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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
--------------------------------------------
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 (626) 302-1212
Rosemead, California 91770 (Registrant's telephone number,
(Address of principal (Zip Code) Including area code)
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Capital Stock
Cumulative Preferred $100 Cumulative Preferred American and
4.08% Series 4.78% Series 6.05% Series Pacific
4.24% Series 5.80% Series 6.45% Series
4.32% Series 7.23% Series
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 23, 1998 there were 434,888,104 shares of Common Stock
outstanding, all of which are held by the registrant's parent holding
company. The aggregate market value of registrant's voting stock held by
non-affiliates was approximately $426,452,116 on or about March 23, 1998
based upon prices reported by the American Stock Exchange. The market
values of the various classes of voting stock held by non-affiliates were
as follows: CUMULATIVE PREFERRED STOCK $151,452,116; $100 CUMULATIVE
PREFERRED STOCK $275,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents listed below have been incorporated by
reference into the parts of this report so indicated.
(1) Designated portions of the Annual Report to
Shareholders for the year ended
December 31, 1997. . . . . . . . . . . . . . . . Parts I, II and IV
(2) Designated portions of the Joint Proxy Statement
relating to registrant's 1998 Annual Meeting
of Shareholders. . . . . . . . . . . . . . . . . Part III
PAGE
TABLE OF CONTENTS
Item Page
- ---- ----
Part I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Competitive Environment. . . . . . . . . . . . . . . . . . 1
Regulation . . . . . . . . . . . . . . . . . . . . . . . . 7
Rate Matters . . . . . . . . . . . . . . . . . . . . . . . 9
Fuel Supply and Purchased Power Costs . . . . . . . . . . . 13
Environmental Matters . . . . . . . . . . . . . . . . . . . 14
Year 2000 Issue . . . . . . . . . . . . . . . . . . . . . . 17
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Existing Generating Facilities . . . . . . . . . . . . . . 17
Construction Program and Capital Expenditures . . . . . . . 19
Nuclear Power Matters . . . . . . . . . . . . . . . . . . . 19
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 22
Qualifying Facilities Litigation . . . . . . . . . . . . . 22
Wind Generators' Litigation . . . . . . . . . . . . . . . . 23
Geothermal Generators' Litigation . . . . . . . . . . . . . 24
Electric and Magnetic Fields (EMF) Litigation . . . . . . . 25
San Onofre Personal Injury Litigation . . . . . . . . . . . 26
Oil Pipeline Litigation . . . . . . . . . . . . . . . . . . 28
False Claims Act Litigation . . . . . . . . . . . . . . . . 28
Mohave Generating Station Environmental Litigation . . . . 28
4. Submission of Matters to a Vote of Security Holders . . . . . . 29
Executive Officers of the Registrant . . . . . . . . . . . . . . 29
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 31
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 31
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . . . 31
8. Financial Statements and Supplementary Data . . . . . . . . . . 31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . 31
Part III
10. Directors and Executive Officers of the Registrant . . . . . . . 31
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 31
12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . 32
13. Certain Relationships and Related Transactions . . . . . . . . . 32
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 32
Report of Independent Public Accountants on
Supplemental Schedules . . . . . . . . . . . . . . . . . . 33
Supplemental Schedules . . . . . . . . . . . . . . . . . . 34
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 37
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . 38
PAGE
PART I
In this form 10-K, Southern California Edison Company (SCE) uses the words
estimates, expects, anticipates, believes, and other similar expressions
that are intended to identify forward-looking information that involves
risks and uncertainties. Actual results or outcomes could differ
materially as a result of such important factors as further actions by
state and federal regulatory bodies setting rates and implementing the
restructuring of the electric utility industry; the effects of new laws
and regulations relating to restructuring and other matters; the effects
of increased competition in the electric utility business, including the
beginning of direct customer access to retail energy suppliers and the
unbundling of revenue cycle services such as metering and billing; changes
in prices of electricity and fuel costs; changes in market interest rates;
new or increased environmental liabilities; and other unforeseen events.
Item 1. Business
SCE was incorporated under California law in 1909. SCE is a public
utility primarily engaged in the business of supplying electric energy to
a 50,000 square-mile area of Central and Southern California, excluding
the City of Los Angeles and certain other cities. This area includes some
800 cities and communities and a population of more than 11 million
people. SCE had 12,642 full-time employees at year-end 1997. During
1997, 38% of SCE's total operating revenue was derived from residential
customers, 38% from commercial customers, 12% from industrial customers,
7% from public authorities, 4% from agricultural and other customers and
1% from resale customers. SCE comprises the major portion of the assets
and revenue of Edison International, its parent holding company.
Competitive Environment
SCE currently operates in a highly regulated environment in which it has
an obligation to deliver electric service to customers in return for an
exclusive franchise within its service territory. This regulatory
environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators are
restructuring California's electric utility industry.
California Electric Utility Restructuring
Restructuring Decision - The California Public Utilities Commission's
(CPUC) December 1995 decision on restructuring California's electric
utility industry started the transition to a new market structure, which
is expected to provide competition and customer choice and is scheduled to
begin March 31, 1998. Key elements of the CPUC's restructuring decision
included: creation of an independent power exchange (PX) and independent
system operator (ISO); availability of direct customer access and customer
choice; performance-based ratemaking (PBR) for those utility services not
subject to competition; voluntary divestiture of at least 50% of
utilities' gas-fueled generation, and implementation of the competition
transition charge (CTC).
Restructuring Legislation - In September 1996, the State of California
enacted legislation to provide a transition to a competitive market
structure. The legislation substantially adopted the CPUC December 1995
restructuring decision by addressing stranded-cost recovery for utilities
and providing a certain cost-recovery time period for the transition costs
associated with utility-owned generation-related assets. Transition costs
related to power-purchase contracts would be recovered through the terms
of their contracts while most of the remaining transition costs would be
recovered through 2001. The legislation also included provisions to
finance a portion of the stranded costs that residential and small
commercial customers would have paid between 1998 and 2001, which would
allow SCE to reduce rates by at least 10% to these customers, beginning
January 1, 1998. The financing would occur with securities issued by the
page 1
California Infrastructure and Economic Development Bank (Bank), or an
entity approved by the Bank. The legislation included a rate freeze for
all other customers, including large commercial and industrial customers,
as well as provisions for continued funding for energy conservation,
low-income programs and renewable resources. Despite the rate freeze, SCE
expects to be able to recover its revenue requirement during the 1998-2001
transition period. In addition, the legislation mandated the
implementation of the CTC that provides utilities the opportunity to
recover costs made uneconomic by electric utility restructuring. Finally,
the legislation contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related
expenses.
Rate Reduction Notes - In May 1997, SCE filed an application with the CPUC
requesting approval of the issuance of an aggregate amount of up to $3
billion of rate reduction notes in one or more series or classes and a 10%
rate reduction for the period from January 1, 1998, through March 31,
2002. At the same time, SCE filed an application with the Bank for
approval to issue the notes. Residential and small commercial customers
will repay the notes over the expected 10-year term through non-bypassable
charges based on electricity consumption. In December 1997, after
receiving approval from both the CPUC and the Bank, a limited liability
company created by SCE issued approximately $2.5 billion
of these notes.
Rate-setting - In December 1996, SCE filed a more comprehensive plan
(elaborating on its July 1996 filing related to the conceptual aspects of
separating costs as requested by CPUC and Federal Energy Regulatory
Commission (FERC) directives) for the functional unbundling of its rates
for electric service, beginning January 1, 1998. In response to CPUC and
FERC orders, as well as the new restructuring legislation, this filing
addressed the implementation-level detail for the functional unbundling of
rates into separate charges for energy, transmission, distribution, the
CTC, public benefit programs and nuclear decommissioning. The
transmission component of this rate unbundling process was addressed at
the FERC through a March 1997 filing. In December 1997, the FERC approved
these rates, subject to refund, to be effective on the date the ISO begins
operation. (See "Transmission Owners Tariff and Wholesale Distribution
Access Tariff" below for further discussion.) CPUC hearings on SCE's rate
unbundling (also known as rate-setting) plan were concluded in April 1997.
In August 1997, the CPUC issued a decision which adopted the methodology
for determining CTC residually (see "CTC" discussion) and adopted SCE's
revenue requirement components for public benefit programs and nuclear
decommissioning. The decision also adjusted SCE's proposed distribution
revenue requirement by reallocating $76 million of it annually to other
functions such as generation and transmission. Under the decision, SCE
will be able to recover most of the reallocated amount through market
revenue, other rate-making mechanisms after petitioning the CPUC to modify
its prior decisions, or another review process later in its divestiture
proceeding.
PX and ISO - In April 1996, SCE, Pacific Gas and Electric Company (PG&E)
and San Diego Gas & Electric Company (SDG&E) filed a proposal with the
FERC regarding the creation of the PX and the ISO. In November 1996, the
FERC conditionally accepted the proposal and directed the three utilities,
the ISO, and the PX to file more specific information. The filing was
made in March 1997, and included SCE's proposed transmission revenue
requirement. On October 29, 1997, the FERC gave conditional, interim
authorization for operation of the PX and ISO, which are new independent
non-profit California corporations, to begin on January 1, 1998. Prior to
the start of the ISO and PX, the chief executive officers of the PX, ISO
and the three utilities are required to certify that all the conditions
were in place to ensure reliable electric power operations. In addition,
the FERC stated it would closely monitor the PX and ISO, require further
page 2
studies and make modifications, where necessary. A comprehensive review
will be performed by the FERC after three years of operation of the PX and
ISO. On December 22, 1997, the PX and ISO governing boards announced a
delay in the planned start-up of the PX and ISO due to insufficient
testing of operational, settlement and billing systems. The PX and ISO
are now expected to begin operation by March 31, 1998.
In July 1996, the three utilities jointly filed an application with the
CPUC requesting approval to establish a restructuring trust which would
obtain loans up to $250 million for the development of the ISO and PX
through January 1, 1998. The loans are backed by utility guarantees;
SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an
interim order establishing the restructuring trust and the funding level
of $250 million, which has been used to build the hardware and software
systems for the ISO and PX. The ISO and PX will repay the trust's loans
and recover funds from future ISO and PX customers. In November 1997,
the CPUC approved a petition jointly filed by the three utilities which
requested an increase in the loan guarantees from $250 million to $300
million; SCE's share of this new total is $135 million. In December 1997,
the CPUC approved a remaining issue with respect to the petition which
requested that the one-time restructuring implementation charge, to be
paid to the PX by the utilities, be deemed a non-bypassable charge to be
recovered from all retail customers. The amount of the PX charge is
approximately $101 million, plus interest; SCE's share is 45%, or $45.5
million.
Direct Customer Access - In May 1997, the CPUC issued a decision
describing how all California investor-owned-utility customers will be
able to choose who will provide them with electric generation service
beginning January 1, 1998. On December 30, 1997, the CPUC issued a
decision delaying direct access until March 31, 1998, due to operational
delays in the startup of the PX and ISO. When the PX and ISO become
operational, customers will be able to choose to remain utility customers
with bundled electric service from SCE (which will purchase its power
through the PX), or choose direct access, which means the customer can
contract directly with either independent power producers or retail
electric service providers such as power brokers, marketers and
aggregators. Additionally, all investor-owned utility customers must pay
the CTC whether or not they choose to buy power through SCE. Electric
utilities will continue to provide the core distribution service of
delivering energy through their distribution systems regardless of a
customer's choice of electricity supplier. The CPUC will continue to
regulate the prices and service obligations related to distribution
services. If the new competitive market cannot accommodate the volume of
direct access transactions, the CPUC could implement a contingency plan.
However, the CPUC indicated that it believes it is likely that interest in
and migration to direct access will be gradual.
Revenue Cycle Services - A decision issued by the CPUC in May 1997,
introduces customer choice to metering, billing and related services
(revenue cycle services) that are now provided by California's investor-
owned utilities. Under this revenue cycle services unbundling decision,
beginning in January 1998, direct access customers may choose to have
either SCE or their electric generation service provider render
consolidated (energy and distribution) bills, or they may choose to have
separate billings from each service provider. However, not all electric
generation service providers will necessarily offer each billing option.
In addition, beginning in January 1998, customers with maximum demand
above 20 kW (primarily industrial and large commercial) can choose SCE or
any other supplier to provide their metering service. All other customers
will have this option beginning in January 1999. Since direct access was
delayed, options described in the CPUC decision as becoming available
January 1, 1998, will not be available until the PX and ISO become
operational. In determining whether any credit should be provided by the
utility to firms providing customers with revenue cycle services, and
the amount of any such credit, the CPUC has indicated that it is
page 3
appropriate to net the cost incurred by the utility and the cost avoided
by the utility as a result of such services being provided by the other
firm rather than by the utility. The unbundling of revenue cycle services
will expose SCE to the possible loss of revenue, higher stranded costs and
a reduction in revenue security.
PBR - In 1993, SCE filed for a PBR mechanism to determine most of its
revenue (excluding fuel). The filing was subsequently divided between
transmission and distribution (T&D) and power generation.
In September 1996, the CPUC adopted a non-generation or T&D PBR mechanism
for SCE which began on January 1, 1997. According to the CPUC, beginning
in 1998 (coincident with the initiation of the competitive market), the
transmission portion is to be separated from non-generation PBR and
subject to ratemaking under the rules of the FERC. The distribution-only
PBR will extend through December 2001. Key elements of the non-generation
PBR include: T&D rates indexed for inflation based on the Consumer Price
Index less a productivity factor; elimination of the kilowatt-hour sales
adjustment; adjustments for cost changes that are not within SCE's
control; a cost of capital trigger mechanism based on changes in a bond
index; standards for service reliability and safety; and a net revenue-
sharing mechanism that determines how customers and shareholders will
share gains and losses from T&D operations.
With the CPUC's 1995 restructuring decision and the passage of
restructuring legislation in 1996, the majority of power generation
ratemaking (primarily fossil-fueled and nuclear) was assigned to other
mechanisms. In April 1997, a CPUC interim order determined that the
proposed structure of the fossil-fueled plants' must-run contracts were
under the FERC's jurisdiction. On October 31, 1997, SCE filed must-run
tariff schedules with the FERC covering its six ISO-designated must-run
plants. In the meantime, SCE is pursuing the divestiture of these plants
(see "Divestiture" discussion) and might not ever itself provide service
under these FERC tariff schedules.
In December 1997, the CPUC adopted a PBR-type rate-making mechanism for
SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue
requirement in 1998 and establishes a formula for extending it through the
duration of the electric industry restructuring transition period, or
until market valuation of the hydroelectric facilities, whichever occurs
first. The mechanism provides that power sales revenue from hydroelectric
facilities in excess of the hydroelectric revenue requirement be credited
against the costs to transition to a competitive market (see "CTC"
discussion).
The CPUC has announced its intention to unbundle SCE's cost of capital by
major utility function and has directed SCE to file an application by May
8, 1998. This proceeding could result in a change in late 1998 or early
1999 to the cost of capital included within the PBR cost of capital
trigger mechanism.
Divestiture - In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its oil- and gas-fueled
generating plants. This application built upon SCE's March 1996 plan
which outlined how SCE proposed to divest 50% of these assets. SCE would
continue to operate and maintain the divested plants for at least two
years following their sale, as mandated by the restructuring legislation
enacted in September 1996. In addition, SCE would offer workforce
transition programs to those employees who may be impacted by divestiture-
related job reductions. In September 1997, the CPUC approved SCE's
proposal to auction the 12 plants.
On December 1, 1997, SCE filed a compliance filing with the CPUC stating
that it agreed to sell ten plants. On December 16, 1997, the CPUC
approved the sale of the ten plants. On February 6, 1998, SCE filed a
page 4
compliance filing with the CPUC for the sale of an eleventh plant. CPUC
approval of the sale is expected before March 31, 1998. The total sales
price of the eleven plants is $1.1 billion or 2.16 times their combined
book value of $531 million. Net proceeds of the sales will be used to
reduce stranded costs, which otherwise were expected to be collected
through the CTC mechanism. The transfer of ownership of the eleven plants
is expected to occur concurrently with the start of the new competitive
market, which the PX and ISO expect to occur on March 31, 1998. The
process of selling the single remaining plant is still underway.
CTC - Recovery of costs to transition to a competitive market is being
implemented through a non-bypassable CTC. This charge applies to all
customers who were using or began using utility services on or after the
CPUC's December 20, 1995, decision date. In August 1996, in compliance
with the CPUC's restructuring decision, SCE filed its application to
estimate its 1998 transition costs. In October 1996, SCE amended its
transition cost filing to reflect the effects of the legislation enacted
in September 1996. Under the rate freeze codified in the legislation, the
CTC will be determined residually (i.e., after subtracting other cost
components for the energy from PX, T&D, nuclear decommissioning and public
benefit programs). Nevertheless, the CPUC directed that the amended
application provide estimates of SCE's potential transition costs from
1998 through 2030. SCE provided two estimates between approximately $13.1
billion (1998 net present value) assuming the fossil plants have a market
value equal to their net book value, and $13.8 billion (1998 net present
value) assuming the fossil plants have no market value. These estimates
are based on incurred costs, forecasts of future costs and assumed market
prices. However, changes in the assumed market prices could materially
affect these estimates. The potential transition costs are composed of:
$7.5 billion from SCE's qualifying facility (QF) contracts, which are the
direct result of prior legislative and regulatory mandates; and $5.6
billion to $6.3 billion from costs pertaining to certain generating plants
(successful completion of the sale of SCE's gas-fired generating plants
would reduce this estimate of transition costs for SCE-owned generation to
less than $5 billion) and regulatory commitments consisting of costs
incurred (whose recovery has been deferred by the CPUC) to provide service
to customers. Such commitments include the recovery of income tax
benefits previously flowed through to customers, postretirement benefit
transition costs, accelerated recovery of San Onofre Nuclear Generating
Station Units 2 and 3 and the Palo Verde Nuclear Generating Station units,
and certain other costs. In February 1997, SCE filed an update to the CTC
filing to reflect approval by the CPUC of settlements regarding ratemaking
for SCE's share of Palo Verde and the buyout of a power purchase
agreement, as well as other minor data updates. No substantive changes in
the total CTC estimates were included. This issue has been separated into
two phases; Phase 1 addresses the rate-making issues and Phase 2 the
quantification issues.
A decision on Phase 1 was issued in June 1997, which, among other things,
required the establishment of a transition cost balancing account and
annual transition cost proceedings, set a market rate forecast for 1998
transition costs, and required that generation-related regulatory assets
be amortized ratably over a 48-month period. Hearings on Phase 2 were
held in May and June 1997 and a final decision was issued on November 19,
1997. The Phase 2 decision established the calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the
end of the rate freeze. The Phase 2 decision also reduced SCE's authorized
rate of return on certain assets eligible for transition cost recovery
(primarily fossil- and hydroelectric- generation related assets) beginning
July 1997, five months earlier than anticipated. The decision, excluding
the effects of other rate actions, had a negative impact on 1997 earnings
of approximately $14 million. SCE has filed an application for rehearing
on the 1997 rate of return issue.
page 5
Utility Rate Reduction and Reform Act Initiative - On November 24, 1997,
individuals representing The Utility Reform Network (TURN), Public Media
Center and the Coalition Against Utility Taxes filed a voter initiative
with the California Attorney General. The proposed initiative, which was
amended by the proponents on December 9, 1997, seeks among other things
to: (i) impose an additional 10 percent rate reduction; (ii) block
stranded cost recovery of nuclear investments; (iii) restrict stranded
cost recovery of non-nuclear investments unless the CPUC finds that the
utility would be deprived of the opportunity to earn a fair rate of
return; and (iv) prohibit the collection of any charges pursuant to a
financing order for the purpose of making payments on rate reduction
notes, or if the financing order is found enforceable by a court, require
the utility to offset such charges with an equal credit to customers. On
February 11, 1998, the California Secretary of State circulated a copy of
the title and summary prepared for the proposed initiative by the
California Attorney General's Office, which included a summary of estimate
of the fiscal impacts on state and local governments if the initiative
were to pass. That estimate concluded that the net impact on state
government revenue would be annual revenue reductions of approximately
$100 million per fiscal year from 1998-2002. The estimate also referred
to potential state liability for debt service on the rate reduction notes.
The earliest that the initiative could be placed on a statewide ballot is
November 3, 1998. SCE is unable to predict the outcome of this matter,
but if the initiative were to qualify for the ballot, be voted into law
and upheld by courts, it could have a material effect on its results of
operations.
Accounting for Generation-Related Assets - If the CPUC's electric industry
restructuring plan is implemented as outlined above, SCE would be allowed
to recover its CTC through non-bypassable charges to its distribution
customers (although its investment in certain generation assets would be
subject to a lower authorized rate of return).
From November 1996 to July 1997, SCE and the other major California
electric utilities were engaged in discussions with the Securities and
Exchange Commission (SEC) staff regarding the proper application of
regulatory accounting standards in light of the electric industry
restructuring legislation enacted by the State of California in September
1996 and the CPUC's electric industry restructuring plan. This issue was
placed on the agenda of the Financial Accounting Standards Board's
Emerging Issues Task Force (EITF) during April 1997 and a final consensus
was reached at the July EITF meeting. During the third quarter of 1997,
SCE implemented the EITF consensus and discontinued application of
accounting principles for rate-regulated enterprises for its investment in
generation facilities.
However, implementation of the EITF consensus did not require SCE to write
off any of its generation-related assets, including regulatory assets of
approximately $600 million at December 31, 1997. SCE has retained these
assets on its balance sheet because the legislation and restructuring plan
referred to above make probable their recovery through a non-bypassable
CTC to distribution customers. These regulatory assets relate primarily
to the recovery of accelerated income tax benefits previously flowed
through to customers, purchased power contract termination payments,
unamortized losses on reacquired debt, and the recovery of amounts
deferred under the Palo Verde rate phase-in plan. The consensus reached
by the EITF also permits the recording of new generation-related
regulatory assets during the transition period that are probable of
recovery through the CTC mechanism.
If during the transition period events were to occur that made the
recovery of these generation-related regulatory assets no longer probable,
SCE would be required to write off the remaining balance of such assets as
a one-time, non-cash charge against earnings. If such a write-off were to
be required, SCE believes that it should not affect the recovery of
stranded costs provided for in the legislation and restructuring plan.
page 6
Although depreciation-related differences could result from applying a
regulatory prescribed depreciation method (straight-line, remaining-life
method) rather than a method that would have been applied absent the
regulatory process, SCE believes that the depreciable lives of its
generation-related assets would not vary significantly from that of an
unregulated enterprise, as the CPUC bases depreciable lives on periodic
studies that reflect the physical useful lives of the assets. SCE also
believes that any depreciation-related differences would be recovered
through the CTC.
If events occur during the restructuring process that result in all or a
portion of the CTC being improbable of recovery, SCE could have additional
write-offs associated with these costs if they are not recovered through
another regulatory mechanism. At this time, SCE cannot predict what other
revisions will ultimately be made during the restructuring process in
subsequent proceedings or implementation phases, or the effect, after the
transition period, that competition will have on its results of operations
or financial position.
Transmission Owners Tariff and Wholesale Distribution Access Tariff - On
March 31, 1997, SCE, PG&E and SDG&E jointly filed with the FERC a pro
forma Transmission Owners Tariff (T.O. Tariff). The pro forma T.O. Tariff
was filed in conjunction with the ISO and PX tariffs, also filed on that
date. Together, these tariffs set forth the rate design and terms and
conditions for transmission service provided over SCE's facilities over
which the ISO will have operational control. Additionally, on March 31,
1997, SCE filed an individual T.O. Tariff, its proposed revenue
requirement for the facilities being turned over to the operational
control of the ISO, and a Wholesale Distribution Access Tariff (WDAT).
The SCE T.O. Tariff, excluding appendices, is identical to the pro forma
T.O. Tariff, and also contains appendices setting forth SCE's proposed
Transmission Access Charges. FERC accepted the SCE T.O. Tariff rates and
WDAT for filing, subject to refund, on December 17, 1997.
FERC Restructuring Decision - In April 1996, the FERC issued its decision
on stranded-cost recovery and open access transmission, effective July
1996. The decision, reaffirmed by the FERC in its March and November 1997
orders, requires all electric utilities subject to the FERC's jurisdiction
to file transmission tariffs which provide competitors with increased
access to transmission facilities for wholesale transactions and also
establishes information requirements for the transmission utility. The
decision also provides utilities with the opportunity to recover stranded
costs associated with existing wholesale customers, retail-turned-
wholesale customers and retail wheeling when the state regulatory body
does not have authority to address retail stranded costs. Even though the
CPUC is currently addressing stranded-cost recovery through the CTC
proceedings, the FERC has also asserted primary jurisdiction over the
recovery of stranded costs associated with retial-turned-wholesale
customers, such as a new municipal electric system or a municipal
annexation. However, FERC did clarify that it does not intend to prevent
or interfere with a state's authority and that it has discretion to defer
to a state stranded-cost-calculation method. In January 1997, the FERC
accepted the open access transmission tariff SCE filed in compliance with
the April 1996 decision. The rates included in the tariff are being
collected subject to refund. In May 1997, SCE filed a revised open access
tariff to reflect the few revisions set forth in the March 1997 order.
The open access transmission tariff will be terminated on the date the ISO
begins operation.
Regulation
SCE's retail operations are subject to regulation by the CPUC. The CPUC
has the authority to regulate, among other things, retail rates, issuances
of securities and accounting practices. SCE's wholesale operations are
subject to regulation by the FERC. The FERC has the authority to regulate
page 7
wholesale rates as well as other matters, including transmission service
pricing, accounting practices and licensing of hydroelectric projects.
SCE is subject to the jurisdiction of the Nuclear Regulatory Commission
(NRC) with respect to its nuclear power plants. NRC regulations govern
the granting of licenses for the construction and operation of nuclear
power plants and subject those power plants to continuing review and
regulation.
The construction, planning and siting of SCE's power plants within
California are subject to the jurisdiction of the California Energy
Commission and the CPUC. SCE is subject to rules and regulations of the
California Air Resources Board and local air pollution control districts
with respect to the emission of pollutants into the atmosphere, the
regulatory requirements of the California State Water Resources Control
Board and regional boards with respect to the discharge of pollutants into
waters of the state and the requirements of the California Department of
Toxic Substances Control with respect to handling and disposal of
hazardous materials and wastes. SCE is also subject to regulation by the
EPA, which administers certain federal statutes relating to environmental
matters. Other federal, state and local laws and regulations relating to
environmental protection, land use and water rights also affect SCE.
The California Coastal Commission has continuing jurisdiction over the
coastal permit for San Onofre Units 2 and 3. Although the units are
operating, the permit's mitigation requirements have not yet been
fulfilled. California Coastal Commission jurisdiction may continue for
several years due to implementation and oversight of permit mitigation
conditions, including restoration of wetlands and construction of an
artificial reef for kelp.
The Department of Energy (DOE) has regulatory authority over certain
aspects of SCE's operations and business relating to energy conservation,
solar energy development, power plant fuel use and disposal, coal
conversion, electric sales for export, public utility regulatory policy
and natural gas pricing.
On December 16, 1997, the CPUC adopted a decision which established new
rules governing the relationship between California's natural gas local
distribution companies, electric utilities and certain of their
affiliates. While SCE and its affiliates have been subject to affiliate
transaction rules since the establishment of its holding company structure
in 1988, these new rules are more detailed and restrictive. On December
31, 1997, SCE filed a preliminary Compliance Plan which set forth SCE's
implementation of the new affiliate transaction rules. This preliminary
Compliance Plan was supplemented by an additional filing made on January
30, 1998. A CPUC resolution is expected on SCE's Compliance Plan during
the second quarter of 1998.
For purposes of an electric utility, such as SCE, these new rules apply to
all utility transactions with affiliates engaging in the provision of a
product that uses electricity or the provision of services that relate to
the use of electricity. Edison International is not subject to these new
affiliate transaction rules and will continue to be subject to the prior
rules. The new affiliate transaction rules are structured to address what
the CPUC perceives market power and cross subsidization concerns arising
out of the new competitive electricity market in California. These new
rules are categorized into nondiscrimination standards, disclosure and
information standards, and separation standards. In addition, the new
rules set forth requirements and restrictions on the utility's offering of
certain products and services.
SCE believes that the implementation of these new affiliate transaction
rules will not materially affect its results of operation or financial
position.
page 8
Rate Matters
CPUC Retail Ratemaking
The CPUC regulates the charges for services provided by SCE to its retail
customers. As discussed in the section on Competitive Environment, the
nature in which the CPUC regulates SCE is changing. The CPUC has issued
final decisions regarding direct access, transition cost recovery and rate
unbundling in the restructuring of the electric industry. These decisions
impact cost recovery and rate regulation beginning in January 1998, and
implement new ratemaking mechanisms replacing the Electric Revenue
Adjustment Mechanism, Energy Cost Adjustment Clause (ECAC) and base rates
mechanism (collectively, the "pre-restructuring ratemaking mechanisms")
described in prior annual and quarterly reports filed with the SEC.
Total rates for all customers are frozen at June 10, 1996, levels,
although residential and small commercial customers received a 10%
reduction from their June 10, 1996, rate levels beginning January 1, 1998.
These rate levels will remain in effect for the remainder of the
transition period. Under these frozen rates, individual rate components
(distribution, transmission, nuclear decommissioning and public purpose
programs) are determined according to CPUC or FERC authorized mechanisms,
with the generation rate determined residually by subtracting these other
components from the total rate.
Distribution Rates
Distribution cost recovery is through a distribution PBR mechanism
currently authorized 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 service
reliability and safety; and a net revenue-sharing mechanism that
determines how customers and shareholders will share gains and losses from
distribution operations. (See "California Electric Utility Restructuring-
- -PBR" section for additional discussion.)
Transmission Rates
Upon the commencement of the ISO and PX, transmission cost recovery will
be under FERC authority. Until commencement of the ISO and PX,
transmission cost recovery will be combined with distribution cost
recovery through a T&D PBR. (See "California Electric Utility
Restructuring--Rate-setting" and "FERC Restructuring Decision" above for
additional discussion.)
Nuclear Decommissioning and Public Purpose Program Rates
Recovery of SCE's nuclear decommissioning costs and legislatively mandated
public purpose program funding is through rates set to recover 100% of
these costs. Public purpose programs include cost effective energy
efficiency, research, renewable technology development, and low income
programs.
Generation Rates
Effective with the commencement of ISO and PX operations, generation costs
will be subject to recovery through the market price and the CTC.
Revenue available to recover the uneconomic generation costs subject to
recovery through the CTC will be determined residually by subtracting the
other rate components from total rates. This residual revenue will be
first allocated to recovery of FERC-authorized ISO charges for
transmission support and for purchases from the PX, and then to recovery
of transition costs. Transition costs associated with QF and interutility
contracts and the acceleration of sunk cost recovery will be subject to
annual reasonableness review by the CPUC.
page 9
Transition cost recovery for most utility generation assets will terminate
by March 31, 2002, or when these costs are fully collected. (See "CTC"
above for additional discussion.)
1991 Annual ECAC Application
In 1991, SCE issued its QF reasonableness testimony for the period April
1, 1990, through March 31, 1991. The Office of Ratepayer Advocates' (ORA)
report on QF reasonableness issues was issued in 1993. In its report, the
ORA recommended that the CPUC disallow $1.5 million in power purchase
expenses incurred as a result of purchases during the record period under
a QF contract with Mojave Cogeneration Company, a nonutility generator.
The ORA further alleged that ratepayers may be harmed in the amount of
$31.6 million (1993 net present value) over the contract's 20-year life.
SCE filed its rebuttal testimony on the contract in 1994. SCE and the ORA
subsequently reached a settlement where SCE agreed to a one-time reduction
to its ECAC balancing account of $14 million plus interest from January 1,
1996, to resolve the unreasonable action allegations by the ORA for 1991
and all subsequent record periods through the contract's 20-year life. On
October 30, 1996, the CPUC issued a decision which would approve the
settlement, subject to SCE and the ORA accepting certain conditions
concerning the manner in which the $14 million payment would be reflected
in rates. After reviewing the decision, SCE declined to accept the
condition proposed by the CPUC. Hearings on the ORA's disallowance
recommendations regarding the Mojave Cogeneration contract were held in
June 1997. During the hearings, the ORA presented testimony to update its
assessment of ratepayer harm, which it now assesses to be $45 million
(1997 net present value) over the contract's life. On November 26, 1997,
the assigned Administrative Law Judge (ALJ) issued a proposed decision
(which is not binding on the CPUC) which would adopt the ORA's imprudence
allegations. On January 13, 1998, the assigned ALJ issued an order
setting aside the proposed decision in order to accommodate SCE's request
for an oral argument to a quorum of the Commissioners. Oral arguments
were heard on February 4, 1998, at which time SCE requested an alternate
proposed decision be issued. On March 11, 1998, the Assigned Commissioner
issued an alternate proposed decision which recommends a disallowance of
$46,000 for the record period and expected disallowances of $16.3 million
over the life of the Mojave Cogeneration contract. The matter is
currently scheduled for consideration at the CPUC's March 26, 1998
meeting.
1992 Annual ECAC Application
SCE filed its QF reasonableness testimony in September 1992. In January
1996, the ORA released its report on QF reasonableness for the 1992 record
period as well as for that portion of the 1991 record period concerning
capacity truncation and energy deliveries at forecast rates. On February
17, 1998, the ORA submitted surrebuttal testimony. Hearings on the matter
began on March 9 and concluded March 17, 1998 subject to SCE's right to
recall certain witnesses in rebuttal to ORA's witnesses. If SCE elects to
recall such witnesses, the hearing will resume on April 1, 1998. An
adverse decision for SCE on either or both issues could, under certain
circumstances, have a material impact on SCE's financial position if the
decision were extended to subsequent record periods. The ORA's
surrebuttal testimony recommends a disallowance of $17.5 million
associated with firm capacity truncation, $17.4 million for forecasted
energy payments at forecast rates, and $43,000 for as-available capacity
payments at forecast rates. These amounts encompass the 1991 and 1992
periods, and exclude certain projects which have been deferred in this
proceeding.
1993 Annual ECAC Application
SCE filed its QF reasonableness testimony on September 1, 1993. On March
2, 1998, the ORA filed a combined report covering the QF reasonableness
phases of SCE's ECAC applications for 1993-1995. In the report, the ORA
page 10
recommends a disallowance of $5.6 million related to SCE's administration
of a contract with the Arbutus wind project. No other reasonableness
issues were identified in the report. SCE's rebuttal testimony is due on
June 4, 1998, and hearings are scheduled for early August 1998.
1994 Annual ECAC Application
SCE filed its QF reasonableness testimony and non-QF Reasonableness of
Operations Report on May 27, 1994. The QF testimony reflects the
reasonableness of execution of two new QF contracts and the reasonableness
of SCE's administration of 393 QF contracts. The non-QF report addresses
power purchases and exchanges, and the operation of hydroelectric, coal,
gas and nuclear resources for the period April 1, 1993, through March 31,
1994. The 1993, 1994 and 1995 QF issues will be joined for hearing.
The non-QF issues were bifurcated with the gas procurement issues being
separated from the other non-QF issues. On August 2, 1996, the CPUC
issued a decision finding that SCE's non-QF, non-gas procurement
activities were reasonable.
The ORA recommended a $13.3 million disallowance for costs incurred from
November 1993 through March 1994 associated with SCE's Canadian gas supply
and transportation contracts.
On October 17, 1996, the ALJ granted the ORA's motion to consolidate the
1994 and 1995 record periods for the limited purpose of addressing the gas
reasonableness issues. Hearings on these issues began January 21, 1997,
and were concluded on February 20, 1997.
However, briefing was suspended by the ALJ at the request of the parties
to facilitate settlement discussions. On July 11, 1997, the ORA and SCE
executed a Settlement Agreement.
The basic elements of the Settlement include: (1) a $39 million
disallowance for Canadian gas costs incurred through December 31, 1996;
(2) a disallowance of $257,000 per month, per contract, for each of SCE's
four supply contracts for Canadian gas costs beginning after January 1,
1997, and continuing until each of the commodity contracts are terminated
(one supply agreement was terminated on May 1, 1997, and the remaining
three supply agreements were terminated on July 1, 1997); (3) a cost
sharing mechanism in lieu of reasonableness review, whereby shareholders
would absorb at least 20% of the termination or restructuring costs
associated with the Canadian supply and transportation contracts and at
least 5% of the termination or restructuring costs associated with the El
Paso transportation contract which the CPUC has already found reasonable
(a portion of these termination or restructuring costs associated with the
cost sharing mechanisms would be flowed through to ratepayers through the
Energy Deferred Refund Account); and (4) agreement that all other costs
incurred under these contracts, including the termination, buy-down and/or
buy-out costs are reasonable and should be determined to be reasonable by
the CPUC.
On December 3, 1997, the CPUC issued a decision approving the Settlement
between SCE and the ORA. On March 12, 1998, the CPUC issued a decision
ordering SCE to refund $65 million. The Settlement has been fully
reflected in SCE's financial statements.
A discussion of the ORA's report in the QF reasonableness phase of this
ECAC is set forth above in the discussion of the 1993 ECAC Application.
page 11
1995 Annual ECAC Application
SCE filed its reasonableness of operations testimony on May 26, 1996. The
QF reasonableness testimony reflects the reasonableness of settlement
agreements with six QFs, the reasonableness of the Biogen Power I
termination agreement, and the reasonableness of the SCE's administration
of 414 QF contracts for the period April 1, 1994, through March 31, 1995.
The 1993, 1994 and 1995 QF issues will be joined for hearing.
The non-QF report addresses power purchases and exchanges, and the
operation of hydroelectric, coal, gas and nuclear resources for the period
April 1, 1994, through March 31, 1995. In May 1996, the ORA issued its
reasonableness report on several non-QF reasonableness issues. The report
recommended a $6.6 million disallowance for replacement fuel expenses
associated with 64 outage days due to the Palo Verde Unit 2 steam
generator tube rupture in 1993, and that the issue of $5.2 million of
nuclear fuel expenses associated with the NUEXCO Trading Corp. bankruptcy
be held open for review. In written response to data requests, the ORA
indicated it has withdrawn its concerns over the nuclear fuel expenses.
Additionally, SCE and the ORA executed a stipulation on December 18, 1997,
resolving the Palo Verde issue by agreeing to a disallowance of $318,540
plus interest which is the replacement fuel expense associated with six
outage days. A motion requesting approval of the SCE/ORA stipulation was
filed with the CPUC in December 1997. The CPUC issued its decision
approving the stipulation on February 19, 1998.
On October 4, 1996, the ORA issued its report on SCE's Canadian gas
procurement contracts discussed above. The report recommended a $37.6
million disallowance for the period April 1994 through March 1995. On
October 17, 1996, the ALJ consolidated the gas reasonableness issues into
the 1994 ECAC proceeding. The reasonableness of the Canadian gas
procurement and transportation costs for the record period was resolved by
the ORA/SCE settlement discussed above in the 1994 Annual ECAC
Application. The Settlement has been fully reflected in SCE's financial
statements.
A discussion of the ORA's report in the QF reasonableness phase of this
ECAC is set forth above in the discussion of the 1993 ECAC Application.
1996 Annual ECAC Application
SCE filed its testimony on May 3, 1996, requesting a finding that its fuel
and purchased power costs, including purchases from QFs recorded during
the period April 1, 1995, through March 31, 1996, were reasonable. The QF
reasonableness testimony supports the reasonableness of SCE's
administration of 396 QF contracts, including the restructuring or buyout
of certain contracts. The non-QF testimony supports the reasonableness of
other power purchases and exchanges, and the operation of hydroelectric,
coal, gas and nuclear resources.
SCE requested and obtained an expedited finding of reasonableness by the
CPUC for an agreement it signed with Portland General Electric (PGE),
terminating a long-term power purchase contract. On December 9, 1996, the
CPUC issued a decision finding the termination of the agreement
reasonable. Additionally, as the final part in the approval process, PGE
and SCE filed notices of cancellation of the agreement with the FERC to be
effective December 31, 1996. The FERC has accepted the notices of
cancellation.
Review by the ORA of the non-QF operations has been consolidated with its
review in the 1997 Annual ECAC Application. The ORA's report was issued
on August 18, 1997. (See "1997 Annual ECAC Application.") No date has
been scheduled for the ORA's report on QF reasonableness.
page 12
1997 Annual ECAC Application
On May 30, 1997, SCE filed its annual reasonableness report requesting
that the CPUC find reasonable its fuel and purchased-power costs,
including purchases from QFs recorded during the period of April 1, 1996,
through March 31, 1997. The QF testimony supports the reasonableness of
the SCE's administration of its QF contracts, including two QF
settlements. The non-QF testimony supports the reasonableness of other
power purchases and exchanges, fuel costs and the operation of
hydroelectric, coal, gas and nuclear resources.
The ORA's review of the non-QF operations and costs has been consolidated
with its review of the non-QF operations and costs in the 1996 ECAC
Application. The ORA filed its report on August 18, 1997. In its report,
the ORA recommended, among other things, (1) a disallowance of $360,000
associated with an outage at the coal-fired Four Corners Generating
Station and (2) a $200,000 adjustment to the costs recorded in SCE's
Catastrophic Events Memorandum Account. Hearings took place in January
1998. A CPUC decision is expected by July 1998. No date has been
scheduled for the ORA's report on QF reasonableness.
Palo Verde
In January 1997, the CPUC authorized a further acceleration of the
recovery of its remaining investment of $1.2 billion in Palo Verde Units
1, 2 and 3. The accelerated recovery will continue through December 2001,
earning a 7.35% fixed rate of return. The accelerated plant recovery, as
well as future operating costs, including nuclear fuel and nuclear fuel
financing costs, and incremental capital expenditures, are subject to
balancing account treatment through 2001. Beginning January 1, 1998, the
balancing account became part of the CTC mechanism. The existing nuclear
unit incentive procedure will continue only for purposes of calculating a
reward for performance of any unit above an 80% capacity factor for a fuel
cycle. Beginning in 2002, SCE will be required to share equally with
ratepayers the net benefits received from operation of Palo Verde.
Proposed New Accounting Standard
During 1996, the Financial Accounting Standards Board issued an exposure
draft, that would establish accounting standards for the recognition and
measurement of closure and removal obligations. The exposure draft would
require the estimated present value of an obligation to be recorded as a
liability, along with a corresponding increase in the plant or regulatory
asset accounts when the obligation is incurred. If the exposure draft is
approved in its present form, it would affect SCE's accounting practices
for decommissioning of its nuclear power plants, obligations for coal mine
reclamation costs, and any other activities related to the closure or
removal of long-lived assets. SCE does not expect that the accounting
changes proposed in the exposure draft, even after deregulation, would
have an adverse effect on its results of operations due to its current and
expected future ability to recover these costs through customer rates.
Fuel Supply and Purchased Power Costs
Fuel and purchased-power costs were approximately $3.7 billion in 1997, an
11.9% increase over 1996.
SCE's sources of energy during 1997 were: purchased power 49%; natural gas
16%; nuclear 17%; coal 12%; and hydro 6%.
Average fuel costs, expressed in cents per kilowatt-hour, for the year
ended December 31, 1997, were: oil, 8.53 cents; natural gas, 3.39 cents;
nuclear, 0.48 cents; and coal, 1.32 cents.
page 13
Natural Gas Supply
As a result of the sale of 11 of its 12 gas-fired generating stations, SCE
has terminated four long-term natural gas supply and three long-term gas
transportation contracts which had been used to import gas from Canada.
In addition, SCE has exercised the option under its 15-year gas
transportation commitment with El Paso Natural Gas Company to reduce its
capacity obligation from 200 million to 130 million cubic feet per day.
Nuclear Fuel Supply
SCE has contractual arrangements covering 100% of the projected nuclear
fuel requirements for San Onofre through the years indicated below:
Units
2 & 3
-----
Uranium concentrates(1). . . . . . . . . . . . . . . 2003
Conversion . . . . . . . . . . . . . . . . . . . . . 2003
Enrichment . . . . . . . . . . . . . . . . . . . . . 2003
Fabrication. . . . . . . . . . . . . . . . . . . . . 2005
Spent fuel storage(2). . . . . . . . . . . . . . . . 2006/2006
_______________
(1) Assumes the San Onofre participants meet their supply obligations
in a timely manner.
(2) Assumes full utilization of expanded on-site storage capacity and
normal operation of the units, including interpool transfers and
maintaining full-core reserve. The Nuclear Waste Policy Act of
1982 requires that the DOE provide for the disposal of utility
spent nuclear fuel beginning January 31, 1998. The DOE defaulted
on its obligation to begin acceptance of spent nuclear fuel from
San Onofre. Dry cask storage either on-site or at another location
will be required to permit continued operations beyond the date
indicated above.
Participants at Palo Verde have contractual agreements for uranium
concentrates to meet projected requirements through 2000. Independent of
arrangements made by other participants, SCE will furnish its share of
uranium concentrates requirement through at least 1998 from existing
contracts. Contracts cover requirements to provide conversion through
2000, enrichment through 2002, and fabrication through 2016.
Palo Verde on-site spent fuel storage capacity will accommodate needs
through 2002 for Units 1 and 2, and through 2003 for Unit 3.
Environmental Matters
Legislative and regulatory activities in the areas of air and water
pollution, waste management, hazardous chemical use, noise abatement, land
use, aesthetics and nuclear control continue to result in the imposition
of numerous restrictions on SCE's operation of existing facilities, on the
timing, cost, location, design, construction and operation by SCE of new
facilities, and on the cost of mitigating the effect of past operations on
the environment. These activities substantially affect future planning
and will continue to require modifications of SCE's existing facilities
and operating procedures. SCE is unable to predict the extent to which
additional regulations may affect its operations and capital expenditure
requirements.
The Clean Air Act (CAA) provides the statutory framework to implement a
program for achieving national ambient air quality standards in areas
exceeding such standards and provides for maintenance of air quality in
areas already meeting such standards.
page 14
The CAA as amended in 1990, and as implemented within the South Coast Air
Quality Management District (SCAQMD) and other districts within California
required SCE to reduce emissions of oxides of nitrogen from its generating
stations. SCE is selling all of its oil- and gas-fueled generating
stations within the SCAQMD, the Mohave Desert Air Quality Management
District, Ventura County Air Pollution Control District, and the Santa
Barbara County Air Pollution Control District, with an expected sale
closure date for 11 of the 12 generating stations being sold by March 31,
1998 (the twelfth plant is expected to be sold in 1998). It is expected
that after the generating stations' sale closure dates, under operations
and maintenance contracts with the individual owners, SCE will operate
those facilities that are kept in operation as active generating stations.
SCE operations of the stations it gains contracts for, will be under the
direction and expense of the new owners. SCE will be responsible for
maintaining the environmental permits of the plants. However, the new
owners, not SCE, will be responsible for the purchase and installation of
emissions control equipment, and sufficient trading credits required for
the plants under the Regional Clean Air Incentives Market within the
SCAQMD.
The CAA does not require any significant additional emissions control
expenditures that are identifiable at this time. The Environmental
Protection Agency (EPA) plans to issue its final rulemaking regarding
regional haze regulations in late 1998. Also, the EPA and SCE will
conclude a cooperative tracer study of sulfur dioxide emissions from the
Mohave Generating Station in mid- to late-1998. The study is evaluating
potential impact from Mohave emissions on haze within the Grand Canyon
National Park. The extent to which these two activities may require
sulfur dioxide or particulate emissions reductions at the Mohave plant is
not known. The acid rain provisions of the amended CAA also put an annual
limit on sulfur dioxide emissions allowed from power plants. SCE has
received more sulfur dioxide allowances than it requires for its projected
operations. Until more definite information on tracer study results are
available, SCE expects to meet all the present regulations through
improved operations at the plant.
On February 19, 1998, the Sierra Club and the Grand Canyon Trust filed
suit against SCE and the other co-owners of Mohave in the U.S. District
Court of Nevada alleging violations over the last five years of the CAA,
the Nevada State Implementation Plan, and applicable air quality permits
relating to opacity and sulfur dioxide emission limits. SCE, on behalf of
the co-owners, will provide a timely response in defense of the suit.
The CAA also requires the EPA to carry out a three-year study of risk to
public health from the emissions of toxic air contaminants from electric
utility steam generating plants, and to regulate such emissions only if
required. The study has not been finalized by the EPA to date.
Regulations under the Clean Water Act require permits for the discharge of
certain pollutants into waters of the U.S. Under this act, the EPA issues
effluent limitation guidelines, pretreatment standards and new source
performance standards for the control of certain pollutants. Individual
states may impose even more stringent limitations. In order to comply
with guidelines and standards applicable to steam electric power plants,
SCE incurs additional expenses and capital expenditures. SCE presently
has discharge permits for all applicable facilities.
The Safe Drinking Water and Toxic Enforcement Act prohibits the exposure
to individuals of chemicals known to the State of California to cause
cancer or reproductive harm and the discharge of such listed chemicals
into potential sources of drinking water. Additional chemicals are
continuously being put on the state's list, requiring constant monitoring.
page 15
The Resource Conservation and Recovery Act (RCRA) provides the statutory
authority for the EPA to implement a regulatory program for the safe
treatment, recycling, storage and disposal of solid and hazardous wastes.
There is an unresolved issue regarding the degree to which coal wastes
should be regulated under the RCRA. Increased regulation may result in an
increase in expenses related to the operation of Mohave.
The Toxic Substances Control Act and accompanying regulations govern the
manufacturing, processing, distribution in commerce, use and disposal of
polychlorinated biphenyls, a toxic substance used in certain electrical
equipment (PCB waste). Current costs for disposal of PCB waste are
immaterial.
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 discounted amounts). While
SCE has numerous insurance policies that it believes may provide coverage
for some of these liabilities, it does not recognize recoveries in its
financial statements until they are realized.
In connection with the issuance of the San Onofre Units 2 and 3 operating
permits, SCE reached an agreement with the California Coastal Commission
in 1991 to restore certain marine mitigation sites. The restorations
include two sites: designated wetlands and the construction of an
artificial reef for kelp off the California coast. After SCE requested
certain modifications to the agreement, the California Coastal Commission
issued a final ruling in April 1997 to reduce the scope of remediations.
SCE elected to pay for the costs of marine mitigation in lieu of placing
the funds into a trust. Recovery of these costs is occurring through the
San Onofre incentive pricing plan.
SCE's recorded estimated minimum liability to remediate its 50 identified
sites is $178 million, which includes $75 million for the two sites
discussed above. The ultimate costs to clean up SCE's identified sites
may vary from its recorded liability due to numerous uncertainties
inherent in the estimation process, such as the extent and nature of
contamination; the scarcity of reliable data for identified sites; the
varying costs of alternative cleanup methods; developments resulting from
investigatory studies; the possibility of identifying additional sites;
and the time periods over which site remediation is expected to occur.
SCE believes that, due to these uncertainties, it is reasonably possible
that cleanup costs could exceed its recorded liability by up to $246
million. The upper limit of this range of costs was estimated using
assumptions least favorable to SCE among a range of reasonably possible
outcomes.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its
sites, representing $91 million of its recorded liability, through an
incentive mechanism (SCE may request to include additional sites). Under
this mechanism, SCE will recover 90% of cleanup costs through customer
rates; shareholders fund the remaining 10%, with the opportunity to
recover these costs from insurance carriers and other third parties. SCE
has successfully settled insurance claims with all responsible carriers.
Costs incurred at SCE's remaining sites are expected to be recovered
through customer rates. SCE has recorded a regulatory asset of $153
page 16
million for its estimated minimum environmental-cleanup costs expected to
be recovered through customer rates. This amount includes $60 million of
marine mitigation costs remaining to be recovered through the San Onofre
incentive pricing plan.
SCE's identified sites include several sites for which there is a lack of
currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCE may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can now be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $10 million. Recorded costs for 1997 were $10
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.
SCE's projected capital expenditures to protect the environment are $820
million for the 1998-2002 period, mainly for aesthetics treatment,
including undergrounding certain transmission and distribution lines.
Year 2000 Issue
Many of SCE's existing computer systems identify a year by using only two
digits instead of four. If not corrected, these programs could fail or
create erroneous results when encountering dates in 2000 or later. This
situation has been referred to generally as the Year 2000 Issue.
SCE has developed plans and is addressing the programming changes that it
has determined are necessary in order for its computer systems to function
properly beginning in 2000. Remediation of SCE's key financial systems
for the Year 2000 Issue was completed in 1997. SCE's informational and
operational systems have been assessed, and detailed plans have been
developed to address modifications required to be completed, tested and
operational by December 31, 1999. Preliminary estimates of the costs to
complete these modifications, including the cost of new hardware and
software application modifications, range from $55 million to $80 million,
about half of which are expected to be capital costs. Current rate levels
for providing electric service should be sufficient to provide funding for
these modifications. Remediation of existing critical systems is expected
to be 75% complete by the end of 1998. SCE expects its Year 2000 date
conversion project to be completed on a timely basis, with no material
adverse impact to its results of operations or financial position.
SCE's Year 2000 date conversion project includes an assessment of critical
interfaces with the computer systems of others and it does not expect a
material adverse effect on its operating and business functions from the
Year 2000 Issue.
Item 2. Properties
Existing Generating Facilities
SCE owns and operates 12 oil- and gas-fueled electric generating plants,
one diesel-fueled generating plant, 38 hydroelectric plants and an
undivided 75.05% interest (1,614 MW net) in Units 2 and 3 at San Onofre.
page 17
SCE has signed agreements to sell 11 of its 12 oil- and gas-fueled
generating plants, and expects those sales to close by March 31, 1998.
SCE is also seeking to sell the twelfth plant. Any of the sold plants
which remain in operation will continue to be operated by SCE for at least
two years following the sale.
These plants are located in Central and Southern California. Palo Verde
(15.8% SCE-owned, 579 MW net) is located near Phoenix, Arizona. SCE owns
a 48% undivided interest (754 MW) in Units 4 and 5 at Four Corners, a
coal-fueled steam electric generating plant in New Mexico. Palo Verde
and Four Corners are operated by other utilities. SCE operates and owns
a 56% undivided interest (885 MW) in Mohave, which consists of two
coal-fueled steam electric generating units in Clark County, Nevada. At
year-end 1997, the existing SCE-owned generating capacity (summer
effective rating) was comprised of approximately 65% gas, 15% nuclear, 11%
coal, 8% hydroelectric and 1% oil.
San Onofre, Four Corners, certain of SCE's substations and portions of its
transmission, distribution and communication systems are located on lands
of the United States or others under (with minor exceptions) licenses,
permits, easements or leases or on public streets or highways pursuant to
franchises. Certain of such documents obligate SCE, under specified
circumstances and at its expense, to relocate transmission, distribution
and communication facilities located on lands owned or controlled by
federal, state or local governments.
With certain exceptions, major and certain minor hydroelectric projects
with related reservoirs, currently having an effective operating capacity
of 1,156 MW and located in whole or in part on lands of the U.S., are
owned and operated by SCE under governmental licenses which expire at
various times between 1997 and 2026. Such licenses impose numerous
restrictions and obligations on SCE, including the right of the United
States to acquire the project upon payment of specified compensation.
When existing licenses expire, FERC has the authority to issue new
licenses to third parties, but only if their license application is
superior to SCE's and then only upon payment of specified compensation to
SCE. Any new licenses issued to SCE are expected to be issued under terms
and conditions less favorable than those of the expired licenses. SCE's
applications for the relicensing of certain hydroelectric projects
referred to above with an aggregate effective operating capacity of 59.1
MW are pending. Annual licenses issued for all SCE projects, whose
licenses have expired and are undergoing relicensing, will be renewed
until the new licenses are issued.
In 1997, SCE's peak demand was 19,118 MW, set on September 4, 1997. Total
area system operating capacity of 21,511 MW was available to SCE at the
time of the 1997 peak.
Substantially all of SCE's properties are subject to the lien of a trust
indenture securing First and Refunding Mortgage Bonds (Trust Indenture),
of which approximately $2.8 billion principal amount was outstanding at
December 31, 1997. Such lien and SCE's title to its properties are
subject to the terms of franchises, licenses, easements, leases, permits,
contracts and other instruments under which properties are held or
operated, certain statutes and governmental regulations, liens for taxes
and assessments, and liens of the trustees under the Trust Indenture. In
addition, such lien and SCE's title to its properties are subject to
certain other liens, prior rights and other encumbrances, none of which,
with minor or unsubstantial exceptions, affects SCE's right to use such
properties in its business, unless the matters with respect to SCE's
interest in Four Corners and the related easement and lease referred to
below may be so considered.
page 18
SCE's rights in the Four Corners Project, which is located on land of The
Navajo Nation of Indians under an easement from the United States and a
lease from The Navajo Nation, may be subject to possible defects. These
defects include possible conflicting grants or encumbrances not
ascertainable because of the absence of, or inadequacies in, the
applicable recording law and the record systems of the Bureau of Indian
Affairs and The Navajo Nation, the possible inability of SCE to resort to
legal process to enforce its rights against The Navajo Nation without
Congressional consent, possible impairment or termination under certain
circumstances of the easement and lease by The Navajo Nation, Congress or
the Secretary of the Interior and the possible invalidity of the Trust
Indenture lien against SCE's interest in the easement, lease and
improvements on the Four Corners Project.
Construction Program and Capital Expenditures
Cash required by SCE for its capital expenditures totaled $685 million in
1997, $616 million in 1996 and $773 million in 1995. Construction
expenditures for the 1998-2002 period are forecasted at $3.9 billion.
In addition to cash required for construction expenditures for the next
five years as discussed above, $2.8 billion is needed to meet requirements
for long-term debt maturities and sinking fund redemption requirements.
SCE's estimates of cash available for operations for the five years
through 2002 assume, among other things, the receipt of adequate and
timely rate relief and the realization of its assumptions regarding cost
increases, including the cost of capital. SCE's estimates and underlying
assumptions are subject to continuous review and periodic revision.
The timing, type and amount of all additional long-term financing are also
influenced by market conditions, rate relief and other factors, including
limitations imposed by SCE's Articles of Incorporation and Trust
Indenture.
Nuclear Power Matters
SCE's nuclear facilities have been reliable sources of inexpensive, non-
polluting power for SCE's customers for more than a decade. Throughout
the operating life of these facilities, SCE's customers have supported the
revenue requirements of SCE's capital investment in these facilities and
for their incremental costs through traditional cost-of-service
ratemaking.
On January 10, 1996, the CPUC's decision for SCE's Test Year 1995 General
Rate Case (GRC) rejected a settlement agreement proposed by SCE, SDG&E and
the ORA in its original form, but proposed modifications to certain terms
related and granted SCE the opportunity to accept the portion of the
settlement agreement related to San Onofre Units 2 and 3 with the proposed
modifications. The CPUC gave SCE 25 days to prepare a detailed proposal
consistent with the policy adopted in SCE's 1995 GRC decision. On
February 5, 1996, SCE filed a revised San Onofre Unit 2 and 3 proposal in
which it accepted the modifications to certain settlement agreement terms
as proposed by the CPUC. The CPUC adopted the revised proposal on
April 10, 1996. Under this proposal, SCE would have recovered its
remaining investment in San Onofre Units 2 and 3 at a reduced rate of
return of 7.35%, but on an accelerated basis during the eight-year period
from the effective date in 1996 through December 31, 2003. Under Assembly
Bill 1890, however, the recovery of the San Onofre remaining investment
must be completed by December 31, 2001. In addition, the traditional
cost-of-service ratemaking for San Onofre Units 2 and 3 was superseded by
an incentive pricing plan, in which SCE's customers would pay a preset
price for each kilowatt-hour of energy generated at San Onofre during the
eight-year period. Assembly Bill 1890 allowed continuation of the
incentive pricing plan through December 31, 2003, the end of the
page 19
eight-year period. SCE was compensated for the incremental costs required
for the continued operation of San Onofre Units 2 and 3 only with revenue
earned through the incentive pricing plan. However, SCE also retained the
ability to request recovery of the cost of fuel consumed for generation of
replacement energy for periods in which San Onofre is not generating power
through future ECAC filings. SCE would also continue to collect funds for
decommissioning expenses through traditional ratemaking treatment.
On July 16, 1997, the CPUC approved SCE's request to transfer the recorded
net investment in San Onofre Units 2 and 3 step-up transformers to San
Onofre Units 2 and 3 sunk costs for recovery by December 31, 2001, at a
reduced rate of return of 7.35%.
On August 21, 1997, the CPUC approved SDG&E and SCE's Joint Petition to
Modify, requesting continued recovery of certain corporate administrative
and general costs allocable to San Onofre Units 2 and 3, at rates of 0.28 cent
and 0.21 cent per kWh, respectively, for the period January 1, 1998, through
December 31, 2003.
In the restructuring decision, the CPUC ordered SCE to file an application
by March 29, 1996, requesting a new rate mechanism for its share of the
Palo Verde units to be effective January 1, 1997. On February 29, 1996,
SCE filed its Palo Verde Proposal Application requesting adoption of a new
rate mechanism for Palo Verde consistent with the San Onofre Units 2 and
3 rate mechanism. On November 15, 1996, SCE, ORA and TURN, entered into
a settlement agreement regarding SCE's Palo Verde Proposal Application.
The settlement retained SCE's proposal to recover its remaining investment
in the Palo Verde units by December 31, 2001, at a reduced rate of return
of 7.35% consistent with AB 1890, but modified SCE's proposed Palo Verde
rate mechanism. Instead of receiving a preset price for each kilowatt-
hour of energy generated during that period, as proposed, the settling
parties agreed that SCE would recover its share of Palo Verde incremental
operating costs, except if those costs exceed 95% of the levels forecast
by SCE in its application by more than 30% in any given year. In that
case, SCE must demonstrate that the aggregate amount of the costs
exceeding the forecast in that year are reasonable. In addition, if the
annual Palo Verde site Gross Capacity Factor (GCF) is less than 55% in a
calendar year, SCE will bear the burden of proof to demonstrate that the
site's operations causing the GCF to fall below 55% were reasonable in
that year. If operations are determined to be unreasonable by the CPUC,
SCE's replacement power purchases associated with that period of Palo
Verde operations below 55% GCF may be disallowed. The CPUC approved the
settlement agreement on December 20, 1996.
Beginning in 2002, power from Palo Verde Units 1, 2 and 3 will be sold at
the then-current market prices with 50% of the benefits of such operation
given to customers. Likewise, beginning in 2004, power from San Onofre
Units 2 and 3 will be sold at the then-current market prices with 50% of
the benefits of such operation given to customers.
San Onofre Nuclear Generating Station
In 1992, the CPUC approved a settlement agreement between SCE and the ORA
to discontinue operation of Unit 1 at the end of its then-current fuel
cycle. In November 1992, SCE discontinued operation of Unit 1. As part
of the agreement, SCE recovered its remaining investment over a four-year
period ending August 1996.
The Units 2 and 3 steam generators have performed relatively well through
the first 15 years of operation, with low rates of ongoing tube
degradation. However, during the Unit 2 scheduled refueling and
inspection outage, which was completed in Spring 1997, an increased rate
of degradation was identified, which resulted in the removal of more tubes
from service than had been expected. The steam generator design allows
for the removal of up to 10% of the tubes before the rating capacity
page 20
of the unit must be reduced. As a result of the increased degradation, a
mid-cycle outage was conducted in February 1998 for Unit 2. The results
of that outage are still being evaluated.
During Unit 3's refueling outage, which was completed in July 1997,
inspections of structural supports for steam generator tubes identified
several areas where the thickness of the supports had been reduced,
apparently by erosion during normal plant operation. As a result, a mid-
cycle outage is planned for early 1998. However, during Unit 2's Spring
1997 outage and the February 1998 mid-cycle outage, similar tube supports
showed no signs of such erosion.
Palo Verde Nuclear Generating Station
On March 14, 1993, Arizona Public Service Company (APS), the operating
agent for Palo Verde, manually shut down Unit 2 as a result of a steam
generator tube leak. Unit 2 remained shut down and began its scheduled
refueling outage on March 19, 1993.
APS performed an extensive inspection of the Unit 2 steam generators prior
to the unit's return to service on September 1, 1993. APS determined that
intergranular attack/intergranular stress corrosion cracking was a major
contributor to the tube leak. Subsequent inspections have revealed
similar, though less severe, corrosion in the Unit 1 and Unit 3 steam
generators. APS has taken, and indicates it will continue to take,
remedial actions that it believes have slowed the rate of steam generator
tube degradation in all three units.
Based on latest available data, APS estimates that the Unit 1 and Unit 3
steam generators should operate for the 40 year licensed operating life of
those units, although APS continues to monitor the situation. APS has
disclosed that it believes it will be economically desirable to replace
the Unit 2 steam generators, which have been most affected by tube
cracking, in five to ten years. APS has indicated to the participants
that it believes that replacement of the Unit 2 steam generators would
cost between $100 million and $150 million. SCE estimates that this cost
could be higher, such that its share of this cost would be between $16
million and $30 million plus replacement power costs. Unanimous approval
of the Palo Verde participants is required for capital improvements,
including steam generator replacement. In December 1997, the Palo Verde
participants unanimously agreed to purchase two spare steam generators at
a cost of approximately $82 million; however, SCE has not yet decided
whether it supports replacement of the Unit 2 steam generators.
Nuclear Facility Decommissioning
With the exception of San Onofre Unit 1, SCE plans to decommission its
nuclear generating facilities at the end of each facility's operating
license by a prompt removal method authorized by the NRC. Currently, San
Onofre Unit 1, which shut down in 1992, is expected to be stored until
decommissioning begins at the other San Onofre units. Decommissioning is
estimated to cost $2.1 billion in current-year dollars based on site-
specific studies performed in 1993 for San Onofre and 1992 for Palo Verde.
This estimate considers the total cost of decommissioning and dismantling
the plant, including labor, material, burial and other costs. The site
specific studies are updated approximately every three years. Changes in
the estimated costs, timing of decommissioning, or the assumptions
underlying these estimates could cause material revisions to the estimated
total cost to decommission in the near term. Decommissioning is scheduled
to begin in 2013 at San Onofre and 2024 at Palo Verde.
Decommissioning costs, which are accrued and recovered through non-
bypassable customer rates over the terms of each nuclear facility's
operating license, are recorded as a component of depreciation expense.
Decommissioning expense was $154 million in 1997, $148 million in 1996 and
$151 million in 1995. The accumulated provision for decommissioning was
page 21
$1.1 billion at December 31, 1997, and $949 million at December 31,
1996. The estimated costs to decommission San Onofre Unit 1 ($280 million
in 1993 dollars) 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.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $8.9
billion. SCE and other owners of San Onofre and Palo Verde have purchased
the maximum private primary insurance available ($200 million). The
balance is covered by the industry's retrospective rating plan that uses
deferred premium charges to every reactor licensee if a nuclear incident
at any licensed reactor in the U.S. results in claims and/or costs which
exceed the primary insurance at that plant site. Federal regulations
require this secondary level of financial protection. The NRC exempted
San Onofre Unit 1 from this secondary level, effective June 1994. The
maximum deferred premium for each nuclear incident is $79 million per
reactor, but not more than $10 million per reactor may be charged in any
one year for each incident. Based on its ownership interests, SCE could
be required to pay a maximum of $158 million per nuclear incident.
However, it would have to pay no more than $20 million per incident in any
one year. Such premium amounts include a 5% surcharge if additional funds
are needed to satisfy public liability claims and are subject to periodic
adjustment for inflation. If the public liability limit above is
insufficient, federal regulations may impose further revenue-raising
measures to pay claims, including a possible additional assessment on all
licensed reactor operators.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination
liability and property damage coverage exceeding the primary $500 million
has also been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by these arrangements were to
exceed the accumulated funds for these insurance programs, SCE could be
assessed retrospective premium adjustments of up to $28 million per year.
Insurance premiums are charged to operating expense.
Item 3. Legal Proceedings
Qualifying Facilities Litigation
On May 20, 1993, four geothermal QFs filed a lawsuit against SCE in Los
Angeles County Superior Court, claiming that SCE underpaid, and continues
to underpay, the plaintiffs for energy. SCE denied the allegations in its
response to the complaint. The action was brought on behalf of Vulcan/BN
Geothermal Power Company, Elmore L.P., Del Ranch L.P. and Leathers L.P.,
each of which was partially owned by a subsidiary of Edison Mission Energy
(EME) (a subsidiary of Edison International) at the time of filing. In
April 1996, EME's 50% share in these projects was sold to CalEnergy. In
October 1994, plaintiffs submitted an amended complaint to the court to
add causes of action for unfair competition and restraint of trade. In
July 1995, after several motions to strike had been heard by the court,
the plaintiffs served a fourth amended complaint, which omitted the
previous claims based on alleged restraint of trade. The plaintiffs
allege in the fourth amended complaint that past underpayments have
totaled at least $21 million. In other court filings, plaintiffs contend
that additional contract payments owing from the beginning of the alleged
underpayments through the end of the contract term could total
approximately $60 million. Plaintiffs also seek unspecified punitive
damages and an injunction to enjoin SCE from "future" unfair competition.
page 22
After SCE's motion to strike portions of the fourth amended complaint was
denied, SCE filed an answer to the fourth amended complaint which denies
its material allegations.
On May 1, 1996, the parties entered into an agreement for a settlement of
all claims in dispute. Pursuant to the agreement, the specific terms of
which are confidential, a settlement amount has been paid and the parties
have entered into mutual general releases, with respect to the period
before January 1, 1996. SCE intends to seek recovery of this payment
through rates. SCE has also agreed, subject to CPUC approval, to increase
payments to plaintiffs for specified levels of energy deliveries for the
period after December 31, 1995. Plaintiffs have reserved the right to
continue the litigation with respect to the period after December 31,
1995, if CPUC approval is not obtained. On August 8, 1996, SCE filed its
application with the CPUC for approval of the settlement as it pertains to
the period after 1995. On December 20, 1996, the ORA filed a protest to
the application. In its protest, the ORA requests that the CPUC not grant
the application or, in the alternative, that the CPUC conduct hearings
on the application. On January 17, 1997, SCE filed a reply to the ORA's
request. On February 27, 1997, a prehearing conference was held, at which
time SCE's application was set for hearing to start on April 23, 1997.
This hearing date was subsequently vacated by the assigned administrative
law judge due to ongoing discussions to resolve issues raised by the ORA's
protest. As a result of those discussions, SCE and the ORA entered into
a stipulation and agreement (Stipulation) effective July 11, 1997. In the
Stipulation, the ORA agrees to withdraw its protest and support SCE's
application in return for SCE's agreement that the cost recovery issues
presented in the application may be transferred for a decision in SCE's
1992 ECAC proceeding, where related issues are currently pending. The
Stipulation further provides for SCE and the ORA to file a joint motion
for approval of the Stipulation. The motion was filed on September 25,
1997. In light of the Stipulation, plaintiffs and SCE have entered into
two amendments to the May 1, 1996, settlement agreement. The first
amendment provides for the post-1995 portion of the settlement to become
effective through 1997 upon CPUC approval consistent with the Stipulation.
The second amendment resulted in plaintiffs dismissing the lawsuit without
prejudice pending final CPUC resolution of the issues raised by SCE's
application. On December 16, 1997, the CPUC issued a decision which
approves the application subject to the terms of the Stipulation. In
light of this decision, SCE has supplemented its testimony in the 1992
ECAC proceeding to support its request to recover its costs of settlement.
Hearings in the 1992 ECAC began on March 9, 1998, and are scheduled to
conclude on approximately March 20, 1998.
Wind Generators' Litigation
Between January 1994 and October 1994, SCE was named as a defendant in a
series of eight lawsuits brought by independent power producers of wind
generation. Seven of the lawsuits were filed in Los Angeles County
Superior Court and one was filed in Kern County Superior Court. The
lawsuits allege SCE incorrectly interpreted contracts with the plaintiffs
by limiting fixed energy payments to a single 10-year period rather than
beginning a new 10-year period of fixed energy payments for each stage of
development. In its responses to the complaints, SCE denied the
plaintiffs' allegations. In each of the lawsuits, the plaintiffs seek
declaratory relief regarding the proper interpretation of the contracts.
Plaintiffs allege a combined total of approximately $189 million in
damages, which includes consequential damages claimed in seven of the
eight lawsuits. On March 1, 1995, the court in the lead Los Angeles
Superior Court case granted the plaintiffs' motion seeking summary
adjudication that the contract language in question is not reasonably
susceptible to SCE's position that there is only a single, 10-year period
page 23
of fixed payments. Following the March 1 ruling, a ninth lawsuit was
filed in the Los Angeles Superior Court raising claims similar to those
alleged in the first eight. SCE subsequently responded to the complaint
in the new lawsuit by denying its material allegations. On April 5, 1995,
SCE filed a petition for Writ of Mandate, Prohibition or Other Appropriate
Relief, requesting that the Court of Appeal of the State of California,
Second Appellate District issue a writ directing the Los Angeles Superior
Court to vacate its March 1 order granting summary adjudication. In a
decision filed August 9, 1995, the Court of Appeal issued a writ directing
that the order be overturned, and a new order be entered denying the
motion. In light of the Court of Appeal decision in the lead Los Angeles
case, a summary adjudication motion in the Kern County case was withdrawn.
On March 25, 1996, pursuant to a court-approved stipulation, all but one
of the cases were consolidated for trial in Los Angeles Superior Court.
Shortly thereafter, on April 3, 1996, pursuant to stipulation of the
parties, the Kern County case was ordered to be coordinated with the Los
Angeles cases so that it too will be tried in Los Angeles. Trial of the
consolidated cases, beginning with the lead case, commenced on March 10,
1997. The consolidated cases are to be tried one after another in
bifurcated fashion with the liability phase of each and all of the cases
to be tried before commencement of the damages phase, if applicable.
Testimony and arguments in the liability phase of the lead case concluded
on May 20, 1997. On July 7, 1997, the court issued a tentative decision
which effectively would resolve all liability issues in the lead case in
SCE's favor. A proposed Statement of Decision consistent with the
conclusions in the tentative decision was submitted by SCE and argument on
the same took place at a hearing on October 31, 1997. The hearing was not
concluded at that time and further argument took place on November 17,
1997. On December 22, 1997, the judge ruled on the objections raised at
the two hearings and ordered SCE to prepare a proposed Statement of
Decision incorporating her ruling. SCE submitted this document to the
court on January 13, 1998. At a hearing on February 4, 1998, the court,
after considering additional objections to parts of the proposed order,
directed SCE to prepare a further, revised order which would not
materially change the court's previous, tentative rulings. This final
statement of decision was filed on February 6, 1998. In addition, on
February 20, 1998, the court entered a judgment against the lead
Plaintiff. The court also scheduled another status and trial setting
conference for April 2, 1998.
Geothermal Generators' Litigation
On June 9, 1997, SCE filed a complaint in Los Angeles Superior Court
against another independent power producer of geothermal generation and
five of its affiliated entities (collectively the "Defendants"). SCE
alleges that in order to avoid power production plant shutdowns caused by
excessive noncondensable gas in the geothermal field brine, the Defendants
routinely vented highly toxic hydrogen sulfide gas from unmonitored
release points beginning in 1990 and continuing through at least 1994, in
violation of applicable federal, state and local environmental law.
According to SCE, these violations constituted material breaches by the
Defendants of their obligations under their contracts and applicable law.
The complaint seeks termination of the contracts and damages for excess
power purchase payments made to the Defendants. The Defendants' motion to
transfer venue to Inyo County Superior Court was granted on August 31,
1997.
On December 19, 1997, SCE filed a second amended complaint in response to
which the Defendants filed a motion to strike, which was argued and taken
under submission by the court on March 13, 1998. The Defendants also
filed a motion for summary judgment, set for hearing on March 19, 1998,
asserting that SCE's claims are time-barred or were released in connection
with the settlement of prior litigation among some of the Defendants and
two of SCE's affiliates, Mission Power Engineering Company, and The
Mission Group (the Mission Parties). SCE asserts that the earlier
settlement does not bar the claims it is prosecuting in this matter and
page 24
that these claims are not time-barred. SCE has filed its opposition
to the motion for summary judgment and will shortly file a supplemental
opposition to address certain additional matters raised by the Defendants.
SCE has also filed a cross motion for summary adjudication with respect to
the issues raised in Defendants' summary judgment motion. No hearing date
has been scheduled for SCE's motion for summary adjudication. In
addition, the Defendants have filed a motion to stay SCE's case pending
resolution of certain technical issues by the Great Basin Air Quality
Management District under the doctrine of primary jurisdiction. The
motion was heard for hearing on March 13, 1998, and the matter was taken
under submission at that time.
The Defendants have also asserted various claims against SCE and the
Mission Parties in a cross-complaint filed in the action commenced by SCE
as well as in a separate action filed against SCE by three of the
Defendants in Inyo County Superior Court. Following a hearing on November
20, 1997, the court consolidated these actions for all purposes and
ordered the Defendants to file a second amended cross-complaint.
The second amended cross-complaint asserts nineteen causes of action
against SCE, three of which are also asserted against the Mission Parties.
Included are claims for declaratory relief; breach of the implied covenant
of good faith and fair dealing; inducing breach of employee agreements;
breach of contract; disparagement, and slander per se; injunctive relief
and restitution for unfair business practices; anticipatory breach of
contract; violation of Public Utilities Code Sections 453, 707 and 2106;
and negligent and intentional misrepresentation. Several of these claims
are premised on the theory that SCE has incorrectly interpreted the cross-
complainants' contracts as providing for only a single "fixed price"
period in view of the fact that the cross-complainants developed their
projects in phases. This theory has also been asserted by other
independent power producers in litigation pending in Los Angeles Superior
Court. (See, "Wind Generation Litigation" above.) SCE filed a demurrer
to, and a motion to strike, in response to the second amended cross-
complaint, both of which were argued on March 13, 1998, and taken under
submission by the court.
Based on the common issues asserted in the Wind Generation Litigation and
the Defendants' second amended cross-complaint, SCE filed a petition to
coordinate the consolidated actions pending in Inyo County Superior Court
with the Wind Generation Litigation pending in Los Angeles Superior Court.
In connection with the petition to coordinate, SCE has also applied for a
stay of all proceedings in Inyo County. Both the petition to coordinate
and the application for stay will be decided by the judge presiding in the
Wind Generation Litigation. A hearing has been scheduled with respect to
both SCE's petition to coordinate and the application for stay on March
30, 1998.
Discovery is at a very preliminary stage, and it is reasonable to
anticipate that there will be further amendments to the pleadings. The
materiality of net final judgments against SCE in these actions would be
largely dependent on the extent to which any damages or additional
payments which might result therefrom are recoverable through rates.
Electric and Magnetic Fields (EMF) Litigation
SCE is involved in three lawsuits alleging that various plaintiffs
developed cancer as a result of exposure to EMF from SCE facilities. SCE
denied the material allegations in its responses to each of these
lawsuits.
The first lawsuit was filed in Orange County Superior Court and served on
SCE in June 1994. There are five named plaintiffs and six named
defendants, including SCE. Three of the five plaintiffs are presently or
were formerly employed by Grubb & Ellis, a real estate brokerage firm with
offices located in a commercial building known as the Koll Center in
page 25
Newport Beach. Two of the named plaintiffs are spouses of the other
plaintiffs. Grubb & Ellis and the owners and developers of the Koll
Center are also named as defendants in the lawsuit. This lawsuit alleges,
among other things, that the three plaintiffs employed by Grubb & Ellis
developed various forms of cancer as a result of exposure to EMF from
electrical facilities owned by SCE and/or the other defendants located on
Koll Center property. No specific damage amounts are alleged in the
complaint, but supplemental documentation prepared by the plaintiffs
indicates that plaintiffs allege compensatory damages of approximately $8
million, plus unspecified punitive damages. In December 1995, the court
granted SCE's motion for summary judgment and dismissed the case.
Plaintiffs have filed a Notice of Appeal. Briefs have been submitted but
no date for oral argument has been set.
A second lawsuit was filed in Orange County Superior Court and served on
SCE in January 1995. This lawsuit arises out of the same fact situation
as the June 1994 lawsuit described above and involves the same defendants.
There are four named plaintiffs, two of whom were formerly employed by
Grubb & Ellis and now allegedly have various forms of cancer. The other
two plaintiffs are the spouses of those two individuals. No specific
damage amounts are alleged in the complaint, but supplemental
documentation prepared by the plaintiffs indicates that plaintiffs will
allege compensatory damages of approximately $13.5 million, plus
unspecified punitive damages. In April 1995, Grubb & Ellis filed a cross-
complaint against the other co-defendants, requesting indemnification and
declaratory relief concerning the rights and responsibilities of the
parties. Although stayed for a time pending appellate review of sanctions
imposed against plaintiffs' attorneys by the trial court, the case has
been remanded back to the trial court following the Court of Appeal's
decision modifying the sanctions order. To date, no further proceedings
have been scheduled.
A third case was filed in Orange County Superior Court and served on SCE
in March 1995. The plaintiff alleges, among other things, that he
developed cancer as a result of EMF emitted from SCE distribution lines
which he alleges were not constructed in accordance with CPUC standards.
No specific damage amounts are alleged in the complaint but supplemental
documentation prepared by the plaintiff indicates that plaintiff will
allege compensatory damages of approximately $5.5 million, plus
unspecified punitive damages. No trial date has been set in this case.
San Onofre Personal Injury Litigation
An SCE engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued SCE and SDG&E, as well as
Combustion Engineering, the manufacturer of the fuel rods for the plant,
in the U.S. District Court for the Southern District of California.
Plaintiffs alleged that the former employee's illness resulted from, and
was aggravated by, exposure to radiation at San Onofre, including contact
with radioactive fuel particles released from failed fuel rods.
Plaintiffs sought unspecified compensatory and punitive damages. On April
3, 1995, the court granted the defendants' motion to dismiss 14 of the
plaintiffs' 15 claims. SCE's April 20, 1995, answer to the complaint
denied all material allegations. On October 10, 1995, the court granted
plaintiffs' motion to include the Institute of Nuclear Power Operations
(an organization dedicated to achieving excellence in nuclear power
operations) as a defendant in the suit. On December 7, 1995, the court
granted SCE's motion for summary judgment on the sole outstanding claim
against it, basing the ruling on the worker's compensation system being
the exclusive remedy for the claim. Plaintiffs have appealed this ruling
to the Ninth Circuit Court of Appeals. Oral argument on the appeal took
place on December 4, 1997, and the matter is now under submission. All
trial court proceedings have been stayed pending the ruling of the Court
of Appeals. The impact on SCE, if any, from further proceedings in this
case against the remaining defendants cannot be determined at this time.
page 26
On July 5, 1995, a former SCE reactor operator and his wife sued SCE and
SDG&E in the U.S. District Court for the Southern District of California.
Plaintiffs also named Combustion Engineering, the manufacturer of the fuel
rods for the plant, and the Institute of Nuclear Power Operations as
defendants. The former employee died of leukemia shortly after the
complaint was filed. Plaintiffs allege that the former operator's illness
resulted from, and was aggravated by, exposure to radiation at San Onofre,
including contact with radioactive fuel particles released from failed
fuel rods. Plaintiffs seek unspecified compensatory and punitive damages.
On November 22, 1995, the complaint was amended to allege wrongful death
and added the former employee's two children as plaintiffs. On December
22, 1995, SCE filed a motion to dismiss or, in the alternative, for
summary judgment based on worker's compensation exclusivity. On March 25,
1996, the court granted SCE's motion for summary judgment. Plaintiffs
have appealed this ruling to the Ninth Circuit Court of Appeals. Oral
argument on the appeal took place on December 4, 1997, and the matter is
now under submission. All trial court proceedings have been stayed
pending the ruling of the Court of Appeals in this case and in the case
described in the above paragraph. The impact on SCE, if any, from further
proceedings in this case against the remaining defendants cannot be
determined at this time.
On August 31, 1995, the wife and daughter of a former San Onofre security
supervisor sued SCE and SDG&E in the U.S. District Court for the Southern
District of California. Plaintiffs also named Combustion Engineering, the
manufacturer of fuel rods for the plant, and the Institute of Nuclear
Power Operations as defendants. The security officer worked for a
contractor in 1982, worked for SCE as a temporary employee (1982-1984),
and later worked as an SCE security supervisor (1984-1994). The officer
died of leukemia in 1994. Plaintiffs allege that the former officer's
illness resulted from, and was aggravated by, his exposure to radiation at
San Onofre, including contact with radioactive fuel particles released
from failed fuel rods. Plaintiffs seek unspecified compensatory and
punitive damages. SCE's November 13, 1995, answer to the complaint denied
all material allegations. All trial court proceedings have been stayed
pending the rulings of the Court of Appeals in the cases described in the
above two paragraphs.
On November 17, 1995, an SCE employee and his wife sued SCE in the U.S.
District Court for the Southern District of California. Plaintiffs also
named Combustion Engineering, the manufacturer of the fuel rods for the
San Onofre plant. The employee worked for SCE at San Onofre from 1981 to
1990. Plaintiffs alleged that the employee transported radioactive
byproducts on his person, clothing and/or tools to his home where his wife
was then exposed to radiation that caused her leukemia. Plaintiffs seek
unspecified compensatory and punitive damages. SCE's December 19, 1995,
partial answer to the complaint denied all material non-employment related
allegations. SCE's motion to dismiss the employee's employment related
allegations based on worker's compensation exclusivity was granted on
March 19, 1996. The employee's wife died on August 15, 1996. On
September 20, 1996, the complaint was amended to allege wrongful death and
to add the employee's two children as plaintiffs. SCE's motion for
summary judgment was denied on April 9, 1997. The trial in this case took
place over approximately 22 days between January and March 1998 and
resulted in a jury verdict for both defendants. It is not known whether
plaintiffs will move for a new trial and/or appeal.
On November 28, 1995, a former contract worker at San Onofre, her husband,
and her son, sued SCE in the U.S. District Court for the Southern District
of California. Plaintiffs also named Combustion Engineering, the
manufacturer of the fuel rods for the San Onofre plant. Plaintiffs allege
that the former contract worker transported radioactive byproducts on her
person and clothing to her home where her son was then exposed to
radiation that caused his leukemia. Plaintiffs seek unspecified
compensatory and punitive damages. SCE's January 2, 1996, answer denied
all material allegations. On August 12, 1996, the Court dismissed the
page 27
claims of the former worker and her husband with prejudice. This case is
expected to go to trial in mid-1998, after completion of the trial court
proceedings in the case described in the preceding paragraph.
On November 20, 1997, a former contract worker at San Onofre and his wife
sued SCE in the Superior Court of California, County of San Diego. The
contract worker was an ironworker at San Onofre during a portion of 1995.
The suit alleges that SCE allowed dangerous conditions to exist at San
Onofre, causing him to sustain unspecified personal injuries. His wife
alleges loss of consortium and other general damages. The case has been
removed to the U.S. District Court for the Southern District of
California. SCE filed a motion on January 6, 1998, asking that the case
be converted to a Price-Anderson cause of action.
Oil Pipeline Litigation
On November 1, 1996, plaintiff, a crude oil pipeline company, filed a
lawsuit against SCE and the City of Los Angeles (the City) in the United
States District Court for the Central District of California claiming that
SCE and the City had interfered with its attempt to construct a proposed
132-mile oil pipeline (Pacific Pipeline) designed to transport oil from
the San Joaquin Valley and Santa Barbara to the Los Angeles refineries.
Plaintiff alleges, among other things, that SCE and the City wrongfully
initiated administrative and other legal proceedings in an attempt to
derail and obstruct the construction of the Pacific Pipeline. Plaintiff
alleges that these acts constitute unfair competition, tortious
interference with economic advantage and violate state and federal
antitrust laws. Plaintiff further claims that because of the alleged
delays, it could suffer losses in excess of $300 million. Additionally,
plaintiff seeks treble and punitive damages.
On June 30, 1997, SCE filed an answer to the complaint denying the
substantive allegations and raising appropriate defenses. Plaintiff and
SCE reached a settlement of this dispute for nonmonetary compensation. An
agreement to dismiss the lawsuit was filed with the court on February 8,
1998.
False Claims Act Litigation
In September 1997, SCE became aware of a complaint filed in the Southern
District of the U.S. District Court of California by a San Onofre
employee, acting at his own initiative on behalf of the United States
under the False Claims Act, against SCE and SDG&E. The complaint alleges
that SCE and SDG&E have submitted fraudulent claims to the United States
government, the State of California and their customers resulting in $491
million in overpayments ($383 million of which is attributed to SCE). The
employee alleges that SCE and SDG&E provided the CPUC with data which
inflated projected costs at San Onofre while minimizing projected revenue,
resulting in the CPUC setting inflated rates. The amount sought in this
complaint is subject to trebling, plus civil penalties of $10,000 per
false claim submitted for payment (for an unspecified number of claims).
SCE and SDG&E filed separate motions to dismiss this lawsuit on November
6, 1997. The employee responded to both motions on December 20, 1997.
SCE and SDG&E replied to the employee's response on January 13, 1998.
Oral argument on the motion to dismiss was heard on January 20, 1998, and
the court has the matter under submission.
Mohave Generating Station Environmental Litigation
On February 19, 1998, the Sierra Club and the Grand Canyon Trust filed
suit against SCE. Mohave is operated by SCE, and SCE is one of several
co-owners. The lawsuit alleges that Mohave has been violating various
provisions of the Clean Air Act, the Nevada state implementation plan,
and applicable pollution permits relating to opacity and sulfur dioxide
page 28>
emission limits over the last five years. The plaintiffs seek declaratory
and injunctive relief as well as civil penalties. Under the Clean Air
Act, the maximum civil penalty obtainable is $25,000 per day of violation.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Pursuant to Form 10-K's General Instruction ("General Instruction") G(3),
the following information is included as an additional item in Part I:
Executive Officers(1) of the Registrant
Age at
December Effective
Executive Officer 31, 1997 Company Position Date
- ----------------- -------- ---------------- ----------
John E. Bryson 54 Chairman of the Board, October 1, 1990
Chief Executive Officer
and Director
Stephen E. Frank 56 President, Chief Operating June 19, 1995
Officer and Director
Bryant C. Danner 60 Executive Vice President June 1, 1995
and General Counsel
Alan J. Fohrer 47 Executive Vice President and September 1, 1996
Chief Financial Officer
Harold B. Ray 57 Executive Vice President, June 1, 1995
Generation Business Unit
Theodore F. Craver, Jr.46 Senior Vice President and Treasurer February 18, 1998
John R. Fielder 52 Senior Vice President, Regulatory February 18, 1998
Policy and Affairs
Robert G. Foster 50 Senior Vice President, November 21, 1996
Public Affairs
Richard M. Rosenblum 47 Senior Vice President, February 18, 1998
T&D Wires Business Unit
Pamela A. Bass 50 Vice President, Customer June 1, 1996
Solutions Business Unit
Richard K. Bushey 57 Vice President and Controller January 1, 1984
Bruce C. Foster 45 Vice President, San Francisco January 1, 1995
Regulatory Affairs
Thomas J. Higgins 52 Vice President, Corporate April 1, 1995
Communications
Beverly P. Ryder 47 Corporate Secretary January 1, 1996
______________
(1) Executive Officers are defined by Rule 3b-7 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
Executive Officers, Bryson, Danner, Fohrer, Craver, Robert Foster,
Bushey, Higgins, and Ryder hold the same positions with Edison
International. Edison International is the parent holding company of
SCE.
None of SCE's executive officers are related to each other by blood or
marriage. As set forth in Article IV of SCE's Bylaws, the officers of SCE
are chosen annually by and serve at the pleasure of SCE's Board of
Directors and hold their respective offices until their resignation,
removal, other disqualification from service, or until their respective
successors are elected. All of the executive officers have been actively
engaged in the business of SCE for more than five years except for Stephen
E. Frank, Theodore F. Craver, Jr., Bruce C. Foster, Thomas J. Higgins, and
Beverly P. Ryder. Those officers who have not held their present position
for the past five years had the following business experience:
Stephen E. Frank President and Chief Operating Officer, August 1990 to January 1995
Florida Power and Light Company(1)
Bryant C. Danner Senior Vice President and July 1992 to May 1995
General Counsel of Edison
International and SCE
Alan J. Fohrer Executive Vice President, Chief February 1996 to August 1996
Financial Officer and Treasurer
of SCE
Executive Vice President and May 1995 to January 1996
Chief Financial Officer of SCE
Executive Vice President, Chief May 1995 to August 1996
Financial Officer and Treasurer
of Edison International
Senior Vice President, Chief January 1993 to April 1995
Financial Officer and Treasurer
of Edison International
Senior Vice President and Chief January 1993 to April 1995
Financial Officer of SCE
Vice President, Chief Financial April 1991 to January 1993
Officer and Treasurer of Edison
International and SCE
Harold B. Ray Senior Vice President, Power Systems June 1990 to May 1995
Theodore F. Craver, Jr. Vice President and Treasurer, SCE September 1996 to February 1998
Executive Vice President and Corporate September 1990 to August 1996
Treasurer, First Interstate Bancorp(1)
John R. Fielder Vice President, Regulatory Policy February 1992 to January 1998
and Public Affairs
Robert G. Foster Vice President, Public Affairs November 1993 to January 1996
Regional Vice President, Sacramento January 1988 to October 1993
Office
Richard M. Rosenblum Vice President, Distribution January 1996 to January 1998
Business Unit
Vice President, Nuclear Engineering June 1993 to December 1995
and Technical Services
Manager of Nuclear Regulatory Affairs June 1989 to May 1993
Bruce C. Foster Regional Vice President, San Francisco January 1992 to December 1994
Office
Thomas J. Higgins Vice President, Corporate Communications April 1995 to January 1996
President, The Laurel Company(1)(2) January 1994 to December 1994
Senior Vice President of Blue October 1990 to December 1993
Cross/Blue Shield of Maryland(1)
Beverly P. Ryder Special Assistant to the Chairman May 1995 to December 1995
of Edison International and SCE
Director, Strategic Alliances, October 1993 to April 1995
EnvestSCE(3)
General Manager, Customer Solutions June 1992 to September 1993
______________
(1) This entity is not a parent, subsidiary or other affiliate of SCE.
page 30
(2) As President of The Laurel Company, Thomas J. Higgins provided advice
on planning and financing for mergers and acquisitions for clients in
the managed health care business.
(3) This entity is a division of SCE.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Certain information responding to Item 5 with respect to frequency and
amount of cash dividends is included in SCE's Annual Report to
Shareholders for the year ended December 31, 1997, ("Annual Report") under
"Quarterly Financial Data" on page 40 and is incorporated by reference
pursuant to General Instruction G(2). As a result of the formation of a
holding company described above in Item 1, all of the issued and
outstanding common stock of SCE is owned by Edison International and there
is no market for such stock.
Item 6. Selected Financial Data
Information responding to Item 6 is included in the Annual Report under
"Selected Financial and Operating Data: 1993-1997" on page 1 and is
incorporated herein by reference pursuant to General Instruction G(2).
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Information responding to Item 7 is included in the Annual Report under
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 2 through 14 and is incorporated herein by
reference pursuant to General Instruction G(2).
Item 8. Financial Statements and Supplementary Data
Certain information responding to Item 8 is set forth after Item 14 in
Part IV. Other information responding to Item 8 is included in the Annual
Report on pages 15 through 40, and is incorporated herein by reference
pursuant to General Instruction G(2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning executive officers of Edison International is set
forth in Part I in accordance with General Instruction G(3), pursuant to
Instruction 3 to Item 401(b) of Regulation S-K. Other information
responding to Item 10 is included in the Joint Proxy Statement ("Proxy
Statement") filed with the Commission in connection with SCE's Annual
Meeting to be held on April 16, 1998, under the heading, "Election of
Directors of Edison International and SCE" on pages 3 through 6 and
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 22, and
is incorporated herein by reference pursuant to General Instruction G(3).
Item 11. Executive Compensation
Information responding to Item 11 is included in the Proxy Statement
beginning with the section under the heading "Executive Compensation Table
- - Edison International and SCE" on pages 9 through 20, and is incorporated
herein by reference pursuant to General Instruction G(3).
page 31
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information responding to Item 12 is included in the Proxy Statement under
the headings "Stock Ownership of Directors and Executive Officers of
Edison International and SCE" on pages 7 through 10 and "Stock Ownership
of Certain Shareholders" on page 31, and is incorporated herein by
reference pursuant to General Instruction G(3).
Item 13. Certain Relationships and Related Transactions
Information responding to Item 13 is included in the Proxy Statement under
the heading "Certain Relationships and Transactions of Nominees and
Executive Officers" on pages 22 through 25, and is incorporated herein by
reference pursuant to General Instruction G(3).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following items contained in the 1997 Annual Report to Shareholders
are incorporated by reference in this report.
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Consolidated Statements of Income -- Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Retained Earnings -- Years Ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets -- December 31, 1997, and 1996
Consolidated Statements of Cash Flows -- Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Responsibility for Financial Reporting
Report of Independent Public Accountants
(2) Report of Independent Public Accountants and Schedules
Supplementing Financial Statements
The following documents may be found in this report at the indicated page
numbers.
Page
----
Report of Independent Public Accountants on Supplemental
Schedules. . . . . . . . . . . . . . . . . . . . . . . . . 33
Schedule II--Valuation and Qualifying Accounts for the Years
Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . 34
Schedules I through V, except those referred to above, are omitted as not
required or not applicable.
(3) Exhibits
See Exhibit Index on page 38 of this report.
(b) Reports on Form 8-K
December 8, 1997
Item 5: Other Events: Sale of Southern California Edison Company's
10 Gas-fired Generating Plants
December 17, 1997
Item 5: Other Events: Rate Reduction Bonds Sold
February 13, 1998
Item 5: Other Events: Sale of Southern California Edison Company's
Long Beach Gas-Fired Generating Plant
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
To Southern California Edison Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the 1997 Annual Report
to Shareholders of Southern California Edison Company (SCE) incorporated
by reference in this Form 10-K, and have issued our report thereon dated
January 30, 1998. Our audits of the consolidated financial statements
were made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The supplemental
schedules listed in Part IV of this Form 10-K, which are the
responsibility of SCE's management, are presented for purposes of
complying with the Securities and Exchange Commission's rules and
regulations, and are not part of the basic consolidated financial
statements. These supplemental schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation
to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
January 30, 1998
page 33
SOUTHERN CALIFORNIA EDISON COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1997
Additions
------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts Deductions of Period
----------- ----------- ---------- ---------- ---------- ----------
(In thousands)
Group A:
Uncollectible accounts --
Customers $ 24,390 $ 20,597 $ -- $ 20,742 $ 24,245
All other 1,689 1,180 -- 661 2,208
-------- -------- -------- -------- --------
Total $ 26,079 $ 21,777 $ -- $ 21,403(a) $ 26,453
======== ======== ======== ======== ========
Group B:
DOE Decontamination
and Decommissioning $ 48,789 $ -- $ 1,089(b) $ 5,542(c) $ 44,336
Purchased-power settlements 107,700 -- 67,320(d) 29,380(e) 145,640
Pension and benefits 180,927 102,193 17,624(f) 89,544(g) 211,200
Insurance, casualty and
other 86,509 57,749 -- 65,797(h) 78,461
-------- -------- -------- -------- --------
Total $423,925 $159,942 $ 86,033 $190,263 $479,637
======== ======== ======== ======== ========
________________
(a) Accounts written off, net.
(b) Represents revision to estimate based on actual billings.
(c) Represents amounts paid.
(d) Represents the present value of payments to be made under an agreement
to terminate a purchased-power contract.
(e) Represents the amortization of the liability established for
purchased-power contract settlement agreements.
(f) Primarily represents transfers from the accrued paid absence allowance
account for required additions to the comprehensive disability plan
accounts.
(g) Includes pension payments to retired employees, amounts paid to active
employees during periods of illness and the funding of certain pension
benefits.
(h) Amounts charged to operations that were not covered by insurance.
page 34
SOUTHERN CALIFORNIA EDISON COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1996
Additions
------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts Deductions of Period
----------- ------------ ---------- ---------- ---------- ---------
(In thousands)
Group A:
Uncollectible accounts --
Customers $ 22,126 $ 21,831 $ -- $ 19,567 $ 24,390
All other 2,013 376 -- 700 1,689
-------- -------- -------- -------- --------
Total $ 24,139 $ 22,207 $ -- $ 20,267(a) $ 26,079
======== ======== ======== ======== ========
Group B:
DOE decontamination
and decommissioning $ 52,742 $ -- $ 1,468(b) $ 5,421(c) $ 48,789
Purchased-power settlement -- -- 107,700(d) -- 107,700
Pension and benefits 196,662 8,547 21,869(e) 46,151(f) 180,927
Insurance, casualty and
other 94,788 59,123 -- 67,402(g) 86,509
-------- ------- -------- -------- --------
Total $344,192 $67,670 $131,037 $118,974 $423,925
======== ======= ======== ======== ========
_______________
(a) Accounts written off, net.
(b) Represents revision to estimate based on actual billings.
(c) Represents amounts paid.
(d) Represents payments to be made under an agreement to terminate a
purchased-power contract.
(e) Primarily represents transfers from the accrued paid absence allowance
account for required additions to the comprehensive disability plan
accounts.
(f) Includes pension payments to retired employees, amounts paid to active
employees during periods of illness and the funding of certain pension
benefits.
(g) Amounts charged to operations that were not covered by insurance.
page 35
SOUTHERN CALIFORNIA EDISON COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1995
Additions
------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts Deductions of Period
----------- ----------- ---------- ---------- ---------- ----------
(In thousands)
Group A:
Uncollectible accounts --
Customers $ 21,000 $ 22,179 $ -- $ 21,053 $ 22,126
All other 2,806 801 -- 1,594 2,013
-------- -------- ------- -------- --------
Total $ 23,806 $ 22,980 $ -- $ 22,647(a) $ 24,139
======== ======== ======= ======== ========
Group B:
DOE Decontamination
and Decommissioning $ 56,485 $ -- $ 1,531(b) $ 5,274(c) $ 52,742
Pension and benefits 174,851 42,805 23,676(d) 44,670(e) 196,662
Insurance, casualty and
other 79,727 74,751 -- 59,690(f) 94,788
-------- -------- ------- -------- --------
Total $311,063 $117,556 $25,207 $109,634 $344,192
======== ======== ======= ======== ========
________________
(a) Accounts written off, net.
(b) Represents revision to estimate based on actual billings.
(c) Represents amounts paid.
(d) Primarily represents transfers from the accrued paid absence allowance
account for required additions to the comprehensive disability plan
accounts.
(e) Includes pension payments to retired employees, amounts paid to active
employees during periods of illness and the funding of certain pension
benefits.
(f) Amounts charged to operations that were not covered by insurance.
page 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By Kenneth S. Stewart
-------------------------------
Kenneth S. Stewart
Assistant General Counsel
Date: March 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer:
John E. Bryson* Chairman of the Board, March 24, 1998
Chief Executive Officer
and Director
Principal Financial Officer:
Alan J. Fohrer* Executive Vice President March 24, 1998
and Chief Financial Officer
Controller or Principal
Accounting Officer:
Richard K. Bushey* Vice President and March 24, 1998
Controller
Board of Directors:
Winston H. Chen* Director March 24, 1998
Warren Christopher* Director March 24, 1998
Stephen E. Frank* Director March 24, 1998
Camilla C. Frost* Director March 24, 1998
Joan C. Hanley* Director March 24, 1998
Carl F. Huntsinger* Director March 24, 1998
Charles D. Miller* Director March 24, 1998
Luis G. Nogales* Director March 24, 1998
Ronald L. Olson* Director March 24, 1998
J. J. Pinola* Director March 24, 1998
James M. Rosser* Director March 24, 1998
E. L. Shannon, Jr.* Director March 24, 1998
Robert H. Smith* Director March 24, 1998
Thomas C. Sutton* Director March 24, 1998
Daniel M. Tellep* Director March 24, 1998
James D. Watkins* Director March 24, 1998
Edward Zapanta* Director March 24, 1998
*By Kenneth S. Stewart
-----------------------------------------
Kenneth S. Stewart
Assistant General Counsel
page 37
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation as amended through January
1996 (File No. 1-2313)*
3.2 Bylaws as adopted by the Board of Directors on January 1, 1998
4.1 Trust Indenture, dated as of October 1, 1923 (Registration No.
2-1369)*
4.2 Supplemental Indenture, dated as of March 1, 1927 (Registration
No. 2-1369)*
4.3 Second Supplemental Indenture, dated as of April 25, 1935
(Registration No. 2-1472)*
4.4 Third Supplemental Indenture, dated as of June 24, 1935
(Registration No. 2-1602)*
4.5 Fourth Supplemental Indenture, dated as of September 1, 1935
(Registration No. 2-4522)*
4.6 Fifth Supplemental Indenture, dated as of August 15, 1939
(Registration No. 2-4522)*
4.7 Sixth Supplemental Indenture, dated as of September 1, 1940
(Registration No. 2-4522)*
4.8 Seventh Supplemental Indenture, dated as of January 15, 1948
(Registration No. 2-7369)*
4.9 Eighth Supplemental Indenture, dated as of August 15, 1948
(Registration No. 2-7610)*
4.10 Ninth Supplemental Indenture, dated as of February 15, 1951
(Registration No. 2-8781)*
4.11 Tenth Supplemental Indenture, dated as of August 15, 1951
(Registration No. 2-7968)*
4.12 Eleventh Supplemental Indenture, dated as of August 15, 1953
(Registration No. 2-10396)*
4.13 Twelfth Supplemental Indenture, dated as of August 15, 1954
(Registration No. 2-11049)*
4.14 Thirteenth Supplemental Indenture, dated as of April 15, 1956
(Registration No. 2-12341)*
4.15 Fourteenth Supplemental Indenture, dated as of February 15, 1957
(Registration No. 2-13030)*
4.16 Fifteenth Supplemental Indenture, dated as of July 1, 1957
(Registration No. 2-13418)*
4.17 Sixteenth Supplemental Indenture, dated as of August 15, 1957
(Registration No. 2-13516)*
4.18 Seventeenth Supplemental Indenture, dated as of August 15, 1958
(Registration No. 2-14285)*
4.19 Eighteenth Supplemental Indenture, dated as of January 15, 1960
(Registration No. 2-15906)*
4.20 Nineteenth Supplemental Indenture, dated as of August 15, 1960
(Registration No. 2-16820)*
4.21 Twentieth Supplemental Indenture, dated as of April 1, 1961
(Registration No. 2-17668)*
4.22 Twenty-First Supplemental Indenture, dated as of May 1, 1962
(Registration No. 2-20221)*
4.23 Twenty-Second Supplemental Indenture, dated as of October 15,
1962 (Registration No. 2-20791)*
4.24 Twenty-Third Supplemental Indenture, dated as of May 15, 1963
(Registration No. 2-21346)*
4.25 Twenty-Fourth Supplemental Indenture, dated as of February 15,
1964 (Registration No. 2-22056)*
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.26 Twenty-Fifth Supplemental Indenture, dated as of February 1, 1965
(Registration No. 2-23082)*
4.27 Twenty-Sixth Supplemental Indenture, dated as of May 1, 1966
(Registration No. 2-24835)*
4.28 Twenty-Seventh Supplemental Indenture, dated as of August 15,
1966 (Registration No. 2-25314)*
4.29 Twenty-Eighth Supplemental Indenture, dated as of May 1, 1967
(Registration No. 2-26323)*
4.30 Twenty-Ninth Supplemental Indenture, dated as of February 1, 1968
(Registration No. 2-28000)*
4.31 Thirtieth Supplemental Indenture, dated as of January 15, 1969
(Registration No. 2-31044)*
4.32 Thirty-First Supplemental Indenture, dated as of October 1, 1969
(Registration No. 2-34839)*
4.33 Thirty-Second Supplemental Indenture, dated as of December 1,
1970 (Registration No. 2-38713)*
4.34 Thirty-Third Supplemental Indenture, dated as of September 15,
1971 (Registration No. 2-41527)*
4.35 Thirty-Fourth Supplemental Indenture, dated as of August 15, 1972
(Registration No. 2-45046)*
4.36 Thirty-Fifth Supplemental Indenture, dated as of February 1, 1974
(Registration No. 2-50039)*
4.37 Thirty-Sixth Supplemental Indenture, dated as of July 1, 1974
(Registration No. 2-59199)*
4.38 Thirty-Seventh Supplemental Indenture, dated as of November 1,
1974 (Registration No. 2-52160)*
4.39 Thirty-Eighth Supplemental Indenture, dated as of March 1, 1975
(Registration No. 2-52776)*
4.40 Thirty-Ninth Supplemental Indenture, dated as of March 15, 1976
(Registration No. 2-55463)*
4.41 Fortieth Supplemental Indenture, dated as of July 1, 1977
(Registration No. 2-59199)*
4.42 Forty-First Supplemental Indenture, dated as of November 1, 1978
(Registration No. 2-62609)*
4.43 Forty-Second Supplemental Indenture, dated as of June 15, 1979
(File No. 1-2313)*
4.44 Forty-Third Supplemental Indenture, dated as of September 15,
1979 (File No. 1-2313)*
4.45 Forty-Fourth Supplemental Indenture, dated as of October 1, 1979
(Registration No. 2-65493)*
4.46 Forty-Fifth Supplemental Indenture, dated as of April 1, 1980
(Registration No. 2-66896)*
4.47 Forty-Sixth Supplemental Indenture, dated as of November 15, 1980
(Registration No. 2-69609)*
4.48 Forty-Seventh Supplemental Indenture, dated as of May 15, 1981
(Registration No. 2-71948)*
4.49 Forty-Eighth Supplemental Indenture, dated as of August 1, 1981
(File No. 1-2313)*
4.50 Forty-Ninth Supplemental Indenture, dated as of December 1, 1981
(Registration No. 2-74339)*
4.51 Fiftieth Supplemental Indenture, dated as of January 16, 1982
(File No. 1-2313)*
4.52 Fifty-First Supplemental Indenture, dated as of April 15, 1982
(Registration No. 2-76626)*
page 39
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.53 Fifty-Second Supplemental Indenture, dated as of November 1, 1982
(Registration No. 2-79672)*
4.54 Fifty-Third Supplemental Indenture, dated as of November 1, 1982
(File No. 1-2313)*
4.55 Fifty-Fourth Supplemental Indenture, dated as of January 1, 1983
(File No. 1-2313)*
4.56 Fifty-Fifth Supplemental Indenture, dated as of May 1, 1983 (File
No. 1-2313)*
4.57 Fifty-Sixth Supplemental Indenture, dated as of December 1, 1984
(Registration No. 2-94512)*
4.58 Fifty-Seventh Supplemental Indenture, dated as of March 15, 1985
(Registration No. 2-96181)*
4.59 Fifty-Eighth Supplemental Indenture, dated as of October 1, 1985
(File No. 1-2313)*
4.60 Fifty-Ninth Supplemental Indenture, dated as of October 15, 1985
(File No. 1-2313)*
4.61 Sixtieth Supplemental Indenture, dated as of March 1, 1986 (File
No. 1-2313)*
4.62 Sixty-First Supplemental Indenture, dated as of March 15, 1986
(File No. 1-2313)*
4.63 Sixty-Second Supplemental Indenture, dated as of April 15, 1986
(File No. 1-2313)*
4.64 Sixty-Third Supplemental Indenture, dated as of April 15, 1986
(File No. 1-2313)*
4.65 Sixty-Fourth Supplemental Indenture, dated as of July 1, 1986
(File No. 1-2313)*
4.66 Sixty-Fifth Supplemental Indenture, dated as of September 1, 1986
(File No. 1-2313)*
4.67 Sixty-Sixth Supplemental Indenture, dated as of September 1, 1986
(File No. 1-2313)*
4.68 Sixty-Seventh Supplemental Indenture, dated as of December 1,
1986 (File No. 1-2313)*
4.69 Sixty-Eighth Supplemental Indenture, dated as of July 1, 1987
(Registration No. 33-19541)*
4.70 Sixty-Ninth Supplemental Indenture, dated as of October 15, 1987
(Registration No. 33-19541)*
4.71 Seventieth Supplemental Indenture, dated as of November 1, 1987
(File No. 1-2313)*
4.72 Seventy-First Supplemental Indenture, dated as of February 15,
1988 (File No. 1-2313)*
4.73 Seventy-Second Supplemental Indenture, dated as of April 15, 1988
(File No. 1-2313)*
4.74 Seventy-Third Supplemental Indenture, dated as of July 1, 1988
(File No. 1-2313)*
4.75 Seventy-Fourth Supplemental Indenture, dated as of August 15,
1988 (File No. 1-2313)*
4.76 Seventy-Fifth Supplemental Indenture, dated as of September 15,
1988 (File No. 1-2313)*
4.77 Seventy-Sixth Supplemental Indenture, dated as of January 15,
1989 (File No. 1-2313)*
4.78 Seventy-Seventh Supplemental Indenture, dated as of May 1, 1990
(File No. 1-2313)*
4.79 Seventy-Eighth Supplemental Indenture, dated as of June 15, 1990
(File No. 1-2313)*
4.80 Seventy-Ninth Supplemental Indenture, dated as of August 15, 1990
(File No. 1-2313)*
4.81 Eightieth Supplemental Indenture, dated as of December 1, 1990
(File No. 1-2313)*
page 40
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.82 Eighty-First Supplemental Indenture, dated as of April 1, 1991
(File No. 1-2313)*
4.83 Eighty-Second Supplemental Indenture, dated as of May 1, 1991
(File No. 1-2313)*
4.84 Eighty-Third Supplemental Indenture, dated as of June 1, 1991
(File No. 1-2313)*
4.85 Eighty-Fourth Supplemental Indenture, dated as of December 1,
1991 (File No. 1-2313)*
4.86 Eighty-Fifth Supplemental Indenture, dated as of February 1, 1992
(File No. 1-2313)*
4.87 Eighty-Sixth Supplemental Indenture, dated as of April 1, 1992
(File No. 1-2313)*
4.88 Eighty-Seventh Supplemental Indenture, dated as of July 1, 1992
(File No. 1-2313)*
4.89 Eighty-Eighth Supplemental Indenture, dated as of July 15 1992
(File No. 1-2313)*
4.90 Eighty-Ninth Supplemental Indenture, dated as of December 1, 1992
(File No. 1-2313)*
4.91 Ninetieth Supplemental Indenture, dated as of January 15, 1993
(File No. 1-2313)*
4.92 Ninety-First Supplemental Indenture, dated as of March 1, 1993
(File No. 1-2313)*
4.93 Ninety-Second Supplemental Indenture, dated as of June 1, 1993*
4.94 Ninety-Third Supplemental Indenture, dated as of June 15, 1993
(File No. 1-2313)*
4.95 Ninety-Fourth Supplemental Indenture, dated as of July 15, 1993
(File No. 1-2313)*
4.96 Ninety-Fifth Supplemental Indenture, dated as of September 1,
1993 (File No. 1-2313)*
4.97 Ninety-Sixth Supplemental Indenture, dated as of October 1, 1993
(File No. 1-2313)*
page 41
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 1981 Deferred Compensation Agreement (File No. 1-2313)*
10.2 1985 Deferred Compensation Agreement for Executives (File No.
1-2313)*
10.3 1985 Deferred Compensation Agreement for Directors (File No.
1-2313)*
10.4 Director Deferred Compensation Plan (File No. 1-9936)*
10.5 Director Grantor Trust Agreement (File No. 1-9936)*
10.6 Executive Deferred Compensation Plan (File No. 1-9936)*
10.7 Executive Grantor Trust Agreement (File No. 1-9936)*
10.8 Executive Supplemental Benefit Program (File No. 1-2313)*
10.9 Executive Retirement Plan (File No. 1-2313)*
10.10 Employment Agreement with Howard P. Allen (File No. 1-2313)*
10.11 1996 Executive Incentive Compensation Plan (File No. 1-9936)*
10.12 Executive Incentive Compensation Plan
10.13 Executive Disability and Survivor Benefit Program (File No. 1-
9936)*
10.14 Retirement Plan for Directors
10.15 Director Incentive Compensation Plan (File No. 1-2313)*
10.16 Officer Long-Term Incentive Compensation Plan
10.16.1 Form of Agreement for 1989-1995 Awards under the Officer Long-
Term Incentive Compensation Plan (File No. 1-9936)*
10.16.2 Form of Agreement for 1996 Awards under the Officer Long-Term
Incentive Compensation Plan(File No. 1-2313)*
10.16.3 Form of Agreement for 1997 Awards under the Officer and
Management Long-Term Incentive Compensation Plans
10.17 Estate and Financial Planning Program (File No. 1-9936)*
10.18 Consulting Arrangement with Howard P. Allen
10.19 Employment Agreement with Bryant C. Danner (File No. 1-9936)*
10.20 Employment Agreement with Stephen E. Frank (File No. 1-9936)*
10.21 Election terms for Warren Christopher
12. Computation of Ratios of Earnings to Fixed Charges
13. Annual Report to Shareholders for year ended December 31, 1997
23. Consent of Independent Public Accountants - Arthur Andersen LLP
24.1 Power of Attorney
24.2 Certified copy of Resolution of Board of Directors Authorizing
Signature
27. Financial Data Schedule
____________
* Incorporated by reference pursuant to Rule 12b-32.
EXHIBIT 3.2
To Holders of the Company's Bylaws:
Effective January 1, 1998, Article III, Section 6, was amended to
specify the months in which regular Board meetings will be held.
BEVERLY P. RYDER
Corporate Secretary
BYLAWS
OF
SOUTHERN CALIFORNIA EDISON COMPANY
AS AMENDED TO AND INCLUDING
JANUARY 1, 1998
PAGE
INDEX
Page
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office 1
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations 1
Section 2. Annual Meetings 1
Section 3. Special Meetings 2
Section 4. Notice of Annual or Special Meeting 2
Section 5. Quorum 3
Section 6. Adjourned Meeting and Notice Thereof 4
Section 7. Voting 4
Section 8. Record Date 6
Section 9. Consent of Absentees 7
Section 10. Action Without Meeting 7
Section 11. Proxies 7
Section 12. Inspectors of Election 8
ARTICLE III -- DIRECTORS
Section 1. Powers 8
Section 2. Number of Directors 9
Section 3. Election and Term of Office 10
Section 4. Vacancies 10
Section 5. Place of Meeting 11
Section 6. Regular Meetings 11
Section 7. Special Meetings 11
Section 8. Quorum 12
Section 9. Participation in Meetings by
Conference Telephone 12
Section 10. Waiver of Notice 12
Section 11. Adjournment 12
Section 12. Fees and Compensation 13
Section 13. Action Without Meeting 13
Section 14. Rights of Inspection 13
Section 15. Committees 13
PAGE
ARTICLE IV -- OFFICERS
Section 1. Officers 14
Section 2. Election 14
Section 3. Eligibility of Chairman or President 15
Section 4. Removal and Resignation 15
Section 5. Appointment of Other Officers 15
Section 6. Vacancies 15
Section 7. Salaries 15
Section 8. Furnish Security for Faithfulness 16
Section 9. Chairman's Duties; Succession to
Such Duties in Chairman's Absence or Disability16
Section 10. President's Duties 16
Section 11. Chief Financial Officer 16
Section 12. Vice President's Duties 17
Section 13. General Counsel's Duties 17
Section 14. Associate General Counsel's and Assistant General
Counsel's Duties 17
Section 15. Controller's Duties 17
Section 16. Assistant Controllers' Duties 17
Section 17. Treasurer's Duties 17
Section 18. Assistant Treasurers' Duties 18
Section 19. Secretary's Duties 18
Section 20. Assistant Secretaries' Duties 19
Section 21. Secretary Pro Tempore 19
Section 22. Election of Acting Treasurer or Acting Secretary19
Section 23. Performance of Duties 19
ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records 20
Section 2. Inspection of Bylaws 21
Section 3. Contracts and Other Instruments, Loans, Notes
and Deposits of Funds 21
Section 4. Certificates of Stock 22
Section 5. Transfer Agent, Transfer Clerk and Registrar 22
Section 6. Representation of Shares of Other Corporations 22
PAGE
ARTICLE V -- OTHER PROVISIONS (Cont.)
Section 7. Stock Purchase Plans 23
Section 8. Fiscal Year and Subdivisions 23
Section 9. Construction and Definitions 23
ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers 24
Section 2. Indemnification of Employees and Agents 25
Section 3. Right of Directors and Officers to Bring Suit 26
Section 4. Successful Defense 26
Section 5. Non-Exclusivity of Rights 26
Section 6. Insurance26
Section 7. Expenses as a Witness 27
Section 8. Indemnity Agreements 27
Section 9. Separability 27
Section 10. Effect of Repeal or Modification 27
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General 27
Section 2. Unavailable Directors 28
Section 3. Authorized Number of Directors 28
Section 4. Quorum 28
Section 5. Creation of Emergency Committee 28
Section 6. Constitution of Emergency Committee 29
Section 7. Powers of Emergency Committee 29
Section 8. Directors Becoming Available 29
Section 9. Election of Board of Directors 29
Section 10. Termination of Emergency Committee 30
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments 30
PAGE
BYLAWS
Bylaws for the regulation, except as otherwise provided
by statute or its Articles of Incorporation
of
SOUTHERN CALIFORNIA EDISON COMPANY
AS AMENDED TO AND INCLUDING
JANUARY 1, 1998
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office.
The Edison General Office, situated at 2244 Walnut Grove Avenue,
in the City of Rosemead, County of Los Angeles, State of California, is
hereby fixed as the principal office for the transaction of the business
of the corporation.
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations.
All meetings of shareholders shall be held at the principal
office of the corporation or at such other place or places within or
without the State of California as may be designated by the Board of
Directors (the "Board"). In the event such places shall prove inadequate
in capacity for any meeting of shareholders, an adjournment may be taken
to and the meeting held at such other place of adequate capacity as may be
designated by the officer of the corporation presiding at such meeting.
Section 2. Annual Meetings.
The annual meeting of shareholders shall be held on the third
Thursday of the month of April of each year at 10:00 a.m. on said day to
elect directors to hold office for the year next ensuing and until their
successors shall be elected, and to consider and act upon such other
matters as may lawfully be presented to such meeting; provided, however,
that should said day fall upon a legal holiday, then any such annual
meeting of shareholders shall be held at the same time and place on the
next day thereafter ensuing which is not a legal holiday.
PAGE 1
ARTICLE II
Section 3. Special Meetings.
Special meetings of the shareholders may be called at any time by
the Board, the Chairman of the Board, the President, or upon written
request of any three members of the Board, or by the holders of shares
entitled to cast not less than ten percent of the votes at such meeting.
Upon request in writing to the Chairman of the Board, the President, any
Vice President or the Secretary by any person (other than the Board)
entitled to call a special meeting of shareholders, the officer forthwith
shall cause notice to be given to the shareholders entitled to vote that
a meeting will be held at a time requested by the person or persons
calling the meeting, not less than thirty-five nor more than sixty days
after the receipt of the request. If the notice is not given within
twenty days after receipt of the request, the persons entitled to call the
meeting may give the notice.
Section 4. Notice of Annual or Special Meeting.
Written notice of each annual or special meeting of shareholders
shall be given not less than ten (or if sent by third-class mail, thirty)
nor more than sixty days before the date of the meeting to each
shareholder entitled to vote thereat. Such notice shall state the place,
date, and hour of the meeting and (i) in the case of a special meeting,
the general nature of the business to be transacted, and no other business
may be transacted, or (ii) in the case of an annual meeting, those matters
which the Board, at the time of the mailing of the notice, intends to
present for action by the shareholders, but, subject to the provisions of
applicable law and these Bylaws, any proper matter may be presented at an
annual meeting for such action. The notice of any special or annual
meeting at which directors are to be elected shall include the names of
nominees intended at the time of the notice to be presented by the Board
for election. For any matter to be presented by a shareholder at an
annual meeting held after December 31, 1993, including the nomination of
any person (other than a person nominated by or at the direction of the
Board) for election to the Board, written notice must be received by the
Secretary of the corporation from the shareholder not less than sixty nor
more than one hundred twenty days prior to the date of the annual meeting
specified in these Bylaws and to which the shareholder's notice relates;
provided however, that in the event the annual meeting to which the
shareholder's written notice relates is to be held on a date which is more
than thirty days earlier than the date of the annual meeting specified in
these Bylaws, the notice from a shareholder must be received by the
Secretary not later than the close of business on the tenth day following
the date on which public disclosure of the date of the annual meeting was
made or given to the shareholders. The shareholder's notice to the
Secretary shall set forth (a) a brief description of each matter to be
presented at the annual meeting by the shareholder; (b) the name and
address, as they appear on the corporation's books, of the shareholder;
PAGE 2
ARTICLE II
(c) the class and number of shares of the corporation which are
beneficially owned by the shareholder; and (d) any material interest of
the shareholder in the matters to be presented. Any shareholder who
intends to nominate a candidate for election as a director shall also set
forth in such a notice (i) the name, age, business address and residence
address of each nominee that he or she intends to nominate at the meeting,
(ii) the principal occupation or employment of each nominee, (iii) the
number of shares of capital stock of the corporation beneficially owned by
each nominee, and (iv) any other information concerning the nominee that
would be required under the rules of the Securities and Exchange
Commission in a proxy statement soliciting proxies for the election of the
nominee. The notice shall also include a consent, signed by the
shareholder's nominees, to serve as a director of the corporation if
elected. Notwithstanding anything in these Bylaws to the contrary, and
subject to the provisions of any applicable law, no business shall be
conducted at a special or annual meeting except in accordance with the
procedures set forth in this Section 4.
Notice of a shareholders' meeting shall be given either
personally or by first-class mail (or, if the outstanding shares of the
corporation are held of record by 500 or more persons on the record date
for the meeting, by third-class mail) or by other means of written
communication, addressed to the shareholder at the address of such
shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice; or, if no such
address appears or is given, at the place where the principal office of
the corporation is located or by publication at least once in a newspaper
of general circulation in the county in which the principal office is
located. Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid.
Any other written notice shall be deemed to have been given at the time it
is personally delivered to the recipient or is delivered to a common
carrier for transmission, or actually transmitted by the person giving the
notice by electronic means, to the recipient.
Section 5. Quorum.
A majority of the shares entitled to vote, represented in person
or by proxy, shall constitute a quorum at any meeting of shareholders.
The affirmative vote of a majority of the shares represented and voting at
a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number
or voting by classes is required by law or the Articles; provided,
however, that the shareholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to have less than a
quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
PAGE 3
ARTICLE II
Section 6. Adjourned Meeting and Notice Thereof.
Any shareholders' meeting, whether or not a quorum is present,
may be adjourned from time to time by the vote of a majority of the
shares, the holders of which are either present in person or represented
by proxy thereat, but in the absence of a quorum (except as provided in
Section 5 of this Article) no other business may be transacted at such
meeting.
It shall not be necessary to give any notice of the time and
place of the adjourned meeting or of the business to be transacted
thereat, other than by announcement at the meeting at which such
adjournment is taken. At the adjourned meeting, the corporation may
transact any business which might have been transacted at the original
meeting. However, when any shareholders' meeting is adjourned for more
than forty-five days or, if after adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of an original meeting.
Section 7. Voting.
The shareholders entitled to notice of any meeting or to vote at
any such meeting shall be only persons in whose name shares stand on the
stock records of the corporation on the record date determined in
accordance with Section 8 of this Article.
Voting shall in all cases be subject to the provisions of Chapter
7 of the California General Corporation Law, and to the following
provisions:
(a) Subject to clause (g), shares held by an administrator,
executor, guardian, conservator or custodian may be voted by such holder
either in person or by proxy, without a transfer of such shares into the
holder's name; and shares standing in the name of a trustee may be voted
by the trustee, either in person or by proxy, but no trustee shall be
entitled to vote shares held by such trustee without a transfer of such
shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by
such receiver; and shares held by or under the control of a receiver may
be voted by such receiver without the transfer thereof into the receiver's
name if authority to do so is contained in the order of the court by which
such receiver was appointed.
PAGE 4
ARTICLE II
(c) Subject to the provisions of Section 705 of the California
General Corporation Law and except where otherwise agreed in writing
between the parties, a shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been transferred into
the name of the pledgee, and thereafter the pledgee shall be entitled to
vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the
minor, in person or by proxy, whether or not the corporation has notice,
actual or constructive, of the non-age unless a guardian of the minor's
property has been appointed and written notice of such appointment given
to the corporation.
(e) Shares standing in the name of another corporation, domestic
or foreign, may be voted by such officer, agent or proxyholder as the
bylaws of such other corporation may prescribe or, in the absence of such
provision, as the Board of Directors of such other corporation may
determine or, in the absence of such determination, by the chairman
of the board, president or any vice president of such other corporation,
or by any other person authorized to do so by the chairman of the board,
president or any vice president of such other corporation. Shares which
are purported to be voted or any proxy purported to be executed in the
name of a corporation (whether or not any title of the person signing is
indicated) shall be presumed to be voted or the proxy executed in
accordance with the provisions of this subdivision, unless the contrary is
shown.
(f) Shares of the corporation owned by any of its subsidiaries
shall not be entitled to vote on any matter.
(g) Shares of the corporation held by the corporation in a
fiduciary capacity, and shares of the corporation held in a fiduciary
capacity by any of its subsidiaries, shall not be entitled to vote on any
matter, except to the extent that the settlor or beneficial owner
possesses and exercises a right to vote or to give the corporation binding
instructions as to how to vote such shares.
(h) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, husband and wife as community property, tenants by the
entirety, voting trustees, persons entitled to vote under a shareholder
voting agreement or otherwise, or if two or more persons (including
proxyholders) have the same fiduciary relationship respecting the same
shares, unless the secretary of the corporation is given written notice to
the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
PAGE 5
ARTICLE II
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so voting
binds all;
(iii) If more than one vote, but the vote is evenly split
on any particular matter, each faction may vote the
securities in question proportionately.
If the instrument so filed or the registration of the shares shows that
any such tenancy is held in unequal interests, a majority or even split
for the purpose of this section shall be a majority or even split in
interest.
No shareholder of any class of stock of this corporation shall be
entitled to cumulate votes at any election of directors of this
corporation.
Elections for directors need not be by ballot; provided, however,
that all elections for directors must be by ballot upon demand made by a
shareholder at the meeting and before the voting begins.
In any election of directors, the candidates receiving the
highest number of votes of the shares entitled to be voted for them up to
the number of directors to be elected by such shares are elected.
Section 8. Record Date.
The Board may fix, in advance, a record date for the
determination of the shareholders entitled to notice of any meeting or to
vote or entitled to receive payment of any dividend or other distribution,
or any allotment of rights, or to exercise rights in respect of any other
lawful action. The record date so fixed shall be not more than sixty days
nor less than ten days prior to the date of the meeting nor more than
sixty days prior to any other action. When a record date is so fixed, only
shareholders of record at the close of business on that date are entitled
to notice of and to vote at the meeting or to receive the dividend,
distribution, or allotment of rights, or to exercise the rights, as the
case may be, notwithstanding any transfer of shares on the books of the
corporation after the record date, except as otherwise provided by law or
these Bylaws. A determination of shareholders of record entitled to
notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for
the adjourned meeting. The Board shall fix a new record date if the
meeting is adjourned for more than forty-five days.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the
PAGE 6
ARTICLE II
close of business on the business day next preceding the day on which the
meeting is held. The record date for determining shareholders for any
purpose other than as set forth in this Section 8 or Section 10 of this
Article shall be at the close of business on the day on which the Board
adopts the resolution relating thereto, or the sixtieth day prior to the
date of such other action, whichever is later.
Section 9. Consent of Absentees.
The transactions of any meeting of shareholders, however called
and noticed, and wherever held, are as valid as though had at a meeting
duly held after regular call and notice, if a quorum is present either in
person or by proxy, and if, either before or after the meeting, each of
the persons entitled to vote, not present in person or by proxy, signs a
written waiver of notice or a consent to the holding of the meeting or an
approval of the minutes thereof. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of
the meeting. Neither the business to be transacted at nor the purpose of
any regular or special meeting of shareholders need be specified in any
written waiver of notice, consent to the holding of the meeting or
approval of the minutes thereof, except as provided in Section 601 (f) of
the California General Corporation Law.
Section 10. Action Without Meeting.
Subject to Section 603 of the California General Corporation Law,
any action which, under any provision of the California General
Corporation Law, may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice if a
consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number
of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and
voted. Unless a record date for voting purposes be fixed as provided in
Section 8 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 10, when no prior action
by the Board has been taken, shall be the day on which the first written
consent is given.
Section 11. Proxies.
Every person entitled to vote shares has the right to do so
either in person or by one or more persons, not to exceed three,
authorized by a written proxy executed by such shareholder and filed with
the Secretary. Subject to the following sentence, any proxy duly executed
continues in full force and effect until revoked by the person executing
it prior to the vote pursuant thereto by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy
PAGE 7
ARTICLE III
executed by the person executing the prior proxy and presented to the
meeting, or by attendance at the meeting and voting in person by the
person executing the proxy; provided, however, that a proxy is not revoked
by the death or incapacity of the maker unless, before the vote is
counted, written notice of such death or incapacity is received by this
corporation. No proxy shall be valid after the expiration of eleven
months from the date of its execution unless otherwise provided in the
proxy.
Section 12. Inspectors of Election.
In advance of any meeting of shareholders, the Board may appoint
any persons other than nominees as inspectors of election to act at such
meeting and any adjournment thereof. If inspectors of election are not so
appointed, or if any persons so appointed fail to appear or refuse to act,
the chairman of any such meeting may, and on the request of any
shareholder or shareholder's proxy shall, make such appointments at the
meeting. The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares present shall determine whether one or
three inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section
707 (b) of the California General Corporation Law and shall include:
determining the number of shares outstanding and the voting power of each,
the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies; receiving votes, ballots or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote; counting and tabulating all
votes or consents; determining when the polls shall close; determining the
result; and doing such acts as may be proper to conduct the election or
vote with fairness to all shareholders. If there are three inspectors of
election, the decision, act or certificate of a majority is effective in
all respects as the decision, act or certificate of all. Any report or
certificate made by the inspectors of election is prima facie evidence of
the facts stated therein.
ARTICLE III -- DIRECTORS
Section 1. Powers.
Subject to limitations of the Articles, of these Bylaws and of
the California General Corporation Law relating to action required to be
approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers
shall be exercised by or under the direction of the Board. The Board may
delegate the management of the day-to-day operation of the business of the
PAGE 8
corporation provided that the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised under the
ultimate direction of the Board. Without prejudice to such general
powers, but subject to the same limitations, it is hereby expressly
declared that the Board shall have the following powers in addition to the
other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and
employees of the corporation, prescribe the powers and duties for them as
may not be inconsistent with law, with the Articles or these Bylaws, fix
their compensation and require from them security for faithful service.
(b) To conduct, manage and control the affairs and business of
the corporation and to make such rules and regulations therefor not
inconsistent with law, or with the Articles or these Bylaws, as they may
deem best.
(c) To adopt, make and use a corporate seal, and to prescribe
the forms of certificates of stock, and to alter the form of such seal and
of such certificates from time to time as in their judgment they may deem
best.
(d) To authorize the issuance of shares of stock of the
corporation from time to time, upon such terms and for such consideration
as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of
the corporation, and to cause to be executed and delivered therefor, in
the corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor.
Section 2. Number of Directors.
The authorized number of directors shall be not less than fifteen
nor more than twenty until changed by amendment of the Articles or by a
Bylaw duly adopted by the shareholders. The exact number of directors
shall be fixed, within the limits specified, by the Board by adoption of
a resolution or by the shareholders in the same manner provided in these
Bylaws for the amendment thereof.
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ARTICLE III
Section 3. Election and Term of Office.
The directors shall be elected at each annual meeting of the
shareholders, but if any such annual meeting is not held or the directors
are not elected thereat, the directors may be elected at any special
meeting of shareholders held for that purpose. Each director shall hold
office until the next annual meeting and until a successor has been
elected and qualified.
Section 4. Vacancies.
Any director may resign effective upon giving written notice to
the Chairman of the Board, the President, the Secretary or the Board,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a
successor may be elected to take office when the resignation becomes
effective.
Vacancies in the Board, except those existing as a result of a
removal of a director, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until the next annual meeting
and until such director's successor has been elected and qualified.
Vacancies existing as a result of a removal of a director may be filled by
the shareholders as provided by law.
A vacancy or vacancies in the Board shall be deemed to exist in
case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the shareholders fail,
at any annual or special meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to
be voted for at that meeting.
The Board may declare vacant the office of a director who has
been declared of unsound mind by an order of court or convicted of a
felony.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors. Any such
election by written consent other than to fill a vacancy created by
removal requires the consent of a majority of the outstanding shares
entitled to vote. If the Board accepts the resignation of a director
tendered to take effect at a future time, the Board or the shareholders
shall have power to elect a successor to take office when the resignation
is to become effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's
term of office.
PAGE 10
ARTICLE III
Section 5. Place of Meeting.
Regular or special meetings of the Board shall be held at any
place within or without the State of California which has been designated
from time to time by the Board or as provided in these Bylaws. In the
absence of such designation, regular meetings shall be held at the
principal office of the corporation.
Section 6. Regular Meetings.
Promptly following each annual meeting of shareholders the Board
shall hold a regular meeting for the purpose of organization, election of
officers and the transaction of other business.
Regular meetings of the Board shall be held at the principal
office of the corporation without notice on the third Thursday of the
months of February, April, May, July and September, and on the second
Thursday in December, at the hour of 9:00 a.m. or as soon thereafter as
the regular meeting of the Board of Directors of Edison International is
adjourned, and on the third Thursday in March, at the hour of 8:00 a.m. or
as soon thereafter as the regular meeting of the Board of Directors of
Edison International is adjourned. Call and notice of all regular
meetings of the Board are not required.
Section 7. Special Meetings.
Special meetings of the Board for any purpose or purposes may be
called at any time by the Chairman of the Board, the President, any Vice
President, the Secretary or by any two directors.
Special meetings of the Board shall be held upon four days'
written notice or forty-eight hours' notice given personally or by
telephone, telegraph, telex, facsimile, electronic mail or other similar
means of communication. Any such notice shall be addressed or delivered
to each director at such director's address as it is shown upon the
records of the corporation or as may have been given to the corporation by
the director for purposes of notice or, if such address is not shown on
such records or is not readily ascertainable, at the place in which the
meetings of the directors are regularly held. The notice need not specify
the purpose of such special meeting.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mail, postage prepaid.
Any other written notice shall be deemed to have been given at the time it
is personally delivered to the recipient or is delivered to a common
PAGE 11
ARTICLE III
carrier for transmission, or actually transmitted by the person giving the
notice by electronic means to the recipient. Oral notice shall be deemed
to have been given at the time it is communicated, in person or by
telephone, radio or other similar means to the recipient or to a person at
the office of the recipient who the person giving the notice has reason to
believe will promptly communicate it to the recipient.
Section 8. Quorum.
One-third of the number of authorized directors constitutes a
quorum of the Board for the transaction of business, except to adjourn as
provided in Section ll of this Article. Every act or decision done or
made by a majority of the directors present at a meeting duly held at
which a quorum is present shall be regarded as the act of the Board,
unless a greater number is required by law or by the Articles; provided,
however, that a meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required
quorum for such meeting.
Section 9. Participation in Meetings by Conference Telephone.
Members of the Board may participate in a meeting through use of
conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another. Such
participation constitutes presence in person at such meeting.
Section 10. Waiver of Notice.
The transactions of any meeting of the Board, however called and
noticed or wherever held, are as valid as though had at a meeting duly
held after regular call and notice if a quorum is present and if, either
before or after the meeting, each of the directors not present signs a
written waiver of notice, a consent to holding such meeting or an approval
of the minutes thereof. All such waivers, consents or approvals shall be
filed with the corporate records or made a part of the minutes of the
meeting.
Section 11. Adjournment.
A majority of the directors present, whether or not a quorum is
present, may adjourn any directors' meeting to another time and place.
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned. If the meeting is adjourned for more than twenty-four hours,
notice of any adjournment to another time or place shall be given prior to
the time of the adjourned meeting to the directors who were not present at
the time of the adjournment.
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ARTICLE III
Section 12. Fees and Compensation.
Directors and members of committees may receive such
compensation, if any, for their services, and such reimbursement for
expenses, as may be fixed or determined by the Board.
Section 13. Action Without Meeting.
Any action required or permitted to be taken by the Board may be
taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or
consents shall have the same force and effect as a unanimous vote of the
Board and shall be filed with the minutes of the proceedings of the Board.
Section 14. Rights of Inspection.
Every director shall have the absolute right at any reasonable
time to inspect and copy all books, records and documents of every kind
and to inspect the physical properties of the corporation and also of its
subsidiary corporations, domestic or foreign. Such inspection by a
director may be made in person or by agent or attorney and includes the
right to copy and make extracts.
Section 15. Committees.
The Board may appoint one or more committees, each consisting of
two or more directors, to serve at the pleasure of the Board. The Board
may delegate to such committees any or all of the authority of the Board
except with respect to:
(a) The approval of any action for which the California General
Corporation Law also requires shareholders' approval or approval of the
outstanding shares;
(b) The filling of vacancies on the Board or in any committee;
(c) The fixing of compensation of the directors for serving on
the Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new
Bylaws;
(e) The amendment or repeal of any resolution of the Board which
by its express terms is not so amendable or repealable;
PAGE 13
ARTICLE IV
(f) A distribution to the shareholders of the corporation except
at a rate or in a periodic amount or within a price range determined by
the Board; or
(g) The appointment of other committees of the Board or the
members thereof.
Any such committee, or any member or alternate member thereof,
must be appointed by resolution adopted by a majority of the exact number
of authorized directors as specified in Section 2 of this Article. The
Board shall have the power to prescribe the manner and timing of giving of
notice of regular or special meetings of any committee and the manner in
which proceedings of any committee shall be conducted. In the absence of
any such prescription, such committee shall have the power to prescribe
the manner in which its proceedings shall be conducted. Unless the Board
or such committee shall otherwise provide, the regular and special
meetings and other actions of any such committee shall be governed by the
provisions of this Article applicable to meetings and actions of the
Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV -- OFFICERS
Section 1. Officers.
The officers of the corporation shall be a Chairman of the Board,
a President, a Chief Financial Officer, one or more Vice Presidents, a
General Counsel, one or more Associate General Counsel, one or more
Assistant General Counsel, a Controller, one or more Assistant
Controllers, a Treasurer, one or more Assistant Treasurers, a Secretary
and one or more Assistant Secretaries, and such other officers as may be
elected or appointed in accordance with Section 5 of this Article. The
Board, the Chairman of the Board or the President may confer a special
title upon any Vice President not specified herein. Any number of offices
of the corporation may be held by the same person.
Section 2. Election.
The officers of the corporation, except such officers as may be
elected or appointed in accordance with the provisions of Section 5 or
Section 6 of this Article, shall be chosen annually by, and shall serve at
the pleasure of the Board, and shall hold their respective offices until
their resignation, removal, or other disqualification from service, or
until their respective successors shall be elected.
PAGE 14
ARTICLE IV
Section 3. Eligibility of Chairman or President.
No person shall be eligible for the office of Chairman of the
Board or President unless such person is a member of the Board of the
corporation; any other officer may or may not be a director.
Section 4. Removal and Resignation.
Any officer may be removed, either with or without cause, by the
Board at any time or by any officer upon whom such power or removal may be
conferred by the Board. Any such removal shall be without prejudice to
the rights, if any, of the officer under any contract of employment of the
officer.
Any officer may resign at any time by giving written notice to
the corporation, but without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or
at any later time specified therein and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make
it effective.
Section 5. Appointment of Other Officers.
The Board may appoint such other officers as the business of the
corporation may require, each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in the Bylaws
or as the Board may from time to time determine.
Section 6. Vacancies.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled at any time deemed
appropriate by the Board in the manner prescribed in these Bylaws for
regular election or appointment to such office.
Section 7. Salaries.
The salaries of the Chairman of the Board, President, Chief
Financial Officer, Vice Presidents, General Counsel, Controller, Treasurer
and Secretary of the corporation shall be fixed by the Board. Salaries of
all other officers shall be as approved from time to time by the chief
executive officer.
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ARTICLE IV
Section 8. Furnish Security for Faithfulness.
Any officer or employee shall, if required by the Board, furnish
to the corporation security for faithfulness to the extent and of the
character that may be required.
Section 9. Chairman's Duties; Succession to Such Duties in Chairman's
Absence or Disability.
The Chairman of the Board shall be the chief executive officer of
the corporation and shall preside at all meetings of the shareholders and
of the Board. Subject to the Board, the Chairman of the Board shall have
charge of the business of the corporation, including the construction of
its plants and properties and the operation thereof. The Chairman of the
Board shall keep the Board fully informed, and shall freely consult them
concerning the business of the corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as the chief executive officer of the corporation; in
the absence or disability of the Chairman of the Board and the President,
the next in order of election by the Board of the Vice Presidents shall
act as chief executive officer of the corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as Chairman of the Board at meetings of the Board; in
the absence or disability of the Chairman of the Board and the President,
the next, in order of election by the Board, of the Vice Presidents who is
a member of the Board shall act as Chairman of the Board at any such
meeting of the Board; in the absence or disability of the Chairman of the
Board, the President, and such Vice Presidents who are members of the
Board, the Board shall designate a temporary Chairman to preside at any
such meeting of the Board.
Section 10. President's Duties.
The President shall perform such other duties as the Chairman of
the Board shall delegate or assign to such officer.
Section 11. Chief Financial Officer.
The Chief Financial Officer of the corporation shall be the chief
consulting officer in all matters of financial import and shall have
control over all financial matters concerning the corporation.
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ARTICLE IV
Section 12. Vice Presidents' Duties.
The Vice Presidents shall perform such other duties as the chief
executive officer shall designate.
Section 13. General Counsel's Duties.
The General Counsel shall be the chief consulting officer of the
corporation in all legal matters and, subject to the chief executive
officer, shall have control over all matters of legal import concerning
the corporation.
Section 14. Associate General Counsel's and Assistant General Counsel's
Duties.
The Associate General Counsel shall perform such of the duties of
the General Counsel as the General Counsel shall designate, and in the
absence or disability of the General Counsel, the Associate General
Counsel, in order of election to that office by the Board at its latest
organizational meeting, shall perform the duties of the General Counsel.
The Assistant General Counsel shall perform such duties as the General
Counsel shall designate.
Section 15. Controller's Duties.
The Controller shall be the chief accounting officer of the
Corporation and, subject to the Chief Financial Officer, shall have
control over all accounting matters concerning the Corporation and shall
perform such other duties as the Chief Executive Officer shall designate.
Section 16. Assistant Controllers' Duties.
The Assistant Controllers shall perform such of the duties of the
Controller as the Controller shall designate, and in the absence or
disability of the Controller, the Assistant Controllers, in order of
election to that office by the Board at its latest organizational meeting,
shall perform the duties of the Controller.
Section 17. Treasurer's Duties.
It shall be the duty of the Treasurer to keep in custody or
control all money, stocks, bonds, evidences of debt, securities and other
items of value that may belong to, or be in the possession or control of,
the corporation, and to dispose of the same in such manner as the Board or
the chief executive officer may direct, and to perform all acts incident
to the position of Treasurer.
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ARTICLE IV
Section 18. Assistant Treasurers' Duties.
The Assistant Treasurers shall perform such of the duties of the
Treasurer as the Treasurer shall designate, and in the absence or
disability of the Treasurer, the Assistant Treasurers, in order of
election to that office by the Board at its latest organizational meeting,
shall perform the duties of the Treasurer, unless action is taken by the
Board as contemplated in Article IV, Section 22.
Section 19. Secretary's Duties.
The Secretary shall keep or cause to be kept full and complete
records of the proceedings of shareholders, the Board and its committees
at all meetings, and shall affix the corporate seal and attest by signing
copies of any part thereof when required.
The Secretary shall keep, or cause to be kept, a copy of the
Bylaws of the corporation at the principal office in accordance with
Section 213 of the California General Corporation Law.
The Secretary shall be the custodian of the corporate seal and
shall affix it to such instruments as may be required.
The Secretary shall keep on hand a supply of blank stock
certificates of such forms as the Board may adopt.
The Secretary shall serve or cause to be served by publication or
otherwise, as may be required, all notices of meetings and of other
corporate acts that may by law or otherwise be required to be served, and
shall make or cause to be made and filed in the principal office of the
corporation, the necessary certificate or proofs thereof.
An affidavit of mailing of any notice of a shareholders' meeting
or of any report, in accordance with the provisions of Section 601 (b) of
the California General Corporation Law, executed by the Secretary shall be
prima facie evidence of the fact that such notice or report had been duly
given.
The Secretary may, with the Chairman of the Board, the President,
or a Vice President, sign certificates of ownership of stock in the
corporation, and shall cause all certificates so signed to be delivered to
those entitled thereto.
The Secretary shall keep all records required by the California
General Corporation Law.
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ARTICLE IV
The Secretary shall generally perform the duties usual to the
office of secretary of corporations, and such other duties as the chief
executive officer shall designate.
Section 20. Assistant Secretaries' Duties.
Assistant Secretaries shall perform such of the duties of the
Secretary as the Secretary shall designate, and in the absence or
disability of the Secretary, the Assistant Secretaries, in the order of
election to that office by the Board at its latest organizational meeting,
shall perform the duties of the Secretary, unless action is taken by the
Board as contemplated in Article IV, Sections 21 and 22 of these Bylaws.
Section 21. Secretary Pro Tempore.
At any meeting of the Board or of the shareholders from which the
Secretary is absent, a Secretary pro tempore may be appointed and act.
Section 22. Election of Acting Treasurer or Acting Secretary.
The Board may elect an Acting Treasurer, who shall perform all
the duties of the Treasurer during the absence or disability of the
Treasurer, and who shall hold office only for such a term as shall be
determined by the Board.
The Board may elect an Acting Secretary, who shall perform all
the duties of the Secretary during the absence or disability of the
Secretary, and who shall hold office only for such a term as shall be
determined by the Board.
Whenever the Board shall elect either an Acting Treasurer or
Acting Secretary, or both, the officers of the corporation as set forth in
Article IV, Section 1 of these Bylaws, shall include as if therein
specifically set out, an Acting Treasurer or an Acting Secretary, or both.
Section 23. Performance of Duties.
Officers shall perform the duties of their respective offices as
stated in these Bylaws, and such additional duties as the Board shall
designate.
PAGE 19
ARTICLE V
ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records.
(a) A shareholder or shareholders holding at least five percent
in the aggregate of the outstanding voting shares of the corporation or
who hold at least one percent of such voting shares and have filed a
Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors of the corporation shall have an
absolute right to do either or both of the following:
(i) Inspect and copy the record of shareholders' names
and addresses and shareholdings during usual business
hours upon five business days' prior written demand
upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the
corporation, upon five business days' prior written
demand and upon the tender of its usual charges for
such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon
request), a list of the shareholders' names and
addresses who are entitled to vote for the election
of directors and their shareholdings, as of the most
recent record date for which it has been compiled or
as of a date specified by the shareholder subsequent
to the date of demand.
(b) The record of shareholders shall also be open to inspection
and copying by any shareholder or holder of a voting trust certificate at
any time during usual business hours upon written demand on the
corporation, for a purpose reasonably related to such holder's interest as
a shareholder or holder of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings
of the shareholders and the Board and committees of the Board shall be
open to inspection upon written demand on the corporation of any
shareholder or holder of a voting trust certificate at any reasonable time
during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as a holder of such voting trust
certificate.
(d) Any such inspection and copying under this Article may be
made in person or by agent or attorney.
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ARTICLE V
Section 2. Inspection of Bylaws.
The corporation shall keep in its principle office the original
or a copy of these Bylaws as amended to date, which shall be open to
inspection by shareholders at all reasonable times during office hours.
Section 3. Contracts and Other Instruments, Loans, Notes and Deposits
of Funds.
The Chairman of the Board, the President, or a Vice President,
either alone or with the Secretary or an Assistant Secretary, or the
Secretary alone, shall execute in the name of the corporation such written
instruments as may be authorized by the Board and, without special
direction of the Board, such instruments as transactions of the ordinary
business of the corporation may require and, such officers without the
special direction of the Board may authenticate, attest or countersign any
such instruments when deemed appropriate. The Board may authorize any
person, persons, entity, entities, attorney, attorneys, attorney-in-fact,
attorneys-in-fact, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the
corporation, and such authority may be general or confined to specific
instances.
No loans shall be contracted on behalf of the corporation and no
evidences of such indebtedness shall be issued in its name unless
authorized by the Board as it may direct. Such authority may be general
or confined to specific instances.
All checks, drafts, or other similar orders for the payment of
money, notes, or other such evidences of indebtedness issued in the name
of the corporation shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as the Board or chief
executive officer may direct.
Unless authorized by the Board or these Bylaws, no officer,
agent, employee or any other person or persons shall have any power or
authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or amount.
All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Board may direct.
PAGE 21
ARTICLE V
Section 4. Certificates of Stock.
Every holder of shares of the corporation shall be entitled to
have a certificate signed in the name of the corporation by the Chairman
of the Board, the President, or a Vice President and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary,
certifying the number of shares and the class or series of shares owned by
the shareholder. Any or all of the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent or registrar
at the date of issue.
Certificates for shares may be used prior to full payment under
such restrictions and for such purposes as the Board may provide;
provided, however, that on any certificate issued to represent any partly
paid shares, the total amount of the consideration to be paid therefor and
the amount paid thereon shall be stated.
Except as provided in this Section, no new certificate for shares
shall be issued in lieu of an old one unless the latter is surrendered and
canceled at the same time. The Board may, however, if any certificate for
shares is alleged to have been lost, stolen or destroyed, authorize the
issuance of a new certificate in lieu thereof, and the corporation may
require that the corporation be given a bond or other adequate security
sufficient to indemnify it against any claim that may be made against it
(including expense or liability) on account of the alleged loss, theft or
destruction of such certificate or the issuance of such new certificate.
Section 5. Transfer Agent, Transfer Clerk and Registrar.
The Board may, from time to time, appoint transfer agents,
transfer clerks, and stock registrars to transfer and register the
certificates of the capital stock of the corporation, and may provide that
no certificate of capital stock shall be valid without the signature of
the stock transfer agent or transfer clerk, and stock registrar.
Section 6. Representation of Shares of Other Corporations.
The chief executive officer or any other officer or officers
authorized by the Board or the chief executive officer are each authorized
to vote, represent and exercise on behalf of the corporation all rights
incident to any and all shares of any other corporation or corporations
PAGE 22
ARTICLE V
standing in the name of the corporation. The authority herein granted may
be exercised either by any such officer in person or by any other person
authorized so to do by proxy or power of attorney duly executed by said
officer.
Section 7. Stock Purchase Plans.
The corporation may adopt and carry out a stock purchase plan or
agreement or stock option plan or agreement providing for the issue and
sale for such consideration as may be fixed of its unissued shares, or of
issued shares acquired, to one or more of the employees or directors of
the corporation or of a subsidiary or to a trustee on their behalf and for
the payment for such shares in installments or at one time, and may
provide for such shares in installments or at one time, and may provide
for aiding any such persons in paying for such shares by compensation for
services rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold
under the plan or agreement, the number of shares which may be subscribed
for, the method of payment therefor, the reservation of title until full
payment therefor, the effect of the termination of employment and option
or obligation on the part of the corporation to repurchase the shares upon
termination of employment, restrictions upon transfer of the shares, the
time limits of and termination of the plan, and any other matters, not in
violation of applicable law, as may be included in the plan as approved or
authorized by the Board or any committee of the Board.
Section 8. Fiscal Year and Subdivisions.
The calendar year shall be the corporate fiscal year of the
corporation. For the purpose of paying dividends, for making reports and
for the convenient transaction of the business of the corporation, the
Board may divide the fiscal year into appropriate subdivisions.
Section 9. Construction and Definitions.
Unless the context otherwise requires, the general provisions,
rules of construction and definitions contained in the General Provisions
of the California Corporations Code and in the California General
Corporation Law shall govern the construction of these Bylaws.
PAGE 23
ARTICLE VI
ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers.
Each person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action,
suit or proceeding, formal or informal, whether brought in the name of the
corporation or otherwise and whether of a civil, criminal, administrative
or investigative nature (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is an alleged
action or inaction in an official capacity or in any other capacity while
serving as a director or officer, shall, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permissible under
California law and the corporation's Articles of Incorporation, against
all costs, charges, expenses, liabilities and losses (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid
or to be paid in settlement) reasonably incurred or suffered by such
person in connection therewith, and such indemnification shall continue as
to a person who has ceased to be a director or officer and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that (A) the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of the corporation; (B) the corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) other than a proceeding by or in the name of
the corporation to procure a judgment in its favor only if any settlement
of such a proceeding is approved in writing by the corporation; (C) that
no such person shall be indemnified (i) except to the extent that the
aggregate of losses to be indemnified exceeds the amount of such losses
for which the director or officer is paid pursuant to any directors' and
officers' liability insurance policy maintained by the corporation; (ii)
on account of any suit in which judgment is rendered against such person
for an accounting of profits made from the purchase or sale by such person
of securities of the corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law; (iii) if
a court of competent jurisdiction finally determines that any
indemnification hereunder is unlawful; and (iv) as to circumstances in
which indemnity is expressly prohibited by Section 317 of the General
Corporation Law of California (the "Law"); and (D) that no such person
shall be indemnified with regard to any action brought by or in the right
of the corporation for breach of duty to the corporation and its
ARTICLE VI
shareholders (a) for acts or omissions involving intentional misconduct or
knowing and culpable violation of law; (b) for acts or omissions that the
director or officer believes to be contrary to the best interests of the
corporation or its shareholders or that involve the absence of good faith
on the part of the director or officer; (c) for any transaction from which
the director or officer derived an improper personal benefit; (d) for acts
or omissions that show a reckless disregard for the director's or
officer's duty to the corporation or its shareholders in circumstances in
which the director or officer was aware, or should have been aware, in the
ordinary course of performing his or her duties, of a risk of serious
injury to the corporation or its shareholders; (e) for acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's or officer's duties to the corporation or its
shareholders; and (f) for costs, charges, expenses, liabilities and losses
arising under Section 310 or 316 of the Law. The right to indemnification
conferred in this Article shall include the right to be paid by the
corporation expenses incurred in defending any proceeding in advance of
its final disposition; provided, however, that if the Law permits the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, such advances shall be
made only upon delivery to the corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts to the
corporation if it shall be ultimately determined that such person is not
entitled to be indemnified.
Section 2. Indemnification of Employees and Agents.
A person who was or is a party or is threatened to be made a
party to or is involved in any proceeding by reason of the fact that he or
she is or was an employee or agent of the corporation or is or was serving
at the request of the corporation as an employee or agent of another
enterprise, including service with respect to employee benefit plans,
whether the basis of such action is an alleged action or inaction in an
official capacity or in any other capacity while serving as an employee or
agent, may, subject to the terms of any agreement between the corporation
and such person, be indemnified and held harmless by the corporation to
the fullest extent permitted by California law and the corporation's
Articles of Incorporation, against all costs, charges, expenses,
liabilities and losses, (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith.
PAGE 25
ARTICLE VI
Section 3. Right of Directors and Officers to Bring Suit.
If a claim under Section 1 of this Article is not paid in full by
the corporation within 30 days after a written claim has been received by
the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be
paid the expense of prosecuting such claim. Neither the failure of the
corporation (including its Board, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is permissible in the
circumstances because he or she has met the applicable standard of
conduct, if any, nor an actual determination by the corporation (including
its Board, independent legal counsel, or its shareholders) that the
claimant has not met the applicable standard of conduct, shall be a
defense to the action or create a presumption for the purpose of an action
that the claimant has not met the applicable standard of conduct.
Section 4. Successful Defense.
Notwithstanding any other provision of this Article, to the
extent that a director or officer has been successful on the merits or
otherwise (including the dismissal of an action without prejudice or the
settlement of a proceeding or action without admission of liability) in
defense of any proceeding referred to in Section 1 or in defense of any
claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred in
connection therewith.
Section 5. Non-Exclusivity of Rights.
The right to indemnification provided by this Article shall not
be exclusive of any other right which any person may have or hereafter
acquire under any statute, bylaw, agreement, vote of shareholders or
disinterested directors or otherwise.
Section 6. Insurance.
The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not
the corporation would have the power to indemnify such person against such
expense, liability or loss under the Law.
PAGE 26
ARTICLE VI
Section 7. Expenses as a Witness.
To the extent that any director, officer, employee or agent of
the corporation is by reason of such position, or a position with another
entity at the request of the corporation, a witness in any action, suit or
proceeding, he or she shall be indemnified against all costs and expenses
actually and reasonably incurred by him or her on his or her behalf in
connection therewith.
Section 8. Indemnity Agreements.
The corporation may enter into agreements with any director,
officer, employee or agent of the corporation providing for
indemnification to the fullest extent permissible under the Law and the
corporation's Articles of Incorporation.
Section 9. Separability.
Each and every paragraph, sentence, term and provision of this
Article is separate and distinct so that if any paragraph, sentence, term
or provision hereof shall be held to be invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the validity
or enforceability of any other paragraph, sentence, term or provision
hereof. To the extent required, any paragraph, sentence, term or
provision of this Article may be modified by a court of competent
jurisdiction to preserve its validity and to provide the claimant with,
subject to the limitations set forth in this Article and any agreement
between the corporation and claimant, the broadest possible
indemnification permitted under applicable law.
Section 10. Effect of Repeal or Modification.
Any repeal or modification of this Article shall not adversely
affect any right of indemnification of a director or officer existing at
the time of such repeal or modification with respect to any action or
omission occurring prior to such repeal or modification.
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General.
The provisions of this Article shall be operative only during a
national emergency declared by the President of the United States or the
person performing the President's functions, or in the event of a nuclear,
atomic or other attack on the United States or a disaster making it
impossible or impracticable for the corporation to conduct its business
PAGE 27
ARTICLE VII
without recourse to the provisions of this Article. Said provisions in
such event shall override all other Bylaws of the corporation in conflict
with any provisions of this Article, and shall remain operative so long as
it remains impossible or impracticable to continue the business of the
corporation otherwise, but thereafter shall be inoperative; provided that
all actions taken in good faith pursuant to such provisions shall
thereafter remain in full force and effect unless and until revoked by
action taken pursuant to the provisions of the Bylaws other than those
contained in this Article.
Section 2. Unavailable Directors.
All directors of the corporation who are not available to perform
their duties as directors by reason of physical or mental incapacity or
for any other reason or who are unwilling to perform their duties or whose
whereabouts are unknown shall automatically cease to be directors, with
like effect as if such persons had resigned as directors, so long as such
unavailability continues.
Section 3. Authorized Number of Directors.
The authorized number of directors shall be the number of
directors remaining after eliminating those who have ceased to be
directors pursuant to Section 2, or the minimum number required by law,
whichever number is greater.
Section 4. Quorum.
The number of directors necessary to constitute a quorum shall be
one-third of the authorized number of directors as specified in the
foregoing Section, or such other minimum number as, pursuant to the law or
lawful decree then in force, it is possible for the Bylaws of a
corporation to specify.
Section 5. Creation of Emergency Committee.
In the event the number of directors remaining after eliminating
those who have ceased to be directors pursuant to Section 2 is less than
the minimum number of authorized directors required by law, then until the
appointment of additional directors to make up such required minimum, all
the powers and authorities which the Board could by law delegate,
including all powers and authorities which the Board could delegate to a
committee, shall be automatically vested in an emergency committee, and
the emergency committee shall thereafter manage the affairs of the
corporation pursuant to such powers and authorities and shall have all
other powers and authorities as may by law or lawful decree be conferred
on any person or body of persons during a period of emergency.
PAGE 28
ARTICLE VII
Section 6. Constitution of Emergency Committee.
The emergency committee shall consist of all the directors
remaining after eliminating those who have ceased to be directors pursuant
to Section 2, provided that such remaining directors are not less than
three in number. In the event such remaining directors are less than
three in number the emergency committee shall consist of three persons,
who shall be the remaining director or directors and either one or two
officers or employees of the corporation, as the remaining director or
directors may in writing designate. If there is no remaining director,
the emergency committee shall consist of the three most senior officers
of the corporation who are available to serve, and if and to the extent
that officers are not available, the most senior employees of the
corporation. Seniority shall be determined in accordance with any
designation of seniority in the minutes of the proceedings of the Board,
and in the absence of such designation, shall be determined by rate of
remuneration. In the event that there are no remaining directors and no
officers or employees of the corporation available, the emergency
committee shall consist of three persons designated in writing by the
shareholder owning the largest number of shares of record as of the date
of the last record date.
Section 7. Powers of Emergency Committee.
The emergency committee, once appointed, shall govern its own
procedures and shall have power to increase the number of members thereof
beyond the original number, and in the event of a vacancy or vacancies
therein, arising at any time, the remaining member or members of the
emergency committee shall have the power to fill such vacancy or
vacancies. In the event at any time after its appointment all members of
the emergency committee shall die or resign or become unavailable to act
for any reason whatsoever, a new emergency committee shall be appointed in
accordance with the foregoing provisions of this Article.
Section 8. Directors Becoming Available.
Any person who has ceased to be a director pursuant to the
provisions of Section 2 and who thereafter becomes available to serve as
a director shall automatically become a member of the emergency committee.
Section 9. Election of Board of Directors.
The emergency committee shall, as soon after its appointment as
is practicable, take all requisite action to secure the election of a
ARTICLE VIII
board of directors, and upon such election all the powers and authorities
of the emergency committee shall cease.
Section 10. Termination of Emergency Committee.
In the event, after the appointment of an emergency committee, a
sufficient number of persons who ceased to be directors pursuant to
Section 2 become available to serve as directors, so that if they had not
ceased to be directors as aforesaid, there would be enough directors to
constitute the minimum number of directors required by law, then all such
persons shall automatically be deemed to be reappointed as directors and
the powers and authorities of the emergency committee shall be at an end.
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments.
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however,
that a Bylaw specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable Board or
vice versa may only be adopted by approval of the outstanding shares. The
exact number of directors within the maximum and minimum number specified
in these Bylaws may be amended by the Board alone.
EXHIBIT 10.12
EDISON INTERNATIONAL
EXECUTIVE INCENTIVE COMPENSATION PLAN
Effective January 1, 1997
WHEREAS, it has been determined that it is in the best interest of Edison
International and its affiliates to offer and maintain competitive
executive compensation programs designed to attract and retain qualified
executives;
WHEREAS, it has been determined that providing financial incentives to
executives that reinforce and recognize corporate, organizational and
individual performance and accomplishments will enhance the financial and
operational performance of Edison International and its affiliates; and
WHEREAS, it has been determined that an incentive compensation program
would encourage the attainment of short-term corporate goals and
objectives;
NOW, THEREFORE, the Edison International Executive Incentive Compensation
Plan has been established by the Compensation and Executive Personnel
Committee of the Board of Directors effective January 1, 1997, and made
available to eligible executives of Edison International and its
participating affiliates subject to the following terms and conditions:
1. Definitions. When capitalized herein, the following terms are defined
as indicated:
"Base Salary" is defined to be the annual salary of the Participant on the
last day of the year worked by the Participant.
"Board" means the Board of Directors of a Company.
"CEO" means the chief executive officer of a Company.
"Chairman" means the Chairman of the Board and Chief Executive Officer of
Edison International.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Edison International or a participating affiliate.
"Committee" means the Compensation and Executive Personnel Committee of
the Edison International Board of Directors.
page 1
"Participant" means the Chairman, president, executive vice presidents,
senior vice presidents, elected vice presidents, and senior managers whose
participation in this Plan has been approved by the Committee, Chairman
or Board.
"Plan" means the Edison International Executive Incentive Compensation
Plan.
2. Eligibility. To be eligible for the full amount of any incentive
award, an individual must have been a Participant for the entire calendar
year. Pro-rata awards may be distributed to Participants who are
discharged for reasons other than incompetence, misconduct or fraud, or
who resigned, retired or became disabled during the calendar year, or who
were Participants for less than the full year. In the event of the death
of a Participant during the calendar year, a pro-rata award may be made
at the discretion of the Committee, the Board, or CEO having the authority
to approve the Participant's award had the death not occurred.
3. Company Performance Goals. Each CEO will furnish recommended Company
performance goals to the Chairman. In consultation with the Chairman, the
Committee will select specific performance goals for the year. The
performance goals must represent relatively optimistic, but reasonably
attainable goals, the accomplishment of which will contribute
significantly to the attainment of Company strategic objectives.
4. Individual Incentive Award Levels. Company, organizational and
individual performance relative to the pre-established goals will
determine the award a Participant can receive. The Committee will
establish target award levels for the year as a percentage of base salary
at the time performance goals are set. If the Committee determines
individual and Company performance goals have been substantially met,
Participants will be eligible for individual incentive awards at the
target award levels established by the Committee. Stretch-maximum awards
may be established by the Committee and earned on the basis of performance
in excess of targets. All awards are discretionary and will be based on
the assessment of corporate and individual performance by the Committee
or the CEO.
5. Approval and Payment of Individual Awards. During the first quarter
of the year following the completion of the calendar year, the Chairman,
in consultation with each CEO, will assess the degree to which individual
and corporate goals and objectives have been achieved. Incentive award
recommendations for eligible officers will be developed. The Committee
will receive a report from the Chairman as to overall Company performance,
will deliberate on management recommendations, and will approve, or
recommend for approval by the applicable Board, the officer awards.
Awards to non-officers will be determined and approved by the CEO of each
Company, or his/her designee. All decisions of the Committee, the
Chairman and the CEOs regarding individual incentive awards will be final
and conclusive.
Incentive award payments will be made as soon as practical following the
appropriate approval. Payment will be made in cash except to the extent
an eligible Participant has
page 2
previously elected to defer payment of some or all of the award pursuant
to the terms of a deferred compensation plan of the Company or to the
extent the Committee or Board elects to defer payment of some or all of
the award. Awards made will be subject to any income or payroll tax
withholding or other deductions as may required by Federal, State or local
law.
Awards under this Plan will not be considered to be salary or other
compensation for the purpose of computing benefits to which the
Participant may be entitled under any qualified Company retirement plan,
including but not limited to the SCE Retirement Plan, the SCE Stock
Savings Plus Plan, or any other plan or arrangement of the Company for the
benefit of its employees if such plan or arrangement is a plan qualified
under Section 401(a) of the Code and is a trust exempt from Federal income
tax under Section 501(a) of the Code. Awards may be considered
compensation for nonqualified plan purposes depending on the terms and
conditions of the particular nonqualified plan.
Awards payable to Participants under this Plan shall constitute an
unsecured general obligation of the Company, and no special fund or trust
will be created, nor will any notes or securities be issued with respect
to any awards.
6. Plan Modifications and Adjustments. In order to ensure the incentive
features of the Plan, avoid distortion in its operation and compensate for
or reflect extraordinary changes which may have occurred during the
calendar year, the Committee may make adjustments to the Company
performance goals or other Plan terms and conditions before, during or
after the end of the calendar year to the extent it determines appropriate
in its sole discretion. Adjustments to the Plan shall be conclusive and
binding upon all parties concerned. The Plan may be modified or
terminated by the Committee at any time.
7. Plan Administration. This Plan and any officer awards made pursuant
to it are to be approved by the Committee, or the Board of the
participating affiliate after review by the Committee. Each CEO, or
his/her delegate, shall approve any non-officer awards. Administration
of the Plan is otherwise delegated to the Edison International Vice
President of Human Resources and designees acting under his/her direction.
Such vice president is authorized to approve ministerial amendments to the
Plan, to interpret Plan provisions, and to approve changes as may be
required by law or regulation. No Company, Board, Committee or individual
shall be liable to any person for any action taken or omitted in
connection with the interpretation and administration of the Plan.
8. Successors and Assigns. This Plan shall be binding upon and inure to
the benefit of the heirs, legal representatives, successors and assigns
of the Company and Participant. Notwithstanding the foregoing, any right
to receive payment hereunder is hereby expressly declared to be personal,
nonassignable and nontransferable, except by will, intestacy, or as
otherwise required by law, and in the event of any attempted
page 3
assignment, alienation or transfer of such rights contrary to the
provisions hereof, the Company shall have no further liability for
payments hereunder.
9. Beneficiaries. Any award approved following the death of a
Participant will be made to the Participant's most recently designated
beneficiary or beneficiaries under the Long-Term Incentive Compensation
Plan of the Company. If no beneficiary has been designated by the
Participant, or if no beneficiary survives the Participant, or if a
designated beneficiary should die after surviving the Participant but
before the award has been paid, any award approved will be paid in a lump-
sum payment to the Participant's estate as soon as practicable.
10. Capacity. If any person entitled to payments under this Plan is
incapacitated and unable to use such payments in his or her own best
interest, the Company may direct that payments (or any portion) be made
to that person's legal guardian or conservator, or that person's spouse,
as an alternative to the payment to the person unable to use the payments.
Court-appointed guardianship or conservatorship may be required by the
Company before payment is made. The Company shall have no obligation to
supervise the use of such payments.
11. No Right of Employment. Nothing contained herein shall be construed
as conferring upon the Participant the right to continue in the employ of
the Company as an officer or manager of the Company or in any other
capacity.
12. Severability and Controlling Law. The various provisions of this
Plan are severable in their entirety. Any determination of invalidity or
unenforceability of any one provision will have no effect on the
continuing force and effect of the remaining provisions. This Plan shall
be governed by the laws of the State of California.
EDISON INTERNATIONAL
Lillian R. Gorman
--------------------------
Lillian R. Gorman
Vice President
EXHIBIT 10.14
EDISON INTERNATIONAL
SOUTHERN CALIFORNIA EDISON COMPANY
RETIREMENT PLAN FOR DIRECTORS
As Amended May 15, 1997
I. GENERAL
1.1 Purpose
The purpose of this Plan is to provide recognition and retirement
compensation to eligible members of the Edison International and Southern
California Edison Company Boards of Directors ("Boards") to facilitate the
companies' ability to attract, retain, and reward members of the Boards.
1.2 Eligibility
Eligibility in this Plan is limited to members of the Boards who have at
least five years of total service (which need not be continuous service)
as directors, and who retire or resign from the Boards in good standing
or die while in service and in good standing. This Plan covers periods
of service both as an employee director and as an outside director. For
purposes of this Plan, a year of service will be determined on a calendar
year basis and a full year of service will be credited for any fractional
year served.
II. AMOUNT OF ANNUAL BENEFIT
2.1 Benefit
The Plan pays an annual retirement benefit equal to the annual retainer
in effect at the time of the eligible director's retirement, resignation,
or death. The retirement benefit will be paid quarterly in advance in
equal installments for the period described in Section 3.1(a). No
additional amount will be paid for service on any of the committees of the
Boards, nor will interest be paid.
2.2 Benefit of Directors in Service Before 1996
If a director has Board service prior to 1996, the Plan will pay an annual
retirement benefit determined by multiplying the director's years of
service before and after January 1, 1996 by the applicable compensation
base and dividing the sum of the products by the director's total years
of service. For service before 1996, the compensation base will be the
annual retainer plus eight times the regular monthly meeting fee in effect
at the time of the eligible director's retirement, resignation or death.
For service after 1995, the
page 1
compensation base will be the annual retainer in effect at the time of the
eligible director's retirement, resignation or death.
III. DURATION OF PAYMENTS
3.1 Benefit Period
(a) The Plan benefit will be paid to the retired director or his/her
surviving spouse for the number of years equal to the director's total
years of service on the Boards.
(b) A break in service on the Board of Edison International or
Southern California Edison Company which was required to allow the
director to render a period of uninterrupted high-level government
service, and which was followed by reelection to that Board within 12
months after the completion of such government service, will be recognized
under this Plan as a period of service on that Board.
(c) A year of simultaneous service on the Boards of Edison
International and Southern California Edison Company will be counted as
one year for computation of the Plan's benefit period.
3.2 Commencement of Payments
The first quarterly installment of Plan Benefits will be paid on the first
day of the calendar quarter following the director's retirement as a
director, or the 65th anniversary of the director's birth, whichever
occurs later.
3.3 Survivor Benefits
(a) If the director dies without leaving a surviving spouse, a lump
sum of any benefit payments remaining will be calculated and paid to the
estate of the director.
(b) If the director dies leaving a surviving spouse before retiring
from the Boards, benefit payments to that spouse will begin on the first
day of the calendar quarter following the date of the director's death,
or the 65th anniversary of the director's birth, whichever occurs later.
(c) If the director dies leaving a surviving spouse after benefit
payments have begun, benefit payments will continue and be paid to that
spouse.
(d) If the director dies leaving a surviving spouse after retirement
from the Boards but before benefit payments have begun, benefit payments
to that spouse will begin on the first day of the calendar quarter
following the 65th anniversary of the director's birth.
page 2
3.4 Termination of Benefit Payments
Once begun, benefit payments to a retired director or his/her surviving
spouse will continue until the earlier of the
o completion of payments for the Benefit Period, or
o date of death of the later to die of the director or the surviving
spouse. Upon said death, a lump sum of any remaining benefit payments
will be calculated and paid to that person's estate.
V. ADMINISTRATION
(a) This Plan is non-contributory, non-qualified and unfunded, and
represents an unsecured general obligation of each Company. No special
fund or trust will be created, nor will any notes or securities be issued
with respect to any retirement benefits.
(b) The Chair of each Company's Compensation and Executive Personnel
Committee, or the Vice President of Human Resources of Southern California
Edison Company, will have full and final authority to interpret this Plan,
and to make determinations advisable for the administration of this Plan,
to approve ministerial changes, and to approve changes as may be required
by law or regulation. All such decisions and determinations will be final
and binding upon all parties.
(c) If any person entitled to payments under this Plan is, in the
opinion of the Committees or their designee, incapacitated and unable to
use such payments in his/her own best interest, the Committees or their
designee may direct that payments (or any portion) be made to the person's
spouse or legal guardian, as an alternative to the payment to the person
unable to use the payments. The Committees or their designee will have
no obligation to supervise the use of such payments.
(d) This Plan will be governed by the laws of the State of
California.
EDISON INTERNATIONAL AND
SOUTHERN CALIFORNIA EDISON COMPANY
Beverly P. Ryder
___________________________________
Beverly P. Ryder, Secretary
EXHIBIT 10.16
EDISON INTERNATIONAL
OFFICER LONG-TERM INCENTIVE COMPENSATION PLAN
Amended and Restated as of January 1, 1997
WHEREAS, the Officer Long-Term Incentive Compensation Plan was approved
by the shareholders of SCEcorp on April 16, 1992 and was amended and
restated as the Edison International Officer Long-Term Incentive
Compensation Plan ("Plan") on February 15, 1996; and
WHEREAS, it is deemed appropriate to amend and restate the Plan to reflect
certain Security and Exchange Commission rule changes, and Plan amendments
addressing administration and change of control;
NOW, THEREFORE, the Plan is restated subject to the following terms and
conditions:
1. Purpose.
The purpose of the Edison International Officer Long-Term Incentive
Compensation Plan is to improve the long-term financial and operational
performance of Edison International and its affiliates by providing
eligible Participants a financial incentive which reinforces and
recognizes long-term corporate, organizational and individual performance
and accomplishments. The Plan is intended to promote the interests of
Edison International and its shareholders by encouraging eligible
Participants to acquire stock or increase their proprietary interest in
Edison International.
2. Definitions.
Whenever the following terms are used in this Plan, they will have the
meanings specified below unless the context clearly indicates the
contrary:
"Board of Directors" or "Board" means the Board of Directors of Edison
International.
"Cash Equivalent" means a stock-based award payable in cash only granted
pursuant to Section 14.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation and Executive Personnel Committee of
the Board of Directors excluding those members ineligible to administer
this Plan as determined under Section 4.
"Common Stock" means the common shares of Edison International.
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"Company" means Edison International or the Edison International affiliate
employing the Participant.
"Dividend Equivalent" means the additional amount of cash or Common Stock
as described in Section 12.
"Eligible Person" or "Participant" means an officer of the Company whose
participation has been approved by the Committee, including without
limitation, executive officers under Section 16 of the Securities Exchange
Act of 1934, as amended, but excluding those persons participating in the
Edison International Management Long-Term Incentive Compensation Plan.
"Fair Market Value" means the average of the highest and lowest sale
prices for the Common Stock as reported in the western edition of The Wall
Street Journal for the New York Stock Exchange Composite Transactions for
the date as of which such determination is made.
"Holder" means a person holding an Incentive Award.
"Incentive Award" means any award which may be made under the Plan by the
Committee.
"Incentive Stock Option" means an option as defined under Section 422A of
the Code granted pursuant to Section 7 of the Plan.
"Nonqualified Stock Option" means an option, other than an Incentive Stock
Option, granted pursuant to Section 6 of the Plan.
"Option" means either a Nonqualified Stock Option or Incentive Stock
Option.
"Performance Award" means an award granted pursuant to Section 10 which
may be based on stock value, book value, or other specific performance
criteria.
"Plan" means the Officer Long-Term Incentive Compensation Plan as set
forth herein, which may be amended from time-to-time.
"Restricted Stock" means Common Stock granted or awarded pursuant to
Section 8 of the Plan, which is nontransferable and subject to substantial
risk of forfeiture until restrictions lapse.
"Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, and
effective August 15, 1996.
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"Stock Appreciation Equivalent" means an award based on Common Stock
appreciation or other specific performance criteria which is granted
pursuant to Section 11.
"Stock Appreciation Right" or "Right" means a right granted pursuant to
Section 9 of the Plan.
"Stock Payment" means a payment pursuant to Section 13 in shares of Common
Stock to replace all or any portion of the compensation (other than base
salary) that would otherwise become payable to a Participant in cash.
3. Aggregate Awards Under Plan.
Pursuant to the terms of the Plan, and subject to the provisions of this
Section 3 and Section 16 of the Plan, the aggregate number of shares of
Common Stock that may be issued or transferred pursuant to Incentive
Awards, and the total aggregate value of Incentive Awards other than
Dividend Equivalents which are payable in a form other than Common Stock,
will not exceed 3 million shares, or the fair market value of such shares
as determined on the dates of payment of the Incentive Awards. On an
annual basis, as long as any Incentive Awards are outstanding and have not
been paid, Dividend Equivalents payable in cash will not exceed the annual
dividend payable on 3 million shares of Common Stock.
The shares to be delivered under the Plan will be made available, at the
discretion of the Board or Committee, either from authorized but unissued
shares of Common Stock or from previously issued shares of Common Stock
reacquired by Edison International including shares purchased on the open
market.
If any Incentive Award expires, is forfeited, is canceled, or otherwise
terminates for any reason other than upon exercise or payment, the shares
of Common Stock (provided the Participant receives no benefit of
ownership) or equivalent value that could have been delivered will not be
charged against the limitations provided above and may again be made
subject to Incentive Awards. However, shares subject to Stock
Appreciation Rights settled in cash will not be charged against the share
limitations provided above, but only against the fair market value
limitation.
4. Administration.
The Plan will be administered by the Committee, which will consist of
those directors on the Compensation and Executive Personnel Committee of
the Board who qualify as Non-Employee Directors under Rule 16b-3. The
Board shall ensure at least two members are qualified to administer the
Plan.
The Committee has, and may exercise, such powers and authority of the
Board as may be necessary or appropriate for the Committee to carry out
its functions as described in the Plan. The Committee has sole authority
in its discretion to determine the Officers to whom, and the time or times
at which, Incentive Awards may be granted, the nature of the Incentive
Award, the number of shares of Common Stock or the amount of cash
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that makes up each Incentive Award, the pricing and amount of any
Incentive Award, the objectives, goals and performance criteria (which
need not be identical) utilized to measure the value of Incentive Awards,
the form of payment (cash or Common Stock or a combination thereof)
payable upon the event or events giving rise to payment of an Incentive
Award, the vesting schedule of any Incentive Award, the term of any
Incentive Award, and such other terms and conditions applicable to each
individual Incentive Award as the Committee shall determine. The
Committee may grant at any time new Incentive Awards to a Participant who
has previously received Incentive Awards whether such prior Incentive
Awards are still outstanding, have previously been exercised in whole or
in part, or are canceled in connection with the issuance of new Incentive
Awards. The purchase price or initial value of the Incentive Awards may
be established by the Committee without regard to the existing Incentive
Awards or such other grants. Further, the Committee may, with the consent
of a Participant, amend the terms of any existing Incentive Award
previously granted to include or amend any provisions which could be
incorporated in such an Incentive Award at the time of such amendment.
The Committee has the sole authority to interpret the Plan, to determine
the terms and provisions of the Incentive Award agreements, and to make
all determinations necessary or advisable for the administration of the
Plan. The Committee has authority to prescribe, amend, and rescind rules
and regulations relating to the Plan. All interpretations,
determinations, and actions by the Committee will be final, conclusive,
and binding upon all parties. Any action of the Committee with respect
to the administration of the Plan shall be taken pursuant to a majority
vote or by the unanimous written consent of its members. The Committee
may delegate to one or more agents such nondiscretionary administrative
duties as it may deem advisable.
No member of the Board or the Committee or agent or designee thereof will
be liable for any action or determination made in good faith by the Board
or the Committee with respect to the Plan or any transaction arising under
the Plan.
5. Eligibility and Date of Grant.
The Committee has authority, in its sole discretion, to determine and
designate from time-to-time those Eligible Persons who are to be granted
Incentive Awards, the type of Incentive Awards to be granted, the times
at which Incentive Awards will be granted, the prices of Incentive Awards
(which may be any lawful consideration determined by the Committee), the
amount of any Incentive Award, and the number of shares of Common Stock
or the amount of cash subject to each Incentive Award.
Each Incentive Award will be evidenced by a written instrument and may
include any other terms and conditions consistent with the Plan as the
Committee may in its discretion determine. The date of grant of an
Incentive Award will be the date of the Agreement between the Company and
the Participant.
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6. Nonqualified Stock Options.
The Committee may approve the grant of Nonqualified Stock Options to
Eligible Persons, subject to the following terms and conditions:
(a) The purchase price of Common Stock under each Nonqualified Stock
Option may not be less than one hundred percent of the Fair Market Value
of the Common Stock on the date the Nonqualified Stock Option is granted.
(b) No Nonqualified Stock Option may be exercised after ten years and one
day from the date of grant.
(c) Upon the exercise of a Nonqualified Stock Option, the purchase price
will be payable in full in cash and/or its equivalent, such as Common
Stock, acceptable to Edison International. Any shares so assigned and
delivered to Edison International in payment or partial payment of the
purchase price will be valued at their Fair Market Value on the exercise
date.
(d) No fractional shares will be issued pursuant to the exercise of a
Nonqualified Stock Option. Only cash payments will be made in lieu of
fractional shares.
7. Incentive Stock Options.
The Committee may approve the grant of Incentive Stock Options to Eligible
Persons, subject to the following terms and conditions:
(a) The purchase price of each share of Common Stock under an Incentive
Stock Option will be at least equal to the Fair Market Value of a share
of the Common Stock on the date of grant; provided, however, that if a
Participant, at the time an Incentive Stock Option is granted, owns stock
representing more than ten (10%) percent of the total combined voting
power of all classes of stock of Edison International (as defined in
Section 425(e) or (d) of the Code), then the exercise price of each share
of Common Stock subject to such Incentive Stock Option shall be at least
one hundred and ten (110%) percent of the Fair Market Value of such share
of Common Stock, as determined in the manner stated in this paragraph.
(b) No Incentive Stock Option may be exercised after ten (10) years from
the date of the grant. Each Incentive Stock Option granted under this
Plan shall also be subject to earlier termination as provided in this
Plan.
(c) Upon the exercise of an Incentive Stock Option, the purchase price
will be payable in full in cash and/or its equivalent, such as Common
Stock, acceptable to Edison International. Any shares so assigned and
delivered to Edison International in payment or partial payment of the
purchase price will be valued at their Fair Market Value on the exercise
date.
(d) The Fair Market Value (determined at the time the Incentive Stock
Option is granted) of the shares of Common Stock for which any Participant
may be granted
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Incentive Stock Options that are first exercisable during any one calendar
year (including Incentive Stock Options under all plans of the Company)
will not in the aggregate exceed One Hundred Thousand ($100,000) Dollars.
(e) No fractional share will be issued pursuant to the exercise of an
Incentive Stock Option. Only cash payments will be made in lieu of
fractional shares.
8. Restricted Stock.
The Committee may approve the grant or award of Restricted Stock to
Eligible Persons subject to the conditions of this Section 8.
(a) All shares of Restricted Stock granted or awarded pursuant to the
Plan (including any shares of Restricted Stock received by the Holder as
a result of stock dividends, stock splits, or any other forms of
adjustment) will be subject to the following restrictions:
(i) The shares may not be sold, transferred, or otherwise alienated
or hypothecated until the restrictions are removed or expire.
(ii) The Committee may require the Holder to enter into an escrow
agreement providing that the certificates representing Restricted
Stock granted or awarded pursuant to the Plan will remain in the
physical custody of an escrow holder or Edison International
until all restrictions are removed or expire.
(iii) Each certificate representing Restricted Stock granted or
awarded pursuant to the Plan will bear a legend making
appropriate reference to the restrictions imposed on the
Restricted Stock.
(iv) The Committee may impose restrictions on any shares granted or
awarded as it may deem advisable, including, without limitation,
restrictions designed to facilitate exemption from or compliance
with the Securities Exchange Act of 1934, as amended, with
requirements of any stock exchange upon which such shares or
shares of the same class are then listed, and with any blue sky
or other securities laws applicable to such shares.
(b) The restrictions imposed under subparagraph (a) above upon Restricted
Stock will lapse in accordance with a schedule or other conditions as
determined by the Committee, subject to the provisions of Sections 18 and
19.
(c) Upon acceptance of the Restricted Stock offer, the purchase price,
if any, established by the Committee will be payable in full in cash
and/or its equivalent, such as Common Stock, acceptable to Edison
International.
(d) Subject to the provisions of subparagraph (a) above and Section 19,
the Holder will have all rights of a shareholder with respect to the
Restricted Stock granted or
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awarded, including the right to vote the shares and receive all dividends
and other distributions paid or made with respect thereto.
9. Stock Appreciation Rights.
The Committee may approve the grant of Rights related or unrelated to
Options to Eligible Persons, subject to the following terms and
conditions:
(a) A Stock Appreciation Right may be granted:
(i) at any time if unrelated to an option;
(ii) either at the time of grant, or at any time thereafter during the
option term if related to a Nonqualified Stock Option;
(iii) only at the time of grant if related to an Incentive Stock
Option.
(b) A Stock Appreciation Right grant in connection with an Option will
entitle the Holder of the related Option, upon exercise of the Stock
Appreciation Right, to surrender such Option, or any portion thereof to
the extent unexercised, with respect to the number of shares as to which
such Stock Appreciation Right is exercised, and to receive payment of an
amount computed pursuant to Section 9(d). Such Option will, to the extent
surrendered, then cease to be exercisable.
(c) Subject to Section 9(g), a Stock Appreciation Right granted in
connection with an Option hereunder will be exercisable at such time or
times, and only to the extent that a related Option is exercisable, and
will not be transferable except to the extent that such related Option may
be transferable.
(d) Upon the exercise of a Stock Appreciation Right related to an Option,
the Holder will be entitled to receive payment of an amount determined by
multiplying:
(i) The difference obtained by subtracting the purchase price of a
share of Common Stock specified in the related Option from the
Fair Market Value of a share of Common Stock on the date of
exercise of such Stock Appreciation Right, by
(ii) The number of shares to which such Stock Appreciation Right has
been exercised.
(e) The Committee may grant Stock Appreciation Rights unrelated to
Options to Eligible Persons. Section 9(d) shall be used to determine the
amount payable at exercise of such Stock Appreciation Right(s) if Fair
Market Value is not used, except that Fair Market Value shall not be used
if the Committee specified in the award that book value or another measure
as deemed appropriate by the Committee was to be used. In applying the
formula in Section 9(d), the initial share value specified in the Stock
Appreciation Right award shall be used in lieu of the price "specified in
the related Option."
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(f) Payment of the amount determined under Section 9(d) or (e) may be
made solely in whole shares of Common Stock in a number determined at
their Fair Market Value on the date of exercise of the Stock Appreciation
Right or alternatively, at the sole discretion of the Committee, solely
in cash or in a combination of cash and shares as the Committee deems
advisable. If the Committee decides to make full payment in shares of
Common Stock, and the amount payable results in a fractional share, no
fractional share will be issued. Payment for the fractional share will
be made in cash only.
(g) The Committee may, at the time a Stock Appreciation Right is granted,
impose such conditions on the exercise of the Stock Appreciation Right as
may be required to satisfy the requirements of Rule 16b-3, as applicable
(or any other comparable provisions in effect at the time or times in
question). Without limiting the generality of the foregoing, the
Committee may determine that a Stock Appreciation Right may be exercised
only during the period beginning on the third business day and ending on
the twelfth business day following the publication of Edison
International's quarterly and annual summarized financial data.
10. Performance Awards.
The Committee may approve Performance Awards to Eligible Persons. Such
awards may be based on Common Stock performance over a period determined
in advance by the Committee or any other measures as determined
appropriate by the Committee. Payment will be in cash unless replaced by
a Stock Payment in full or in part as determined by the Committee.
11. Stock Appreciation Equivalents.
The Committee may approve Stock Appreciation Equivalents to Eligible
Persons. Such awards may be based on Common Stock performance over a
period determined in advance by the Committee, or any other measures as
determined appropriate by the Committee. Payment will be in cash unless
replaced by a Stock Payment in full or in part as determined by the
Committee.
12. Dividend Equivalents.
The Committee may approve Dividend Equivalents based on the dividends
declared on the Common Stock on record dates during the period between the
date an Incentive Award is granted and the date such Incentive Award is
exercised or paid. Dividend Equivalents may be awarded separately or in
connection with Incentive Awards payable, whether payable in cash or
Common Stock. Subject to Sections 3 and 16, such Dividend Equivalents
shall be converted to cash or additional shares by such formula and at
such time as may be determined by the Committee.
13. Stock Payments.
The Committee may approve Stock Payments of Common Stock to Eligible
Persons for all or any portion of the compensation (other than base
salary) that would otherwise become payable to a Participant in cash.
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Notwithstanding anything to the contrary contained in this Plan, if the
written instrument evidencing any Incentive Award states that the
Incentive Award(s) will be paid in cash, the Committee may not make a
Stock Payment in lieu thereof, and the Incentive Award(s) will be
redeemable or exercisable by the Holder only for cash.
14. Cash Equivalents.
The Committee may grant any Incentive Award permitted under the Plan which
is otherwise payable in stock in the form of a cash equivalent award.
15. Deferral of Payment.
The Committee may approve the deferral of any payments which may become
due under the Plan. Such deferrals shall be subject to any conditions,
restrictions or requirements as the Committee may determine.
16. Adjustment Provisions.
Subject to the provisions of this Section 16 below, if the outstanding
shares of Common Stock are increased, decreased, or exchanged for a
different number or kind of shares or other securities, or if additional
shares or new or different shares or other securities are distributed with
respect to such shares of Common Stock or other securities, through
merger, consolidation, sale of all or substantially all of the property
of Edison International, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or
other distribution with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (i)
the maximum number and kind of shares provided in Section 3 of the Plan,
(ii) the number and kind of shares or other securities subject to the then
outstanding Incentive Awards, and (iii) the price for each share or other
unit of any other securities subject to the then outstanding Incentive
Awards without change in the aggregate purchase price or value as to which
Incentive Awards remain exercisable or subject to restrictions.
Despite the foregoing, upon dissolution or liquidation of Edison
International, or upon a reorganization, merger, or consolidation of
Edison International with one or more corporations as a result of which
Edison International is not the surviving corporation, or upon the sale
of all or substantially all the property of Edison International, all
Options, Stock Appreciation Rights, and other Incentive Awards then
outstanding under the Plan will be fully vested and exercisable and all
restrictions on Restricted Stock will immediately cease, unless provisions
are made in connection with such transaction for the continuance of the
Plan and the assumption of or the substitution for such Incentive Awards
of new Options, Stock Appreciation Rights, or other Incentive Awards, or
Restricted Stock covering the stock of a successor employer corporation,
or a parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and prices.
Any adjustments pursuant to this Section will be made by the Committee,
whose determination as to what adjustments will be made and the extent
thereof will be final,
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binding, and conclusive. No fractional interest will be issued under the
Plan on account of any such adjustments. Only cash payments will be made
in lieu of fractional shares.
Notwithstanding the foregoing, if a reorganization, merger, consolidation,
or other corporate transaction is consummated following and related to the
occurrence of a Distribution Date, as that term is defined in the Rights
Agreement approved by the Edison International Board of Directors on
November 20, 1996, as a result of which Edison International is not the
surviving corporation, all Options, Stock Appreciation Rights, and other
Incentive Awards then outstanding under the Plan will fully vest and all
restrictions on Restricted Stock will immediately cease. This Plan may
not be terminated, nor may any Incentive Award be cashed out, modified or
terminated without the consent of the holder, by Edison International or
its successor in interest during the subsequent period necessary to allow
Incentive Awards to remain exercisable for at least two years following
the close of the transaction, or where applicable, through the first
exercise period occurring at least two years after the close of the
transaction. During such subsequent period, valuation procedures and
exercise periods will occur on a basis consistent with past practice.
17. General Provisions.
(a) With respect to any share of Common Stock issued or transferred under
any provision of the Plan, such shares may be issued or transferred
subject to such conditions, in addition to those specifically provided in
the Plan, as the Committee may direct.
(b) Nothing in the Plan or in any instrument executed pursuant to the
Plan will confer upon any Holder any right to continue in the employ of
the Company or affect the right of the Company to terminate the employment
of any Holder at any time with or without cause.
(c) No shares of Common Stock will be issued or transferred pursuant to
an Incentive Award unless and until all then applicable requirements
imposed by federal and state securities and other laws, rules, and
regulations and by any regulatory agencies having jurisdiction, and by any
stock exchanges upon which the Common Stock may be listed, have been fully
met. As a condition precedent to the issue of shares pursuant to the
grant or exercise of an Incentive Award, Edison International may require
the Holder to take any reasonable action to meet such requirements.
(d) No Holder (individually or as a member of a group) and no beneficiary
or other person claiming under or through such Holder will have any right,
title, or interest in or to any shares of Common Stock allocated or
reserved under the Plan or subject to any Incentive Award except as to
such shares of Common Stock, if any, that have been issued or transferred
to such Holder.
(e) Edison International may make such provisions as it deems appropriate
to withhold any taxes which it determines it is required to withhold in
connection with any Incentive Award. Subject to this Section 17(e),
however, and without in anyway limiting the
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generality of Section 9, the Committee, in its sole discretion and subject
to such rules as the Committee may adopt, may permit Participants to elect
(i) cash settlement of any Incentive Award, or (ii) to apply a portion of
the shares of Common Stock they are otherwise entitled to receive pursuant
to an Incentive Award, or shares of Common Stock already owned, to satisfy
the tax withholding obligation arising from the receipt, vesting, or
exercise of any Incentive Award, as applicable.
(f) No Incentive Award and no right under the Plan, contingent or
otherwise, will be assignable or subject to any encumbrance, pledge, or
charge of any nature, or otherwise transferable (meaning, without
limitation, that such Incentive Award or right is exercisable during the
Holder's lifetime only by him or her or by his or her guardian or legal
representative) except that, under such rules and regulations as Edison
International may establish pursuant to the terms of the Plan, a
beneficiary may be designated with respect to an Incentive Award in the
event of death of a Holder of such Incentive Award, and Incentive Awards
may be transferred pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security
Act, or the regulations promulgated thereunder. If such beneficiary is
the executor or administrator of the estate of the Holder of such
Incentive Award, any rights with respect to such Incentive Award may be
transferred to the person or persons or entity (including a trust)
entitled thereto under the will of the Holder of such Incentive Award, or,
in the case of intestacy, under the laws relating to intestacy.
(g) Notwithstanding Section 17(f), the Committee may, to the extent
permitted by applicable law and Rule 16b-3, as applicable, permit a Holder
to assign the rights to exercise Options or Rights to a trust or to
exercise options or rights in favor of a trust, provided that, in the case
of Incentive Stock Options, such exercise in favor of a trust shall be
permitted only if and to the extent that such exercise is not deemed to
be a transfer to or exercise by someone other than the Holder in
contravention of Section 422A(b)(5) of the Code.
(h) Whenever a Holder is entitled to receive cash in lieu of a fractional
share, recognizing that such payment may be deemed a sale of the
underlying Common Stock under Section 16 of the Securities Exchange Act
of 1934, as amended, the Holder may alternatively elect, at least six
months in advance of the payment date, to receive the cash payment or to
forfeit his or her rights to such cash payment. This election will be
evidenced in the Incentive Award agreement.
(i) This Plan shall be governed by the laws of the State of California.
18. Amendment and Termination of the Plan.
The Board of Directors or the Committee will have the power, in its
discretion, to amend, suspend, or terminate the Plan at any time. No such
amendment will, without approval of the shareholders of Edison
International to the extent required by law or the rules of any exchange
upon which the Common Stock is listed, and except as provided in Section
16 of the Plan:
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(a) Materially modify the requirements as to eligibility for
participation in the Plan;
(b) Materially increase the benefits accruing to Eligible Persons under
the Plan; or
(c) Materially increase the number of securities which may be issued
under the Plan.
The Committee may, with the consent of a Holder, make such modifications
in the terms and conditions of any Incentive Award as it deems advisable
or cancel the Incentive Award (with or without consideration). No
amendment, suspension, or termination of the Plan will, without the
consent of the Holder, alter, terminate, impair, or adversely affect any
right or obligation under any Incentive Award previously granted under the
Plan.
19. Termination of Employment.
(a) A Stock Appreciation Right or an Option held by a person who was an
employee at the time such Right or Option was granted will expire
immediately if and when the Holder ceases to be an employee, except as
follows:
(i) If the employment of a Participant is terminated by the Company
other than for cause, then the Stock Appreciation Rights and
Options will expire six months thereafter unless the terms of the
Incentive Award agreement specify otherwise. For purposes of
this provision, termination "for cause" shall include, but shall
not be limited to, termination because of dishonesty, criminal
offense, or violation of work rule, and shall be determined by,
and in the sole discretion of, the Company. During the six-
month period, the Stock Appreciation Rights and Options may be
exercised in accordance with their terms, but only to the extent
exercisable on the date of termination of employment.
(ii) If a Participant dies or becomes permanently and totally disabled
while employed by the Company, the Stock Appreciation Rights and
Options of the Participant will expire three years after the date
of death or permanent and total disability unless the terms of
the Incentive Award agreement specify otherwise. If the
Participant dies or becomes permanently and totally disabled
within the six-month period referred to in subparagraph (a)
above, the Stock Appreciation Rights and Options will expire six
months after the date of death or permanent and total disability,
unless the terms of the Incentive Award agreement specify
otherwise.
(b) In the event a Holder of other Incentive Awards ceases to be an
employee, all such Incentive Awards will terminate except in the case of
retirement, death, or permanent and total disability. To be eligible for
the full amount of any such Incentive Award, an individual must have been
a Participant for the entire period to which the Incentive Award applies.
Pro-rata awards may be distributed to Participants who are discharged or
who terminate their employment for reasons other than incompetence,
misconduct or fraud, or who retired or became disabled during the
incentive period, or who were
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Participants for less than the full incentive period. A pro-rata award
may be made to a Participant's designated beneficiary in the event of
death of a Participant during an incentive period prior to an award being
made.
(c) The Committee may in its sole discretion determine, with respect to
an Incentive Award, that any Holder who is on a leave of absence for any
reason will be considered as still in the employ of the Company, provided
that rights to such Incentive Award during an unpaid leave of absence will
be limited to the extent to which such right was earned or vested at the
commencement of such leave of absence.
(d) The Committee may vary the strict requirements of this Section 19 by
agreement at the time of grant, or on a case-by-case basis thereafter, as
it deems appropriate and in the best interests of Edison International.
The Committee may accelerate the vesting of all, or a portion of any
Incentive Award, and may extend the above-described exercise periods to
as long as the term provided in the original Incentive Award agreement.
20. Effective Date of Plan and Duration of Plan.
This Plan as amended and restated will become effective on the date
specified by the Board of Directors of Edison International, subject,
however, to approval by the stockholders of Edison International at their
next annual meeting or at any adjournment thereof, within twelve (12)
months following the date of its adoption by the Board of Directors.
Unless previously terminated by the Board of Directors, the Plan will
terminate April 16, 2002.
EDISON INTERNATIONAL
Lillian R. Gorman
-------------------------------
Lillian R. Gorman
Vice President
EXHIBIT 10.16.3
EDISON INTERNATIONAL
OFFICER AND MANAGEMENT LONG-TERM INCENTIVE COMPENSATION PLANS
1997 AWARD AGREEMENT
This award is made by Edison International to "NAME" ("Employee"), as of
January 2, 1997, pursuant to the Officer or Management Long-Term Incentive
Compensation Plan. Edison International hereby grants to Employee, as a
matter of separate agreement and not in lieu of salary or any other
compensation for services, the right and option to purchase the following:
"EIX" shares of authorized Edison
International Common Stock, coupled with
dividend equivalents, at an exercise price
of $19.75 per share.
"EME" shares of Edison Mission Energy "EC" shares of Edison Capital phantom
phantom stock having a base price of stock having a base price of $105.7676 per
$120.5499 per share and the following share and the following projected exercise
projected exercise prices based on the prices based on the current cost of
current cost of capital: capital:
- ---------------------------------------------- ---------------------------------------------
Period Price $ Period Price $ Period Price $ Period Price $
- ------ ------- ------ ------- ------ ------- ------ --------
1998 135.0159 2003 237.9441 1998 113.9969 2003 165.5692
1999 151.2178 2004 266.4974 1999 122.8317 2004 178.4008
2000 169.3639 2005 298.4771 2000 132.3511 2005 192.2268
2001 189.6876 2006 334.2944 2001 142.6083 2006 207.1244
2002 212.4501 2007 374.4097 2002 153.6605 2007 223.1766
- ----------------------------------------------- ---------------------------------------------
This award is made subject to the conditions contained in the 1997
Statement of Terms and Conditions which is incorporated herein by
reference and receipt of which is acknowledged by Employee. Employee
hereby consents to the amendment of the terms and conditions of any prior
phantom stock award to incorporate the repricing mechanism described in
Section 5 of the 1997 Statement of Terms and Conditions.
IN WITNESS WHEREOF, Edison International and Employee have caused this
instrument to be executed as of the day and year first written above.
Edison International Employee
By:_______________________________ _______________________________
Edison International Officer and Management Long-Term Incentive
Compensation Plans
1997 Statement of Terms and Conditions
1997 awards made under the Edison International Officer and Management
Long-Term Incentive Compensation Plans are subject to the following terms
and conditions:
1. PRICE
(a) The exercise price for the option to purchase Edison International
Common Stock (EIX Stock) stated in the Award Certificate is the average
of the high and low sales prices of EIX Stock as reported in the Western
Edition of The Wall Street Journal for the New York Stock Exchange
Composite Transactions for the date of the award.
(b) The annual exercise price for each affiliate phantom option (Affiliate
Option) will be the base price stated in the Award Certificate escalated
by an annual compound appreciation rate linked to the affiliate's cost of
capital plus an overhead allowance. Upon any significant subsequent
change in the affiliate's cost of capital, the Affiliate Option exercise
price for that year may be redetermined and prospectively indexed
reflecting the affiliate's revised appreciation rate.
2. VESTING
(a) Subject to the provisions of Section 3, options may only be exercised
to the extent vested. The initial vesting date will be January 2nd of the
year following the date of the award, or six months after the date of the
award, whichever date is later. The options will vest as follows:
o On the initial vesting date, the options will vest as to 33-1/3% of the
covered shares.
o On January 2nd of the following year, the options will vest as to an
additional 33-1/3% of the covered shares.
o On January 2nd of the third year following the date of the award, the
options will be fully vested.
(b) The vested portions of the options will accumulate to the extent not
exercised, and be exercisable by the Employee subject to the provisions
of Section 3, in whole or in part, in any subsequent period but not later
than the first business day of the 10th year following the date of the
award, or, in the case of Affiliate Options, not later than the end of the
final 60-day exercise period.
(c) If an Employee is removed from a position entitling him/her to
benefits under the Plan, retires, dies or is permanently and totally
disabled during the three-year vesting period, the options will vest and
be exercisable to the extent of 1/36th of the aggregate number of shares
stated in the Award Certificate for each full month of service during the
vesting period. Notwithstanding the foregoing, the options of an officer
who has served as a member of the Southern California Edison Company
Management Committee will be fully vested and exercisable upon his/her
retirement, death or permanent and total disability.
(d) Upon termination of an Employee for any reason other than those
specified in Subsection (c), only that portion of the options which has
vested as of the prior vesting date may be exercised, and that portion,
together with any earned dividend equivalents, will be forfeited unless
exercised within 180 days following the date of termination, or in the
case of Affiliate Options, the first 60-day exercise period following the
date of termination.
(e) Notwithstanding the foregoing, the options and earned dividend
equivalents may vest in accordance with Section 16 of the Plan as a result
of certain events, including liquidation of Edison International or
merger, reorganization or consolidation of Edison International as a
result of which Edison International is not the surviving corporation.
Upon a change of control of Edison International following the occurrence
page 1
of a Distribution Date, as that term is defined in the Rights Agreement
approved by the Edison International Board of Directors on November 20,
1996, the options will vest and will remain exercisable for at least two
years following the Distribution Date, or in the case of Affiliate
Options, through the first exercise period occurring at least two years
after such date. During that period, (i) the Plan may not be terminated,
(ii) individual awards may not be cashed out, terminated, or modified
without the Employee's consent, and (iii) valuation procedures and
exercise periods will occur on a basis consistent with past practice.
3. OPTION EXERCISE
(a) The Employee may exercise an option by providing written notice to
Edison International on the form prescribed by Edison International for
this purpose specifying the number of shares to be purchased, and
accompanied by full payment of the exercise price for the shares. A
sample notice is attached as Exhibit 1. Payment must be in cash, or its
equivalent, such as EIX Stock, acceptable to Edison International. A
"cashless" exercise will be accommodated for all Affiliate Options, and
may be accommodated for Edison International Options at the discretion of
Edison International. Until payment is accepted, the Employee will have
no rights in the optioned stock. If Edison International Options are
exercised, the Employee may elect to apply any earned dividend equivalents
related to the shares for which the options are being exercised to the
exercise price for such shares.
(b) Edison International Options may be exercised at any time after they
have vested through the first business day of the 10th calendar year
following the date of the award. Affiliate Options may be exercised after
they have vested, but only during an annually specified 60-day period
following the fiscal year end and the completion of an independently
reviewed valuation report which indicates a share value for the fiscal
year higher than the applicable Affiliate Option exercise price for that
period. The final 60-day Affiliate Option exercise period will commence
no later than the end of the second quarter of the 10th calendar year
following the date of the award. Subject to Section 8, Affiliate Options
are payable in cash upon exercise to the extent the actual value of an
affiliate share exceeds the applicable exercise price.
(c) The Employee agrees that any securities acquired by him/her hereunder
are being acquired for his/her own account for investment and not with a
view to or for sale in connection with any distribution thereof and that
he/she understands that such securities may not be sold, transferred,
pledged, hypothecated, alienated, or otherwise assigned or disposed of
without either registration under the Securities Act of 1933 or compliance
with the exemption provided by Rule 144 or another applicable exemption
under such act.
(d) In accordance with Section 17(d) of the Plan, the Employee will have
no right or claim to any specific funds, property or assets of Edison
International as a result of the award.
4. EDISON INTERNATIONAL OPTION DIVIDEND EQUIVALENTS
(a) An Edison International Dividend Equivalent Account will be
established on behalf of the Employee if Edison International Options have
been granted pursuant to the award. This account may be credited with all
or a portion of the dividends payable after the date of the award on the
number of shares of stock covered by such Edison International Options
depending upon Edison International's performance during the first three
years of the option period as provided in Subsection (b). No amount will
be credited prior to January 2nd of the third year following the date of
the award. No dividend equivalent will accrue to any option exercised
during that period regardless of Edison International performance.
Dividend equivalents credited after that date, if any, will accumulate in
this account without interest and will vest and become payable upon the
exercise of the option to purchase the corresponding shares of EIX Stock.
(b) Dividend equivalents related to Edison International Options are
subject to a performance measure based on the percentile ranking of Edison
International's total shareholder return ("TSR") compared to the TSR for
each stock in the Dow Jones Electric Utilities Group Index. The
percentile ranking will be measured at the completion of the first three
years of the option term . If Edison International's average ranking is
in the 60th percentile or higher for the 3-year period, 100% of the
dividend equivalents will be
earned from the date of grant through the date the options are exercised.
If Edison International's average ranking is in the 25th percentile, 25%
of the dividend equivalents will be earned. No dividend equivalents will
be earned for performance below the 25th percentile, and a pro rata amount
will be earned for performance between the 25th and 60th percentiles.
Dividend equivalents related to unexercised Edison International Options
that were not earned due to the limitations of this Subsection (b) may be
earned back as of the end of each of the last five years of the option
period if it is determined at that point that the Edison International
cumulative average TSR percentile ranking equals or exceeds the 60th
percentile.
5. AFFILIATE OPTION PERFORMANCE UNITS
The Affiliate Options are performance units under the Plan based on shares
of artificial or "phantom" stock created for this purpose only. The
Affiliate Option exercise prices were derived by applying a compound
annual appreciation rate, based on the affiliate's cost of capital and an
allowance for corporate overhead, to the base price of a share. Following
the end of each calendar year during the option term, new affiliate share
prices will be computed. If a change in the affiliate's cost of capital
has occurred that significantly affects the new share price valuation, the
Affiliate Option exercise prices may be redetermined (i) for that year to
reflect the same intrinsic value result (gain or loss) that would have
existed using the previous cost of capital, and (ii) for subsequent years
by applying the revised appreciation rate. If the affiliate share value
exceeds the exercise price for that period, any portion of the vested
Affiliate Option may be exercised by the Employee in accordance with
Section 3 and the difference will be paid in cash to the Employee.
6. TRANSFER AND BENEFICIARY
The options will not be transferable by the Employee. During the lifetime
of the Employee, the options will be exercisable only by him/her. The
Employee may designate a beneficiary who, upon the death of the Employee,
will be entitled to exercise the then vested portion of the options during
the remaining term subject to the provisions of the Plan and these terms
and conditions.
7. TERMINATION OF OPTIONS
As set forth in Section 2(d), in the event of termination of the
employment of the Employee for any cause, other than retirement, permanent
and total disability or death of the Employee, the options will terminate
180 days from the date on which such employment terminated, or in the case
of Affiliate Options, at the end of the first 60-day exercise period
following the employment termination date. In addition, the options may
be terminated if Edison International elects to substitute cash awards as
provided under Section 11.
8. TAXES
Edison International will have the right to retain and withhold the amount
of taxes required by any government to be withheld or otherwise deducted
and remitted with respect to the exercise of any Edison International or
Affiliate option, the receipt of cash, or the receipt or application of
any dividend equivalents to the exercise price. In its discretion, Edison
International may require the Employee to reimburse Edison International
for any such taxes required to be withheld by Edison International and may
withhold any distribution in whole or in part until Edison International
is so reimbursed. In lieu thereof, Edison International will have the
right to withhold from any other cash amounts due from Edison
International to the Employee an amount equal to such taxes required to
be withheld by Edison International to reimburse Edison International for
any such taxes or to retain and withhold a number of shares of EIX Stock
having a market value equal to the taxes and cancel (in whole or in part)
the shares in order to reimburse Edison International for the taxes.
Each recipient of an Edison International Option must attach a statement
to his/her federal and state tax returns for the year in which the Edison
International Option was granted containing certain information about the
option. A sample statement is attached as Exhibit 2.
page 3
9. CONTINUED EMPLOYMENT
(a) In consideration of the granting of such options to him/her, the
Employee agrees that he/she will remain in the continuous service of
Edison International or an Edison International affiliate as an officer
or employee during the term of the award. In the event employment is
terminated, except as a result of death, disability, or retirement under
the Southern California Edison Company Retirement Plan, or a successor
plan, whether voluntarily or otherwise, the restrictions of Section 2(d)
will apply.
(b) Nothing in the Award Certificate or this Statement of Terms and
Conditions will be deemed to confer on the Employee any right to continue
in the employ of Edison International or an Edison International affiliate
or interfere in any way with the right of the employer to terminate
his/her employment at any time.
10. NOTICE OF DISPOSITION OF SHARES
Employee agrees that if he/she should dispose of any shares of stock
acquired on the exercise of the Edison International Options, including
a disposition by sale, exchange, gift or transfer of legal title within
six months from the date such shares are transferred to the Employee, the
Employee will notify Edison International promptly of such disposition.
11. AMENDMENT
The options and dividend equivalents are subject to the terms of the Plan
as amended. Edison International reserves the right to substitute cash
awards substantially equivalent in value to the options and dividend
equivalents. The options and dividend equivalents may not otherwise be
restricted or limited by any Plan amendment or termination approved after
the date of the award without the Employee's written consent.
12. FORCE AND EFFECT
The various provisions herein are severable in their entirety. Any
determination of invalidity or unenforceability of any one provision will
have no effect on the continuing force and effect of the remaining
provisions.
13. GOVERNING LAW
The terms and conditions of the options and dividend equivalents will be
construed under the laws of the State of California.
14. NOTICE.
Unless waived by Edison International, any notice required under or
relating to the options and dividend equivalents must be in writing, with
postage prepaid, addressed to: Edison International, Attn: Corporate
Secretary, P.O. Box 800, Rosemead, CA 91770
Lillian R Gorman
_________________________
Lillian R. Gorman
Vice President, Human Resources
page 4
EXHIBIT 1
Date_________________
Corporate Secretary
Edison International
P.O. Box 800
Rosemead, CA 91770
Dear Sir or Madam:
I hereby elect to exercise an option to purchase _____________ shares,
no par value, of the Common Stock of Edison International under and
pursuant to the _______________ (specify Officer or Management) Long-Term
Incentive Compensation Plan Award Certificate dated ___________________.
Delivered herewith is my check in the amount of $_______________in full
payment of the exercise price.
I elect/do not elect to apply any corresponding dividend equivalents to
the exercise price.
The name(s) to be on the stock certificate or certificates and the
address and Social Security Number of such person is as follows:
Name:
Address:
Social Security Number:
- AND/OR -
I hereby elect to exercise an option to purchase _________ shares of
____ (specify Affiliate name) phantom stock pursuant to the __________
(specify Officer or Management) Long-Term Incentive Compensation Plan
Award Certificate dated________________.
Very truly yours,
cc: Executive Compensation Manager
EXHIBIT 2
STATEMENT PURSUANT TO INCOME TAX
REGULATION SECTION 1.61-15(c)
This statement is attached to my income tax return in compliance with
the requirements of Income Tax Regulation Section 1.61-15(c) relative to
a nonqualified stock option I received on _____________, 19__.
(1) Name and address of the taxpayer:
John Q. Doe
1234 Your Street
Anywhere, CA 90000
(2) Description of Securities subject to the option:
On ____________, 19__, I was granted a nonqualified stock option
covering shares of Edison International common stock.
(3) Period during which the option is exercisable:
The option vests and becomes exercisable as to one-third of the covered
shares on _______________, 19__, ______________, 19__ and ______________,
19__, respectively. To the extent vested, the option may be exercised at
any time through January 2, 20__.
(4) Whether the option had an ascertainable market value:
The option did not have a readily ascertainable fair market value on the
date of the grant.
(5) Whether the option was granted as compensation:
The option was granted as compensation and is subject to Reg. Section
1.61-15(a).
Respectfully Submitted,
RESOLUTION OF THE BOARD OF DIRECTORS OF
SOUTHERN CALIFORNIA EDISON COMPANY
Adopted May 15, 1996
RE: DIRECTOR RESIGNATION
WHEREAS, Howard P. Allen has tendered his resignation as a
director of this corporation after a long and distinguished career as an
employee and director; and
WHEREAS, the Board of Directors of this corporation desires that
Mr. Allen remain available to the corporation for advice and consultation;
NOW, THEREFORE, BE IT RESOLVED, that Mr. Allen's resignation is
accepted with regret and that the terms and conditions of the consulting
arrangement set forth in the attached Schedule A are approved.
BE IT FURTHER RESOLVED, that the Chief Executive Officer is
authorized to execute any agreement or other document, or take any other
action deemed necessary or appropriate in his discretion, to implement the
intent of this resolution.
SCHEDULE A
Terms and Conditions of Howard P. Allen
Consulting Arrangement
Term: May 15, 1997 - May 14, 2002
Compensation: Amounts equal to those that would otherwise have been
payable to Mr. Allen as a director through April 16, 1998 (his normal
retirement date from the Board), will be deposited in his account in the
Director Deferred Compensation Plan.
Affected corporate and Board benefit plan payments will commence in
accordance with the terms of the plans as if Mr. Allen retired from the
Board on April 16, 1998.
APPROVED:
John E. Bryson
- ----------------------
John E. Bryson
Chairman of the Board
Bryant C. Danner
- ----------------------
Bryant C. Danner
Executive Vice President and General Counsel
EXHIBIT 10.21
RESOLUTION OF THE BOARD OF DIRECTORS OF
SOUTHERN CALIFORNIA EDISON COMPANY
Adopted May 15, 1997
RE: ELECTION AND COMMITTEE APPOINTMENTS OF NEW DIRECTOR
WHEREAS, the Nominating Committee of the Board of Directors of
this corporation has nominated Warren Christopher to be re-elected as a
director of this corporation;
WHEREAS, Howard P. Allen has submitted his resignation as a
director of this corporation effective immediately following this regular
meeting of the Board of Directors, and he serves as Chairman of the
Executive Committee and as a member of the Finance Committee of the Board
of Directors of this corporation;
WHEREAS, pursuant to Article III, Section 2 of the Bylaws of this
corporation, the exact number of Directors is fixed at 18, and the
addition of Mr. Christopher will increase the number of Directors to 19,
until Mr. Allen's resignation is effective;
WHEREAS, the charter of the Executive Committee of the Board of
Directors of this corporation provides that any vacancy created by any
member ceasing to be a director shall be filled by the Board of Directors
of this corporation and the Board shall designate one Committee member to
be chairman; and
WHEREAS, the charter of the Finance Committee of the Board of
Directors of this corporation provides that any vacancy created by any
member ceasing to be a director shall be filled by the Board of Directors
of this corporation or left unfilled at the Board's discretion, and the
Board desires to fill such vacancy;
NOW, THEREFORE, BE IT RESOLVED, that pursuant to Article III,
Section 2 of the Bylaws, the exact number of Directors is fixed at 19 for
this regular meeting of this Board of Directors, and the exact number of
Directors is fixed at 18 immediately following this regular meeting of
this Board of Directors;
BE IT FURTHER RESOLVED, that Warren Christopher is elected a
director of this corporation, effective immediately, including for this
regular meeting of the Board of Directors, subject to the terms and
conditions set forth on the attached Schedule A.
BE IT FURTHER RESOLVED, that Mr. Christopher is hereby appointed
a member and Chairman of the Executive Committee, and a member of the
Finance Committee of the Board of Directors of this corporation effective
immediately following this regular meeting of the Board of Directors.
APPROVED:
John E. Bryson
- -------------------------------------------
John E. Bryson
Chairman of the Board
Bryant C. Danner
- -------------------------------------------
Executive Vice President and General Counsel
SCHEDULE A
Warren Christopher
Election Terms and Conditions
o Except as provided below, all regular director compensation and
benefits shall apply.
o Age restrictions applicable to nominees for director will be waived as
to Mr. Christopher until the annual meeting of shareholders in April,
2002.
o Retirement benefits and deferred compensation attributable to prior
Board service will continue to be paid. Any retirement benefits or
deferred compensation attributable to later periods will be payable in
accordance with the terms of the plans upon Mr. Christopher's
subsequent retirement from the board.
o A 500 share grant of Edison International stock will be awarded upon
initial election to the Boards of Edison International and Southern
California Edison Company.
PAGE
EXHIBIT 12
SOUTHERN CALIFORNIA EDISON COMPANY AND CONSOLIDATED UTILITY-RELATED
SUBSIDIARIES
RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
Year Ended December 31,
----------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
EARNINGS BEFORE INCOME
TAXES AND FIXED CHARGES:
Income before interest
expense(1) $1,190,051 $1,127,275 $1,081,800 $1,143,477 $1,108,410 $1,049,866
Add:
Taxes on income(2) 443,548 408,033 452,091 509,632 511,819 520,468
Rentals(3) 4,460 3,463 3,512 4,018 3,269 2,639
Allocable portion of interest
on long-term contracts for
the purchase of power(4) 1,908 1,890 1,870 1,848 1,824 1,797
Spent nuclear fuel interest(6) 1,339 487 68 - - -
Amortization of previously
capitalized fixed charges 22,344 4,878 2,271 1,185 814 1,127
---------- ---------- ---------- --------- --------- ---------
Total earnings before
income taxes and fixed
charges (A) $1,663,650 $1,546,026 $1,541,612 $1,660,160 $1,626,136 $1,575,897
========== ========== ========== ========== ========== ==========
FIXED CHARGES:
Interest and amortization $ 517,142 $ 449,230 $ 443,219 $ 463,786 $ 453,015 $ 444,272
Rentals(3) 4,460 3,463 3,512 4,018 3,269 2,639
Capitalized fixed charges-
nuclear fuel(5) 873 978 254 1,531 1,711 2,398
Allocable portion of interest
on long-term contracts for
the purchase of power(4) 1,908 1,890 1,870 1,848 1,824 1,797
Spent nuclear fuel interest(6) 1,339 487 68 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges(B) $ 525,722 $ 456,048 $ 448,923 $ 471,183 $ 459,819 $ 451,106
========== ========== ========== ========== ========== ==========
RATIO OF EARNINGS TO
FIXED CHARGES(A)/(B): 3.16 3.39 3.43 3.52 3.54 3.49
========== ========== ========== ========== ========== ==========
(1) Includes allowance for funds used during construction and accrual of
unbilled revenue.
(2) Includes allocation of federal income and state franchise taxes to
other income.
(3) Rentals include the interest factor relating to certain significant
rentals plus one-third of all remaining annual rentals.
(4) Allocable portion of interest included in annual minimum debt service
requirement of supplier.
(5) Includes fixed charges associated with Nuclear Fuel.
(6) Represents interest on spent nuclear fuel disposal obligation.
PAGE
EXHIBIT 13
Southern California Edison Company
1997 Annual Report
PAGE
A Profile of Southern California Edison Company
Southern California Edison (SCE) is one of the nation's largest electric
utilities. Headquartered in Rosemead, California, SCE is a subsidiary of
Edison International, which is primarily an energy-services company.
SCE, a 111-year-old investor-owned utility, serves 4.3 million customers
in Central and Southern California. More than 11 million people live in
its 50,000-square-mile service territory.
Contents
1 Selected Financial and Operating Data: 1993-1997
2 Management's Discussion and Analysis of
Results of Operations and Financial Condition
15 Consolidated Financial Statements
19 Notes to Consolidated Financial Statements
40 Quarterly Financial Data
41 Responsibility for Financial Reporting
42 Report of Independent Public Accountants
43 Board of Directors
43 Management Team
PAGE
Selected Financial and Operating Data: 1993-1997
Southern California Edison Company
Dollars in millions 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Income statement data:
Operating revenue $ 7,953 $ 7,583 $ 7,873 $ 7,799 $ 7,397
Operating expenses 6,893 6,450 6,724 6,705 6,232
Fuel and purchased power expenses 3,735 3,336 3,197 3,403 3,290
Income tax from operations 582 578 560 508 506
Allowance for funds used during construction 17 25 34 29 36
Interest expense - net 444 453 464 443 449
Net income 606 655 680 639 678
Earnings available for common stock 576 621 643 599 637
Ratio of earnings to fixed charges 3.49 3.54 3.52 3.43 3.39
- ------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Assets $18,059 $17,737 $18,155 $18,076 $18,098
Gross utility plant 21,483 21,134 20,717 20,127 19,441
Accumulated provision for depreciation and
decommissioning 10,544 9,431 8,569 7,710 7,138
Common shareholder's equity 3,958 5,045 5,144 5,039 4,932
Preferred stock:
Not subject to mandatory redemption 184 284 284 359 359
Subject to mandatory redemption 275 275 275 275 275
Long-term debt 6,145 4,779 5,215 4,988 5,234
Capital structure:
Common shareholder's equity 37.5% 48.6% 47.1% 47.3% 45.7%
Preferred stock:
Not subject to mandatory redemption 1.7% 2.7% 2.6% 3.3% 3.3%
Subject to mandatory redemption 2.6% 2.7% 2.5% 2.6% 2.5%
Long-term debt 58.2% 46.0% 47.8% 46.8% 48.5%
- ------------------------------------------------------------------------------------------------------------------
Operating data:
Peak demand in megawatts (MW) 19,118 18,207 17,548 18,044 16,475
Generation capacity at peak (MW) 21,511 21,602 21,603 20,615 20,606
Kilowatt-hour sales (kWh) (in millions) 77,234 75,572 74,296 77,986 73,308
Average annual kWh sales per residential
customer 6,399 6,322 6,188 6,259 6,070
Total energy requirement (kWh) (in millions) 86,849 84,236 81,924 85,011 81,328
Energy mix:
Thermal 44.7% 47.6% 51.6% 59.5% 53.8%
Hydro 6.5% 6.9% 7.7% 3.9% 7.3%
Purchased power and other sources 48.8% 45.5% 40.7% 36.6% 38.9%
Customers (in millions) 4.25 4.22 4.18 4.15 4.12
Full-time employees* 12,642 12,057 14,886 16,351 16,585
*1993-1994 are based on twelve-month averages.
- ------------------------------------------------------------------------------------------------------------------
PAGE 1
Management's Discussion and Analysis of Results of Operations
and Financial Condition
In the following Management's Discussion and Analysis of Results of
Operations and Financial Condition and elsewhere in this annual report,
the words estimates, expects, anticipates, believes, and other similar
expressions are intended to identify forward-looking information that
involves risks and uncertainties. Actual results or outcomes could differ
materially as a result of such important factors as further actions by
state and federal regulatory bodies setting rates and implementing the
restructuring of the electric utility industry; the effects of new laws
and regulations relating to restructuring and other matters; the effects
of increased competition in the electric utility business, including the
beginning of direct customer access to retail energy suppliers and the
unbundling of revenue cycle services such as metering and billing; changes
in prices of electricity and fuel costs; changes in market interest rates;
new or increased environmental liabilities; and other unforeseen events.
Results of Operations
Earnings
Southern California Edison Company's (SCE) 1997 earnings were $576
million, compared with $621 million in 1996 and $643 million in 1995.
SCE's earnings include special charges of $18 million in 1996 for
workforce management costs and reserves, and $15 million in 1995 for
workforce management expenses. Before special charges, earnings declined
$63 million in 1997 from the prior year, mainly due to the extended outage
and lower return at the San Onofre Nuclear Generating Station. The
decline was partially offset by higher sales and lower non-nuclear
operating expenses. The $19 million decrease in 1996 earnings from 1995
(excluding nonrecurring charges) is mainly attributable to a reduction in
authorized rates of return and authorized operating expenses, partially
offset by improved operating performance.
Operating Revenue
Operating revenue increased 5% over 1996, due to an increase in sales
volume and customer refunds in 1996. There were no comparable refunds in
1997. The increase in volume is mainly attributable to the overall
increase in retail sales among residential and commercial customers.
Operating revenue in 1996 decreased 4% from 1995, as increased sales
volume was more than offset by lower average rates. The lower rates were
attributable to the California Public Utilities Commission's (CPUC)
decision to lower SCE's 1996 authorized revenue by 4.4%. Additionally,
during 1996, SCE's customers received a one-time bill credit totaling
$237 million as part of a CPUC-ordered refund of energy cost balancing
account overcollections. In 1997, over 98% of SCE's operating revenue was
from retail sales. Retail rates are regulated by the CPUC and wholesale
rates are regulated by the Federal Energy Regulatory Commission (FERC).
Due to warm weather during the summer months, operating revenue during the
third quarter of each year is significantly higher than the other
quarters.
The changes in operating revenue resulted from:
In millions Year ended December 31, 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------
Operating revenues
Rate changes (including refunds) $173 $ (522) $168
Sales volume changes 193 206 (129)
Other 4 26 35
- ------------------------------------------------------------------------------------------------------------------
Total $370 $(290) $ 74
- ------------------------------------------------------------------------------------------------------------------
Legislation enacted in September 1996 provided for, among other things,
at least a 10% rate reduction (financed through the issuance of rate
reduction notes) for residential and small commercial customers in 1998
and other rates to remain frozen at the June 10, 1996, level (system
average of 10.1 cents per kilowatt-hour). See discussion in Competitive
Environment.
PAGE 2
Southern California Edison Company
Operating Expenses
Fuel expense increased 40% in 1997. The increase is primarily due to a
$174 million gas contract termination payment during the third quarter,
combined with higher gas prices and the extended refueling outages at San
Onofre. San Onofre Unit 2 was shut down during the entire first quarter
of 1997, Unit 3 was shut down 80 days of the second quarter and both units
had a combined outage time of 30 days during the third quarter, which
resulted in an overall increase in gas-powered generation for the year.
There were no comparable outages in 1996. Fuel expense increased 11% in
1996, compared to 1995, due to higher gas prices and changes in the fuel
mix.
Purchased-power expense increased slightly in 1997 and 1996, due to
increases in spot market purchases and increases in power purchased under
federally mandated contracts. SCE is required under federal law to
purchase power from certain nonutility generators even though energy
prices under these contracts are generally higher than other sources. In
1997, SCE paid about $1.6 billion (including energy and capacity payments)
more for these power purchases than the cost of power available from other
sources. The CPUC has mandated the prices for these contracts.
Provisions for regulatory adjustment clauses decreased substantially in
1997, due to undercollections in the energy cost balancing account as
actual energy costs (including the gas termination payments discussed
above) exceeded CPUC-authorized fuel and purchased-power cost estimates.
In addition, there were undercollections associated with SCE's direct
access activities (see discussion in Competitive Environment - Direct
Customer Access), research and development activities and San Onofre.
These undercollections were offset by overcollections related to actual
base-rate revenue from kilowatt-hour sales exceeding CPUC-authorized
estimates and the final settlement of SCE's Canadian supply and
transportation contracts (see discussion in Regulatory Matters). The
provisions for regulatory adjustment clauses also decreased in 1996 from
1995 due to lower than authorized base-rate revenue, undercollections
related to the accelerated recovery of SCE's remaining investment in San
Onofre Units 2 and 3, and the $237 million refund to ratepayers during
1996 for prior energy cost balancing account overcollections.
Maintenance expense increased 23% in 1997, due to increased maintenance
costs for the scheduled refueling outages at the San Onofre units and
SCE's transmission and distribution operating facilities.
Depreciation and decommissioning expense increased 17% in 1997. The
increase is due to increases in plant assets and the accelerated recovery
of the Palo Verde Nuclear Generating Station units effective January 1997.
Depreciation and decommissioning expense increased 12% in 1996, compared
to 1995, due to higher depreciation rates and the accelerated recovery of
San Onofre Units 2 and 3 starting in April 1996.
Property and other taxes decreased 32% in 1997, due to a reclassification
of payroll taxes to operation and maintenance expense.
Other Income and Deductions
The provision for rate phase-in plan reflects a CPUC-authorized, 10-year
rate phase-in plan, which deferred the collection of revenue during the
first four years of operation for the Palo Verde units. The deferred
revenue (including interest) was collected evenly over the final six years
of each unit's plan. The plan ended in February 1996, September 1996 and
January 1998 for Units 1, 2 and 3, respectively. The provision is non-
cash offset to the collection of deferred revenue.
Interest and dividend income increased 18% in 1997, due to increases in
interest earned on SCE's balancing accounts and increases in dividend
income from its equity investments.
PAGE 3
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Other nonoperating income decreased substantially in 1997, due to
additional accruals for regulatory matters associated with the
restructuring of California's electric utility industry. Other
nonoperating income also decreased in 1996, compared to 1995, due to
regulatory accruals in 1996.
Interest Expense
Interest on long-term debt decreased 9% in 1997, due to the early
retirement of $400 million of first and refunding mortgage bonds in July
1997, partially offset by additional interest expense associated with the
issuance of approximately $2.5 billion in rate reduction notes in December
1997 (see discussion in Cash Flows from Financing Activities).
Other interest expense increased in 1997, due to higher levels of short-
term debt used to retire first and refunding mortgage bonds, discussed
above. Other interest expense decreased in 1996 from 1995, due to the
lower levels of short-term debt and lower interest rates.
Financial Condition
SCE's liquidity is primarily affected by debt maturities, dividend
payments and capital expenditures. Capital resources include cash from
operations and external financings.
Edison International's Board of Directors has authorized the repurchase
of up to $2.3 billion of its outstanding shares of common stock. Edison
International has repurchased 76.9 million shares ($1.7 billion) between
January 1995 and January 30, 1998, funded by dividends from its
subsidiaries and its lines of credit.
SCE's cash flow coverage of dividends during 1997 decreased to 0.9 times
from 2.2 times in 1996 and 3.5 times in 1995 as a result of a $1.2 billion
special dividend SCE paid to Edison International from the rate reduction
note proceeds received in December 1997.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $1.7 billion in 1997,
$1.8 billion in 1996 and $2.0 billion in 1995. Cash from operations
exceeded capital requirements for all years presented.
Cash Flows from Financing Activities
Short-term debt is used to finance fuel inventories, balancing account
undercollections and general cash requirements. Long-term debt is used
mainly to finance capital expenditures. External financings are
influenced by market conditions and other factors, including limitations
imposed by its articles of incorporation and trust indenture. As of
December 31, 1997, SCE could issue approximately $10.4 billion of
additional first and refunding mortgage bonds and $5.3 billion of
preferred stock at current interest and dividend rates.
At December 31, 1997, SCE had available lines of credit of $1.8 billion,
with $1.3 billion for general purpose short-term debt and $500 million for
the long-term refinancing of its variable-rate pollution-control bonds.
These unsecured lines of credit are at negotiated or bank index rates with
various expiration dates; the majority have five-year terms.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital
structure, limiting the dividends it may pay Edison International. At
December 31, 1997, SCE had the capacity to pay $1.4 billion in additional
dividends and continue to maintain its authorized capital structure.
Southern California Edison Company
In December 1997, SCE Funding LLC, a special purpose entity (SPE), of
which SCE is the sole member, issued approximately $2.5 billion of rate
reduction notes to Bankers Trust Company of California, as certificate
trustee for the California Infrastructure and Economic Development Bank
Special Purpose Trust SCE-1 (Trust), which is a special purpose entity
established by the State of California. The terms of the rate reduction
notes generally mirror the terms of the pass-through certificates issued
by the Trust, which are known as rate reduction certificates. The
proceeds of the rate reduction notes were used by the SPE to purchase from
SCE an enforceable right known as transition property. Transition
property is a current property right created pursuant to the restructuring
legislation and a financing order of the CPUC and consists generally of
the right to be paid a specified amount from a non-bypassable tariff
levied on residential and small commercial customers. Notwithstanding the
legal sale of the transition property by SCE to the SPE, the amounts
reflected as assets on SCE's balance sheet have not been reduced by the
amount of the transition property sold to the SPE, and the liabilities of
the SPE for the rate reduction notes are for accounting purposes reflected
as long-term liabilities on the consolidated balance sheet of SCE. SCE
used the proceeds from the sale of the transition property to retire debt
and equity securities.
The rate reduction notes have maturities ranging from one to 10 years, and
bear interest at rates ranging from 5.98% to 6.42%. The rate reduction
notes are secured solely by the transition property and certain other
assets of the SPE, and there is no recourse to SCE or Edison
International.
Although the SPE is consolidated with SCE in the financial statements, as
required by generally accepted accounting principles, the SPE is legally
separate from SCE, the assets of the SPE are not available to creditors
of SCE or Edison International, and the transition property is legally not
an asset of SCE or Edison International.
Cash Flows from Investing Activities
The primary uses of cash for investing activities are additions to
property and plant and funding of nuclear decommissioning trusts.
Decommissioning costs are accrued and recovered in rates over the term of
each nuclear generating facility's operating license through charges to
depreciation expense. SCE estimates that it will spend approximately $12.7
billion between 2013 - 2070 to decommission its nuclear facilities. This
estimate is based on SCE's current-dollar decommissioning costs ($2.1
billion), escalated using a 6.65% annual rate. These costs are expected
to be funded from independent decommissioning trusts which receive SCE
contributions of approximately $100 million per year until decommissioning
begins.
Market Risk Exposures
SCE's primary market risk exposures arise from fluctuations in energy
prices and interest rates. SCE's risk management policy allows the use
of derivative financial instruments to manage its financial exposures, but
prohibits the use of these instruments for speculative or trading
purposes.
SCE has hedged a portion of its exposure to increases in natural gas
prices. Increases in natural gas prices tend to increase the price of
electricity purchased from the power exchange (PX). SCE's exposure is
also limited by regulatory mechanisms that protect SCE from much of the
risk arising from high electricity prices.
A 10% increase in market interest rates would result in a $6 million
increase in the fair value of SCE's interest rate hedge agreements. A 10%
decrease in market interest rates would result in a $6 million decline in
the fair market value of interest rate hedge agreements. A 10% increase
in natural gas prices would result in a $26 million increase in the fair
market value of gas call options. A 10% decrease in natural gas prices
would result in a $17 million decline in the fair market value of gas call
options. A 10% change in market rates is expected to have an immaterial
effect on SCE's other financial instruments.
PAGE 5
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Projected Capital Requirements
SCE's projected construction expenditures for the next five years are:
1998 - $956 million; 1999 - $807 million; 2000 - $763 million; 2001 - $721
million; and 2002 - $671 million.
Long-term debt maturities and sinking fund requirements for the next five
years are: 1998 - $693 million; 1999 - $401 million; 2000 - $571 million;
2001 - $646 million; and 2002 - $446 million.
Preferred stock redemption requirements for the next five years are: 1998
through 2001 - zero and 2002 - $105 million.
Regulatory Matters
Legislation enacted in September 1996 provided for, among other things,
a 10% rate reduction for residential and small commercial customers in
1998 and other rates to remain frozen at the June 10, 1996, level (system
average of 10.1 cents per kilowatt-hour). See further discussion in
Competitive Environment - Restructuring Legislation.
In 1998, revenue will be affected by various mechanisms depending on the
utility operation. Revenue related to distribution operations will be
determined through a performance-based rate-making mechanism (PBR) (see
discussion in Competitive Environment - PBR) and the distribution assets
will have the opportunity to earn a CPUC-authorized 9.49% return. Until
the independent system operator (ISO) begins operation, transmission
revenue will be determined by the same mechanism as distribution
operations. After that time, transmission revenue will be determined
through FERC-authorized rates and transmission assets will earn a 9.43%
return. These rates are subject to refund. See discussions in the
Competitive Environment - Rate-setting and FERC Restructuring Decision
sections.
Revenue from generation-related operations will be determined through the
competition transition charge (CTC) mechanism, nuclear rate-making
agreements and the competitive market. Revenue related to fossil and
hydroelectric generation operations will be recovered from two sources.
The portion that is made uneconomic by electric industry restructuring
will be determined through the CTC mechanism. The portion that is economic
will be recovered through the PX mechanism. In 1998, fossil and
hydroelectric generation assets will earn a 7.22% return. A more detailed
discussion is in Competitive Environment - CTC.
The CPUC has authorized revised rate-making plans for SCE's nuclear
facilities, which call for the accelerated recovery of its nuclear
investments in exchange for a lower authorized rate of return. SCE's
nuclear assets are earning an annual rate of return of 7.35%. In
addition, the San Onofre plan authorizes a fixed rate of approximately 4 cents
per kilowatt-hour generated for operating costs including incremental
capital costs, and nuclear fuel and nuclear fuel financing costs. The San
Onofre plan commenced in April 1996, and ends in December 2001 for the
accelerated recovery portion and in December 2003 for the incentive
pricing portion. Palo Verde's operating costs, including incremental
capital costs, and nuclear fuel and nuclear fuel financing costs, are
subject to balancing account treatment. The Palo Verde plan commenced in
January 1997 and ends in December 2001. Beginning January 1, 1998, both
the San Onofre and Palo Verde rate-making plans became part of the CTC
mechanism.
The changes in revenue from the regulatory mechanisms discussed above,
excluding the effects of other rate actions, is expected to have a minimal
impact on 1998 earnings. However, the issuance of the rate reduction
notes in December 1997, which enables the repurchase of debt and equity,
will have a negative impact on 1998 earnings of approximately $97 million.
In 1994, SCE filed its testimony in the non-Qualifying Facilities (QF)
phase of the 1994 Energy Cost Adjustment Clause proceeding. In 1995, the
CPUC's Office of Ratepayer Advocates (ORA) filed its report on the
reasonableness of SCE's gas supply costs for both the 1993 and 1994 record
periods. The
PAGE 6
Southern California Edison Company
report recommends a disallowance of $13 million for excessive costs
incurred from November 1993 through March 1994 associated with SCE's
Canadian gas purchase and supply contracts. The report requested that the
CPUC defer finding SCE's Canadian supply and transportation agreements
reasonable for the duration of their terms and that the costs under these
contracts be reviewed on a yearly basis. In 1996, the ORA issued its
report for the 1995 record period recommending a $38 million disallowance
for excessive costs incurred from April 1994 through March 1995.
Both proposed disallowances were later consolidated into one proceeding.
On December 3, 1997, the CPUC approved a settlement agreement between SCE
and the ORA on this and any future issues, which will result in a $61
million (including interest) refund to SCE's customers. The refund which
is fully reflected in the financial statements will be made in first
quarter 1998.
In 1991, SCE filed its testimony in the QF phase of the 1991 Energy Cost
Adjustment Clause proceeding. In 1993, the ORA filed its report on the
reasonableness of SCE's QF contracts and alleged that SCE had imprudently
renegotiated a QF contract with the Mojave Cogeneration Company. The
report recommended a disallowance of $32 million (1993 net present value)
over the contract's 20-year life. Subsequently, SCE and the ORA reached
a settlement where SCE agreed to a one-time reduction to its energy cost
adjustment clause balancing account of $14 million plus interest. In
October 1996, the CPUC approved the settlement agreement, subject to SCE
and the ORA accepting certain conditions concerning the way the $14
million payment would be reflected in rates. After reviewing the
decision, SCE declined to accept the condition proposed by the CPUC and
in November 1996 filed an application for rehearing. In February 1997,
the CPUC denied SCE's application. Because SCE and the ORA were unable
to finalize their settlement, hearings on the ORA's disallowance
recommendations were held in June 1997. During the hearings, the ORA
presented testimony to update its assessment of ratepayer harm, which it
now estimates to be $45 million (1997 net present value) over the
contract's life. In November 1997, a CPUC administrative law judge (ALJ)
issued a proposed decision which would adopt the ORA's $45 million
disallowance. In January 1998, the CPUC withdrew the ALJ's proposed
decision pending oral arguments. Oral arguments were heard on February
4, 1998, at which time SCE requested an alternate proposed decision be
issued. SCE expects this matter to be returned to the CPUC's agenda in
the near future and a final decision to be issued during second quarter
1998. SCE cannot predict the final outcome of this matter but does not
believe it will materially affect its results of operations.
Competitive Environment
SCE currently operates in a highly regulated environment in which it has
an obligation to deliver electric service to customers in return for an
exclusive franchise within its service territory. This regulatory
environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators are
restructuring California's electric utility industry.
California Electric Utility Restructuring
Restructuring Legislation - In September 1996, the State of California
enacted legislation to provide a transition to a competitive market
structure. The legislation substantially adopted the CPUC's December 1995
restructuring decision by addressing stranded-cost recovery for utilities
and providing a certain cost-recovery time period for the transition costs
associated with utility-owned generation-related assets. Transition costs
related to power-purchase contracts would be recovered through the terms
of their contracts while most of the remaining transition costs would be
recovered through 2001. The legislation also included provisions to
finance a portion of the stranded costs that residential and small
commercial customers would have paid between 1998 and 2001, which would
allow SCE to reduce rates by at least 10% to these customers, beginning
January 1, 1998. The financing would occur with securities issued by the
California Infrastructure and Economic Development Bank, or an entity
approved by the Bank. The legislation included a rate freeze for all
other customers, including large commercial and industrial customers, as
well as provisions for continued funding for energy conservation, low-
income programs and renewable resources. Despite the rate freeze, SCE
expects to be able to recover its revenue requirement during the 1998-2001
transition period. In addition, the legislation mandated the
Management's Discussion and Analysis of Results of Operations
and Financial Condition
implementation of the CTC that provides utilities the opportunity to
recover costs made uneconomic by electric utility restructuring. Finally,
the legislation contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related
expenses.
Rate Reduction Notes - In May 1997, SCE filed an application with the CPUC
requesting approval of the issuance of an aggregate amount of up to $3
billion of rate reduction notes in one or more series or classes and a 10%
rate reduction for the period from January 1, 1998, through March 31,
2002. At the same time, SCE filed an application with the California
Infrastructure and Economic Development Bank for approval to issue the
notes. Residential and small commercial customers will repay the notes
over the expected 10-year term through non-bypassable charges based on
electricity consumption. In December 1997, after receiving approval from
both the CPUC and the Infrastructure Bank, a limited liability company
created by SCE issued approximately $2.5 billion of these notes. For
further details, see the discussion in Cash Flows from Financing
Activities.
CPUC Restructuring Decision - The CPUC's December 1995 decision on
restructuring California's electric utility industry started the
transition to a new market structure, which is expected to provide
competition and customer choice and is scheduled to begin March 31, 1998.
Key elements of the CPUC's restructuring decision included: creation of
the PX and ISO; availability of direct customer access and customer
choice; PBR for those utility services not subject to competition;
voluntary divestiture of at least 50% of utilities' gas-fueled generation,
and implementation of the CTC.
Rate-setting - In December 1996, SCE filed a more comprehensive plan
(elaborating on its July 1996 filing related to the conceptual aspects of
separating costs as requested by CPUC and FERC directives) for the
functional unbundling of its rates for electric service, beginning January
1, 1998. In response to CPUC and FERC orders, as well as the new
restructuring legislation, this filing addressed the implementation-level
detail for the functional unbundling of rates into separate charges for
energy, transmission, distribution, the CTC, public benefit programs and
nuclear decommissioning. The transmission component of this rate
unbundling process was addressed at the FERC through a March 1997 filing.
In December 1997, the FERC approved these rates, subject to refund, to be
effective on the date the ISO begins operation. CPUC hearings on SCE's
rate unbundling (also known as rate-setting) plan were concluded in April
1997. In August 1997, the CPUC issued a decision which adopted the
methodology for determining CTC residually (see CTC discussion below) and
adopted SCE's revenue requirement components for public benefit programs
and nuclear decommissioning. The decision also adjusted SCE's proposed
distribution revenue requirement by reallocating $76 million of it
annually to other functions such as generation and transmission. Under
the decision, SCE will be able to recover most of the reallocated amount
through market revenue, other rate-making mechanisms after petitioning the
CPUC to modify its prior decisions, or another review process later in its
divestiture proceeding.
PX and ISO - In April 1996, SCE, Pacific Gas & Electric Company and San
Diego Gas & Electric Company filed a proposal with the FERC regarding the
creation of the PX and the ISO. In November 1996, the FERC conditionally
accepted the proposal and directed the three utilities, the ISO, and the
PX to file more specific information. The filing was made in March 1997,
and included SCE's proposed transmission revenue requirement. On October
29, 1997, the FERC gave conditional, interim authorization for operation
of the PX and ISO to begin on January 1, 1998. The FERC stated it would
closely monitor the PX and ISO, require further studies and make
modifications, where necessary. A comprehensive review will be performed
by the FERC after three years of operation of the PX and ISO. On December
22, 1997, the PX and ISO governing boards announced a delay in the
planned start-up of the PX and ISO due to insufficient testing of
operational, settlement and billing systems. The PX and ISO are now
expected to begin operation by March 31, 1998.
In July 1996, the three utilities jointly filed an application with the
CPUC requesting approval to establish a restructuring trust which would
obtain loans up to $250 million for the development of the ISO and PX
Southern California Edison Company
through January 1, 1998. The loans are backed by utility guarantees;
SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an
interim order establishing the restructuring trust and the funding level
of $250 million, which has been used to build the hardware and software
systems for the ISO and PX. The ISO and PX will repay the trust's loans
and recover funds from future ISO and PX customers. In November 1997,
the CPUC approved a petition jointly filed by the three utilities which
requested an increase in the loan guarantees from $250 million to $300
million; SCE's share of this new total is $135 million. In December 1997,
the CPUC approved a remaining item with respect to the petition which
requested that the one-time restructuring implementation charge, to be
paid to the PX by the utilities, be deemed a non-bypassable charge to be
recovered from all retail customers. The amount of the PX charge is $85
million; SCE's share is 45%, or $38 million.
Direct Customer Access - In May 1997, the CPUC issued a decision
describing how all California investor-owned-utility customers will be
able to choose who will provide them with electric generation service
beginning January 1, 1998. On December 30, 1997, the CPUC issued a
decision delaying direct access until March 31, 1998, due to operational
delays in the start-up of the PX and ISO. On this date, customers will
be able to choose to remain utility customers with bundled electric
service from SCE (which will purchase its power through the PX), or choose
direct access, which means the customer can contract directly with either
independent power producers or retail electric service providers such as
power brokers, marketers and aggregators. Additionally, all investor-
owned-utility customers must pay the CTC whether or not they choose to
buy power through SCE. Electric utilities will continue to provide the
core distribution service of delivering energy through its distribution
system regardless of a customer's choice of electricity supplier. The
CPUC will continue to regulate the prices and service obligations related
to distribution services. If the new competitive market cannot
accommodate the volume of direct access transactions, the CPUC could
implement a contingency plan. However, the CPUC believes it is likely
that interest in and migration to direct access will be gradual.
Revenue Cycle Services - A decision issued by the CPUC in May 1997,
introduces customer choice to metering, billing and related services
(referred to as revenue cycle services) that are now provided by
California's investor-owned utilities. Under this revenue cycle services
unbundling decision, beginning in January 1998, direct access customers
may choose to have either SCE or their electric generation service
provider render consolidated (energy and distribution) bills, or they may
choose to have separate billings from each service provider. However, not
all electric generation service providers will necessarily offer each
billing option. In addition, beginning in January 1998, customers with
maximum demand above 20 kW (primarily industrial and large commercial) can
choose SCE or any other supplier to provide their metering service. All
other customers will have this option beginning in January 1999. In
determining whether any credit should be provided by the utility to firms
providing customers with revenue cycle services, and the amount of any
such credit, the CPUC has indicated that it is appropriate to net the cost
incurred by the utility and the cost avoided by the utility as a result
of such services being provided by the other firm rather than by the
utility. The unbundling of revenue cycle services will expose SCE to the
possible loss of revenue, higher stranded costs and a reduction in revenue
security.
PBR - In 1993, SCE filed for a PBR mechanism to determine most of its
revenue (excluding fuel). The filing was subsequently divided between
transmission and distribution (T&D) and power generation.
In September 1996, the CPUC adopted a non-generation or T&D PBR mechanism
for SCE which began on January 1, 1997. According to the CPUC, beginning
in 1998 (coincident with the initiation of the competitive market), the
transmission portion is to be separated from non-generation PBR and
subject to ratemaking under the rules of the FERC. The distribution-only
PBR will extend through December 2001. Key elements of the non-generation
PBR include: T&D rates indexed for inflation based on the Consumer Price
Index less a productivity factor; elimination of the kilowatt-hour sales
adjustment; adjustments for cost changes that are not within SCE's
control; a cost of capital trigger mechanism based on changes in a bond
index; standards for service reliability and safety; and a net revenue-
sharing mechanism that determines how customers and shareholders will
share gains and losses from T&D operations.
PAGE 9
Management's Discussion and Analysis of Results of Operations
and Financial Condition
With the CPUC's 1995 restructuring decision and the passage of
restructuring legislation in 1996, the majority of power generation
ratemaking (primarily fossil-fueled and nuclear) was assigned to other
mechanisms. In April 1997, a CPUC interim order determined that the
proposed structure of the fossil-fueled plants' must-run contracts were
under the FERC's jurisdiction. On October 31, 1997, SCE filed must-run
tariff schedules with the FERC covering its six ISO-designated must-run
plants. In the meantime, SCE is pursuing the divestiture of these plants
(see Divestiture discussion below) and might not ever itself provide
service under these FERC tariff schedules.
In December 1997, the CPUC adopted a PBR-type rate-making mechanism for
SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue
requirement in 1998 and establishes a formula for extending it through the
duration of the electric industry restructuring transition period, or
until market valuation of the hydroelectric facilities, whichever occurs
first. The mechanism provides that power sales revenue from hydroelectric
facilities in excess of the hydroelectric revenue requirement be credited
against the costs to transition to a competitive market (see CTC
discussion below).
Divestiture - In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its oil- and gas-fueled
generation plants. This application builds on SCE's March 1996 plan which
outlined how SCE proposed to divest 50% of these assets. Under the new
proposal, SCE would continue to operate and maintain the divested power
plants for at least two years following their sale, as mandated by the
restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be
impacted by divestiture-related job reductions. SCE's proposal is
contingent on the overall electric industry restructuring implementation
process continuing on a satisfactory path. In September 1997, the CPUC
approved SCE's proposal to auction the 12 plants.
On December 1, 1997, SCE filed a compliance filing with the CPUC stating
that it had sold 10 plants. On December 16, 1997, the CPUC approved the
sale of the 10 plants. On February 6, 1998, SCE filed a compliance filing
with the CPUC for the sale of an 11th plant. CPUC approval of the sale
is expected before March 31, 1998. The total sales price of the 11 plants
is $1.1 billion, or 2.16 times their combined book value of $531 million.
Net proceeds of the sales will be used to reduce stranded costs, which
otherwise were expected to be collected through the CTC mechanism. The
transfer of ownership of the 11 plants is expected to occur shortly before
the start of the new competitive market, which the PX and ISO expect to
occur on March 31, 1998. The sale and CPUC approval of the single
remaining plant is expected to be completed in early 1998.
CTC - Recovery of costs to transition to a competitive market is being
implemented through a non-bypassable CTC. This charge applies to all
customers who were using or began using utility services on or after the
CPUC's December 20, 1995, decision date. In August 1996, in compliance
with the CPUC's restructuring decision, SCE filed its application to
estimate its 1998 transition costs. In October 1996, SCE amended its
transition cost filing to reflect the effects of the legislation enacted
in September 1996. Under the rate freeze codified in the legislation, the
CTC will be determined residually (i.e., after subtracting other cost
components for the PX, T&D, nuclear decommissioning and public benefit
programs). Nevertheless, the CPUC directed that the amended application
provide estimates of SCE's potential transition costs from 1998 through
2030. SCE provided two estimates between approximately $13.1 billion
(1998 net present value) assuming the fossil plants have a market value
equal to their net book value, and $13.8 billion (1998 net present value)
assuming the fossil plants have no market value. These estimates are based
on incurred costs, forecasts of future costs and assumed market prices.
However, changes in the assumed market prices could materially affect
these estimates. The potential transition costs are comprised of: $7.5
billion from SCE's qualifying facility contracts, which are the direct
result of prior legislative and regulatory mandates; and $5.6 billion to
$6.3 billion from costs pertaining to certain generating plants
(successful completion of the sale of SCE's gas-fired generating plants
would reduce this estimate of transition costs for SCE-owned generation
to less than $5 billion) and regulatory commitments consisting of costs
incurred (whose recovery has been deferred by the CPUC) to provide
PAGE 10
Southern California Edison Company
service to customers. Such commitments include the recovery of income tax
benefits previously flowed through to customers, postretirement benefit
transition costs, accelerated recovery of San Onofre Units 2 and 3 and the
Palo Verde units (as discussed in Regulatory Matters), and certain other
costs. In February 1997, SCE filed an update to the CTC filing to reflect
approval by the CPUC of settlements regarding ratemaking for SCE's share
of Palo Verde and the buyout of a power purchase agreement, as well as
other minor data updates. No substantive changes in the total CTC
estimates were included. This issue has been separated into two phases;
Phase 1 addresses the rate-making issues and Phase 2 the quantification
issues.
A decision on Phase 1 was issued in June 1997, which, among other things,
required the establishment of a transition cost balancing account and
annual transition cost proceedings, set a market rate forecast for 1998
transition costs, and required that generation-related regulatory assets
be amortized ratably over a 48-month period. Hearings on Phase 2 were
held in May and June 1997 and a final decision was issued on November 19,
1997. The Phase 2 decision established the calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the
end of the rate freeze. The Phase 2 decision also reduced SCE's authorized
rate of return on certain assets eligible for transition cost recovery
(primarily fossil- and hydroelectric-generation related assets) beginning
July 1997, five months earlier than anticipated. The decision, excluding
the effects of other rate actions, had a negative impact on 1997 earnings
of approximately $14 million. SCE has filed an application for rehearing
on the 1997 rate of return issue.
Accounting for Generation-Related Assets - If the CPUC's electric industry
restructuring plan is implemented as outlined above, SCE would be allowed
to recover its CTC through non-bypassable charges to its distribution
customers (although its investment in certain generation assets would be
subject to a lower authorized rate of return).
As previously reported, from November 1996 to July 1997, SCE and the other
major California electric utilities were engaged in discussions with the
Securities and Exchange Commission staff regarding the proper application
of regulatory accounting standards in light of the electric industry
restructuring legislation enacted by the State of California in September
1996 and the CPUC's electric industry restructuring plan. This issue was
placed on the agenda of the Financial Accounting Standards Board's
Emerging Issues Task Force (EITF) during April 1997 and a final consensus
was reached at the July EITF meeting. During the third quarter of 1997,
SCE implemented the EITF consensus and discontinued application of
accounting principles for rate-regulated enterprises for its investment
in generation facilities.
However, implementation of the EITF consensus did not require SCE to write
off any of its generation-related assets, including regulatory assets of
approximately $600 million at December 31, 1997. SCE has retained these
assets on its balance sheet because the legislation and restructuring plan
referred to above make probable their recovery through a non-bypassable
CTC to distribution customers. These regulatory assets relate primarily
to the recovery of accelerated income tax benefits previously flowed
through to customers, purchased power contract termination payments,
unamortized losses on reacquired debt, and the recovery of amounts
deferred under the Palo Verde rate phase-in plan. The consensus reached
by the EITF also permits the recording of new generation-related
regulatory assets during the transition period that are probable of
recovery through the CTC mechanism.
If during the transition period events were to occur that made the
recovery of these generation-related regulatory assets no longer probable,
SCE would be required to write off the remaining balance of such assets
as a one-time, non-cash charge against earnings. If such a write-off were
to be required, SCE believes that it should not affect the recovery of
stranded costs provided for in the legislation and restructuring plan.
Although depreciation-related differences could result from applying a
regulatory prescribed depreciation method (straight-line, remaining-life
method) rather than a method that would have been applied absent the
regulatory process, SCE believes that the depreciable lives of its
generation-related assets would
Management's Discussion and Analysis of Results of Operations
and Financial Condition
not vary significantly from that of an unregulated enterprise, as the CPUC
bases depreciable lives on periodic studies that reflect the physical
useful lives of the assets. SCE also believes that any depreciation-
related differences would be recovered through the CTC.
If events occur during the restructuring process that result in all or a
portion of the CTC being improbable of recovery, SCE could have additional
write-offs associated with these costs if they are not recovered through
another regulatory mechanism. At this time, SCE cannot predict what other
revisions will ultimately be made during the restructuring process in
subsequent proceedings or implementation phases, or the effect, after the
transition period, that competition will have on its results of operations
or financial position.
FERC Restructuring Decision
In April 1996, the FERC issued its decision on stranded-cost recovery and
open access transmission, effective July 1996. The decision, reaffirmed
by the FERC in its March and November 1997 orders, requires all electric
utilities subject to the FERC's jurisdiction to file transmission tariffs
which provide competitors with increased access to transmission facilities
for wholesale transactions and also establishes information requirements
for the transmission utility. The decision also provides utilities with
the opportunity to recover stranded costs associated with existing
wholesale customers, retail-turned-wholesale customers and retail wheeling
when the state regulatory body does not have authority to address retail
stranded costs. Even though the CPUC is currently addressing stranded-
cost recovery through the CTC proceedings, the FERC has also asserted
primary jurisdiction over the recovery of stranded costs associated
with retail-turned-wholesale customers, such as a new municipal
electric system or a municipal annexation. However, the FERC did clarify
that it does not intend to prevent or interfere with a state's authority
and that it has discretion to defer to a state stranded-cost-calculation
method. In January 1997, the FERC accepted the open access transmission
tariff SCE filed in compliance with the April 1996 decision. The rates
included in the tariff are being collected subject to refund. In May
1997, SCE filed a revised open access tariff to reflect the few revisions
set forth in the March 1997 order. The open access transmission tariff
will be terminated on the date the ISO begins operation.
Environmental Protection
SCE is subject to numerous environmental laws and regulations, which
require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect
of past operations on the environment.
As further discussed in Note 10 to the Consolidated Financial Statements,
SCE records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCE reviews its sites and measures the liability
quarterly, by assessing a range of reasonably likely costs for each
identified site. Unless there is a probable amount, SCE records the lower
end of this likely range of costs.
In connection with the issuance of the San Onofre Units 2 and 3 operating
permits, SCE reached agreement with the California Coastal Commission in
1991 to restore certain marine mitigation sites. The restorations include
two sites: designated wetlands and the construction of an artificial kelp
reef off the California coast. After SCE requested certain modifications
to the agreement, the Coastal Commission issued a final ruling in April
1997 to reduce the scope of remediations. SCE elected to pay for the
costs of marine mitigation in lieu of placing the funds into a trust.
Rate recovery of these costs is occurring through the San Onofre incentive
pricing plan discussed in Note 1 to the Consolidated Financial Statements.
PAGE 12
Southern California Edison Company
SCE's recorded estimated minimum liability to remediate its 50
identified sites is $178 million, which includes $75 million for the two
sites discussed above. One of SCE's sites, a former pole-treating
facility, is considered a federal Superfund site and represents 42% of its
recorded liability. The ultimate costs to clean up SCE's identified sites
may vary from its recorded liability due to numerous uncertainties
inherent in the estimation process. SCE believes that, due to these
uncertainties, it is reasonably possible that cleanup costs could exceed
its recorded liability by up to $246 million. The upper limit of this
range of costs was estimated using assumptions least favorable to SCE
among a range of reasonably possible outcomes.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its
sites, representing $91 million of its recorded liability, through an
incentive mechanism. Under this mechanism, SCE will recover 90% of
cleanup costs through customer rates; shareholders fund the remaining 10%,
with the opportunity to recover these costs from insurance carriers and
other third parties. SCE has successfully settled insurance claims with
all responsible carriers. Costs incurred at SCE's remaining sites are
expected to be recovered through customer rates. SCE has recorded a
regulatory asset of $153 million for its estimated minimum environmental-
cleanup costs expected to be recovered through customer rates. This amount
includes $60 million of marine mitigation costs remaining to be recovered
through the San Onofre incentive pricing plan.
SCE's identified sites include several sites for which there is a lack of
currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCE may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $10 million. Recorded costs for 1997 were $10
million.
Based on currently available information, SCE believes it is unlikely that
it will incur amounts in excess of the upper limit of the estimated range
and, based upon the CPUC's regulatory treatment of environmental cleanup
costs, SCE believes that costs ultimately recorded will not materially
affect its results of operations or financial position. There can be no
assurance, however, that future developments, including additional
information about existing sites or the identification of new sites, will
not require material revisions to such estimates.
The 1990 federal Clean Air Act requires power producers to have emissions
allowances to emit sulfur dioxide. Power companies receive emissions
allowances from the federal government and may bank or sell excess
allowances. SCE expects to have excess allowances under Phase II of the
Clean Air Act (2000 and later). The act also calls for a study to
determine if additional regulations are needed to reduce regional haze in
the southwestern U.S. In addition, another study is in progress to
determine the specific impact of air contaminant emissions from the Mohave
Coal Generating Station on visibility in Grand Canyon National Park. The
potential effect of these studies on sulfur dioxide emissions regulations
for Mohave is unknown.
SCE's projected capital expenditures to protect the environment are $820
million for the 1998 - 2002 period, mainly for aesthetics treatment,
including undergrounding certain transmission and distribution lines.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects has been the subject of
scientific research. After many years of research, scientists have not
found that exposure to EMF causes disease in humans. Research on this
topic is continuing. However, the CPUC has issued a decision which
provides for a rate-recoverable research and public education program
conducted by California electric utilities, and authorizes these utilities
to take no-cost or low-cost steps to reduce EMF
Management's Discussion and Analysis of Results of Operations
and Financial Condition
in new electric facilities. SCE is unable to predict when or if the
scientific community will be able to reach a consensus on any health
effects of EMF, or the effect that such a consensus, if reached, could
have on future electric operations.
San Onofre Steam Generator Tubes
The San Onofre Units 2 and 3 steam generators have performed relatively
well through the first 15 years of operation, with low rates of ongoing
steam generator tube degradation. However, during the Unit 2 scheduled
refueling and inspection outage, which was completed in Spring 1997, an
increased rate of tube degradation was identified, which resulted in the
removal of more tubes from service than had been expected. The steam
generator design allows for the removal of up to 10% of the tubes before
the rating capacity of the unit must be reduced. As a result of the
increased degradation, a mid-cycle inspection outage will be conducted in
early 1998 for Unit 2.
During Unit 3's refueling outage, which was completed in July 1997,
inspections of structural supports for steam generator tubes identified
several areas where the thickness of the supports had been reduced,
apparently by erosion during normal plant operation. As a result, a mid-
cycle inspection outage is planned for early 1998. However, during Unit
2's Spring 1997 inspection outage, similar tube supports showed no sign
of such erosion.
Proposed New Accounting Standard
During 1996, the Financial Accounting Standards Board issued an exposure
draft that would establish accounting standards for the recognition and
measurement of closure and removal obligations. The exposure draft would
require the estimated present value of an obligation to be recorded as a
liability, along with a corresponding increase in the plant or regulatory
asset accounts when the obligation is incurred. If the exposure draft is
approved in its present form, it would affect SCE's accounting practices
for the decommissioning of its nuclear power plants, obligations for coal
mine reclamation costs and any other activities related to the closure or
removal of long-lived assets. SCE does not expect that the accounting
changes proposed in the exposure draft would have an adverse effect on its
results of operations even after deregulation due to its current and
expected future ability to recover these costs through customer rates.
Year 2000 Issue
Many of SCE's existing computer systems identify a year by using only two
digits instead of four. If not corrected, these programs could fail or
create erroneous results when the new century begins. This situation has
been referred to generally as the Year 2000 Issue.
SCE has developed plans and is addressing the programming changes that it
has determined are necessary in order for its computer systems to function
properly beginning in 2000. Remediation of SCE's key financial systems
for the Year 2000 Issue was completed in 1997. SCE's informational and
operational systems have been assessed, and detailed plans have been
developed to address modifications required to be completed, tested and
operational by December 31, 1999. Preliminary estimates of the costs to
complete these modifications, including the cost of new hardware and
software application modifications, range from $55 million to $80 million,
about half of which are expected to be capital costs. Current rate levels
for providing electric service should be sufficient to provide funding for
these modifications. Remediation of existing critical systems is expected
to be 75% complete by the end of 1998. SCE expects its Year 2000 date
conversion project to be completed on a timely basis, with no material
adverse impact to its results of operations or financial position.
SCE's Year 2000 date conversion project includes an assessment of critical
interfaces with the computer systems of others and it does not expect a
material adverse effect on its operating and business functions from the
Year 2000 Issue.
PAGE 14
Consolidated Statements of Income Southern California Edison Company
In thousands Year ended December 31, 1997 1996 1995
- ------------ ----------------------- ---------------------------------------------
Operating revenue $7,953,386 $7,583,382 $7,872,718
---------- ---------- ----------
Fuel 881,471 630,512 614,954
Purchased power 2,854,002 2,705,880 2,581,878
Provisions for regulatory adjustment clauses - net (410,935) (225,908) 229,744
Other operating expenses 1,212,468 1,178,316 1,226,534
Maintenance 405,545 329,371 356,693
Depreciation and decommissioning 1,239,878 1,063,505 954,141
Income taxes 582,031 578,329 559,694
Property and other taxes 129,038 190,284 200,236
---------- ---------- ----------
Total operating expenses 6,893,498 6,450,289 6,723,874
---------- ---------- ----------
Operating income 1,059,888 1,133,093 1,148,844
---------- ---------- ----------
Provision for rate phase-in plan (48,486) (84,288) (122,233)
Allowance for equity funds used during construciton 7,651 15,579 19,082
Interest and dividend income 44,636 37,855 37,644
Other nonoperating income (deductions) - net (23,036) (3,623) 45,651
---------- ---------- ----------
Total other income (deductions) - net (19,235) (34,477) (19,856)
---------- ---------- ----------
Income before interest expense 1,040,653 1,098,616 1,128,988
---------- ---------- ----------
Interest on long-term debt 345,592 380,812 385,187
Other interest expense 101,078 73,914 80,130
Allowance for borrowed funds used during construction (9,213) (9,794) (14,489)
Capitalized interest (2,398) (1,711) (1,531)
---------- ---------- ----------
Total interest expense - net 435,059 443,221 449,297
---------- ---------- ----------
Net income 605,594 655,395 679,691
Dividends on preferred stock 29,488 34,395 36,764
---------- ---------- ----------
Earnings available for common stock $ 576,106 $ 621,000 $ 642,927
========== ========== ==========
Consolidated Statements of Retained Earnings
In thousands Year ended December 31, 1997 1996 1995
- ------------ ---------------------- ---------- ---------- ----------
Balance at beginning of year $2,665,612 $2,780,058 $2,683,568
Net income 605,594 655,395 679,691
Dividends declared on common stock (1,829,040) (735,429) (545,672)
Dividends declared on preferred stock (29,488) (34,395) (36,764)
Reacquired capital stock expense (4,844) (17) (765)
---------- ---------- ----------
Balance at end of year $1,407,834 $2,665,612 $2,780,058
========== ========== ==========
The accompanying notes are integral part of these financial statements.
PAGE 15
Consolidated Balance Sheets
In thousands December 31, 1997 1996
- ------------ ----------- ----------- -------------
ASSETS
Transmission and distribution:
Utility plant, at original cost, subject to
cost-based rate regulation $11,213,352 $10,973,311
Accumulated provision for depreciation (5,573,742) (5,128,652)
Construction work in progress 492,614 461,048
----------- -----------
6,132,224 6,305,707
----------- -----------
Generation:
Utility plant, at original cost, not subject to
cost-based rate regulation 9,522,127 9,427,076
Accumulated provision for depreciation and
decommissioning (4,970,137) (4,302,419)
Construction work in progress 100,283 95,597
Nuclear fuel, at amortized cost 154,757 176,827
----------- -----------
4,807,030 5,397,081
----------- -----------
Total utility plant 10,939,254 11,702,788
----------- -----------
Nonutility property - less accumulated provision
for depreciation of $24,730 and $25,102
at respective dates 67,869 63,931
Nuclear decommissioning trusts 1,831,460 1,485,525
Other investments 171,399 103,973
----------- -----------
Total other property and investments 2,070,728 1,653,429
----------- -----------
Cash and equivalents 962,272 319,942
Receivables, including unbilled revenue, less allowances
of $26,453 and $26,079 for uncollectible accounts
at respective dates 906,388 921,083
Fuel inventory 58,059 72,480
Materials and supplies, at average cost 132,980 154,266
Accumulated deferred income taxes - net 123,146 240,429
Regulatory balancing accounts - net 193,311 -
Prepayments and other current assets 93,098 105,137
----------- -----------
Total current assets 2,469,254 1,813,337
----------- -----------
Unamortized debt issuance and reacquisition expense 359,304 346,834
Rate phase-in plan 3,777 50,703
Income tax-related deferred charges 1,543,380 1,741,091
Other deferred charges 673,601 428,370
----------- -----------
Total deferred charges 2,580,062 2,566,998
----------- -----------
Total assets $18,059,298 $17,736,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
PAGE 16
Southern California Edison Company
In thousands, except share amounts December 31, 1997 1996
- ---------------------------------- ----------- ------------ ------------
Common shareholder's equity:
Common stock (434,888,104 shares outstanding
at each date) $ 2,168,054 $ 2,168,054
Additional paid-in capital and other 382,054 210,857
Retained earnings 1,407,834 2,665,612
----------- -----------
3,957,942 5,044,523
Preferred stock:
Not subject to mandatory redemption 183,755 283,755
Subject to mandatory redemption 275,000 275,000
Long-term debt 6,144,597 4,778,703
----------- -----------
Total capitalization 10,561,294 10,381,981
----------- -----------
Other long-term liabilities 479,637 423,925
----------- -----------
Current portion of long-term debt 692,875 501,470
Short-term debt 322,028 230,149
Accounts payable 406,704 392,779
Accrued taxes 509,270 484,688
Accrued interest 85,406 93,363
Dividends payable 95,146 108,563
Regulatory balancing accounts - net - 181,488
Deferred unbilled revenue and other current liabilities 931,856 825,317
----------- -----------
Total current liabilities 3,043,285 2,817,817
----------- -----------
Accumulated deferred income taxes - net 2,939,471 3,170,696
Accumulated deferred investment tax credits 326,728 347,118
Customer advances and other deferred credits 708,745 595,015
----------- -----------
Total deferred credits 3,974,944 4,112,829
----------- -----------
Minority Interest 138 -
----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $18,059,298 $17,736,552
=========== ===========
The accompanying notes are an integral part of these financial statements.
PAGE 17
Consolidated Statements of Cash Flows
Southern California Edison Company
In thousands Year ended December 31, 1997 1996 1995
- ------------ ---------------------- ------------- ------------ -----------
Cash flows from operating activities:
Net income $605,594 $655,395 $679,691
Adjustments for non-cash items:
Depreciation and decommissioning 1,239,878 1,063,505 954,141
Amortization 81,363 90,931 68,064
Rate phase-in plan 46,926 79,011 111,016
Deferred income taxes and investment tax credits 63,379 46,122 (208,671)
Other long-term liabilities 55,712 79,733 33,129
Other - net (208,624) (153,034) (261)
Changes in working capital:
Receivables 14,695 (9,120) (9,873)
Regulatory balancing accounts (374,799) (156,379) 282,157
Fuel inventory, materials and supplies 35,707 38,791 (19,499)
Prepayments and other current assets 12,039 9,152 (15,511)
Accrued interest and taxes 16,625 (58,827) 34,704
Accounts payable and other current liabilities 120,464 93,362 45,355
---------- ---------- ---------
Net cash provided by operating activities 1,708,959 1,778,642 1,954,442
---------- ---------- ---------
Cash flows from financing activities:
Long-term debt issued - 396,309 393,829
Long-term debt repaid (916,145) (403,957) (422,503)
Rate reduction notes issued 2,449,289 - -
Preferred stock redeemed (100,000) - (75,000)
Nuclear fuel financing - net (20,140) 41,803 31,134
Short-term debt financing - net 91,879 (129,359) (316,006)
Capital transferred 153,000 - -
Dividends paid (1,871,944) (799,593) (559,886)
--------- --------- ---------
Net cash used by financing activities (214,061) (894,797) (948,432)
--------- --------- ---------
Cash flows from investing activities:
Additions to property and plant (685,320) (616,427) (772,950)
Funding of nuclear decommissioning trusts (153,756) (148,158) (150,595)
Unrealized gain in equity investments - net 32,911 14,900 8,483
Other - net (46,403) (75,985) (21,273)
--------- --------- ---------
Net cash used by investing activities (852,568) (825,670) (936,335)
--------- --------- ---------
Net increase in cash and equivalents 642,330 58,175 69,675
Cash and equivalents, beginning of year 319,942 261,767 192,092
--------- --------- ---------
Cash and equivalents, end of year $962,272 $319,942 $261,767
--------- --------- ---------
Cash payments for interest and taxes:
Interest - net of amounts capitalized $342,137 $346,980 $381,267
Taxes 438,003 545,834 692,780
The accompanying notes are an integral part of these financial statements.
PAGE 18
Notes to Consolidated Financial Statements
Southern California Edison Company
Note 1. Summary of Significant Accounting Policies
Accounting Principles
Southern California Edison Company's (SCE) accounting policies conform
with generally accepted accounting principles (GAAP), including the
accounting principles for rate-regulated enterprises which reflect the
rate-making policies of the California Public Utilities Commission (CPUC)
and the Federal Energy Regulatory Commission (FERC). As a result of
industry restructuring legislation enacted by the State of California and
a related change in the application of accounting principles for rate-
regulated enterprises adopted recently by the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF), during the third
quarter of 1997, SCE began accounting for its investment in generation
facilities in accordance with GAAP applicable to enterprises in general.
Although this change did not result in any adjustment of the carrying
value of such investment, it is shown separately on SCE's Balance Sheet
under the caption: Generation utility plant, at original cost, not subject
to cost-based rate regulation. The competitive market for electric
generation in California is scheduled to begin March 31, 1998.
Competition Transition Charge (CTC)
Beginning January 1, 1998, a non-bypassable charge is being billed to all
customers, which provides SCE the opportunity to recover its costs to
transition to a competitive market.
Consolidation Policy
The consolidated financial statements include SCE and its subsidiaries.
Intercompany transactions have been eliminated.
Estimates
Financial statements prepared in compliance with GAAP require management
to make estimates and assumptions that affect the amounts reported in the
financial statements and disclosure of contingencies. Actual results could
differ from those estimates. Certain significant estimates related to
electric utility restructuring, decommissioning and contingencies are
further discussed in Notes 2, 9 and 10 to the Consolidated Financial
Statements, respectively.
Fuel Inventory
Fuel inventory is valued under the last-in, first-out method for fuel oil
and natural gas, and under the first-in, first-out method for coal.
Nature of Operations
SCE's outstanding common stock is owned entirely by its parent company,
Edison International. SCE is a public utility which produces and supplies
electric energy for its 4.3 million customers in Central and Southern
California. SCE currently operates in a highly regulated environment in
which it has an obligation to deliver electric service to customers in
return for an exclusive franchise within its service territory. This
regulatory environment is changing, as further discussed in Note 2 to the
Consolidated Financial Statements.
Nuclear
The CPUC authorized rate phase-in plans to defer the collection of $200
million in revenue for each unit at the Palo Verde Nuclear Generating
Station during the first four years of operation and recover the deferred
revenue (including interest) evenly over the following six years. The
phase-in plans ended in February 1996, September 1996 and January 1998 for
Units 1, 2 and 3, respectively.
PAGE 19
Notes to Consolidated Financial Statements
Under federal law, SCE is liable for its share of the estimated costs to
decommission three federal nuclear enrichment facilities (based on
purchases). These costs, which will be paid over 15 years, are recorded
as a fuel cost and recovered through non-bypassable customer rates.
In 1992, SCE discontinued operation of San Onofre Nuclear Generating
Station Unit 1, after the CPUC approved a settlement agreement between
SCE and the CPUC's Office of Ratepayer Advocates (ORA) to discontinue
operation of Unit 1 because operation of the unit was no longer cost-
effective. As part of the agreement, SCE recovered its remaining
investment over a four-year period ending August 1996, earning an 8.98%
rate of return.
In 1994, the CPUC authorized accelerated recovery of SCE's nuclear plant
investments by $75 million per year, with a corresponding deceleration in
recovery of its transmission and distribution assets through revised
depreciation estimates over their remaining useful lives.
In April 1996, the CPUC authorized a further acceleration of the recovery
of SCE's remaining investment of $2.6 billion in San Onofre Units 2 and
3. The accelerated recovery will continue through December 2001, earning
a 7.35% fixed rate of return. Operating costs, including nuclear fuel and
nuclear fuel financing costs, and incremental capital expenditures at San
Onofre Units 2 and 3 are recovered through an incentive pricing plan which
allows SCE to receive about 4 cents per kilowatt-hour through 2003. Any
differences between these costs and the incentive price will flow through
to the shareholders. Beginning January 1, 1998, the accelerated plant
recovery and the incentive pricing plan became part of the CTC mechanism.
Beginning in 2004, SCE will be required to share equally with ratepayers
the net benefits received from operation of the units.
In January 1997, the CPUC authorized a further acceleration of the
recovery of its remaining investment of $1.2 billion in Palo Verde Units
1, 2 and 3. The accelerated recovery will continue through December 2001,
earning a 7.35% fixed rate of return. The accelerated plant recovery, as
well as operating costs, including nuclear fuel and nuclear fuel financing
costs, and incremental capital expenditures, are subject to balancing
account treatment through 2001. Beginning January 1, 1998, the balancing
account became part of the CTC mechanism. The existing nuclear unit
incentive procedure will continue only for purposes of calculating a
reward for performance of any unit above an 80% capacity factor for a fuel
cycle. Beginning in 2002, SCE will be required to share equally with
ratepayers the net benefits received from operation of Palo Verde.
Reclassifications
Certain prior-year amounts were reclassified to conform to the December
31, 1997, financial statement presentation.
Regulatory Balancing Accounts
Prior to January 1, 1998, the differences between CPUC-authorized and
actual base-rate revenue from kilowatt-hour sales and CPUC-authorized and
actual energy costs were accumulated in balancing accounts until they were
refunded to, or recovered from, utility customers through authorized rate
adjustments (with interest). Beginning January 1, 1998, the difference
between generation related revenue and generation-related costs is being
accumulated in a transition cost balancing account. These transition costs
are being recovered from utility customers (with interest) through the CTC
through 2001. Income tax effects on all balancing account changes are
deferred.
In January 1997, in compliance with the new restructuring legislation,
overcollections in the kilowatt-hour sales and energy cost balancing
accounts at December 31, 1996, were transferred to an interim balancing
account and were credited to the transition cost balancing account
beginning in January 1998.
PAGE 20
Southern California Edison Company
Research, Development and Demonstration (RD&D)
SCE capitalizes RD&D costs that are expected to result in plant
construction. If construction does not occur, these costs are charged to
expense. RD&D expenses are recorded in a balancing account and, at the
end of the rate-case cycle, any authorized but unspent RD&D funds are
refunded to customers. RD&D expenses were $39 million in 1997, $21 million
in 1996 and $28 million in 1995.
Revenue
Operating revenue includes amounts for services rendered but unbilled at
the end of each year.
Utility Plant
Plant additions, including replacements and betterments, are capitalized.
Such costs include direct material and labor, construction overhead and
an allowance for funds used during construction (AFUDC). AFUDC represents
the estimated cost of debt and equity funds that finance utility-plant
construction. AFUDC is capitalized during plant construction and reported
in current earnings. AFUDC is recovered in rates through depreciation
expense over the useful life of the related asset. Depreciation of
utility plant is computed on a straight-line, remaining-life basis.
Replaced or retired property and removal costs less salvage are charged
to the accumulated provision for depreciation. Depreciation expense
stated as a percent of average original cost of depreciable utility plant
was 5.2% for 1997, 4.2% for 1996 and 3.6% for 1995.
During the third quarter of 1997, SCE discontinued accounting for its
investment in generation facilities using accounting principles applicable
to rate-regulated enterprises and began accounting for such investment
using GAAP applicable to enterprises in general. The carrying value of
such investment was unaffected by this change.
Note 2. Regulatory Matters
California Electric Utility Industry Restructuring
Restructuring Legislation - In September 1996, the State of California
enacted legislation to provide a transition to a competitive market
structure. The legislation substantially adopted the CPUC's December 1995
restructuring decision by addressing stranded-cost recovery for utilities
and providing a certain cost-recovery time period for the transition costs
associated with utility-owned generation-related assets. Transition costs
related to power-purchase contracts would be recovered through the terms
of their contracts while most of the remaining transition costs would be
recovered through 2001. The legislation also included provisions to
finance a portion of the stranded costs that residential and small
commercial customers would have paid between 1998 and 2001, which would
allow SCE to reduce rates by at least 10% to these customers, beginning
January 1, 1998. The financing would occur with securities issued by the
California Infrastructure and Economic Development Bank, or an entity
approved by the Bank. The legislation included a rate freeze for all
other customers, including large commercial and industrial customers, as
well as provisions for continued funding for energy conservation, low-
income programs and renewable resources. Despite the rate freeze, SCE
expects to be able to recover its revenue requirement during the 1998 -
2001 transition period. In addition, the legislation mandated the
implementation of the CTC that provides utilities the opportunity to
recover costs made uneconomic by electric utility restructuring. Finally,
the legislation contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related
expenses.
Notes to Financial Consolidated Statements
Rate Reduction Notes - In May 1997, SCE filed an application with the CPUC
requesting approval of the issuance of an aggregate amount of up to $3
billion of rate reduction notes in one or more series or classes and a 10%
rate reduction for the period from January 1, 1998, through March 31,
2002. At the same time, SCE filed an application with the California
Infrastructure and Economic Development Bank for approval to issue the
notes. Residential and small commercial customers will repay the notes
over the expected 10-year term through non-bypassable charges based on
electricity consumption. In December 1997, after receiving approval from
both the CPUC and the Infrastructure Bank, a limited liability company
created by SCE issued approximately $2.5 billion of these notes. For
further details, see the discussion under Long-Term Debt in Note 3 to the
Consolidated Financial Statements.
CPUC Restructuring Decision - The CPUC's December 1995 decision on
restructuring California's electric utility industry started the
transition to a new market structure, which is expected to provide
competition and customer choice and is scheduled to begin March 31, 1998.
Key elements of the CPUC's restructuring decision included: creation of
an independent power exchange (PX) and independent system operator (ISO);
availability of direct customer access and customer choice; performance-
based ratemaking (PBR) for those utility services not subject to
competition; voluntary divestiture of at least 50% of utilities' gas-
fueled generation, and implementation of the CTC.
Rate-setting - In December 1996, SCE filed a more comprehensive plan
(elaborating on its July 1996 filing related to the conceptual aspects of
separating costs as requested by CPUC and FERC directives) for the
functional unbundling of its rates for electric service, beginning January
1, 1998. In response to CPUC and FERC orders, as well as the new
restructuring legislation, this filing addressed the implementation-level
detail for the functional unbundling of rates into separate charges for
energy, transmission, distribution, the CTC, public benefit programs and
nuclear decommissioning. The transmission component of this rate
unbundling process was addressed at the FERC through a March 1997 filing.
In December 1997, the FERC approved these rates, subject to refund, to be
effective on the date the ISO begins operation. CPUC hearings on SCE's
rate unbundling (also known as rate-setting) plan were concluded in April
1997. In August 1997, the CPUC issued a decision which adopted the
methodology for determining CTC residually (see CTC discussion below) and
adopted SCE's revenue requirement components for public benefit programs
and nuclear decommissioning. The decision also adjusted SCE's proposed
distribution revenue requirement by reallocating $76 million of the amount
annually to other functions such as generation and transmission. Under
the decision, SCE will be able to recover most of the reallocated amount
through market revenue, other rate-making mechanisms after petitioning the
CPUC to modify its prior decisions, or another review process later in its
divestiture proceeding.
PX and ISO - In April 1996, SCE, Pacific Gas & Electric Company and San
Diego Gas & Electric Company filed a proposal with the FERC regarding the
creation of the PX and the ISO. In November 1996, the FERC conditionally
accepted the proposal and directed the three utilities, the ISO, and the
PX to file more specific information. The filing was made in March 1997,
and included SCE's proposed transmission revenue requirement. On October
29, 1997, the FERC gave conditional, interim authorization for operation
of the PX and ISO to begin on January 1, 1998. The FERC stated it would
closely monitor the PX and ISO, require further studies and make
modifications, where necessary. A comprehensive review will be performed
by the FERC after three years of operation of the PX and ISO. On December
22, 1997, the PX and ISO governing boards announced a delay in the
planned start-up of the PX and ISO due to insufficient testing of
operational, settlement and billing systems. The PX and ISO are now
expected to begin operation by March 31, 1998.
In July 1996, the three utilities jointly filed an application with the
CPUC requesting approval to establish a restructuring trust which would
obtain loans up to $250 million for the development of the ISO and PX
through January 1, 1998. The loans are backed by utility guarantees;
SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an
interim order establishing the restructuring trust and the funding level
of $250 million, which has been used to build the hardware and software
systems for the
PAGE 22
Southern California Edison Company
ISO and PX. The ISO and PX will repay the trust's loans and recover funds
from future ISO and PX customers. In November 1997, the CPUC approved
a petition jointly filed by the three utilities which requested an
increase in the loan guarantees from $250 million to $300 million; SCE's
share of this new total is $135 million. In December 1997, the CPUC
approved a remaining item with respect to the petition which requested
that the one-time restructuring implementation charge, to be paid to the
PX by the utilities, be deemed a non-bypassable charge to be recovered
from all retail customers. The amount of the PX charge is $85 million;
SCE's share is 45%, or $38 million.
Direct Customer Access - In May 1997, the CPUC issued a decision
describing how all California investor-owned-utility customers will be
able to choose who will provide them with electric generation service
beginning January 1, 1998. On December 30, 1997, the CPUC issued a
decision delaying direct access until March 31, 1998, due to the
operational delays in the start-up of the PX and ISO. On this date,
customers will be able to choose to remain utility customers with
bundled electric service from SCE (which will purchase its power through
the PX), or choose direct access, which means the customer can contract
directly with either independent power producers or retail electric
service providers such as power brokers, marketers and aggregators.
Additionally, all investor-owned-utility customers must pay the CTC
whether or not they choose to buy power through SCE. Electric utilities
will continue to provide the core distribution service of delivering
energy through its distribution system regardless of a customer's choice
of electricity supplier. The CPUC will continue to regulate the prices
and service obligations related to distribution services. If the new
competitive market cannot accommodate the volume of direct access
transactions, the CPUC could implement a contingency plan. However, the
CPUC believes it is likely that interest in and migration to direct access
will be gradual.
Revenue Cycle Services - A decision issued by the CPUC in May 1997,
introduces customer choice to metering, billing and related services
(referred to as revenue cycle services) that are now provided by
California's investor-owned utilities. Under this revenue cycle services
unbundling decision, beginning in January 1998, direct access customers
may choose to have either SCE or their electric generation service
provider render consolidated (energy and distribution) bills, or they may
choose to have separate billings from each service provider. However, not
all electric generation service providers will necessarily offer each
billing option. In addition, beginning in January 1998, customers with
maximum demand above 20 kW (primarily industrial and large commercial) can
choose SCE or any other supplier to provide their metering service. All
other customers will have this option beginning in January 1999. In
determining whether any credit should be provided by the utility to firms
providing customers with revenue cycle services, and the amount of any
such credit, the CPUC has indicated that it is appropriate to net the cost
incurred by the utility and the cost avoided by the utility as a result
of such services being provided by the other firm rather than by the
utility.
PBR - In 1993, SCE filed for a PBR mechanism to determine most of its
revenue (excluding fuel). The filing was subsequently divided between
transmission and distribution (T&D) and power generation. In September
1996, the CPUC adopted a non-generation or T&D PBR mechanism for SCE which
began on January 1, 1997. According to the CPUC, beginning in 1998
(coincident with the initiation of the competitive market), the
transmission portion is to be separated from non-generation PBR and
subject to ratemaking under the rules of the FERC. The distribution-only
PBR will extend through December 2001. Key elements of the non-generation
PBR include: T&D rates indexed for inflation based on the Consumer Price
Index less a productivity factor; elimination of the kilowatt-hour sales
adjustment; adjustments for cost changes that are not within SCE's
control; a cost of capital trigger mechanism based on changes in a bond
index; standards for service reliability and safety; and a net revenue-
sharing mechanism that determines how customers and shareholders will
share gains and losses from T&D operations.
With the CPUC's 1995 restructuring decision and the passage of
restructuring legislation in 1996, the majority of power generation
ratemaking (primarily fossil-fueled and nuclear) was assigned to other
mechanisms. In April 1997, a CPUC interim order determined that the
proposed structure of the fossil-fueled plants' must-run contracts were
under the FERC's jurisdiction. On October 31, 1997, SCE filed
Notes to Consolidated Financial Statements
must-run tariff schedules with the FERC covering its six ISO-designated
must-run plants. In the meantime, SCE is pursuing the divestiture of
these plants (see Divestiture discussion below) and might not ever itself
provide service under these FERC tariff schedules.
In December 1997, the CPUC adopted a PBR-type rate-making mechanism for
SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue
requirement in 1998 and establishes a formula for extending it through the
duration of the electric industry restructuring transition period, or
until market valuation of the hydroelectric facilities, whichever occurs
first. The mechanism provides that power sales revenue from hydroelectric
facilities in excess of the hydroelectric revenue requirement be credited
against the costs to transition to a competitive market (see CTC
discussion below).
Divestiture - In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its oil- and gas-fueled
generation plants. This application builds on SCE's March 1996 plan which
outlined how SCE proposed to divest 50% of these assets. Under the new
proposal, SCE would continue to operate and maintain the divested power
plants for at least two years following their sale, as mandated by the
restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be
impacted by divestiture-related job reductions. SCE's proposal is
contingent on the overall electric industry restructuring implementation
process continuing on a satisfactory path. In September 1997, the CPUC
approved SCE's proposal to auction the 12 plants.
On December 1, 1997, SCE filed a compliance filing with the CPUC stating
that it had sold 10 plants. On December 16, 1997, the CPUC approved the
sale of the 10 plants. On February 6, 1998, SCE filed a compliance filing
with the CPUC for the sale of an 11th plant. CPUC approval of the sale
is expected before March 31, 1998. The total sales price of the 11 plants
is $1.1 billion, or 2.16 times their combined book value of $531 million.
Net proceeds of the sales will be used to reduce stranded costs which
otherwise were expected to be collected through a non-bypassable CTC. The
transfer of ownership of the 11 plants is expected to occur shortly before
the start of the new competitive market, which the PX and ISO currently
expect to occur on March 31, 1998. The sale and CPUC approval of the
single remaining plant is expected to be completed in early 1998.
CTC - The CTC applies to all customers who were using or began using
utility services on or after the CPUC's December 20, 1995, decision date.
In August 1996, in compliance with the CPUC's restructuring decision, SCE
filed its application to estimate its 1998 transition costs. In
October 1996, SCE amended its transition cost filing to reflect the
effects of the legislation enacted in September 1996. Under the rate
freeze codified in the legislation, the CTC will be determined residually
(i.e., after subtracting other cost components for the PX, T&D, nuclear
decommissioning and public benefit programs). Nevertheless, the CPUC
directed that the amended application provide estimates of SCE's potential
transition costs from 1998 through 2030. SCE provided two estimates
between approximately $13.1 billion (1998 net present value) assuming the
fossil plants have a market value equal to their net book value, and $13.8
billion (1998 net present value) assuming the fossil plants have no market
value. These estimates are based on incurred costs, forecasts of future
costs and assumed market prices. However, changes in the assumed market
prices could materially affect these estimates. The potential transition
costs are comprised of: $7.5 billion from SCE's qualifying facilities (QF)
contracts, which are the direct result of prior legislative and regulatory
mandates; and $5.6 billion to $6.3 billion from costs pertaining to
certain generating plants (successful completion of the sale of SCE's gas-
fired generating plants would reduce this estimate of transition costs for
SCE-owned generation to less than $5 billion) and regulatory commitments
consisting of costs incurred (whose recovery has been deferred by the
CPUC) to provide service to customers. Such commitments include the
recovery of income tax benefits previously flowed through to customers,
postretirement benefit transition costs, accelerated recovery of San
Onofre Units 2 and 3 and the Palo Verde units, (as discussed in Note 1 to
the Consolidated Financial Statements) and certain other costs. In
February 1997, SCE filed an update to the CTC filing to reflect approval
by the CPUC of settlements regarding ratemaking for SCE's share of Palo
Verde and the buyout of a power purchase agreement, as well as other minor
data updates. No substantive changes in the total CTC estimates were
included.
Southern California Edison Company
This issue has been separated into two phases: Phase 1 addresses the rate-
making issues and Phase 2 the quantification issues.
A decision on Phase 1 was issued in June 1997, which, among other things,
required the establishment of a transition cost balancing account and
annual transition cost proceedings, set a market rate forecast for 1998
transition costs, and required that generation-related regulatory assets
be amortized ratably over a 48-month period. Hearings on Phase 2 were
held in May and June 1997 and a final decision was issued on November 19,
1997. The Phase 2 decision established the calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the
end of the rate freeze. The Phase 2 decision also reduced SCE's authorized
rate of return on certain assets eligible for transition cost recovery
(primarily fossil- and hydroelectric-generation related assets) beginning
July 1997, five months earlier than anticipated. The decision, excluding
the effects of other rate actions, had a negative impact on 1997 earnings
of approximately $14 million. SCE has filed an application for rehearing
on the 1997 rate of return issue.
Accounting for Generation-Related Assets - If the CPUC's electric industry
restructuring plan is implemented as outlined above, SCE would be allowed
to recover its CTC through non-bypassable charges to its distribution
customers (although its investment in certain generation assets would be
subject to a lower authorized rate of return).
As previously reported, from November 1996 to July 1997, SCE and the other
major California electric utilities were engaged in discussions with the
Securities and Exchange Commission staff regarding the proper application
of regulatory accounting standards in light of the electric industry
restructuring legislation enacted by the State of California in September
1996 and the CPUC's electric industry restructuring plan. This issue was
placed on the agenda of the EITF during April 1997 and a final consensus
was reached at the July EITF meeting. During the third quarter of 1997,
SCE implemented the EITF consensus and discontinued application of
accounting principles for rate-regulated enterprises for its investment
in generation facilities.
However, implementation of the EITF consensus did not require SCE to write
off any of its generation-related assets, including regulatory assets of
approximately $600 million at December 31, 1997. SCE has retained these
assets on its balance sheet because the legislation and restructuring plan
referred to above make probable their recovery through a CTC to
distribution customers. These regulatory assets relate primarily to the
recovery of accelerated income tax benefits previously flowed through to
customers, purchased power contract termination payments, unamortized
losses on reacquired debt, and the recovery of amounts deferred under the
Palo Verde rate phase-in plan. The consensus reached by the EITF also
permits the recording of new generation-related regulatory assets during
the transition period that are probable of recovery through the CTC
mechanism.
If during the transition period events were to occur that made the
recovery of these generation-related regulatory assets no longer probable,
SCE would be required to write off the remaining balance of such assets
as a one-time, non-cash charge against earnings. If such a write-off were
to be required, SCE believes that it should not affect the recovery of
stranded costs provided for in the legislation and restructuring plan.
Although depreciation-related differences could result from applying a
regulatory prescribed depreciation method (straight-line, remaining-life
method) rather than a method that would have been applied absent the
regulatory process, SCE believes that the depreciable lives of its
generation-related assets would not vary significantly from that of an
unregulated enterprise, as the CPUC bases depreciable lives on periodic
studies that reflect the physical useful lives of the assets. SCE also
believes that any depreciation-related differences would be recovered
through the CTC.
PAGE 25
Notes to Consolidated Financial Statements
If events occur during the restructuring process that result in all or a
portion of the CTC being improbable of recovery, SCE could have additional
write-offs associated with these costs if they are not recovered through
another regulatory mechanism. At this time, SCE cannot predict what other
revisions will ultimately be made during the restructuring process in
subsequent proceedings or implementation phases, or the effect, after the
transition period, that competition will have on its results of operations
or financial position.
FERC Restructuring Decision
In April 1996, the FERC issued its decision on stranded-cost recovery and
open access transmission, effective July 1996. The decision, reaffirmed
by the FERC in its March and November 1997 orders, requires all electric
utilities subject to the FERC's jurisdiction to file transmission tariffs
which provide competitors with increased access to transmission facilities
for wholesale transactions and also establishes information requirements
for the transmission utility. The decision also provides utilities with
the opportunity to recover stranded costs associated with existing
wholesale customers, retail-turned-wholesale customers and retail wheeling
when the state regulatory body does not have authority to address retail
stranded costs. Even though the CPUC is currently addressing stranded-
cost recovery through the CTC proceedings, the FERC has also asserted
primary jurisdiction over the recovery of stranded costs associated with
retail-turned-wholesale customers, such as a new municipal electric system
or a municipal annexation. However, the FERC did clarify that it does not
intend to prevent or interfere with a state's authority and that it has
discretion to defer to a state stranded-cost-calculation method. In
January 1997, the FERC accepted the open access transmission tariff SCE
filed in compliance with the April 1996 decision. The rates included in
the tariff are being collected subject to refund. In May 1997, SCE filed
a revised open access tariff to reflect the few revisions set forth in the
March 1997 order. The open access transmission tariff will be terminated
on the date the ISO begins operation.
Canadian Gas Contracts
In 1994, SCE filed its testimony in the non-QF phase of the 1994 Energy
Cost Adjustment Clause proceeding. In 1995, the ORA filed its report on
the reasonableness of SCE's gas supply costs for both the 1993 and 1994
record periods. The report recommended a disallowance of $13 million for
excessive costs incurred from November 1993 through March 1994 associated
with SCE's Canadian gas purchase and supply contracts. The report
requested that the CPUC defer finding SCE's Canadian supply and
transportation agreements reasonable for the duration of their terms and
that the costs under these contracts be reviewed on a yearly basis. In
1996, the ORA issued its report for the 1995 record period recommending
a $38 million disallowance for excessive costs incurred from April 1994
through March 1995. Both proposed disallowances were later consolidated
into one proceeding. On December 3, 1997, the CPUC approved a settlement
agreement between SCE and the ORA on this and any future issues which will
result in a $61 million (including interest) refund to SCE's customers.
This refund is fully reflected in the financial statements and will be
made in first quarter 1998.
Mojave Cogeneration Contract
In 1991, SCE filed its testimony in the QF phase of the 1991 Energy Cost
Adjustment Clause proceeding. In 1993, the ORA filed its report on the
reasonableness of SCE's QF contracts and alleged that SCE had imprudently
renegotiated a QF contract with the Mojave Cogeneration Company. The
report recommended a disallowance of $32 million (1993 net present value)
over the contract's 20-year life. Subsequently, SCE and the ORA reached
a settlement where SCE agreed to a one-time reduction to its energy-cost
adjustment clause balancing account of $14 million plus interest. In
October 1996, the CPUC approved the settlement agreement, subject to SCE
and the ORA accepting certain conditions concerning the way the $14
million payment would be reflected in rates. After reviewing the
decision, SCE declined to accept the condition proposed by the CPUC and
in November 1996 filed an application
PAGE 26
Southern California Edison Company
for rehearing. In February 1997, the CPUC denied SCE's application.
Because SCE and the ORA were unable to finalize their settlement, hearings
on the ORA's disallowance recommendations were held in June 1997. During
the hearings, the ORA presented testimony to update its assessment of
ratepayer harm, which it now estimates to be $45 million (1997 net present
value) over the contract's life. In November 1997, a CPUC administrative
law judge (ALJ) issued a proposed decision which would adopt the ORA's $45
million disallowance. In January 1998, the CPUC withdrew the ALJ's
proposed decision pending oral arguments. Oral arguments were heard on
February 4, 1998, at which time SCE requested an alternate proposed
decision be issued. SCE expects this matter to be returned to the CPUC's
agenda in the near future and a final decision to be issued during second
quarter 1998. SCE cannot predict the final outcome of this matter but
does not believe it will materially affect its results of operations.
Note 3. Financial Instruments
Cash Equivalents
Cash and equivalents include tax-exempt investments ($936 million at
December 31, 1997, and $261 million at December 31, 1996), and time
deposits and other investments ($26 million at December 31, 1997, and $59
million at December 31, 1996) with maturities of three months or less.
Derivative Financial Instruments
SCE's risk management policy allows the use of derivative financial
instruments to manage financial exposure on its investments and
fluctuations in interest rates, but prohibits the use of these instruments
for speculative or trading purposes.
SCE uses the hedge accounting method to record its derivative financial
instruments, except for gas call options. Hedge accounting requires an
assessment that the transaction reduces risk, that the derivative be
designated as a hedge at the inception of the derivative contract, and
that the changes in the market value of a hedge move in an inverse
direction to the item being hedged. Under hedge accounting, the
derivative itself is not recorded on SCE's balance sheet. Mark-to-market
accounting would be used if the hedge accounting criteria were not met.
Interest rate differentials and amortization of premiums for interest rate
caps are recorded as adjustments to interest expense. If the derivatives
were terminated before the maturity of the corresponding debt issuance,
the realized gain or loss on the transaction would be amortized over the
remaining term of the debt.
SCE uses the mark-to-market accounting method for its gas call options.
Gains and losses from monthly changes in market prices are recorded as
income or expense. However, the costs of the options and the market price
changes are recovered through the transition cost balancing account. As
a result, the mark-to-market gains or losses have no effect on earnings.
Interest rate swaps and caps are used to reduce the potential impact of
interest rate fluctuations on floating-rate long-term debt. At the
balance sheet date of December 31, 1996, SCE had an interest rate cap
agreement which capped the interest rate at 6% for $30 million of debt due
2027; it expired July 1, 1997. At the balance sheet dates of December 31,
1997, and December 31, 1996, SCE had an interest rate swap agreement which
fixed the interest rate at 5.585% for $196 million of debt due 2008; it
expires February 28, 2008. The interest rate swap agreement requires the
parties to pledge collateral according to bond rating and market interest
rate changes. At December 31, 1997, SCE had pledged $19 million as
collateral due to a decline in market interest rates. SCE is exposed to
credit loss in the event of nonperformance by the counterparty to the
agreement, but does not expect the counterparty to fail to meet its
obligations.
At December 31, 1997, SCE had gas call options valued at $34 million.
These options mitigate SCE's exposure to increases in natural gas prices.
Increases in natural gas prices tend to increase the price of electricity
purchased from the PX. The options cover various periods from 1998
through 2001.
PAGE 27
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
Fair values of financial instruments were:
In millions December 31, 1997 1996
- ----------- ----------- --------------- ---------------
Cost Fair Cost Fair
Basis Value Basis Value
----- ----- ----- -----
Financial assets:
Decommissioning trusts $1,371 $1,831 $1,217 $1,486
Equity investments 9 90 11 68
Gas call options 34 34 - -
Financial liabilities:
DOE decommissioning and
decontamination fees 50 43 54 45
Interest rate hedges - 24 - 16
Long-term debt 6,145 6,456 4,779 5,001
Preferred stock subject to
mandatory redemption 275 293 275 286
----- ----- ----- -----
Financial assets are carried at their fair value based on quoted market
prices for decommissioning trusts and equity investments, and on financial
models for gas call options. Financial liabilities are recorded at cost.
Financial liabilities' fair values are based on: termination costs for the
interest rate swap; brokers' quotes for long-term debt, preferred stock
and the cap; and discounted future cash flows for U.S. Department of
Energy (DOE) decommissioning and decontamination fees. Due to their short
maturities, amounts reported for cash equivalents and short-term debt
approximate fair value.
Gross unrealized holding gains on financial assets were:
In millions December 31, 1997 1996
- ----------- ----------- ---- ----
Decommissioning trusts:
Municipal bonds $131 $79
Stocks 190 138
U.S. government issues 91 39
Short-term and other 48 13
---- ----
460 269
Equity investments 81 57
---- ----
Total $541 $326
==== ====
There were no unrealized holding losses on financial assets for the years
presented.
PAGE 28
Southern California Edison Company
Investments
Net unrealized gains (losses) in equity investments are recorded as a
separate component of shareholder's equity under the caption: Additional
paid-in capital and other. Unrealized gains and losses on decommissioning
trust funds are recorded in the accumulated provision for decommissioning.
All investments are classified as available-for-sale.
Long-Term Debt
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates.
Almost all SCE properties are subject to a trust indenture lien.
SCE has pledged first and refunding mortgage bonds as security for
borrowed funds obtained from pollution-control bonds issued by government
agencies. SCE uses these proceeds to finance construction of pollution-
control facilities. Bondholders have limited discretion in redeeming
certain pollution-control bonds, and SCE has arranged with securities
dealers to remarket or purchase them if necessary.
Debt premium, discount and issuance expenses are amortized over the life
of each issue. Under CPUC rate-making procedures, debt reacquisition
expenses are amortized over the remaining life of the reacquired debt or,
if refinanced, the life of the new debt.
Long-term debt maturities and sinking-fund requirements for the five years
are: 1998 - $693 million; 1999 - $401 million; 2000 - $571 million; 2001
- - $646 million; and 2002 - $446 million.
In December 1997, SCE Funding LLC, a special purpose entity (SPE), of
which SCE is the sole member, issued approximately $2.5 billion of rate
reduction notes to Bankers Trust Company of California, as certificate
trustee for the California Infrastructure and Economic Development Bank
Special Purpose Trust SCE-1 (Trust), which is a special purpose entity
established by the State of California. The terms of the rate reduction
notes generally mirror the terms of the pass-through certificates issued
by the Trust, which are known as rate reduction certificates. The
proceeds of the rate reduction notes were used by the SPE to purchase from
SCE an enforceable right known as transition property. Transition
property is a current property right created pursuant to the restructuring
legislation and a financing order of the CPUC and consists generally of
the right to be paid a specified amount from a non-bypassable tariff
levied on residential and small commercial customers. Notwithstanding the
legal sale of the transition property by SCE to the SPE, the amounts
reflected as assets on SCE's balance sheet have not been reduced by the
amount of the transition property sold to the SPE, and the liabilities of
the SPE for the rate reduction notes are for accounting purposes reflected
as long-term liabilities on the consolidated balance sheet of SCE. SCE
used the proceeds from the sale of the transition property to retire debt
and equity securities.
The rate reduction notes have maturities ranging from one to 10 years, and
bear interest at rates ranging from 5.98% to 6.42%. The rate reduction
notes are secured solely by the transition property and certain other
assets of the SPE, and there is no recourse to SCE or Edison
International.
Although the SPE is consolidated with SCE in the financial statements, as
required by generally accepted accounting principles, the SPE is legally
separate from SCE, the assets of the SPE are not available to creditors
of SCE or Edison International, and the transition property is legally not
an asset of SCE or Edison International.
PAGE 29
Notes to Consolidated Financial Statements
Long-term debt consisted of:
In millions December 31, 1997 1996
- ----------- ----------- ------- ------
First and refunding mortgage bonds:
1998 - 2026 (5.45% to 8.375%) $1,825 $2,725
Rate reduction notes:
1998 - 2007 (5.98% to 6.42%) 2,463 -
Pollution-control bonds:
1999-2027 (5.4% to 7.2% and variable) 1,202 1,204
Funds held by trustees (2) (2)
Debentures and notes:
1998-2006 (5.6% to 8.25%) 1,195 1,195
Subordinated debentures:
2044 (8.375%) 100 100
Commercial paper for nuclear fuel 92 112
Long-term debt due within one year (693) (501)
Unamortized debt discount - net (37) (54)
------ ------
Total $6,145 $4,779
====== ======
On January 30, 1998, SCE redeemed $125 million of 8.375% first and
refunding mortgage bonds, due 2017. Also, on January 30, 1998, a wholly
owned financing subsidiary of SCE redeemed $200 million of 7.375% notes,
due 2003.
Short-Term Debt
SCE has lines of credit it can use at negotiated or bank index rates. At
December 31, 1997, available lines totaled $1.8 billion, with $1.3
billion for short-term debt and $500 million available for the long-term
refinancing of certain variable-rate pollution-control debt.
Short-term debt consisted of commercial paper used to finance fuel
inventories, balancing account undercollections and general cash
requirements. Commercial paper outstanding at December 31, 1997, and
1996, was $415 million and $345 million, respectively. Commercial paper
intended to finance nuclear fuel scheduled to be used more than one year
after the balance sheet date is classified as long-term debt in
connection with refinancing terms under five-year term lines of
credit with commercial banks. Weighted-average interest rates were 6.0%
and 5.5% at December 31, 1997, and 1996, respectively.
Note 4. Equity
The CPUC regulates SCE's capital structure, limiting the dividends it may
pay Edison International. At December 31, 1997, SCE had the capacity to
pay $1.4 billion in additional dividends and continue to maintain its
authorized capital structure.
Authorized common stock is 560 million shares with no par value.
Authorized shares of preferred and preference stock are: $25 cumulative
preferred - 24 million; $100 cumulative preferred - 12 million; and
preference - 50 million. All cumulative preferred stocks are redeemable.
Mandatorily redeemable preferred stocks are subject to sinking-fund
provisions. When preferred shares are redeemed, the premiums paid are
charged to common equity.
Preferred stock redemption requirements for the next five years are: 1998
through 2001 - zero and 2002 - $105 million.
PAGE 30
Southern California Edison Company
Cumulative preferred stock consisted of:
Dollars in millions, except per-share amounts December 31, 1997 1996
- --------------------------------------------- ----------- ---- ----
December 31, 1997
-----------------
Shares Redemption
Outstanding Price
----------- ----------
Not subject to mandatory redemption:
$25 par value:
4.08% Series 1,000,000 $25.50 $25 $25
4.24 1,200,000 25.80 30 30
4.32 1,653,429 28.75 41 41
4.78 1,296,769 25.80 33 33
5.80 2,200,000 25.25 55 55
7.36 - - - 100
---- ----
Total $184 $284
==== ====
Subject to mandatory redemption:
$100 par value:
6.05% Series 750,000 $100.00 $75 $75
6.45 1,000,000 100.00 100 100
7.23 1,000,000 100.00 100 100
---- ----
Total $275 $275
==== ====
In 1997, 4 million shares of Series 7.36% preferred stock were redeemed.
In 1995, 750,000 shares of Series 7.58% preferred stock were redeemed.
There were no preferred stock issuances or redemptions in 1996.
Note 5. Income Taxes
SCE and its subsidiaries will be included in Edison International's
consolidated federal income tax and combined state franchise tax returns.
Under income tax allocation agreements, each subsidiary calculates its own
tax liability.
Income tax expense includes the current tax liability from operations and
the change in deferred income taxes during the year. Investment tax
credits are amortized over the lives of the related properties.
PAGE 31
Notes to Consolidated Financial Statements
The components of the net accumulated deferred income tax liability were:
In millions December 31, 1997 1996
- ----------- ----------- ----- ----
Deferred tax assets:
Property-related $227 $247
Unrealized gains or losses 273 201
Investment tax credits 192 206
Regulatory balancing accounts 180 298
Decommissioning-related 114 208
Other 335 135
------ ------
Total $1,321 $1,295
------ ------
Deferred tax liabilities:
Property-related $3,272 $3,550
Capitalized software costs 127 122
Other 738 553
------ ------
Total $4,137 $4,225
------ ------
Accumulated deferred income taxes - net $2,816 $2,930
------ ------
Classification of accumulated deferred income taxes:
Included in deferred credits $2,939 $3,170
------ ------
Included in current assets 123 240
------ ------
The current and deferred components of income tax expense were:
In millions Year ended December 31, 1997 1996 1995
- ----------- ---------------------- ---- ---- ----
Current:
Federal $375 $386 $560
State 100 129 165
---- ---- ----
475 515 725
---- ---- ----
Deferred--federal and state:
Accrued charges (33) (14) 1
Depreciation (47) (14) 21
Investment and energy tax credits - net (20) (24) (25)
Pension reserves (5) 45 (3)
Rate phase-in plan (19) (32) (46)
Regulatory balancing accounts 141 34 (118)
State tax - privilege year - 21 (12)
Other 28 (20) (33)
----- ----- -----
45 (4) (215)
----- ----- -----
Total income tax expense $ 520 $ 511 $ 510
----- ----- -----
Classification of income taxes:
Included in operating income $582 $578 $560
Included in other income (62) (67) (50)
The composite federal and state statutory income tax rate was 40.551% for
1997 and 41.045% for 1996 and 1995.
PAGE 32
Southern California Edison Company
The federal statutory income tax rate is reconciled to the effective tax
rate below:
Year ended December 31, 1997 1996 1995
---------------------- ---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Capitalized software (0.9) (0.8) (0.8)
Depreciation and other 6.9 4.5 4.3
Investment and energy tax credits (1.8) (2.0) (2.2)
State tax - net of federal deduction 7.0 7.1 6.5
----- ----- -----
Effective tax rate 46.2% 43.8% 42.8%
===== ===== =====
Note 6. Employee Compensation and Benefit Plans
Stock Option Plans
Under its Long-Term Incentive Compensation Plan, SCE participates in the
use of 8.2 million shares of parent company common stock reserved for
potential issuance under various stock compensation programs to directors,
officers and senior managers of Edison International and its affiliates.
Under these programs, options on 3.7 million shares of Edison
International common stock are currently outstanding to officers and
senior managers of SCE.
Each option may be exercised to purchase one share of Edison International
common stock, and is exercisable at a price equivalent to the fair market
value of the underlying stock at the date of grant. Edison International
stock options include a dividend equivalent feature. Generally, for
options issued before 1994, amounts equal to dividends accrue on the
options at the same time and at the same rate as would be payable on the
number of shares of Edison International common stock covered by the
options. The amounts accumulate without interest. For Edison International
stock options issued subsequent to 1993, dividend equivalents are subject
to reduction unless certain shareholder return performance criteria are
met.
Edison International stock options have a 10-year term with one-third of
the total award vesting after each of the first three years of the award
term. If an optionee retires, dies or is permanently and totally disabled
during the three-year vesting period, the unvested options will vest and
be exercisable to the extent of 1/36 of the grant for each full month of
service during the vesting period. Unvested options of any person who has
served in the past on the Edison International or SCE Management Committee
will vest and be exercisable upon the member's retirement, death or
permanent and total disability. Upon retirement, death or permanent and
total disability, the vested options may continue to be exercised within
their original terms by the recipient or beneficiary. If an optionee is
terminated other than by retirement, death or permanent and total
disability, options which had vested as of the prior anniversary date of
the grant are forfeited unless exercised within 180 days of the date of
termination. All unvested options are forfeited on the date of
termination.
SCE measures compensation expense related to stock-based compensation by
the intrinsic value method. Compensation expense recorded under the
stock-compensation program was $5 million, $8 million and $4 million for
the years 1997, 1996 and 1995, respectively.
Stock-based compensation expense under the fair-value method of accounting
would have resulted in pro forma earnings of $602 million, $653 million
and $677 million for the years 1997, 1996, and 1995, respectively.
The weighted-average fair value of options granted during 1997 and 1996
was $7.62 per share option and $6.27 per share option, respectively. The
weighted-average remaining life of options outstanding as of December 31,
1997, and 1996, was 7 years.
PAGE 33
Notes to Consolidated Financial Statements
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:
1997 1996
---- ----
Expected life 7 years 7 years
Risk-free interest rate 6.3% - 6.8% 5.5%
Expected volatility 17% 17%
The recognition of dividend equivalents results in no dividends assumed
for purposes of fair-value determination. The application of fair-value
accounting to calculate the pro forma disclosures above is not an
indication of future income statement effects. The pro forma disclosures
do not reflect the effect of fair-value accounting on stock-based
compensation awards granted prior to 1995.
Pension Plan
SCE has a noncontributory, defined-benefit pension plan that covers
employees meeting minimum service requirements. Benefits are based on
years of accredited service and average base pay. SCE funds the plan on
a level-premium actuarial method. These funds are accumulated in an
independent trust. Annual contributions meet minimum legal funding
requirements and do not exceed the maximum amounts deductible for income
taxes. Prior service costs from pension plan amendments are funded over
30 years. Plan assets are primarily common stocks, corporate and
government bonds, and short-term investments. In 1996, SCE recorded
pension gains from a special voluntary early retirement program.
The plan's funded status was:
In millions December 31, 1997 1996
- ----------- ----------- ---- ----
Actuarial present value of benefit obligations:
Vested benefits $1,577 $1,670
Nonvested benefits 126 71
------ ------
Accumulated benefit obligation 1,703 1,741
Value of projected future compensation levels 391 261
------ ------
Projected benefit obligation $2,094 $2,002
------ ------
Fair value of plan assets $2,298 $2,165
------ ------
Projected benefit obligation
less than plan assets $ (204) (163)
Unrecognized net gain 304 300
Unrecognized prior service cost (184) (199)
Unrecognized net obligation (17-year
amortization) (38) (43)
------ ------
Pension liability (asset) $ (122) $ (105)
------ ------
Discount rate 7.0% 7.75%
Rate of increase in future compensation 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0%
------ ------
PAGE 34
Southern California Edison Company
SCE recognizes pension expense calculated under the actuarial method used
for ratemaking.
The components of pension expense were:
In millions Year ended December 31, 1997 1996 1995
- ----------- ---------------------- ----- ----- -----
Service cost for benefits earned $44 $49 $57
Interest cost on projected benefit obligation 138 178 156
Actual return on plan assets (369) (343) (454)
Net amortization and deferral 222 145 268
----- ----- -----
Pension expense under accounting standards 35 29 27
Special termination benefits - - 3
Regulatory adjustment - deferred 17 22 22
----- ----- -----
Net pension expense recognized 52 51 52
Settlement gain - (121) -
----- ----- -----
Total expense (gain) $ 52 $ (70) $ 52
===== ===== =====
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55 with at least 10 years of service
(or those eligible under the 1996 special voluntary early retirement
program), are eligible for postretirement health and dental care, life
insurance and other benefits. Health and dental care benefits are subject
to deductibles, copayment provisions and other limitations.
SCE is amortizing its obligation related to prior service over 20 years.
SCE funds these benefits (by contributions to independent trusts) up to
tax-deductible limits, in accordance with rate-making practices. In 1996,
SCE recorded special termination expenses due to a special voluntary early
retirement program. Any difference between recognized expense and amounts
authorized for rate recovery is not expected to be material (except for
the impact of the early retirement program) and will be charged to
earnings.
Trust assets are primarily common stocks, corporate and government bonds,
and short-term investments.
The funded status of these benefits is reconciled to the recorded
liability below:
In millions December 31, 1997 1996
- ----------- ----------- ----- -----
Actuarial present value of benefit obligation:
Retirees $1,000 $ 928
Employees eligible to retire 45 35
Other employees 488 386
------ ------
Accumulated benefit obligation $1,533 $1,349
------ ------
Fair value of plan assets $ 815 $ 617
------ ------
Plan assets less than accumulated benefit obligation $ 718 $ 732
Unrecognized transition obligation (403) (430)
Unrecognized net gain (loss) (244) (231)
------ ------
Recorded liability $ 71 $ 71
------ ------
Discount rate 7.0% 7.75%
Expected long-term rate of return on assets 8.0% 8.5%
PAGE 35
Notes to Consolidated Financial Statements
The components of postretirement benefits other than pensions expense
were:
In millions Year ended December 31, 1997 1996 1995
- ----------- ---------------------- ---- ---- ----
Service cost for benefits earned $ 30 $ 31 $ 35
Interest cost on benefit obligation 99 90 77
Actual return on plan assets (50) (43) (28)
Amortization of loss 4 6 1
Amortization of transition obligation 27 27 27
---- ---- ----
Net expense 110 111 112
Special termination expense - 72 -
---- ---- ---- Total
expense $110 $183 $112
==== ==== ====
The assumed rate of future increases in the per-capita cost of health care
benefits is 8.5% for 1998, gradually decreasing to 5.25% for 2004 and
beyond. Increasing the health care cost trend rate by one percentage
point would increase the accumulated obligation as of December 31, 1997,
by $255 million annual aggregate service and interest costs by $28
million.
Employee Savings Plan
SCE has a 401(k) defined contribution savings plan designed to supplement
employees' retirement income. The plan received employer contributions
of $15 million in 1997, $24 million in 1996 and $19 million in 1995.
Note 7. Jointly Owned Utility Projects
SCE owns interests in several generating stations and transmission systems
for which each participant provides its own financing. SCE's share of
expenses for each project is included in the consolidated statements of
income.
The investment in each project, as included in the consolidated balance
sheet as of December 31, 1997, was:
Plant in Accumulated Under Ownership
In millions Service Depreciation Construction Interest
- ----------- -------- ------------ ------------ ----------
Transmission system:
Eldorado $ 28 $ 9 $ 3 60%
Pacific Intertie 241 75 1 50
Generating stations:
Four Corners Units 4 and 5 (coal) 459 247 3 48
Mohave (coal) 307 146 5 56
Palo Verde (nuclear) 1,601 665 9 16
San Onofre (nuclear) 4,212 2,210 38 75
------ ------ --- ---
Total $6,848 $3,352 $59
====== ====== ===
PAGE 36
Southern California Edison Company
Note 8. Leases
SCE has operating leases, primarily for vehicles, with varying terms,
provisions and expiration dates.
Estimated remaining commitments for noncancellable leases at December 31,
1997, were:
Year ended December 31, In millions
- ---------------------- -----------
1998 $15
1999 12
2000 10
2001 6
2002 3
Thereafter 5
---
Total $51
===
Note 9. Commitments
Nuclear Decommissioning
SCE plans to decommission its nuclear generating facilities at the end of
each facility's operating license by a prompt removal method authorized
by the Nuclear Regulatory Commission. Decommissioning is estimated to
cost $2.1 billion in current-year dollars, based on site-specific studies
performed in 1993 for San Onofre and 1992 for Palo Verde. Changes in the
estimated costs, timing of decommissioning, or the assumptions underlying
these estimates could cause material revisions to the estimated total cost
to decommission in the near term. Decommissioning is scheduled to begin
in 2013 at San Onofre and 2024 at Palo Verde. San Onofre Unit 1, which
shut down in 1992, is expected to be secured until decommissioning begins
at the other San Onofre units.
Decommissioning costs, which are accrued and recovered through non-
bypassable customer rates over the term of each nuclear facility's
operating license, are recorded as a component of depreciation expense.
Decommissioning expense was $154 million in 1997, $148 million in 1996
and $151 million in 1995. The accumulated provision for decommissioning
was $1.1 billion at December 31, 1997, and $949 million at December 31,
1996. The estimated costs to decommission San Onofre Unit 1
($280 million) are recorded as a liability.
Decommissioning funds collected in rates are placed in independent trusts,
which, together with accumulated earnings, will be utilized solely for
decommissioning.
Trust investments include:
Maturity December 31,
In millions Dates 1997 1996
- ----------- --------- ---- ----
Municipal bonds 1998-2026 $ 459 $ 400
Stocks - 392 549
U.S. government issues 1998-2027 357 212
Short-term and other 2002-2003 163 56
------ ------
Total $1,371 $1,217
====== ======
PAGE 37
Notes to Consolidated Financial Statements
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $54 million, $49 million and $51 million for the years ended
1997, 1996 and 1995, respectively. Proceeds from sales of securities
(which are reinvested) were $595 million for 1997, and $1.0 billion for
1996 and 1995. Approximately 89% of the trust fund contributions were
tax-deductible.
The Financial Accounting Standards Board has issued an exposure draft
related to accounting practices for removal costs, including
decommissioning of nuclear power plants. The exposure draft would require
SCE to report its estimated decommissioning costs as a liability, rather
than recognizing these costs over the term of each facility's operating
license (current industry practice). SCE does not believe that the
changes proposed in the exposure draft would have an adverse effect on its
results of operations even after deregulation due to its current and
expected future ability to recover these costs through customer rates.
Other Commitments
SCE has fuel supply contracts which require payment only if the fuel is
made available for purchase.
SCE has power-purchase contracts with certain QFs (cogenerators and small
power producers) and other utilities. The QF contracts provide for
capacity payments if a facility meets certain performance obligations and
energy payments based on actual power supplied to SCE. There are no
requirements to make debt-service payments.
SCE has unconditional purchase obligations for part of a power plant's
generating output, as well as firm transmission service from another
utility. Minimum payments are based, in part, on the debt-service
requirements of the provider, whether or not the plant or transmission
line is operable. The purchased-power contract is not expected to provide
more than 5% of current or estimated future operating capacity. SCE's
minimum commitment under both contracts is approximately $193 million
through 2017.
Certain commitments for the years 1998 through 2002 are estimated below:
In millions 1998 1999 2000 2001 2002
- ----------- ---- ---- ---- ---- ----
Projected construction expenditures $956 $807 $763 $721 $671
Fuel supply contracts 228 146 167 154 163
Purchased-power capacity payments 686 711 714 716 714
Unconditional purchase obligations 9 9 10 9 10
---- ---- ---- ---- ----
Note 10. Contingencies
In addition to the matters disclosed in these notes, SCE is involved in
legal, tax and regulatory proceedings before various courts and
governmental agencies regarding matters arising in the ordinary course of
business. SCE believes the outcome of these proceedings will not
materially affect its results of operations or liquidity.
Environmental Protection
SCE is subject to numerous environmental laws and regulations, which
require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect
of past operations on the environment.
PAGE 38
Southern California Edison Company
SCE records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCE reviews its sites and measures the liability
quarterly, by assessing a range of reasonably likely costs for each
identified site using currently available information, including existing
technology, presently enacted laws and regulations, experience gained at
similar sites, and the probable level of involvement and financial
condition of other potentially responsible parties. These estimates
include costs for site investigations, remediation, operations and
maintenance, monitoring and site closure. Unless there is a probable
amount, SCE records the lower end of this reasonably likely range of costs
(classified as other long-term liabilities at undiscounted amounts).
While SCE has numerous insurance policies that it believes may provide
coverage for some of these liabilities, it does not recognize recoveries
in its financial statements until they are realized.
In connection with the issuance of the San Onofre Units 2 and 3 operating
permits, SCE reached an agreement with the California Coastal Commission
in 1991 to restore certain marine mitigation sites. The restorations
include two sites: designated wetlands and the construction of an
artificial kelp reef off the California coast. After SCE requested
certain modifications to the agreement, the Coastal Commission issued a
final ruling in April 1997 to reduce the scope of remediations. SCE
elected to pay for the costs of marine mitigation in lieu of placing the
funds into a trust. Rate recovery of these costs is occurring through the
San Onofre incentive pricing plan discussed in Note 1 to the Consolidated
Financial Statements.
SCE's recorded estimated minimum liability to remediate its 50 identified
sites is $178 million, which includes $75 million for the two sites
discussed above. The ultimate costs to clean up SCE's identified sites
may vary from its recorded liability due to numerous uncertainties
inherent in the estimation process, such as: the extent and nature of
contamination; the scarcity of reliable data for identified sites; the
varying costs of alternative cleanup methods; developments resulting from
investigatory studies; the possibility of identifying additional sites;
and the time periods over which site remediation is expected to occur.
SCE believes that, due to these uncertainties, it is reasonably possible
that cleanup costs could exceed its recorded liability by up to $246
million. The upper limit of this range of costs was estimated using
assumptions least favorable to SCE among a range of reasonably possible
outcomes.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its
sites, representing $91 million of its recorded liability, through an
incentive mechanism (SCE may request to include additional sites). Under
this mechanism, SCE will recover 90% of cleanup costs through customer
rates; shareholders fund the remaining 10%, with the opportunity to
recover these costs from insurance carriers and other third parties. SCE
has successfully settled insurance claims with all responsible carriers.
Costs incurred at SCE's remaining sites are expected to be recovered
through customer rates. SCE has recorded a regulatory asset of $153
million for its estimated minimum environmental-cleanup costs expected to
be recovered through customer rates. This amount includes $60 million of
marine mitigation costs remaining to be recovered through the San Onofre
incentive pricing plan.
SCE's identified sites include several sites for which there is a lack of
currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCE may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can now be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $10 million. Recorded costs for 1997 were $10
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
Notes to Consolidated Financial Statements
developments, including additional information about existing sites or
the identification of new sites, will not require material revisions to
such estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $8.9
billion. SCE and other owners of San Onofre and Palo Verde have purchased
the maximum private primary insurance available ($200 million). The
balance is covered by the industry's retrospective rating plan that uses
deferred premium charges to every reactor licensee if a nuclear incident
at any licensed reactor in the U.S. results in claims and/or costs which
exceed the primary insurance at that plant site. Federal regulations
require this secondary level of financial protection. The Nuclear
Regulatory Commission exempted San Onofre Unit 1 from this secondary
level, effective June 1994. The maximum deferred premium for each nuclear
incident is $79 million per reactor, but not more than $10 million per
reactor may be charged in any one year for each incident. Based on its
ownership interests, SCE could be required to pay a maximum of $158
million per nuclear incident. However, it would have to pay no more than
$20 million per incident in any one year. Such amounts include a 5%
surcharge if additional funds are needed to satisfy public liability
claims and are subject to adjustment for inflation. If the public
liability limit above is insufficient, federal regulations may impose
further revenue-raising measures to pay claims, including a possible
additional assessment on all licensed reactor operators.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination
liability and property damage coverage exceeding the primary $500 million
also has been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by the arrangement were to
exceed the accumulated funds for these insurance programs, SCE could be
assessed retrospective premium adjustments of up to $28 million per year.
Insurance premiums are charged to operating expense.
Quarterly Financial Data
In millions Total Fourth Third Second First Total Fourth Third Second First
- ----------- ----- ------ ----- ------ ----- ----- ------ ----- ------ -----
Operating revenue $7,953 $1,980 $2,434 $1,844 $1,695 $7,583 $1,866 $2,346 $1,611 $1,760
Operating income 1,060 248 349 229 234 1,133 231 382 257 263
Net income 606 123 233 129 121 655 121 256 131 147
Earnings available for
common stock 576 116 226 122 112 621 113 247 123 138
Common dividends declared 1,829 1,266 217 171 175 735 196 178 180 181
----- ----- ----- ----- ----- ----- ----- ----- ----- ----
PAGE 40
Responsibility for Financial Reporting
The management of Southern California Edison Company (SCE)is responsible
for the integrity and objectivity of the accompanying financial
statements. The statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
are based, in part, on management estimates and judgment.
SCE maintains systems of internal control to provide reasonable, but not
absolute, assurance that assets are safeguarded, transactions are executed
in accordance with management's authorization and the accounting records
may be relied upon for the preparation of the financial statements. There
are no limits inherent in all systems of internal control, the design of
which involves management's judgment and the recognition that the costs
of such systems should not exceed the benefits to be derived. SCE
believes its systems of internal control achieve this appropriate balance.
These systems are augmented by internal audit programs through which the
adequacy and effectiveness of internal controls and policies and
procedures are monitored, evaluated and reported to management. Actions
are taken to correct deficiencies as they are identified.
SCE's independent public accountants, Arthur Andersen LLP, are engaged to
audit the financial statements in accordance with generally accepted
auditing standards and to express an informed opinion on the fairness, in
all material respects, of SCE's reported results of operations, cash flows
and financial position.
As a further measure to assure the ongoing objectivity of financial
information, the audit committee of the board of directors, which is
composed of outside directors, meets periodically, both jointly and
separately, with management, the independent public accountants and
internal auditors, who have restricted access to the committee. The
committee recommends annually to the board of directors the appointment
of a firm of independent public accounts to conduct audits of its
financial statements; considers the independence of such firm and the
overall adequacy of the audit scope and SCE's systems of internal control;
reviews financial reporting issues; and is advised of management's actions
regarding financial reporting and internal control matters.
SCE maintains high standards in selecting, training and developing
personnel to assure that its operations are conducted in conformity with
applicable laws and is committed to maintaining the highest standards of
personal and corporate conduct. Management maintains programs to
encourage and assess compliance with these standards.
Richard K. Bushey John E. Bryson
- ----------------- --------------
Richard K. Bushey John E. Bryson
Vice President Chairman of the Board
and Controller and Chief Executive Officer
January 30, 1998
PAGE 41
Report of Independent Public Accounts Southern California Edison Company
To the Shareholders and the Board of Directors,
Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (SCE, a California corporation) and its
subsidiaries as of December 31, 1997, and 1996, and the related
consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of SCE's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SCE and its
subsidiaries as of December 31, 1997, and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
January 30, 1998
Board of Directors Southern California Edison Company
- ------------------
John E. Bryson Carl F. Huntsinger E. L. Shannon, Jr.
Chairman of the Board and CEO, General Partner, Retired Chairman of the Board,
Edison International and SCE DAE Limited Partnership Ltd., Santa Fe International Corporation,
Ojai, California Alhambra, California
Winston H. Chen Charles D. Miller Robert H. Smith
Chairman of the Paramitas Foundation Chairman of the Board and CEO, Managing Director,
and Chairman of Paramitas Avery Dennison Corporation, Smith and Crowley Incorporated,
Investment Corporation, Pasadena, California Pasadena, California
Santa Clara, California
Warren Christopher Luis G. Nogales Thomas C. Sutton
Senior Partner, President, Chairman of the Board and CEO,
O'Melveny & Myers, Nogales Partners, Pacific Life Insurance Company,
Los Angeles, California Los Angeles, California Newport Beach, California
Stephen E. Frank Ronald L. Olson Daniel M. Tellep
President and Chief Operating Senior Partner, Retired Chairman of the Board,
Officer, SCE Munger, Tolles and Olson, Lockheed Martin Corporation,
Los Angeles, California Bethesda, Maryland
Camilla C. Frost* J.J. Pinola* James D. Watkins
Trustee, Chandler Trusts, Retired Chairman of the Admiral USN, Retired
Director and Secretary-Treasurer, Board and CEO, President, Joint Oceanographic
Chandis Securities Company, First Interstate Bancorp, Institutions, Inc. and President,
Los Angeles, California Los Angeles, California Consortium for Oceanographic
Research and Education
Wasington, D.C.
Joan C. Hanley James M. Rosser Edward Zapanta, M.D.
General Partner, President, Physician and Neurosurgeon,
Miramonte Vineyards, California State University, Torrance, California
Rancho Palos Verdes, California Los Angeles
Los Angeles, California
*Retiring on April 16, 1998
- ------------------------------------------------------------------------------------------------------------
Management Team
- ---------------
John E. Bryson Robert G. Foster Lawrence D. Hamlin
Chairman of the Board and CEO Senior Vice President, Vice President, Power Production
Public Affairs
Stephen E. Frank Richard M. Rosenblum Thomas J. Higgins
President and Chief Operating Senior Vice President, Vice President,
Officer T&D Wires Business Unit Corporate Communications
Bryant C. Danner Emiko Banfield R. W. Krieger
Executive Vice President and Vice President, Vice President, Nuclear Generation
General Counsel Shared Services
Alan J. Fohrer Pamela A. Bass J. Michael Mendez
Executive Vice President and Vice President, Vice President, Labor Relations
Chief Financial Officer Customer Solutions Business Unit
Harold B. Ray Richard K. Bushey Dwight E. Nunn
Executive Vice President, Vice President and Controller Vice President, Nuclear Engineering
Generation Business Unit and Technical Services
Theodore F. Craver, Jr. Bruce C. Foster Frank J. Quevedo
Senior Vice President and Vice President, Vice President, Equal Opportunity
Treasurer San Francisco Regulatory Affairs
John R. Fielder Lillian R. Gorman Mahvash Yazdi
Senior Vice President, Vice President, Human Resources Vice President and Chief
Regulatory Policy and Affairs Information Officer
Beverly P. Ryder
Corporate Secretary
PAGE 43
Shareholder Information
- ------------------------------------------------------------------------
Annual Meeting of Shareholders
Thursday, April 16, 1998
10:00 a.m.
The Industry Hills Sheraton Resort and Conference Center
One Industry Hills Parkway
City of Industry, California
- ------------------------------------------------------------------------
Stock Listing and Trading Information
SCE Preferred Stock
The American and Pacific stock exchanges use the ticker symbol SCE.
Previous day's closing prices, when traded, are listed in the daily
newspapers in the American Stock Exchange table under the symbol SoCalEd.
The 6.05%, 6.45% and 7.23% series are not listed.
Where to Buy and Sell Stock
The listed preferred stocks may be purchased through any brokerage firm.
Firms handling unlisted series can be located through your broker.
- -----------------------------------------------------------------------
Transfer Agent and Registrar
Southern California Edison Company maintains shareholder records and is
transfer agent and registrar for SCE preferred stock. Shareholders may
call Shareholder Services, (800) 347-8625, between 8:00 a.m. and 4:00 p.m.
(Pacific time) every business day, regarding:
o stock transfer and name-change requirements;
o address changes, including dividend addresses;
o electronic deposit of dividends;
o taxpayer identification number submission or changes;
o duplicate 1099 forms and W-9 forms;
o notices of and replacement of lost or destroyed stock certificates;
o dividend checks;
o requests to eliminate multiple annual report mailings; and
o request access to online account information via Edison International's
Internet Home Page, www.edisonx.com
The address of Shareholder Services is:
P.O. Box 400, Rosemead, California 91770-0400
FAX: (626) 302-4815