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EXHIBIT 13
SCEcorp
1993
Annual Report: Focus on Competitive Performance
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Financial Information
Management's Discussion and Analysis: SCEcorp and Subsidiaries
Results of Operations
Earnings
SCEcorp's 1993 earnings per share were $1.43, compared with $1.66 in
1992 and $1.61 in 1991. In 1993, Edison contributed $1.42 per share of
SCEcorp's earnings, unchanged from 1992 and up 8 cents per share from 1991. In
1993, the Mission companies contributed 1 cent per SCEcorp share, down 23 cents
from 1992 and 26 cents from 1991.
SCEcorp's 1993 earnings reflect special charges of 18 cents per share.
Mission Energy recorded special charges of 13 cents, including 7 cents to
recognize the reduced value of investments in five geothermal power plants, 4
cents to terminate its investment in the Carbon II project in Mexico, and 2
cents for additional reserves for project development and other costs. Mission
Power Engineering, which ceased operations in 1990, recorded a 3-cent-per-share
charge resulting from settlement of all remaining litigation for its Coso
geothermal project. Mission Land recorded special charges of 2 cents per share
to reflect the reduced value of several real estate projects and joint venture
project restructuring costs.
SCEcorp's 1992 earnings included a 5-cent-per-share charge to settle
litigation between Edison and Tucson Electric Power Company and a
3-cent-per-share charge in anticipation of real estate losses at Mission Land.
SCEcorp's 1991 earnings included a 21-cent-per-share charge for a
purchased-power regulatory settlement, legal and regulatory reserves, and a
corporate restructuring program at Edison.
All per-share amounts have been restated to reflect the two-for-one
common stock split effective June 1, 1993.
1993 vs. 1992
Excluding the special charges noted above, SCEcorp's earnings declined
13 cents per share -- 5 cents at Edison and 8 cents at the Mission companies.
Edison's decline is mainly due to a lower authorized return on common equity,
partially offset by a decline in interest expense as the result of an
aggressive refinancing program. The Mission companies' decrease from 1992 is
primarily due to higher administrative, general, project development and
start-up costs at Mission Energy and reduced earnings at Mission Land.
In addition to establishing its reserve for the geothermal projects,
Mission Energy discontinued recording earnings from these projects in the third
quarter of 1993, and will continue to forgo recording earnings through the 10th
year of each contract. This will not affect the expected cash flow from each
contract, but will significantly impact Mission Energy's earnings for 1994 and
possibly beyond.
1992 vs. 1991
Excluding special charges, SCEcorp's 1992 earnings declined 8 cents per
share, attributed to a lower authorized return on common equity and reduced
interest income at Edison.
Operating Revenue
Electric utility revenue decreased in 1993 compared to 1992, mostly due
to a 2.9% rate decrease authorized by the California Public Utilities
Commission (CPUC) and a 2% decline in retail sales volume. In 1992, electric
utility revenue increased 6% compared to 1991, mostly due to warmer weather
during the summer of 1992. In addition, retail rates rose in 1992, reflecting a
CPUC-authorized increase of 1.9% for Edison's higher operating and maintenance
expenses and capital-related costs. Retail rates account for over 98% of
electric revenue and are regulated by the CPUC. Wholesale rates are regulated
by the Federal Energy Regulatory Commission. Revenue from diversified
operations increased 62% in 1993 compared to 1992, mostly due to Mission
Energy's electric revenue from its Lakeland and Loy Yang B projects and Mission
Land's real estate rent and sales revenue.
The changes in electric revenue resulted from:
Year ended December 31,
------------------------
In millions 1993 1992 1991
- ----------- ---- ---- ----
Electric revenue--
Rate changes $(251) $170 $353
Sales volume changes (124) 270 (73)
Other 50 (16) 31
---- --- ---
Total $(325) $424 $311
===== ==== ====
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Management's Discussion and Analysis: SCEcorp and Subsidiaries
Results of Operations
Operating Expenses
Fuel expense decreased minimally in 1993, due to a $44 million decrease
at Edison, partially offset by a $42 million increase at Mission Energy.
Edison's lower expense in 1993 was primarily due to an 11% decrease in power
generation, as the result of an increase in required purchases from nonutility
generators. Mission Energy's increase was related to its Lakeland and Loy Yang
B projects. Fuel expense was 18% higher in 1992, primarily due to Edison's
increased power generation compared to the previous year.
Purchased-power expense increased 11% in 1993 and 2% in 1992,
reflecting higher prices and an increased volume of federally required
purchases by Edison from nonutility generators. These purchases were made under
contracts with CPUC-mandated pricing. In 1993, these contracts cost about $800
million more than power available from other sources.
The provisions for regulatory adjustment clauses minimize rate
fluctuations by adjusting for differences between estimated and actual
kilowatt-hour sales or energy costs. These differences are accumulated in
balancing accounts for subsequent rate adjustment. Prior-period rate
adjustments are also reflected in these provisions. The 1993 and 1992 decreases
were mostly due to Edison's energy costs exceeding CPUC-authorized estimates.
The 1992 decrease was partially offset by kilowatt-hour sales exceeding
authorized estimates.
Other operating expenses increased 23% in 1993, primarily due to
Mission Energy's pretax charges of $28 million to terminate its investment in
Carbon II and $52 million to reflect the reduced value of its investments in
five geothermal projects. Additionally, Mission Land had increased costs
resulting from the sale of properties in Dallas and Chicago, the reduced value
of certain real estate projects and the related restructuring costs. In 1992,
other operating expenses increased 6%, reflecting Edison's authorized increases
in energy conservation programs and increased funding levels for postretirement
benefits other than pensions, and Mission Land's reserve for real estate
losses.
Depreciation and decommissioning expense increased 14% in 1993 compared
to 1992, mainly due to Edison's accelerated recovery of its investment in San
Onofre Nuclear Generating Station Unit 1.
Income taxes decreased 14% in 1993, mostly due to Mission Energy's
lower operating income resulting from the charges for its geothermal and Carbon
II projects.
Other Income and Deductions
The provision for rate phase-in plan reflects a CPUC-authorized,
10-year rate phase-in plan for the three Palo Verde Nuclear Generating Station
units. Phase-in plans minimize the effect on customer rates of placing newly
constructed plants in service by gradually implementing rate increases. Palo
Verde's plan deferred $200 million of revenue for each unit during the first
four years of operation. The deferred revenue, including interest, is being
collected evenly over six years ending in 1996 for Units 1 and 2, and in 1998
for Unit 3. The provision is a non-cash offset to the collection of deferred
revenue.
Other nonoperating income decreased 6% in 1993 and 34% in 1992,
reflecting a decrease in interest income due to lower interest rates and lower
balances in Edison's Palo Verde phase-in plan and balancing accounts. In
addition, Edison had a $40 million settlement of litigation in 1992 with Tucson
Electric. The case arose when San Diego Gas & Electric Company (SDG&E) withdrew
from its 1988 merger agreement with Tucson Electric and agreed to merge with
Edison. The CPUC later denied Edison's and SDG&E's merger application. Tucson
Electric had alleged that Edison wrongfully interfered with Tucson Electric's
and SDG&E's proposed merger.
Interest Expense
Interest on long-term debt increased in 1993, mainly due to more
long-term borrowings at Mission Energy related to two international projects,
Loy Yang B and Lakeland, partially offset by savings from Edison's $2 billion
refinancing program to take advantage of lower interest rates.
Other interest expense decreased 32% in 1993, primarily due to
regulatory balancing account adjustments for Edison's CPUC-approved
purchased-power settlement in 1992 and lower interest rates in 1993.
Capitalized interest increased in 1993 and in 1992, due to increased
construction activity at Mission Energy.
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Consolidated Statements of Income SCEcorp and Subsidiaries
In millions, except
per-share amounts Year ended December 31, 1993 1992 1991
- ------------------- ----------------------- ---- ---- ----
Electric revenue $7,397 $7,722 $7,298
Diversified operations 424 262 258
------ ------ ------
Total operating revenue 7,821 7,984 7,556
------ ------ ------
Fuel 834 836 709
Purchased power 2,499 2,251 2,203
Provisions for regulatory adjustment
clauses -- net (287) 340 384
Other operating expenses 1,588 1,294 1,215
Maintenance 363 362 383
Depreciation and decommissioning 922 807 767
Income taxes 465 544 453
Property and other taxes 220 207 203
------ ------ ------
Total operating expenses 6,604 6,641 6,317
------ ------ ------
Operating income 1,217 1,343 1,239
------ ------ ------
Provision for rate phase-in plan (137) (147) (82)
Allowance for equity funds used
during construction 20 20 16
Other nonoperating income -- net 87 93 141
------ ------ ------
Total other income (deductions) -- net (30) (34) 75
------ ------ ------
Income before interest and other expenses 1,187 1,309 1,314
------ ------ ------
Interest on long-term debt 528 477 491
Other interest expense 65 96 103
Allowance for borrowed funds used
during construction (16) (17) (12)
Capitalized interest (70) (28) (13)
Dividends on subsidiary preferred stock 41 42 42
------ ------ ------
Total interest and other expenses -- net 548 570 611
------ ------ ------
Net income $ 639 $ 739 $ 703
====== ====== ======
Weighted-average shares of common stock
outstanding 448 445 437
Earnings per share $1.43 $1.66 $1.61
Consolidated Statements of Retained Earnings
In millions, except
per-share amounts Year ended December 31, 1993 1992 1991
- ------------------- ----------------------- ---- ---- ----
Balance at beginning of year $3,263 $3,150 $3,038
Net income 639 739 703
Dividends declared on common stock (636) (626) (591)
------ ------ ------
Balance at end of year $3,266 $3,263 $3,150
====== ====== ======
Dividends declared per common share $1.415 $1.39 $1.35
The accompanying notes are an integral part of these financial
statements.
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Consolidated Balance Sheets
In millions,
except share amounts December 31, 1993 1992
- -------------------- ------------ ---- ----
ASSETS
Utility plant, at original cost $18,436 $17,805
Less -- accumulated provision for
depreciation and decommissioning 7,138 6,544
------- -------
11,298 11,261
Construction work in progress 857 724
Nuclear fuel, at amortized cost 148 123
------- -------
Total utility plant 12,303 12,108
------- -------
Nonutility property -- less accumulated
provision for depreciation
of $73 and $50 at respective dates 1,276 1,024
Nuclear decommissioning trusts 789 648
Investments in partnerships and unconsolidated
subsidiaries 1,163 1,453
Investments in leveraged leases 497 462
Other investments 21 19
------- -------
Total other property and investments 3,746 3,606
------- -------
Cash and equivalents 421 496
Receivables, including unbilled revenue,
less allowances of $19 and $13
for uncollectible accounts at respective dates 880 876
Fuel inventory 121 108
Materials and supplies, at average cost 104 110
Accumulated deferred income taxes -- net 204 194
Prepayments and other current assets 118 201
------- -------
Total current assets 1,848 1,985
------- -------
Unamortized debt issuance and
reacquisition expense 382 301
Rate phase-in plan 364 488
Unamortized nuclear plant -- net 274 380
Income tax-related deferred charges 2,016 --
Other deferred charges 446 443
------- -------
Total deferred charges 3,482 1,612
------- -------
Total assets $21,379 $19,311
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The accompanying notes are an integral part of these financial
statements.
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SCEcorp and Subsidiaries
In millions, except share amounts December 31, 1993 1992
- --------------------------------- ------------ ---- ----
CAPITALIZATION AND LIABILITIES
Common shareholders' equity:
Common stock (447,799,172 and 447,736,054 shares
outstanding at respective dates) $ 2,692 $ 2,691
Retained earnings 3,266 3,263
------- -------
5,958 5,954
Preferred stock:
Not subject to mandatory redemption 359 359
Subject to mandatory redemption 275 278
Long-term debt 6,459 6,320
------- -------
Total capitalization 13,051 12,911
------- -------
Other long-term liabilities 267 342
------- -------
Current portion of long-term debt and redeemable
preferred stock 349 219
Short-term debt 655 758
Accounts payable 373 391
Accrued taxes 411 342
Accrued interest 101 120
Dividends payable 163 161
Regulatory balancing accounts -- net 58 88
Deferred unbilled revenue and other current liabilities 741 719
------- -------
Total current liabilities 2,851 2,798
------- -------
Accumulated deferred income taxes -- net 4,169 2,245
Accumulated deferred investment tax credits 456 462
Customer advances and other deferred credits 585 553
------- -------
Total deferred credits 5,210 3,260
------- -------
Commitments and contingencies (Notes 2, 8, 9 and 10)
Total capitalization and liabilities $21,379 $19,311
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The accompanying notes are an integral part of these financial statements.
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Management's Discussion and Analysis: SCEcorp and Subsidiaries
Financial Condition
SCEcorp's liquidity is primarily affected by debt maturities, dividend
payments, and capital expenditures. Although SCEcorp is committed to a strong
dividend, recent CPUC decisions (see Regulatory Matters) may affect its ability
to raise or retain current dividend levels. Capital resources include cash from
operations and external financings.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled approximately $2.0
billion per year in 1993, 1992 and 1991. SCEcorp continues to meet most of its
capital requirements with cash from operations.
Cash Flows from Financing Activities
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 December 31, 1993, Edison
could issue approximately $6.6 billion of additional first and refunding
mortgage bonds and $4.4 billion of preferred stock at current interest and
dividend rates.
SCEcorp has lines of credit of $1.7 billion -- $1.2 billion for
short-term debt and $500 million for the long-term refinancing of Edison's
variable-rate pollution-control bonds. Of the $1.2 billion for short-term debt,
the Mission companies have $600 million to finance general cash requirements.
Two credit rating agencies affirmed Edison's credit rating following
the CPUC's 1994 cost-of-capital proceedings (see Regulatory Matters). One of
these agencies also lowered Edison's commercial paper rating to be consistent
with the previous overall downgrade in November 1992, from double-A to
single-A-plus.
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. 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, Mission companies' investments and contributions to nuclear
decommissioning trusts. Cash used for the Mission companies' investing
activities was $289 million in 1993, $763 million in 1992 and $75 million in
1991. Edison contributes approximately $96 million per year to nuclear
decommissioning trusts. Trust contributions will continue until decommissioning
begins.
Projected Capital Requirements
SCEcorp's projected capital requirements for the years 1994 through
1998 are:
In millions 1994 1995 1996 1997 1998
- ----------- ---- ---- ---- ---- ----
Construction expenditures $1,305 $1,330 $1,156 $1,094 $1,349
Maturities of long-term debt 336 272 297 570 523
------ ------ ------ ------ ------
Total $1,641 $1,602 $1,453 $1,664 $1,872
====== ====== ====== ====== ======
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Consolidated Statements of Cash Flows SCEcorp and Subsidiaries
In millions Year ended December 31, 1993 1992 1991
- ----------- ----------------------- ------- ------- --------
Cash flows from operating activities:
Net income $ 639 $ 739 $ 703
Adjustments for noncash items:
Depreciation and decommissioning 922 807 767
Amortization 107 150 166
Rate phase-in plan 123 125 43
Deferred income taxes and investment tax credits 95 32 103
Equity in income from partnerships and
unconsolidated subsidiaries (135) (148) (140)
Other long-term liabilities (75) 36 146
Nonrecurring charges 99 -- 79
Other -- net 10 26 21
Changes in working capital components:
Receivables 56 (17) (73)
Regulatory balancing accounts (30) 246 68
Fuel inventory, materials and supplies (7) 58 10
Prepayments and other current assets 115 (30) (73)
Accrued interest and taxes (160) (62) (25)
Accounts payable and other current liabilities (29) (118) 16
Distributions from partnerships and
unconsolidated subsidiaries 271 124 149
------- ------- -------
Net cash provided by operating activities 2,001 1,968 1,960
------- ------- -------
Cash flows from financing activities:
Issuances of long-term debt 2,496 1,611 819
Issuances of preferred stock 75 296 --
Repayment of long-term debt (2,291) (1,332) (363)
Redemption of preferred stock (86) (232) (12)
Nuclear fuel financing -- net 8 (126) 23
Proceeds from sales of common stock 1 160 67
Short-term debt financings -- net (167) (36) (558)
Dividends paid (631) (614) (586)
------- ------- -------
Net cash used by financing activities (595) (273) (610)
------- ------- -------
Cash flows from investing activities:
Additions to property and plant (1,259) (1,241) (1,033)
Nuclear decommissioning trusts (141) (132) (131)
Investments in partnerships and
unconsolidated subsidiaries (14) (257) (238)
Other -- net (67) (48) 48
------- ------- -------
Net cash used by investing activities (1,481) (1,678) (1,354)
------- ------- -------
Net increase (decrease) in cash and equivalents (75) 17 (4)
Cash and equivalents, beginning of year 496 479 483
------- ------- -------
Cash and equivalents, end of year $ 421 $ 496 $ 479
======= ======= =======
Cash payments for interest and taxes:
Interest $ 468 $ 459 $ 520
Taxes 415 457 380
Noncash investing and financing activities:
Obligation to fund investment in partnerships
and unconsolidated subsidiaries 118 69 102
The accompanying notes are an integral part of these financial statements.
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Management's Discussion and Analysis SCEcorp and Subsidiaries
Regulatory Matters
The CPUC increased Edison's authorized revenue by $232 million, or
3.2%, for 1994. The increase includes a $275 million increase for fuel and
related costs and an $82 million increase for higher operating costs, partially
offset by a $108 million decrease for the lower costs of debt and equity.
In its 1994 cost-of-capital decision, the CPUC approved Edison's
request to increase its equity ratio from 46% to 47.25%. The increase reflects
the CPUC's recognition of Edison's need to reduce debt to levels more in line
with other utilities and the competitive environment. The CPUC also authorized
Edison an 11.0% return on common equity for 1994. Authorized return on common
equity was 11.8% for 1993 and 12.65% for 1992. This decision is expected to
reduce 1994 earnings by approximately 6 cents per share.
The CPUC is reviewing Edison's costs (approximately $90 million)
related to a 1985 steam-pipe rupture at the Mohave Generating Station. A
December 1993 proposed decision, issued by a CPUC administrative law judge,
recommended disallowance of all accident-related expenditures. A final CPUC
decision, expected in 1994, may accept or modify the proposed decision. If
accepted, a second phase of this proceeding will quantify the disallowance.
Edison maintains the accident was caused by a manufacturing defect in a seam
weld and filed comments on January 20, 1994, contesting the proposed decision.
The probable effect on net income cannot be determined at this time, but
SCEcorp believes it will not materially affect its financial position.
The CPUC is also reviewing extended outages at Palo Verde. The CPUC's
Division of Ratepayer Advocates (DRA) initially recommended a disallowance
valued at $169 million. In September 1993, Edison and the DRA agreed to settle
these disputes for $38 million, subject to CPUC approval. The effect of the
settlement has been fully reflected in the financial statements. A CPUC
decision is expected in early 1994.
In its 1995 general rate case filing, Edison requested a $117 million
revenue increase to recover the higher costs of operations (excluding fuel)
resulting from inflation and new capital investments. This increase, adjusted
for inflation, represents a 7.2% reduction from Edison's 1992 authorized
revenue. In addition, Edison filed a proposal for a performance-based
rate-making mechanism that would determine most of Edison's revenue (excluding
fuel) from 1995-2000 (see Competitive Environment). Hearings on both matters
will be conducted in 1994 with implementation, if approved, in January 1995.
Environmental Protection
Costs to protect the environment continue to grow due to increasingly
stringent laws and regulations.
SCEcorp has identified 46 sites for which it is, or may be, responsible
for remediation under environmental laws. SCEcorp is participating in
investigations and cleanups at a number of these sites and has recorded a $60
million liability for its estimated minimum costs to clean up several sites.
Additional costs may be incurred as progress is made in determining the
magnitude of required remedial actions, as SCEcorp's share of these costs in
proportion to other responsible parties is determined, and as additional
investigations and cleanups are performed. The CPUC currently allows Edison
rate recovery of environmental-cleanup costs after reasonableness reviews.
However, in a recent decision, the CPUC concluded that this procedure may not
be appropriate and requested interested parties to recommend alternatives. In
late 1993, the major California utilities, the DRA and others recommended an
incentive mechanism for these costs, where shareholders would fund 10% of
cleanup costs, with the opportunity to recover these costs through insurance.
Accordingly, Edison has recorded a regulatory asset representing 90% of the
estimated cleanup costs. A final CPUC decision is expected in early 1994.
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 five-year study of regional haze in
the southwestern U.S. In addition, the U.S. Environmental Protection Agency is
conducting a study of the effect of air contaminant emissions on visibility in
Grand Canyon National Park. The potential effect of these studies on sulfur
dioxide emissions regulations for the Mohave Coal Generating Station is
unknown.
Edison's projected capital expenditures to protect the environment are
$1.2 billion for the 1994-1998 period, mainly for placing overhead distribution
lines underground and reducing nitrogen-oxides emissions from
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gas-fired electric generators. Local regulations may lower Edison's projected
capital expenditures (up to $330 million by 1998) to reduce nitrogen-oxides
emissions.
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 received increased attention. The
scientific community has not yet reached a consensus on the nature of any
health effects of EMF. However, an administrative law judge's proposed decision
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 com-
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SCEcorp and Subsidiaries
munity 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.
The probable effect on net income of these environmental protection
matters cannot be determined at this time, but SCEcorp believes it will not
materially affect its financial position.
Competitive Environment
Electric utilities have historically operated in a highly regulated
environment that provides limited opportunities for direct competition in
providing electric service to their customers. This regulatory environment is
being challenged and Edison expects even greater competition in the generation
sector of its business in the next decade. The Energy Policy Act of 1992
assures that all power producers have access to transmission service for
wholesale transactions between utility and nonutility generators. Some parties
are seeking additional deregulation of power markets to obtain direct access to
utility customers who are the ultimate users of the energy. This is referred to
as "retail wheeling," which Edison opposes because it would adversely affect
most existing utility customers and would not contribute to economic
efficiency.
Due to this changing regulatory environment, Edison has requested a
performance-based rate-making mechanism (see Regulatory Matters). The filing
asks for a revenue-indexing formula that combines operating expenses and
capital-related costs into a single index. This is a departure from the
traditional utility model that links earnings with capital investment, and will
more efficiently utilize monetary resources and will allow for the sharing of
some cost savings between customers and shareholders. Edison will continue to
focus on increased productivity to further reduce its cost base.
Mission Energy Company, one of the nation's largest independent power
producers, is well positioned to take advantage of the changing regulatory
environment for electric power. Further, international markets present an even
greater opportunity for growth and earnings. Mission Energy currently owns
1,862 megawatts of generating capacity, enough power to serve a population of
over one million.
New Accounting Standards
In January 1993, SCEcorp adopted a new income tax accounting standard.
This standard requires the balance sheet method to account for income taxes,
where deferred taxes are recognized for all temporary differences between book
and tax income. Upon adoption, Edison recorded balance sheet adjustments of
$2.1 billion for previously unrecorded deferred taxes on temporary differences,
including the effect of the 1993 tax rate change. Substantially all of these
deferred taxes were offset by deferred charges representing amounts expected to
be recovered in future rates. The cumulative effect of adoption increased
SCEcorp's 1993 earnings by $16 million.
In January 1993, SCEcorp also adopted a new accounting standard for
postretirement benefits other than pensions, which requires the expected cost
of these benefits to be charged to expense during employees' years of service.
Previously, the costs of these benefits were recognized as expense when paid or
funded. SCEcorp will amortize its $728 million obligation related to prior
service over 20 years. The CPUC allows Edison to recover tax-deductible funding
for these benefits in rates. Any difference between expense determined under
the new standard and amounts authorized for rate recovery is not expected to be
material and will be charged to earnings.
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Notes to Consolidated Financial Statements SCEcorp and Subsidiaries
Note 1. Summary of Significant Accounting Policies
The consolidated financial statements include SCEcorp and its
subsidiaries: Southern California Edison Company, a rate-regulated electric
utility; and the Mission companies, SCEcorp's nonutility subsidiaries. SCEcorp
uses the equity method to account for significant investments in partnerships
and subsidiaries in which it owns 50% or less. Intercompany transactions have
been eliminated, except Mission Energy Company's profits from energy sales to
Edison, which are allowed in utility rates.
Edison's accounting policies conform with generally accepted accounting
principles for regulated enterprises and reflect the rate-making policies of
the California Public Utilities Commission (CPUC) and the Federal Energy
Regulatory Commission.
Certain prior-year reclassifications have been made to conform to the
December 31, 1993, financial statement presentation.
Cash Equivalents
Cash equivalents include temporary investments with original maturities
of three months or less. Due to their short maturities, reported amounts
approximate fair value.
Construction Financing Costs
Allowance for funds used during construction (AFUDC) represents the
estimated cost of debt and equity funds that finance utility-plant
construction. AFUDC is capitalized as a cost of utility plant and reported in
current earnings. AFUDC is recovered in rates through depreciation when
completed projects are placed into commercial operation.
Debt Issuance and Reacquisition Expense
Debt premium, discount and issuance expenses are amortized over the
life of each issue. Debt reacquisition expenses are amortized over the
remaining life of the reacquired debt or, if refinanced, the life of the new
debt.
Depreciation and Decommissioning
Depreciation of utility plant is computed on a straight-line,
remaining-life basis. Depreciation of nonutility properties is computed on a
straight-line basis over their estimated useful lives.
Decommissioning of Edison's nuclear generating facilities will cost an
estimated $1.0 billion in current-year dollars. Decommissioning costs are
accrued and recovered in rates over the life of the facility through charges to
depreciation expense ($141 million in 1993). The accumulated balance of these
costs ($797 million at December 31, 1993) approximates amounts funded, which
are held in trusts until decommissioning begins. Funded amounts are invested in
high-grade securities and reported at the lower of cost or market value. The
market value of the trusts was $853 million and $683 million at December 31,
1993, and 1992, respectively (based on quoted market prices). Earnings on these
funds are included in other income. Approximately 86% of the trust fund
contributions were tax-deductible.
Edison expects to decommission its facilities by prompt removal or
decontamination at the end of their useful lives. Decommissioning at Palo Verde
Nuclear Generating Station is scheduled to begin in 2024. Decommissioning at
San Onofre Nuclear Generating Station is scheduled to begin in 2013. San Onofre
Unit 1, which shut down in 1992, will be stored until decommissioning begins at
the other San Onofre units. The estimated current-dollar decommissioning costs
for Unit 1 have been recorded as a liability.
Under the Energy Policy Act of 1992, Edison is liable for its share of
the estimated costs to decommission three federal nuclear enrichment
facilities. Edison's share is based on the number of nuclear enrichment units
purchased, and will be paid over 15 years. These costs are fully recoverable
through rates. The fair value of this obligation was $59 million and $58
million at December 31, 1993, and 1992, respectively (estimated by discounting
future cash flows).
Nuclear Fuel
The cost of nuclear fuel, including disposal, is amortized to fuel
expense on the basis of generation. Under CPUC rate-making procedures,
nuclear-fuel financing costs are capitalized until the fuel is placed into
production.
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Rate Phase-In Plan
Collection of $200 million in revenue for each unit at Palo Verde was
deferred during the first four years of operation, under a CPUC-authorized rate
phase-in plan. The deferred revenue (including interest) is collected evenly
over the final six years of each unit's plan. The plans end in 1996 for Units 1
and 2, and in 1998 for Unit 3.
Regulatory Balancing Accounts
The differences between CPUC-authorized and actual kilowatt-hour sales
or energy costs are accumulated in balancing accounts until they are refunded
to, or recovered from, utility customers through authorized rate adjustments
(with interest). Income tax effects on balancing account changes are deferred.
CPUC-established target generation levels act as performance incentives
for Edison's nuclear generating stations. Fuel savings or costs above or below
these targets are shared equally by Edison and its customers through balancing
account adjustments.
Research, Development and Demonstration (RD&D)
Edison charges RD&D costs to expense unless they are expected to result
in plant construction. If construction does not result, any capitalized costs
are subsequently charged to expense. RD&D expenses are recorded in a balancing
account. At the end of the rate-case cycle, authorized but unspent RD&D funds
are refunded to customers. Edison's RD&D expenses were $49 million in 1993, $40
million in 1992 and $49 million in 1991.
Revenue
Electric revenue includes amounts for services rendered but unbilled at
the end of each year.
San Onofre Unit 1
In November 1992, Edison discontinued operation of San Onofre Unit 1.
Edison will recover its investment, plus an 8.98% rate of return, by mid-1996.
14
31
Utility Plant
Plant additions, including replacements and betterments, are
capitalized. Such costs include direct material and labor, construction
overhead and AFUDC. Replaced or retired property and removal costs -- less
salvage -- are charged to the accumulated provision for depreciation.
Note 2. Regulatory Matters
Mohave Outage Review
In 1986, the CPUC began investigating a 1985 steam-pipe rupture at the
Mohave Generating Station. Edison, plant operator and 56% owner, incurred costs
of approximately $90 million, after insurance recoveries, to repair damage and
provide replacement power during the six-month outage. In 1991, the CPUC's
Division of Ratepayer Advocates (DRA) alleged that Edison contributed to the
piping failure by imprudently operating the plant and recommended the
disallowance of all accident-related expenditures. A December 1993 proposed
decision issued by a CPUC administrative law judge agreed with the DRA's
allegations. The final decision by the CPUC, expected in 1994, may accept or
modify the proposed decision. If accepted, a second phase of this proceeding
will quantify the disallowance.
Edison maintains the accident was caused by a manufacturing defect in a
seam weld and filed comments on January 20, 1994, contesting the proposed
decision. The probable effect on net income cannot be determined at this time,
but SCEcorp believes it will not materially affect its financial position.
Palo Verde Outage Review
In March 1989, Arizona Public Service Company, operating agent for Palo
Verde, removed Units 1 and 3 from service for modifications required by
regulatory agencies. As required by state law, the CPUC conducted an
investigation, and ordered the authorized revenue collected during the outages
be subject to refund. The units resumed operation in December 1989 and July
1990.
During 1992, the CPUC consolidated its reasonableness review of
replacement power costs from several Unit 2 outages in 1989 and 1990 with the
investigation of Units 1 and 3. The DRA initially recommended a disallowance
valued at $169 million, including: $63 million of revenue collected during the
outages (including interest); $5 million for capital projects deemed
unnecessary; $50 million in replacement power costs; and $51 million in
penalties for environmental effects of replacement power and the outages'
effect on the regional energy market. Edison filed testimony that its costs
were reasonably incurred.
In September 1993, Edison and the DRA agreed to settle these disputes
for $38 million (including $29 million for replacement power costs, $2 million
for capital projects and $7 million for interest), subject to CPUC approval.
The effect of the settlement has been fully reflected in the financial
statements. A CPUC decision is expected in early 1994.
RD&D Cost Review
In Edison's 1992 general rate case, the CPUC deferred a decision
(pending additional information from Edison) on the recovery of $56 million in
capitalized RD&D costs. Edison refiled, requesting that $35 million be included
in rate base and $17 million be classified as RD&D expense. Subsequently,
additional adjustments of $11 million were recorded. In August 1993, the DRA
filed its position on Edison's RD&D capital refiling, recommending further
disallowances of about $15 million. Edison is contesting the DRA's
recommendation. A CPUC decision is expected in early 1994. The probable effect
on net income cannot be determined at this time, but SCEcorp believes it will
not materially affect its results of operations or financial position.
Resale Rates
Resale revenue related to pending rate proceedings is subject to refund
with interest if subsequently disallowed by the Federal Energy Regulatory
Commission. SCEcorp believes any refunds from pending rate proceedings will not
materially affect its results of operations or financial position.
Note 3. Debt
Long-Term Debt
California law prohibits Edison from incurring or guaranteeing debt for
its nonutility affiliates.
Almost all Edison properties are subject to a trust indenture lien.
Edison has pledged first and refunding mortgage bonds as security for
borrowed funds obtained from pollution-control bonds issued by government
agencies. Edison uses these proceeds to finance construction of
15
pollution-control facilities. Bondholders have limited discretion in
redeeming certain pollution-control bonds, and Edison has arranged with
securities dealers to remarket or purchase them in such cases.
SCEcorp had interest-rate swap and cap agreements to reduce the effect
of changes in interest rates on $959 million and $400 million of its debt at
December 31, 1993, and 1992, respectively. The fair value of the agreements
(the cost to terminate them) was estimated at $64 million and $28 million, at
December 31, 1993, and 1992, respectively (based on brokers' quotes). SCEcorp
has entered into foreign exchange contracts as a hedge against foreign currency
fluctuations. SCEcorp is exposed to credit loss from nonperformance by
counterparties to these agreements, but does not anticipate such
nonperformance.
A portion of commercial paper has been classified as long-term debt
based on the loan and credit agreement with the issuing bank. Commercial paper
that finances nuclear fuel scheduled to be used more than one year after the
balance sheet date is classified as long-term debt.
16
32
Notes to Consolidated Financial Statements
Long-term debt maturities and sinking-fund requirements for the next
five years are: 1994 -- $336 million; 1995 -- $272 million; 1996 -- $297
million; 1997 -- $570 million; and 1998 -- $523 million.
Long-term debt consisted of:
December 31,
--------------
In millions 1993 1992
- ----------- ---- ----
First and refunding mortgage bonds:
1994-1997 (5.55% to 6.125%) $ 700 $1,050
1998-2002 (5.45% to 7.5%) 725 650
2003-2026 (5.875% to 10%) 2,118 2,025
Pollution-control bonds:
1999-2027 (5.585% to 7.2% and variable) 1,208 1,209
Funds held by trustees (2) (2)
Debentures and notes:
1994-2017 (4.875% to 10.364% and variable) 1,758 1,259
Commercial paper 252 245
Spent nuclear fuel obligation -- 6
Capital lease obligation 128 153
Current portion of capital lease obligation (13) (19)
Long-term debt due within one year (336) (195)
Unamortized debt discount -- net (79) (61)
------ ------
Total $6,459 $6,320
====== ======
Fair value $6,915 $6,682
====== ======
The fair value estimates were based on brokers' quotes.
Short-Term Debt
SCEcorp has lines of credit it can use at negotiated or bank index
rates. At December 31, 1993, such lines totaled $1.7 billion, with $1.2 billion
supporting commercial paper and other short-term debt. The remaining $500
million is available for the long-term refinancing of certain variable-rate
pollution-control debt.
Short-term debt consisted of:
December 31,
--------------
In millions 1993 1992
- ----------- ---- ----
Commercial paper:
Balancing accounts $ 163 $ 247
Fuel 270 228
General purpose 434 466
Other short-term debt 42 64
Amount reclassified as long-term (252) (245)
Unamortized debt discount (2) (2)
----- -----
Total $ 655 $ 758
===== =====
Due to these instruments' short maturities, reported amounts
approximate fair value.
Note 4. Equity
The CPUC regulates Edison's capital structure, limiting the dividends
Edison may pay SCEcorp. SCEcorp does not expect this restriction to affect its
ability to meet its cash obligations.
All share data have been restated to reflect the two-for-one common
stock split effective June 1, 1993.
Authorized common stock is 800 million shares with no par value.
SCEcorp issued 63,118 ($1 million), 7,830,014 ($160 million) and
2,957,176 ($67 million) shares of common stock in 1993, 1992 and 1991,
respectively.
Edison's 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. There are no preferred stock redemption requirements for the next five
years. The fair value estimates of Edison's preferred stock subject to
mandatory redemption were based on brokers' quotes.
17
Edison's cumulative preferred stock consisted of:
December 31,
------------
Dollars in millions, except per-share amounts 1993 1992
- --------------------------------------------- ---- ----
December 31, 1993
------------------------
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 4,000,000 25.00 100 100
$100 par value:
7.58% Series 750,000 101.00 75 75
---- ----
Total $359 $359
==== ====
Subject to mandatory redemption:
$100 par value:
6.05% Series 750,000 $100.00 $ 75 $ --
6.45 1,000,000 100.00 100 100
7.23 1,000,000 100.00 100 100
7.325 -- -- -- 42
7.80 -- -- -- 41
Preferred stock to be redeemed
within one year -- (5)
---- ----
Total $275 $278
==== ====
Fair value of preferred stock
subject to mandatory redemption $291 $288
==== ====
18
33
Changes in Edison's preferred stocks were:
Year ended December 31,
---------------------------
In thousands of shares 1993 1992 1991
- ---------------------- ---- ---- ----
Series:
6.05% 750 -- --
6.45 -- 1,000 --
7.23 -- 1,000 --
7.325 (427) (30) (30)
7.36 -- 4,000 --
7.80 (411) (18) (18)
8.54 -- (547) (22)
8.70 -- (500) --
8.70A -- (394) (13)
8.96 -- (500) --
12.31 -- (277) (34)
---- ----- ----
Net issuances (redemptions) (88) 3,734 (117)
==== ===== ====
Note 5. Income Taxes
SCEcorp's subsidiaries will be included in its consolidated federal
income tax and combined state franchise tax returns. Under income tax allocation
agreements, each subsidiary calculates its own tax liability.
Change in Accounting Principle
In January 1993, SCEcorp adopted a new income tax accounting standard.
This standard requires the balance sheet method to account for income taxes,
where deferred taxes are recognized for all temporary differences between book
and tax income. Prior-year financial statements have not been restated; they
reflect income taxes accounted for under the income statement method.
Upon adoption of the standard, Edison recorded balance sheet adjustments
of $2.1 billion for previously unrecorded deferred taxes on temporary
differences, including the effects of the 1993 tax rate change. Substantially
all of these deferred taxes were offset by deferred charges representing amounts
expected to be recovered in future rates. The cumulative effect of adoption
increased SCEcorp's 1993 earnings by $16 million.
Current and Deferred Taxes
Income tax expense includes the current tax liability from operations
and the change in deferred income taxes during the year. Investment tax credits
are amortized over the lives of the related properties.
The components of the net accumulated deferred income tax liability
were:
December 31, January 1,
In millions 1993 1993
- ----------- ------------ ----------
Deferred tax assets:
Depreciation $ 240 $ 61
Investment tax credits 317 297
Regulatory balancing accounts 171 89
Other 590 606
------ ------
Total $1,318 $1,053
------ ------
Deferred tax liabilities:
Depreciation $2,842 $2,731
Property-related 1,404 1,476
Leveraged leases 401 336
Other 636 495
------ ------
Total $5,283 $5,038
------ ------
Accumulated deferred income taxes -- net $3,965 $3,985
====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits $4,169 $4,219
Included in current assets 204 234
====== ======
19
The current and deferred components of income tax expense were:
Year ended December 31,
-----------------------
In millions 1993 1992 1991
- ----------- ---- ---- ----
Current:
Federal $ 183 $ 324 $219
State 75 110 114
----- ----- ----
258 434 333
----- ----- ----
Deferred -- federal and state:
Accrued charges (38) (8) (82)
Deferred alternative minimum tax credit (46) -- --
Depreciation 78 150 163
Investment and energy tax credits -- net (31) (30) (33)
Leveraged leases 63 93 77
Nonutility special charges (49) (6) --
Rate phase-in plan (51) (50) (17)
Regulatory balancing accounts 118 (121) (27)
Resale revenue 26 34 22
Retirement of debt 33 (5) 3
Other (7) (25) (3)
----- ----- ----
96 32 103
----- ----- ----
Total income tax expense $ 354 $ 466 $436
===== ===== ====
Classification of income taxes:
Included in operating income $ 465 $ 544 $453
Included in other income (111) (78) (17)
===== ===== ====
The composite federal and state statutory income tax rate was 41.045%
for 1993 and 40.138% for 1992 and 1991.
20
34
Notes to Consolidated Financial Statements
A reconciliation of the federal statutory income tax rate to the
effective rate is presented below:
Year ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Federal statutory rate 35.0% 34.0% 34.0%
Depreciation and related timing differences not deferred 6.1 3.0 4.3
Capitalized software (2.0) 0.3 --
Housing credits (1.8) (0.7) (0.7)
Investment and energy tax credits (3.1) (2.5) (3.6)
Merger expenses -- -- (2.1)
New accounting standard (1.9) -- --
State tax -- net of federal deduction 5.4 4.3 5.7
Other (2.1) 0.3 0.7
---- ---- ----
Effective tax rate 35.6% 38.7% 38.3%
==== ==== ====
Note 6. Employee Benefit Plans
Pension Plan
SCEcorp has a noncontributory, defined-benefit pension plan,
administered by a trustee, that covers employees meeting minimum service
requirements. Benefits are based on years of accredited service and average
base pay. SCEcorp funds the plan on a level-premium actuarial method. 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.
Net pension cost recognized is calculated under the actuarial method
used for ratemaking. The difference between pension costs calculated for
accounting and ratemaking is deferred.
The plan's funded status was:
December 31,
----------------
In millions 1993 1992
- ----------- ---- ----
Actuarial present value of benefit obligations:
Vested benefits $1,343 $1,438
Nonvested benefits 166 38
------ ------
Accumulated benefit obligation 1,509 1,476
Value of projected future compensation levels 558 494
------ ------
Projected benefit obligation $2,067 $1,970
====== ======
Plan assets at fair value $2,205 $1,947
====== ======
Projected benefit obligation in excess of
(less than) plan assets $(138) $23
Unrecognized net gain 249 83
Unrecognized prior service cost (5) (6)
Unrecognized net obligation being amortized
over 17 years (62) (67)
------ ------
Accrued pension liability $ 44 $ 33
====== ======
Discount rate 7.25% 7.0%
Rate of increase in future compensation 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0%
21
The components of pension expense were:
Year ended December 31,
-----------------------
In millions 1993 1992 1991
- ----------- ---- ---- ----
Net pension expense:
Service cost for benefits earned $ 70 $ 55 $ 53
Interest cost on projected benefit obligation 139 127 126
Actual return on plan assets (291) (86) (375)
Net amortization and deferral 142 (62) 251
----- ---- -----
Pension expense under accounting standards 60 34 55
Regulatory adjustment (11) 14 (7)
----- ---- -----
Net pension expense recognized $ 49 $ 48 $ 48
===== ==== =====
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55, who have at least 10 years of
service, are eligible for postretirement health care, dental, life insurance
and other benefits. Health care benefits are subject to deductibles, copayment
provisions and other limitations.
In January 1993, SCEcorp adopted a new accounting standard for
postretirement benefits other than pensions, which requires the expected cost
of these benefits to be charged to expense during employees' years of service.
SCEcorp will amortize its $728 million obligation related to prior service over
20 years.
Edison funds the plan up to tax-deductible limits, in accordance with
rate-making practices. Edison began funding its future liability for these
benefits in 1991. Amounts funded prior to 1993 are amortized to expense and
recovered in rates over 12 months. Total expense was $165 million in 1993, $85
million in 1992 and $26 million in 1991. Any difference between expense
determined under the new standard and amounts authorized for rate recovery is
not expected to be material and will be charged to earnings. Plan assets are
primarily common stocks, corporate and government bonds, and short-term
investments.
The components of postretirement benefits other than pensions expense
were:
In millions Year ended December 31,
- ----------- -----------------------
1993
----
Service cost for benefits earned $ 27
Interest cost on projected benefit obligation 66
Actual return on plan assets (12)
Amortization of transition obligation 36
----
Net expense 117
Amortization of prior funding 48
----
Total expense $165
====
22
35
A reconciliation of the plan's funded status with the recorded
liability is presented below:
December 31, January 1,
In millions 1993 1993
- ----------- ------------ ---------
Actuarial present value of benefit obligation:
Retirees $ 512 $ 482
Employees eligible to retire 87 75
Other employees 363 287
----- -----
Accumulated benefit obligation $ 962 $ 844
===== =====
Plan assets at fair value $ 210 $ 116
===== =====
Accumulated benefit obligation in excess
of plan assets $ 752 $ 728
Unrecognized transition obligation (693) (728)
Unrecognized net loss (59) --
----- -----
Recorded liability -- --
====== =====
The assumed rate of future increases in the per-capita cost of health
care benefits is 12% for 1994, gradually decreasing to 5% for 2004 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated obligation as of December 31, 1993, by $134 million and
annual aggregate service and interest costs by $19 million. The actuarial
assumptions used were discount rates of 7.75% and 8.0% at December 31, 1993, and
January 1, 1993, respectively, and an expected long-term rate of return on plan
assets of 8.5% at both dates.
Stock Plans
SCEcorp has two stock plans designed to supplement employees' retirement
income. The Employee Stock Ownership Plan was funded primarily by employees and
federal income tax benefits. This plan will be transferred to the Stock Savings
Plus Plan by the end of 1994. The Stock Savings Plus Plan received Edison
contributions of $21 million in 1993, $20 million in 1992 and $18 million in
1991.
Under SCEcorp's long-term incentive compensation plan, 8.0 million
shares and 8.1 million shares of SCEcorp common stock were reserved at December
31, 1993, and 1992, respectively, for issue to key employees in various forms,
including the exercise of stock options. There were 6.5 million shares and 7.0
million shares reserved for future grants at December 31, 1993, and 1992,
respectively. Under SCEcorp's stock option plan, share options accrue dividend
equivalents at the same rate as outstanding common stock. The dividend
equivalents may be applied against the grant price at the time of exercise.
Activity in the stock option plan was:
Share Options Share Price
Outstanding, December 31, 1991 823,570 $16.00-$20.10
Granted 395,400 20.66- 23.28
Canceled (82,150) 18.75- 23.28
Exercised (41,416) 16.19- 19.85
--------- -------------
Outstanding, December 31, 1992 1,095,404 16.00- 23.28
Granted 402,600 21.94- 24.44
Canceled (44,252) 18.75- 23.28
Exercised (63,118) 16.19- 23.28
--------- -------------
Outstanding, December 31, 1993 1,390,634 16.00- 24.44
Exercisable, December 31, 1993 778,530 16.00- 24.44
Note 7. Jointly Owned Utility Projects
Edison owns interests in several generating stations and transmission
systems for which each participant provides its own financing.
The proportionate share of expenses for each project is included in the
consolidated statements of income.
23
The investment in each project, as included in the consolidated balance
sheet as of December 31, 1993, was:
Plant in Accumulated Under Ownership
In millions Service Depreciation Construction Interest
- ----------- -------- ------------ ------------ -------
Eldorado Transmission System $ 27 $ 11 $ 1 60%
Four Corners Coal Generating Station--Units 4 and 5 448 217 5 48
Mohave Coal Generating Station 274 138 10 56
Pacific Intertie Transmission System 213 60 1 50
Palo Verde Nuclear Generating Station 1,541 279 27 16
San Onofre Nuclear Generating Station 4,047 1,269 74 75
------ ------ ---- ---
Total $6,550 $1,974 $118 --
====== ====== ==== ===
24
36
Notes to Consolidated Financial Statements
Note 8. Leases
Investments in Leveraged Leases
Mission First Financial is the lessor in several leveraged-lease
agreements with terms of 13 to 30 years. All operating, maintenance, insurance
and decommissioning costs are the responsibility of the lessees. The total cost
of these facilities was $1.5 billion and $1.4 billion at December 31, 1993, and
1992, respectively.
The equity investment in these facilities is 21% of the purchase price.
The remainder is nonrecourse debt secured by first liens on the leased
property. The lenders have accepted their security interests as their only
remedy if the lessee defaults.
The net investment in leveraged leases consisted of:
December 31,
---------------
In millions 1993 1992
- ----------- ---- ----
Rentals receivable (net of principal and
interest on nonrecourse debt) $ 710 $ 687
Unearned income (256) (261)
----- -----
Investment in leveraged leases 454 426
Estimated residual value 44 36
Deferred income taxes (401) (338)
----- -----
Net investment in leveraged leases $ 97 $ 124
===== =====
Lease Commitments
SCEcorp has operating leases, primarily for vehicles (with varying
terms, provisions and expiration dates), and a capital lease ($128 million) for
a nonutility power-production facility.
Estimated remaining commitments for noncancelable leases at December
31, 1993, were:
Operating Capital
In millions Lease Lease
- ----------- --------- -------
Year ended December 31,
1994 $ 27 $ 24
1995 22 24
1996 18 24
1997 13 24
1998 11 24
Thereafter 20 58
---- ----
Total future commitments $111 $178
---- ----
Amount representing interest (9.65%) (50)
----
Net commitments $128
====
Note 9. Commitments
Edison has fuel supply contracts which require payment only if the fuel
is made available for purchase.
Edison has power-purchase contracts with certain qualifying facilities
(cogenerators and small power producers). These contracts provide for capacity
payments subject to a facility meeting certain performance obligations and
energy payments based on actual power supplied to Edison. There are no
requirements to make debt-service payments.
Edison 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. Edison's minimum commitment under both
contracts is approximately $210 million through 2017.
25
Certain commitments for the years 1994 through 1998 are estimated
below:
In millions 1994 1995 1996 1997 1998
- ----------- ---- ---- ---- ---- ----
Construction expenditures $1,305 $1,330 $1,155 $1,094 $1,349
Fuel supply contracts 315 217 197 172 173
Purchased power capacity payments 658 666 676 680 682
Unconditional purchase obligations 9 9 9 9 9
====== ====== ====== ====== ======
Mission Energy Company has guaranteed equity obligations of its
subsidiaries related to the Loy Yang B and Gordonsville projects. Mission Energy
has issued debt supporting most of the Loy Yang B equity obligations; the
remaining obligation (approximately $80 million) is expected to terminate in
1996, when the project becomes fully operational. The Gordonsville obligation
(approximately $55 million) is expected to be funded in June 1994.
In connection with the sale of interests in affordable housing projects,
SCEcorp has certain continuing obligations to investors through 2008,
(approximately $40 million).
26
37
Note 10. Contingencies
Environmental Protection
SCEcorp is subject to numerous legislative and regulatory
environmental-protection requirements. To meet these requirements, SCEcorp will
continue 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 has identified 46 sites for which it is, or may be, responsible
for remediation under environmental laws. SCEcorp is participating in
investigations and cleanups at a number of these sites and has recorded a $60
million liability for its estimated minimum costs to clean up several sites.
Additional costs may be incurred as progress is made in determining the
magnitude of required remedial actions, as SCEcorp's share of these costs in
proportion to other responsible parties is determined, and as additional
investigations and cleanups are performed.
The CPUC currently allows Edison to recover environmental cleanup costs
through rates, subject to reasonableness reviews. Edison filed for a
reasonableness review of costs incurred through 1991 at two hazardous substance
sites. Hearings have been delayed due to a 1992 CPUC decision, involving
another California utility, which concluded that the current procedure may not
be appropriate for these costs, and requested interested parties to recommend
alternatives. In November 1993, the major California utilities, the DRA and
others filed a collaborative report recommending an incentive mechanism, which
would require shareholders to fund 10% of cleanup costs. Shareholders would
have the opportunity to recover these costs through insurance. Accordingly,
Edison has recorded a regulatory asset which represents 90% of the estimated
cleanup costs for sites covered by this proposed mechanism. The remaining
sites' cleanup costs are expected to be immaterial and would be recovered
through base rates. If approved by the CPUC, Edison would be allowed to recover
90% of cleanup costs incurred to date under the reasonableness review procedure
($11 million). A final CPUC decision is expected in early 1994.
The probable effect on net income of these environmental-protection
matters cannot be determined at this time, but SCEcorp believes it will not
materially affect its financial position.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to
$9.4 billion. Edison 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. Federal regulations require this secondary level of
financial protection. The secondary level and other insurance for San Onofre
Unit 1 remains in effect pending Nuclear Regulatory Commission approval to
discontinue the coverage. 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 ownership interests,
Edison could be required to pay a maximum of $218 million per nuclear incident.
However, it would have to pay no more than $28 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 $34 million per year. Insurance premiums are charged to operating
expense.
Note 11. Investments in Partnerships
The Mission companies have equity interests in several energy
generation and real estate investment partnerships. Summarized financial
information of the partnerships was:
27
Income statements:
Year ended December 31,
-------------------------
In millions 1993 1992 1991
- ----------- ---- ---- ----
Revenue $1,678 $1,369 $1,267
Expenses 1,323 1,040 959
------ ------ ------
Net income $ 355 $ 329 $ 308
====== ====== ======
Balance sheets:
In millions December 31, 1993 1992
------ ------
Current assets $ 947 $ 762
Other assets 3,882 3,258
------ ------
Total assets $4,829 $4,020
====== ======
Current liabilities $ 490 $ 350
Other liabilities 2,434 1,919
Equity 1,905 1,751
------ ------
Total liabilities and equity $4,829 $4,020
====== ======
28
38
Notes to Consolidated Financial Statements
Note 12. Business Segments
SCEcorp's business segments include rate-regulated electric utility
operations (Edison) and three nonutility segments: electric power generation
(Mission Energy), financial investments (Mission First Financial) and real
estate holdings (Mission Land Company). The nonutility segment operations are
not individually significant for reporting purposes, so they are combined as
"diversified operations" below.
SCEcorp's business segment information was:
Year ended December 31,
--------------------------
In millions 1993 1992 1991
- ----------- ---- ---- ----
Operating income:
Electric $ 1,670 $ 1,750 $ 1,547
Diversified operations 14 139 146
------- ------- -------
Total operating income before taxes 1,684 1,889 1,693
------- ------- -------
Income taxes (465) (544) (453)
Corporate items and eliminations (2) (2) (1)
------- ------- -------
Total operating income $ 1,217 $ 1,343 $ 1,239
======= ======= =======
Depreciation and decommissioning:
Electric $ 893 $ 797 $ 759
Diversified operations 29 10 8
------- ------- -------
Total depreciation and decommissioning $ 922 $ 807 $ 767
======= ======= =======
Assets:
Electric $18,092 $15,969 $15,961
Diversified operations 3,291 3,344 2,344
Corporate items and eliminations (4) (2) 38
------- ------- -------
Total assets $21,379 $19,311 $18,343
======= ======= =======
Additions to property and plant:
Electric $ 1,040 $ 787 $ 964
Diversified operations 219 454 69
------- ------- -------
Total additions to property and plant $ 1,259 $ 1,241 $ 1,033
======= ======= =======
29
Revenue by segment is shown in the Consolidated Statements of Income.
Quarterly Financial Data
Unaudited
1993
In millions, ---------------------------------------------------------
except per-share amounts Total Fourth Third Second First
- ------------------------ ------ ------ ------ ------ ------
Operating revenue $7,821 $1,844 $2,424 $1,768 $1,785
Operating income 1,217 282 349 293 293
Net income 639 138 211 141 149
Per share:
Earnings 1.43 .31 .47 .32 .33
Dividends declared 1.415 .355 .355 .355 .35
------ ------ ------ ------ ------
Common stock prices
High $25-3/4 $23-5/8 $25-3/4 $24-7/8 $24-13/16
Low 19-7/8 19-7/8 23-1/4 23-3/16 21-7/16
Close 20 20 23-3/8 24-1/4 23-5/8
======= ======= ======= ======= ========
1992
In millions, ---------------------------------------------------------
except per-share amounts Total Fourth Third Second First
- ------------------------ ----- ------ ----- ------ -------
Operating revenue $7,984 $1,939 $2,555 $1,771 $1,719
Operating income 1,343 293 441 305 304
Net income 739 152 272 158 157
Per share:
Earnings 1.66 .34 .61 .35 .36
Dividends declared 1.39 .35 .35 .35 .34
--------- -------- -------- -------- ---------
Common stock prices
High $23-13/16 $23-3/8 $23-13/16 $23-1/16 $23-11/16
Low 20-1/8 21-3/16 22-1/16 20-1/8 20-1/4
Close 22 22 22-5/8 22-1/8 20-3/8
========== ======== ======== ======== =========
30
39
Responsibility for Financial Reporting SCEcorp and Subsidiaries
The management of SCEcorp is responsible for preparing the accompanying
financial statements. The statements were prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
management's estimates and judgment. Management believes other information in
the annual report is consistent with the financial statements.
Management maintains systems of internal control to provide reasonable
assurance that assets are safeguarded, transactions are properly executed in
accordance with management's authorization, and accounting records may be
relied upon for the preparation of financial statements and other financial
information. The design of internal control systems involves management's
judgment concerning the relative cost and expected benefits of specific control
measures. These systems are augmented by internal audit programs through which
the adequacy and effectiveness of internal controls, policies and procedures
are evaluated and reported to management.
In addition, Arthur Andersen & Co., as part of its independent audit of
SCEcorp's financial statements, is responsible under generally accepted
auditing standards to evaluate the internal control structures in order to
determine the scope of its auditing procedures for the purpose of expressing
its opinion on the financial statements.
Management believes SCEcorp's systems of internal control are adequate
to accomplish the objectives discussed herein. Management has implemented all
of the internal and external auditors' significant recommendations regarding
the systems of internal control.
The audit committee of the board of directors, which is composed
entirely of non-employee directors, meets periodically with both the external
and internal auditors, who have unrestricted access to the committee. This
committee recommends to the board of directors the annual appointment of a firm
of independent public accountants, considers the audit scope and independence
of the external auditor, discusses the adequacy of internal controls, reviews
financial reporting issues and is advised of management's actions regarding
these matters.
Management is responsible for fostering a climate in which SCEcorp's
affairs are conducted in accordance with the highest standards of personal and
corporate conduct, which are reflected in SCEcorp's Standards of Conduct.
Management maintains programs to encourage and assess compliance with these
standards.
Richard K. Bushey John E. Bryson
Vice President Chairman of the Board
and Controller and Chief Executive Officer
February 4, 1994
Report of Independent Public Accountants
To the Shareholders and the Board of Directors, SCEcorp:
We have audited the accompanying consolidated balance sheets of SCEcorp
(a California corporation) and its subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of SCEcorp'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 SCEcorp and its
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 5 and 6 to the financial statements, and as
required by generally accepted accounting principles, SCEcorp changed its
methods of accounting for income taxes and postretirement benefits other than
pensions in 1993.
ARTHUR ANDERSEN & CO.
Los Angeles, California
February 4, 1994
31
40
Selected Financial and Operating Data: 1989 -- 1993 SCEcorp and Subsidiaries
Dollars in millions,
except per-share amounts* 1993 1992 1991 1990 1989
- ------------------------- ---- ---- ---- ---- ----
SCEcorp and Subsidiaries
Operating revenue $ 7,821 $ 7,984 $ 7,556 $ 7,226 $ 6,904
Operating expenses $ 6,604 $ 6,641 $ 6,317 $ 5,960 $ 5,737
Net income $ 639 $ 739 $ 703 $ 786 $ 778
Weighted-average shares of
common stock outstanding
(in millions) 448 445 437 437 437
Per-share data:
Earnings $1.43 $1.66 $1.61 $1.80 $1.78
Dividends declared $1.415 $1.39 $1.35 $1.31 $1.27
Book value $13.30 $13.30 $12.91 $12.59 $12.10
Market value at
year-end $20 $22 $23-3/8 $18-15/16 $19-11/16
Dividend payout ratio 98.6% 83.1% 83.2% 72.2% 70.8%
Rate of return on common
equity 10.65% 12.54% 12.51% 14.51% 14.99%
Price/earnings ratio 14.0 13.3 14.6 10.5 11.1
Ratio of earnings to
fixed charges 2.28 2.68 2.53 2.69 2.79
Assets $21,379 $19,311 $18,343 $17,684 $16,495
Retained earnings $ 3,266 $ 3,263 $ 3,150 $ 3,038 $ 2,824
Common shareholders' equity $ 5,958 $ 5,954 $ 5,681 $ 5,503 $ 5,289
Preferred stock:
Not subject to mandatory
redemption $ 359 $ 359 $ 359 $ 359 $ 359
Subject to mandatory
redemption $ 275 $ 278 $ 199 $ 210 $ 224
Long-term debt $ 6,459 $6,320 $ 5,940 $ 5,488 $ 5,283
Southern California Edison
Company
Financial data:
Operating revenue $ 7,397 $ 7,722 $ 7,298 $ 6,986 $ 6,524
Earnings $ 637 $ 631 $ 587 $ 693 $ 679
Earnings per SCEcorp
common share $1.42 $1.42 $1.34 $1.58 $1.55
Rate of return on
common equity 13.2% 13.2% 12.6% 15.0% 14.7%
Internal generation of funds 78% 83% 70% 76% 88%
Operating data:
Peak demand in megawatts (MW) 16,475 18,413 16,709 17,647 15,632
Generation capacity at
peak (MW) 20,606 20,712 20,875 20,323 20,136
Kilowatt-hour sales
(in millions) 73,308 74,186 71,146 71,614 69,136
Customers (in millions) 4.12 4.11 4.08 4.03 3.94
Full-time employees 16,487 16,736 17,110 16,604 16,627
Mission Companies
Net income $3 $109 $116 $94 $100
Earnings per SCEcorp
common share $.01 $.24 $.27 $.22 $.23
Percent of SCEcorp's earnings
per share 0.7% 14.5% 16.8% 12.2% 12.9%
Common shareholder's equity $1,002 $1,169 $1,020 $904 $735
Rate of return on common
equity 0.3% 9.8% 12.2% 11.8% 17.2%
Full-time employees 706 523 401 321 383
* Per-share figures reflect the two-for-one split of SCEcorp common
stock effective June 1, 1993.