which if not appropriately remediated,
may have a significant impact on customers, the revenue stream, regulatory
compliance, or the health and safety of personnel.
The scope of this program includes three categories: mainframe computing,
distributed computing and physical assets (also known as embedded processors).
For mainframe financial systems, Year 2000 remediation was completed in the
fourth quarter of 1997. Remediation for the material management system was
completed in the second quarter of 1998. The customer information and billing
system is scheduled to be replaced by the first quarter of 1999 with a system
designed to be Year 2000-ready. Distributed computing assets include operations
and business information systems. The critical operations information systems
include outage management, power management, and plant monitoring and access
retrieval systems. Business information systems include a data acquisition
system for billing, the computer call center support system, credit support and
maintenance management. SCE is on schedule to have its mainframe and distributed
computing assets Year 2000-ready within the timeframe discussed above. The
physical asset portfolio includes systems in the generation, transmission,
distribution, telecommunications and facilities areas. SCE has completed its
inventory of these systems and impact assessment for critical physical assets is
nearly complete.
The other essential component of the SCE Year 2000 readiness program is to
identify and assess vendor products and business partners for Year 2000
readiness. SCE has a process in place to identify and contact vendors and
business partners to determine their Year 2000 status, and is evaluating the
responses. SCE's general policy requires that all newly purchased products be
Year 2000-ready or otherwise designed to allow SCE to determine whether such
products present Year 2000 issues. SCE is also working to address Year 2000
issues related to all ISO and PX interfaces.
Preliminary estimates of the costs to complete these modifications, including
the cost of new hardware and software application modification, range from $55
million to $80 million, about half of which are
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expected to be capital costs. SCE expects current rate levels for providing
electric service to be sufficient to provide funding for these modifications.
Although SCE is confident that its critical systems will be fully remediated
prior to year-end 1999, SCE believes that prudent business practices call for
the development of contingency plans. Such contingency plans shall include
developing strategies for dealing with Year 2000-related processing failures or
malfunctions due to SCE's internal systems or from external parties. SCE's
contingency plans are expected to be completed by March 1999; therefore, these
risk factors are not yet fully known, and SCE's reasonably likely worst case
scenario also is unknown at this time. SCE does not expect the Year 2000 issue
to have a material adverse effect on its results of operation or financial
position; however, if not effectively remediated, negative effects from Year
2000 issues, including those related to internal systems, vendors, business
partners, the ISO, the PX or customers, could cause results to differ.
Forward-looking Information
In the preceding 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 further actions by state and federal regulatory bodies
setting rates and implementing the restructuring of the electric utility
industry; the effects of new laws and regulations relating to restructuring and
other matters; the effects of increased competition in the electric utility
business, including the beginning of direct customer access to retail energy
suppliers and the unbundling of revenue cycle services such as metering and
billing; changes in prices of electricity and fuel costs; changes in market
interest rates; new or increased environmental liabilities; the effects of the
Year 2000 Issue; the passage and implementation of California Proposition 9; and
other unforeseen events.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wind Generators' Litigation
As previously reported in Part II, Item 1 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, 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 ("Los Angeles County") and one was
filed in Kern County Superior Court ("Kern County"). The lawsuits alleged 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 sought declaratory relief regarding the proper interpretation of the
contracts. Plaintiffs alleged a combined total of approximately $189 million in
damages, which included consequential damages claimed in seven of the eight
lawsuits. Following the March 1 ruling, a ninth lawsuit was filed in Los Angeles
County 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.
After receiving a favorable decision in the liability phase of the lead case,
SCE agreed to settle with the plaintiffs in seven of the lawsuits on terms
whereby SCE waived its rights to recover costs against such plaintiffs in
exchange for their agreement that there is only one fixed price period under
each of their power purchase contracts with SCE and a mutual dismissal with
prejudice of claims. SCE also entered into a settlement agreement with the
plaintiff in another of the lawsuits which resolved the issue of multiple fixed
price periods on the same terms and which also resolved a related issue unique
to that plaintiff in exchange for a nominal payment by SCE. This settlement was
subject to bankruptcy court approval in bankruptcy proceedings involving the
plaintiff. On April 24, 1998, the bankruptcy court issued an order approving the
settlement.
Geothermal Generators' Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, on June 9, 1997, SCE filed a
complaint in Los Angeles County Superior Court against an independent power
producer of geothermal generation and six of its affiliated entities
(collectively the "Coso Defendants"). SCE alleges that in order to avoid power
production plant shutdowns caused by excessive noncondensable gas in the
geothermal field brine, the Coso Defendants routinely vented highly toxic
hydrogen sulfide gas from unmonitored release points beginning in 1990 and
continuing through at least 1994, in violation of applicable federal, state and
local environmental law. According to SCE, these violations constituted material
breaches by the Coso Defendants of their obligations under their contracts and
applicable law. The complaint sought termination of the contracts and damages
for excess power purchase payments made to the Coso Defendants. The Coso
Defendants' motion to transfer venue to Inyo County Superior Court was granted
on August 31, 1997.
On December 19, 1997, SCE filed a first amended complaint in response to which
the Coso Defendants filed a motion to strike the termination remedy sought by
SCE. This motion was granted on June 1, 1998. The Coso Defendants also filed a
motion for summary judgment, asserting that SCE's claims are time-barred or were
released in connection with the settlement of prior litigation among some of the
Coso Defendants and two of SCE's affiliates, Mission Power Engineering, and The
Mission Group (the Mission Parties). The court denied the Coso Defendants'
motion for summary judgment by order dated July 8, 1998. In addition, the Coso
Defendants filed a motion to stay SCE's case pending resolution of certain
technical issues by the Great Basin Air Quality Management District under the
doctrine of primary adjudication. On April 30, 1998, the court denied the motion
for stay without prejudice.
The Coso Defendants have also asserted various claims against SCE and the
Mission Parties in a cross-complaint filed in the action commenced by SCE as
well as in a separate action filed against SCE by three of the Coso Defendants
in Inyo County Superior Court. Following a hearing on
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November 20, 1997, the court consolidated these actions for all purposes and
ordered the Coso Defendants to file a second amended cross-complaint,
incorporating all but two of the claims in the separate complaint.
The second amended cross-complaint asserts nineteen causes of action against
SCE, three of which are also asserted against the Mission Parties, and alleges
in excess of $115 million in compensatory damages and also punitive damages.
Several of these claims are premised on the theory that SCE has incorrectly
interpreted the cross-complainants' contracts as providing for only a single
"fixed price" period in view of the fact that the cross-complainants developed
their projects in phases. This theory has also been asserted by other
independent power producers in litigation pending in Los Angeles Superior Court.
(See "Wind Generators Litigation" above.) SCE filed a demurrer to, as well as a
motion to strike, certain portions of the second amended cross-complaint which
was argued on March 13, 1998. On May 22, 1998, the court granted SCE's motion to
strike and sustained the demurrer with leave to amend. The Coso Defendants
subsequently filed a motion for leave to file a third amended cross-complaint
which was argued and taken under submission on July 9, 1998.
Electric and Magnetic Fields (EMF) Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, 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.
In December 1995, the court granted SCE's motion for summary judgment in the
first lawsuit and dismissed the case. Plaintiffs have filed a Notice of Appeal.
Briefs have been submitted but no date for oral argument has been set.
The second lawsuit has been dismissed by the plaintiffs. However, one of the
named plaintiffs is now deceased and a wrongful death action was filed by her
husband and children on May 7, 1998 and has been served on SCE.
On July 23, 1998, the court granted SCE's motion for summary judgment in the
third lawsuit and dismissed this case.
A California Court of Appeal decision, Cynthia Jill Ford et al. v. Pacific Gas &
Electric Co. (Ford), has held that the Superior Courts do not have jurisdiction
to decide issues, such as those concerning EMF, which are regulated by the CPUC.
The California Supreme Court recently denied the plaintiffs' petition for review
in Ford and it is now binding throughout California. SCE intends to seek
dismissal of the remaining cases in light of the Court of Appeal's decision.
San Onofre Personal Injury Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, SCE is involved in six
lawsuits alleging personal injuries relating to San Onofre.
An SCE engineer employed at San Onofre died in 1991 from cancer of the abdomen.
On February 6, 1995, his children sued SCE and 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 in the first lawsuit. 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
appealed this ruling to the Ninth Circuit Court of Appeals. On May 28, 1998, the
Ninth Circuit Court affirmed the lower court's judgment in favor of SCE. The
impact on SCE, if any, from further proceedings in this case against the
remaining defendants cannot be determined at this time.
On July 5, 1995, a former SCE reactor operator and his wife sued SCE and SDG&E
in the U.S. District Court for the Southern District of California in a second
lawsuit. Plaintiffs also named Combustion Engineering and the Institute of
Nuclear Power Operations as defendants. On December 22, 1995, SCE
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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 appealed this ruling to the Ninth
Circuit Court of Appeals. On May 28, 1998, the Ninth Circuit Court affirmed the
lower court's judgment in favor of SCE. The impact on SCE, if any, from further
proceedings in this case against the remaining defendants cannot be determined
at this time.
On August 31, 1995, the 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 in the third lawsuit. Plaintiffs also named Combustion
Engineering and the Institute of Nuclear Power Operations as defendants. All
trial court proceedings have been stayed pending the ruling of the Court of
Appeals, recently issued by the Ninth Circuit on May 28, 1998 affirming the
lower court's judgment in favor of SCE, in the cases described in the above two
paragraphs. A trial date has not yet been set.
On November 17, 1995, an SCE employee and his wife sued SCE in the U.S. District
Court for the Southern District of California in the fourth lawsuit. Plaintiffs
also named Combustion Engineering. The trial in this case took place over
approximately 22 days between January and March 1998 and resulted in a jury
verdict for both defendants. On March 19, 1998, the plaintiffs filed a motion
for a new trial. That motion was denied on June 9, 1998. On July 6, 1998,
plaintiffs filed a notice of appeal stating that they will appeal the trial
court's judgment to the Ninth Circuit Court of Appeals.
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 in the fifth lawsuit. Plaintiffs also named Combustion Engineering.
On August 12, 1996, the Court dismissed the claims of the former worker and her
husband with prejudice. This case, with only the son as plaintiff, is expected
to go to trial in late 1998 or early 1999.
On November 20, 1997, a former contract worker at San Onofre and his wife sued
SCE in the Superior Court of California, County of San Diego in the sixth
lawsuit. The case was removed to the U.S. District Court for the Southern
District of California. SCE filed a motion to dismiss the complaint for failure
to state a claim. In April 1998, the plaintiffs and SCE stipulated that SCE's
motion to dismiss be granted and that the plaintiffs be given leave to file an
amended complaint on or before May 11, 1998. On May 11, 1998, the plaintiffs
filed a first amended complaint. On May 22, 1998, SCE filed an answer denying
the material allegations of the first amended complaint.
False Claims Act Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, in September 1997, SCE became
aware of a complaint filed in the Southern District of the U.S. District Court
of California by a former San Onofre employee, acting at his own initiative on
behalf of the United States under the False Claims Act, against SCE and SDG&E.
SCE and SDG&E filed separate motions to dismiss this lawsuit on November 6,
1997. The former employee responded to both motions on December 20, 1997. SCE
and SDG&E replied to the former employee's responses on January 13, 1998. Oral
argument on the motion to dismiss was heard on January 20, 1998. On July 1,
1998, the U.S. District Court granted SCE's motion to dismiss. The court found
that the filed rate doctrine barred the former employee's federal claims, but
declined to rule on whether the state law claims would be likewise barred.
Instead, the court declined to exercise jurisdiction over the state law claims
in the wake of the dismissal of the federal claims.
Mohave Generating Station Environmental Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, on February 19, 1998, the
Sierra Club and the Grand Canyon Trust filed suit in the U.S. District Court of
Nevada against SCE, which operates Mohave, and the other three co-owners of
Mohave Generating Station. The lawsuit alleges that Mohave has been violating
various provisions of the Clean Air Act, the Nevada state implementation plan,
certain Environmental Protection Agency orders, and applicable pollution permits
relating to opacity and sulfur dioxide emission limits over the last five years.
The plaintiffs seek declaratory and injunctive relief as well as civil
penalties. Under the Clean Air Act, the maximum civil penalty obtainable is
$25,000 per day per violation. SCE and the co-owners
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obtained an extension to respond to the complaint and on April 10, 1998, a
motion to dismiss was filed. The plaintiffs filed an opposition to the motion to
dismiss and a motion for partial summary judgment on May 8, 1998. On May 29,
1998, SCE and the co-owners filed their reply brief to the plaintiffs'
opposition. On June 15, 1998, the plaintiffs filed their final reply brief. SCE
and the co-owners filed their final reply to plaintiffs' opposition on June 25,
1998. The initial ruling by the court on these motions is expected in early
fall.
In addition, on June 4, 1998, the plaintiffs served SCE and its co-owners with a
60-day supplemental notice of intent to sue. This supplemental notice identified
additional causes of action that may be added to the ongoing litigation after
August 3, 1998. The new causes of action are expected to be a variation of the
existing allegations, and are not expected to raise new substantive issues. The
supplemental notice also stated the intent to add the National Parks and
Conservation Association as an additional plaintiff to these proceedings.
However, it is not expected that this will substantially change the timetable
for the court's initial ruling on all the pending motions.
California Proposition 9 Litigation
In November 1997, individuals representing The Utilities Reform Network, Public
Media Center and the Coalition Against Utility Taxes filed a proposed voter
initiative that seeks to overturn major portions of the electric industry
restructuring legislation enacted in California in September 1996 ("Statute").
The voter initiative proposes, among other things, to: (i) impose an additional
10% rate reduction for residential and small commercial customers beyond the 10%
reduction that went into effect on January 1, 1998; (ii) block stranded-cost
recovery of nuclear investments; (iii) restrict stranded-cost recovery of
non-nuclear investments unless the CPUC finds that the utility would be deprived
of the opportunity to earn a fair rate of return; and (iv) prohibit the
collection of any charges in connection with a financing order for the purpose
of making payments on rate reduction notes, or if the financing order is found
enforceable by a court, require the utility to offset such charges with an equal
credit to customers.
On June 24, 1998, the California Secretary of State announced that the proposed
voter initiative qualified for the November 1998 ballot. On July 17, 1998, the
Secretary of State designated the initiative as Proposition 9 on the ballot.
On May 22, 1998, Californians for Affordable and Reliable Electric Service
(CARES), a coalition of California business organizations and utilities
(sponsored by the California Business Roundtable, the California Chamber of
Commerce, San Diego Gas & Electric Company, the California Manufacturers
Association, Pacific Gas & Electric Company, the California Retailers
Association, and SCE, among other groups) filed a petition for writ of mandate
with the Court of Appeal of the State of California. The CARES petition
challenged the voter initiative (later designated as Proposition 9) as illegal
and unconstitutional on its face, and sought to remove the initiative from the
November 1998 ballot. On July 2, 1998, the Court of Appeal denied the CARES
petition. On July 6, 1998, CARES filed its appeal of the denial with the
California Supreme Court. On July 15, 1998, the California Supreme Court denied
the CARES petition for pre-election review. In these rulings, the Court of
Appeal of the State of California and the California Supreme Court both decided,
in effect, not to consider the legality and constitutionality of Proposition 9
prior to the November 1998 election.
If Proposition 9 is voted into law, further litigation would ensue. Under the
terms of a servicing agreement relating to the rate reduction notes, SCE (acting
as the servicer) is required to take such legal or administrative actions as may
be reasonably necessary to block or overturn any attempts to cause a repeal of,
modification of, or supplement to the Statute, the financing order issued by the
CPUC, or the rights of holders of the property right authorized by the Statute
and the financing order by legislative enactment, voter initiative or
constitutional amendment that would be adverse to holders of the rate reduction
notes. The costs of such actions would be payable out of collections of the
non-bypassable charges established by the financing order and the related
issuance advice letter as an operating expense related to the rate reduction
notes. However, SCE may be required to advance its own funds to satisfy its
obligations as servicer to take such legal and administrative actions.
SCE is unable to predict the outcome of this matter, but if Proposition 9 is
voted into law, and not immediately stayed and ultimately invalidated by the
courts, it could have a material adverse effect on
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SCE's results of operation and financial position as more specifically described
in California Proposition 9 -- November 1998 Voter Initiative in Item 2 of Part
1 of this Form, which is hereby incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation as amended through June 1, 1993
(File No. 1-2313, Form 10-K for the year ended December 31, 1993)*
3.2 Certificate of Correction of Restated Articles of Incorporation
of Southern California Edison Company as amended through June 1,
1993 (File No. 1-2313, Form 10-Q for the quarterly period ended
September 30, 1997)*
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3.3 Bylaws as adopted by the Board of Directors effective January 1,
1998 (File No. 1-2313, Form 10-K for the year ended
December 31, 1997)*
10. Material Contracts
10.1. Equity Compensation Plan
10.2. Retirement Plan for Directors
10.3. Director Deferred Compensation Plan
10.4. Form of Agreement for 1998 Employee Awards under the
Equity Compensation Plan
10.5. Form of 1998 Director Award under the Equity Compensation
Plan
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
- ---------------------
* Incorporated by reference pursuant to Rule 12b-32.
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
August 13, 1998
EXHIBIT 10.1
EDISON INTERNATIONAL
EQUITY COMPENSATION PLAN
As Restated Effective
January 1, 1998
<PAGE>
EDISON INTERNATIONAL
EQUITY COMPENSATION PLAN
TABLE OF CONTENTS
Section Page
1. GENERAL.................................................................1
1.1 PURPOSE.......................................................1
1.2 PARTICIPATION.................................................1
1.3 OPERATION, ADMINISTRATION AND DEFINITIONS.....................1
2. PLAN AWARDS.............................................................2
2.1 GENERAL.......................................................2
2.2 NONQUALIFIED STOCK OPTIONS....................................2
2.3 STATUTORY STOCK OPTIONS.......................................2
2.4 STOCK APPRECIATION RIGHTS.....................................3
2.5 PERFORMANCE AWARDS............................................4
2.6 DIVIDEND EQUIVALENTS..........................................5
2.7 STOCK GRANTS..................................................5
2.8 STOCK PAYMENTS................................................5
3. OPERATION AND ADMINISTRATION............................................5
3.1 EFFECTIVE DATE OF PLAN AND DURATION...........................5
3.2 ADMINISTRATION................................................5
3.3 AGGREGATE AND MAXIMUM AWARDS UNDER PLAN.......................7
3.4 ADJUSTMENT PROVISIONS.........................................8
3.5 GENERAL PROVISIONS............................................9
3.6 AMENDMENT AND TERMINATION OF THE PLAN........................12
3.7 TERMINATION OF EMPLOYMENT....................................12
4. DEFINITIONS............................................................13
<PAGE>
EDISON INTERNATIONAL
EQUITY COMPENSATION PLAN
As Restated Effective January 1, 1998
WHEREAS, the Officer and Management Long-Term Incentive Compensation Plans and
the Director Incentive Compensation Plan were approved by the shareholders of
SCEcorp on April 16, 1992 and were subsequently amended and restated as Edison
International plans; and
WHEREAS, it is deemed desirable and appropriate to replace those plans with a
new plan called the Edison International Equity Compensation Plan ("Plan") and
to authorize the issuance of additional shares of Common Stock under the Plan;
NOW, THEREFORE, the Plan is effective January 1, 1998 subject to approval by the
shareholders of Edison International, to be solicited at the annual meeting of
the shareholders to be held on April 16, 1998, or at any adjournment thereof
within twelve months following the date of the Plan's adoption by the Board of
Directors, and subject to the following terms and conditions:
1. GENERAL
1.1 Purpose.
The purpose of the Plan is to improve the long-term financial and
operational performance of Edison International and its affiliates by providing
eligible Participants a financial incentive which reinforces and recognizes
long-term corporate, organizational and individual performance and
accomplishments. The Plan is further intended to promote the interests of Edison
International and its shareholders by attracting and retaining qualified
officers, employees and directors and aligning their interests with those of the
other shareholders by encouraging Participants to acquire Common Stock or
otherwise increase their proprietary interest in Edison International.
1.2 Participation.
The Administrator has authority, in its sole discretion, to
determine and designate from time-to-time from among the Eligible Persons, those
who are to be granted Plan Awards and thereby become Participants in the Plan.
1.3 Operation, Administration and Definitions.
The operation and administration of the Plan, and the Plan Awards are subject
to the provisions of Article 3. Capitalized terms in the Plan are defined
in Article 4.
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2. PLAN AWARDS
2.1 General.
The Administrator may grant any Plan Award except as otherwise provided in this
Article 2 to eligible Executive Officers and Key Management Employees. The
Administrator may grant only Nonqualified Stock Options or Stock Grants to
Directors. Awards may be granted as alternatives or replacements of awards
outstanding under any other plan or arrangement of another business or entity,
all or a portion of which is acquired by an EIX Company. Each Plan Award will be
evidenced by a written instrument specifying the date of grant and may include
or incorporate by reference any additional terms and conditions consistent with
the Plan as determined in the discretion of the Administrator. The Administrator
may grant any Plan Award permitted under the Plan which is otherwise payable in
Common Stock in the form of a cash equivalent award.
2.2 Nonqualified Stock Options.
The grant of a Nonqualified Stock Option entitles the Participant to purchase
shares of Common Stock at an exercise price established by the Administrator.
Nonqualified Stock Options awarded pursuant to the Plan are subject to the
following terms and conditions:
(a) The exercise price of each Nonqualified Stock Option will be determined by a
method established by the Administrator at the time of the grant, except that
the exercise price may not be less than one hundred percent of the Fair Market
Value of the Common Stock as of the Pricing Date.
(b) Upon the exercise of a Nonqualified Stock Option, the purchase price will be
payable in full in cash and/or its equivalent, such as Common Stock, acceptable
to Edison International. Any shares so assigned and delivered to Edison
International in payment or partial payment of the purchase price will be valued
at their Fair Market Value on the exercise date.
(c) No fractional shares will be issued pursuant to the exercise of a
Nonqualified Stock Option. Cash payments will be made in lieu of fractional
shares.
(d) No Nonqualified Stock Option may be exercised more than ten years from the
date of the grant. Each Nonqualified Stock Option granted under this Plan will
also be subject to earlier termination as provided in this Plan.
2.3 Statutory Stock Options.
The grant of a Statutory Stock Option entitles the Participant to purchase
shares of Common Stock at an exercise price established by the Administrator.
Statutory Stock Options awarded pursuant to the Plan will be subject to the
following terms and conditions:
(a) The purchase price of each share of Common Stock under a Statutory Stock
Option will be at least equal to the Fair Market Value of a share of the Common
Stock on the date of grant; provided, however, that if a Participant, at the
time a Statutory Stock Option is granted, owns stock representing more than ten
percent of the total combined voting power of all classes of stock of Edison
2
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International (as defined in Section 424(d) or (e) of the Code), then the
exercise price of each share of Common Stock subject to such Statutory Stock
Option will be at least one hundred and ten percent of the Fair Market Value of
such share of Common Stock on the date of grant.
(b) No Statutory Stock Option may be awarded more than ten years after this Plan
is adopted, nor may it be exercised more than ten years from the date of the
grant. Each Statutory Stock Option granted under this Plan will also be subject
to earlier termination as provided in this Plan.
(c) Upon the exercise of a Statutory Stock Option, the purchase price will be
payable in full in cash and/or its equivalent, such as Common Stock, acceptable
to Edison International. Any shares so assigned and delivered to Edison
International in payment or partial payment of the purchase price will be valued
at their Fair Market Value on the exercise date.
(d) The Fair Market Value (determined at the time the Statutory Stock Option is
granted) of the shares of Common Stock for which any Participant may be granted
Statutory Stock Options that are first exercisable during any one calendar year
(including Statutory Stock Options under all plans of Edison International) will
not in the aggregate exceed $100,000. To the extent that the aggregate Fair
Market Value of such shares exceeds $100,000, such Options shall be treated as
Nonqualified Stock Options.
(e) No fractional share will be issued pursuant to the exercise of a Statutory
Stock Option. Cash payments will be made in lieu of fractional shares.
2.4 Stock Appreciation Rights.
The grant of a Stock Appreciation Right entitles the Participant to receive in
cash or stock, the value equal to all or a portion of the appreciation in value
of Common Stock determined pursuant to Subsection 2.4(d). Stock Appreciation
Rights awarded pursuant to the Plan will be subject to the following terms and
conditions:
(a) A Stock Appreciation Right may be granted:
(i) at any time if unrelated to an Option;
(ii) either at the time of grant, or at any time thereafter during
the option term if related to a Nonqualified Stock Option;
(iii) only at the time of grant if related to a Statutory Stock
Option.
(b) A Stock Appreciation Right granted in connection with an Option will
entitle the Holder of the related Option, upon exercise of the Stock
Appreciation Right and surrender of the related Option, or any portion
thereof to the extent unexercised, with respect to the number of shares
as to which such Stock Appreciation Right is exercised, to receive
payment of an amount computed pursuant to Subsection 2.4(d). Such
Option will, to the extent surrendered, then cease to be exercisable.
(c) Subject to Subsection 2.4(g), a Stock Appreciation Right granted in
connection with an Option hereunder will be exercisable at such time or
times, and only to
3
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the extent that a related Option is exercisable, and will not be
transferable except to the extent that such related Option may be
transferable.
(d) Upon the exercise of a Stock Appreciation Right related to an Option,
the Holder will be entitled to receive payment of an amount determined
by multiplying:
(i) The difference obtained by subtracting the purchase price of a
share of Common Stock specified in the related Option from the
Fair Market Value of a share of Common Stock on the date of
exercise of such Stock Appreciation Right, by
(ii) The number of shares to which such Stock Appreciation
Right has been exercised.
(e) The Administrator may grant Stock Appreciation Rights unrelated to
Options. Subsection 2.4(d) will be used to determine the amount payable
at exercise of such Stock Appreciation Rights if Fair Market Value is
used, except that Fair Market Value will not be used if the
Administrator specified in the award that book value or another measure
as deemed appropriate by the Administrator was to be used. In applying
the formula in Subsection 2.4(d), the initial share value specified in
the Stock Appreciation Right award will be used in lieu of the price
"specified in the related Option."
(f) Payment of the amount determined under Subsection 2.4(d) or (e) may be
made solely in whole shares of Common Stock in a number determined at
their Fair Market Value on the date of exercise of the Stock
Appreciation Right or alternatively, at the sole discretion of the
Administrator, solely in cash or in a combination of cash and shares as
the Administrator deems advisable. If the Administrator decides to make
full payment in shares of Common Stock, and the amount payable results
in a fractional share, no fractional share will be issued. Payment for
the fractional share will be made in cash only.
(g) The Administrator may, at the time a Stock Appreciation Right is
granted, impose such conditions on the exercise of the Stock
Appreciation Right as may be required to satisfy the requirements of
Rule 16b-3, as applicable (or any other comparable provisions in effect
at the time or times in question). Without limiting the generality of
the foregoing, the Administrator may determine that a Stock
Appreciation Right may be exercised only during the period beginning on
the third business day and ending on the twelfth business day following
the publication of Edison International's quarterly and annual
summarized financial data.
2.5 Performance Awards.
The grant of a Performance Award entitles the Participant to receive in cash an
amount determined by formula established by the Administrator over a specified
term. Performance Awards may be based on Common Stock performance over a period
determined in advance by the Administrator or may be based on any other measures
as determined appropriate by the Administrator, including the performance of
hypothetical equity-related measures of any EIX Company. Payment will be in cash
4
<PAGE>
unless replaced by a Stock Payment in full or in part as determined by the
Administrator.
2.6 Dividend Equivalents.
The grant of Dividend Equivalents entitles the Participant to receive cash or
stock based on the dividends declared on the Common Stock on record dates during
the period between the date a Plan Award is granted and the date such Plan Award
is exercised or paid. Dividend Equivalents may be awarded separately or in
connection with Plan Awards, whether payable in cash or Common Stock. Subject to
Sections 3.3 and 3.4, such Dividend Equivalents will be converted to cash or
additional shares by such formula and at such time as may be determined by the
Administrator.
2.7 Stock Grants.
The award of a Stock Grant entitles the Participant to receive a specified
amount of Common Stock on the grant date. Stock Grants may be awarded pursuant
to the Plan to non-employee Directors only subject to the terms and conditions
established at the time of the award. Stock Grants may also be awarded in the
form of stock units with payment in cash delayed until retirement or as
otherwise provided at the time of grant.
2.8 Stock Payments.
The Administrator may approve Stock Payments of Common Stock to Eligible Persons
for all or any portion of the compensation (other than base salary) that would
otherwise become payable to a Participant in cash. Notwithstanding anything to
the contrary contained in this Plan, if the written instrument evidencing any
Plan Award states that the Plan Award will be paid in cash, the Administrator
may not make a Stock Payment in lieu thereof, and the Plan Award will be
redeemable or exercisable by the Holder only for cash.
3. OPERATION AND ADMINISTRATION
3.1 Effective Date of Plan and Duration.
This Plan will become effective on January 1, 1998, subject, however, to
approval by the shareholders of Edison International at their next annual
meeting or at any adjournment thereof, within twelve months following the date
of its adoption by the Board of Directors. Unless the Plan is terminated earlier
pursuant to Section 3.6, no Plan Awards will be made after December 31, 2007.
3.2 Administration.
(a) The Plan will be administered with respect to Executive Officers, Key
Management Employees, or Directors as follows:
(i) Executive Officers. The Administrator of the Plan for purposes
of Plan Awards made to Executive Officers is the Committee.
The Administrator has, and may exercise, such powers and
authority of the Board as may be necessary or appropriate for
the Administrator to carry out its functions as described in
the Plan. The Administrator has sole authority in its
discretion to determine the Executive Officers to whom, and
the time or times at which, Plan Awards may be granted, the
nature of the Plan
5
<PAGE>
Award, the numberof shares of Common Stock or the amount of
cash that makes up each Plan Award, the pricing and amount of
any Plan Award, the objectives, goals and performance criteria
(which need not be identical) utilized to measure the value of
Plan Awards, the form of payment (cash or Common Stock or a
combination thereof) upon the event or events giving rise to
payment of a Plan Award, the vesting schedule of any Plan
Award, the term of any Plan Award, and such other terms and
conditions applicable to each individual Plan Award as the
Administrator will determine. The Administrator may grant at
any time additional Plan Awards to Participants who have
previously received Plan Awards during the year. The purchase
price or initial value of the Plan Awards may be established
by the Administrator without regard to the existing Plan
Awards or such other grants. Further, the Administrator may,
with the consent of a Participant, amend the terms of any
existing Plan Award previously granted to include or amend any
provisions which could be incorporated in such a Plan Award at
the time of such amendment except that repricing of
Nonqualified Stock Options is not permitted.
The Administrator has the sole authority to interpret the
Plan, to determine the terms and provisions of the Plan Award
agreements, and to make all determinations necessary or
advisable for the administration of the Plan. The
Administrator has authority to prescribe, amend, and rescind
rules and regulations relating to the Plan. All
interpretations, determinations, and actions by the
Administrator will be final, conclusive, and binding upon all
parties. Any action of the Administrator with respect to the
administration of the Plan will be taken pursuant to a
majority vote or by the unanimous written consent of its
members. The Administrator may delegate to one or more agents
such nondiscretionary administrative duties as it may deem
advisable.
(ii) Key Management Employees. The Administrator of the Plan for
purposes of Plan Awards made to Key Management Employees is
the Committee which will administer the Plan and Plan Awards
as provided in Paragraph 3.2(a)(i) except as provided in this
Paragraph 3.2(a)(ii). The Committee will annually determine
the type or types of Plan Awards, the total number of Plan
Awards to be authorized under the Plan for the following year,
the prices of Plan Awards (which may be any lawful
consideration as determined by the Committee), any additional
terms and conditions, and the form of the documentation to be
utilized. The Committee will allocate a portion of the total
number of Plan Awards to each EIX Company. Each EIX Company
will then have the authority to determine to whom Plan Awards
will be granted and the amount of the individual awards.
Each EIX Company may grant Plan Awards to newly eligible
individuals at any time during the year provided the total
number of Plan Awards authorized by the Committee for that EIX
Company for that year is not exceeded. With the consent of
Edison International, additional Plan
6
<PAGE>
Awards may be granted to Participants who have previously
received Plan Awards during the year. The purchase price or
initial value of the Plan Awards may be established without
regard to the existing Plan Awards or such other grants.
Further, with the consent of Edison International and the
Participant, each EIX Company may amend the terms of any
existing Plan Award previously granted to include or amend any
provisions which could have been incorporated in such a Plan
Award at the time of such amendment except that repricing of
Nonqualified Stock Options is not permitted.
(iii) Directors. The Plan will be administered as provided under
Paragraph 3.2(a)(i) with respect to any Plan Award made to a
Director except that the Board will be substituted for any
reference therein to the Committee. With respect to any
reference throughout the Plan as to discretion exercised by
the Committee, such discretion will be exercised by the Board
with respect to Directors.
(b) No member of the Board or the Committee or agent or designee thereof
will be liable for any action or determination made in good faith with
respect to the Plan or any transaction arising under the Plan.
(c) Notwithstanding the provisions of Section 3.6 regarding the term of the
Plan, all authority of the Board and the Committee with respect to Plan
Awards hereunder, including (subject to share limits) the authority to
amend outstanding Plan Awards, shall continue after the term of the
Plan, so long as any Plan Award remains outstanding. The Administrator
shall have the authority to permit a deferred payment in respect of
Plan Awards under any deferred compensation plan of Edison
International, consistent with Subsection 3.5(b). Any such settlement
or deferral shall not be deemed a new award hereunder so long as all
shares issuable in respect thereof do not exceed the aggregate number
of shares subject to the Plan Award so paid thereby.
(d) Notwithstanding anything to the contrary contained in this Plan, no
Nonqualified Stock Option may be exercised more than ten years from the
date of the grant. Each Nonqualified Stock Option granted under this
Plan will also be subject to earlier termination as provided in this
Plan.
3.3 Aggregate and Maximum Awards Under Plan.
(a) Effective on the Approval Date, and subject to the provisions of
Sections 3.3 and 3.4 of the Plan, the aggregate annual number of shares
of Common Stock that may be issued or transferred pursuant to Plan
Awards, and the total aggregate annual value of Plan Awards other than
Dividend Equivalents which are payable in a form other than Common
Stock, will not exceed one percent of the total issued and outstanding
shares of Common Stock, as of December 31 of the next preceding year,
cumulative from the Approval Date until the Plan termination date, or
the fair market value of such shares as determined on the dates of
grant of the Plan Awards. Any shares of Common Stock available that are
not awarded during a calendar year, or portion thereof, will be
available for grant in
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may subsequent year, or portion thereof.On an annual basis, as long as
any Plan Awards are outstanding andhave not been paid, Dividend
Equivalents payable in cash will not exceed the annual dividend payable
on the aggregate shares of Common Stock authorized under the Plan
cumulative from the Approval Date.
(b) No Plan Award to an individual Participant, other than a Director,
during any calendar year will exceed 500,000 shares of Common Stock or
the value of such shares at the time of grant except that the maximum
number of Statutory Stock Options will also not exceed the limitations
set forth in Section 2.3. No Stock Grant to a Director during any
calendar year will exceed 2,500 shares of Common Stock, and no
Nonqualified Stock Option award to a Director during any calendar year
will exceed 12,500 shares of Common Stock. The shares to be delivered
under the Plan will be made available, at the discretion of Edison
International, either from authorized but unissued shares of Common
Stock or from shares purchased on the open market.
(c) If any Plan Award expires, is forfeited, is canceled, or otherwise
terminates for any reason other than upon exercise or payment, the
shares of Common Stock (provided the Participant receives no benefit of
ownership) or equivalent value that could have been delivered will not
be charged against the limitations provided above and may again be made
subject to Plan Awards. However, shares subject to Stock Appreciation
Rights settled in cash will not be charged against the share
limitations provided above, but only against the fair market value
limitation.
3.4 Adjustment Provisions.
(a) Subject to the provisions of this Section 3.4, if the outstanding
shares of Common Stock are increased, decreased, or exchanged for a
different number or kind of shares or other securities, or if
additional shares or new or different shares or other securities are
distributed with respect to such shares of Common Stock or other
securities, through merger, consolidation, sale of all or substantially
all of the property of Edison International, reorganization,
recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other distribution with respect to such shares
of Common Stock or other securities, an appropriate and proportionate
adjustment may be made in (i) the maximum number and kind of shares
provided in Article 3 of the Plan, (ii) the maximum individual award,
(iii) the number and kind of shares or other securities subject to the
then outstanding Plan Awards, and (iv) the price for each share or
other unit of any other securities subject to the then outstanding Plan
Awards without change in the aggregate purchase price or value as to
which Plan Awards remain exercisable or subject to restrictions.
(b) Despite the foregoing, upon dissolution or liquidation of Edison
International, or upon a reorganization, merger, or consolidation of
Edison International with one or more corporations as a result of which
Edison International is not the surviving corporation, or upon the sale
of all or substantially all the property of Edison International, all
Options, Stock Appreciation Rights, and other Plan Awards then
8
<PAGE>
outstanding under the Plan willbefully vested and exercisable unless
provisions are made in connection with such transaction for the
continuance of the Plan and the assumption of or the substitution for
such Plan Awards of new Options, Stock Appreciation Rights, or other
Plan Awards covering the stock of a successor employer corporation, or
a parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and prices.
(c) Any adjustments pursuant to this Section 3.4 will be made by the
Administrator, whose determination as to what adjustments will be made
and the extent thereof will be final, binding, and conclusive. No
fractional interest will be issued under the Plan on account of any
such adjustments. Only cash payments will be made in lieu of fractional
shares.
(d) Notwithstanding the foregoing, if a reorganization, merger,
consolidation, or other corporate transaction is consummated following
and related to the occurrence of a Distribution Date, as that term is
defined in the Rights Agreement approved by the Edison International
Board of Directors on November 20, 1996, as a result of which Edison
International is not the surviving corporation, all Options, Stock
Appreciation Rights, and other Plan Awards then outstanding under the
Plan will fully vest. This Plan may not be terminated, nor may any Plan
Award be cashed out, modified or terminated without the consent of the
Holder, by Edison International or its successor in interest during the
subsequent period necessary to allow Plan Awards to remain exercisable
for at least two years following the close of the transaction, or where
applicable, through the first exercise period occurring at least two
years after the close of the transaction. During such subsequent
period, valuation procedures and exercise periods will occur on a basis
consistent with past practice.
3.5 General Provisions.
(a) With respect to any share of Common Stock issued or transferred under
any provision of the Plan, such shares may be issued or transferred
subject to such conditions, in addition to those specifically provided
in the Plan, as the Administrator may direct.
(b) Notwithstanding the term of a Plan Award, the Administrator may approve
the delayed payment or delivery of any cash or shares of Common Stock
which may become due under the Plan. Any such delayed payment or
delivery must specifically be authorized by the Administrator in
writing and shall be subject to any conditions, restrictions or
requirements as the Administrator may determine.
The Administrator may permit the deferral of any cash or Common Stock
payable in respect of a Plan Award in the form of Stock Units which may
earn Dividend Equivalents and other compensation in respect thereof,
and the Committee may provide that such Stock Units and Dividend
Equivalents shall eventually be paid in the form of shares of Common
Stock (subject to share limits).
In the event that the purchase price of an Option is paid in full in
shares of Common Stock and the delivery of shares of Common Stock in
excess of the
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option price isdeferred, Stock Units may be credited in respect of such
excess shares and may earn Dividend Equivalents or other compensation
in respect thereof, and the number of shares of Common Stock issued in
respect of the deferred shares may include the number of such deferred
shares and the number of Stock Units credited as Dividend Equivalents
(subject to share limits).
In addition, during the term of the Plan, the Committee may grant Stock
Units to selected employees as dividend equivalents under and as set
forth in any Edison International option gain deferral program (the
"Deferral Program") and may deliver shares of Common Stock in respect
to such Stock Units pursuant to the selected employee's election under
the Deferral Program."
(c) Nothing in the Plan or in any instrument executed pursuant to the Plan
will confer upon any Holder any right to continue in the employ of an
EIX Company or affect the right of the EIX Company to terminate the
employment of any Holder at any time with or without cause.
(d) No shares of Common Stock will be issued or transferred pursuant to a
Plan Award unless and until all then applicable requirements imposed by
federal and state securities and other laws, rules, and regulations and
by any regulatory agencies having jurisdiction, and by any stock
exchanges upon which the Common Stock may be listed, have been fully
met. As a condition precedent to the issue of shares pursuant to the
grant or exercise of a Plan Award, Edison International may require the
Holder to take any reasonable action to meet such requirements.
(e) No Holder (individually or as a member of a group) and no beneficiary
or other person claiming under or through such Holder will have any
right, title, or interest in or to any shares of Common Stock allocated
or reserved under the Plan or subject to any Plan Award except as to
such shares of Common Stock, if any, that have been issued or
transferred to such Holder.
(f) Except to the extent prohibited by applicable law or the applicable
rules of a stock exchange, the Administrator may delegate all or any
portion of its responsibilities and powers to any one or more of its
members or any other person or persons selected by it. Such delegation
may be revoked by the Administrator at any time.
(g) Edison International may make such provisions as it deems appropriate
to withhold any taxes which it determines it is required to withhold in
connection with any Plan Award. Subject to this Subsection, however,
and without in anyway limiting the generality of Section 2.4, the
Administrator, in its sole discretion and subject to such rules as the
Administrator may adopt, may permit Participants to elect (i) cash
settlement of any Plan Award, or (ii) to apply a portion of the shares
of Common Stock they are otherwise entitled to receive pursuant to a
Plan Award, or shares of Common Stock already owned, to satisfy the tax
withholding obligation arising from the receipt, vesting, or exercise
of any Plan Award, as applicable.
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(h) No Plan Award and no right under the Plan, contingent or otherwise,
will be assignable or subject to any encumbrance, pledge, or charge of
any nature, or otherwise transferable (meaning, without limitation,
that such Plan Award or right is exercisable during the Holder's
lifetime only by him/her or by his/her guardian or legal
representative) except that, under such rules and regulations as Edison
International may establish pursuant to the terms of the Plan, a
beneficiary may be designated with respect to a Plan Award in the event
of death of a Holder of such Plan Award, and Plan Awards may be
transferred pursuant to a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act,
or the regulations promulgated thereunder. If such beneficiary is the
executor or administrator of the estate of the Holder of such Plan
Award, any rights with respect to such Plan Award may be transferred to
the person or persons or entity (including a trust) entitled thereto
under the will of the Holder of such Plan Award, or, in the case of
intestacy, under the laws relating to intestacy. Plan Awards
transferred remain subject to all applicable terms, conditions and
restrictions.
(i) Notwithstanding Subsection (h), the Administrator will have the
authority, in its discretion, to grant (or to sanction by way of
amendment of an existing grant) Plan Awards which may be transferred by
the Participant during his/her lifetime to any member of his/her
immediate family or to a trust, limited liability corporation, family
limited partnership or other equivalent vehicle, established for the
exclusive benefit of one or more members of his/her immediate family,
in which case the written documentation containing the terms and
conditions of such Plan Awards will so state. A transfer of a Plan
Award pursuant to this Subsection may only be effected by the
Administrator at the written request of a Participant and will become
effective only when recorded in Edison International's record of
outstanding Plan Awards. In the event a Plan Award is transferred as
contemplated in this Subsection, such Plan Award may not be
subsequently transferred by the transferee except by will or the laws
of descent and distribution. In the event a Plan Award is transferred
as contemplated in this Subsection, such Plan Award will continue to be
governed by and subject to the terms, conditions and restrictions of
the Plan and the relevant grant. A transfer of a Statutory Stock Option
as such pursuant to this provision will only be permissible if and to
the extent that Section 422 of the Code, as in effect from time to
time, does not cause such Statutory Stock Option to be treated as a
non-statutory stock option that does not meet the requirements of
Section 422 of the Code. As used in this Subsection, "immediate family"
will mean, with respect to any person, a spouse, child, stepchild or
grandchild, and will include relationships arising from legal adoption.
(j) No fractional shares will be issued under the Plan. Only cash payments
will be made in lieu of fractional shares.
(k) Each EIX Company will be liable for payment of cash due under the Plan
with respect to any Participant to the extent that such benefits are
attributable to services rendered for that EIX Company by the
Participant. Any disputes related
11
<PAGE>
to liability of an EIX Company for cash payments will be resolved by
the Committee.
(l) Future services shall not constitute payment or part payment for
previously unissued shares of Common Stock to be paid as a Plan Award.
(m) Edison International may, in its discretion, repurchase shares received
upon exercise of a Plan Award if requested by the Holder.
(n) This Plan will be governed by the laws of the State of California.
3.6 Amendment and Termination of the Plan.
(a) The Board will have the power, in its discretion, to amend, suspend, or
terminate the Plan at any time if, in the sole judgment of the Board,
such action is in the best interests of Edison International. No
amendment will, without approval of the shareholders of Edison
International, except as provided in Section 3.4 of the Plan,
materially increase the number of securities which may be issued under
the Plan, the maximum individual Plan Award, or the duration of the
Plan.
(b) The Administrator may, with the consent of a Holder, make such
modifications in the terms and conditions of any Plan Award as it deems
advisable or cancel the Plan Award (with or without consideration). No
amendment, suspension, or termination of the Plan will, without the
consent of the Holder, alter, terminate, impair, or adversely affect
any right or obligation under any Plan Award previously granted under
the Plan.
3.7 Termination of Employment.
(a) The Administrator shall provide in the terms and conditions of any Plan
Award at the time of grant the extent to which termination of
employment, or termination of service as a Director, will shorten the
period for exercising an Award.
(b) In the event a Holder of a Plan Award ceases to be an employee, the
Holder must have been a Participant for the entire incentive or vesting
period applicable to the Plan Award in order to be eligible for the
full amount of any such Plan Award. Pro-rata awards may be distributed
to Participants who are discharged or who terminate their employment
for reasons other than incompetence, misconduct or fraud, or who
retired or became disabled during the incentive period, or who were
Participants for less than the full incentive period. A pro-rata award
may be made to a Participant's designated beneficiary in the event of
death of a Participant during an incentive period prior to an award
being made.
(c) The Administrator may in its sole discretion determine, with respect to
a Plan Award, that any Holder who is on a leave of absence for any
reason will be considered as still in the employ of an EIX Company,
provided that rights to such Plan Award during an unpaid leave of
absence will be limited to the extent to which such right was earned or
vested at the commencement of such leave of absence.
(d) The Administrator may vary the requirements of this Section 3.7 in the
terms and conditions of a Plan Award at the time of grant, or on a
case-by-case basis
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<PAGE>
thereafter, as it deems appropriate and in the best interests of
Edison International. The Administrator may accelerate the vesting of
all, or a portion of any Plan Award, and may extend the above-described
exercise periods to as long as the term provided in the terms and
conditions of the original Plan Award.
4. DEFINITIONS.
Whenever the following terms are used in this Plan, they will have the meanings
specified below unless the context clearly indicates otherwise:
"Administrator" is the Committee or the Board as determined under Article 3.
"Approval Date" means April 16, 1998, or such later date on which shareholder
approval of the Plan occurs.
"Board of Directors" or "Board" means the Board of Directors of Edison
International.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means those Directors on the Compensation and Executive Personnel
Committee of the Board who qualify as both "non-employee Directors" under Rule
16b-3 and "outside Directors" under Section 162(m) of the Code. The Board will
ensure at least two members are qualified to administer the Plan at all times.
"Common Stock" means the common shares of Edison International.
"Director" means a non-employee member of the Board of Directors of an EIX
Company.
"Dividend Equivalent" means the additional amount of cash or Common Stock as
described in Section 2.6 of the Plan.
"EIX Company" means Edison International or the Edison International affiliate
that the Participant serves as an employee or Director. For this purpose, an
Edison International affiliate is any company during any period in which it is a
"subsidiary company" as that term is defined in Section 424(f) of the Code.
"Eligible Person" means Directors, Executive Officers, or Key Management
Employees of an EIX Company.
"Executive Officer" means an executive officer of Edison International, as
determined from time-to-time by Edison International pursuant to Section 16 of
the Securities Exchange Act of 1934, as amended, and may include one or more
individuals who are officers of other EIX Companies.
"Fair Market Value" means the average of the highest and lowest sale prices for
the Common Stock as reported in the western edition of The Wall Street Journal
for the New York Stock Exchange Composite Transactions for the date as of which
such determination is made.
"Holder" means a person holding a Plan Award.
"Key Management Employee" means an officer or management employee of an EIX
Company whose participation as such has been approved by the Committee or the
EIX Company and who has not been determined to be an Executive Officer of Edison
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International pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended.
"Nonqualified Stock Option" means an option, other than a Statutory Stock
Option, granted pursuant to Section 2.2 of the Plan.
"Option" means either a Nonqualified Stock Option or Statutory Stock Option.
"Participant" is an Eligible Person who has been granted a Plan Award.
"Performance Award" means a Plan Award granted pursuant to Article 2.5 of the
Plan.
"Plan" means the Equity Compensation Plan as set forth herein, which may be
amended from time-to-time.
"Plan Award" means any award (including any award or crediting of Stock Units)
which may be made under the Plan by the Administrator.
"Pricing Date" means the date the Plan Award is granted except that the
Administrator may provide that the Pricing Date is the date the recipient is
hired or promoted if the grant of the Plan Award occurs within 90 days of such
event.
"Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended.
"Statutory Stock Option" means an option as defined under Section 422 of the
Code granted pursuant to Section 2.3 of the Plan.
"Stock Appreciation Right" or "Right" means a right granted pursuant to Section
2.4 of the Plan.
"Stock Grant" means an award made in shares of Common Stock or Stock Units
pursuant to Section 2.7 of the Plan.
"Stock Payment" means a payment pursuant to Section 2.8 in shares of Common
Stock to replace all or any portion of the compensation (other than base salary)
that would otherwise become payable to a Participant in cash.
"Stock Unit" means a non-voting unit of measurement which is deemed for
bookkeeping purposes to be equivalent to one outstanding share of Common Stock
(subject to adjustment).
EDISON INTERNATIONAL
Lillian R. Gorman
- --------------------------------------------
Lillian R. Gorman, Vice President
EXHIBIT 10.2
EDISON INTERNATIONAL
SOUTHERN CALIFORNIA EDISON COMPANY
RETIREMENT PLAN FOR DIRECTORS
As Amended February 19, 1998
Contingent on Shareholder Approval of the
Equity Compensation Plan on April 16, 1998
I. GENERAL
1.1 Purpose
The purpose of this Plan is to provide recognition and retirement compensation
to eligible members of the Edison International and Southern California Edison
Company Boards of Directors ("Boards") to facilitate the companies' ability to
attract, retain, and reward members of the Boards.
1.2 Eligibility Eligibility
in this Plan is limited to members of the Boards who have at least five years of
total service (which need not be continuous service) as directors, and who
retire or resign from the Boards in good standing or die while in service and in
good standing. This Plan covers periods of service both as an employee director
and as an outside director. For purposes of this Plan, a year of service will be
determined on a calendar year basis and a full year of service will be credited
for any fractional year served.
II. AMOUNT OF ANNUAL BENEFIT
2.1 Benefit
The Plan pays an annual retirement benefit equal to the annual retainer in
effect at the time of the eligible director's retirement, resignation, or death.
The retirement benefit will be paid quarterly in advance in equal installments
for the period described in Section 3.1(a). No additional amount will be paid
for service on any of the committees of the Boards, nor will interest be paid.
2.2 Benefit of Directors in Service Before 1996 If a director has Board service
prior to 1996, the Plan will pay an annual retirement benefit determined by
multiplying the director's years of service before and after January 1, 1996 by
the applicable compensation base and dividing the sum of the products by the
director's total years of service. For service before 1996, the compensation
base will be (i) the annual retainer plus (ii) the regular Board meeting fee
multiplied by the annual number of regular meetings of the Board as described in
the
<PAGE>
Bylaws. For service after 1995, the compensation base will be the annual
retainer. The annual retainer, the regular Board meeting fee and the number of
regular meetings of the Board will be those in effect, or made effective, at the
time of the eligible director's retirement, resignation or death.
2.3 Termination of Benefit Accrual for Service After 1997
Notwithstanding any other provision of this Plan to the contrary, no Board
Service after 1997 of any Director who is elected or re-elected as a Director in
1998, or any time thereafter, will be taken into account for purposes of
determining benefits payable under this Plan. Benefits accrued based on Board
service prior to 1998 shall otherwise remain payable in accordance with the
terms of the Plan.
III. DURATION OF PAYMENTS
3.1 Benefit Period
(a) The Plan benefit will be paid to the retired director or his/her surviving
spouse for the number of years equal to the director's total years of service on
the Boards.
(b) A break in service on the Board of Edison International or Southern
California Edison Company which was required to allow the director to render a
period of uninterrupted high-level government service, and which was followed by
reelection to that Board within 12 months after the completion of such
government service, will be recognized under this Plan as a period of service on
that Board.
(c) A year of simultaneous service on the Boards of Edison International and
Southern California Edison Company will be counted as one year for computation
of the Plan's benefit period.
3.2 Commencement of Payments
The first quarterly installment of Plan Benefits will be paid on the first day
of the calendar quarter following the director's retirement as a director, or
the 65th anniversary of the director's birth, whichever occurs later.
3.3 Survivor Benefits
(a) If the director dies without leaving a surviving spouse, a lump sum of any
benefit payments remaining will be calculated and paid to the estate of the
director.
(b) If the director dies leaving a surviving spouse before retiring from the
Boards, benefit payments to that spouse will begin on the first day of the
calendar quarter following the date of the director's death, or the 65th
anniversary of the director's birth, whichever occurs later.
(c) If the director dies leaving a surviving spouse after benefit payments have
begun, benefit payments will continue and be paid to that spouse.
<PAGE>
(d) If the director dies leaving a surviving spouse after retirement from the
Boards but before benefit payments have begun, benefit payments to that spouse
will begin on the first day of the calendar quarter following the 65th
anniversary of the director's birth.
3.4 Termination of Benefit Payments
Once begun, benefit payments to a retired director or his/her surviving spouse
will continue until the earlier of the
o completion of payments for the Benefit Period, or
o date of death of the later to die of the director or the
surviving spouse. Upon said death, a lump sum of any remaining
benefit payments will be calculated and paid to that person's
estate.
V. ADMINISTRATION
(a) This Plan is non-contributory, non-qualified and unfunded, and represents an
unsecured general obligation of each Company. No special fund or trust will be
created, nor will any notes or securities be issued with respect to any
retirement benefits.
(b) The Chair of each Company's Compensation and Executive Personnel Committee,
or the Vice President of Human Resources of Southern California Edison Company,
will have full and final authority to interpret this Plan, and to make
determinations advisable for the administration of this Plan, to approve
ministerial changes, and to approve changes as may be required by law or
regulation. All such decisions and determinations will be final and binding upon
all parties.
(c) If any person entitled to payments under this Plan is, in the opinion of the
Committees or their designee, incapacitated and unable to use such payments in
his/her own best interest, the Committees or their designee may direct that
payments (or any portion) be made to the person's spouse or legal guardian, as
an alternative to the payment to the person unable to use the payments. The
Committees or their designee will have no obligation to supervise the use of
such payments.
(d) This Plan will be governed by the laws of the State of California.
EDISON INTERNATIONAL AND
SOUTHERN CALIFORNIA EDISON COMPANY
Lillian R. Gorman
---------------------------------
Lillian R. Gorman, Vice President
EXHIBIT 10.3
Edison International
Director Deferred Compensation Plan
As Restated
Effective January 1, 1998
Contingent Upon Shareholder Approval
of the Equity Compensation Plan on April 16, 1998
<PAGE>
EDISON INTERNATIONAL
DIRECTOR DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Section Title Page
- ------- ----- ----
ARTICLE 1 DEFINITIONS 1
ARTICLE 2 PARTICIPATION 4
2.1 Participant Election 4
2.2 Annual Deferral 4
2.3 Continuation of Participation 4
ARTICLE 3 DIRECTOR DEFERRALS 4
3.1 Participation Election 4
3.2 Minimum Annual Deferral 5
3.3 Maximum Annual Deferral 5
3.4 Deferred Stock Units 5
3.5 Vesting 5
ARTICLE 4 DEFERRAL ACCOUNTS 5
4.1 Deferral Accounts 5
4.2 Timing of Credits 5
ARTICLE 5 RETIREMENT BENEFITS 6
5.1 Amount 6
5.2 Form of Retirement Benefits 7
5.3 Commencement of Benefits 7
5.4 Small Benefit Exception 7
ARTICLE 6 TERMINATION BENEFITS 7
6.1 Amount 7
6.2 Form of Termination Benefits 8
ARTICLE 7 SURVIVOR BENEFITS 8
7.1 Pre-Retirement Survivor Benefit 8
7.2 Post-Retirement Survivor Benefit 8
7.3 Post-Termination Survivor Benefit 9
7.4 Changing Form of Benefit 9
7.5 Small Benefit Exception 9
ARTICLE 8 CHANGE OF CONTROL 9
<PAGE>
EDISON INTERNATIONAL
DIRECTOR DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Section Title Page
- ------- ----- ----
ARTICLE 9 SCHEDULED AND UNSCHEDULED WITHDRAWALS 9
9.1 Scheduled Withdrawals 9
9.2 Unscheduled Withdrawals 10
ARTICLE 10 CONDITIONS RELATED TO BENEFITS
10.1 Nonassignability 11
10.2 Financial Hardship Distribution 11
10.3 No Right to Assets 11
10.4 Protective Provisions 11
10.5 Withholding 11
ARTICLE 11 PLAN ADMINISTRATION 12
ARTICLE 12 BENEFICIARY DESIGNATION 12
ARTICLE 13 AMENDMENT OR TERMINATION OF PLAN 13
13.1 Amendment of Plan 13
13.2 Termination of Plan 13
13.3 Amendment or Termination After Change of Control 13
13.4 Exercise of Power to Amend or Terminate 13
13.5 Constructive Receipt Termination 13
ARTICLE 14 CLAIMS AND REVIEW PROCEDURES 14
14.1 Claims Procedure 14
14.2 Review Procedure 14
14.3 Dispute Arbitration 14
ARTICLE 15 MISCELLANEOUS 16
15.1 Successors 16
15.2 Trust 16
15.3 Service Not Guaranteed 16
15.4 Gender, Singular and Plural 16
15.5 Captions 16
15.6 Validity 16
15.7 Waiver of Breach 17
15.8 Applicable Law 17
15.9 Notice 17
<PAGE>
EDISON INTERNATIONAL
DIRECTOR DEFERRED COMPENSATION PLAN
Restated Effective January 1, 1998
PREAMBLE
Edison International Director Deferred Compensation Plan benefits are available
to Eligible Directors of Edison International and its participating affiliates.
Amounts of compensation deferred by Participants pursuant to this Plan accrue as
liabilities of the participating Affiliate at the time of the deferral under the
terms and conditions set forth herein. By electing to defer compensation under
the Plan, Participants consent to Edison International sponsorship of the Plan,
but acknowledge that Edison International is not a guarantor of the benefit
obligations of other participating Affiliates. Each participating Affiliate is
responsible for payment of the accrued benefits under the Plan with respect to
its own Eligible Directors subject to the terms and conditions set forth herein.
ARTICLE 1
DEFINITIONS
Capitalized terms in the text of the Plan are defined as follows:
Administrator means the Compensation and Executive Personnel Committee of the
Board of Directors of the Company.
Affiliate means Edison International or any corporation or entity which (i)
along with Edison International, is a component member of a "controlled group of
corporations" within the meaning of Section 414(b) of the Code, and (ii) has
approved the participation of its directors in the Plan.
Annual Deferral means the amount of Compensation which the Participant elects to
defer for a Plan Year pursuant to Articles 2 and 3 of the Plan.
Beneficiary means the person or persons or entity designated as such in
accordance with Article 12 of the Plan.
Board means the Board of Directors of Edison International.
Change of Control means either: (i) the dissolution or liquidation of Edison
International or a Company; (ii) a reorganization, merger or consolidation of
Edison International or a Company with one or more corporations as a result of
which Edison
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International or a Company is not the surviving corporation; (iii) approval by
the stockholders of Edison International or a Company of any sale, lease,
exchange or other transfer (in one or a series of transactions) of all or
substantially all of the assets of Edison International or a Company; (iv)
approval by the stockholders of Edison International or a Company of any merger
or consolidation of Edison International or a Company, in which the holders of
voting stock of Edison International or a Company immediately before the merger
or consolidation will not own 50% or more of the outstanding voting shares of
the continuing or surviving corporation immediately after the merger or
consolidation; or (v) a change of at least 51% (rounded to the next whole
person) in the membership of the Board of Directors of Edison International or a
Company within a 24-month period, unless the election or nomination for election
by stockholders of each new director within the period was approved by the vote
of at least 85% (rounded to the next whole person) of the directors then still
in office who were in office at the beginning of the twenty-four-month period,
except that any replacement of directors who are employees of Edison
International or a Company, with other employees of Edison International or a
Company, will be disregarded and not be considered a change in membership.
Notwithstanding the foregoing, any reorganization, merger or consolidation of a
Company with Edison International or another Company will be disregarded and not
be considered a Change of Control.
Code means the Internal Revenue Code of 1986, as amended.
Company means the Affiliate the Participant serves as a director.
Compensation means the sum of the all retainers and meeting fees which would be
paid to a Participant as an Eligible Director for the Plan Year before
reductions for deferrals under the Plan.
Crediting Rate means the rate at which interest will be credited to Participant
Deferral Accounts. The rate will be determined annually in advance of the Plan
Year and will be equal to 120 percent of the Index Rate. Edison International
reserves the right to prospectively change the Crediting Rate or formula.
Deferral Account means the notional account comprised of Compensation deferrals
and Deferred Stock Units established for record keeping purposes for a
Participant pursuant to Article 5 of the Plan.
Deferral Period means the Plan Year covered by a valid Participation Election
previously submitted by a Participant, or in the case of a newly eligible
Participant, the balance of the Plan Year following the date of the
Participation Election.
Deferred Stock Unit means a bookkeeping entry linked to shares of Edison
International Common Stock on a one-for-one basis. Deferred Stock Units may be
credited to a Participant's account as a result of an award under the Equity
Compensation Plan or Dividend Equivalents on such an award.
2
<PAGE>
Dividend Equivalent means an amount equal to the dividend declared by the Board
on one share of Edison International common stock for any calendar quarter.
Eligible Director means a non-employee director of an Affiliate who (i) is a
U.S. director or an expatriate who is based and paid in the U.S., and (ii) is
designated by the Company as eligible to participate in the Plan (subject to the
restrictions in Article 8 and Section 10.2 of the Plan).
Financial Hardship means an unexpected and unforeseen financial disruption
arising from an illness, casualty loss, sudden financial reversal, or other such
unforeseeable occurrence as determined by the Administrator or its designee.
Needs arising from foreseeable events such as the purchase of a residence or
education expenses for children will not, alone, be considered a Financial
Hardship.
Index Rate means the 120-month average rate of 10-year U.S. Treasury Notes
determined for any Plan Year as of October 15th of the prior year.
Participant means an Eligible Director who has elected to participate and has
completed a Participation Election pursuant to Section 2.1 of the Plan or has
received an award of Deferred Stock Units under the Edison International Equity
Compensation Plan which has been credited under this Plan.
Participation Election means the Participant's written election to defer
Compensation under the Plan submitted on the form prescribed by the
Administrator for that purpose.
Plan means the Edison International Director Deferred Compensation Plan.
Plan Year means the calendar year.
Retirement means a separation from service after attaining age 55 with at least
5 years of service.
Scheduled Withdrawal means a distribution of all or a portion of the entire
amount of Annual Deferrals and earnings credited to the Participant's
Compensation Deferral Account as elected by the Participant pursuant to the
provisions of Article 9 of the Plan.
Termination for Cause means the Termination of Service of the Participant upon
willful failure by the Participant to substantially perform his or her duties
for the Company or the willful engaging by the Participant in conduct which is
injurious to the Company, monetarily or otherwise.
Termination of Service means the voluntary or involuntary cessation of the
Participant's service as a member of the Board of Directors of a Company for any
reason other than Retirement or death. Termination of Service will not be deemed
to have occurred for purposes of this Plan if the Participant continues to serve
on the
3
<PAGE>
Board of Directors of another participating Affiliate, or commences such service
within 30 days.
Unscheduled Withdrawal means a distribution of all or a portion of the entire
amount of Annual Deferrals and earnings credited to the Participant's
Compensation Deferral Account as requested by the Participant pursuant to the
provisions of Article 9 of the Plan.
Valuation Date means the last day of the month in which Termination of Service,
Retirement or death occurs, or the day before a Scheduled Withdrawal or
Unscheduled Withdrawal occurs.
ARTICLE 2
PARTICIPATION
2.1 Commencement
(a) An Eligible Director will become a Participant in the Plan on the first day
of the month coincident with or next following the date the director becomes an
Eligible Director, provided the Eligible Director has submitted to the
Administrator a Participation Election prior to that date. Except for directors
who become newly eligible during the Plan Year, the Participation Election must
be submitted to the Administrator during the enrollment period designated by the
Administrator which will always be prior to the commencement of the Plan Year.
(b) An Eligible Director will also become a Participant upon any award of
Deferred Stock Units made under the Edison International Equity Compensation
Plan and credited to this Plan.
2.2 Annual Deferral
Subject to the restrictions in Article 3, the Eligible Director will designate
his or her Annual Deferral for the covered Plan Year on the Participation
Election.
2.3 Continuation of Participation
Participation will continue as long as the Participant has a Deferral Account
balance under the Plan.
ARTICLE 3
DIRECTOR DEFERRALS
3.1 Participation Election
Eligible Directors may elect to make an Annual Deferral under the Plan by
submitting a Participation Election during the applicable enrollment period. The
Participation Election will designate the percentage of Compensation, in whole
percentage
4
<PAGE>
increments, that the Participant wishes to defer pursuant to the terms of the
Plan. Once made, a Participation Election will continue to apply for subsequent
Deferral Periods unless the Participant submits a new Participation Election
form during a subsequent enrollment period changing the deferral amount or
revoking the existing election. A Participation Election may be revoked by the
Participant upon 30 days written notice to the Administrator; however, such
Participant will be ineligible to make an Annual Deferral under the Plan for the
following Plan Year.
3.2 Minimum Annual Deferral
The minimum Annual Deferral for a Plan Year is 10% of the Participant's
Compensation.
3.3 Maximum Annual Deferral
The maximum Annual Deferral for a Plan Year is 100% of the Participant's
Compensation.
3.4 Deferred Stock Units
The Company will credit the Participant's account with any Deferred Stock Unit
award approved by the Board pursuant to the Equity Compensation Plan.
3.5 Vesting
Amounts deferred under this Article 3 and any earnings thereon will be 100%
vested at all times.
ARTICLE 4
DEFERRAL ACCOUNTS
4.1 Deferral Accounts
Solely for record keeping purposes, the Administrator will maintain Deferral
Accounts for Compensation and Deferred Stock Units for each Participant with
such subaccounts as the Administrator or its record keeper find necessary or
convenient in the administration of the Plan.
4.2 Timing of Credits
(a) Annual Deferrals. The Administrator will credit the Annual Deferrals to the
Participant's Compensation Deferral Account at the time such amounts would
otherwise have been paid to the Participant but for the Participation Election.
(b) Deferred Stock Units. The Administrator will credit Deferred Stock Units to
the Participant's Deferred Stock Unit Deferral Account as of the effective date
of any award of Deferred Stock Units under the Equity Compensation Plan.
5
<PAGE>
(c) Earnings Crediting Dates.
(i) The Administrator will credit interest at the Crediting Rate to
the Participant's Compensation Deferral Account on a daily basis,
compounded annually.
(ii) The Administrator will credit a Dividend Equivalent for each
Deferred Stock Unit credited to the Participant's Deferred Stock
Unit Deferral Account on the Edison International common stock
ex-dividend date each quarter. Dividend Equivalents so credited
will be converted into additional Deferred Stock Units based on
the closing price of Edison International Common Stock on that
date as reported in the Western Edition of the Wall Street
Journal. Fractional Dividend Equivalents and Deferred Stock Units
will be credited.
(d) Statement of Accounts. The Administrator will periodically provide to each
Participant a statement setting forth the balance of the Deferral Account
maintained for the Participant.
ARTICLE 5
RETIREMENT BENEFITS
5.1 Amount
(a) Deferred Compensation. Upon Retirement, the Company will pay to the
Participant a retirement benefit in the form provided in Section 5.2(a), based
on the balance of the Compensation Deferral Account as of the Valuation Date. If
paid as a lump sum, the retirement benefit will be equal to the Compensation
Deferral Account balance. If paid in installments, the installments will be paid
in amounts that will amortize the Compensation Deferral Account balance with
interest credited at the Crediting Rate over the period of time benefits are to
be paid. For purposes of calculating installments, the Compensation Deferral
Account will be valued as of December 31 each year, and the subsequent
installments will be adjusted for the next Plan Year according to procedures
established by the Administrator to reflect changes in the Crediting Rate.
(b) Deferred Stock Units. Upon Retirement, the Company will pay to the
Participant a retirement benefit in the form provided in Section 5.2(b), based
on the balance of the Deferred Stock Unit Deferral Account as of the Valuation
Date. If paid as a lump sum, the retirement benefit will be equal to the
Deferred Stock Unit Deferral Account balance. If paid in installments, the
installments will be paid in amounts that will amortize the Deferred Stock Unit
Deferral Account balance with Dividend Equivalents credited over the period of
time benefits are to be paid. For purposes of calculating installments, the
Deferred Stock Unit Deferral Account will be valued as of December 31 each year,
and the subsequent installments will be adjusted for the next Plan Year
according to procedures established by the Administrator to reflect any changes
in the Dividend Equivalent crediting rate.
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5.2 Form of Retirement Benefits
(a) Compensation Deferrals. The Participant may elect on the Participation
Election form to have the retirement benefit attributable to Compensation
deferrals paid in cash:
(i) In a lump sum,
(ii) In installments paid monthly over a period of 60, 120, or 180
months, or
(iii) In a lump sum of a portion of the Deferral Account upon
Retirement with the balance in installments paid monthly over a
period of 60, 120, or 180 months.
If no valid election is made, the Administrator will pay the retirement benefit
in installments over a 180 month period. Participants may change the form of
payout by written election filed with the Administrator; provided, however, that
if the Participant files the election less than 13 months prior to the date of
Retirement, the payout election in effect 13 months prior to the date of
Retirement will govern.
(b) Deferred Stock Units. The balance in the Deferred Stock Unit Deferral
Account will be paid in cash in a lump sum. At least six months prior to
retirement, the Participant may request distribution in monthly installments
over 5, 10, or 15 years subject to approval of the Board.
5.3 Commencement of Benefits
Payments will commence within 60 days after the date the Participant retires, or
attains age 55, whichever is later.
5.4 Small Benefit Exception
Notwithstanding the foregoing, the Administrator may, in its sole discretion:
(a) pay the benefits in a single lump sum if the sum of all benefits payable to
the Participant is less than or equal to $3,500.00, or
(b) reduce the number of installments elected by the Participant to 120 or 60 if
necessary to produce a monthly benefit of at least $300.00.
ARTICLE 6
TERMINATION BENEFITS
6.1 Amount
No later than 60 days following a Termination of Service, the Administrator will
pay to the Participant a termination benefit as of the Valuation Date equal to
(i) the balance of the Compensation Deferral Account, and (ii) the balance of
the Deferred Stock Unit Deferral Account.
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6.2 Form of Termination Benefits
(a) The Administrator will pay the Compensation Deferral Account termination
benefits in a single lump sum cash payment unless the Participant has previously
elected payment to be made in three annual installments. Installments paid under
this Section 6.2(a) will include interest at the Index Rate and will be
redetermined annually to reflect adjustments in that rate.
(b) The Administrator will pay the Deferred Stock Unit Deferral Account
termination benefit in a single lump sum cash payment.
(c) Notwithstanding the foregoing, any Termination for Cause will result in an
single lump sum cash payment.
ARTICLE 7
SURVIVOR BENEFITS
7.1 Pre-Retirement Survivor Benefit
If the Participant dies while actively serving on the board of directors of an
Affiliate, the Administrator will pay a pre-retirement survivor benefit to the
Participant's Beneficiary. With respect to the Compensation Deferral Account,
the Administrator will pay a lump sum in cash or commence monthly installments
in accordance with the Participant's prior election within 60 days after the
Participant's death. The payment(s) will be based on the Participant's
Compensation Deferral Account balance as of the Valuation Date; provided
however, that if the Participant's death occurs within ten years of (i) his or
her initial Plan participation date, or (ii) January 1, 1995, whichever is
later, then the Beneficiary's payment(s) will be based on twice the
Participant's Compensation Deferral Account balance as of the Valuation Date.
With respect to Deferred Stock Units, the Administrator will pay a lump sum in
cash based on the Deferred Stock Unit Deferral Account balance as of the
Valuation Date within 60 days after the Participant's death. No doubling will
apply to the Deferred Stock Unit Deferral Account.
7.2 Post-Retirement Survivor Benefit
If the Participant dies after Retirement, the Administrator will pay a
post-retirement survivor benefit to the Participant's Beneficiary in an amount
equal to the remaining benefits payable to the Participant from the Compensation
Deferral Account under the Plan over the same period the benefits would have
been paid to the Participant; provided however, if the Participant's death
occurs within ten years of (i) his or her initial Plan participation date, or
(ii) January 1, 1995, whichever is later, then the Beneficiary's death benefit
will be based on twice the Participant's Compensation Deferral Account balance
as of the Valuation Date. In the event the Deferred Stock Unit Deferral Account
Balance has not yet been paid to the Participant, the Administrator will pay a
lump sum in cash as of the Valuation Date within 60 days after
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the Participant's death. No doubling will apply to the Deferred Stock Unit
Deferral Account.
7.3 Post-Termination Survivor Benefit
It the Participant dies following Termination of Service, but prior to the
payment of all benefits under the Plan, the Beneficiary will be paid the
remaining balance in the Participant's Deferral Account in a lump sum. No double
benefit will apply.
7.4 Changing Form of Benefit
Beneficiaries may petition the Administrator once, and only after the death of
the Participant, for a change in the form of survivor Benefits. The
Administrator may, in its sole and absolute discretion, choose to grant or deny
such a petition.
7.5 Small Benefit Exception
Notwithstanding the foregoing, the Administrator may, in its sole discretion:
(a) pay the benefits in a single lump sum if the sum of all benefits payable to
the Beneficiary is less than or equal to $3,500.00, or
(b) reduce the number of installments elected by the Participant to 120 or 60 if
necessary to produce a monthly benefit of at least $300.00.
ARTICLE 8
CHANGE OF CONTROL
Within two years after a Change of Control, any Participant or Beneficiary in
the case of an Edison International Change of Control, or the affected
Participants or Beneficiaries in the case of a Company Change of Control, may
elect to receive a distribution of the balance of the Compensation Deferral
Account. There will be a penalty deducted from the Compensation Deferral Account
prior to distribution pursuant to this Article 8 equal to 5% of the total
balance of the Compensation Deferral Account (instead of the 10% reduction
otherwise provided for in Section 9.2). If a Participant elects such a
withdrawal, any on-going Annual Deferral will cease, and the Participant may not
again be designated as an Eligible Employee until one entire Plan Year following
the Plan Year in which the withdrawal was made has elapsed.
ARTICLE 9
SCHEDULED AND UNSCHEDULED WITHDRAWALS
9.1 Scheduled Withdrawals
(a) Election. When making a Participation Election, a Participant may elect to
receive a distribution of a specific dollar amount or a percentage of the Annual
Deferral that will be made in the following Plan Year at a specified year in the
future when the Participant
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will still be an active director. Such an election must be made on an In-Service
Distribution Election Form and submitted concurrently with the Participation
Election. The election of a Scheduled Withdrawal will only apply to the Annual
Deferral and related earnings for that Deferral Period, but not to previous or
subsequent Annual Deferrals or related earnings. Elections under this Section
will be superseded by benefit payments due to the Retirement, Termination of
Service or death of the Participant.
(b) Timing and Form of Withdrawal. The year specified for the Scheduled
Withdrawal may not be sooner than the second Plan Year following the Plan Year
in which the deferral occurs. The Participant will receive a lump sum
distribution of the amount elected on January 1st of the Plan Year specified.
(c) Remaining Compensation Deferral Account. The remainder, if any, of the
Participant's Compensation Deferral Account will continue in effect and will be
distributed in the future according to the terms of the Plan.
(d) Deferred Stock Units. No Scheduled Withdrawal of Deferred Stock Units is
permitted.
9.2 Unscheduled Withdrawals
(a) Election. A Participant (or Beneficiary if the Participant is deceased) may
request in writing to the Administrator an Unscheduled Withdrawal of all or a
portion of the entire vested amount credited to the Participant's Compensation
Deferral Account, including earnings, which will be paid within 30 days in a
single lump sum; provided, however, that (i) the minimum withdrawal will be 25%
of the Compensation Deferral Account balance, (ii) an election to withdraw 75%
or more of the balance will be deemed to be an election to withdraw the entire
balance, and (iii) such an election may be made only once in a Plan Year.
(b) Withdrawal Penalty. There will be a penalty deducted from the Compensation
Deferral Account prior to an Unscheduled Withdrawal equal to 10% of the
Unscheduled Withdrawal. If a Participant elects such a withdrawal, any on-going
Annual Deferral will cease, and the Participant may not again be designated as
an Eligible Director until one entire Plan Year following the Plan Year in which
the withdrawal was made has elapsed.
(c) Small Benefit Exception. Notwithstanding any of the foregoing, if the sum of
all benefits payable to the Participant or Beneficiary who has requested the
Unscheduled Withdrawal is less than or equal to $3,500.00, the Administrator
may, in its sole discretion, elect to pay out the entire Compensation Deferral
Account (reduced by the 10% penalty) in a single lump sum.
(d) Deferred Stock Units. No Unscheduled Withdrawal of Deferred Stock Units is
permitted.
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ARTICLE 10
CONDITIONS RELATED TO BENEFITS
10.1 Nonassignability
The benefits provided under the Plan may not be alienated, assigned,
transferred, pledged or hypothecated by or to any person or entity, at any time
or any manner whatsoever. These benefits will be exempt from the claims of
creditors of any Participant or other claimants and from all orders, decrees,
levies, garnishment or executions against any Participant to the fullest extent
allowed by law. Notwithstanding the foregoing, the benefit payable to a
Participant may be assigned in full or in part, pursuant to a domestic relations
order of a court of competent jurisdiction.
10.2 Financial Hardship Distribution
A participant may submit a hardship distribution request to the Administrator in
writing setting forth the reasons for the request. The Administrator will have
the sole authority to approve or deny such requests. Upon a finding that the
Participant or the Beneficiary has suffered a Financial Hardship, the
Administrator may in its discretion, permit the Participant to cease any
on-going deferrals and accelerate distributions of benefits under the Plan in
the amount reasonably necessary to alleviate the Financial Hardship. If a
distribution is to be made to a Participant on account of Financial Hardship,
the Participant may not make deferrals under the Plan until one entire Plan Year
following the Plan Year in which a distribution based on Financial Hardship was
made has elapsed.
10.3 No Right To Assets
The benefits paid under the Plan will be paid from the general funds of the
Company, and the Participant and any Beneficiary will be no more than unsecured
general creditors of the Company with no special or prior right to any assets of
the Company for payment of any obligations hereunder. The Participant will have
no claim to benefits from any other Affiliate.
10.4 Protective Provisions
The Participant will cooperate with the Administrator by furnishing any and all
information requested by the Administrator, in order to facilitate the payment
of benefits hereunder, taking such physical examinations as the Administrator
may deem necessary and signing such consents to insure or taking such other
actions as may be requested by the Administrator. If the Participant refuses to
cooperate, the Administrator and the Employer will have no further obligation to
the Participant under the Plan.
10.5 Withholding
The Participant or the Beneficiary will make appropriate arrangements with the
Administrator for satisfaction of any federal, state or local income tax
withholding requirements and Social Security or other director tax requirements
applicable to the
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payment of benefits under the Plan. If no other arrangements are made, the
Administrator may provide, at its discretion, for such withholding and tax
payments as may be required.
ARTICLE 11
PLAN ADMINISTRATION
The Administrator will administer the Plan and interpret, construe and apply its
provisions in accordance with its terms and will provide direction and oversight
as necessary to management, staff, or contractors to whom day-to-day Plan
operations may be delegated. The Administrator will establish, adopt or revise
such rules and regulations as it may deem necessary or advisable for the
administration of the Plan. All decisions of the Administrator will be final and
binding.
ARTICLE 12
BENEFICIARY DESIGNATION
The Participant will have the right, at any time, to designate any person or
persons as Beneficiary (both primary and contingent) to whom payment under the
Plan will be made in the event of the Participant's death. The Beneficiary
designation will be effective when it is submitted in writing to the
Administrator during the Participant's lifetime on a form prescribed by the
Administrator.
The submission of a new Beneficiary designation will cancel all prior
Beneficiary designations. Any finalized divorce or marriage of a Participant
subsequent to the date of a Beneficiary designation will revoke such
designation, unless in the case of divorce the previous spouse was not
designated as Beneficiary, and unless in the case of marriage the Participant's
new spouse has previously been designated as Beneficiary. The spouse of a
married Participant must consent in writing to any designation of a Beneficiary
other than the spouse.
If a Participant fails to designate a Beneficiary as provided above, or if the
Beneficiary designation is revoked by marriage, divorce, or otherwise without
execution of a new designation, or if every person designated as Beneficiary
predeceases the Participant or dies prior to complete distribution of the
Participant's benefits, then the Administrator will direct the distribution of
the benefits to the Participant's estate. If a Beneficiary dies after
commencement of payments to the Beneficiary, a lump sum of any remaining
payments will be paid to that person's Beneficiary, if one has been designated,
or to the Beneficiary's estate.
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ARTICLE 13
AMENDMENT OR TERMINATION OF PLAN
13.1 Amendment of Plan
Subject to the terms of Section 13.3, Edison International may at any time amend
the Plan in whole or in part, provided, however, that the amendment (i) will not
decrease the balance of the Participant's Deferral Account at the time of the
amendment and (ii) will not retroactively decrease the applicable Crediting
Rates of the Plan prior to the time of the amendment. Edison International may
amend the Crediting Rates of the Plan prospectively, in which case the
Administrator will notify the Participant of the amendment in writing within 30
days after the amendment.
13.2 Termination of Plan
Subject to the terms of Section 13.3, Edison International may at any time
terminate the Plan. If Edison International terminates the Plan, the date of the
termination will be treated as the date of Termination of Service for the
purpose of calculating Plan benefits, and the benefits the Participant is
entitled to receive under the Plan will be paid to the Participant in a lump sum
within 60 days.
13.3 Amendment or Termination After Change of Control
Notwithstanding the foregoing, Edison International will not amend or terminate
the Plan without the prior written consent of affected Participants for a period
of two calendar years following a Change of Control and will not thereafter
amend or terminate the Plan in any manner which affects any Participant (or
Beneficiary of a deceased Participant) who commences receiving payment of
benefits under the Plan prior to the end of the two-year period following a
Change of Control.
13.4 Exercise of Power to Amend or Terminate
Edison International's power to amend or terminate the Plan will be exercisable
by the Board.
13.5 Constructive Receipt Termination
Notwithstanding anything to the contrary in this Plan, in the event the
Administrator determines that amounts deferred under the Plan have been
constructively received by Participants and must be recognized as income for
federal income tax purposes, the Plan will terminate and distributions will be
made to Participants in accordance with the provisions of Section 13.2 or as may
be determined by the Administrator. The determination of the Administrator under
this Section 13.5 will be binding and conclusive.
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ARTICLE 14
CLAIMS AND REVIEW PROCEDURES
14.1 Claims Procedure
The Administrator will notify a Participant in writing, within 90 days after his
or her written application for benefits, of his or her eligibility or
noneligibility for benefits under the Plan. If the Administrator determines that
a Participant is not eligible for benefits or full benefits, the notice will set
forth (1) the specific reasons for the denial, (2) a specific reference to the
provisions of the Plan on which the denial is based, (3) a description of any
additional information or material necessary for the claimant to perfect his or
her claim, and a description of why it is needed, and (4) an explanation of the
Plan's claims review procedure and other appropriate information as to the steps
to be taken if the Participant wishes to have the claim reviewed. If the
Administrator determines that there are special circumstances requiring
additional time to make a decision, the Administrator will notify the
Participant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional 90-day
period.
14.2 Review Procedure
If a Participant is determined by the Administrator not to be eligible for
benefits, or if the Participant believes that he or she is entitled to greater
or different benefits, the Participant will have the opportunity to have the
claim reviewed by the Administrator by filing a petition for review with the
Administrator within 60 days after receipt of the notice issued by the
Administrator. Said petition will state the specific reasons which the
Participant believes entitle him or her to benefits or to greater or different
benefits. Within 60 days after receipt by the Administrator of the petition, the
Administrator will afford the Participant (and counsel, if any) an opportunity
to present his or her position to the Administrator orally or in writing, and
the Participant (or counsel) will have the right to review the pertinent
documents. The Administrator will notify the Participant of its decision in
writing within the 60-day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the Participant and
the specific provisions of the Plan on which the decision is based. If, because
of the need for a hearing, the 60-day period is not sufficient, the decision may
be deferred for up to another 60-day period at the election of the
Administrator, but notice of this deferral will be given to the Participant. In
the event of the death of the Participant, the same procedures will apply to the
Participant's Beneficiaries.
14.3 Dispute Arbitration
Notwithstanding the foregoing, and because it is agreed that time will be of the
essence in determining whether any payments are due to Participant or his or her
Beneficiary under the Plan, a Participant or Beneficiary may, if he or she
desires, submit any claim for payment under the Plan to arbitration. This right
to select arbitration will be solely that of the Participant or Beneficiary and
the Participant or Beneficiary may decide whether or not to arbitrate in his or
her discretion. The "right to select arbitration" is not mandatory on the
Participant or Beneficiary, and the Participant or Beneficiary may
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choose in lieu thereof to bring an action in an appropriate civil court. Once an
arbitration is commenced, however, it may not be discontinued without the mutual
consent of both parties to the arbitration. During the lifetime of the
Participant only he or she can use the arbitration procedure set forth in this
Section.
Any claim for arbitration may be submitted as follows: if a Participant or
Beneficiary has submitted a request to be paid under the Plan and the claim is
finally denied by the Administrator in whole or in part, the claim may be filed
in writing with an arbitrator of the Participant's or Beneficiary's choice who
is selected by the method described in the next four sentences. The first step
of the selection will consist of the Participant or Beneficiary submitting a
list of five potential arbitrators to the Administrator. Each of the five
arbitrators must be either (1) a member of the National Academy of Arbitrators
located in the State of California or (2) a retired California Superior Court or
Appellate Court judge. Within one week after receipt of the list, the
Administrator will select one of the five arbitrators as the arbitrator for the
dispute in question. If the Administrator fails to select an arbitrator within
one week after receipt of the list, the Participant or Beneficiary will then
designate one of the five arbitrators for the dispute in question.
The arbitration hearing will be held within seven days (or as soon thereafter as
possible) after the picking of the arbitrator. No continuance of said hearing
will be allowed without the mutual consent of Participant or Beneficiary and the
Administrator. Absence from or nonparticipation at the hearing by either party
will not prevent the issuance of an award. Hearing procedures which will
expedite the hearing may be ordered at the arbitrator's discretion, and the
arbitrator may close the hearing in his or her sole discretion when he or she
decides he or she has heard sufficient evidence to satisfy issuance of an award.
The arbitrator's award will be rendered as expeditiously as possible and in no
event later than one week after the close of the hearing.
In the event the arbitrator finds that the Administrator or the Company has
breached the terms of the Plan, he or she will order the Company to pay to
Participant or Beneficiary within two business days after the decision is
rendered the amount then due the Participant or Beneficiary, plus,
notwithstanding anything to the contrary in the Plan, an additional amount equal
to 20% of the amount actually in dispute. This additional amount will constitute
an additional benefit under the Plan. The award of the arbitrator will be final
and binding upon the Parties.
The award may be enforced in any appropriate court as soon as possible after its
rendition. The Administrator will be considered the prevailing party in a
dispute if the arbitrator determines (1) that the Administrator or the Company
has not breached the terms of the Plan and (2) the claim by Participant or his
or her Beneficiary was not made in good faith. Otherwise, the Participant or his
or her Beneficiary will be considered the prevailing party. In the event that
the Administrator is the prevailing party, the fee of the arbitrator and all
necessary expenses of the hearing (excluding any attorneys' fees incurred by the
Administrator) including stenographic reporter, if
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employed, will be paid by the losing party. In the event that the Participant or
his or her Beneficiary is the prevailing party, the fee of the arbitrator and
all necessary expenses of the hearing (including all attorneys' fees incurred by
Participant or his or her Beneficiary in pursuing his or her claim), including
the fees of a stenographic reporter, if employed, will be paid by the Company.
ARTICLE 15
MISCELLANEOUS
15.1 Successors
The rights and obligations of Edison International and the Companies under the
Plan will inure to the benefit of, and will be binding upon, the successors and
assigns of Edison International and the Companies, respectively.
15.2 Trust
The Companies will be responsible for the payment of all benefits under the
Plan. At their discretion, the Companies may establish one or more grantor
trusts for the purpose of providing for payment of benefits under the Plan. The
trust or trusts may be irrevocable, but a Company's share of the assets thereof
will be subject to the claims of the Company's creditors. Benefits paid to the
Participant from any such trust will be considered paid by the Company for
purposes of meeting the obligations of the Company under the Plan.
15.3 Service Not Guaranteed
Nothing contained in the Plan nor any action taken hereunder will be construed
as a contract of service or as giving any Participant any right to continue in
service as a director of Edison International or any other Affiliate.
15.4 Gender, Singular and Plural
All pronouns and variations thereof will be deemed to refer to the masculine,
feminine, or neuter, as the identity of the person or persons may require. As
the context may require, the singular may be read as the plural and the plural
as the singular.
15.5 Captions
The captions of the articles and sections of the Plan are for convenience only
and will not control or affect the meaning or construction of any of its
provisions.
15.6 Validity
If any provision of the Plan is held invalid, void or unenforceable, the same
will not affect, in any respect whatsoever, the validity of any other provisions
of the Plan.
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15.7 Waiver of Breach
The waiver by the Administrator of any breach of any provision of the Plan by
the Participant will not operate or be construed as a waiver of any subsequent
breach by the Participant.
15.8 Applicable Law
The Plan will be governed and construed in accordance with the laws of
California.
15.9 Notice
Any notice or filing required or permitted to be given to the Administrator
under the Plan will be sufficient if in writing and hand-delivered, or sent by
first class mail to the principal office of Edison International, directed to
the attention of the Administrator. The notice will be deemed given as of the
date of delivery, or, if delivery is made by mail, as of the date shown on the
postmark.
IN WITNESS WHEREOF, Edison International has restated this Plan effective the
1st day of January, 1998.
Edison International
Lillian R. Gorman
- -------------------------------------------
Lillian R. Gorman, Vice President
EXHIBIT 10.4
EDISON INTERNATIONAL EQUITY COMPENSATION PLAN
1998 Statement of Terms and Conditions of Plan Awards for
Executive Officers and Key Management Employees
(Revised to Include Edison Enterprises CVA Performance Awards)
1998 awards (Plan Awards) made under the Edison Equity Compensation Plan (Plan)
to eligible recipients (Holders) at Edison International (EIX) or its
participating affiliates (the Companies, or individually, the Company) include
EIX nonqualified stock options to purchase EIX Common Stock (EIX Options), EIX
Option dividend equivalents (Dividend Equivalents), Edison Mission Energy or
Edison Capital affiliate option performance awards (Affiliate Options) and
Edison Enterprises affiliate cash value added performance awards (CVA
Performance Awards) which are subject to the following terms and conditions:
1. PRICE
(a) The exercise price of an EIX Option stated in the award certificate is the
average of the high and low sales prices of EIX Common Stock as reported in the
Western Edition of The Wall Street Journal for the New York Stock Exchange
Composite Transactions for the date of the award.
(b) The annual exercise price of an Affiliate Option will be the base price
stated in the award certificate escalated by an annual compound appreciation
rate linked to the affiliate's cost of capital plus an overhead allowance. Upon
any significant subsequent change in the affiliate's cost of capital, the
Affiliate Option exercise price for that year may be redetermined and
prospectively indexed reflecting the affiliate's revised appreciation rate.
2. VESTING
(a) Subject to the provisions of Section 3, Plan Awards may only be exercised or
paid to the extent vested. The initial vesting date will be January 2nd of the
year following the date of the grant, or six months after the date of the grant,
whichever date is later. The Plan Awards will vest as follows:
o On the initial vesting date, the Plan Awards will vest as to 25% of the
covered shares or units.
o On January 2nd of the following year, the Plan Awards will vest as to an
additional 25% of the covered shares or units.
o On January 2nd of the following year, the Plan Awards will vest as to an
additional 25% of the covered shares or units.
o On January 2nd of the fourth year following the date of grant, the Plan Awards
will be fully vested.
(b) The vested portions of the Plan Award will accumulate to the extent not
exercised, and be exercisable by the Holder subject to the provisions of Section
3, in whole or in part, in any subsequent period but not later than the first
business day of the 10th calendar year following the date of the award, or, in
the case of Affiliate Options, not later than the end of the final 60-day
exercise period.
(c) If the Holder is removed from a position entitling him or her to benefits
under the Plan, but continues employment, or the Holder retires, dies or is
permanently and totally disabled during the four-year vesting period, the Plan
Awards will vest and be exercisable to the extent of 1/48th of the aggregate
number of shares or units granted for each full month of service during the
vesting period. Notwithstanding the foregoing, the Plan Award of a Holder who
has served as a member of the Southern California Edison Company Management
Committee will be fully vested and exercisable upon his or her retirement, death
or permanent and total disability.
(d) Upon termination of a Holder's employment for any reason other than the
reasons specified in Subsection (c), only that portion of the Plan Award which
has vested as of the prior vesting date may be exercised, and that portion will
be forfeited unless exercised within 180 days following the date of
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termination, or in the case of Affiliate Options, the first 60-day exercise
period following the date of termination. Any earned and vested Dividend
Equivalents remaining unpaid will be paid upon expiration of the 180-day period.
(e) Notwithstanding the foregoing, Plan Awards may vest in accordance with
Section 3.4 of the Plan as a result of certain events, including liquidation of
EIX or merger, reorganization or consolidation of EIX as a result of which EIX
is not the surviving corporation. Upon a change of control of EIX following the
occurrence of a Distribution Date, as that term is defined in the Rights
Agreement approved by the EIX Board of Directors on November 20, 1996, the Plan
Awards will vest and will remain exercisable for at least two years following
the Distribution Date, or in the case of Affiliate Options, through the first
exercise period occurring at least two years after such date. During that
period, (i) the Plan may not be terminated, (ii) individual awards may not be
cashed out, terminated, or modified without the Holder's consent, and (iii)
valuation procedures and exercise periods will occur on a basis consistent with
past practice.
3. PLAN AWARD EXERCISE
(a) The Holder may exercise a Plan Award by providing written notice to EIX on
the form prescribed by EIX for this purpose accompanied by full payment of any
applicable exercise price. Payment must be in cash, or its equivalent, such as
EIX Common Stock, acceptable to EIX. A "cashless" exercise will be accommodated
for all Affiliate Options, and may be accommodated for EIX Options at the
discretion of EIX. Until payment is accepted, the Holder will have no rights in
the optioned stock. Earned Dividend Equivalents may not be directly applied to
payment of the exercise price for EIX Options.
(b) EIX Options may be exercised at any time after they have vested through the
first business day of the 10th calendar year following the date of the award,
and CVA Performance Awards that have been translated into EIX Common Stock Units
(EIX Units) as provided in Section 5(b) may be exercised at any time after they
have vested through the first business day of the 10th calendar year following
the date of the award. Affiliate Options may be exercised after they have
vested, but only during an annually specified 60-day period following the fiscal
year end and the completion of an independently reviewed valuation report which
indicates a share value for the fiscal year higher than the applicable Affiliate
Option exercise price for that period. The final 60-day Affiliate Option
exercise period will commence no later than the end of the second quarter of the
10th calendar year following the date of the award. Subject to Section 9,
Affiliate Options are payable in cash upon exercise to the extent the actual
value of an affiliate share exceeds the applicable exercise price.
(c) The Holder agrees that any securities acquired by him or her hereunder are
being acquired for his or her own account for investment and not with a view to
or for sale in connection with any distribution thereof and that he or she
understands that such securities may not be sold, transferred, pledged,
hypothecated, alienated, or otherwise assigned or disposed of without either
registration under the Securities Act of 1933 or compliance with the exemption
provided by Rule 144 or another applicable exemption under such act.
(d) In accordance with Section 3.5(e) of the Plan, the Holder will have no right
or claim to any specific funds, property or assets of EIX as a result of the
award.
4. EIX OPTION DIVIDEND EQUIVALENTS
(a) An EIX Dividend Equivalent account will be established on behalf of the
Holder if EIX Options have been granted pursuant to the award. This account may
be credited with all or a portion of the dividends payable after the date of the
award on the number of shares of stock covered by such EIX Options depending
upon EIX performance during the first three years of the Plan Award term as
provided in Subsection (b). No amount will be credited prior to January 2nd of
the third year following the date of the award. No Dividend Equivalent will
accrue on any EIX Option exercised during that period regardless of EIX
performance. Dividend Equivalents credited on any EIX Option will accumulate in
this account without interest and will vest on the same schedule as the EIX
Option to purchase the corresponding shares of EIX Common Stock. Once earned and
vested, the Dividend Equivalents will be paid upon the
2
<PAGE>
earlier of (i) the request of the holder at any time prior to the final year of
the Plan Award term regardless of whether the corresponding EIX Option is
exercised, (ii) the exercise of the corresponding EIX Option, or (iii) the
expiration or termination of the corresponding EIX Option. Upon such payment, no
further Dividend Equivalents will accrue even if the corresponding EIX Option
remains outstanding and exercisable.
(b) Dividend Equivalents related to EIX Options are subject to a performance
measure based on the percentile ranking of EIX total shareholder return (TSR)
compared to the TSR for each stock in the Dow Jones Electric Utilities Group
Index. The percentile ranking will be measured at the completion of the first
three years of the Plan Award term . If the EIX average ranking is in the 60th
percentile or higher for the 3-year period, 100% of the Dividend Equivalents
will be earned from the date of grant through the date the EIX Option is
exercised or the date the Dividend Equivalents are paid, whichever is earlier.
If the EIX average ranking is in the 25th percentile, 25% of the Dividend
Equivalents will be earned. No Dividend Equivalents will be earned for
performance below the 25th percentile, and a pro rata amount will be earned for
performance between the 25th and 60th percentiles.
Dividend Equivalents related to unexercised EIX Options that were not earned due
to the limitations of this Subsection (b) may be earned back as of the end of
each of the last five years of the Plan Award term if it is determined at that
point that the EIX cumulative average TSR percentile ranking equals or exceeds
the 60th percentile.
5. PERFORMANCE AWARDS
(a) Affiliate Options are performance awards under the Plan similar to stock
options but based on shares of hypothetical affiliate stock created for this
purpose only. The Affiliate Option exercise prices are derived by applying a
compound annual appreciation rate, based on the affiliate's cost of capital and
an allowance for corporate overhead, to the base price of a share. Following the
end of each calendar year during the Plan Award term, new affiliate share prices
will be computed. If the affiliate share value exceeds the exercise price for
that period, any portion of the vested Affiliate Option may be exercised by the
Holder in accordance with Section 3 and the difference will be paid in cash to
the Holder. If a change in the affiliate's cost of capital has occurred that
significantly affects the new share price valuation, the Affiliate Option
exercise prices may be redetermined (i) for that year to reflect the same
intrinsic value result (gain or loss) that would have existed using the previous
cost of capital, and (ii) for subsequent years by applying the revised
appreciation rate.
(b) CVA Performance Awards under the Plan are based on value created at the
affiliate and allocated to Holders for this purpose only. Following the end of
the first year of the ten-year Plan Award term, the improvement in cash value
added at the affiliate during the first year will be determined. Each Holder's
share of any improvement in cash value added during the first year of the Plan
Award term will be translated into EIX Units and credited to the Holder's
account under the Plan as of the first business day of the second year of the
Plan Award term ("Crediting Date") based on the average of the high and low
prices of EIX Common Stock on the Crediting Date as determined in accordance
with 1(a) above. The EIX Units will be 25% vested as of the Crediting Date, and
will continue to vest at the rate of 25% per year as provided under Section 2.
The Holder's account will be credited thereafter with any dividends payable on a
comparable number of shares of EIX Common Stock as of the quarterly ex-dividend
date. Dividends so credited will be translated into additional EIX Units based
on the closing price of EIX Common Stock on that date as reported in the Western
Edition of the Wall Street Journal and will be credited with dividends in
subsequent quarters. Once vested, the Holder may elect payment of the EIX Units
in cash at any time. If not elected sooner, the EIX Units will be paid in cash
to the Holder at the end of the Plan Award term.
6. DELAYED PAYMENT OR DELIVERY OF PLAN AWARD GAINS
Notwithstanding the term of any Plan Award, Holders who are eligible to defer
salary under the EIX Executive Deferred Compensation Plan (EDCP) may irrevocably
elect to alternatively exercise all or a portion of any vested Plan Award
pursuant to the Option Gain Deferral Program (OGDP) in the case of EIX Options,
or the EDCP in the case of Dividend Equivalents or performance awards, and defer
gains
3
<PAGE>
that would otherwise be realized upon exercise of the Plan Award. To make such
an election, the Holder must submit a signed alternative exercise agreement in
the form approved by the Administrator at least six months prior to the
expiration date of the Plan Award. The Plan Award may generally not be exercised
for six months thereafter. Any subsequent exercises will be subject to the
terms, conditions and restrictions of the OGDP or the EDCP, as applicable.
7. TRANSFER AND BENEFICIARY
(a) The Plan Awards will not be transferable by the Holder. During the lifetime
of the Holder, the Plan Award will be exercisable only by him or her. The Holder
may designate a beneficiary who, upon the death of the Holder, will be entitled
to exercise the then vested portion of the Plan Award during the remaining term
subject to the provisions of the Plan and these terms and conditions. (b)
Notwithstanding the foregoing, Plan Awards of the CEOs of EIX, Edison Mission
Energy, Edison Capital and Edison Enterprises, the COO of Southern California
Edison and the EVPs of EIX are transferable to a spouse, children or
grandchildren, or trusts or other vehicles established exclusively for their
benefit. Any transfer request must specifically be authorized by EIX in writing
and shall be subject to any conditions, restrictions or requirements as the
administrator may determine.
8. TERMINATION OF PLAN AWARDS
As set forth in Section 2(d), in the event of termination of the employment of
the Holder for any reason other than retirement, permanent and total disability
or death of the Holder, Plan Awards will terminate 180 days from the date on
which such employment terminated, or in the case of Affiliate Options, at the
end of the first 60-day exercise period following the employment termination
date. In addition, the Plan Awards may be terminated if EIX elects to substitute
cash awards as provided under Section 12.
9. TAXES
EIX will have the right to retain and withhold the amount of taxes required by
any government to be withheld or otherwise deducted and remitted with respect to
the exercise of any Plan Award. In its discretion, EIX may require the Holder to
reimburse EIX for any such taxes required to be withheld by EIX and may withhold
any distribution in whole or in part until EIX is so reimbursed. In lieu
thereof, EIX will have the right to withhold from any other cash amounts due
from EIX to the Holder an amount equal to such taxes required to be withheld by
EIX to reimburse EIX for any such taxes or to retain and withhold a number of
shares of EIX Common Stock having a market value equal to the taxes and cancel
(in whole or in part) the shares in order to reimburse EIX for the taxes.
Each recipient of an EIX Option must attach a statement to his or her federal
and state tax returns for the year in which the EIX Option was granted
containing certain information specified in tax regulations. A sample statement
is attached as Exhibit 1.
10. CONTINUED EMPLOYMENT
(a) Nothing in the award certificate or this Statement of Terms and Conditions
will be deemed to confer on the Holder any right to continue in the employ of
EIX or an EIX affiliate or interfere in any way with the right of the employer
to terminate his or her employment at any time.
(b) In the event employment is terminated, except as a result of death,
disability, or retirement under the Southern California Edison Company
Retirement Plan, or a successor plan, whether voluntarily or otherwise, the
restrictions of Section 2(d) will apply.
11. NOTICE OF DISPOSITION OF SHARES
Holder agrees that if he or she should dispose of any shares of stock acquired
on the exercise of EIX Options, including a disposition by sale, exchange, gift
or transfer of legal title within six months from the date such shares are
transferred to the Holder, the Holder will notify EIX promptly of such
disposition.
12. AMENDMENT
The Plan Awards are subject to the terms of the Plan as amended from time to
time. EIX reserves the right to substitute cash awards substantially equivalent
in value to the Plan Awards. The Plan Awards
4
<PAGE>
may not otherwise be restricted or limited by any Plan amendment or termination
approved after the date of the award without the Holder's consent.
13. FORCE AND EFFECT
The various provisions herein are severable in their entirety. Any determination
of invalidity or unenforceability of any one provision will have no effect on
the continuing force and effect of the remaining provisions.
14. GOVERNING LAW
The terms and conditions of the Plan Awards will be construed under the laws of
the State of California.
15. NOTICE
Unless waived by EIX, any notice required under or relating to the Plan Awards
must be in writing, with postage prepaid, addressed to: Edison International,
Attn: Corporate Secretary, P.O. Box 800, Rosemead, CA 91770
EDISON INTERNATIONAL
Lillian R. Gorman
- -------------------------------------------------
Lillian R. Gorman, Vice President
5
<PAGE>
EXHIBIT 1
STATEMENT PURSUANT TO INCOME TAX
REGULATION SECTION 1.61-15(c)
This statement is attached to my income tax return in compliance with
the requirements of Income Tax Regulation ss.1.61-15(c) relative to a
nonqualified stock option I received on _____________, 19__.
(1) Name and address of the taxpayer:
John Q. Doe
1234 Your Street
Anywhere, CA 90000
(2) Description of Securities subject to the option:
On ____________, 19__, I was granted a nonqualified stock option
covering _______ shares of Edison International common stock.
(3) Period during which the option is exercisable:
The option vests and becomes exercisable as to one-fourth of the
covered shares on January 2, 1999 (or six months after the date of grant if
later), January 2, 2000, January 2, 2001 and January 2, 2002, respectively. To
the extent vested, the option may be exercised at any time through January 2,
2008.
(4) Whether the option had an ascertainable market value:
The option did not have a readily ascertainable fair market value on
the date of the grant.
(5) Whether the option was granted as compensation:
The option was granted as compensation and is subject to
Reg.ss.1.61-15(a).
Respectfully Submitted,
<PAGE>
EDISON LOGO
EQUITY COMPENSATION PLAN
1998 AWARD AGREEMENT
This award is made by Edison International to -NAME- ("Employee"), as of January
2, 1998, pursuant to the Equity Compensation Plan. Edison International hereby
grants to Employee, as a matter of separate agreement and not in lieu of salary
or any other compensation for services, the right and option to purchase the
following:
-------------------------------------------------------
-EIX- shares of authorized Edison
International Common Stock, coupled with
dividend equivalents, at an exercise price of
$27.25 per share.
-------------------------------------------------------
This award is made subject to the conditions contained in the 1998 Statement of
Terms and Conditions which is incorporated herein by reference.
Edison International
By:___________________________________
EXHIBIT 10.5
EDISON LOGO
EQUITY COMPENSATION PLAN
1998 DIRECTOR AWARD CERTIFICATE
This award is made by Edison International to -NAME- ("Director"), as of April
16, 1998, pursuant to the Equity Compensation Plan ("Plan"). Edison
International hereby grants to Director, as a matter of separate arrangement and
not in lieu of any other compensation for services, the following:
---------------------------------------------------
500 shares of Edison International Common
Stock to be issued as soon as practicable in
accordance with the Director's instructions, and
300 Edison International deferred stock units
to be credited under the Director Deferred
Compensation Plan.
---------------------------------------------------
The deferred stock unit award is made subject to the terms and conditions
contained in the Director Deferred Compensation Plan which are incorporated
herein by reference.
Edison International
By:___________________________________
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this quarterly report on Form 10-Q for
the quarter ended June 30, 1998, 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
August 13, 1998
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