===============================================================================
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 June 30, 2000 OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from --------------- to -----------------
Commission File Number 1-2313
SOUTHERN CALIFORNIA EDISON COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1240335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P.O. Box 800)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
(626) 302-1212
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at August 9, 2000
----------------------------------------------------------------------------
Common Stock, no par value 434,888,104
===============================================================================
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
INDEX
Page
No.
Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Report of Independent Public Accountants 1
Consolidated Statements of Income - Three, Six and
Twelve Months Ended June 30, 2000, and 1999 2
Consolidated Statements of Comprehensive Income - Three,
Six and Twelve Months Ended June 30, 2000, and 1999 2
Consolidated Balance Sheets - June 30, 2000,
December 31, 1999, and June 30, 1999 3
Consolidated Statements of Common Shareholder's Equity - Three,
Six and Twelve Months Ended June 30, 2000, and 1999 5
Consolidated Statements of Cash Flows - Three, Six and
Twelve Months Ended June 30, 2000, and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 28
Part II. Other Information:
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 40
<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) and its subsidiaries as of June 30, 2000,
December 31, 1999, and June 30, 1999, and the related consolidated statements of
income, comprehensive income, common shareholder's equity and cash flows for
each of the three-, six- and twelve-month periods ended June 30, 2000, and 1999.
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SCE and its subsidiaries as of
June 30, 2000, December 31, 1999, and June 30, 1999, and the results of their
operations and their cash flows for each of the three-, six- and twelve-month
periods ended June 30, 2000, and 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 10, 2000
1
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Operating revenue $1,853,029 $1,725,716 $3,682,723 $3,410,598 $7,819,956 $7,693,175
---------------------------------------------------------------------------------------------------------------------------
Fuel 22,032 43,098 81,237 95,118 201,092 215,314
Purchased power - contracts 435,429 422,754 863,603 1,032,660 2,250,091 2,556,698
Purchased power - PX / ISO - net 251,641 99,246 323,686 224,546 869,714 846,527
Provisions for regulatory adjustment clauses - net (97,291) (80,632) 5,662 (360,268) (396,721) (990,575)
Other operating expenses 374,410 448,785 698,313 855,417 1,412,190 1,662,693
Maintenance 82,530 106,744 167,004 195,628 335,299 406,304
Depreciation, decommissioning and amortization 370,811 377,365 747,142 763,984 1,530,896 1,551,434
Income taxes 134,961 81,983 257,949 164,777 544,422 388,163
Property and other taxes 29,033 29,255 68,411 67,603 122,436 125,364
Net (gain) loss on sale of utility plant (308) (724) (6,531) (2,925) (6,643) 73,502
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,603,248 1,527,874 3,206,476 3,036,540 6,862,776 6,835,424
---------------------------------------------------------------------------------------------------------------------------
Operating income 249,781 197,842 476,247 374,058 957,180 857,751
---------------------------------------------------------------------------------------------------------------------------
Allowance for equity funds used during construction 3,067 3,056 6,684 5,889 13,800 12,174
Interest and dividend income 24,096 16,823 43,947 30,971 82,366 64,179
Other nonoperating income - net 9,782 10,489 2,986 19,504 27,469 17,109
---------------------------------------------------------------------------------------------------------------------------
Total other income - net 36,945 30,368 53,617 56,364 123,635 93,462
---------------------------------------------------------------------------------------------------------------------------
Income before interest expense 286,726 228,210 529,864 430,422 1,080,815 951,213
---------------------------------------------------------------------------------------------------------------------------
Interest and amortization on long-term debt 94,267 99,819 189,513 198,460 383,947 404,451
Other interest expense 34,380 19,469 66,597 43,603 114,550 74,062
Allowance for borrowed funds used
during construction (2,670) (2,652) (5,819) (5,113) (11,993) (9,288)
Capitalized interest (184) (272) (319) (1,068) (462) (2,080)
---------------------------------------------------------------------------------------------------------------------------
Total interest and amortization expense - net 125,793 116,364 249,972 235,882 486,042 467,145
---------------------------------------------------------------------------------------------------------------------------
Net income 160,933 111,846 279,892 194,540 594,773 484,068
Dividends on preferred stock 4,571 5,609 10,219 11,808 24,300 23,032
---------------------------------------------------------------------------------------------------------------------------
Net income available for common stock $ 156,362 $ 106,237 $ 269,673 $ 182,732 $ 570,473 $ 461,036
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
In thousands
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Net income $ 160,933 $ 111,846 $ 279,892 $ 194,540 $ 594,773 $ 484,068
Unrealized gain (loss) on securities - net 1,974 (1,002) 4,788 (7,217) 40,014 (10,384)
Reclassification adjustment for gains
included in net income (24,487) (14,874) (24,487) (32,245) (38,162) (50,081)
--------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 138,420 $ 95,970 $ 260,193 $ 155,078 $ 596,625 $ 423,603
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands
June 30, December 31, June 30,
2000 1999 1999
------------------------------------------------------------------------------------------------------------------
ASSETS
Utility plant, at original cost:
<S> <C> <C> <C>
Transmission and distribution $ 12,696,730 $ 12,439,059 $11,975,779
Generation 1,743,415 1,717,676 1,705,009
Accumulated provision for depreciation and decommissioning (7,701,822) (7,520,036) (7,175,966)
Construction work in progress 684,221 562,651 654,516
Nuclear fuel, at amortized cost 110,378 132,197 163,281
------------------------------------------------------------------------------------------------------------------
Total utility plant 7,532,922 7,331,547 7,322,619
------------------------------------------------------------------------------------------------------------------
Nonutility property - less accumulated
provision for depreciation of $8,333, $6,797
and $8,307 at respective dates 105,246 103,644 73,225
Nuclear decommissioning trusts 2,546,090 2,508,904 2,357,155
Other investments 187,750 160,241 124,375
------------------------------------------------------------------------------------------------------------------
Total investments and other assets 2,839,086 2,772,789 2,554,755
------------------------------------------------------------------------------------------------------------------
Cash and equivalents 105,917 26,046 72,439
Receivables, including unbilled revenue, less
allowances of $21,793, $24,665 and $23,266
for uncollectible accounts at respective dates 1,130,734 1,013,661 1,062,376
Fuel inventory 35,604 49,989 52,963
Materials and supplies, at average cost 130,357 122,866 116,191
Accumulated deferred income taxes - net 524,910 188,143 92,795
Regulatory balancing accounts - net -- -- 278,095
Prepayments and other current assets 50,203 111,151 17,470
------------------------------------------------------------------------------------------------------------------
Total current assets 1,977,725 1,511,856 1,692,329
------------------------------------------------------------------------------------------------------------------
Unamortized nuclear investment - net 978,262 1,365,848 1,763,390
Income tax-related deferred charges 1,234,694 1,272,947 1,440,617
Regulatory balancing accounts - net 2,258,452 1,714,973 825,670
Unamortized debt issuance and reacquisition expense 323,107 335,044 343,126
Other deferred charges 1,100,286 1,352,302 1,032,117
------------------------------------------------------------------------------------------------------------------
Total deferred charges 5,894,801 6,041,114 5,404,920
------------------------------------------------------------------------------------------------------------------
Total assets $ 18,244,534 $ 17,657,306 $ 16,974,623
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except share amounts
June 30, December 31, June 30,
2000 1999 1999
----------------------------------------------------------------------------------------------------------------
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 334,031 335,038 334,031
Accumulated other comprehensive income 1,852 21,551 --
Retained earnings 690,347 608,453 694,161
----------------------------------------------------------------------------------------------------------------
3,194,284 3,133,096 3,196,246
----------------------------------------------------------------------------------------------------------------
Preferred stock:
Not subject to mandatory redemption 128,755 128,755 128,755
Subject to mandatory redemption 255,700 255,700 255,700
Long-term debt 4,850,460 5,136,681 5,297,014
----------------------------------------------------------------------------------------------------------------
Total capitalization 8,429,199 8,654,232 8,877,715
----------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 647,781 571,300 569,229
Short-term debt 855,357 795,988 407,115
Accounts payable 558,055 573,919 385,763
Accrued taxes 607,675 500,709 698,505
Accrued interest 88,821 82,554 115,456
Dividends payable 91,889 94,407 94,347
Regulatory balancing accounts - net 472,032 75,693 --
Deferred unbilled revenue 355,520 300,339 286,825
Other current liabilities 1,138,616 1,140,048 872,663
---------------------------------------------------------------------------------------------------------------
Total current liabilities 4,815,746 4,134,957 3,429,903
---------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes - net 3,150,397 2,938,661 2,877,011
Accumulated deferred investment tax credits 184,157 205,197 228,586
Customer advances and other deferred credits 787,951 823,992 818,785
Power purchase contracts 505,604 563,459 342,911
Other long-term liabilities 371,133 336,473 399,387
---------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 4,999,242 4,867,782 4,666,680
---------------------------------------------------------------------------------------------------------------
Minority interest 347 335 325
---------------------------------------------------------------------------------------------------------------
Commitments and contingencies
(Notes 2, 10 and 11)
Total capitalization and liabilities $ 18,244,534 $ 17,657,306 $ 16,974,623
---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
In thousands
Accumulated Total
Additional Other Common
Common Paid-in Comprehensive Retained Shareholder's
Stock Capital Income Earnings Equity
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999 $ 2,168,054 $ 334,031 $ 15,876 $ 700,146 $ 3,218,107
---------------------------------------------------------------------------------------------------------------------
Net income 111,846 111,846
Unrealized gain on securities (1,686) (1,686)
Tax effect 684 684
Reclassified adjustment for gain
included in net income (25,019) -- (25,019)
Tax effect 10,145 10,145
Dividends declared on common stock (111,279) (111,279)
Dividends declared on preferred stock (5,609) (5,609)
Stock option appreciation (943) (943)
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 2,168,054 $ 334,031 $ -- $ 694,161 $ 3,196,246
---------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 $ 2,168,054 $ 335,073 $ 24,365 $ 625,514 $ 3,153,006
---------------------------------------------------------------------------------------------------------------------
Net income 160,933 160,933
Unrealized gain on securities 3,322 3,322
Tax effect (1,348) (1,348)
Reclassified adjustment for gain
included in net income (41,190) (41,190)
Tax effect 16,703 16,703
Dividends declared on common stock (91,225) (91,225)
Dividends declared on preferred stock (4,571) (4,571)
Stock option appreciation (305) (305)
Capital stock expense (1,042) (1,042)
Required capital stock expense and other 1 1
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 2,168,054 $ 334,031 $ 1,852 $ 690,347 $ 3,194,284
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 2,168,054 $ 334,031 $ 39,462 $ 793,625 $ 3,335,172
---------------------------------------------------------------------------------------------------------------------
Net income 194,540 194,540
Unrealized gain on securities (10,323) (10,323)
Tax effect 3,106 3,106
Reclassified adjustment for gains
included in net income (54,238) (54,238)
Tax effect 21,993 21,993
Dividends declared on common stock (280,393) (280,393)
Dividends declared on preferred stock (11,808) (11,808)
Stock option appreciation (1,804) (1,804)
Reacquired capital stock expense and other 1 1
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 2,168,054 $ 334,031 $ -- $ 694,161 $ 3,196,246
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 2,168,054 $ 335,038 $ 21,551 $ 608,453 $ 3,133,096
---------------------------------------------------------------------------------------------------------------------
Net income 279,892 279,892
Unrealized gain on securities 8,056 8,056
Tax effect (3,268) (3,268)
Reclassified adjustment for gain
included in net income (41,190) (41,190)
Tax effect 16,703 16,703
Dividends declared on common stock (186,741) (186,741)
Dividends declared on preferred stock (10,219) (10,219)
Stock option appreciation (1,039) (1,039)
Capital stock expense (1,007) (1,007)
Reacquired capital stock expense and other 1 1
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 2,168,054 $ 334,031 $ 1,852 $ 690,347 $ 3,194,284
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
In thousands
Accumulated Total
Additional Other Common
Common Paid-in Comprehensive Retained Shareholder's
Stock Capital Income Earnings Equity
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 2,168,054 $ 334,032 $ 60,465 $ 1,078,982 $ 3,641,533
----------------------------------------------------------------------------------------------------------------------
Net income 484,068 484,068
Unrealized gain on securities (16,560) (16,560)
Tax effect 6,176 6,176
Reclassified adjustment for gain
included in net income (84,240) (84,240)
Tax effect 34,159 34,159
Dividends declared on common stock (843,302) (843,302)
Dividends declared on preferred stock (23,032) (23,032)
Stock option appreciation (2,555) (2,555)
Reacquired capital stock expenses and other (1) (1)
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 2,168,054 $ 334,031 $ -- $ 694,161 $ 3,196,246
----------------------------------------------------------------------------------------------------------------------
Net income 594,773 594,773
Unrealized gain on securities 64,192 64,192
Tax effect (24,178) (24,178)
Reclassified adjustment for gain
included in net income (64,192) (64,192)
Tax effect 26,030 26,030
Dividends declared on common stock (572,233) (572,233)
Dividends declared on preferred stock (24,300) (24,300)
Stock option appreciation (2,054) (2,054)
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 2,168,054 $ 334,031 $ 1,852 $ 690,347 $ 3,194,284
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Authorized common stock is 560 million shares with no par value.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 160,933 $ 111,846 $ 279,892 $ 194,540 $ 594,773 $ 484,068
Adjustments for non-cash items:
Depreciation, decommissioning and amortization 370,811 377,365 747,142 763,984 1,530,896 1,551,434
Other amortization 24,995 22,506 50,491 43,124 102,427 94,915
Deferred income taxes and investment
tax credits (68,863) (15,549) (107,818) 67,016 2,765 179,537
Other long-term liabilities 21,579 28,788 34,472 81,311 (15,726) 52,717
Regulatory balancing accounts - long-term (451,570) (135,170) (543,479) (464,267) (1,432,782) (967,697)
Regulatory asset related to sale of generating plants 51 -- 49 241 (13) (112,000)
Net loss (gain) on sale of oil and gas plants (45) 14 (26) (1,110) 147 74,606
Other - net (33,922) 4,117 (77,064) (20,202) (132,987) 2,912
Changes in working capital:
Receivables (139,881) (14,272) (117,073) 50,254 (68,358) (31,584)
Regulatory balancing accounts 275,831 5,595 396,339 9,283 750,127 (85,834)
Fuel inventory, materials and supplies (1,070) 2,656 6,894 (1,596) 3,193 (1,511)
Prepayments and other current assets 5,423 37,395 60,948 74,522 (32,733) (2,330)
Accrued interest and taxes 23,421 40,091 113,232 45,178 (117,466) (175,959)
Accounts payable and other current liabilities 230,858 (5,187) 155,886 1,435 506,940 99,580
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 418,551 460,195 999,885 843,713 1,691,203 1,162,854
----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt issued -- 355,540 247,698 355,540 382,998 355,540
Long-term debt repaid (580) (217,462) (325,000) (217,462) (470,410) (389,037)
Rate reduction notes repaid (52,227) (49,229) (113,179) (119,760) (239,719) (288,886)
Preferred stock redeemed -- -- -- -- -- (1,000)
Nuclear fuel financing - net (7,561) (180) (21,923) (9,016) (50,195) 26,099
Short-term debt financing - net 6,203 (222,082) 59,369 (62,450) 448,242 285,560
Dividends paid (100,269) (116,890) (200,484) (289,015) (597,201) (865,804)
----------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (154,434) (250,303) (353,519) (342,163) (526,285) (877,528)
----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and plant (268,837) (244,640) (522,043) (475,826) (1,031,840) (1,000,229)
Proceeds from sale of generating plants -- -- -- -- -- 58,000
Funding of nuclear decommissioning trusts (36,219) (29,298) (59,401) (66,424) (108,914) (152,467)
Unrealized gain (loss) on securities - net (22,512) (15,876) (19,699) (39,462) 1,852 (60,465)
Other - net 38,360 30,051 34,648 71,101 7,462 111,332
----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (289,208) (259,763) (566,495) (510,611) (1,131,440) (1,043,829)
----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (25,091) (49,871) 79,871 (9,061) 33,478 (758,503)
Cash and equivalents, beginning of period 131,008 122,310 26,046 81,500 72,439 830,942
----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $105,917 $ 72,439 $105,917 $ 72,439 $105,917 $ 72,439
----------------------------------------------------------------------------------------------------------------------------
Cash payments for interest and taxes:
Interest - net of amounts capitalized $ 71,106 $ 49,695 $ 145,173 $ 117,313 $ 314,811 $ 255,390
Taxes 202,958 -- 202,958 12 635,570 407,919
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Southern California Edison Company (SCE) is a rate-regulated electric utility
which supplies electric energy for nearly 4.4 million customers in central,
coastal and southern California. SCE also produces electricity. All power
generated by SCE is sold through the California Power Exchange (PX) and
delivered by SCE to its customers. Utility rate-regulation is changing as
California transitions toward a more competitive utility environment.
Basis of Presentation
SCE's accounting policies conform with accounting principles generally accepted
in the United States, 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, state legislation and related changes in
the rate-recovery of generation-related assets, SCE accounts for its investment
in generation facilities in accordance with accounting principles applicable to
enterprises in general. Application of such accounting principles to SCE's
generation assets began in 1997 and did not result in any adjustment of their
carrying value; however, the carrying value of SCE's nuclear investments
(excluding decommissioning) was reduced by $2.6 billion and a regulatory asset
was established for the same amount in 1998.
The consolidated financial statements include SCE and its subsidiaries.
Intercompany transactions have been eliminated. Certain prior-period amounts
were reclassified to conform to the June 30, 2000, financial statement
presentation.
SCE's outstanding common stock is owned entirely by its parent company, Edison
International.
Estimates
Financial statements prepared in compliance with accounting principles generally
accepted in the United States 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 regulatory matters, decommissioning and
contingencies are further discussed in Notes 2, 10 and 11 to the Consolidated
Financial Statements, respectively.
Cash Equivalents
Cash equivalents include tax-exempt investments and time deposits and other
investments with original maturities of three months or less.
Fuel Inventory
Fuel inventory is valued under the last-in, first-out method for fuel oil and
under the first-in, first-out method for coal.
Revenue
Operating revenue includes amounts for services rendered but unbilled at the end
of each period.
8
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Net unrealized gains (losses) on equity securities are recorded as a separate
component of shareholder's equity under the caption "Accumulated 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.
Regulation of Utility Business
SCE, which is subject to rate-regulation by the CPUC and the FERC, 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 has changed over recent years and
continues to change as California moves toward a more competitive climate.
SCE's rates are unbundled into separate charges for energy, transmission,
distribution, the non-bypassable competition transition charge (CTC), public
benefit programs and nuclear decommissioning. The transmission component is
being collected through FERC-approved rates, subject to refund. Revenue related
to distribution operations is being determined through a performance-based
rate-making mechanism, and the distribution assets have the opportunity to earn
a CPUC-authorized 9.49% return. SCE's costs associated with its hydroelectric
plants are also being recovered through a performance-based mechanism. This
mechanism sets the hydroelectric revenue requirement and establishes a formula
for extending it through the duration of the electric industry restructuring
transition period (March 31, 2002), or until market valuation of the
hydroelectric facilities, whichever occurs first. (See Hydroelectric Market
Value Filing discussion in Note 2.) Revenue from hydroelectric facilities in
excess of the hydroelectric revenue requirement is credited against the costs to
transition to a competitive market. Nuclear decommissioning costs are being
recovered through a CPUC-authorized non-bypassable charge.
California law and regulation provide SCE the opportunity to recover its costs
to transition to a competitive market. Transition costs related to
power-purchase contracts are being recovered through the terms of the contracts
while most other transition costs will be recovered through 2001. A portion of
the stranded costs that residential and small commercial customers would have
paid between 1998 and 2001 has been financed by the issuance of rate reduction
notes, allowing SCE to reduce rates by at least 10% to these customers,
effective January 1, 1998. The notes allow for the rate reduction by lowering
the carrying cost on a portion of the transition costs and by deferring recovery
of a portion of these transition costs until after the transition period.
Additionally, California law contains provisions for the recovery (through 2006)
of reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related expenses.
There are three sources of revenue available to SCE for transition cost
recovery: CTC revenue, revenue from the sale or valuation of generation assets
in excess of book values, and net market revenue from sale of SCE-controlled
generation into the California Independent System Operator (ISO) and PX markets.
CTC revenue is determined residually, (i.e., CTC revenue is the residual amount
remaining from monthly gross customer revenue under the rate freeze after
subtracting the revenue requirements for transmission, distribution, nuclear
decommissioning and public benefit programs, and ISO payments and power
purchases from the PX). During second quarter 2000, SCE experienced negative CTC
revenue for the first time; there was insufficient revenue from customers under
the frozen rates to cover all costs of providing service during the quarter.
This undercollection in the transition revenue account was due to unusually high
PX market prices. Under existing CPUC decisions, SCE may carry over transition
revenue account undercollections, and recover such undercollections from future
positive CTC revenue until the end of the rate freeze. To date, the CPUC has
denied SCE requests to allow recovery of such
9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
undercollections after the end of the rate freeze. SCE is reassessing the
significance of the current undercollections and may renew requests to the CPUC
to modify certain ratemaking practices.
Since April 1, 1998, when the new market structure began, SCE has been selling
all of its electric generation through the PX and scheduling delivery through
the ISO, as mandated by the CPUC's 1995 restructuring decision. Through the PX
and ISO, SCE satisfies the electric energy needs of customers who did not choose
an alternative energy provider. These transactions are reported as "Purchased
power - PX/ISO - net."
Transactions through the PX and ISO were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
In millions 2000 1999 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
Purchases $ 1,529 $ 459 $ 2,041 $ 867 $ 3,664 $ 2,533
Generation sales 1,277 360 1,717 642 2,794 1,686
----------------------------------------------------------------------------------------------------------------
Purchased power - PX/ISO - net $ 252 $ 99 $ 324 $ 225 $ 870 $ 847
----------------------------------------------------------------------------------------------------------------
</TABLE>
The CPUC regulates SCE's capital structure, limiting the dividends it may pay
Edison International. At June 30, 2000, SCE had the capacity to pay $89 million
in additional dividends and continue to maintain its authorized capital
structure.
Regulatory Assets and Liabilities
In accordance with accounting principles for rate-regulated enterprises, SCE
records regulatory assets, which represent probable future revenue associated
with certain costs that will be recovered from customers through the rate-making
process, and regulatory liabilities, which represent probable future reductions
in revenue associated with amounts that are to be credited to customers through
the rate-making process. SCE's discontinuance of accounting principles for
rate-regulated enterprises to its generation assets did not result in a
write-off of its generation-related regulatory assets since the CPUC has
approved recovery of these assets through the CTC.
10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory assets and liabilities included in the consolidated balance sheets
are:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 2000 1999 1999
---------------------------------------------------------------------------------------------------------------
Generation-related:
<S> <C> <C> <C>
Unamortized nuclear investment - net $ 978 $ 1,366 $ 1,763
Flow-through taxes 170 306 407
Unamortized loss on sale of plant 91 122 152
Purchased-power settlements 474 531 311
Transition-related balancing accounts 424 1,044 591
Transition revenue account 644 -- --
Other - net 41 47 52
---------------------------------------------------------------------------------------------------------------
Subtotal 2,822 3,416 3,276
---------------------------------------------------------------------------------------------------------------
Rate reduction notes - transition cost deferral 887 707 515
---------------------------------------------------------------------------------------------------------------
Other:
Flow-through taxes 1,065 967 1,034
Unamortized loss on reacquired debt 283 295 303
Environmental remediation 55 111 118
Regulatory balancing accounts and other (85) (36) 81
---------------------------------------------------------------------------------------------------------------
Subtotal 1,318 1,337 1,536
---------------------------------------------------------------------------------------------------------------
Total $ 5,027 $ 5,460 $ 5,327
---------------------------------------------------------------------------------------------------------------
</TABLE>
Generation-related regulatory assets and liabilities are being recovered through
the CTC. The regulatory asset related to the rate reduction notes will be
recovered over the terms of the rate reduction notes. The other regulatory
assets and liabilities are being recovered through other components of the
unbundled rates.
The unamortized nuclear investment regulatory asset was created during the
second quarter of 1998. SCE reduced its remaining nuclear plant investment by
$2.6 billion (as of June 30, 1998) and recorded a regulatory asset on its
balance sheet for the same amount in accordance with asset impairment accounting
standards. For this impairment assessment, the fair value of the investment was
calculated by discounting expected future net cash flows. This reclassification
had no effect on SCE's results of operations.
Despite the rate freeze, SCE expects to recover its revenue requirement during
the transition period. If during the transition period events were to occur that
made the recovery of any of SCE's costs no longer probable, SCE would be
required to write off the unrecoverable portion as a one-time charge against
earnings.
Regulatory Balancing Accounts
The difference between generation-related revenue and generation-related costs
is being accumulated in the transition cost balancing account. Additionally,
gains resulting from the sale of the 12 generating plants during 1998 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 mechanism.
Income tax effects on all balancing account changes are deferred.
11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nuclear
SCE is recovering its investments in San Onofre Nuclear Generating Station Units
2 and 3 and Palo Verde Nuclear Generating Station on an accelerated basis, as
authorized by the CPUC. The accelerated recovery will continue through December
2001, earning a 7.35% fixed rate of return. San Onofre's operating costs,
including nuclear fuel and nuclear fuel financing costs, and incremental capital
expenditures, 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. Palo
Verde's 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.
The San Onofre incentive pricing plan and accelerated plant recovery and the
Palo Verde balancing account are part of the transition cost balancing account.
The benefits of operation of the San Onofre units will be shared equally with
ratepayers beginning in 2004. Palo Verde's 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. SCE has
entered into an agreement to sell its investment in Palo Verde (see further
discussion in Note 2).
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 3.3%, 3.5% and 3.7%
for the three, six and twelve months ended June 30, 2000, respectively, and 3.7%
for the three, six and twelve months ended June 30, 1999, respectively.
SCE's net investment in generation-related utility plant was approximately $1
billion at both June 30, 2000, and December 31, 1999, and $1.1 billion at
June 30, 1999.
Note 2. Regulatory Matters
FERC Transmission Rate Case
SCE filed its first FERC transmission rate case in March 1997. The filing
proposed a transmission revenue requirement of $211 million. In March 1999, a
proposed FERC decision was issued recommending a return on equity of 9.68%
(compared to SCE's current CPUC rate for distribution of 11.6%) and a lower
revenue requirement. On July 26, 2000, the FERC issued its final decision
adopting SCE's requested return on equity (11.6%). The FERC decision rejected
SCE's proposed approach for the recovery of a portion of administrative and
general and plant costs related to transmission and, instead, suggested that SCE
seek recovery of such costs through distribution rates.
Generating Plant Divestiture
In October 1999, SCE filed an application with the CPUC to approve an auction
process to sell its 56% interest in Mohave Generating Station. On April 6, 2000,
the CPUC approved the auction process. On
12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 10, 2000, SCE agreed to sell its interest in Mohave to AES Corporation
for approximately $533 million. The transaction is subject to approval by the
CPUC and various federal regulatory agencies. On June 28, 2000, SCE submitted a
compliance filing with the CPUC, seeking approval of the auction results and the
sale to AES. The sale is expected to close within the next twelve months.
On April 27, 2000, SCE agreed to sell its 16% interest in Palo Verde and its 48%
interest in Four Corners Generating Station to Pinnacle West Energy for a total
price of $550 million, subject to certain adjustments. The sale of assets at
Palo Verde will be accompanied by an assignment of SCE's interest in the related
decommissioning fund. Palo Verde is located in Arizona and Four Corners is
located in New Mexico. The transaction is subject to the approval of the CPUC,
the Nuclear Regulatory Commission, the FERC and other state and federal
entities, and to the receipt of a favorable ruling from the Internal Revenue
Service. The Utility Reform Network has filed a protest with the CPUC
recommending that the CPUC reject the sale and require SCE to retain these
generating assets. There can be no assurance that other protests will not be
filed with the CPUC. The transaction is expected to close by mid-2001. Until the
end of November, competing offers may be solicited by SCE, subject to certain
conditions, and any superior offers obtained are subject to matching rights by
Pinnacle West Energy.
Hydroelectric Market Value Filing
In December 1999, SCE filed an application with the CPUC establishing a market
value for its hydroelectric generation-related assets at approximately $1.0
billion (almost twice the assets' book value) and proposing to retain and
operate the hydroelectric assets under a performance-based, revenue-sharing
mechanism. The application has broad-based support from labor, ratepayer and
environmental groups. If approved by the CPUC, SCE would be allowed to recover
an authorized, inflation-indexed operations and maintenance allowance, as well
as a reasonable return on capital investment. A revenue-sharing arrangement
would be activated if revenue from the sale of hydroelectricity exceeds or falls
short of the authorized revenue requirement. SCE would then refund 90% of the
excess revenue to ratepayers or recover 90% of any shortfalls from ratepayers. A
final CPUC decision is expected in 2001.
Note 3. Financial Instruments
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 has gas call options that mitigate its exposure to increases in energy
prices. Increases in natural gas prices tend to increase the price of
electricity purchased from the PX. The options cover various periods through
2001. Additionally, SCE participates in the PX block forward market. The PX
block forward market allows SCE to purchase monthly blocks of energy and
ancillary services for six days a week (excluding Sundays and holidays) for 8 to
16 hours a day. Purchases from the PX forward markets can
13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be made up to 12 months in advance of the delivery date. The CPUC has
increased SCE's PX block forward market participation limits to a maximum of
5,200 MW in summer months. In April 2000, the CPUC approved SCE's request to
begin a demand responsiveness program that would allow customers to be paid to
curtail their load during times of very high PX energy prices. On August 3,
2000, the CPUC approved SCE's request to enter into bilateral contracts for
delivery of electricity.
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, costs of the options and the market price changes are included
in the transition cost balancing account. As a result, the mark-to-market gains
or losses have no effect on earnings.
Interest rate swaps are used to reduce the potential impact of interest rate
fluctuations on floating-rate long-term debt. At June 30, 2000, December 31,
1999, and June 30, 1999, SCE had an interest rate swap agreement which fixed the
interest rate at 5.585% for $196 million of debt due 2008. The swap agreement
expires February 28, 2008. The interest rate swap agreement requires the parties
to pledge collateral according to bond rating and market interest rate changes.
At June 30, 2000, SCE had pledged $8 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 obligation.
Fair Value of Financial Instruments
Fair values of financial instruments were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 2000 1999 1999
----------------------------------------------------------------------------------------------------------------
Cost Fair Cost Fair Cost Fair
Instrument Basis Value Basis Value Basis Value
----------------------------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Decommissioning trusts $ 1,710 $ 2,546 $ 1,650 $ 2,509 $ 1,601 $ 2,357
Equity investments -- -- -- 33 -- --
Gas call options 22 99 28 20 34 21
Financial liabilities:
DOE decommissioning and
decontamination fees 40 33 40 35 45 39
Interest rate swap -- 12 -- 13 -- 19
Long-term debt 4,850 4,712 5,137 5,044 5,297 5,337
Preferred stock subject to
mandatory redemption 256 256 256 259 256 264
----------------------------------------------------------------------------------------------------------------
</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.
14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross unrealized holding gains on debt and equity investments were:
June 30, December 31, June 30,
In millions 2000 1999 1999
-----------------------------------------------------------------------
Decommissioning trusts:
Municipal bonds $ 230 $ 239 $ 190
Stocks 420 454 401
U.S. government issues 132 119 132
Short-term and other 54 47 34
-----------------------------------------------------------------------
836 859 757
Equity investments -- 33 (13)
-----------------------------------------------------------------------
Total $ 836 $ 892 $ 744
-----------------------------------------------------------------------
There were no unrealized holding losses for the periods presented.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which as amended SCE will be required
to implement on January 1, 2001, 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.
Note 4. 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.
Commercial paper intended to be refinanced for a period exceeding one year and
used to finance nuclear fuel scheduled to be used more than one year after the
balance sheet date is classified as long-term debt.
Long-term debt maturities and sinking-fund requirements for the five
twelve-month periods following June 30, 2000, are: 2001 - $648 million; 2002 -
$246 million; 2003 - $572 million; 2004 - $247 million; and 2005 - $372 million.
In December 1997, $2.5 billion of rate reduction notes were issued on behalf of
SCE by SCE Funding LLC, a special purpose entity. These notes were issued to
finance the 10% rate reduction mandated by state law. The proceeds of the rate
reduction notes were used by SCE Funding LLC to purchase from SCE an enforceable
right known as transition property. Transition property is a current property
right
15
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
created by the restructuring legislation and a financing order of the CPUC
and consists generally of the right to be paid a specified amount from
non-bypassable rates charged to residential and small commercial customers. The
rate reduction notes are being repaid over 10 years through these non-bypassable
residential and small commercial customer rates which constitute the transition
property purchased by SCE Funding LLC. The notes are secured by the transition
property and are not secured by, or payable from, assets of SCE or Edison
International. SCE used the proceeds from the sale of the transition property to
retire debt and equity securities. Although, as required by generally accepted
accounting principles, SCE Funding LLC is consolidated with SCE and the rate
reduction notes are shown as long-term debt in the consolidated financial
statements, SCE Funding LLC is legally separate from SCE. The assets of SCE
Funding LLC are not available to creditors of SCE or Edison International and
the transition property is legally not an asset of SCE or Edison International.
Long-term debt consisted of:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 2000 1999 1999
--------------------------------------------------------------------------------------------------
First and refunding mortgage bonds:
<S> <C> <C> <C>
2002 - 2026 (5.625% to 7.25%) $ 1,175 $ 1,400 $ 1,400
Rate reduction notes:
2001 - 2007 (6.17% to 6.42%) 1,857 1,970 2,096
Pollution control bonds:
2008 - 2031 (5.125% to 7.2% and variable) 1,196 1,196 1,201
Funds held by trustees (2) (2) (2)
Debentures and notes:
2001 - 2029 (5.875% to 7.625%) 1,150 1,000 1,000
Subordinated debentures:
2044 (8.375%) 100 100 100
Commercial paper for nuclear fuel 49 71 99
Long-term debt due within one year (648) (571) (569)
Unamortized debt discount - net (27) (27) (28)
--------------------------------------------------------------------------------------------------
Total $ 4,850 $ 5,137 $ 5,297
--------------------------------------------------------------------------------------------------
</TABLE>
On July 19, 2000, SCE issued $144 million of pollution control bonds at an
interest rate that is reset daily, due in June 2035. The proceeds are held in a
trust until October 2000, at which time the funds will be used for the early
retirement of $144 million of pollution control bonds.
Note 5. Short-Term Debt
SCE has lines of credit totaling $1.25 billion (that can be used at negotiated
or bank index rates) with $1 million available for general purpose short-term
debt and $515 million available for the refinancing of certain variable-rate
pollution control debt.
Short-term debt includes commercial paper used to finance fuel inventories,
balancing account undercollections and general cash requirements. Commercial
paper intended to finance nuclear fuel scheduled to be used more than one year
after the balance sheet date is classified as long-term debt in connection with
refinancing terms under five-year term lines of credit with commercial banks.
Weighted-average interest rates were 6.6%, 5.3%, and 5.0% at June 30, 2000,
December 31, 1999, and June 30, 1999, respectively.
16
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term debt consisted of:
June 30, December 31, June 30,
In millions 2000 1999 1999
-----------------------------------------------------------------------------
Commercial paper $ 734 $ 696 $ 508
Floating rate notes 175 175 --
Amount reclassified as long-term debt (49) (71) (99)
Unamortized discount (5) (4) (2)
-----------------------------------------------------------------------------
Total $ 855 $ 796 $ 407
-----------------------------------------------------------------------------
Note 6. Preferred Stock
Authorized shares of preferred and preference stock are: $25 cumulative
preferred - 24 million; $100 cumulative preferred - 12 million; and preference-
50 million. All cumulative preferred stocks are redeemable. Mandatorily
redeemable preferred stocks are subject to sinking-fund provisions. When
preferred shares are redeemed, the premiums paid are charged to common equity.
Preferred stock redemption requirements for the five twelve-month periods
following June 30, 2000, are: 2001 - zero; 2002 - $105 million; 2003 - $9
million; 2004 - $9 million; and 2005 - $9 million.
Cumulative preferred stock consisted of:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Dollars in millions, except per share amounts 2000 1999 1999
--------------------------------------------------------------------------------------------------------------------
June 30, 2000
----------------------------------
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
------------------------------------------------------------------------------------------------------------------
Total $ 129 $ 129 $ 129
------------------------------------------------------------------------------------------------------------------
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 81 81
------------------------------------------------------------------------------------------------------------------
Total $ 256 $ 256 $ 256
------------------------------------------------------------------------------------------------------------------
</TABLE>
In third quarter 1998, 10,000 shares of Series 7.23% preferred stock were
redeemed. There were no preferred stock issuances for the periods presented.
17
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Income Taxes
SCE and its subsidiaries are 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.
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
In millions 2000 1999 1999
------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 188 $ 184 $ 194
Unrealized gains or losses - decommissioning 470 453 402
Investment tax credits 98 113 140
Regulatory balancing accounts 69 67 122
Decommissioning-related 131 127 128
Fixed costs 294 247 157
Unbilled revenue 116 122 103
Other 81 92 164
-----------------------------------------------------------------------------------------------------
Total $ 1,447 $ 1,405 $ 1,410
-----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property-related $ 2,490 $ 2,629 $ 2,817
Capitalized software costs 241 225 221
Regulatory balancing accounts 518 448 337
Unrealized gains and losses - decommissioning 367 351 300
Other 456 502 519
-----------------------------------------------------------------------------------------------------
Total $ 4,072 $ 4,155 $ 4,194
-----------------------------------------------------------------------------------------------------
Accumulated deferred income taxes - net $ 2,625 $ 2,750 $ 2,784
-----------------------------------------------------------------------------------------------------
Classification of accumulated deferred income taxes:
Included in deferred credits $ 3,150 $ 2,938 $ 2,877
Included in current assets 525 188 93
</TABLE>
18
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
In millions June 30, June 30, June 30,
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
Current:
Federal $ 151 $ 70 $ 283 $ 64 $ 518 $ 159
State 39 21 69 18 130 41
----------------------------------------------------------------------------------------------------------------
190 91 352 82 648 200
----------------------------------------------------------------------------------------------------------------
Deferred - federal and state:
Accrued charges (40) (34) (49) 15 (139) (14)
Contributions in aid of construction (6) (4) (1) -- (11) (8)
Property related (45) (50) (92) (96) (190) (181)
Investment and energy tax credits - net (11) (11) (21) (22) (44) (80)
Regulatory assets 13 9 14 12 9 86
Regulatory balancing accounts 44 92 34 137 269 430
State tax privilege year (13) (7) 3 28 (17) 20
Unbilled revenue (3) 1 5 14 (14) (55)
Other 8 (1) 12 4 10 (1)
-----------------------------------------------------------------------------------------------------------------
(53) (5) (95) 92 (127) 197
-----------------------------------------------------------------------------------------------------------------
Total income tax expense $ 137 $ 86 $ 257 $ 174 $ 521 $ 397
-----------------------------------------------------------------------------------------------------------------
Classification of income taxes:
Included in operating income $ 135 $ 82 $ 258 $ 165 $ 544 $ 388
Included in other income 2 4 (1) 9 (23) 9
</TABLE>
The composite federal and state statutory income tax rate was 40.551% for all
periods presented.
The federal statutory income tax rate is reconciled to the effective tax rate
below:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Capitalized software (0.9) (1.7) (0.9) (1.3) (2.1) (0.8)
Property-related and other 3.0 1.4 7.4 7.6 8.4 2.4
Investment and energy tax credits (3.5) (5.2) (3.9) (5.6) (3.7) (8.7)
Regulatory asset amortization 3.7 4.0 2.3 3.0 0.7 9.5
State tax - net of federal deduction 8.6 9.9 7.8 8.2 8.2 7.5
------------------------------------------------------------------------------------------------------------------
Effective tax rate 45.9% 43.4% 47.7% 46.9% 46.5% 44.9%
------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8. Employee Compensation and Benefit Plans
Employee Savings Plan
SCE has a 401(k) defined contribution savings plan designed as a source of
employees' retirement income. The plan received employer contributions of $6
million, $15 million and $27 million for the three-, six- and twelve-month
periods ended June 30, 2000, respectively, and $7 million, $12 million and $21
million for the three-, six- and twelve-month periods ended June 30, 1999,
respectively.
19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 1999, SCE
adopted a cash balance feature for its pension plan.
Information on plan assets and benefit obligations is shown below:
<TABLE>
<CAPTION>
6 Months Ended Year Ended 6 Months Ended
June 30, December 31, June 30,
In millions 2000 1999 1999
----------------------------------------------------------------------------------------------------------------
Change in benefit obligation
<S> <C> <C> <C>
Benefit obligation at beginning of period $ 2,075 $ 2,251 $ 2,251
Service cost 32 66 34
Interest cost 78 146 76
Plan amendment -- (22) (25)
Actuarial loss (gain) -- (224) --
Benefits paid (89) (142) (66)
---------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $ 2,096 $ 2,075 $ 2,270
---------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $ 3,078 $ 2,552 $ 2,552
Actual return on plan assets 226 620 218
Employer contributions 29 48 34
Benefits paid (89) (142) (66)
---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $ 3,244 $ 3,078 $ 2,738
---------------------------------------------------------------------------------------------------------------
Funded status $ 1,148 $ 1,003 $ 468
Unrecognized net loss (gain) (1,104) (1,018) (490)
Unrecognized transition obligation 26 28 31
Unrecognized prior service cost 124 132 136
---------------------------------------------------------------------------------------------------------------
Recorded asset $ 194 $ 145 $ 145
---------------------------------------------------------------------------------------------------------------
Discount rate 7.75% 7.75% 6.75%
Rate of compensation increase 5.0% 5.0% 5.0%
Expected return on plan assets 7.5% 7.5% 7.5%
</TABLE>
The components of pension expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
In millions June 30, June 30, June 30,
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Service cost $ 16 $ 16 $ 32 $ 34 $ 64 $ 65
Interest cost 39 38 78 76 148 147
Expected return on plan assets (57) (48) (114) (96) (206) (176)
Net amortization and deferral (8) 2 (16) 5 (9) 11
-------------------------------------------------------------------------------------------------------------------
Pension expense (benefit) under
accounting standards (10) 8 (20) 19 (3) 47
Regulatory adjustment - deferred 10 5 20 7 27 8
-------------------------------------------------------------------------------------------------------------------
Net pension expense recognized $ -- $ 13 $ -- $ 26 $ 24 $ 55
-------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55 with at least 10 years of service are
eligible for postretirement health and dental care, life insurance and other
benefits.
Information on plan assets and benefit obligations is shown below:
<TABLE>
<CAPTION>
6 Months Ended Year Ended 6 Months Ended
June 30, December 31, June 30,
In millions 2000 1999 1999
------------------------------------------------------------------------------------------------
Change in benefit obligation
<S> <C> <C> <C>
Benefit obligation at beginning of period $ 1,462 $ 1,545 $ 1,545
Service cost 18 46 22
Interest cost 58 109 52
Actuarial loss (gain) -- (185) --
Benefits paid (30) (53) (30)
------------------------------------------------------------------------------------------------
Benefit obligation at end of period $ 1,508 $ 1,462 $ 1,589
------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of period $ 1,283 $ 1,029 $ 1,029
Actual return on plan assets 46 185 38
Employer contributions 42 122 50
Benefits paid (30) (53) (30)
------------------------------------------------------------------------------------------------
Fair value of plan assets at end of period $ 1,341 $ 1,283 $ 1,087
------------------------------------------------------------------------------------------------
Funded status $ (167) $ (179) $ (502)
Unrecognized net loss (gain) (205) (207) 84
Unrecognized transition obligation 335 349 362
------------------------------------------------------------------------------------------------
Recorded asset (liability) $ (37) $ (37) $ (56)
------------------------------------------------------------------------------------------------
Discount rate 8.0% 8.0% 6.75%
Expected return on plan assets 7.5% 7.5% 7.5%
</TABLE>
Expense components were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
In millions June 30, June 30, June 30,
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
Service cost $ 9 $ 11 $ 18 $ 22 $ 42 $ 45
Interest cost 29 26 58 52 115 99
Expected return on plan assets (23) (19) (46) (38) (87) (68)
Net amortization and deferral 6 7 12 14 25 26
--------------------------------------------------------------------------------------------------------------
Total expense $ 21 $ 25 $ 42 $ 50 $ 95 $ 102
--------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed rate of future increases in the per-capita cost of health care
benefits is 11.75% for 2000, gradually decreasing to 5.0% for 2008 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated obligation as of June 30, 2000, by $234 million and
annual aggregate service and interest costs by $29 million. Decreasing the
health care cost trend rate by one percentage point would decrease the
accumulated obligation as of June 30, 2000, by $189 million and annual aggregate
service and interest costs by $23 million.
21
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
In 1998, Edison International shareholders approved the Edison International
Equity Compensation Plan, replacing the Long-Term Incentive Compensation Program
(prior program), which had been adopted by shareholders in 1992. Under the prior
program, options on 1.6 million shares of Edison International common stock
remain outstanding to officers and senior managers of SCE. The 1998 plan
authorizes a limited annual award of Edison International common shares and
options on shares. The annual authorization is cumulative, allowing subsequent
issuance of previously unutilized awards. In May 2000, Edison International
adopted an additional plan, the 2000 Equity Plan, which did not require
shareholder approval.
Under the 1998 and 2000 plans, options on 8.6 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. Options expire 10 years after date
of grant, and vest over a period of up to five years. Edison International stock
options awarded prior to 2000 include a dividend equivalent feature. Dividend
equivalents on stock options issued after 1993 are subject to reduction unless
certain performance criteria are met. The 2000 awards include performance shares
which are earned as a combination of Edison International common stock and cash.
Performance shares awarded in 2000 could result in the issuance of up to 258,000
shares of Edison International common stock. A special grant of stock options
only was awarded in May 2000 to officers and senior managers of SCE in lieu of
the regular option grants for 2001 and 2002. Performance share grants may still
be awarded in 2001 and 2002. No special stock option grant shares may be
exercised before five years have passed unless the stock price appreciates to
$25 (based on the average of 20 consecutive trading day closing prices).
The performance shares values are accrued ratably over a three-year performance
period. Performance shares are valued based on Edison International's stock
performance relative to the stock performance of other such entities comprising
the Dow Jones Electric Utility Index.
SCE measures compensation expense related to stock-based compensation by the
intrinsic value method. Compensation expense recorded under the
stock-compensation programs was $1 million, $2 million and $5 million for the
three, six and twelve months ended June 30, 2000, respectively, and $2 million,
$3 million and $5 million for the three, six and twelve months ended June 30,
1999, respectively.
Stock-based compensation expense under the fair-value method of accounting would
have resulted in pro forma earnings of $156 million, $270 million and $569
million for the three, six and twelve months ended June 30, 2000, respectively,
and $106 million, $182 million and $460 million for the three, six and twelve
months ended June 30, 1999, respectively.
The fair value for each option granted, reflecting the basis for the above pro
forma disclosures, was determined on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used in determining fair
value through the model:
12 Months Ended
June 30,
------------------------------------------------------------------
2000 1999
------------------------------------------------------------------
Expected life 7-10 years 7 years
Risk-free interest rate 4.7% - 6.0% 4.7% - 5.6%
Expected volatility 17% - 38% 17% - 18%
------------------------------------------------------------------
22
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Note 9. Jointly Owned Utility Projects
SCE owns interests in several generating stations and transmission systems for
which each participant provides its own financing. SCE's share of expenses for
each project is included in the consolidated statements of income.
The investment in each project, as included in the consolidated balance sheet as
of June 30, 2000, 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 $ 40 $ 10 $ 1 60%
Pacific Intertie 231 77 6 50%
Generating stations:
Four Corners Units 4 and 5 (coal) 459 345 7 48%
Mohave (coal) 326 235 1 56%
Palo Verde (nuclear)(1) 1,618 1,276 15 16%
San Onofre (nuclear)(1) 4,267 3,507 16 75%
------------------------------------------------------------------------------------------------------
Total $ 6,941 $ 5,450 $ 46 --
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reported as "Unamortized nuclear investment - net."
Note 10. Commitments
Leases
SCE has operating leases, primarily for vehicles, with varying terms, provisions
and expiration dates.
Estimated remaining commitments for noncancelable leases at June 30, 2000, were:
Year ended December 31, In millions
---------------------------------------------------------------
2000 $ 8
2001 14
2002 10
2003 9
2004 7
Thereafter 14
---------------------------------------------------------------
Total $ 62
---------------------------------------------------------------
Nuclear Decommissioning
Decommissioning is estimated to cost $2.1 billion in current-year dollars, based
on site-specific studies performed in 1998 for San Onofre and Palo Verde.
Changes in the estimated costs, timing of decommissioning, or the assumptions
underlying these estimates could cause material revisions to the estimated total
cost to decommission in the near term. SCE estimates that it will spend
approximately $8.6 billion through 2060 to decommission its nuclear facilities.
This estimate is based on SCE's current dollar decommissioning costs, escalated
at rates ranging from 0.3% to 10.0% (depending on the cost
23
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
element) annually. These costs are expected to be funded from independent
decommissioning trusts, which, effective 1999, receive contributions of
approximately $25 million per year. SCE estimates annual after-tax earnings on
the decommissioning funds of 3.9% to 4.9%.
SCE plans to decommission its nuclear generating facilities by a prompt removal
method authorized by the Nuclear Regulatory Commission. Decommissioning is
expected to begin after the plants' operating licenses expire. The operating
licenses expire in 2022 for San Onofre Units 2 and 3, and 2028 for Palo Verde.
Decommissioning costs, which are recovered through non-bypassable customer
rates, are recorded as a component of depreciation expense.
Decommissioning of San Onofre Unit 1 (shutdown in 1992 per CPUC agreement)
commenced in 1999 and will continue through 2008. All of SCE's San Onofre Unit 1
decommissioning costs will be paid from its nuclear decommissioning trust funds.
Decommissioning expense was $38 million, $61 million and $115 million for the
three, six and twelve months ended June 30, 2000, respectively, and $31 million,
$70 million and $157 million for the three, six and twelve months ended June 30,
1999, respectively. The accumulated provision for decommissioning, excluding San
Onofre Unit 1, was $1.4 billion at June 30, 2000, and $1.3 billion at both
December 31, 1999, and June 30, 1999. The estimated costs to decommission San
Onofre Unit 1 (approximately $350 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 (cost basis) include:
<TABLE>
<CAPTION>
Maturity June 30, December 31, June 30,
In millions Dates 2000 1999 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Municipal bond 2000 - 2033 $ 668 $ 684 $ 554
Stocks -- 473 482 533
U.S. government issues 2000 - 2030 401 351 417
Short-term and other 2002 - 2040 168 133 97
--------------------------------------------------------------------------------------------
Total $ 1,710 $ 1,650 $ 1,601
--------------------------------------------------------------------------------------------
</TABLE>
Trust fund earnings (based on specific identification) increase the trust fund
balance and the accumulated provision for decommissioning. Net earnings were $22
million, $31 million and $65 million for the three, six and twelve months ended
June 30, 2000, respectively, and $10 million, $24 million and $59 million for
the three, six and twelve months ended June 30, 1999, respectively. Proceeds
from sales of securities (which are reinvested) were $807 million, $2.5 billion
and $4.1 billion for the three, six and twelve months ended June 30, 2000,
respectively, and $689 million, $1.1 billion and $1.7 billion for the three, six
and twelve months ended June 30, 1999, respectively. Approximately 90% 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. Additionally, SCE's gas and coal fuel contracts require
payment of certain fixed charges whether or not gas or coal is delivered.
SCE has power-purchase contracts with certain qualifying facilities
(cogenerators and small power producers) and other utilities. These contracts
provide for capacity payments if a facility meets certain
24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performance obligations and energy payments based on actual power supplied
to SCE. There are no requirements to make debt-service payments. As a result of
the utility industry restructuring, SCE has entered into purchased-power
settlements to end its contract obligations with certain qualifying facilities.
The settlements are reported as long-term liabilities. Settlement payments are
being recovered through the CTC.
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. SCE's
minimum commitment under both contracts is approximately $166 million through
2017. The purchased-power contract (approximately $30 million) is expected to
provide approximately 5.5% of current or estimated future operating capacity,
and is reported as a long-term liability. The transmission service contract
requires a minimum payment of approximately $6 million a year.
Certain commitments for the years 2000 through 2004 are estimated below:
<TABLE>
<CAPTION>
In millions 2000 2001 2002 2003 2004
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected construction expenditures $ 1,149 $ 1,072 $ 923 $ 905 $ 921
Fuel supply contracts 192 123 130 141 122
Purchased-power capacity payments 637 647 644 637 635
-------------------------------------------------------------------------------------------------
</TABLE>
Note 11. 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 proceedings will not materially affect its results
of operations or liquidity.
Environmental Protection
SCE is subject to numerous environmental laws and regulations, which require it
to incur substantial costs to operate existing facilities, construct and operate
new facilities, and mitigate or remove the effect of past operations on the
environment.
SCE records its environmental liabilities when site assessments and/or remedial
actions are probable and a range of reasonably likely cleanup costs can be
estimated. SCE reviews its sites and measures the liability quarterly, by
assessing a range of reasonably likely costs for each identified site using
currently available information, including existing technology, presently
enacted laws and regulations, experience gained at similar sites, and the
probable level of involvement and financial condition of other potentially
responsible parties. These estimates include costs for site investigations,
remediation, operations and maintenance, monitoring and site closure. Unless
there is a probable amount, SCE records the lower end of this reasonably likely
range of costs (classified as other long-term liabilities at undiscounted
amounts).
SCE's recorded estimated minimum liability to remediate its 45 identified sites
is $104 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 $281 million. The upper limit of this range of costs
was estimated using assumptions least favorable to SCE among a range of
reasonably
25
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
possible outcomes. In 1998, SCE sold all of its gas- and oil-fueled
generation plants but has retained some liability associated with the divested
properties.
The CPUC allows SCE to recover environmental-cleanup costs at 44 of its sites,
representing $34 million of its recorded liability, through an incentive
mechanism (SCE may request to include additional sites). Under this mechanism,
SCE will recover 90% of cleanup costs through customer rates; shareholders fund
the remaining 10%, with the opportunity to recover these costs from insurance
carriers and other third parties. SCE has successfully settled insurance claims
with all responsible carriers. Costs incurred at SCE's remaining sites are
expected to be recovered through customer rates. SCE has recorded a regulatory
asset of $71 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
$5 million to $15 million. Recorded costs for the twelve-month period ended
June 30, 2000, were $13 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 $9.5
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 by a mutual insurance company owned by
utilities with nuclear facilities. If losses at any nuclear facility covered by
the arrangement were to exceed the accumulated funds for these
26
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance programs, SCE could be assessed retrospective premium adjustments
of up to $19 million per year. Insurance premiums are charged to operating
expense.
Spent Nuclear Fuel
Under federal law, the DOE is responsible for the selection and development of a
facility for disposal of spent nuclear fuel and high-level radioactive waste.
Such a facility was to be in operation by January 1998. However, the DOE did not
meet its obligation. It is not certain when the DOE will begin accepting spent
nuclear fuel from San Onofre or from other nuclear power plants.
SCE has primary responsibility for the interim storage of its spent nuclear fuel
at San Onofre. Current capability to store spent fuel is estimated to be
adequate through 2005. Meeting spent-fuel storage requirements beyond that
period would require additional on-site storage capability, the costs for which
have not been determined. Extended delays by the DOE could lead to consideration
of costly alternatives involving siting and environmental issues. SCE has paid
the DOE the required one-time fee applicable to nuclear generation at San Onofre
through April 6, 1983 (approximately $24 million, plus interest). SCE is also
paying the required quarterly fee equal to one mill per kilowatt-hour of
nuclear-generated electricity sold after April 6, 1983.
Palo Verde on-site spent fuel storage capacity will accommodate needs until 2003
for Unit 2, and until 2004 for Units 1 and 3. Arizona Public Service Company,
operating agent for Palo Verde, is constructing an interim fuel storage facility
that is expected to be completed in 2002.
SCE and other owners of nuclear power plants may be able to recover interim
storage costs arising from DOE delays in the acceptance of utility spent nuclear
fuel by pursuing relief under the terms of the contracts, as directed by the
courts, or through other court actions.
27
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Earnings
Southern California Edison Company's (SCE) earnings for the three, six and
twelve months ended June 30, 2000, were $156 million, $270 million and $570
million, respectively, compared with $106 million, $183 million and $461 million
for the same periods in 1999. The increases were primarily due to the planned
refueling outages at San Onofre Nuclear Generating Station during the first half
of 1999 (no outages in 2000), combined with superior operating performance at
San Onofre and higher kilowatt-hour sales.
Operating Revenue
As a result of industry restructuring, customers have an option to buy power
from SCE or directly from the California Power Exchange (PX), thus becoming
direct access customers. Most direct access customers continue to be billed by
SCE, but are given a credit for the generation portion of their bills. Operating
revenue increased for the three and six months ended June 30, 2000, compared to
the year-earlier periods, almost completely due to warmer weather in the second
quarter of 2000 as compared to the same period in 1999. For the twelve months
ended June 30, 2000, operating revenue increased less than 2%. Over 92% of
operating revenue was 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).
Due to warmer weather during the summer months, operating revenue during the
third quarter of each year is significantly higher than other quarters.
Operating Expenses
Fuel expense decreased for the three, six and twelve months ended June 30, 2000,
compared with the same periods in 1999, mainly due to a second quarter 2000
refund for a fuel-related settlement with another utility, partially offset by
an increase in San Onofre's fuel expense. During the first half of 1999, both of
the San Onofre units had a planned refueling outage. There have been no
refueling outages in 2000.
Purchased-power expense - contracts decreased for the six and twelve months
ended June 30, 2000, compared to the year-earlier periods, primarily due to SCE
entering into settlements to end its contractual obligations with certain
nonutility generators (known as qualifying facilities, or QFs) and the terms in
some of the QF contracts reverting to lower prices. Prior to April 1998, SCE was
required under federal law and CPUC orders to enter into contracts to purchase
power from QFs at CPUC-mandated prices even though energy and capacity prices
under many of these contracts are generally higher than other sources. For the
twelve months ended June 30, 2000, SCE paid about $1.0 billion (including energy
and capacity payments) more for these power purchases than the cost of power
available from other sources. SCE is continuing to purchase power under existing
contracts from certain QFs and from other utilities. Power purchases from QFs
and other utilities are sold through the PX.
Since April 1, 1998, SCE has been required to sell all of its generated
power through the PX, schedule delivery of the power through the California
Independent System Operator (ISO) and acquire all of its power from the PX to
distribute to its retail customers. These transactions with the PX and ISO are
reported net. PX/ISO purchased-power expense increased for the three, six and
twelve months ended June 30, 2000, compared to the same periods in 1999. During
second quarter 2000, an increased volume of higher priced PX purchases was
partially offset by increases in PX sales revenue and ISO net revenue, as well
as an increase in the market value of gas call options. Increases in the
options' market value
28
<PAGE>
decrease purchased-power expense. These gas call options mitigate SCE's exposure
to increases in energy prices. In addition, the year-to-date and twelve-months
ended increases in 2000 were partially offset by the realization of
hydroelectric-related ISO revenue (in first quarter 2000) that had been
previously deferred awaiting regulatory approval. For a further discussion of
the recent significant increases in PX prices, see Market Risk Exposures.
Provisions for regulatory adjustment clauses decreased for the three months
ended June 30, 2000, compared to the year-earlier period, primarily due to
undercollections related to the generation-related balancing accounts.
Provisions for regulatory adjustment clauses increased for both the six months
and twelve months ended June 30, 2000, compared to the same periods in 1999,
mainly due to overcollections related to the generation-related balancing
accounts and to the administration of public purpose funds. The
twelve-months-ended increase in the provision was partially offset by
undercollections related to the rate-making treatment of the rate reduction
notes. This rate-making treatment has allowed for the deferral of the recovery
of a portion of the transition-related costs, from a four-year period to a
10-year period.
Other operating expenses decreased for the three, six and twelve months ended
June 30, 2000, compared to the prior-year periods, primarily due to a decrease
in mandated transmission service (known as must-run reliability services)
expense, which was caused by SCE being contractually obligated for fewer
must-run units in 2000, compared to 1999. The six- and twelve-months ended
decreases also reflect lower operating expenses at San Onofre in 2000 due to
scheduled refueling outages in the first half of 1999. The twelve-months-ended
decrease also results from lower expenses related to SCE's direct access
activities.
Maintenance expense decreased for the three, six and twelve months ended
June 30, 2000, compared to the year-earlier periods, mainly due to the absence
of any refueling outages at San Onofre in 2000. During the first half of 1999,
both of the San Onofre units were subject to a planned refueling outage. The
twelve-months ended decrease also reflects lower maintenance expenses incurred
at distribution facilities.
Income tax expense increased for the three, six and twelve months ended June 30,
2000. The quarterly and year-to-date increases were primarily due to higher
pre-tax income. The twelve-months-ended increase was primarily due to higher
pre-tax income during the current period and a one-time cumulative benefit for
accelerated amortization of deferred investment tax credits in October 1998.
Net (gain) loss on sale of utility plant resulted from the sale of SCE's
generating plants in 1998. Gains were used to reduce stranded costs. Losses will
be recovered from customers over the transition period through the competition
transition charge (CTC) mechanism.
Other Income
Interest and dividend income increased for the three, six and twelve months
ended June 30, 2000, primarily due to increases in interest earned on higher
balancing account undercollections, partially offset by lower interest income
resulting from lower investment balances during the period.
Other nonoperating income decreased for the six months ended June 30, 2000,
compared to the same period in 1999, primarily due to gains on sales of equity
investments in the first quarter of 1999. Other nonoperating income increased
for the twelve months ended June 30, 2000, compared to the same period in 1999,
mainly due to the one-time adjustment in fourth quarter 1999, resulting from an
Internal Revenue Service ruling that allowed SCE to record a tax benefit,
partially offset by additional regulatory accruals in third quarter 1999 and the
1999 gains on sales of equity investments discussed above.
Interest Expense
Other interest expense increased for the three, six and twelve months ended
June 30, 2000, compared to the same periods in 1999, mostly due to higher
overall short-term debt balances necessary to meet
30
<PAGE>
general cash requirements during the periods and higher interest expense
related to balancing account overcollections.
Financial Condition
SCE's liquidity is primarily affected by debt maturities, dividend payments and
capital expenditures. Capital resources include cash from operations and
external financings.
Edison International's Board of Directors authorized the repurchase of up to
$2.8 billion of its outstanding shares of common stock. Edison International
repurchased more than 21 million shares (approximately $400 million) of its
common stock through the first six months of 2000. These were the first
repurchases since first quarter 1999. Edison International has now repurchased
approximately 122 million shares ($2.8 billion) between January 1, 1995, and
June 30, 2000, funded by dividends from its subsidiaries.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $419 million, $1.0 billion and
$1.7 billion, respectively, for the three, six and twelve months ended June 30,
2000, compared with $460 million, $844 million and $1.2 billion for the same
periods in 1999. SCE's cash flow coverage of dividends for the three, six and
twelve months ended June 30, 2000, was 4.2 times, 5.0 times and 2.8 times,
respectively, compared to 3.9 times, 2.9 times and 1.3 times for the
year-earlier periods. The increases in 2000 reflect special dividends SCE paid
to Edison International ($75 million in first quarter 1999 and $330 million in
third quarter 1998).
Cash Flows from Financing Activities
At June 30, 2000, SCE had total credit lines of $1.25 billion, with $1 million
available for general purpose, short-term debt and $515 million available for
the 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, balancing account
undercollections and general cash requirements. Long-term debt is used mainly to
finance capital expenditures. External financings are influenced by market
conditions and other factors, including limitations imposed by SCE's articles of
incorporation and first mortgage trust indenture. As of June 30, 2000, SCE could
issue approximately $11.8 billion of additional first and refunding mortgage
bonds and $2.9 billion of preferred stock at current interest and dividend
rates.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure,
limiting the dividends it may pay Edison International. At June 30, 2000, SCE
had the capacity to pay $89 million in additional dividends and continue to
maintain its authorized capital structure.
In December 1997, $2.5 billion of rate reduction notes were issued on behalf of
SCE by SCE Funding LLC, a special purpose entity. These notes were issued to
finance the 10% rate reduction mandated by state law. The proceeds of the rate
reduction notes were used by SCE Funding LLC to purchase from SCE an enforceable
right known as transition property. Transition property is a current property
right created by the restructuring legislation and a financing order of the CPUC
and consists generally of the right to be paid a specified amount from
non-bypassable rates charged to residential and small commercial customers. The
rate reduction notes are being repaid over 10 years through these non-
bypassable residential and small commercial customer rates which constitute the
transition property purchased by SCE Funding LLC. The remaining series of
outstanding rate reduction notes have scheduled maturities beginning in 2001 and
ending in 2007, with interest rates ranging from 6.17% to 6.42%. The notes are
secured by the transition property and are not secured by, or payable from,
assets of SCE or Edison International. SCE used the proceeds from the sale of
the transition property to retire debt and equity securities. Although, as
required by generally accepted accounting principles, SCE Funding LLC is
consolidated with SCE and the rate reduction notes are shown as long-term debt
in the
30
<PAGE>
consolidated financial statements, SCE Funding LLC is legally separate
from SCE. The assets of SCE Funding LLC are not available to creditors of SCE or
Edison International and the transition property is legally not an asset of SCE
or Edison International.
On July 19, 2000, SCE issued $144 million of pollution-control bonds at an
interest rate that is reset daily, due in June 2035. The proceeds of the bonds
are held in trust until October 2000, at which time the funds will be used for
the early retirement of $144 million of pollution-control bonds.
Cash Flows from Investing Activities
Cash flows from investing activities are affected by additions to property and
plant and funding of nuclear decommissioning trusts. Decommissioning costs are
recovered in rates. SCE estimates that it will spend approximately $8.6 billion
through 2060 to decommission its nuclear facilities. This estimate is based on
SCE's current-dollar decommissioning costs ($2.1 billion), escalated at rates
ranging from 0.3% to 10.0% (depending on the cost element) annually. These costs
are expected to be funded from independent decommissioning trusts which receive
SCE contributions of approximately $25 million per year.
Projected Capital Requirements
SCE's projected construction expenditures for the next five years are: 2000 -
$1.1 billion; 2001 - $1.1 billion; 2002 - $923 million; 2003 - $905 million; and
2004 - $921 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following June 30, 2000, are: 2001 - $648 million; 2002 -
$246 million; 2003 - $572 million; 2004 - $247 million; and 2005 - $372 million.
Preferred stock redemption requirements for the five twelve-month periods
following June 30, 2000, are: 2001- zero; 2002 - $105 million; 2003 - $9
million; 2004 - $9 million; and 2005 - $9 million.
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 1996 restructuring
legislation, SCE's transition costs are recovered as the residual component of
rates once the costs for distribution, transmission, public benefit programs,
nuclear decommissioning and the cost of supplying power to its customers through
the PX and ISO have already been recovered. Accordingly, more revenue generally
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. The effects of higher prices on
transition cost revenue are mitigated to some extent by increased revenue on
energy sold to the PX from SCE-controlled generation sources. The PX and ISO
market prices to date have generally been consistent, although some irregular
price spikes have occurred, and during second quarter 2000, there were sustained
periods during which market prices diverged from the level of prices that should
have come from properly functioning competitive markets. The ISO has responded
to price spikes in the market for reliability services (referred to as ancillary
services) by imposing a price cap 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 on its market for imbalance energy
until adequate measures to improve the efficient operation of the market have
been implemented. The caps in these markets mitigate the risk of costly price
spikes that would reduce the revenue available to SCE to pay transition costs.
The price cap instituted by the ISO in the summer of 1998 was $250/MWh. In
October 1999, that cap was raised to $750/MWh. The ISO decided to reduce the cap
on imbalance energy and ancillary services to $500/MWh effective July 1, 2000,
and to $250/MWh effective August 7, 2000. The ISO further reduced the cap on
replacement reserves to $100/MWh, also effective July 1, 2000. These price cap
reductions were a response to sustained significantly higher prices in the
energy
31
<PAGE>
and ancillary services markets, beginning in May 2000. Reacting to the
recent price increases, which have continued throughout the summer of 2000,
government and regulatory bodies including the FERC, the CPUC, the California
Electricity Oversight Board, the California Legislature and the California
Attorney General, have launched or announced investigations or other actions
relating to aspects of the electricity markets. SCE cannot predict what actions
any of these bodies may take or the potential effects of their actions.
In 1997, SCE bought gas call options to mitigate its exposure to increases in
energy costs. In July 1999, SCE began participating in forward purchases through
a PX block forward market. In the PX block forward market, SCE can purchase
monthly blocks of energy or ancillary services for six days a week (excluding
Sundays and holidays) for 8 to 16 hours a day. These purchases can be made up to
12 months in advance of the delivery date. The CPUC originally limited SCE's use
of the PX block forward market to a maximum of approximately 2,000 MW in any
month. The PX requested and was granted authority from the FERC to sell other
forward products including a peak product, six days a week, for eight hours a
day. In March 2000, the CPUC approved SCE's request for rate-making treatment
for its use of these additional products and for an expansion of the limits from
all forward PX products up to 5,200 MW in summer months. In April 2000, the CPUC
approved SCE's request to begin a demand responsiveness program that would allow
customers to be paid to curtail their load during times of very high PX energy
prices. On August 3, 2000, the CPUC approved SCE's request to enter into
bilateral contracts for delivery of electricity.
A 10% increase in market interest rates would result in a $3 million increase in
the fair value of SCE's interest rate hedge agreement. A 10% decrease in market
interest rates would result in a $5 million decline in the fair market value of
SCE's interest rate hedge agreement. A 10% increase in natural gas prices would
result in a $54 million increase in the fair market value of gas call options. A
10% decrease in natural gas prices would result in a $35 million decline in the
fair market value of gas call options. A 10% increase in electricity prices
would result in a $66 million increase in the fair market value of block forward
contracts. A 10% decrease in electricity prices would result in a $66 million
decrease in the fair market value of block forward contracts. A 10% change in
market rates is expected to have an immaterial effect on SCE's other financial
instruments.
Regulatory 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 continues to
change as California moves toward a more competitive climate. SCE continues to
recover its stranded costs associated with generation-related assets through an
authorized CTC. California's electric industry restructuring statute 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 mandated other rates to remain frozen at June 1996 levels (system
average of 10.1(cent) per kilowatt-hour), including those for large commercial
and industrial customers, and included provisions for continued funding for
energy conservation, low-income programs and renewable resources.
Revenue is determined by various mechanisms depending on the utility operation.
Generation
Revenue from generation-related operations is being determined through the
market and the CTC mechanism, which now includes the nuclear rate-making
agreements. The portion of revenue related to fossil generation operations that
is made uneconomic by electric industry restructuring is recovered through the
CTC mechanism. The portion that is economic is recovered through the market.
SCE's costs associated with its hydroelectric plants are being recovered through
a performance-based 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
32
<PAGE>
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. In 2000, fossil and hydroelectric generation assets have
the opportunity to earn a 7.22% return. SCE has filed an application with the
CPUC regarding the market valuation of all of its non-nuclear generating
facilities. See additional discussions below regarding hydroelectric valuation,
Mohave Generating Station auction and pending sale, and pending Four Corners
Generating Station sale.
SCE is recovering its investment in its nuclear facilities on an accelerated
basis 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, 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. SCE has entered into
an agreement to sell its investment in Palo Verde (see further discussion
below).
In October 1999, SCE filed an application with the CPUC to approve an auction
process to sell its 56% interest in Mohave Generating Station. On April 6, 2000,
the CPUC approved the auction process. On May 10, 2000, SCE agreed to sell its
interest in Mohave to AES Corporation for approximately $533 million. The
transaction is subject to approval by the CPUC and various federal regulatory
agencies. On June 28, 2000, SCE submitted a compliance filing with the CPUC
seeking approval of the auction results and the sale to AES. The sale is
expected to close within the next 12 months.
In December 1999, SCE filed an application with the CPUC establishing a market
value for its hydroelectric generation-related assets at approximately $1.0
billion (almost twice the assets' book value) and proposing to retain and
operate the hydroelectric assets under a performance-based, revenue-sharing
mechanism. The application has broad-based support from labor, ratepayer and
environmental groups. If approved by the CPUC, SCE would be allowed to recover
an authorized, inflation-indexed operations and maintenance allowance, as well
as a reasonable return on capital investment. A revenue-sharing arrangement
would be activated if revenue from the sale of hydroelectricity exceeds or falls
short of the authorized revenue requirement. SCE would then refund 90% of the
excess revenue to ratepayers or recover 90% of any shortfalls from ratepayers. A
final CPUC decision is expected in 2001.
On April 27, 2000, SCE agreed to sell its 16% interest in Palo Verde and
its 48% interest in Four Corners Generating Station to Pinnacle West Energy for
a total price of $550 million, subject to certain adjustments. The sale of
assets at Palo Verde will be accompanied by an assignment of SCE's interest in
the related decommissioning fund. Palo Verde is located in Arizona and Four
Corners is located in New Mexico. The transaction is subject to the approval of
the CPUC, the Nuclear Regulatory Commission, the FERC and other state and
federal entities, and to the receipt of a favorable ruling from the Internal
Revenue Service. The Utility Reform Network has filed a protest with the CPUC
recommending that the CPUC reject the sale and require SCE to retain these
generating assets. There can be no assurance that other protests will not be
filed with the CPUC. The transaction is expected to close by mid-2001. Until the
end of November, competing offers may be solicited by SCE, subject to certain
conditions, and any superior offers received are subject to matching rights by
Pinnacle West Energy.
Accounting for Generation-Related Assets
As the CPUC's electric industry restructuring plan continues as described above,
SCE is allowed to recover its transition costs through non-bypassable charges to
its distribution customers (although its investment in certain generation assets
is subject to a lower authorized rate of return). In 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
generation assets based on new accounting guidance. The new guidance did not
require SCE to write off any of its
33
<PAGE>
generation-related assets, including related regulatory assets because the
restructuring plan referred to above made probable their recovery through a
non-bypassable charge to distribution customers. The regulatory assets are
comprised 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 related to
the application of asset impairment standards to these assets. Using this
guidance, SCE reduced its remaining nuclear plant investment by $2.6 billion (as
of June 30, 1998) and recorded 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 expected future net cash flows. This
reclassification had no effect on SCE's results of operations.
Status of Stranded-Asset Recovery
SCE's transition costs arise from QF contracts (which are the direct result of
prior legislative and regulatory mandates), costs pertaining to certain
generating assets and regulatory commitments consisting of recovery of costs
incurred 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 investment in San Onofre Units
2 and 3 and the Palo Verde units, and certain other costs. Transition costs
related to power-purchase contracts are being recovered through the terms of
each contract. Most of the remaining transition costs may be recovered through
the end of the transition period, March 31, 2002.
SCE's transition costs are being recovered principally 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 1995 restructuring decision date. Revenue from
the sale or valuation of generation assets in excess of book value is also
applied to recovery of transition costs. During 1998, SCE sold all of its gas-
and oil-fueled generation plants for $1.2 billion, over $500 million more than
the combined book value. Net proceeds of the sales were used to reduced stranded
costs, which otherwise were expected to be collected through the CTC mechanism.
Sales or valuations of other generating assets are discussed above. In addition,
net market revenue from sales of power and capacity from SCE-controlled
generation sources is applied to transition cost recovery.
As further discussed in Note 1 to the Consolidated Financial Statements,
CTC revenue is determined residually. Increases in market prices for electricity
affect SCE in two fundamental ways. First, CTC revenue decreases because there
is less or no residual revenue from frozen rates due to higher cost PX power
purchases. Second, transition costs decrease because there is increased net
market revenue due to sales from SCE-controlled generation sources to the PX at
higher prices. Although the second effect mitigates the first to some extent,
the overall impact on transition cost recovery is negative because SCE purchases
more power than it sells to the PX. In addition, higher market prices for
electricity may adversely affect SCE's ability to recover non-transition costs
during the rate freeze period. For example, if market prices for electricity are
extremely high in a given month, residual CTC revenue may be negative, which
means there was insufficient revenue from customers under the frozen rates to
cover all costs of providing service during that month. Under existing CPUC
decisions, this undercollection in the transition revenue account is carried
forward and recovered from future positive CTC revenue.
Since the beginning of the rate freeze (January 1, 1998), SCE has had positive
CTC revenue of $4.1 billion to recover its transition costs. As the result of
sustained higher market prices which began in May 2000 (further discussed in
Market Risk Exposures), SCE experienced the first month in which there was
negative CTC revenue. SCE continued to have negative CTC revenue in June and
July 2000. To date, the CPUC has denied SCE requests to allow recovery of the
transition revenue account undercollections after the end of the rate freeze.
SCE is currently reassessing the significance of the current undercollections
and may renew requests to the CPUC to modify certain rate-making practices.
34
<PAGE>
As of June 30, 2000, the book value of stranded assets to be recovered by the
end of the rate freeze, less estimated credits from the market valuation or
pending sale of remaining generation assets, is as follows:
In millions
-------------------------------------------------------------------------
Unamortized nuclear investment - net $ 978
Unamortized loss on sale of plant 91
Transition-related balancing accounts 424
Transition revenue account 644
Flow-through taxes 170
Other regulatory assets 40
-------------------------------------------------------------------------
Total regulatory assets 2,347
Book value of remaining generation plant 392
-------------------------------------------------------------------------
Total stranded assets 2,739
Less estimated credits:
Excess of market value over book for hydro assets (500)
Proceeds from pending sale of generating plants (1,083)
------------------------------------------------------------------------
Net amount of stranded assets $ 1,156
------------------------------------------------------------------------
As of July 31, 2000, SCE's transition revenue account undercollection was $1.1
billion and its transition-related balancing accounts undercollections were
$261 million.
Despite the rate freeze, SCE expects to recover its revenue requirement during
the transition period. The following factors may affect the amount of revenue
available to recover both transition and non-transition costs: the market prices
of gas and electricity; the ultimate selling price for the Palo Verde and Four
Corners generating assets; the outcome of SCE's hydroelectric filing; ISO rate
caps; economic conditions; weather conditions; and actions of governmental and
regulatory bodies. If during the transition period events were to occur that
make the recovery of any of SCE's costs no longer probable, SCE would be
required to write off the unrecoverable portion as a one-time charge against
earnings.
Distribution
Revenue related to distribution operations is determined through a
performance-based rate-making (PBR) mechanism and the distribution assets have
the opportunity to earn a CPUC-authorized 9.49% return. The distribution PBR
will extend through December 2001. Key elements of the distribution PBR include:
distribution rates indexed for inflation based on the Consumer Price Index less
a productivity factor; 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 customer satisfaction; service reliability and safety; and a net
revenue-sharing mechanism that determines how customers and shareholders will
share gains and losses from distribution operations.
In January 2000, SCE filed an application with the CPUC proposing rates that
would go into effect when the current rate freeze ends on March 31, 2002, or
earlier, depending on the pace of CTC recovery. On July 7, 2000, SCE updated
this filing with more recent information. The proposal seeks CPUC approval of a
rate redesign that will result in reduced rates for most customers when SCE
completes the first phase of recovery of its transition costs. The proposed new
rates are expected to reduce SCE's system average rates by about 12% from
current frozen rate levels, based on certain assumptions about competitive
energy prices and unbundled revenue requirements for 2002. In addition, SCE's
filing proposes to redesign and establish separate transmission and distribution
rates to better reflect the actual costs to deliver electricity and serve
customers by recovering the fixed costs of delivering electricity in fixed
charges. This pricing approach is consistent with CPUC policies requiring
California's major utilities to move toward cost-based transmission and
distribution rates.
35
<PAGE>
Transmission
Transmission revenue is determined through FERC-authorized rates and is subject
to refund. In March 1997, SCE filed its first FERC transmission rate case. In
response to a FERC ruling, in November 1999, SCE filed additional evidence
regarding return on equity. On July 26, 2000, the FERC issued its final decision
adopting SCE's requested return on equity of 11.6% and a 9.29% return on
transmission assets. The FERC decision rejected SCE's proposed approach for the
recovery of a portion of administrative and general costs and plant costs
related to transmission, and instead suggested that SCE seek recovery of such
costs through distribution rates.
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 11 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's recorded estimated minimum liability to remediate its 45
identified sites is $104 million. SCE believes that, due to the uncertainties
inherent in the estimation process, it is reasonably possible that cleanup costs
could exceed its recorded liability by up to $281 million. In 1998, SCE sold all
of its gas- and oil-fueled power plants but has retained some liability
associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 44 of its sites,
representing $34 million of its recorded liability, through an incentive
mechanism, which is discussed in Note 11. SCE has recorded a regulatory asset of
$71 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. As a result, 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 $5 million to $15 million. Recorded costs for
the twelve months ended June 30, 2000, were $13 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).
A study was undertaken to determine the specific impact of air contaminant
emissions from the Mohave Generating Station on visibility in Grand Canyon
National Park. The final report on this study, which was issued in March 1999,
found negligible correlation between measured Mohave station tracer
concentrations and visibility impairment. The absence of any obvious
relationship cannot rule out Mohave station contributions to haze in Grand
Canyon National Park, but strongly suggests that other sources were primarily
responsible for the haze. In June 1999, the Environmental Protection Agency
(EPA) issued an advanced notice of proposed rulemaking regarding assessment of
visibility impairment at the Grand Canyon. SCE filed comments on the proposed
rulemaking in November 1999. In 1998, several environmental groups filed suit
against the co-owners of the Mohave station regarding alleged violations of
emissions limits. In order to accelerate resolution of key environmental issues
regarding the
36
<PAGE>
plant, the parties filed, in concurrence with SCE and the other station
owners, a consent decree, which was approved by the court in December 1999. In a
letter to SCE, the EPA has expressed its belief that the controls provided in
the consent decree will likely resolve the potential Clean Air Act visibility
concerns. The EPA is considering incorporating the decree into the visibility
provisions of its Federal Implementation Plan for Nevada.
SCE's projected environmental capital expenditures are $850 million for the
2000-2004 period, mainly for undergrounding certain transmission and
distribution lines.
San Onofre Steam Generator Tubes
The San Onofre Units 2 and 3 steam generators have performed relatively well
through the first 16 years of operation. 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. Increased tube degradation was found during routine inspections in
1997. To date, 7.5% of Unit 2's tubes and 5.4% of Unit 3's tubes have been
removed from service. A decreasing (favorable) trend in degradation has been
observed in more recent inspections.
New Accounting Rule
In June 1998, a new accounting standard for derivative instruments and
hedging activities was issued. The new standard, which as amended SCE will be
required to implement on January 1, 2001, 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.
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 including the sale or retention and ongoing operation of remaining
generation assets; the effects, unfavorable interpretations and implementations
of new or existing laws and regulations relating to restructuring, taxes and
other matters; the effects of increased competition in the electric utility
business and other energy-related businesses, 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 financial market conditions; the amount of revenue available to recover both
transition and non-transition costs; the ability to sell or retain electric
generation assets; the ultimate selling price of those plants that are sold; new
or increased environmental liabilities; the ability to create and expand new
businesses such as telecommunications; weather conditions; and other unforeseen
events.
37
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Geothermal Generators' Litigation
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. SCE seeks damages for excess power purchase payments made to
the Coso parties and other relief. The Coso parties' motion to transfer venue to
Inyo County Superior Court was granted on August 31, 1997.
The Coso parties filed a cross-complaint against SCE, The Mission Group, and
Mission Power Engineering Company (Mission parties), which contains claims for
breach of contract, unfair competition, interference with contract, defamation,
breach of an earlier settlement agreement between the Mission parties and the
Coso parties, and other claims. As against SCE, the cross-complaint seeks
restitution, compensatory damages in excess of $115 million, punitive damages in
an amount not less than $400 million, interest, attorney's fees, declaratory
relief, and injunctive relief. As against the Mission parties, the
cross-complaint seeks damages for breach of warranty of authority with respect
to the settlement agreement, and for equitable indemnity. Edison International
was named as a cross-defendant, allegedly as an alter ego of SCE and the Mission
parties. The Coso parties voluntarily dismissed the claims against Edison
International.
Three of the Coso Parties also filed a separate action in the Inyo County
Superior Court against SCE and Edison International, alleging claims for unfair
competition, false advertising and for violations of Public Utilities Code ss.
2106, and seeking injunctive relief, restitution, and punitive damages. The
Court ordered this action consolidated with the SCE action.
Effective February 8, 2000, the parties entered into confidential agreements
resolving all claims in the consolidated action and calling for dismissals with
prejudice and releases. The settlement is subject to the approval of the CPUC.
On February 10, 2000, the Court approved a stipulation staying all proceedings
during the period required to obtain CPUC approval. On April 26, 2000, SCE filed
an application to obtain such approval. The period for protesting the
application has passed and no person has filed a protest. SCE expects a decision
on the application later this year. The settlement is not expected to have a
material financial effect on SCE.
San Onofre Personal Injury Litigation
As previously reported in Part I, Item 3, of the Registrant's Annual Report on
Form 10-K for the year ending December 31, 1999, SCE is actively involved in
three lawsuits claiming personal injuries allegedly resulting from exposure to
radiation at San Onofre.
On August 31, 1995, the wife and daughter of a former San Onofre security
supervisor sued SCE and SDG&E in the U.S. District Court for the Southern
District of California. Plaintiffs also named Combustion Engineering and the
Institute of Nuclear Power Operations as defendants. All trial court proceedings
were stayed pending ruling of the Ninth Circuit Court of Appeal, on an appeal of
a lower court's judgment in favor of SCE in two earlier cases raising
similar allegations. On May 28, 1998, the Court of Appeal affirmed these
judgments. Pursuant to an agreement of the parties as described below, all
proceedings in this matter have been stayed.
38
<PAGE>
On November 17, 1995, an SCE employee and his wife sued SCE in the U.S. District
Court for the Southern District of California. Plaintiffs also named Combustion
Engineering. The trial in this case resulted in a jury verdict for both
defendants. The plaintiffs' motion for a new trial was denied. Plaintiffs filed
an appeal of the trial court's judgment to the Ninth Circuit Court of Appeals.
On July 20, 2000, the Ninth Circuit issued an opinion reversing the trial
court's judgment and ordering a retrial as to both defendants. The Court of
Appeals concluded that the jury instructions were flawed and unfairly prejudiced
plaintiffs and that the trial court erroneously dismissed the products liability
claims against Combustion Engineering. The Ninth Circuit did not decide the
merits of plaintiffs' claims. This decision, if not vacated or altered on
rehearing or other further proceedings, would constitute a "favorable
determination" for plaintiffs in both of the other cases at the U.S. District
Court level (respectively mentioned in the immediately preceding and immediately
following paragraphs), for purposes of the stay agreement described below. SCE
and Combustion Engineering intend to seek rehearing before the Ninth Circuit.
On November 28, 1995, a former contract worker at San Onofre, her husband, and
her son, sued SCE in the U.S. District Court for the Southern District of
California. Plaintiffs also named Combustion Engineering. On August 12, 1996,
the Court dismissed the claims of the former worker and her husband with
prejudice, leaving only the son as plaintiff. Pursuant to an agreement of the
parties as described below, all proceedings in the matter have been stayed.
In March of 1999, SCE reached an agreement with the plaintiffs in both of the
cases at the U.S. District Court level to stay all proceedings including trial,
pending the results of the case currently before the Ninth Circuit Court of
Appeal. The parties agreed that if the plaintiffs in that case do not receive a
favorable determination on appeal, then the two cases at the District Court
level will be dismissed. If, however, those plaintiffs receive a favorable
determination on their appeal, then the two District Court cases will be set for
trial. On March 23, 1999, the District Court approved the parties' stay
agreement in both cases. The stay will remain in effect until the conclusion of
the appellate process, including filing and disposition of any petitions for
rehearing in the Ninth Circuit or petitions for certiorari in the United States
Supreme Court.
SCE was previously involved, along with other defendants, in two earlier cases
raising allegations similar to those described above. Although SCE is no longer
actively involved in these actions, the impact on SCE, if any, from further
proceedings in those cases against the remaining defendants cannot be determined
at this time.
39
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment and Restated Articles of Incorporation of SCE
effective 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 SCE
dated June 23, 1997 (File No. 1-2313, Form 10-Q for the quarter ended
September 30, 1997)*
3.3 Amended Bylaws of Southern California Edison Company as adopted by the
Board of Directors on February 17, 2000 (File No. 1-2313, filed as Exhibit
3.3 to Form 10-K for the period ended December 31, 1999)*
10.1 Edison International 2000 Equity Plan
10.2 Form of Agreement for 2000 Employee Awards under the 2000 Equity Plan
10.3 Form of Agreement for 2000 Director Awards under the Equity Compensation
Plan
10.4 Amendment No. 1 to the Edison International Equity Compensation Plan (as
restated January 1, 1998)
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
------------------
* Incorporated by reference pursuant to Rule 12b-32.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA EDISON COMPANY
(Registrant)
By THOMAS M. NOONAN
---------------------------------
THOMAS M. NOONAN
Vice President and Controller
By KENNETH S. STEWART
---------------------------------
KENNETH S. STEWART
Assistant General Counsel and
Assistant Secretary
August 11, 2000
