UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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 October 30, 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, Nine and
Twelve Months Ended September 30, 1998, and 1997 2
Consolidated Statements of Comprehensive Income --
Three, Nine and Twelve Months Ended September 30, 1998,
and 1997 2
Consolidated Balance Sheets -- September 30, 1998,
December 31, 1997, and September 30, 1997 3
Consolidated Statements of Cash Flows --
Three, Nine and Twelve Months Ended
September 30, 1998, and 1997 5
Consolidated Statements of Retained Earnings --
Three, Nine and Twelve Months Ended
September 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 46
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (SCE), a California corporation and its subsidiaries
as of September 30, 1998, December 31, 1997, and September 30, 1997, and the
related consolidated statements of income, comprehensive income, retained
earnings and cash flows for each of the three-, nine- and twelve-month periods
ended September 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
September 30, 1998, December 31, 1997, and September 30, 1997, and the results
of their operations and their cash flows for each of the three-, nine- and
twelve-month periods ended September 30, 1998, and 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
October 29, 1998
1
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to ultimate consumers $2,258,782 $2,349,316 $5,336,067 $5,740,733 $7,234,752 $7,533,218
Sales to power exchange 687,171 -- 990,856 -- 990,856 --
Other 110,716 84,273 274,903 232,291 356,582 305,548
- ------------------------------------------------------------------------------------------------------------------
Operating revenue 3,056,669 2,433,589 6,601,826 5,973,024 8,582,190 7,838,766
- -----------------------------------------------------------------------------------------------------------------------
Fuel 64,621 423,272 242,489 714,078 409,882 882,673
Purchased power - contracts 908,407 900,781 2,010,269 2,117,116 2,747,155 2,796,234
Purchased power - power exchange 1,080,910 -- 1,424,694 -- 1,424,694 --
Provisions for regulatory
adjustment clauses -- net (447,676) (185,416) (289,314) (277,439) (422,811) (333,133)
Other operating expenses 437,065 303,511 1,124,693 838,907 1,502,105 1,142,266
Maintenance 104,265 89,679 304,627 302,255 407,916 414,004
Depreciation, decommissioning and
amortization 378,189 313,377 1,137,087 930,445 1,446,518 1,198,882
Income taxes 172,015 208,492 396,777 437,373 541,434 555,468
Property and other taxes 31,642 31,169 102,406 101,388 130,055 143,925
Loss (gain) on sale of utility plant 89,939 (271) (529,099) (3,106) (529,840) (4,855)
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,819,377 2,084,594 5,924,629 5,161,017 7,657,108 6,795,464
- -----------------------------------------------------------------------------------------------------------------------
Operating income 237,292 348,995 677,197 812,007 925,082 1,043,302
- -----------------------------------------------------------------------------------------------------------------------
Provision for rate phase-in plan -- (13,218) -- (35,908) (12,578) (50,230)
Allowance for equity funds
used during construction 3,051 1,691 8,740 5,591 10,800 10,236
Interest and dividend income 18,031 10,875 51,754 27,034 69,356 38,200
Other nonoperating income
(deductions) -- net 27,672 (12,527) 19,774 (2,032) (1,234) (3,864)
- -----------------------------------------------------------------------------------------------------------------------
Total other income (deductions) -- net 48,754 (13,179) 80,268 (5,315) 66,344 (5,658)
- -----------------------------------------------------------------------------------------------------------------------
Income before interest expense 286,046 335,816 757,465 806,692 991,426 1,037,644
- -----------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 103,916 77,758 319,784 259,503 405,873 354,062
Other interest expense 16,032 27,104 50,142 72,879 78,342 91,783
Allowance for borrowed funds used
during construction (2,076) (2,036) (5,947) (6,733) (8,427) (9,653)
Capitalized interest (330) (265) (612) (2,320) (691) (3,383)
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense -- net 117,542 102,561 363,367 323,329 475,097 432,809
- -----------------------------------------------------------------------------------------------------------------------
Net income 168,504 233,255 394,098 483,363 516,329 604,835
Dividends on preferred stock 5,612 6,758 19,019 22,729 25,778 31,328
- -----------------------------------------------------------------------------------------------------------------------
Earnings available for common stock $ 162,892 $ 226,497 $ 375,079 $ 460,634 $ 490,551 $ 573,507
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Net income $168,504 $233,255 $ 394,098 $483,363 $516,329 $604,835
Unrealized gain (loss) on
securities -- net (21,631) (10,940) (9,189) 3,508 1,944 7,162
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $146,873 $222,315 $384,909 $486,871 $518,273 $611,997
- -----------------------------------------------------------------------------------------------------------------------
</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>
September 30, December 31, September 30,
1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Transmission and distribution:
Utility plant, at original cost, subject to
<S> <C> <C> <C>
cost-based rate regulation $11,591,649 $11,213,352 $11,087,199
Accumulated provision for depreciation (5,841,948) (5,573,742) (5,294,706)
Construction work in progress 504,388 492,614 461,850
- ----------------------------------------------------------------------------------------------------------------------
6,254,089 6,132,224 6,254,343
- ----------------------------------------------------------------------------------------------------------------------
Generation:
Utility plant, at original cost,
not subject to cost-based rate regulation 1,728,929 9,522,127 9,502,679
Accumulated provision for depreciation,
decommissioning and amortization (923,158) (4,970,137) (4,800,890)
Construction work in progress 78,181 100,283 71,598
Nuclear fuel, at amortized cost 141,569 154,757 167,682
- ----------------------------------------------------------------------------------------------------------------------
1,025,521 4,807,030 4,941,069
- ----------------------------------------------------------------------------------------------------------------------
Total utility plant 7,279,610 10,939,254 11,195,412
- ----------------------------------------------------------------------------------------------------------------------
Nonutility property -- less accumulated provision
for depreciation of $25,381, $24,730
and $24,450 at respective dates 74,940 67,869 67,192
Nuclear decommissioning trusts 2,013,293 1,831,460 1,608,465
Other investments 210,116 171,399 124,093
- ----------------------------------------------------------------------------------------------------------------------
Total other property and investments 2,298,349 2,070,728 1,799,750
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents 284,312 962,272 96,051
Receivables, including unbilled revenue, less
allowances of $20,235, $26,453 and $21,981
for uncollectible accounts at respective dates 1,266,361 906,388 1,208,001
Fuel inventory 50,561 58,059 57,027
Materials and supplies, at average cost 121,408 132,980 148,762
Accumulated deferred income taxes -- net 269,277 123,146 191,563
Regulatory balancing accounts -- net 407,536 193,311 100,935
Prepayments and other current assets 127,168 93,098 126,174
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 2,526,623 2,469,254 1,928,513
- ----------------------------------------------------------------------------------------------------------------------
Unamortized nuclear investment -- net 2,387,998 -- --
Unamortized debt issuance and reacquisition
expense 356,018 359,304 353,060
Rate phase-in plan -- 3,777 16,220
Income tax-related deferred charges 1,454,606 1,543,380 1,581,243
Other deferred charges 915,612 673,601 684,958
- ----------------------------------------------------------------------------------------------------------------------
Total deferred charges 5,114,234 2,580,062 2,635,481
- ----------------------------------------------------------------------------------------------------------------------
Total assets $17,218,816 $18,059,298 $17,559,156
- ----------------------------------------------------------------------------------------------------------------------
</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>
September 30, December 31, September 30,
1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Common shareholder's equity:
Common stock (434,888,104 shares
<S> <C> <C> <C>
outstanding at each date) $ 2,168,054 $ 2,168,054 $ 2,168,054
Additional paid-in capital 334,031 334,031 334,032
Accumulated other comprehensive income 38,834 48,023 36,890
Retained earnings 819,941 1,407,834 2,559,319
- ----------------------------------------------------------------------------------------------------------------------
3,360,860 3,957,942 5,098,295
- ----------------------------------------------------------------------------------------------------------------------
Preferred stock:
Not subject to mandatory redemption 128,755 183,755 183,755
Subject to mandatory redemption 255,700 275,000 275,000
Long-term debt 5,486,384 6,144,597 4,105,221
- ----------------------------------------------------------------------------------------------------------------------
Total capitalization 9,231,699 10,561,294 9,662,271
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 515,930 479,637 504,734
- ----------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 593,311 692,875 276,575
Short-term debt 105,780 322,028 770,300
Accounts payable 640,409 406,704 459,142
Accrued taxes 832,331 509,270 803,253
Accrued interest 70,506 85,406 81,707
Dividends payable 91,943 95,146 101,136
Deferred unbilled revenue and other current
liabilities 1,162,644 931,856 923,167
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,496,924 3,043,285 3,415,280
- ----------------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes -- net 2,880,334 2,939,471 2,957,710
Accumulated deferred investment tax credits 302,539 326,728 331,890
Customer advances and other deferred credits 791,081 708,745 687,271
- ----------------------------------------------------------------------------------------------------------------------
Total deferred credits 3,973,954 3,974,944 3,976,871
- ----------------------------------------------------------------------------------------------------------------------
Minority interest 309 138 --
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $17,218,816 $18,059,298 $17,559,156
- ----------------------------------------------------------------------------------------------------------------------
</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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $168,504 $233,255 $394,098 $483,363 $516,329 $604,835
Adjustments for non-cash items:
Depreciation, decommissioning and
amortization 378,189 313,377 1,137,087 930,445 1,446,518 1,198,882
Other amortization 45,059 23,088 117,631 55,069 143,925 67,983
Rate phase-in plan -- 12,899 3,777 34,483 16,220 49,692
Deferred income taxes and
investment tax credits 66,342 (11,481) (140,683) (19,500) (57,804) 138,645
Other long-term liabilities 20,227 (1,332) 36,293 80,809 11,196 156,968
Regulatory asset related to sale of
utility plant (111,310) -- (219,301) -- (219,301) --
Loss (gain) on sale of oil and
gas plant 88,355 -- (551,984) -- (551,984) --
Other -- net (35,613) (120,958) (89,946) (188,315) (110,251) (350,191)
Changes in working capital:
Receivables (235,569) (225,991) (359,973) (286,918) (58,360) (85,753)
Regulatory balancing accounts (357,302) (187,451) (214,225) (282,423) (306,601) (306,988)
Fuel inventory, materials and
supplies (4,326) 9,243 19,070 20,957 33,820 24,233
Prepayments and other current
assets (112,028) (108,896) (34,070) (21,037) (994) 17,056
Accrued interest and taxes (87,083) 137,103 308,161 306,909 17,877 (131,220)
Accounts payable and other
current liabilities 357,382 226,626 464,493 164,213 420,744 (23,701)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 180,827 299,482 870,428 1,278,055 1,301,334 1,360,441
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt repaid (1,575) (716,090) (606,030) (916,145) (606,030) (916,068)
Rate reduction notes issued -- -- -- -- 2,444,127 --
Rate reduction notes repaid (78,605) -- (161,070) -- (155,908) --
Preferred stock redeemed (1,000) -- (74,300) (100,000) (74,300) (100,000)
Nuclear fuel financing -- net 7,393 (5,567) (11,478) (12,628) (18,990) 8,665
Short-term debt financing -- net (15,775) 625,056 (216,248) 540,151 (664,520) 494,958
Capital transferred -- 153,000 -- 153,000 -- 153,000
Dividends paid (429,124) (297,306) (982,146) (595,448) (2,258,643) (802,524)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (518,686) (240,907) (2,051,272) (931,070) (1,334,264) (1,161,969)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and plant (211,272) (160,142) (548,319) (443,788) (789,850) (572,542)
Proceeds from sale of plant 43,000 -- 1,188,039 -- 1,188,039 --
Funding of nuclear decommissioning
trusts (41,315) (34,629) (118,196) (109,202) (162,750) (147,119)
Unrealized gain (loss) on
securities -- net (21,631) (10,940) (9,189) 3,508 1,944 7,162
Other -- net 22,447 3,806 (9,451) (21,394) (16,192) (39,372)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (208,771) (201,905) 502,884 (570,876) 221,191 (751,871)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and equivalents (546,630) (143,330) (677,960) (223,891) 188,261 (553,399)
Cash and equivalents, beginning
of period 830,942 239,381 962,272 319,942 96,051 649,450
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $284,312 $ 96,051 $284,312 $ 96,051 $284,312 $ 96,051
- ----------------------------------------------------------------------------------------------------------------------
Cash payments for interest and taxes:
Interest -- net of amounts capitalized $ 91,821 $ 74,261 $217,488 $250,561 $309,063 $341,635
Taxes 325,666 198,494 326,092 215,966 548,129 535,679
</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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $1,078,982 $2,554,389 $1,407,834 $2,665,612 $2,559,319 $2,748,983
Net income 168,504 233,255 394,098 483,363 516,329 604,835
Dividends declared on common stock (421,765) (216,738) (959,633) (562,099) (2,226,574) (758,342)
Dividends declared on preferred stock (5,612) (6,758) (19,019) (22,729) (25,778) (31,328)
Stock option appreciation (168) -- (3,339) -- (3,339) --
Reacquired capital stock expense and other -- (4,829) -- (4,828) (16) (4,829)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 819,941 $2,559,319 $ 819,941 $2,559,319 $ 819,941 $2,559,319
- -----------------------------------------------------------------------------------------------------------------------
</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 such accounting principles 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 Nuclear Generating Station
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 September 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. Additionally, gains resulting from the
divestiture of the gas- and oil-fueled generation plants were credited to the
transition cost balancing account; the losses are being amortized over the
remaining transition period and accumulated in the transition cost balancing
account. These transition costs are being recovered from utility customers (with
interest) through the CTC. 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 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 $0.4 million, $1.2 million and $21 million for the three, nine and twelve
months ended September 30, 1998, respectively, and $7 million, $19 million and
$25 million for the three, nine and twelve months ended September 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 3.4%, 4.6% and 5.1%
for the three, nine and twelve months ended September 30, 1998, respectively,
and 5.2%, 5.2% and 5.1% for the three, nine and twelve months ended September
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 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.
9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
Proposition 9 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 -- 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. 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.
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
10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customer's choice of electricity supplier. The CPUC is continuing to regulate
the prices and service obligations related to distribution services.
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 September 1998, the CPUC issued a
decision regarding the credits that would be provided to customers if they elect
to obtain revenue cycle services from someone other than SCE. Although the
decision adopted SCE's recommendation of using the net avoided cost, it also
adopted a methodology which results in higher credits to customers but requires
ESPs to pay service fees to SCE for the costs that SCE incurs as a result of
dealing with the ESP.
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. In May 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 and transferred ownership of all 12 of its gas- and oil-fueled
generation plants. 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
11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these estimates. The potential transition costs are comprised of $6.4 billion
from SCE's qualifying facilities (QF) 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 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
investment in generation facilities based on new accounting guidance. The
financial reporting effect of this discontinuance was to segregate these assets
on the balance sheet; the new guidance did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
new guidance 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 new
accounting guidance 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 (as of June 30, 1998) 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 $2.5
billion, after tax, at September 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
12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
phases, or the effect, after the transition period, that competition will have
on its results of operations or financial position.
Note 3. Financial Instruments
Cash Equivalents
Cash and equivalents include tax-exempt investments ($278 million at September
30, 1998, $936 million at December 31, 1997, and $87 million at September 30,
1997), and time deposits and other investments ($6 million at September 30,
1998, $26 million at December 31, 1997, and $9 million at September 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 are used to reduce the potential impact of interest rate
fluctuations on floating-rate long-term debt. At the balance sheet dates of
September 30, 1998, December 31, 1997, and September 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 September 30, 1998, SCE had pledged $24 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.
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>
September 30, December 31, September 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 $1,489 $2,013 $1,371 $1,831 $1,327 $1,609
Equity investments 9 88 9 90 9 85
Gas call options 42 50 34 34 -- --
Financial liabilities:
DOE decommissioning and
decontamination fees 50 44 50 43 54 45
Interest rate hedges -- 28 -- 24 -- 18
Long-term debt 5,486 5,756 6,145 6,456 4,105 4,353
Preferred stock subject to
mandatory redemption 256 276 275 293 275 293
- ---------------------------------------------------------------------------------------------------------------------
</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 and preferred stock; and discounted
future cash flows for U.S. Department of Energy (DOE) decommissioning and
decontamination fees. Due to their short maturities, amounts reported for cash
equivalents and short-term debt approximate fair value.
Gross unrealized holding gains on financial assets were:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
In millions 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Decommissioning trusts:
<S> <C> <C> <C>
Municipal bonds $162 $131 $ 79
Stocks 245 190 118
U.S. government issues 107 91 55
Short-term and other 10 48 30
- -------------------------------------------------------------------------------------------------------------------
524 460 282
Equity investments 79 81 76
Gas call options 8 -- --
- -------------------------------------------------------------------------------------------------------------------
Total $611 $541 $358
- -------------------------------------------------------------------------------------------------------------------
</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 September 30, 1998, are: 1999 -- $593 million;
2000 -- $568 million; 2001 -- $647 million; 2002 -- $247 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
Long-term debt consisted of:
<TABLE>
<CAPTION>
September 30, December 31, September 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 $1,825
Rate reduction notes:
1998 - 2007 (5.98% to 6.42%) 2,307 2,463 --
Pollution-control bonds:
1999 - 2027 (5.4% to 7.2% and variable) 1,201 1,202 1,203
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 80 92 99
Long-term debt due within one year (593) (693) (277)
Unamortized debt discount -- net (27) (37) (38)
- --------------------------------------------------------------------------------------------------------------------
Total $5,486 $6,145 $4,105
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Short-Term Debt
SCE has lines of credit it can use at negotiated or bank index rates. At
September 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
and general cash requirements. Commercial paper outstanding at September 30,
1998, December 31, 1997, and September 30, 1997, was $187 million, $415 million
and $873 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
commercial bank lines of credit expiring in 2002. Weighted-average interest
rates were 5.6%, 6.0% and 5.6% at September 30, 1998, December 31, 1997, and
September 30, 1997, respectively.
Note 4. Equity
The CPUC regulates SCE's capital structure, limiting the dividends it may pay
Edison International. At September 30, 1998, SCE had the capacity to pay $800
million in additional dividends and continue to maintain its authorized capital
structure.
Authorized common stock is 560 million shares with no par value. Authorized
shares of preferred and preference stock are: $25 cumulative preferred -- 24
million; $100 cumulative preferred -- 12 million; and preference -- 50 million.
All cumulative preferred stocks are redeemable.
Mandatorily redeemable preferred stocks are subject to sinking-fund provisions.
When preferred shares are redeemed, the premiums paid are charged to common
equity.
Preferred stock redemption requirements for the five twelve-month periods
following September 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>
September 30, December 31, September 30,
Dollars in millions, except per share amounts 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
September 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
7.23 807,000 100.00 81 100 100
- --------------------------------------------------------------------------------------------------------------------------
Total $256 $275 $275
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
In third quarter 1998, 10,000 shares of Series 7.23% preferred stock were
redeemed. In second quarter 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 9 Months Ended 12 Months Ended
In millions September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $60 $48 $48 $33 $37 $30
Unrealized gain (loss) on securities (22) (6) (2) 18 4 24
Tax effect 1 (5) (7) (14) (2) (17)
- --------------------------------------------------------------------------------------------------------------------
Ending balance $39 $37 $39 $37 $39 $37
- --------------------------------------------------------------------------------------------------------------------
</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>
September 30, December 31, September 30,
In millions 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Property-related $ 208 $ 227 $ 239
Unrealized gains or losses -- 273 --
Investment tax credits 153 192 195
Regulatory balancing accounts 84 180 125
Decommissioning-related 801 114 110
Other 181 335 604
- --------------------------------------------------------------------------------------------------------------------
Total $1,427 $1,321 $1,273
- --------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property-related $3,046 $3,272 $3,341
Capitalized software costs -- 127 --
Other 992 738 698
- --------------------------------------------------------------------------------------------------------------------
Total $4,038 $4,137 $4,039
- --------------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes -- net $2,611 $2,816 $2,766
- --------------------------------------------------------------------------------------------------------------------
Classification of accumulated deferred income taxes:
Included in deferred credits $2,880 $2,939 $2,958
Included in current assets 269 123 192
The current and deferred components of income tax expense were:
3 Months Ended 9 Months Ended 12 Months Ended
In millions September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 96 $165 $452 $340 $486 $327
State 22 40 100 95 105 96
- --------------------------------------------------------------------------------------------------------------------
118 205 552 435 591 423
- --------------------------------------------------------------------------------------------------------------------
Deferred--federal and state:
Accrued charges (10) (11) (24) (24) (33) (19)
CTC amortization 63 -- 53 -- 53 --
Depreciation (22) (15) (106) (38) (115) (43)
Investment and energy tax credits -- net (6) (5) (22) (15) (27) (20)
Pension reserve -- (1) -- (3) (3) 49
Prior-year state tax (7) (13) -- 2 (2) 12
Regulatory balancing accounts 152 74 36 112 66 131
Unbilled revenue (100) (34) (98) (41) (51) 5
Other (2) (13) 15 (27) 46 (34)
- --------------------------------------------------------------------------------------------------------------------
68 (18) (146) (34) (66) 81
- --------------------------------------------------------------------------------------------------------------------
Total income tax expense $186 $187 $406 $401 $525 $504
- --------------------------------------------------------------------------------------------------------------------
Classification of income taxes:
Included in operating income $172 $208 $397 $437 $541 $555
Included in other income 14 (21) 9 (36) (16) (51)
</TABLE>
The composite federal and state statutory income tax rate was 40.551% for the
three, nine and twelve months ended September 30, 1998, and 40.551%, for both
the three and nine months ended September 30, 1997, and 40.675% for the twelve
months ended September 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 9 Months Ended 12 Months Ended
September 30, September 30, September 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 1.0 (0.4) (0.1) (0.6) (0.5) (0.7)
CTC amortization 17.7 -- 6.6 -- 5.0 --
Depreciation and other (5.8) 4.5 4.1 5.5 6.0 5.9
Investment and energy tax credits (1.2) (1.2) (1.6) (1.7) (1.7) (1.8)
State tax -- net of federal deduction 5.8 6.7 6.3 7.1 6.3 7.1
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 52.5% 44.6% 50.3% 45.3% 50.1% 45.5%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6. Employee Compensation and Benefit Plans
Stock Option Plans
In April 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.
19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unvested options of any person who has served in the past on the Edison
International or SCE Management Committee will vest and be exercisable upon the
member's retirement, death or permanent and total disability. Upon retirement,
death or permanent and total disability, the vested options may continue to be
exercised within their original terms by the recipient or beneficiary. If an
optionee is terminated other than by retirement, death or permanent and total
disability, options which had vested as of the prior anniversary date of the
grant are forfeited unless exercised within 180 days of the date of termination.
All unvested options are forfeited on the date of termination.
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, $8 million and $9 million for the
three, nine and twelve months ended September 30, 1998, respectively, and $3
million, $18 million and $23 million for the three, nine and twelve months ended
September 30, 1997, respectively.
Stock-based compensation expense under the fair-value method of accounting would
have resulted in pro forma earnings of $163 million, $377 million and $492
million for the three, nine and twelve months ended September 30, 1998,
respectively, and $227 million, $463 million and $578 million for the three,
nine and twelve months ended September 30, 1997, respectively.
The weighted-average fair value of options granted during the twelve months
ended September 30, 1998, and September 30, 1997, was $6.44 per share option and
$7.68 per share option, respectively. The weighted-average remaining life of
options outstanding as of September 30, 1998, December 31, 1997, and September
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
September 30,
--------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Expected life 7 years 7 years
Risk-free interest rate 4.7% - 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>
9 Months Ended Year Ended 9 Months Ended
September 30, December 31, September 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 42 44 33
Interest cost 105 138 105
Actuarial gain -- 198 --
Benefits paid (103) (288) (244)
- --------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $2,138 $2,094 $1,896
- --------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $2,298 $2,165 $2,165
Actual return on plan assets 63 369 384
Employer contributions 43 52 43
Benefits paid (103) (288) (244)
- --------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $2,301 $2,298 $2,348
- --------------------------------------------------------------------------------------------------------------------
Funded status $ 163 $ 204 $ 452
Unrecognized net gain (227) (304) (569)
Unrecognized net obligation (17-year amortization) 35 38 40
Unrecognized prior service cost 169 184 187
- --------------------------------------------------------------------------------------------------------------------
Pension asset (liability) $ 140 $ 122 $ 110
- --------------------------------------------------------------------------------------------------------------------
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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
In millions 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 14 $ 11 $ 42 $ 33 $ 53 $ 38
Interest cost 35 35 105 105 139 150
Expected return on plan assets (45) (40) (135) (120) (175) (170)
Net amortization and deferral 4 4 12 12 13 15
- --------------------------------------------------------------------------------------------------------------------
Pension expense under
accounting standards 8 10 24 30 30 33
Regulatory adjustment -- deferred 5 3 15 9 22 18
- --------------------------------------------------------------------------------------------------------------------
Net pension expense recognized 13 13 39 39 52 51
Settlement gain -- -- -- -- -- (35)
- --------------------------------------------------------------------------------------------------------------------
Total expense $ 13 $ 13 $ 39 $ 39 $ 52 $ 16
- --------------------------------------------------------------------------------------------------------------------
</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>
9 Months Ended Year Ended 9 Months Ended
September 30, December 31, September 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 27 30 21
Interest cost 78 99 75
Actuarial loss -- 114 --
Benefits paid (48) (59) (44)
- --------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $ 1,590 $1,533 $1,401
- --------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $ 815 $ 617 $ 617
Actual return on plan assets 48 147 40
Employer contributions 81 110 81
Benefits paid (48) (59) (44)
- --------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $ 896 $ 815 $ 694
- --------------------------------------------------------------------------------------------------------------------
Funded status $ (694) $ (718) $ (707)
Unrecognized net loss 241 244 226
Unrecognized transition obligation (20-year
amortization) 382 403 410
- --------------------------------------------------------------------------------------------------------------------
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%
The components of postretirement benefits other than pensions expense were:
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
In millions 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Service cost $ 9 $ 7 $ 27 $ 22 $ 36 $ 25
Interest cost 26 25 78 77 102 108
Expected return on plan assets (16) (13) (48) (40) (59) (55)
Amortization of loss 1 2 3 5 1 6
Amortization of transition obligation 7 7 21 20 27 27
- --------------------------------------------------------------------------------------------------------------------
Net expense 27 28 81 84 107 111
Special termination expense -- -- -- -- -- 12
- --------------------------------------------------------------------------------------------------------------------
Total expense $ 27 $ 28 $ 81 $ 84 $107 $ 123
- --------------------------------------------------------------------------------------------------------------------
</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 September 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 September 30, 1998, by $218 million and annual
aggregate service and interest costs by $23 million.
22
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Savings Plan
SCE has a 401(k) defined contribution savings plan designed to supplement
employees' retirement income. The plan received employer contributions of $4
million, $12 million and $16 million for the three, nine and twelve months ended
September 30, 1998, respectively, and $3 million, $11 million and $22 million
for the three, nine and twelve months ended September 30, 1997, respectively.
Note 7. Jointly Owned Utility Projects
SCE owns interests in several generating stations and transmission systems for
which each participant provides its own financing. SCE's share of expenses for
each project is included in the consolidated statements of income.
The investment in each project, as included in the consolidated balance sheet as
of September 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 -- 50
Generating stations:
Four Corners Units 4 and 5 (coal) 460 272 1 48
Mohave (coal) 313 167 5 56
Palo Verde (nuclear)(1) 1,605 848 12 16
San Onofre (nuclear)(1) 4,219 2,590 33 75
- ---------------------------------------------------------------------------------------------------------------------
Total $6,871 $3,960 $51
- ---------------------------------------------------------------------------------------------------------------------
</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 September 30, 1998,
were:
Year ended December 31, In millions
- -------------------------------------------------------------------------------
1998 $ 4
1999 13
2000 11
2001 8
2002 4
Thereafter 7
- -------------------------------------------------------------------------------
Total $47
- -------------------------------------------------------------------------------
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
23
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2000, 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 $41
million, $119 million and $155 million for the three, nine and twelve months
ended September 30, 1998, respectively, and $43 million, $118 million and $155
million for the three, nine and twelve months ended September 30, 1997,
respectively. The accumulated provision for decommissioning was $1.2 billion at
September 30, 1998, and $1.1 billion at December 31, 1997, and September 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 September, December 31, September 30,
In millions Dates 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Municipal bonds 2000-2034 $ 537 $ 459 $ 448
Stocks -- 543 392 390
U.S. government issues 1999-2028 396 357 341
Short-term and other 2003-2030 13 163 148
- -------------------------------------------------------------------------------------------------------------------
Total $1,489 $1,371 $1,327
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Trust fund earnings (based on specific identification) increase the trust fund
balance and the accumulated provision for decommissioning. Net earnings were $17
million, $44 million and $55 million for the three, nine and twelve months ended
September 30, 1998, respectively, and $18 million, $43 million and $57 million
for the three, nine and twelve months ended September 30, 1997, respectively.
Proceeds from sales of securities (which are reinvested) were $342 million, $911
million and $1.1 billion for the three, nine and twelve months ended September
30, 1998, respectively, and $110 million, $371 million and $549 million for the
three, six and twelve months ended September 30, 1997. Approximately 89% of the
trust fund contributions were tax-deductible.
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.
24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $846 $790 $674 $680 $655
Fuel supply contracts 172 122 141 129 146
Purchased-power capacity payments 699 702 703 702 698
Unconditional purchase obligations 9 9 10 9 10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Voter Initiative
On November 3, 1998, California voters will vote on Proposition 9, an initiative
supported by various consumer groups.
Proposition 9 would overturn major provisions of California's electric industry
restructuring legislation. Proposition 9 purports to: (1) require SCE and the
other California investor-owned utilities to provide at least a 20% rate
reduction to their residential and small commercial customers to be achieved
through cutting payments for nuclear and other fossil generation transition
costs; (2) eliminate cost recovery for nuclear generation plants and related
assets and obligations (other than reasonable decommissioning costs), except to
the extent such costs are recovered from competitive market sales through the PX
or contracts with the ISO; (3) eliminate cost recovery for non-nuclear
generation plants and related assets and obligations (other than costs
associated with QFs), except to the extent such costs are recovered from
competitive market sales through the PX or contracts with the ISO, unless the
CPUC finds that the utilities would be deprived of the opportunity to earn a
fair rate of return; and (4) prohibit the collection of any customer charges
necessary to pay principal, interest and other costs on the rate reduction bonds
(Fixed Transition Amounts or FTAs) or, if a court finds that the CPUC orders
authorizing the collection of FTAs are nevertheless enforceable, require the
FTAs to be offset with a concurrent equal credit. Proposition 9's purported rate
reduction would be in lieu of the 10% rate reduction for residential and small
commercial customers that went into effect on January 1, 1998.
If Proposition 9 is approved and implemented, and if SCE were unable to conclude
that it is probable that Proposition 9 ultimately would be found invalid, then
under applicable accounting principles SCE would be required to write off
generation-related regulatory assets and certain investments in electric
generation plant to the extent SCE were to conclude that such assets were no
longer probable of recovery due to reductions in future revenue. SCE anticipates
that such a one-time write-off would amount to as much as $3.4 billion pre-tax.
This pre-tax write-off would result in an after-tax write-off of as much as $1.9
billion, representing 50% of SCE's total shareholders' equity of $3.8 billion at
September 30, 1998.
Such an after-tax write-off, which would exceed SCE's current retained earnings
($820 million as of September 30, 1998), would severely impair SCE's ability to
pay dividends to its preferred shareholders and Edison International's ability
to pay dividends to its common shareholders. The potential earnings reductions
described below also would impair the payment of dividends. In addition, an
after-tax write-off of $1.9 billion would reduce the common equity ratio of
SCE's capital structure from approximately 49% to approximately 30%.
The duration and amount of the rate decrease contemplated by Proposition 9 is
uncertain and, if Proposition 9 is approved, will be subject to interpretation
by the courts and regulatory agencies. If all
25
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provisions of Proposition 9 ultimately are upheld against legal challenge and
interpreted in an adverse manner, the amount of the average earnings reductions
to SCE could be as much as $210 million per year from 1999 through 2001, and
gradually decreasing to as much as $10 million in 2007.
The earnings reduction and write-off estimates ultimately will depend on how the
courts and regulators interpret Proposition 9 and how future rate changes
unrelated to Proposition 9 affect SCE's electric revenue.
The financial impacts described above, either singly or in combination, would
likely cause the rating agencies that rate SCE's debt and preferred securities
to lower those ratings substantially, which would immediately reduce the market
value of SCE's $4.2 billion in outstanding debt and preferred securities,
increase the cost of raising new capital, and possibly preclude the use of
certain financial instruments for raising capital.
If the voters approve Proposition 9, then legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of its challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
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 $177 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 $247 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
generation 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 $90 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
26
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
regulatory asset of $145 million for its estimated minimum environmental-cleanup
costs expected to be recovered through customer rates.
SCE's identified sites include several sites for which there is a lack of
currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCE may be held responsible for
contributing to any costs incurred for remediating these sites. Thus, no
reasonable estimate of cleanup costs can now be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30 years.
Remediation costs in each of the next several years are expected to range from
$4 million to $10 million. Recorded costs for the twelve months ended September
30, 1998, were $5 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 $9.9
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 $88 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 $175 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 $25 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, nine and
twelve months ended September 30, 1998, were $163 million, $375 million and $491
million, respectively, compared with $226 million, $461 million and $574 million
for the same periods in 1997. The earnings decreases were due to lower
authorized revenue, which resulted from 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
quarterly decrease also reflects a higher percentage of annual operating and
maintenance expenses incurred during third quarter 1998, compared to the same
period last year.
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." Excluding
the sales to the PX, operating revenue decreased 3%, 6% and 3%, respectively,
for the three, nine and twelve months ended September 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 was
partially offset by a 5% increase in retail sales volume due to the unusually
warm weather in third quarter 1998. 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 85%, 66% and 54%, respectively, for the three, nine and
twelve months ended September 30, 1998, respectively, compared to the same
periods in 1997. The decreases resulted from the sale of the gas- and oil-fueled
generation plants. In addition, the year-to-date and twelve-months-ended
decreases also reflect significantly lower gas prices in the first quarter of
1998.
Since April 1, 1998, SCE is required to purchase all of its power from the PX
for distribution to its retail customers. SCE is continuing to purchase power
from certain nonutility generators (known as qualifying facilities) and under
existing inter-utility contracts. This purchased power is sold to the PX. SCE is
required under federal law to purchase power from certain qualifying facilities
even though energy prices under these contracts are generally higher than other
sources. For the twelve months ended September 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.
Provisions for regulatory adjustment clauses decreased for the quarter, nine
months and twelve months ended September 30, 1998, compared to the same periods
in 1997. The quarterly decrease is primarily due to undercollections in the
transition cost balancing account resulting from high qualifying facilities
energy costs. The year-to-date and twelve-months-ended decreases were mainly due
to under-collections related to the issuance of the rate reduction notes in
December 1997. These undercollections were partially offset by overcollections
related to the gain on sales of the gas- and oil-fueled generation
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plants in second quarter 1998 and other transition costs. The year-to-date
decrease in the provision was also offset by overcollections related to the
administration of public-purpose funds.
Other operating expenses increased for the three, nine and twelve months ended
September 30, 1998, compared to the same periods in 1997, primarily due to
must-run reliability services, direct access activities, and PX and independent
system operator (ISO) activities. The year-to-date and twelve-months-ended
increases also reflect storm damage resulting from a harsher winter in 1998.
Maintenance expense increased 16% for the quarter ended September 30, 1998,
compared to the year-earlier period, mainly due to additional expenses incurred
at the distribution facilities.
Depreciation, decommissioning and amortization expense increased for the
quarter, nine months and twelve months ended September 30, 1998, compared to the
same periods in 1997, primarily due to the further acceleration of San Onofre
Nuclear Generating Station Units 2 and 3 and the Palo Verde Nuclear Generating
Station units and the amortization of the loss on plant sales. The year-to-date
and twelve-months-ended increases also reflect accelerated recovery of the gas-
and oil-fueled generation plants. The amortization of the loss on plant sales,
as well as the accelerated recoveries implemented in 1998 are part of the
competition transition charge (CTC) mechanism (see further discussion under
"California Electric Utility Industry Restructuring").
Income taxes decreased 18% for the three months ended September 30, 1998,
compared to the year-earlier period, primarily due to lower pre-tax income,
partially offset by additional amortization related to the CTC mechanism. Also,
this additional amortization related to the CTC mechanism will continue to cause
an increase in the effective tax rate.
Property and other taxes decreased 10% for the twelve months ended September 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.
Loss (gain) on sale of utility plant resulted from the sale of SCE's 12 gas- and
oil-fueled generation plants in 1998. Gain on sales of the gas- and oil-fueled
plants was used to reduce stranded costs. Loss on sales will be recovered from
customers over the transition period.
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%, 91% and 82%, respectively, for the
three, nine and twelve months ended September 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, as well as increases in
interest earned on higher balancing account undercollections.
Other nonoperating income increased for the three, nine and twelve months ended
September 30, 1998, compared to the year-earlier periods, mostly due to
additional accruals in 1997 for regulatory matters.
Interest Expense
Interest on long-term debt increased 34%, 23% and 15%, respectively, for the
three, nine and twelve months ended September 30, 1998, compared to the same
periods in 1997, primarily due to the issuance of the rate reduction notes in
December 1997. Interest on the rate reduction notes was $37 million, $113
million and $122 million, respectively, for the three, nine and twelve months
ended September 30, 1998.
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Other interest expense decreased 41%, 31% and 15%, respectively, for the three,
nine and twelve months ended September 30, 1998, compared to the same periods in
1997. The decreases are due to lower overall short-term debt balances in 1998,
particularly short-term debt used to finance fuel inventories. These fuel
inventories are no longer needed because of the divestiture of the gas- and
oil-fueled plants.
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 95.5 million shares
($2.2 billion) between January 1995 and October 30, 1998, funded by dividends
from its subsidiaries and the issuance of rate reduction notes.
SCE's cash flow coverage of dividends for the three, nine and twelve months
ended September 30, 1998, was 0.4 times, 0.9 times and 0.6 times, respectively,
compared to 1.0 times, 2.1 times and 1.7 times for the year-earlier periods.
These decreases reflect special dividends of $350 million and $330 million,
respectively, SCE paid to Edison International in the second quarter and third
quarter of 1998. 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 $181 million, $870 million and
$1.3 billion, respectively, for the three, nine and twelve months ended
September 30, 1998, compared with $299 million, $1.3 billion and $1.4 billion,
respectively, for the same periods in 1997.
Cash Flows from Financing Activities
At September 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 and expire in
2002.
Short-term debt is used to finance fuel inventories 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 September 30, 1998, SCE could issue approximately $12.0 billion
of additional first and refunding mortgage bonds and $4.5 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 September 30, 1998,
SCE had the capacity to pay $800 million 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 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
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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 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 "Competitive
Environment -- 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 ($2.2 billion), escalated using a
6.65% annual rate. These costs are expected to be funded from independent
decommissioning trusts, which receive SCE contributions of approximately $100
million per year. 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.
As a result of the rate freeze established in the restructuring statute, SCE's
transition costs are recovered as the residual component of rates once the costs
for distribution, transmission, public purpose programs, nuclear decommissioning
and the cost of supplying power to its customers through the PX and ISO have
already been recovered. Accordingly, more revenue will be available to cover
transition costs when market prices in the PX and ISO are low than when PX and
ISO prices are high. Market prices in the PX and ISO to date have generally been
reasonable, though some irregular price spikes have occurred. The ISO has
responded to price spikes in the market for reliability services (referred to as
ancillary services) by imposing a price cap of $250/MW on the market for such
services until certain actions have been completed to improve the functioning of
those markets. Similarly, the ISO currently maintains a cap of $250/MWh on its
market for imbalance energy while a software problem affecting the efficient
operation of that market persists. The caps in these markets mitigate the risk
of costly price spikes that would reduce the revenue available to SCE to pay
transition costs. During the upcoming year, the ISO will be considering removing
these price caps, which could increase the risk of high market prices. SCE's
exposure to high electricity prices is also partially mitigated by hedges
against high natural
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gas prices, since increases in natural gas prices tend to raise the price of
electricity purchased from the PX.
A 10% increase in market interest rates would result in a $7 million increase in
the fair value of SCE's interest rate hedge agreements. A 10% decrease in market
interest rates would result in a $7 million decline in the fair market value of
interest rate hedge agreements. A 10% increase in natural gas prices would
result in a $25 million increase in the fair market value of gas call options. A
10% decrease in natural gas prices would result in a $17 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 --
$846 million; 1999 -- $790 million; 2000 -- $674 million; 2001 -- $680 million;
and 2002 -- $655 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following September 30, 1998, are: 1999 -- $593 million;
2000 -- $568 million; 2001 -- $647 million; 2002 -- $247 million; and 2003 --
$572 million.
Preferred stock redemption requirements for the five twelve-month periods
following September 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.
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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 enabled 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 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 Utility Reform Network recommended
a combined total disallowance of $37 million. On September 21, 1998, a CPUC
administrative law judge proposed a $4 million disallowance. A final CPUC
decision is expected in fourth quarter 1998. In fourth 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 March 31, 1998, or
the date of divestiture for divested facilities.
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 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.
Proposition 9 seeks to prohibit
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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 -- 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. 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.
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 October 1, 1998, approximately 42,000 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 September 1998, the CPUC issued a
decision regarding the credits that would be provided to customers if they elect
to obtain revenue cycle services from someone other than SCE. Although the
decision adopted SCE's recommendation of using the net avoided cost, it also
adopted a methodology which results in higher credits to customers but requires
ESPs to pay service fees to SCE for the costs that SCE incurs as a result of
dealing with the ESP. SCE may experience a reduction in revenue security as a
result of this unbundling.
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
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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. In May 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 and transferred ownership of all 12 of its gas- and oil-fueled
generation plants. 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 oil- and gas-fueled generation 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 new accounting guidance. The
financial reporting effect of this discontinuance was to segregate these assets
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on the balance sheet; the new guidance did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
new guidance 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 new
accounting guidance 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 (as of June 30, 1998) 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 $2.5
billion, after tax, at September 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 Voter Initiative
On November 3, 1998, California voters will vote on Proposition 9, an initiative
supported by various consumer groups.
Proposition 9 would overturn major provisions of California's electric industry
restructuring legislation. Proposition 9 purports to: (1) require SCE and the
other California investor-owned utilities to provide at least a 20% rate
reduction to their residential and small commercial customers to be achieved
through cutting payments for nuclear and other fossil generation transition
costs; (2) eliminate cost recovery for nuclear generation plants and related
assets and obligations (other than reasonable decommissioning costs), except to
the extent such costs are recovered from competitive market sales through the PX
or contracts with the ISO; (3) eliminate cost recovery for non-nuclear
generation plants and related assets and obligations (other than costs
associated with QFs), except to the extent such costs are recovered from
competitive market sales through the PX or contracts with the ISO, unless the
CPUC finds that the utilities would be deprived of the opportunity to earn a
fair rate of return; and (4) prohibit the collection of any customer charges
necessary to pay principal, interest and other costs on the rate reduction bonds
(Fixed Transition Amounts or FTAs) or, if a court finds that the CPUC orders
authorizing the collection of FTAs are nevertheless enforceable, require the
FTAs to be offset with a concurrent equal credit. Proposition 9's purported rate
reduction would be in lieu of the 10% rate reduction for residential and small
commercial customers that went into effect on January 1, 1998.
If Proposition 9 is approved and implemented, and if SCE were unable to conclude
that it is probable that Proposition 9 ultimately would be found invalid, then
under applicable accounting principles SCE would be required to write off
generation-related regulatory assets and certain investments in electric
generation plant to the extent SCE were to conclude that such assets were no
longer probable of recovery due to reductions in future revenue. SCE anticipates
that such a one-time write-off would amount to as much as $3.4 billion pre-tax.
This pre-tax write-off would result in an after-tax write-off of as much as $1.9
billion, representing 50% of SCE's total shareholders' equity of $3.8 billion at
September 30, 1998.
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Such an after-tax write-off, which would exceed SCE's current retained earnings
($820 million as of September 30, 1998), would severely impair SCE's ability to
pay dividends to its preferred shareholders and Edison International's ability
to pay dividends to its common shareholders. The potential earnings reductions
described below also would impair the payment of dividends. In addition, an
after-tax write-off of $1.9 billion would reduce the common equity ratio of
SCE's capital structure from approximately 49% to approximately 30%.
The duration and amount of the rate decrease contemplated by Proposition 9 is
uncertain and, if Proposition 9 is approved, will be subject to interpretation
by the courts and regulatory agencies. If all provisions of Proposition 9
ultimately are upheld against legal challenge and interpreted in an adverse
manner, the amount of the average earnings reductions to SCE could be as much as
$210 million per year from 1999 through 2001, and gradually decreasing to as
much as $10 million in 2007.
The earnings reduction and write-off estimates ultimately will depend on how the
courts and regulators interpret Proposition 9 and how future rate changes
unrelated to Proposition 9 affect SCE's electric revenue.
The financial impacts described above, either singly or in combination, would
likely cause the rating agencies that rate SCE's debt and preferred securities
to lower those ratings substantially, which would immediately reduce the market
value of SCE's $4.2 billion in outstanding debt and preferred securities,
increase the cost of raising new capital, and possibly preclude the use of
certain financial instruments for raising capital.
If the voters approve Proposition 9, then legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of its challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
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 $177 million. One of SCE's sites, a former pole-treating facility, is
considered a federal Superfund site and represents 40% 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 $247
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 generation 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 $90 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 $145 million for its estimated
minimum environmental-cleanup costs expected to be recovered through customer
rates.
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SCE's identified sites include several sites for which there is a lack of
currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCE may be held responsible for
contributing to any costs incurred for remediating these sites. Thus, no
reasonable estimate of cleanup costs can be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30 years.
Remediation costs in each of the next several years are expected to range from
$4 million to $10 million. Recorded costs for the twelve-month period ended
September 30, 1998, were $5 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. In September 1998, San Onofre Unit
2 experienced a small amount of leakage from a steam generator tube plug which
required an 11-day outage to repair.
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
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Unit 2's February 1998 mid-cycle outage, similar tube supports showed no
significant levels of such erosion.
New Accounting Rules
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 were originally programmed to represent
any date by using six digits (e.g., 12/31/99) rather than eight digits (e.g.,
12/31/1999). Accordingly, such programs could fail or create erroneous results
when attempting to process information containing dates after December 31, 1999.
This situation has been referred to generally as the Year 2000 Issue.
SCE has a comprehensive program in place to address potential Year 2000 impacts.
SCE divides its Year 2000 activities into five phases: inventory, impact
assessment, remediation, testing and implementation. SCE's plan for the Year
2000 readiness of 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. The physical asset portfolio includes systems in the
generation, transmission, distribution, telecommunications and facilities areas.
SCE has completed the inventory and impact assessment phases. Remediation,
testing and implementation activities are in progress for each of the three
categories. SCE is on schedule to have its mainframe computing, distributed
computing and physical assets Year 2000-ready within the timeframe discussed
above.
The other essential component of the SCE Year 2000 readiness program is to
identify and assess vendor products and business partners (external parties) for
Year 2000 readiness, as these external parties may have the potential to impact
SCE's 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, as well as joint
ownership facilities. SCE also intends to exchange Year 2000 readiness
information (including, but not limited to,
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test results and related data) with certain external parties as part of SCE's
internal Year 2000 readiness efforts.
The current estimate of the costs to complete these modifications, including the
cost of new hardware and software application modification, is $80 million,
about half of which is expected to be capital costs. SCE's Year 2000 costs
expended through September 30, 1998, were $20 million. 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 Year
2000-ready 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 the most reasonably likely worst
case scenario concerning Year 2000-related processing failures or malfunctions
due to SCE's internal systems or from external parties. As noted above, SCE is
currently in the remediation and testing phases for many of its internal systems
and is assessing risks posed by external parties. SCE is working with certain
industry groups, including the North American Electric Reliability Council and
the Electric Power Research Institute, in an effort to help define a reasonably
likely worst case scenario and in the development of contingency plans. 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 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 Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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 and one was filed in
Kern County Superior Court. 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. Although the court has not yet set a date for trial of the
outstanding issues in the lead case related to SCE's cross-claim for damages, a
trial setting conference has been set for December 3, 1998.
Geothermal Generators' Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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 (Coso parties). SCE alleges that in order to avoid power production
plant shutdowns caused by excessive noncondensable gas in the geothermal field
brine, the Coso parties 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
parties of their obligations under their contracts with SCE and applicable law.
The complaint sought termination of the contracts and damages for excess power
purchase payments made to the Coso parties. The Coso parties' motion to transfer
venue to Inyo County Superior Court was granted on August 31, 1997.
The Coso parties have also asserted various claims against SCE, as well as The
Mission Group and Mission Power Engineering (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 parties in Inyo County Superior
Court. Following a hearing on November 20, 1997, the court struck all but two
causes of action asserted in the separate action on the grounds that they should
have been raised as part of the Coso parties' cross-complaint, and ordered the
remaining two causes of action consolidated for all purposes with the action
filed by SCE.
As a result of motion practice by SCE and the Mission parties, the Coso parties
filed a second amended cross-complaint on December 29, 1997, and a third amended
cross-complaint on August 21, 1998. The third amended cross-complaint names SCE,
the Mission parties and Edison International. As against SCE, the third amended
cross-complaint purports to state causes of action for declaratory relief;
breach
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of the covenant of good faith and fair dealing; inducing breach of agreements
between the Coso parties and their former employees; breach of an earlier
settlement agreement between the Mission parties and the Coso parties; slander
and disparagement; injunctive relief and restitution for unfair business
practices; anticipatory breach of the contracts; and violations of Public
Utilities Code ss.ss. 453, 702 and 2106. As against the Mission parties, the
third amended cross-complaint seeks damages for breach of warranty of authority
with respect to the settlement agreement and equitable indemnity. The third
amended cross-complaint seeks restitution, compensatory damages in excess of
$115,000,000, punitive damages in an amount not less than $400,000,000,
interest, attorney's fees, declaratory relief and injunctive relief.
On September 21, 1998, SCE filed an answer to the third amended cross-complaint
generally denying the allegations contained therein and asserting affirmative
defenses. In addition, SCE filed a cross-complaint for reformation of the
contracts alleging that if they are not susceptible to SCE's interpretation,
they should be reformed to reflect the parties' true intention. At this time,
the Coso parties have not filed a response to SCE's cross-complaint.
SCE has also filed a motion for summary adjudication with respect to the fourth
cause of action of the third amended cross-complaint for inducing breach of
employment agreements. The hearing on the motion is currently scheduled for
November 4, 1998.
The Mission parties and Edison International demurred to and moved to strike
portions of the third amended cross-complaint. These matters were heard by the
court on October 22, 1998. On October 27, 1998, the court issued an order
continuing the hearing on Edison International's demurrer to December 17, 1998,
and stayed discovery with respect to Edison International until that time. The
Mission parties' demurrer and motion to strike are still under submission. The
court's further disposition of these matters may result in the filing of further
amended pleadings with respect to Edison International and/or SCE.
On October 19, 1998, the Coso parties purported to file a first amended
cross-complaint against Edison International only. In the amended pleading, the
Coso parties assert, among other things, that SCE and Edison International are
alter egos; that SCE engaged in anticompetitive conduct; and that SCE violated
rules of the California Public Utilities Commission governing transactions
between SCE and its affiliates. These allegations are similar to those set forth
in the second amended complaint filed by three of the Coso parties, described
below. In its reply brief in support of its demurrer and at the October 22
hearing, described in the preceding paragraph, Edison International objected to
the filing of the first amended cross-complaint on the grounds that it was filed
without leave of court and has no legal effect. On October 27, 1998, the court
issued an order striking the purported first amended cross-complaint in its
entirety.
On August 21, 1998, the court granted SCE's motion to set aside a default
entered with respect to the first amended complaint filed by three of the Coso
parties in the separately filed (now consolidated) action. SCE filed an answer
to the first amended complaint on September 21, 1998, generally denying its
allegations and asserting affirmative defenses. Since then, the parties have
agreed to stipulate to the filing of a second amended complaint, and it is
likely that the court will approve the filing of the amended pleading, which
names SCE and Edison International. The proposed second amended complaint seeks
injunctive relief and restitution for unfair competition with respect to a broad
range of purported anticompetitive conduct by SCE with respect to its
administration and interpretation of standard offer contracts and with respect
to implementation and operation of the restructured power market. In addition,
the proposed second amended complaint alleges that SCE engaged in false
advertising with respect to the cost and reliability of power generated by
qualifying facilities, such as the facilities owned by the Coso parties. The
proposed amended pleading also alleges violations of Public Utilities Code ss.
2106. The proposed amended pleading seeks restitution, injunctive relief,
unspecified compensatory damages and punitive damages in an amount not less than
$500,000,000. Assuming that the court grants the Coso parties leave to file the
second amended complaint in its current form, Edison International and SCE
intend to file a demurrer and a motion to strike.
On June 29, 1998, the Court adopted a revised discovery plan which provides for
approximately eighteen months of discovery and periodic status conferences.
Discovery and motion practice related to
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discovery is active, except that the court has stayed discovery with respect to
Edison International through at least December 17, 1998. On August 28, 1998,
following the first status conference, the court set a trial date of March 1,
2000. The court reserved jurisdiction to advance or continue the trial date. The
materiality of net final judgments against Edison International or SCE in these
actions would be largely dependent on the extent to which any damages or
additional payments which might result therefrom are recoverable through rates.
Electric and Magnetic Fields (EMF) Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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. This action was dismissed by the court
without leave to amend on September 16, 1998.
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
and 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 case 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 Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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 San Diego Gas & Electric Company
(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.
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 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.
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, issued by the Ninth
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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 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. A pre-trial conference
is scheduled for May 17, 1999.
False Claims Act Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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.
The period for appeal of the U.S. District Court's decision has passed. Mr.
Rubaii did not file an appeal. As a result, this litigation at the U.S. District
court is now dismissed with prejudice.
Mohave Generating Station Environmental Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 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
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
1999.
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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 as well as an additional plaintiff (National Parks
and Conservation Association) to be added to the proceedings. On October 9,
1998, plaintiffs filed a motion to extend time to add a party and amend
complaint. Notwithstanding their supplemental notice of intent to sue,
plaintiffs missed the deadline pursuant to the court's Discovery Plan and
Scheduling Order to file an amended complaint. On October 26, 1998, the
co-owners filed a combined opposition to plaintiffs' motion to extend time to
add a party and amend the complaint. Various discovery motions have been filed
by both parties. It is not expected that these additional filings will
substantially change the timetable for the court's initial ruling on the pending
motions to dismiss and for partial summary judgment.
California Proposition 9 Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, California voters will vote on
Proposition 9, an initiative supported by various consumer groups, in
California's November 3, 1998, general election. Proposition 9 would overturn
major portions of California's electric industry restructuring legislation.
Proposition 9 purports to: (1) require SCE and the other California
investor-owned utilities to provide at least a 20% rate reduction to their
residential and small commercial customers to be achieved through cutting
payments for nuclear and other fossil generation transition costs; (2) eliminate
cost recovery for nuclear generation plants and related assets and obligations
(other than reasonable decommissioning costs), except to the extent such costs
are recovered from competitive market sales through the Power Exchange or
contracts with the Independent System Operator; (3) eliminate cost recovery for
non-nuclear generation plants and related assets and obligations (other than
costs associated with qualifying facilities), except to the extent such costs
are recovered from competitive market sales through the Power Exchange or
contracts with the Independent System Operator, unless the CPUC finds that the
utilities would be deprived of the opportunity to earn a fair rate of return;
and (4) prohibit the collection of any customer charges necessary to pay
principal, interest and other costs on the rate reduction bonds or, if a court
finds that the CPUC orders authorizing the collection of such charges are
nevertheless enforceable, require the charges to be offset with a concurrent
equal credit. Proposition 9's purported rate reduction would be in lieu of the
10% rate reduction for residential and small commercial customers that went into
effect on January 1, 1998.
In May 1998, a coalition of California business organizations and utilities
filed a petition for writ of mandate challenging Proposition 9 as illegal and
unconstitutional on its face and seeking to have it removed from the November
1998 ballot. In July 1998, the petition was denied by the California Court of
Appeal and an appeal was denied by the California Supreme Court.
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 electric industry
restructuring legislation, the financing order issued by the CPUC, or the rights
of holders of the property right authorized by the legislation and the financing
order, by legislative enactment, voter initiative or constitutional amendment
that would be adverse to holders of the rate reduction certificates.
Bankers Trust Company of California, N.A., acting as trustee for the holders of
rate reduction certificates, has sent a letter to the holders of record on
October 14, 1998, notifying them about certain actions the trustee is taking
related to Proposition 9. The letter states that Proposition 9, if approved by
the voters and upheld by the courts, would impair the rights of the holders and
would lead to a default in the payment of principal and interest. The letter
also states that Proposition 9, if approved, would breach the statutory and
contractual pledge by the State of California not to limit or alter payment of
principal and interest on the rate reduction certificates, and that such breach
would constitute an event of default under the agreements pursuant to which the
certificates were issued. Therefore, the letter states, the trustee is
requesting authorization from the holders to commence litigation to enjoin
Proposition 9 if it passes, to collect damages on behalf of the holders for the
breach of the State's statutory and contractual pledge, and for other
appropriate relief. The trustee's letter also attached letters from SCE, Pacific
Gas and Electric Company, and San Diego Gas & Electric Company, in their
capacities as servicers, restating their intention to comply with their
obligations under the related agreements to take reasonable and necessary legal
actions to overturn Proposition 9 if it is approved by the voters.
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If California voters approve Proposition 9, legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of SCE's challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
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 SCE's results of operations
and financial position as more specifically described in "California Voter
Initiative" in Item 2 of Part 1 of this quarterly Report, 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)*
3.3 Bylaws as adopted by the Board of Directors effective
September 17, 1998
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
July 13, 1998 Item 5: Other Events: California Voter Initiative
July 27, 1998 Item 5: Other Events: Proposition 9
- ---------------------
* Incorporated by reference pursuant to Rule 12b-32.
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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
October 30, 1998
To Holders of the Company's Bylaws:
Effective September 17, 1998, Article II, Section 4, was amended to
change the advance notice requirements for certain matters
to be presented by shareholders at an annual meeting.
BEVERLY P. RYDER
Corporate Secretary
BYLAWS
OF
SOUTHERN CALIFORNIA EDISON COMPANY
AS AMENDED TO AND INCLUDING
SEPTEMBER 17, 1998
<PAGE>
INDEX
Page
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office.............................................1
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations............................................1
Section 2. Annual Meetings..............................................1
Section 3. Special Meetings.............................................2
Section 4. Notice of Annual or Special Meeting..........................2
Section 5. Quorum.......................................................4
Section 6. Adjourned Meeting and Notice Thereof.........................4
Section 7. Voting.......................................................4
Section 8. Record Date..................................................6
Section 9. Consent of Absentees.........................................7
Section 10. Action Without Meeting.......................................7
Section 11. Proxies......................................................8
Section 12. Inspectors of Election.......................................8
ARTICLE III -- DIRECTORS
Section 1. Powers.......................................................9
Section 2. Number of Directors.........................................10
Section 3. Election and Term of Office.................................10
Section 4. Vacancies...................................................10
Section 5. Place of Meeting............................................11
Section 6. Regular Meetings............................................11
Section 7. Special Meetings............................................11
Section 8. Quorum......................................................12
Section 9. Participation in Meetings by Conference Telephone...........12
Section 10. Waiver of Notice............................................12
Section 11. Adjournment.................................................13
Section 12. Fees and Compensation.......................................13
Section 13. Action Without Meeting......................................13
Section 14. Rights of Inspection........................................13
Section 15. Committees .................................................13
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ARTICLE IV -- OFFICERS
Section 1. Officers....................................................14
Section 2. Election....................................................15
Section 3. Eligibility of Chairman or President........................15
Section 4. Removal and Resignation.....................................15
Section 5. Appointment of Other Officers...............................15
Section 6. Vacancies...................................................15
Section 7. Salaries....................................................16
Section 8. Furnish Security for Faithfulness...........................16
Section 9. Chairman's Duties; Succession to
Such Duties in Chairman's Absence or Disability.............16
Section 10. President's Duties..........................................16
Section 11. Chief Financial Officer.....................................17
Section 12. Vice President's Duties.....................................17
Section 13. General Counsel's Duties....................................17
Section 14. Associate General Counsel's and Assistant General
Counsel's Duties...................................17
Section 15. Controller's Duties.........................................17
Section 16. Assistant Controllers' Duties...............................17
Section 17. Treasurer's Duties..........................................18
Section 18. Assistant Treasurers' Duties................................18
Section 19. Secretary's Duties..........................................18
Section 20. Assistant Secretaries' Duties...............................19
Section 21. Secretary Pro Tempore.......................................19
Section 22. Election of Acting Treasurer or Acting Secretary............19
Section 23. Performance of Duties.......................................20
ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records.............................20
Section 2. Inspection of Bylaws........................................21
Section 3. Contracts and Other Instruments, Loans, Notes
and Deposits of Funds.......................................21
Section 4. Certificates of Stock.......................................22
Section 5. Transfer Agent, Transfer Clerk and Registrar................22
Section 6. Representation of Shares of Other Corporations..............22
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<PAGE>
ARTICLE V -- OTHER PROVISIONS (Cont.)
Section 7. Stock Purchase Plans........................................23
Section 8. Fiscal Year and Subdivisions................................23
Section 9. Construction and Definitions................................23
ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers...................24
Section 2. Indemnification of Employees and Agents.....................25
Section 3. Right of Directors and Officers to Bring Suit...............26
Section 4. Successful Defense..........................................26
Section 5. Non-Exclusivity of Rights...................................26
Section 6. Insurance...................................................26
Section 7. Expenses as a Witness.......................................27
Section 8. Indemnity Agreements........................................27
Section 9. Separability................................................27
Section 10. Effect of Repeal or Modification............................27
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General.....................................................27
Section 2. Unavailable Directors.......................................28
Section 3. Authorized Number of Directors..............................28
Section 4. Quorum......................................................28
Section 5. Creation of Emergency Committee.............................28
Section 6. Constitution of Emergency Committee.........................29
Section 7. Powers of Emergency Committee...............................29
Section 8. Directors Becoming Available................................29
Section 9. Election of Board of Directors..............................29
Section 10. Termination of Emergency Committee..........................30
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments..................................................30
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<PAGE>
BYLAWS
Bylaws for the regulation, except as otherwise provided
by statute or its Articles of Incorporation
of
SOUTHERN CALIFORNIA EDISON COMPANY
AS AMENDED TO AND INCLUDING
SEPTEMBER 17, 1998
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office.
The Edison General Office, situated at 2244 Walnut Grove Avenue, in the
City of Rosemead, County of Los Angeles, State of California, is hereby fixed as
the principal office for the transaction of the business of the corporation.
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations.
All meetings of shareholders shall be held at the principal office of the
corporation or at such other place or places within or without the State of
California as may be designated by the Board of Directors (the "Board"). In the
event such places shall prove inadequate in capacity for any meeting of
shareholders, an adjournment may be taken to and the meeting held at such other
place of adequate capacity as may be designated by the officer of the
corporation presiding at such meeting.
Section 2. Annual Meetings.
The annual meeting of shareholders shall be held on the third Thursday of
the month of April of each year at 10:00 a.m. on said day to elect directors to
hold office for the year next ensuing and until their successors shall be
elected, and to consider and act upon such other matters as may lawfully be
presented to such meeting; provided, however, that should said day fall upon a
legal holiday, then any such annual meeting of shareholders shall be held at the
same time and place on the next day thereafter ensuing which is not a legal
holiday.
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Section 3. Special Meetings.
Special meetings of the shareholders may be called at any time by the
Board, the Chairman of the Board, the President, or upon written request of any
three members of the Board, or by the holders of shares entitled to cast not
less than ten percent of the votes at such meeting. Upon request in writing to
the Chairman of the Board, the President, any Vice President or the Secretary by
any person (other than the Board) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to the
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five nor more
than sixty days after the receipt of the request. If the notice is not given
within twenty days after receipt of the request, the persons entitled to call
the meeting may give the notice.
Section 4. Notice of Annual or Special Meeting.
Written notice of each annual or special meeting of shareholders shall be
given not less than ten (or if sent by third-class mail, thirty) nor more than
sixty days before the date of the meeting to each shareholder entitled to vote
thereat. Such notice shall state the place, date, and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted, and no other business may be transacted, or (ii) in the case of an
annual meeting, those matters which the Board, at the time of the mailing of the
notice, intends to present for action by the shareholders, but, subject to the
provisions of applicable law and these Bylaws, any proper matter may be
presented at an annual meeting for such action. The notice of any special or
annual meeting at which directors are to be elected shall include the names of
nominees intended at the time of the notice to be presented by the Board for
election. For any matter to be presented by a shareholder at an annual meeting
held after December 31, 1993, but on or before December 31, 1999, including the
nomination of any person (other than a person nominated by or at the direction
of the Board) for election to the Board, written notice must be received by the
Secretary of the corporation from the shareholder not less than sixty nor more
than one hundred twenty days prior to the date of the annual meeting specified
in these Bylaws and to which the shareholder's notice relates; provided however,
that in the event the annual meeting to which the shareholder's written notice
relates is to be held on a date which is more than thirty days earlier than the
date of the annual meeting specified in these Bylaws, the notice from a
shareholder must be received by the Secretary not later than the close of
business on the tenth day following the date on which public disclosure of the
date of the annual meeting was made or given to the shareholders. For any matter
to be presented by a shareholder at an annual meeting held after December 31,
1999, including the nomination of any person (other than a person
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nominated by or at the direction of the Board) for election to the Board,
written notice must be received by the Secretary of the corporation from the
shareholder not more than one hundred eighty days nor less than one hundred
twenty days prior to the date on which the proxy materials for the prior year's
annual meeting were first released to shareholders by the corporation; provided
however, that in the event the annual meeting to which the shareholder's written
notice relates is to be held on a date which is more than thirty days earlier or
later than the date of the annual meeting specified in these Bylaws, the notice
from a shareholder must be received by the Secretary not earlier than two
hundred twenty days prior to the date of the annual meeting to which the
shareholder's notice relates nor later than one hundred sixty days prior to the
date of such annual meeting, unless less than one hundred seventy days' prior
public disclosure of the date of the meeting is made by the earliest possible
quarterly report on Form 10-Q, or, if impracticable, any means reasonably
calculated to inform shareholders including without limitation a report on Form
8-K, a press release or publication once in a newspaper of general circulation
in the county in which the principal office is located, in which event notice by
the shareholder to be timely must be received not later than the close of
business on the tenth day following the date of such public disclosure. The
shareholder's notice to the Secretary shall set forth (a) a brief description of
each matter to be presented at the annual meeting by the shareholder; (b) the
name and address, as they appear on the corporation's books, of the shareholder;
(c) the class and number of shares of the corporation which are beneficially
owned by the shareholder; and (d) any material interest of the shareholder in
the matters to be presented. Any shareholder who intends to nominate a candidate
for election as a director shall also set forth in such a notice (i) the name,
age, business address and residence address of each nominee that he or she
intends to nominate at the meeting, (ii) the principal occupation or employment
of each nominee, (iii) the class and number of shares of capital stock of the
corporation beneficially owned by each nominee, and (iv) any other information
concerning the nominee that would be required under the rules of the Securities
and Exchange Commission in a proxy statement soliciting proxies for the election
of the nominee. The notice shall also include a consent, signed by the
shareholder's nominees, to serve as a director of the corporation if elected.
Notwithstanding anything in these Bylaws to the contrary, and subject to the
provisions of any applicable law, no business shall be conducted at a special or
annual meeting except in accordance with the procedures set forth in this
Section 4.
Notice of a shareholders' meeting shall be given either personally or by
first-class mail (or, if the outstanding shares of the corporation are held of
record by 500 or more persons on the record date for the meeting, by third-class
mail) or by other means of written communication, addressed to the shareholder
at the address of such shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice; or, if no
such
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address appears or is given, at the place where the principal office of the
corporation is located or by publication at least once in a newspaper of general
circulation in the county in which the principal office is located. Notice by
mail shall be deemed to have been given at the time a written notice is
deposited in the United States mails, postage prepaid. Any other written notice
shall be deemed to have been given at the time it is personally delivered to the
recipient or is delivered to a common carrier for transmission, or actually
transmitted by the person giving the notice by electronic means, to the
recipient.
Section 5. Quorum.
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. The affirmative
vote of a majority of the shares represented and voting at a duly held meeting
at which a quorum is present (which shares voting affirmatively also constitute
at least a majority of the required quorum) shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by law or the Articles; provided, however, that the shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to have less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 6. Adjourned Meeting and Notice Thereof.
Any shareholders' meeting, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares, the holders
of which are either present in person or represented by proxy thereat, but in
the absence of a quorum (except as provided in Section 5 of this Article) no
other business may be transacted at such meeting.
It shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. However, when any shareholders' meeting is
adjourned for more than forty-five days or, if after adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given as in the case of an original meeting.
Section 7. Voting.
The shareholders entitled to notice of any meeting or to vote at any such
meeting shall be only persons in whose name shares stand on the stock records
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of the corporation on the record date determined in accordance with Section 8 of
this Article.
Voting shall in all cases be subject to the provisions of Chapter 7 of the
California General Corporation Law, and to the following provisions:
(a) Subject to clause (g), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of such shares into the holder's name; and
shares standing in the name of a trustee may be voted by the trustee, either in
person or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.
(c) Subject to the provisions of Section 705 of the California General
Corporation Law and except where otherwise agreed in writing between the
parties, a shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the corporation
may treat all rights incident thereto as exercisable by the minor, in person or
by proxy, whether or not the corporation has notice, actual or constructive, of
the non-age unless a guardian of the minor's property has been appointed and
written notice of such appointment given to the corporation.
(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the chairman of the board, president or any vice president of such
other corporation. Shares which are purported to be voted or any proxy purported
to be executed in the name of a corporation (whether or not any title of the
person signing is indicated) shall be presumed to be voted or the proxy executed
in accordance with the provisions of this subdivision, unless the contrary is
shown.
(f) Shares of the corporation owned by any of its subsidiaries shall not be
entitled to vote on any matter.
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(g) Shares of the corporation held by the corporation in a fiduciary
capacity, and shares of the corporation held in a fiduciary capacity by any of
its subsidiaries, shall not be entitled to vote on any matter, except to the
extent that the settlor or beneficial owner possesses and exercises a right to
vote or to give the corporation binding instructions as to how to vote such
shares.
(h) If shares stand of record in the names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, husband
and wife as community property, tenants by the entirety, voting trustees,
persons entitled to vote under a shareholder voting agreement or otherwise, or
if two or more persons (including proxyholders) have the same fiduciary
relationship respecting the same shares, unless the secretary of the corporation
is given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so voting binds
all;
(iii) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.
No shareholder of any class of stock of this corporation shall be
entitled to cumulate votes at any election of directors of this corporation.
Elections for directors need not be by ballot; provided, however, that
all elections for directors must be by ballot upon demand made by a shareholder
at the meeting and before the voting begins.
In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
Section 8. Record Date.
The Board may fix, in advance, a record date for the determination of
the shareholders entitled to notice of any meeting or to vote or entitled to
receive payment of any dividend or other distribution, or any allotment of
rights, or to
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exercise rights in respect of any other lawful action. The record date so fixed
shall be not more than sixty days nor less than ten days prior to the date of
the meeting nor more than sixty days prior to any other action. When a record
date is so fixed, only shareholders of record at the close of business on that
date are entitled to notice of and to vote at the meeting or to receive the
dividend, distribution, or allotment of rights, or to exercise the rights, as
the case may be, notwithstanding any transfer of shares on the books of the
corporation after the record date, except as otherwise provided by law or these
Bylaws. A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting. The Board
shall fix a new record date if the meeting is adjourned for more than forty-five
days.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held. The record date for determining shareholders for any purpose other than as
set forth in this Section 8 or Section 10 of this Article shall be at the close
of business on the day on which the Board adopts the resolution relating
thereto, or the sixtieth day prior to the date of such other action, whichever
is later.
Section 9. Consent of Absentees.
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting or an approval of the minutes thereof.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Neither the business to be
transacted at nor the purpose of any regular or special meeting of shareholders
need be specified in any written waiver of notice, consent to the holding of the
meeting or approval of the minutes thereof, except as provided in Section 601
(f) of the California General Corporation Law.
Section 10. Action Without Meeting.
Subject to Section 603 of the California General Corporation Law, any
action which, under any provision of the California General Corporation Law, may
be taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing, setting forth the
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action so taken, shall be signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Unless a record date for voting purposes be fixed as provided
in Section 8 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 10, when no prior action by
the Board has been taken, shall be the day on which the first written consent is
given.
Section 11. Proxies.
Every person entitled to vote shares has the right to do so either in
person or by one or more persons, not to exceed three, authorized by a written
proxy executed by such shareholder and filed with the Secretary. Subject to the
following sentence, any proxy duly executed continues in full force and effect
until revoked by the person executing it prior to the vote pursuant thereto by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or by attendance at the meeting and voting in person by the
person executing the proxy; provided, however, that a proxy is not revoked by
the death or incapacity of the maker unless, before the vote is counted, written
notice of such death or incapacity is received by this corporation. No proxy
shall be valid after the expiration of eleven months from the date of its
execution unless otherwise provided in the proxy.
Section 12. Inspectors of Election.
In advance of any meeting of shareholders, the Board may appoint any
persons other than nominees as inspectors of election to act at such meeting and
any adjournment thereof. If inspectors of election are not so appointed, or if
any persons so appointed fail to appear or refuse to act, the chairman of any
such meeting may, and on the request of any shareholder or shareholder's proxy
shall, make such appointments at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares present shall determine whether
one or three inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707 (b)
of the California General Corporation Law and shall include: determining the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining when
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the polls shall close; determining the result; and doing such acts as may be
proper to conduct the election or vote with fairness to all shareholders. If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the facts stated therein.
ARTICLE III -- DIRECTORS
Section 1. Powers.
Subject to limitations of the Articles, of these Bylaws and of the
California General Corporation Law relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board. The Board may delegate the management of the
day-to-day operation of the business of the corporation provided that the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised under the ultimate direction of the Board. Without
prejudice to such general powers, but subject to the same limitations, it is
hereby expressly declared that the Board shall have the following powers in
addition to the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and employees
of the corporation, prescribe the powers and duties for them as may not be
inconsistent with law, with the Articles or these Bylaws, fix their compensation
and require from them security for faithful service.
(b) To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles or these Bylaws, as they may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe the forms
of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms and for such consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities therefor.
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Section 2. Number of Directors.
The authorized number of directors shall be not less than fifteen nor
more than twenty until changed by amendment of the Articles or by a Bylaw duly
adopted by the shareholders. The exact number of directors shall be fixed,
within the limits specified, by the Board by adoption of a resolution or by the
shareholders in the same manner provided in these Bylaws for the amendment
thereof.
Section 3. Election and Term of Office.
The directors shall be elected at each annual meeting of the
shareholders, but if any such annual meeting is not held or the directors are
not elected thereat, the directors may be elected at any special meeting of
shareholders held for that purpose. Each director shall hold office until the
next annual meeting and until a successor has been elected and qualified.
Section 4. Vacancies.
Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
Vacancies in the Board, except those existing as a result of a removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected and qualified. Vacancies existing as a
result of a removal of a director may be filled by the shareholders as provided
by law.
A vacancy or vacancies in the Board shall be deemed to exist in case of
the death, resignation or removal of any director, or if the authorized number
of directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are elected, to elect
the full authorized number of directors to be voted for at that meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a
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majority of the outstanding shares entitled to vote. If the Board accepts the
resignation of a director tendered to take effect at a future time, the Board or
the shareholders shall have power to elect a successor to take office when the
resignation is to become effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's term
of office.
Section 5. Place of Meeting.
Regular or special meetings of the Board shall be held at any place
within or without the State of California which has been designated from time to
time by the Board or as provided in these Bylaws. In the absence of such
designation, regular meetings shall be held at the principal office of the
corporation.
Section 6. Regular Meetings.
Promptly following each annual meeting of shareholders the Board shall
hold a regular meeting for the purpose of organization, election of officers and
the transaction of other business.
Regular meetings of the Board shall be held at the principal office of
the corporation without notice on the third Thursday of the months of February,
April, May, July and September, and on the second Thursday in December, at the
hour of 9:00 a.m. or as soon thereafter as the regular meeting of the Board of
Directors of Edison International is adjourned, and on the third Thursday in
March, at the hour of 8:00 a.m. or as soon thereafter as the regular meeting of
the Board of Directors of Edison International is adjourned. Call and notice of
all regular meetings of the Board are not required.
Section 7. Special Meetings.
Special meetings of the Board for any purpose or purposes may be called
at any time by the Chairman of the Board, the President, any Vice President, the
Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written
notice or forty-eight hours' notice given personally or by telephone, telegraph,
telex, facsimile, electronic mail or other similar means of communication. Any
such notice shall be addressed or delivered to each director at such director's
address as it is shown upon the records of the corporation or as may have been
given to the corporation by the director for purposes of notice or, if such
address is not shown on such records or is not readily ascertainable, at the
place in which the
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meetings of the directors are regularly held. The notice need not specify the
purpose of such special meeting.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone, radio or other similar means to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.
Section 8. Quorum.
One-third of the number of authorized directors constitutes a quorum of
the Board for the transaction of business, except to adjourn as provided in
Section ll of this Article. Every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board, unless a greater number is required by law
or by the Articles; provided, however, that a meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 9. Participation in Meetings by Conference Telephone.
Members of the Board may participate in a meeting through use of
conference telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Such participation
constitutes presence in person at such meeting.
Section 10. Waiver of Notice.
The transactions of any meeting of the Board, however called and
noticed or wherever held, are as valid as though had at a meeting duly held
after regular call and notice if a quorum is present and if, either before or
after the meeting, each of the directors not present signs a written waiver of
notice, a consent to holding such meeting or an approval of the minutes thereof.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
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Section 11. Adjournment.
A majority of the directors present, whether or not a quorum is
present, may adjourn any directors' meeting to another time and place. Notice of
the time and place of holding an adjourned meeting need not be given to absent
directors if the time and place is fixed at the meeting adjourned. If the
meeting is adjourned for more than twenty-four hours, notice of any adjournment
to another time or place shall be given prior to the time of the adjourned
meeting to the directors who were not present at the time of the adjournment.
Section 12. Fees and Compensation.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by the Board.
Section 13. Action Without Meeting.
Any action required or permitted to be taken by the Board may be taken
without a meeting if all members of the Board shall individually or collectively
consent in writing to such action. Such written consent or consents shall have
the same force and effect as a unanimous vote of the Board and shall be filed
with the minutes of the proceedings of the Board.
Section 14. Rights of Inspection.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and also of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by agent or attorney and includes the right to copy and make extracts.
Section 15. Committees.
The Board may appoint one or more committees, each consisting of two or
more directors, to serve at the pleasure of the Board. The Board may delegate to
such committees any or all of the authority of the Board except with respect to:
(a) The approval of any action for which the California General
Corporation Law also requires shareholders' approval or approval of the
outstanding shares;
(b) The filling of vacancies on the Board or in any committee;
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(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new
Bylaws;
(e) The amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board; or
(g) The appointment of other committees of the Board or the members
thereof.
Any such committee, or any member or alternate member thereof, must be
appointed by resolution adopted by a majority of the exact number of authorized
directors as specified in Section 2 of this Article. The Board shall have the
power to prescribe the manner and timing of giving of notice of regular or
special meetings of any committee and the manner in which proceedings of any
committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the manner in which its proceedings
shall be conducted. Unless the Board or such committee shall otherwise provide,
the regular and special meetings and other actions of any such committee shall
be governed by the provisions of this Article applicable to meetings and actions
of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV -- OFFICERS
Section 1. Officers.
The officers of the corporation shall be a Chairman of the Board, a
President, a Chief Financial Officer, one or more Vice Presidents, a General
Counsel, one or more Associate General Counsel, one or more Assistant General
Counsel, a Controller, one or more Assistant Controllers, a Treasurer, one or
more Assistant Treasurers, a Secretary and one or more Assistant Secretaries,
and such other officers as may be elected or appointed in accordance with
Section 5 of this Article. The Board, the Chairman of the Board or the President
may confer a special title upon any Vice President not specified herein. Any
number of offices of the corporation may be held by the same person.
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Section 2. Election.
The officers of the corporation, except such officers as may be elected
or appointed in accordance with the provisions of Section 5 or Section 6 of this
Article, shall be chosen annually by, and shall serve at the pleasure of the
Board, and shall hold their respective offices until their resignation, removal,
or other disqualification from service, or until their respective successors
shall be elected.
Section 3. Eligibility of Chairman or President.
No person shall be eligible for the office of Chairman of the Board or
President unless such person is a member of the Board of the corporation; any
other officer may or may not be a director.
Section 4. Removal and Resignation.
Any officer may be removed, either with or without cause, by the Board
at any time or by any officer upon whom such power or removal may be conferred
by the Board. Any such removal shall be without prejudice to the rights, if any,
of the officer under any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. Appointment of Other Officers.
The Board may appoint such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in the Bylaws or as the
Board may from time to time determine.
Section 6. Vacancies.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled at any time deemed
appropriate by the Board in the manner prescribed in these Bylaws for regular
election or appointment to such office.
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Section 7. Salaries.
The salaries of the Chairman of the Board, President, Chief Financial
Officer, Vice Presidents, General Counsel, Controller, Treasurer and Secretary
of the corporation shall be fixed by the Board. Salaries of all other officers
shall be as approved from time to time by the chief executive officer.
Section 8. Furnish Security for Faithfulness.
Any officer or employee shall, if required by the Board, furnish to the
corporation security for faithfulness to the extent and of the character that
may be required.
Section 9. Chairman's Duties; Succession to Such Duties in Chairman's
Absence or Disability.
The Chairman of the Board shall be the chief executive officer of the
corporation and shall preside at all meetings of the shareholders and of the
Board. Subject to the Board, the Chairman of the Board shall have charge of the
business of the corporation, including the construction of its plants and
properties and the operation thereof. The Chairman of the Board shall keep the
Board fully informed, and shall freely consult them concerning the business of
the corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as the chief executive officer of the corporation; in the
absence or disability of the Chairman of the Board and the President, the next
in order of election by the Board of the Vice Presidents shall act as chief
executive officer of the corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as Chairman of the Board at meetings of the Board; in the
absence or disability of the Chairman of the Board and the President, the next,
in order of election by the Board, of the Vice Presidents who is a member of the
Board shall act as Chairman of the Board at any such meeting of the Board; in
the absence or disability of the Chairman of the Board, the President, and such
Vice Presidents who are members of the Board, the Board shall designate a
temporary Chairman to preside at any such meeting of the Board.
Section 10. President's Duties.
The President shall perform such other duties as the Chairman of the
Board shall delegate or assign to such officer.
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Section 11. Chief Financial Officer.
The Chief Financial Officer of the corporation shall be the chief
consulting officer in all matters of financial import and shall have control
over all financial matters concerning the corporation.
Section 12. Vice Presidents' Duties.
The Vice Presidents shall perform such other duties as the chief
executive officer shall designate.
Section 13. General Counsel's Duties.
The General Counsel shall be the chief consulting officer of the
corporation in all legal matters and, subject to the chief executive officer,
shall have control over all matters of legal import concerning the corporation.
Section 14. Associate General Counsel's and Assistant General Counsel's
Duties.
The Associate General Counsel shall perform such of the duties of the
General Counsel as the General Counsel shall designate, and in the absence or
disability of the General Counsel, the Associate General Counsel, in order of
election to that office by the Board at its latest organizational meeting, shall
perform the duties of the General Counsel. The Assistant General Counsel shall
perform such duties as the General Counsel shall designate.
Section 15. Controller's Duties.
The Controller shall be the chief accounting officer of the Corporation
and, subject to the Chief Financial Officer, shall have control over all
accounting matters concerning the Corporation and shall perform such other
duties as the Chief Executive Officer shall designate.
Section 16. Assistant Controllers' Duties.
The Assistant Controllers shall perform such of the duties of the
Controller as the Controller shall designate, and in the absence or disability
of the Controller, the Assistant Controllers, in order of election to that
office by the Board at its latest organizational meeting, shall perform the
duties of the Controller.
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Section 17. Treasurer's Duties.
It shall be the duty of the Treasurer to keep in custody or control all
money, stocks, bonds, evidences of debt, securities and other items of value
that may belong to, or be in the possession or control of, the corporation, and
to dispose of the same in such manner as the Board or the chief executive
officer may direct, and to perform all acts incident to the position of
Treasurer.
Section 18. Assistant Treasurers' Duties.
The Assistant Treasurers shall perform such of the duties of the
Treasurer as the Treasurer shall designate, and in the absence or disability of
the Treasurer, the Assistant Treasurers, in order of election to that office by
the Board at its latest organizational meeting, shall perform the duties of the
Treasurer, unless action is taken by the Board as contemplated in Article IV,
Section 22.
Section 19. Secretary's Duties.
The Secretary shall keep or cause to be kept full and complete records
of the proceedings of shareholders, the Board and its committees at all
meetings, and shall affix the corporate seal and attest by signing copies of any
part thereof when required.
The Secretary shall keep, or cause to be kept, a copy of the Bylaws of
the corporation at the principal office in accordance with Section 213 of the
California General Corporation Law.
The Secretary shall be the custodian of the corporate seal and shall
affix it to such instruments as may be required.
The Secretary shall keep on hand a supply of blank stock certificates
of such forms as the Board may adopt.
The Secretary shall serve or cause to be served by publication or
otherwise, as may be required, all notices of meetings and of other corporate
acts that may by law or otherwise be required to be served, and shall make or
cause to be made and filed in the principal office of the corporation, the
necessary certificate or proofs thereof.
An affidavit of mailing of any notice of a shareholders' meeting or of
any report, in accordance with the provisions of Section 601 (b) of the
California General Corporation Law, executed by the Secretary shall be prima
facie evidence of the fact that such notice or report had been duly given.
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The Secretary may, with the Chairman of the Board, the President, or a
Vice President, sign certificates of ownership of stock in the corporation, and
shall cause all certificates so signed to be delivered to those entitled
thereto.
The Secretary shall keep all records required by the California General
Corporation Law.
The Secretary shall generally perform the duties usual to the office of
secretary of corporations, and such other duties as the chief executive officer
shall designate.
Section 20. Assistant Secretaries' Duties.
Assistant Secretaries shall perform such of the duties of the Secretary
as the Secretary shall designate, and in the absence or disability of the
Secretary, the Assistant Secretaries, in the order of election to that office by
the Board at its latest organizational meeting, shall perform the duties of the
Secretary, unless action is taken by the Board as contemplated in Article IV,
Sections 21 and 22 of these Bylaws.
Section 21. Secretary Pro Tempore.
At any meeting of the Board or of the shareholders from which the
Secretary is absent, a Secretary pro tempore may be appointed and act.
Section 22. Election of Acting Treasurer or Acting Secretary.
The Board may elect an Acting Treasurer, who shall perform all the
duties of the Treasurer during the absence or disability of the Treasurer, and
who shall hold office only for such a term as shall be determined by the Board.
The Board may elect an Acting Secretary, who shall perform all the
duties of the Secretary during the absence or disability of the Secretary, and
who shall hold office only for such a term as shall be determined by the Board.
Whenever the Board shall elect either an Acting Treasurer or Acting
Secretary, or both, the officers of the corporation as set forth in Article IV,
Section 1 of these Bylaws, shall include as if therein specifically set out, an
Acting Treasurer or an Acting Secretary, or both.
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Section 23. Performance of Duties.
Officers shall perform the duties of their respective offices as stated
in these Bylaws, and such additional duties as the Board shall designate.
ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records.
(a) A shareholder or shareholders holding at least five percent in the
aggregate of the outstanding voting shares of the corporation or who hold at
least one percent of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have an absolute right to do either or both
of the following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five business days'
prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the
corporation, upon five business days' prior written demand and upon the tender
of its usual charges for such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand.
(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or holder
of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings of the
shareholders and the Board and committees of the Board shall be open to
inspection upon written demand on the corporation of any shareholder or holder
of a voting trust certificate at any reasonable time during usual business
hours, for a purpose reasonably related to such holder's interests as a
shareholder or as a holder of such voting trust certificate.
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(d) Any such inspection and copying under this Article may be made in
person or by agent or attorney.
Section 2. Inspection of Bylaws.
The corporation shall keep in its principle office the original or a
copy of these Bylaws as amended to date, which shall be open to inspection by
shareholders at all reasonable times during office hours.
Section 3. Contracts and Other Instruments, Loans, Notes and Deposits
of Funds.
The Chairman of the Board, the President, or a Vice President, either
alone or with the Secretary or an Assistant Secretary, or the Secretary alone,
shall execute in the name of the corporation such written instruments as may be
authorized by the Board and, without special direction of the Board, such
instruments as transactions of the ordinary business of the corporation may
require and, such officers without the special direction of the Board may
authenticate, attest or countersign any such instruments when deemed
appropriate. The Board may authorize any person, persons, entity, entities,
attorney, attorneys, attorney-in-fact, attorneys-in-fact, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authority may be general or confined to
specific instances.
No loans shall be contracted on behalf of the corporation and no
evidences of such indebtedness shall be issued in its name unless authorized by
the Board as it may direct. Such authority may be general or confined to
specific instances.
All checks, drafts, or other similar orders for the payment of money,
notes, or other such evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation and in such manner as the Board or chief executive officer may
direct.
Unless authorized by the Board or these Bylaws, no officer, agent,
employee or any other person or persons shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or amount.
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the Board may direct.
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Section 4. Certificates of Stock.
Every holder of shares of the corporation shall be entitled to have a
certificate signed in the name of the corporation by the Chairman of the Board,
the President, or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
Certificates for shares may be used prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this Section, no new certificate for shares shall
be issued in lieu of an old one unless the latter is surrendered and canceled at
the same time. The Board may, however, if any certificate for shares is alleged
to have been lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Section 5. Transfer Agent, Transfer Clerk and Registrar.
The Board may, from time to time, appoint transfer agents, transfer
clerks, and stock registrars to transfer and register the certificates of the
capital stock of the corporation, and may provide that no certificate of capital
stock shall be valid without the signature of the stock transfer agent or
transfer clerk, and stock registrar.
Section 6. Representation of Shares of Other Corporations.
The chief executive officer or any other officer or officers authorized
by the Board or the chief executive officer are each authorized to vote,
represent and exercise on behalf of the corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
the corporation.
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The authority herein granted may be exercised either by any such officer in
person or by any other person authorized so to do by proxy or power of attorney
duly executed by said officer.
Section 7. Stock Purchase Plans.
The corporation may adopt and carry out a stock purchase plan or
agreement or stock option plan or agreement providing for the issue and sale for
such consideration as may be fixed of its unissued shares, or of issued shares
acquired, to one or more of the employees or directors of the corporation or of
a subsidiary or to a trustee on their behalf and for the payment for such shares
in installments or at one time, and may provide for such shares in installments
or at one time, and may provide for aiding any such persons in paying for such
shares by compensation for services rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment and option or obligation
on the part of the corporation to repurchase the shares upon termination of
employment, restrictions upon transfer of the shares, the time limits of and
termination of the plan, and any other matters, not in violation of applicable
law, as may be included in the plan as approved or authorized by the Board or
any committee of the Board.
Section 8. Fiscal Year and Subdivisions.
The calendar year shall be the corporate fiscal year of the
corporation. For the purpose of paying dividends, for making reports and for the
convenient transaction of the business of the corporation, the Board may divide
the fiscal year into appropriate subdivisions.
Section 9. Construction and Definitions.
Unless the context otherwise requires, the general provisions, rules of
construction and definitions contained in the General Provisions of the
California Corporations Code and in the California General Corporation Law shall
govern the construction of these Bylaws.
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ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers.
Each person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, formal or informal, whether brought in the name of the corporation
or otherwise and whether of a civil, criminal, administrative or investigative
nature (hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
an alleged action or inaction in an official capacity or in any other capacity
while serving as a director or officer, shall, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permissible under California
law and the corporation's Articles of Incorporation, against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that (A) the corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of the corporation; (B) the corporation shall indemnify
any such person seeking indemnification in connection with a proceeding (or part
thereof) other than a proceeding by or in the name of the corporation to procure
a judgment in its favor only if any settlement of such a proceeding is approved
in writing by the corporation; (C) that no such person shall be indemnified (i)
except to the extent that the aggregate of losses to be indemnified exceeds the
amount of such losses for which the director or officer is paid pursuant to any
directors' and officers' liability insurance policy maintained by the
corporation; (ii) on account of any suit in which judgment is rendered against
such person for an accounting of profits made from the purchase or sale by such
person of securities of the corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law; (iii) if a court of
competent jurisdiction finally determines that any indemnification hereunder is
unlawful; and (iv) as to circumstances in which indemnity is expressly
prohibited by Section 317 of the General Corporation Law of California (the
"Law"); and (D) that no such person shall be indemnified with regard to any
action brought by or in the right of the
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corporation for breach of duty to the corporation and its shareholders (a) for
acts or omissions involving intentional misconduct or knowing and culpable
violation of law; (b) for acts or omissions that the director or officer
believes to be contrary to the best interests of the corporation or its
shareholders or that involve the absence of good faith on the part of the
director or officer; (c) for any transaction from which the director or officer
derived an improper personal benefit; (d) for acts or omissions that show a
reckless disregard for the director's or officer's duty to the corporation or
its shareholders in circumstances in which the director or officer was aware, or
should have been aware, in the ordinary course of performing his or her duties,
of a risk of serious injury to the corporation or its shareholders; (e) for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's or officer's duties to the corporation or its
shareholders; and (f) for costs, charges, expenses, liabilities and losses
arising under Section 310 or 316 of the Law. The right to indemnification
conferred in this Article shall include the right to be paid by the corporation
expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that if the Law permits the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, such advances shall be made only upon delivery to the corporation of
an undertaking, by or on behalf of such director or officer, to repay all
amounts to the corporation if it shall be ultimately determined that such person
is not entitled to be indemnified.
Section 2. Indemnification of Employees and Agents.
A person who was or is a party or is threatened to be made a party to
or is involved in any proceeding by reason of the fact that he or she is or was
an employee or agent of the corporation or is or was serving at the request of
the corporation as an employee or agent of another enterprise, including service
with respect to employee benefit plans, whether the basis of such action is an
alleged action or inaction in an official capacity or in any other capacity
while serving as an employee or agent, may, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permitted by California law
and the corporation's Articles of Incorporation, against all costs, charges,
expenses, liabilities and losses, (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith.
25
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Section 3. Right of Directors and Officers to Bring Suit.
If a claim under Section 1 of this Article is not paid in full by the
corporation within 30 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expense of
prosecuting such claim. Neither the failure of the corporation (including its
Board, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is permissible in the circumstances because he or she has met the
applicable standard of conduct, if any, nor an actual determination by the
corporation (including its Board, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to the action or create a presumption for the purpose of an
action that the claimant has not met the applicable standard of conduct.
Section 4. Successful Defense.
Notwithstanding any other provision of this Article, to the extent that
a director or officer has been successful on the merits or otherwise (including
the dismissal of an action without prejudice or the settlement of a proceeding
or action without admission of liability) in defense of any proceeding referred
to in Section 1 or in defense of any claim, issue or matter therein, he or she
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
Section 5. Non-Exclusivity of Rights.
The right to indemnification provided by this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise.
Section 6. Insurance.
The corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the Law.
26
<PAGE>
Section 7. Expenses as a Witness.
To the extent that any director, officer, employee or agent of the
corporation is by reason of such position, or a position with another entity at
the request of the corporation, a witness in any action, suit or proceeding, he
or she shall be indemnified against all costs and expenses actually and
reasonably incurred by him or her on his or her behalf in connection therewith.
Section 8. Indemnity Agreements.
The corporation may enter into agreements with any director, officer,
employee or agent of the corporation providing for indemnification to the
fullest extent permissible under the Law and the corporation's Articles of
Incorporation.
Section 9. Separability.
Each and every paragraph, sentence, term and provision of this Article
is separate and distinct so that if any paragraph, sentence, term or provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of any other paragraph, sentence, term or provision hereof. To the extent
required, any paragraph, sentence, term or provision of this Article may be
modified by a court of competent jurisdiction to preserve its validity and to
provide the claimant with, subject to the limitations set forth in this Article
and any agreement between the corporation and claimant, the broadest possible
indemnification permitted under applicable law.
Section 10. Effect of Repeal or Modification.
Any repeal or modification of this Article shall not adversely affect
any right of indemnification of a director or officer existing at the time of
such repeal or modification with respect to any action or omission occurring
prior to such repeal or modification.
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General.
The provisions of this Article shall be operative only during a
national emergency declared by the President of the United States or the person
performing the President's functions, or in the event of a nuclear, atomic or
other attack on the United States or a disaster making it impossible or
impracticable for the corporation to conduct its business without recourse to
the provisions of
27
<PAGE>
this Article. Said provisions in such event shall override all other Bylaws of
the corporation in conflict with any provisions of this Article, and shall
remain operative so long as it remains impossible or impracticable to continue
the business of the corporation otherwise, but thereafter shall be inoperative;
provided that all actions taken in good faith pursuant to such provisions shall
thereafter remain in full force and effect unless and until revoked by action
taken pursuant to the provisions of the Bylaws other than those contained in
this Article.
Section 2. Unavailable Directors.
All directors of the corporation who are not available to perform their
duties as directors by reason of physical or mental incapacity or for any other
reason or who are unwilling to perform their duties or whose whereabouts are
unknown shall automatically cease to be directors, with like effect as if such
persons had resigned as directors, so long as such unavailability continues.
Section 3. Authorized Number of Directors.
The authorized number of directors shall be the number of directors
remaining after eliminating those who have ceased to be directors pursuant to
Section 2, or the minimum number required by law, whichever number is greater.
Section 4. Quorum.
The number of directors necessary to constitute a quorum shall be
one-third of the authorized number of directors as specified in the foregoing
Section, or such other minimum number as, pursuant to the law or lawful decree
then in force, it is possible for the Bylaws of a corporation to specify.
Section 5. Creation of Emergency Committee.
In the event the number of directors remaining after eliminating those
who have ceased to be directors pursuant to Section 2 is less than the minimum
number of authorized directors required by law, then until the appointment of
additional directors to make up such required minimum, all the powers and
authorities which the Board could by law delegate, including all powers and
authorities which the Board could delegate to a committee, shall be
automatically vested in an emergency committee, and the emergency committee
shall thereafter manage the affairs of the corporation pursuant to such powers
and authorities and shall have all other powers and authorities as may by law or
lawful decree be conferred on any person or body of persons during a period of
emergency.
28
<PAGE>
Section 6. Constitution of Emergency Committee.
The emergency committee shall consist of all the directors remaining
after eliminating those who have ceased to be directors pursuant to Section 2,
provided that such remaining directors are not less than three in number. In the
event such remaining directors are less than three in number the emergency
committee shall consist of three persons, who shall be the remaining director or
directors and either one or two officers or employees of the corporation, as the
remaining director or directors may in writing designate. If there is no
remaining director, the emergency committee shall consist of the three most
senior officers of the corporation who are available to serve, and if and to the
extent that officers are not available, the most senior employees of the
corporation. Seniority shall be determined in accordance with any designation of
seniority in the minutes of the proceedings of the Board, and in the absence of
such designation, shall be determined by rate of remuneration. In the event that
there are no remaining directors and no officers or employees of the corporation
available, the emergency committee shall consist of three persons designated in
writing by the shareholder owning the largest number of shares of record as of
the date of the last record date.
Section 7. Powers of Emergency Committee.
The emergency committee, once appointed, shall govern its own
procedures and shall have power to increase the number of members thereof beyond
the original number, and in the event of a vacancy or vacancies therein, arising
at any time, the remaining member or members of the emergency committee shall
have the power to fill such vacancy or vacancies. In the event at any time after
its appointment all members of the emergency committee shall die or resign or
become unavailable to act for any reason whatsoever, a new emergency committee
shall be appointed in accordance with the foregoing provisions of this Article.
Section 8. Directors Becoming Available.
Any person who has ceased to be a director pursuant to the provisions
of Section 2 and who thereafter becomes available to serve as a director shall
automatically become a member of the emergency committee.
Section 9. Election of Board of Directors.
The emergency committee shall, as soon after its appointment as is
practicable, take all requisite action to secure the election of a board of
directors,
29
<PAGE>
and upon such election all the powers and authorities of the emergency
committee shall cease.
Section 10. Termination of Emergency Committee.
In the event, after the appointment of an emergency committee, a
sufficient number of persons who ceased to be directors pursuant to Section 2
become available to serve as directors, so that if they had not ceased to be
directors as aforesaid, there would be enough directors to constitute the
minimum number of directors required by law, then all such persons shall
automatically be deemed to be reappointed as directors and the powers and
authorities of the emergency committee shall be at an end.
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments.
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however, that a
Bylaw specifying or changing a fixed number of directors or the maximum or
minimum number or changing from a fixed to a variable Board or vice versa may
only be adopted by approval of the outstanding shares. The exact number of
directors within the maximum and minimum number specified in these Bylaws may be
amended by the Board alone.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this quarterly report on Form 10-Q for the
quarter ended September 30, 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
October 29, 1998
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