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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1995 --------------------------------------- OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------------- ----------------- Commission File Number 1-9936 SCEcorp (Exact name of registrant as specified in its charter) CALIFORNIA 95-4137452 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2244 Walnut Grove Avenue (P.O. Box 999) Rosemead, California (Address of principal 91770 executive offices) (Zip Code) 818-302-2222 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at November 6, 1995 - - -------------------------- -------------------------------- Common Stock, no par value 445,289,374 PAGE
SCEcorp INDEX Page No. ---- Part I. Financial Information: Item 1. Consolidated Financial Statements: Consolidated Statements of Income--Three and Nine Months Ended September 30, 1995, and 1994 2 Consolidated Balance Sheets--September 30, 1995, and December 31, 1994 3 Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1995, and 1994 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Part II. Other Information: Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 24 PAGE
SCEcorp PART I--FINANCIAL INFORMATION Item 1. Consolidated Financial Statements CONSOLIDATED STATEMENTS OF INCOME In thousands, except per-share amounts <TABLE> <CAPTION> 3 Months Ended 9 Months Ended September 30, September 30, -------------------------- -------------------------- 1995 1994 1995 1994 ---------- --------- ---------- ---------- (Unaudited) <S> <C> <C> <C> <C> Electric utility revenue $2,509,848 $2,529,783 $5,969,459 $5,952,901 Diversified operations 160,158 148,337 383,417 349,974 ---------- ---------- ---------- ---------- Total operating revenue 2,670,006 2,678,120 6,352,876 6,302,875 ---------- ---------- ---------- ---------- Fuel 213,558 274,378 517,022 672,336 Purchased power 917,547 922,815 1,954,370 1,949,676 Provisions for regulatory adjustment clauses -- net 146,463 121,536 191,918 82,097 Other operating expenses 350,719 356,823 1,015,516 1,062,075 Maintenance 86,488 77,269 269,212 249,748 Depreciation and decommissioning 253,720 245,620 750,271 721,220 Income taxes 202,602 195,661 419,150 395,665 Property and other taxes 50,612 54,075 158,990 161,434 ---------- ---------- ---------- ---------- Total operating expenses 2,221,709 2,248,177 5,276,449 5,294,251 ---------- ---------- ---------- ---------- Operating income 448,297 429,943 1,076,427 1,008,624 ---------- ---------- ---------- ---------- Provision for rate phase-in plan (33,082) (37,196) (90,947) (101,422) Allowance for equity funds used during construction 4,392 3,807 14,915 11,296 Interest income 16,625 9,903 46,695 30,154 Minority interest (11,284) (11,416) (34,378) (33,221) Other nonoperating income -- net 10,241 23,340 29,023 60,360 ---------- ---------- ---------- ---------- Total other income (deductions) -- net (13,108) (11,562) (34,692) (32,833) ---------- ---------- ---------- ---------- Income before interest and other expenses 435,189 418,381 1,041,735 975,791 ---------- ---------- ---------- ---------- Interest on long-term debt 140,913 130,037 399,141 382,771 Other interest expense 14,676 20,276 61,580 60,946 Allowance for borrowed funds used during construction (3,335) (3,733) (11,326) (11,537) Capitalized interest (16,012) (11,118) (43,581) (33,511) Dividends on subsidiary preferred securities 11,378 10,020 34,934 30,060 ---------- ---------- ---------- ---------- Total interest and other expenses -- net 147,620 145,482 440,748 428,729 ---------- ---------- ---------- ---------- Net income $ 287,569 $ 272,899 $ 600,987 $ 547,062 ========== ========== ========== ========== Weighted-average shares of common stock outstanding 445,855 447,799 446,755 447,799 Earnings per share $.65 $.61 $1.35 $1.22 Dividends declared per common share .25 .25 .75 .855 </TABLE> The accompanying notes are an integral part of these financial statements. PAGE
SCEcorp CONSOLIDATED BALANCE SHEETS In thousands <TABLE> <CAPTION> September 30, December 31, 1995 1994 ------------- ----------- (Unaudited) ASSETS <S> <C> <C> Utility plant, at original cost $19,628,641 $19,121,964 Less -- accumulated provision for depreciation and decommissioning 8,360,622 7,710,227 ----------- ----------- 11,268,019 11,411,737 Construction work in progress 791,058 906,766 Nuclear fuel, at amortized cost 152,668 98,044 ----------- ----------- Total utility plant 12,211,745 12,416,547 ----------- ----------- Nonutility property -- less accumulated provision for depreciation of $129,238 and $101,093 at respective dates 2,078,049 1,977,069 Nuclear decommissioning trusts 1,172,079 919,351 Investments in partnerships and unconsolidated subsidiaries 1,551,829 1,200,927 Investments in leveraged leases 570,100 555,564 Other investments 67,916 39,584 ----------- ----------- Total other property and investments 5,439,973 4,692,495 ----------- ----------- Cash and equivalents 544,519 533,957 Receivables, including unbilled revenue, less allowances of $23,433 and $23,934 for uncollectible accounts at respective dates 1,245,009 975,064 Fuel inventory 118,286 116,929 Materials and supplies, at average cost 156,797 129,109 Accumulated deferred income taxes -- net 465,573 271,308 Prepayments and other current assets 144,916 107,731 ----------- ----------- Total current assets 2,675,100 2,134,098 ----------- ----------- Unamortized debt issuance and reacquisition expense 357,347 356,557 Rate phase-in plan 158,930 240,730 Unamortized nuclear plant -- net 108,367 171,071 Income tax-related deferred charges 1,754,953 1,816,414 Other deferred charges 569,529 562,335 ----------- ----------- Total deferred charges 2,949,126 3,147,107 ----------- ----------- Total assets $23,275,944 $22,390,247 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. PAGE
SCEcorp CONSOLIDATED BALANCE SHEETS In thousands, except share amounts <TABLE> <CAPTION> September 30, December 31, 1995 1994 ------------- ----------- (Unaudited) CAPITALIZATION AND LIABILITIES Common shareholders' equity: Common stock (445,421,874 and 447,799,172 <S> <C> <C> shares outstanding at respective dates) $ 2,677,454 $ 2,691,574 Retained earnings 3,691,821 3,451,842 ----------- ----------- 6,369,275 6,143,416 Preferred securities of subsidiaries: Not subject to mandatory redemption 433,755 446,255 Subject to mandatory redemption 275,000 275,000 Long-term debt 6,751,326 6,347,188 ----------- ----------- Total capitalization 13,829,356 13,211,859 ----------- ----------- Other long-term liabilities 345,029 311,063 ----------- ----------- Current portion of long-term debt 43,224 231,370 Short-term debt 433,002 845,514 Accounts payable 393,598 412,930 Accrued taxes 830,267 530,163 Accrued interest 130,667 99,770 Dividends payable 113,787 115,803 Regulatory balancing accounts -- net 296,764 55,710 Deferred unbilled revenue and other current liabilities 1,116,994 865,758 ----------- ----------- Total current liabilities 3,358,303 3,157,018 ----------- ----------- Accumulated deferred income taxes -- net 4,047,221 4,059,372 Accumulated deferred investment tax credits 411,900 432,265 Customer advances and other deferred credits 646,518 616,110 ----------- ----------- Total deferred credits 5,105,639 5,107,747 ----------- ----------- Minority interest 637,617 602,560 ----------- ----------- Commitments and contingencies (Notes 1 and 2) Total capitalization and liabilities $23,275,944 $22,390,247 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. PAGE
SCEcorp CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands <TABLE> <CAPTION> 9 Months Ended September 30, ------------------------ 1995 1994 --------- ----------- (Unaudited) Cash flows from operating activities: <S> <C> <C> Net income $ 600,987 $ 547,062 Adjustments for non-cash items: Depreciation and decommissioning 750,271 721,220 Amortization 47,347 105,922 Rate phase-in plan 81,800 91,778 Deferred income taxes and investment tax credits (166,959) (135,583) Equity in income from partnerships and unconsolidated subsidiaries (113,770) (111,341) Other long-term liabilities 33,966 48,514 Other -- net (23,622) (100,180) Changes in working capital: Receivables (269,945) (362,850) Regulatory balancing accounts 241,054 51,816 Fuel inventory, materials and supplies (29,045) (26,524) Prepayments and other current assets (37,183) (21,853) Accrued interest and taxes 331,001 442,570 Accounts payable and other current liabilities 185,013 324,059 Distributions from partnerships and unconsolidated subsidiaries 118,033 148,492 ---------- ---------- Net cash provided by operating activities 1,748,948 1,723,102 ---------- ---------- Cash flows from financing activities: Long-term debt issued 836,335 110,224 Long-term debt repayments (762,790) (257,741) Preferred securities issued 62,500 -- Preferred securities redemptions (75,000) -- Common stock repurchases (39,850) -- Nuclear fuel financing -- net 42,775 (25,915) Short-term debt financing -- net (322,512) (114,431) Dividends received (10,150) -- Dividends paid (335,374) (429,887) ---------- ---------- Net cash used by financing activities (604,066) (717,750) ---------- ---------- Cash flows from investing activities: Additions to property and plant (719,964) (853,379) Funding of nuclear decommissioning trusts (111,897) (101,031) Investments in partnerships and unconsolidated subsidiaries (310,523) (167,111) Other -- net 8,064 72,998 ---------- ---------- Net cash used by investing activities (1,134,320) (1,048,523) ---------- ---------- Net increase (decrease) in cash and equivalents 10,562 (43,171) Cash and equivalents, beginning of period 533,957 420,510 ---------- ---------- Cash and equivalents, end of period $ 544,519 $ 377,339 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements. PAGE
SCEcorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management's Statement In the opinion of management, all adjustments have been made that are necessary to present a fair statement of the financial position and results of operations for the periods covered by this report. SCEcorp's significant accounting policies were described in Note 1 of "Notes to Consolidated Financial Statements" included in its 1994 Annual Report on Form 10-K filed with the Securities and Exchange Commission. SCEcorp follows the same accounting policies for interim reporting purposes. This quarterly report should be read in conjunction with SCEcorp's 1994 Annual Report. Certain prior-period amounts have been reclassified to conform to the September 30, 1995, financial statement presentation. Note 1. Regulatory Matters 1995 General Rate Case Proposed Settlement Agreement In 1994, Edison and the California Public Utilities Commission's (CPUC) Division of Ratepayer Advocates (DRA) filed a settlement agreement related to the 1995 general rate case. The settlement, which requires CPUC approval, includes a $67 million reduction in 1995 non-fuel revenue and, beginning February 1, 1996, accelerated recovery (by 2003, instead of 2012) of Edison's remaining investment in San Onofre Units 2 and 3, with an incentive pricing plan for future operating costs. The $67 million revenue reduction has been included in 1995 rates. Edison's unrecovered investment in Units 2 and 3 (approximately $2.7 billion) would be collected over an eight-year period earning a reduced rate of return of 7.78%, compared to the current 9.8%. Under the incentive pricing plan, which would replace traditional regulation and rate recovery, Edison will receive approximately 4 cents per kilowatt-hour to cover its portion of San Onofre's ongoing operating and incremental capital expenditures during the eight-year period. At the end of this period, customers would bear no further obligation for the units, except certain costs associated with decommissioning and permanent closure. Edison would then sell power generated by San Onofre under prices, terms and conditions which conform to any then-existing regulatory procedures. In April 1995, the DRA filed supplemental testimony recommending a 0.25- cent-per-kilowatt-hour decrease to the incentive price originally agreed to in the settlement agreement. The DRA claims the decrease is based on "new information" obtained after the settlement was negotiated, but prior to the hearings. In May 1995, hearings concluded after Edison filed rebuttal testimony showing that the "new information" does not form the basis for any change to the agreement and requesting that the CPUC adopt the original settlement. On September 14, 1995, a CPUC administrative law judge (ALJ) issued a proposed decision that would reduce Edison's 1995 revenue by $105 million. The additional $38 million reduction would be retroactive to January 1, 1995. The ALJ also recommended that the general rate case settlement agreement with the DRA be rejected, including the portion pertaining to San Onofre. The ALJ viewed the latter as being premature in light of California's restructuring proceeding and stated that it could be resubmitted as part of the restructuring proceeding or other appropriate proceeding. A final CPUC decision on the general rate case is expected by year-end. If the CPUC adopts the ALJ recommendation to move the San Onofre Units 2 and 3 agreement to another proceeding, Edison believes the PAGE
SCEcorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS unrecovered investment would be recovered through a competition transition charge or other mechanism (see CPUC Restructuring Proposals). CPUC Restructuring Proposals Since April 1994, the CPUC has been considering its proposal for restructuring California's electric utility industry, seeking to lower energy prices and provide customers with a choice of generation suppliers. As a part of these proceedings, Edison filed a proposal with the CPUC in November 1994 recommending implementation of a competition transition charge (CTC), beginning in 1998, as a mechanism to allow for full recovery of generation-related utility investments and obligations incurred to serve customers under the existing regulatory framework. In its filing, Edison estimates its potential transition costs through 2025 to be approximately $9.3 billion (net present value), based on an assumed 1998 market price of 4 cents per kilowatt-hour. The potential transition costs are comprised of: $4.9 billion from Edison's qualifying facility contracts, which are the direct result of legislative and regulatory mandates; $600 million from costs pertaining to certain generating plants; and $3.8 billion from regulatory commitments consisting of costs incurred to provide service to customers whose recovery has been deferred. Such commitments include the recovery of income-tax benefits previously flowed- through to customers, postretirement benefit transition costs, accelerated recovery of nuclear plants (including accelerated recovery of San Onofre Unit 1 and recovery of San Onofre Units 2 and 3 as discussed above), nuclear decommissioning and certain other costs. At September 30, 1995, these commitments included recorded generation-related regulatory assets of approximately $1.2 billion, primarily for the recovery of income-tax benefits previously flowed-through to customers, the Palo Verde phase-in plan and unamortized loss on reacquired debt. On May 24, 1995, the CPUC issued for public comment two policy proposals on restructuring. Although the proposals differ, they both recommend moving to a restructured competitive electric industry within two years and generally endorse recovery of costs incurred under prior regulatory rules. The majority's proposal, supported by three of the four commissioners, recommends a power pool that would commence operation by the beginning of 1997. One commissioner offered an alternate proposal that would provide for individual customer agreements with power producers. This proposal would also require the immediate sale or spin- off of all utility-owned generating facilities, and may allow utilities to recover only 90% of costs incurred under prior regulatory rules. On July 24, 1995, Edison filed comments supporting the majority proposal as it believes this proposal will be more successful at achieving CPUC goals set in April 1994 for a restructured electric industry in California. On September 11, 1995, Edison and a broad coalition of electricity customers and independent power producers submitted, as a joint recommendation to the CPUC, a set of principles to modify and refine the CPUC's two policy proposals. According to the Memorandum of Understanding: an independent system operator would control the scheduling and dispatch of all electricity on the state's power grid; a separate power exchange would manage electricity supply and demand through an economic auction; physical direct access would be phased in over a five- year schedule, allowing for individual contracts and aggregation of smaller customers; a non-bypassable transition charge would be collected to pay for past regulatory commitments; and, California's social and environmental public policy programs would be funded through a separate charge to all customers during the transition period. Hearings were held on the joint recommendation in September 1995 and a final CPUC decision on industry restructuring is expected by year-end; PAGE
SCEcorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS however, the state legislature has requested the CPUC to withhold implementation of any restructuring plan until its impact can be evaluated by the legislature and governor. FERC Restructuring Proposal In March 1995, the Federal Energy Regulatory Commission (FERC) proposed rules which would require utilities to provide wholesale open transmission access to the nation's interstate transmission grid, while allowing them to recover stranded costs associated with open access. The proposal defines stranded costs as legitimate, prudent and verifiable costs incurred to provide service to customers that would subsequently become unbundled wholesale transmission service customers of the utility. Edison supports the FERC's proposal and filed comments in August 1995. A final FERC decision is expected in mid-1996. Financial Impact of Restructuring Proposals Edison currently applies accounting standards that recognize the economic effects of rate regulation. As a result of applying these standards, Edison has recorded net regulatory assets of approximately $2.4 billion as of September 30, 1995, which include generation-related regulatory assets of $1.2 billion. Effective January 1996, a new accounting standard will impose stricter criteria for the retention of regulatory-created assets. Under this standard, Edison must be able to conclude that regulatory assets continue to be probable of recovery. Currently, a conclusion that such assets are not probable of loss is required. Accordingly, if rate recovery of generation-related costs does not continue to be probable, whether due to competition or regulatory action, regulatory accounting standards may no longer apply to Edison's generation operations and the $1.2 billion ($700 million after-tax) in recorded generation-related regulatory assets would be a non-cash charge against earnings. Additionally, Edison may have write-offs associated with its potential transition costs if all or a portion of these costs are not recovered through a CTC or other mechanism. Until the CPUC issues a final policy decision specifying definitive procedures to identify, value, calculate, allocate and recover transition costs, SCEcorp cannot predict the effect, if any, on its results of operations. Mohave Generating Station A 1994 CPUC decision stated that Edison was liable for expenditures related to a 1985 accident at the Mohave Generating Station. The CPUC ordered a second phase of this proceeding to quantify the disallowance. SCEcorp believes that the final outcome of this matter will not materially affect its results of operations. Note 2. Contingencies In addition to the matters disclosed in these notes, SCEcorp is involved in legal, tax and regulatory proceedings before various courts and governmental agencies with regard to matters arising in the ordinary course of business. SCEcorp believes that the final outcome of these proceedings will not materially affect its results of operations or liquidity. Environmental Protection SCEcorp 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
SCEcorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SCEcorp records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. SCEcorp 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, SCEcorp records the lower end of this reasonably likely range of costs (classified as other long-term liabilities at undiscounted amounts). While SCEcorp 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. At September 30, 1995, SCEcorp's recorded estimated minimum liability to remediate its 62 identified sites was $114 million. The ultimate costs to clean up SCEcorp'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. SCEcorp believes that, due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $215 million. The upper limit of this range of costs was estimated using assumptions least favorable to SCEcorp among a range of reasonably possible outcomes. SCEcorp 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 $8 million. SCEcorp'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 SCEcorp 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 at this time. The CPUC allows Edison to recover environmental-cleanup costs at 24 of its sites, representing $90 million of SCEcorp's recorded liability, through an incentive mechanism (Edison may request to include additional sites). Under this mechanism, Edison will recover 90% of cleanup costs through customer rates; shareholders fund the remaining 10%, with the opportunity to recover these costs through insurance and other third-party recoveries. Edison has settled insurance claims with several carriers, and is continuing to pursue additional recovery. Costs incurred at Edison's remaining 34 sites are expected to be recovered through customer rates. Edison has filed a request with the CPUC to add 11 of these sites ($12 million) to the incentive mechanism. Edison has recorded a regulatory asset of $104 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. SCEcorp's 62 identified sites consist of 58 Edison sites and four Mission Energy sites. In 1994, Edison utilized an estimating technique to quantify its potential liability for environmental cleanup in an effort to obtain a reasonably possible objective and reliable estimate of environmental cleanup. Mission Energy is in the process of conducting a similar review of its sites, which is expected to be completed in 1995. PAGE
SCEcorp NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This review could result in an increase to SCEcorp's number of identified sites and/or its estimated minimum liability. Based on currently available information, SCEcorp believes it is not likely 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, SCEcorp believes that costs ultimately recorded will not have a material adverse effect on its results of operations or financial position. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates. Nuclear Insurance Federal law limits public liability claims from a nuclear incident to $8.9 billion. Edison and other owners of San Onofre and Palo Verde Nuclear Generating Station 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. 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, Edison 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. 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, Edison could be assessed retrospective premium adjustments of up to $45 million per year. Insurance premiums are charged to operating expense. PAGE
SCEcorp Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Earnings SCEcorp's earnings per share for the three- and nine-month periods ended September 30, 1995, were 65 cents and $1.35, respectively, compared with 61 cents and $1.22 for the year-earlier periods. Southern California Edison Company's quarterly earnings were up 4 cents per share and year- to-date earnings increased 10 cents per share, primarily due to a higher authorized return on common equity for 1995 and improved operating efficiencies, partially offset by employee severance costs. The Mission companies' quarterly earnings were unchanged while the year-to-date earnings increased 4 cents per share reflecting Mission Energy's higher returns on oil and gas investments, favorable fuel prices, and improved results at its energy projects primarily during the first quarter of 1995. In 1993, Mission Energy recognized the reduced value of its investment in five geothermal projects. These projects have 30-year power sales contracts that are based on the market price of natural gas after an initial 10-year fixed-price period. The market price of gas is not expected to escalate as originally projected, thus Mission Energy has discontinued recording earnings from these projects. This decision negatively affected 1994 earnings by 3 cents per share and is expected to continue to affect earnings in 1995 and possibly beyond. Operating Revenue Electric utility revenue remained virtually unchanged for the three- and nine-month periods ended September 30, 1995, compared with the same periods in 1994, as a 2.6% California Public Utilities Commission (CPUC)- authorized rate increase was offset by a decline in energy usage caused by milder weather in 1995 and a decrease in the volume of sales to resale cities. Over 98% of electric utility revenue is from retail sales. Retail rates are regulated by the CPUC and wholesale rates are regulated by the Federal Energy Regulatory Commission (FERC). In March 1995, Edison announced that it intends to freeze average rates for residential, small business and agricultural customers through 1996, and announced a five-year goal to reduce system average rates by 25% (after adjusting for inflation), subject to CPUC approval. Edison also urged the CPUC to re-examine certain rate design issues, including possible elimination of the kilowatt-hour sales balancing account, which adjusts utility revenue for differences between CPUC-authorized and actual base-rate revenue. In July 1995, Edison filed expanded rate options and requested that the CPUC expedite the filing in order to offer these services by 1996. Edison does not anticipate that these proposals will have a material effect on future earnings trends, however, if the balancing account mechanism were to be revised or eliminated, the seasonal variability of Edison's earnings could be affected. Revenue from diversified operations increased 8% and 10%, respectively, for the quarter and year-to-date periods, compared to the year-earlier periods, mainly from an increase in Mission Energy's electric revenue from its Roosecote project, which was out of service for the majority of the comparable periods in 1994 due to a transformer failure and scheduled maintenance. Improved operating performance at a number of domestic projects, and an increase in the number of operating projects, also contributed to the year-to-date increase. The year-to-date increase was partially offset by the sale of an apartment complex in the second quarter of 1994 by Mission Land Company.
Operating Expenses Fuel expense decreased 22% and 23%, respectively, in the three and nine months ended September 30, 1995, compared with the same periods in 1994. The decreases primarily reflect a change in Edison's fuel mix from the year-earlier periods. Edison's hydro generation was up significantly in 1995, due to greater rainfall, resulting in lower gas purchases compared with the same periods in 1994. In addition, during the third quarter of 1995, San Onofre Nuclear Generating Station Unit 3 was out of service for two months for refueling and maintenance. Edison also received an $11 million fuel credit from the Department of Energy. Lower overall gas prices and a higher than average operating capacity at San Onofre Units 2 and 3 also contributed to the decrease in Edison's year-to-date energy costs. The year-to-date decline was partially offset by an increase at Mission Energy as its Roosecote project was out of service for slightly more than five months during the year-to-date period ended September 30, 1994, due to the transformer failure and scheduled maintenance. Provisions for regulatory adjustment clauses increased in both periods as CPUC-authorized fuel and purchased-power cost estimates exceeded Edison's actual energy costs. Edison's actual energy costs were lower than estimated due to the increase in hydro generation, San Onofre Unit 3's scheduled refueling outage, and lower gas prices. Other operating expenses include severance charges at Edison of $12 million for the nine-month period ended September 30, 1995. As Edison's operating environment continues to evolve toward a more competitive future, it is anticipated that workforce reductions will continue to occur. At this time, Edison does not have plans for company-wide workforce reductions that would be considered a restructuring for financial reporting purposes; however, each operating department will continue to review staffing needs during this period of change. Excluding severance charges, other operating expenses decreased in both periods primarily due to operating efficiencies at Edison. Maintenance expense increased 12% in the third quarter of 1995, compared with the year-earlier period, due to the scheduled refueling and maintenance outage at San Onofre Unit 3. Unit 3 returned to service on September 26, 1995. 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 Nuclear Generating Station. Revenue previously deferred (including interest) will be collected by the end of 1996 for Units 1 and 2, and 1998 for Unit 3. The provision is a non-cash offset to the collection of deferred revenue. Interest income increased 68% and 55%, respectively, for the three- and nine-month periods ended September 30, 1995, compared to the year-earlier periods, primarily due to higher interest rates and higher investment balances. The higher investment balances reflect the decline in dividend payments, which began in June 1994, and an increase in Mission Energy's loans to projects. Also, both periods in 1995 include interest income from Mission Energy's receivable from its partners in the Carbon II project in Mexico resulting from termination of its investment in the project in the third quarter of 1994. Other nonoperating income decreased for the quarter and year-to-date periods, compared to the same periods in 1994, primarily due to Mission Energy's receipt of insurance proceeds in the third quarter of 1994 related to the transformer failure at its Roosecote project. The year- to-date decrease also reflects a $5 million CPUC-authorized incentive award received by Edison in the first quarter of 1994 related to nuclear plant performance and a 1994 benefit resulting from the effect of a drop in SCEcorp's stock price on Edison's stock option plan. PAGE
Interest Expense Other interest expense decreased 28% for the quarter as a portion of Mission Energy's revolving line of credit related to its Brooklyn Navy Yard project was reclassified to long-term debt, until other financing is secured (see discussion under Cash Flows from Financing Activities). This reclassification reduced short-term interest expense, with a corresponding increase in interest on long-term debt. Other interest expense remained virtually unchanged for the year-to-date period, compared to the year- earlier period, as the third quarter decrease at Mission Energy was offset by an increase at Edison due to rising interest rates on short-term borrowings and higher balances in the regulatory balancing accounts. Capitalized interest increased 44% and 30%, respectively, for the three- and nine-month periods ended September 30, 1995, compared to the year- earlier periods, mainly from an increase in construction activity and debt levels at Mission Energy's Paiton and Brooklyn Navy Yard projects. Dividends on subsidiary preferred securities increased 14% and 16%, respectively, for the three- and nine-month periods ended September 30, 1995, compared to the year-earlier periods, due to Mission Energy's issuance of $87 million in preferred securities in the fourth quarter of 1994 as partial funding for the equity requirements for its Loy Yang B project and an additional issuance of $63 million in preferred securities in August of 1995. FINANCIAL CONDITION SCEcorp's liquidity is primarily affected by debt maturities, dividend payments, capital expenditures and investments in partnerships and unconsolidated subsidiaries. Capital resources include cash from operations and external financings. In June 1994, SCEcorp lowered its quarterly common stock dividend by 30%, as the result of uncertainty of future earnings levels arising from the changing nature of the electric utility industry intensified by recently proposed changes in California utility regulation. SCEcorp's dividends to earnings ratio (payout ratio) for the twelve-month period ended September 30, 1995, was 61%, which compared favorably with the utility industry average of about 80%. The cash flow coverage of dividends for the twelve-month period ended September 30, 1995, increased to 5.2 times from 4.0 times for the year-earlier period, primarily from the lower dividend rate. In January 1995, SCEcorp authorized the repurchase of up to $150 million of its common stock. SCEcorp repurchased 2,774,298 shares ($46 million) through November 3, 1995, funded by dividends from SCEcorp subsidiaries. Cash Flows from Operating Activities Net cash provided by operating activities totaled $1.7 billion for both of the nine-month periods ended September 30, 1995, and 1994, respectively. Cash from operations exceeded capital requirements for all periods presented. Cash Flows from Financing Activities At September 30, 1995, SCEcorp and its subsidiaries had $1.8 billion of borrowing capacity available under lines of credit totaling $2.1 billion. Edison has available lines of credit of $1.4 billion, with $900 million supporting commercial paper and $500 million for the long-term refinancing of its variable-rate pollution control bonds. The holding company has available a $100 million one-year term line of credit for short-term debt. The Mission companies had available lines of credit of $600 million, with $300 million of borrowing capacity available to finance general cash requirements. SCEcorp's unsecured revolving lines of credit are at negotiated or bank index rates with various expiration dates; the majority
with five-year terms. Mission Energy's borrowing capacity under its revolving line of credit increased with the closing of its Auburndale project on October 27, 1995. The increased borrowing capacity is expected to be utilized for additional funding of the Brooklyn Navy Yard project. Although Mission Energy owns 50% of the Brooklyn Navy Yard project, it is funding all of the estimated $400 million in costs for the project; $250 million had been spent through September 30, 1995. In order for Mission Energy to close a $254 million tax-exempt financing for the project, it will be required to provide a letter of credit or guarantee; however, no assurance can be given that such financing will be obtained prior to the end of the current year. In addition, Mission Energy believes that its anticipated returns with respect to the Brooklyn Navy Yard project may be substantially less than it had originally anticipated. Edison's short-term debt is used to finance fuel inventories, balancing account undercollections and general cash requirements. The Mission companies' short-term debt is used mainly for construction projects until long-term construction or project loans are secured. Long-term debt is used mainly to finance capital expenditures. Edison's external financings are influenced by market conditions and other factors, including limitations imposed by its articles of incorporation and trust indenture. As of September 30, 1995, Edison could issue approximately $7.2 billion of additional first and refunding mortgage bonds and $4.3 billion of preferred stock at current interest and dividend rates. In April 1995, Mission Energy and its partners completed a $1.8 billion financing for the Paiton power project in Indonesia. Mission Energy has firm commitments and contingent obligations to make equity contributions of $226 million and $115 million, respectively, over the expected four- year construction period. Mission Energy believes it will have sufficient liquidity to meet these equity requirements from cash provided by operating activities, proceeds from the repayment of loans to energy projects, funds available from Mission Energy's revolving line of credit and additional corporate borrowings. California law prohibits Edison from incurring or guaranteeing debt for its nonutility affiliates. Additionally, the CPUC regulates Edison's capital structure, limiting the dividends Edison may pay SCEcorp. At September 30, 1995, Edison had the capacity to pay $400 million in additional dividends to SCEcorp and continue to maintain its authorized capital structure. These restrictions are not expected to affect SCEcorp's ability to meet its cash obligations. Cash Flows from Investing Activities The primary uses of cash for investing activities are additions to property and plant, the Mission companies' investments in partnerships and unconsolidated subsidiaries, 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. Edison estimates that it will spend approximately $12.7 billion to decommission its nuclear facilities, primarily between 2013-2070. This estimate is based on Edison's current- dollar decommissioning costs ($1.8 billion), escalated using a 6.65% rate and an earnings assumption on trust funds ranging from 5.50% to 5.75%. These amounts are expected to be funded from independent decommissioning trusts (see Notes to Consolidated Financial Statements), which receive Edison contributions of approximately $100 million per year (until decommissioning begins). The Financial Accounting Standards Board is reviewing current accounting practices for removal costs, including decommissioning of nuclear power plants. If current industry accounting practices are changed, Edison could be required to report its estimated decommissioning costs as a liability, rather than recognize these costs over the term of each facility's operating license. SCEcorp does not believe that such changes, if any, would have an adverse effect on its results of operations due to its current and expected future ability to recover these costs through Edison's customer rates. PAGE
Cash used for the Mission companies' investing activities was $432 million for the nine-month period ended September 30, 1995, compared to $214 million for the same period in 1994. The increase was primarily due to Mission Energy's additional investments in and loans to energy projects. SCEcorp's risk management policy allows the use of derivative financial instruments to mitigate risk. Mission Energy has attempted to mitigate the risk of interest rate fluctuations by arranging for fixed rate financing or variable rate financing with interest rate swaps or other hedging mechanisms for the majority of its projects. As a result of interest rate hedging mechanisms, interest expense increased $5 million for both year-to-date periods presented. As Mission Energy continues to expand into foreign markets, fluctuations in foreign currency exchange rates will continue to affect the amount of Mission Energy's equity contributions to, distributions from, and results of operations for its foreign projects. Mission Energy has hedged and will continue to hedge the majority of its exposure to fluctuations in foreign exchange rates through forward contracts, options, offsetting obligations denominated in foreign currencies, and indexing underlying project agreements to U.S. dollars or other indices reasonably expected to correlate with foreign exchange movements. Projected Capital Requirements SCEcorp's projected capital requirements for the next five years are: 1995--$1.1 billion; 1996--$1.0 billion; 1997--$949 million; 1998--$908 million; and 1999--$993 million. Long-term debt maturities and sinking fund requirements for the five twelve-month periods following September 30, 1995, are: 1996--$28 million; 1997--$552 million; 1998--$336 million; 1999--$781 million; and 2000--$397 million. REGULATORY MATTERS Edison's 1995 CPUC-authorized revenue increased $193 million, or 2.6%, primarily due to a $192 million increase for fuel and purchased power ($167 million for federally required purchases), a $121 million increase for higher costs of debt and equity, a $64 million decrease for 1993 postretirement benefits other than pensions (collected in 1994 rates) and a $67 million decrease for a pending settlement agreement with the CPUC's Division of Ratepayer Advocates (DRA) related to Edison's 1995 general rate case (see 1995 General Rate Case Proposed Settlement Agreement below). The CPUC's 1995 cost-of-capital decision authorized an increase to Edison's equity ratio from 47.25% to 47.75%, and an increase to Edison's return on common equity from 11% to 12.1% in 1995. This decision, excluding the effects of other rate actions, would increase 1995 earnings by approximately 14 cents per share. In its 1996 cost-of-capital proceeding, Edison requested to increase its common equity ratio from 47.75% to 48% with no change to its authorized return on common equity. On October 6, 1995, a CPUC administrative law judge (ALJ) issued a proposed decision recommending a decrease to Edison's return on common equity from 12.1% to 11.6%. This recommendation, if adopted, could reduce 1996 earnings by approximately 4 cents per share, excluding the effects of other rate actions. A CPUC decision is expected in late November 1995. A 1994 CPUC decision stated that Edison was liable for expenditures related to a 1985 accident at the Mohave Generating Station. The CPUC ordered a second phase of this proceeding to quantify the disallowance. SCEcorp believes that the final outcome of this matter will not materially affect its results of operations. In October 1994, the CPUC authorized Edison to accelerate recovery of its nuclear plant investments by $75 million per year, through 2011. The rate impact of this accelerated cost recovery is offset by a corresponding
deceleration in recovery of transmission and distribution facilities through revised depreciation estimates over their remaining useful lives. 1995 General Rate Case Proposed Settlement Agreement In 1994, Edison and the DRA filed a settlement agreement, which requires CPUC approval, related to the 1995 general rate case. The settlement includes: a $67 million reduction in 1995 non-fuel revenue, effective January 1, 1995; and, accelerated recovery of Edison's remaining investment (approximately $2.7 billion) in San Onofre Units 2 and 3 at a reduced rate of return (7.78% compared to 9.8%), beginning February 1, 1996. Future operating costs at San Onofre would be recovered through an incentive pricing plan. At the end of the accelerated recovery period (2003, instead of 2012), customers would bear no further obligation for Units 2 and 3, except for certain costs associated with decommissioning and permanent closure. Edison would then sell power generated by San Onofre under prices, terms and conditions which conform to any then- existing regulatory procedures. In April 1995, the DRA filed supplemental testimony requesting a decrease to the incentive prices originally agreed upon in the settlement. Edison filed rebuttal testimony requesting that the CPUC adopt the original settlement. Hearings concluded in May 1995. On September 14, 1995, an ALJ issued a proposed decision recommending that the settlement agreement with the DRA be rejected, including the portion related to San Onofre, and recommended an additional reduction to Edison's 1995 revenue of $38 million. The proposed decision stated that recovery of San Onofre could be resubmitted as part of the CPUC restructuring proceeding or other appropriate proceeding. A final CPUC decision is expected by year-end. If the CPUC adopts the ALJ recommendation to move the San Onofre Units 2 and 3 agreement to another proceeding, Edison believes the unrecovered investment would be recovered through a competition transition charge or other mechanism (see Competitive Environment). Performance-Based Ratemaking In 1993, Edison filed a proposal with the CPUC for a performance-based rate-making mechanism that would determine most of Edison's revenue (excluding fuel) from 1996-2000. The filing proposed a revenue-indexing formula that would combine operating expenses and capital-related costs into a single index. In July 1994, the CPUC ordered Edison to divide its performance-based rate-making application into two phases - transmission and distribution, and power generation. Hearings concluded in December 1994 for the transmission and distribution phase and a decision is expected by year-end. Edison expects to file its proposal for the power generation phase after the CPUC issues its final decision on industry restructuring (see Competitive Environment). COMPETITIVE ENVIRONMENT Electric utilities operate in a highly regulated environment in which they have an obligation to provide electric service to their customers in return for an exclusive franchise within their service territory. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and regulators have proposed restructuring the electric utility industry. Edison expects the generation sector to continue to experience competition and other changes over the next decade. Since April 1994, the CPUC has been considering its proposal for restructuring California's electric utility industry, seeking to lower energy prices and provide customers with a choice of generation providers. As part of these proceedings, Edison filed a proposal with the CPUC in November 1994 recommending implementation of a competition transition charge (CTC), beginning in 1998, as a mechanism to allow for full recovery
of generation-related utility investments and obligations incurred to serve customers under the existing regulatory framework. In its filing, Edison estimates its potential transition costs through 2025 to be approximately $9.3 billion (net present value), based on an assumed 1998 market price of 4 cents per kilowatt-hour. The potential transition costs are comprised of: $4.9 billion from qualifying facility contracts, which are the direct result of legislative and regulatory mandates; $600 million from costs pertaining to certain generating plants; and $3.8 billion from regulatory commitments consisting of costs incurred to provide service to customers whose recovery has been deferred. Such commitments include the recovery of income-tax benefits previously flowed-through to customers, postretirement benefit transition costs, accelerated recovery of nuclear plants (including accelerated recovery of San Onofre Unit 1 and recovery of San Onofre Units 2 and 3 as discussed in the 1995 General Rate Case Proposed Settlement Agreement), nuclear decommissioning and certain other costs. At September 30, 1995, these commitments included recorded generation-related regulatory assets of approximately $1.2 billion, primarily for the recovery of income-tax benefits previously flowed- through to customers, the Palo Verde phase-in plan and unamortized loss on reacquired debt. On May 24, 1995, the CPUC issued for public comment two policy proposals that recommend moving to a restructured competitive electric industry within two years. Although the proposals differ, both generally endorse recovery of costs incurred under prior regulatory rules. The majority's proposal, supported by three of the four commissioners, recommends deregulation of electric generation through a power pool mechanism. The alternate proposal recommends deregulation of electric generation through individual customer agreements with power producers. This proposal would also require the immediate sale or spin-off of all utility owned generation facilities, and may only allow utilities to recover 90% of costs incurred under prior regulatory rules. SCEcorp supports the majority proposal as it believes this proposal would be more successful at achieving CPUC goals set in April 1994 for a restructured electric industry in California. On September 11, 1995, Edison and a broad coalition of electricity customers and independent power producers submitted a joint recommendation to the CPUC which would modify and refine the CPUC's two policy proposals. Key provisions of the joint recommendation include: an independent system operator to schedule and dispatch statewide electricity; a separate power exchange to manage supply and demand through an economic auction; five- year phase-in of direct customer access; a non-bypassable transition charge to recover past regulatory commitments; and, a separate charge for funding the state's social and environmental programs during the transition period. Hearings were held on the joint recommendation in September 1995 and a final CPUC decision on industry restructuring is expected by year-end; however, the state legislature has requested the CPUC to withhold implementation of any restructuring plan until its impact can be evaluated by the legislature and governor. SCEcorp is engaged in an ongoing analysis of the effect of industry restructuring on its internal corporate structure. In addition, Edison is seeking to enhance its competitive position by cutting costs and increasing productivity, and by developing new revenue sources. FERC Restructuring Proposal In March 1995, the FERC proposed rules which would require utilities to provide wholesale open transmission access to the nation's interstate transmission grid, while allowing them to recover stranded costs associated with open access. The proposal defines stranded costs as legitimate, prudent and verifiable costs incurred to provide service to customers that would subsequently become unbundled wholesale transmission service customers of the utility. Edison supports the FERC's proposal and filed comments in August 1995. A final FERC decision is expected in mid- 1996. PAGE
Financial Impact of Restructuring Proposals Edison currently applies accounting standards that recognize the economic effects of rate regulation. As a result of applying these standards, Edison had recorded net regulatory assets of approximately $2.4 billion at September 30, 1995, which includes generation-related regulatory assets of $1.2 billion. Effective January 1996, a new accounting standard will impose stricter criteria for the retention of regulatory-created assets. Under this standard, Edison must be able to conclude that regulatory assets continue to be probable of recovery. Currently, a conclusion that such assets are not probable of loss is required. Accordingly, if rate recovery of generation-related costs does not continue to be probable, whether due to competition or regulatory action, regulatory accounting standards may no longer apply to Edison's generation operations and the $1.2 billion ($700 million after-tax) in recorded generation-related regulatory assets would be a non-cash charge against earnings. Additionally, Edison may have write-offs associated with its potential transition costs if all or a portion of these costs are not recovered through a CTC or other mechanism. Until the CPUC issues a final policy decision specifying definitive procedures to identify, value, calculate, allocate and recover transition costs, SCEcorp cannot predict the effect, if any, on its results of operations. CPUC-MANDATED POWER CONTRACTS In 1994, the CPUC ordered the California utilities to proceed with an energy auction to solicit bids for new contracts with unregulated power producers. This decision would have forced Edison to purchase 686 MW of new power at fixed prices starting in 1997, costing Edison customers $14 billion over the lives of the contracts. Edison had requested the CPUC to reconsider its decision as it has no need for additional generating capacity until at least 2005. Furthermore, Edison believes the contracts would increase customer rates and the decision is inconsistent with the CPUC's restructuring goal to ultimately lower rates. Edison negotiated agreements, at substantially lower costs than those mandated by auction, with seven unregulated power producers, representing 627 MW of the 686 MW mandated. These agreements, which are subject to CPUC approval, would save Edison customers about 80% of anticipated overpayments compared with the mandated contracts. In January 1995, Edison appealed the CPUC decision to the FERC. In February 1995, the FERC ruled that the CPUC violated the federal Public Utility Regulatory Policies Act and FERC regulations because the CPUC did not consider all potential sources of capacity in reaching its avoided cost determination. On July 5, 1995, the CPUC issued a ruling supporting resolution of the energy auction through negotiated settlements and set criteria to be used to evaluate the settlements. Edison is currently evaluating these criteria to determine the impact on its existing settlement agreements and ongoing settlement negotiations. ENVIRONMENTAL PROTECTION SCEcorp 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. SCEcorp records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. SCEcorp 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, SCEcorp records the lower end of this reasonably likely range of costs (see Note 2 to Consolidated Financial Statements). At September 30, 1995, SCEcorp's recorded estimated minimum liability to remediate its 62 identified sites was $114 million. The ultimate costs to clean up SCEcorp'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. SCEcorp believes that due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $215 million. The upper limit of this range of costs was estimated using assumptions least favorable to SCEcorp among a range of reasonably possible outcomes. The CPUC allows Edison to recover environmental-cleanup costs at 24 of its sites, representing $90 million of SCEcorp's recorded liability, through an incentive mechanism (Edison may request to include additional sites). Under this mechanism, Edison will recover 90% of cleanup costs through customer rates; shareholders fund this remaining 10%, with the opportunity to recover these costs through insurance and other third-party recoveries. Edison has settled insurance claims with several carriers, and is continuing to pursue additional recovery. Costs incurred at Edison's remaining 34 sites are expected to be recovered through customer rates. Edison has filed a request with the CPUC to add 11 of these sites ($12 million) to the incentive mechanism. Edison has recorded regulatory assets of $104 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. SCEcorp'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 SCEcorp 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 at this time. SCEcorp 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 $8 million. One of Edison's sites is a former pole-treating facility, which is considered a federal Superfund site and represents 71% of SCEcorp's recorded liability. Remedial actions to clean up soil and ground-water contamination that occurred during pole-treating operations (1925-1980) are expected to continue at this site for 30 years. Rate recovery of environmental-cleanup costs for this site is authorized by the CPUC through an incentive mechanism (discussed below). SCEcorp's 62 identified sites consist of 58 Edison sites and 4 Mission Energy sites. In 1994, Edison utilized an estimating technique to quantify its potential liability for environmental cleanup in an effort to obtain a reasonably possible objective and reliable estimate of environmental cleanup. Mission Energy is in the process of conducting a similar review of its sites, which is expected to be complete in 1995. This review could result in an increase to SCEcorp's number of identified sites and/or its estimated minimum liability. Based on currently available information, SCEcorp believes it is not likely 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, SCEcorp believes that costs ultimately recorded will not have a material adverse effect on its results of operations or financial position. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates. The 1990 federal Clean Air Act requires power producers to have emissions allowances to emit sulfur dioxide. Power companies receive emissions allowances from the federal government and may bank or sell excess allowances. Edison 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 underway 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. SCEcorp's projected capital expenditures to protect the environment are $1.3 billion for the 1995-1999 period, mainly for aesthetics treatment, including undergrounding certain transmission and distribution lines. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects is receiving increased attention. The scientific community has not yet reached a consensus on the nature of any health effects of EMF. However, the CPUC has issued a decision which provides for a rate-recoverable research and public education program conducted by California electric utilities, and authorizes these utilities to take no-cost or low-cost steps to reduce EMF in new electric facilities. Edison 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. PAGE
PART II--OTHER INFORMATION Item 1. Legal Proceedings Qualified Facilities ("QF") Litigation On May 20, 1993, four geothermal QFs filed a lawsuit against Edison in Los Angeles County Superior Court, claiming that Edison underpaid, and continues to underpay, the plaintiffs for energy. Edison 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 is partially owned by a subsidiary of Mission Energy Company (a subsidiary of SCEcorp). In October 1994, plaintiffs submitted an amended complaint to the court to add causes of action for unfair competition and restraint of trade. The plaintiffs alleged that the underpayments totaled at least $21,000,000 as of the filing of the amended complaint. In other court filings, plaintiffs contend that the total amount of additional contract payments expected to be owing through the end of the contract term is approximately $60,000,000. As a result of motion practice, the plaintiffs have recently filed a fourth amended complaint which includes all of the previous claims except for the alleged restraint of trade. In addition to seeking compensatory damages and declaratory relief, the fourth amended complaint also seeks unspecified punitive damages and an injunction to enjoin Edison from "future" unfair competition. Trial on the fourth amended complaint is set for March 13, 1996. The materiality of a judgment in favor of the plaintiffs would be largely dependent on the extent to which additional payments resulting from such a judgment are recoverable through Edison's Energy Cost Adjustment Clause ("ECAC"). Between January 1994 and October 1994, Edison 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 Edison 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, Edison 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 $189,000,000 in damages, which includes consequential damages claimed in seven of the eight lawsuits. On March 1, 1995, the court in the lead Los Angeles County Superior Court case granted the plaintiffs' motion seeking summary adjudication that the contract language in question is not reasonably susceptible to Edison's position that there is only a single, 10-year period of fixed payments. On April 5, 1995, Edison filed a petition seeking writ review of the March 1, 1995, ruling in the California Court of Appeal. On May 3, 1995, the Court of Appeal issued an Order to Show Cause why the March 1 ruling should not be vacated. The matter was heard August 3, 1995, and on August 9, 1995, the Court of Appeal issued its decision vacating the March 1 summary adjudication order and directing the trial court to issue an order denying the summary adjudication motion. A pending summary adjudication motion in the Kern County case has been withdrawn in light of the Court of Appeal decision and an April 22, 1996, trial date has been set in that case. In March 1995, an eighth lawsuit was filed in the Los Angeles County Superior Court raising claims similar to those alleged in the first seven cases in that Court. Edison has responded to the complaint in the new lawsuit by denying its material allegations. The materiality of final judgments in favor of the plaintiffs in these cases would be largely dependent on the extent to which any damages or additional payments which might result from such judgments would be recoverable through Edison's ECAC. This matter was previously reported under the heading "QF Litigation" in Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for the year ended PAGE
December 31, 1994, and Part II, Item 1 of the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995, and June 30, 1995. Electric and Magnetic Fields ("EMF") Litigation Edison has been served with two lawsuits, both of which allege, among other things, that certain plaintiffs developed cancer as a result of EMF emitted from Edison facilities in an office building. The lawsuits, filed in Orange County Superior Court and served on Edison in June 1994 and January 1995, request compensatory and punitive damages. Although no specific damage amounts are alleged in the complaints, in subsequent court filings, plaintiffs estimated general and compensatory damages of $8,000,000 and $13,500,000, plus unspecified punitive damages. The same co-defendant in both actions has filed cross-complaints against the other co-defendants, including Edison, requesting indemnification and declaratory relief concerning the rights and responsibilities of the parties. The case served in June 1994, is set to go to trial on January 8, 1996. The case served in January 1995 is proceeding toward trial but a trial date has not yet been set. A third case was filed in Orange County Superior Court and served on Edison in March 1995. The complaint seeks compensatory and punitive damages. The plaintiff alleges, among other things, that he developed cancer as a result of EMF emitted from Edison facilities 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 $5,500,000, plus unspecified punitive damages. This case is set to go to trial on May 20, 1996. Edison believes that there is no proven scientific basis for the allegation that EMF are hazardous to health and, therefore, believes that the EMF lawsuits described above are without merit. These matters were previously reported under the heading "Environmental Litigation" in Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for the year ended December 31, 1994, and Part II, Item 1 of the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995, and June 30, 1995. San Onofre Personal Injury Litigation An engineer for two contractors providing services for San Onofre has been diagnosed with chronic myelogenous leukemia. On July 12, 1994, the engineer and his wife sued Edison, San Diego Gas and Electric Company ("SDG&E") and Combustion Engineering, the manufacturer of the fuel rods for the plant, in the United States District Court for the Southern District of California. The plaintiffs alleged that the engineer's illness resulted from contact with radioactive fuel particles released from failed fuel rods. Plant records showed that the engineer's exposure to radiation was well below Nuclear Regulatory Commission ("NRC") safety levels. In the complaint, plaintiffs sought unspecified compensatory and punitive damages. The trial began August 3, 1995, and on October 12, 1995, an eight member jury unanimously decided that radiation exposure at San Onofre was not the cause of the leukemia. On October 31, 1995, plaintiffs filed a motion for new trial. An Edison engineer employed at San Onofre died in 1991 from cancer of the abdomen. On February 6, 1995, his children sued Edison, SDG&E and Combustion Engineering in the United States District Court for the Southern District of California. The plaintiffs allege that the engineer's illness resulted from, and was aggravated by, exposure to radiation at San Onofre, including contact with radioactive fuel particles. Plant records show that the engineer's exposure to radiation was well below NRC safety levels. In the complaint, plaintiffs sought unspecified compensatory and punitive damages. PAGE
On April 3, 1995, the Court granted the defendants' motion to dismiss 14 of plaintiffs' 15 claims. Punitive damages are not available under the remaining claim. Edison's April 20, 1995, answer to the complaint denied all material allegations. On October 10, 1995, the Court ruled in favor of plaintiffs request to include the Institute of Nuclear Power Operations (an organization dedicated to achieving excellence in nuclear power operations) as a defendant in the suit. The trial is set for October 1, 1996. These matters were previously reported under the heading "San Onofre Personal Injury Litigation" in Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for the year ended December 31, 1994, and Part II, Item 1 of the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995, and June 30, 1995. On July 5, 1995, a former Edison reactor operator employed at San Onofre and his wife sued Edison, SDG&E, Combustion Engineering and the Institute of Nuclear Power Operations in the U.S. District Court for the Southern District of California. Plaintiffs allege the former employee's acute myelogenous leukemia resulted from, and was aggravated by, exposure to radiation at San Onofre, including contact with radioactive fuel particles. The former employee subsequently died from his illness. Plaintiffs seek unspecified compensatory and punitive damages. Edison intends to deny the plaintiffs' material allegations. Plaintiffs' counsel has indicated that the complaint will be amended to allege wrongful death. This matter was previously reported under the heading "San Onofre Personal Injury Litigation" in Part II, Item 1 of the Quarterly Report on Form 10- Q for the period ended June 30, 1995. On August 31, 1995, the family of a former worker for a contractor at San Onofre, and later a temporary and then a permanent Edison employee at San Onofre, sued Edison, SDG&E, Combustion Engineering and the Institute of Nuclear Power Operations in the U.S. District Court for the Southern District of California. Plaintiffs allege the former employee's acute myelogenous leukemia, which resulted in his death in 1994, resulted from, and was aggravated by, exposure to radiation at San Onofre, including contact with radioactive fuel particles. Plaintiffs seek unspecified compensatory and punitive damages. Edison intends to deny the plaintiffs' material allegations. Employment Discrimination Litigation On September 21, 1994, nine African-American employees filed a lawsuit against SCEcorp and Edison on behalf of an alleged class of African- American employees, alleging racial discrimination in job advancement, pay, training and evaluation. The lawsuit was filed in the United States District Court for the Central District of California. The plaintiffs seek injunctive relief, as well as an unspecified amount of compensatory and punitive damages, attorneys' fees, costs and interest. SCEcorp and Edison have responded by denying the material allegations of the complaint and asserting several affirmative defenses. The Court has ordered that plaintiffs file their motion for class certification no later than December 6, 1995, and that the hearing on that motion be held on March 4, 1996. This matter was previously reported under the heading "Employment Discrimination Litigation" in Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for the year ended December 31, 1994, and the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995, and June 30, 1995. PAGE
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K: August 15, 1995 -- Item 5--Other Events-- Proposed Restructuring of California Utility Industry September 20, 1995 -- Item 5--Other Events-- Industry Restructuring Proposed General Rate Case Decision PAGE
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SCEcorp (Registrant) By R. K. BUSHEY --------------------------------- R. K. BUSHEY Vice President and Controller By W. J. SCILACCI --------------------------------- W. J. SCILACCI Assistant Treasurer November 9, 1995