ML13329A116

Southern California Edison Co Annual Rept 1985

ML13329A116
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Site:	San Onofre
Issue date:	12/31/1985
From:	Allen H, Christie H Southern California Edison Co
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Text

A TRIDITION OF SERVICE,

~ontroI # F6

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DEADLINE RETURN DATE 8612160037 861202 PDR ADOCK 05000206 PDR Southern California Edis RECORDS FACILITY BRANCH

I ioo C~m~ih. thaeas-eatiergeaus-e the Southern California Edison Company. It means treating c'us treated ourselves.

Td remind employees that the Company is committed to serving 4.'X.,

4 uQ ed Eio mp'yees in 1985 began wearing buttons with OUSt~

Tthe simple, but fundamental mes sage..,Customer Powe r-alegm with Edisonslbng-stan'dli'ngmeto Good Service. Square' D.ealing,

Contents,

2. Letter to Shareholders 5: Year in Review 218 Responsibility for Financial Statemnents and Report of Independent Public Accountarits 44 Management s

Ulscussion ard 4AnalysTIo Resu lts of Operations and Financial Condition 51: Capital Stock-Dividend and Price I 'nformation 52 Selected Finafncial Data 1975-1985 54: Directors and Officers 5:IeLi"Rve

Southern California Edison Company Annual Report 1985 Five-Year Compound Annual Growth Highlights 1985 1984 Change Rate Operating Revenues (000)

$5,168,848

$4,899,152 5.5%

7.1%

Fuel and Purchased Power Costs (000)

$2,389,087

$2,084,941 14.6 3.5 Earnings Available for Common and Original Preferred Stock (000)

$702,409

$659,385 65 2

2.3 Weighted-Average Shares of Common and Original Preferred Stock (000) 215,649 207,576 3.9 8.0 Earnings Per Share

$3.26

$3.18 2.5 13.2 Dividends Paid Per Common Share

$2.10

$1.97 6.6 8.6 Total Assets (000)

$12,593,449

$11,358,730 10.9 10.3 Funds Used for Construction Expenditures (000)

$1,076,495

$852,274 26.3 6.6 Kilowatt-Hour Sales (000) 64,984,566 63,310,047 2.6 1.6 Number of Customers 3,490,325 3,400,182 2.7 2.0 Number of Employees 17,182 16,844 2.0 3.9 Area Generating Capacity at Peak (Megawatts) 17,776 17,354 2.4 2.8 Earnings and Dividends Sources and Distribution Paid Per Share of Revenues

$4 Sources Distribution E Earnings 31% Commercial 41% Fuel and C Dividends 28% Residential Purchased Power 23% Industrial 19% Operation and 8% Public Authorities Maintenance 3

7% Resale 15% Dividends and Interest 2% Agricultural 13% Taxes and Other 1% Other 1% 2%

8% Depreciation 4%

7%

4% Reinvested Earnings 8%

%31%

41%13 2 3 %

5 %

0 28%

19 1981 1982 1983 1984 1985 The Company's 1985 earnings per The Company's sources of revenues in 1985 reflected a balanced share reached an all-time high of $3.26, contribution from the three major customer classes-commercial, the fifth consecutive year of record residential and industrial. Fuel and purchased power continue to earnings. A 5.9 percent increase in the represent a major portion of the distribution of revenues.

common stock quarterly dividend raised the annual dividend rate to $2.16 per share.

To Our More Than 190,000 Shareholders:

Our corporate goals are to provide a scheduled outage for refueling until after the competitive return on investment to our share-summer peak demand period because of the holders and reliable electric service at a rea-loss of the Mohave plant's output. Our objec sonable price to our customers. Achieving tive in 1986 is to improve the performance of these goals remains challenging, so our suc-these nuclear units to exceed the industry cesses in 1985 are noteworthy:

average and to reduce their operational

• Our earnings of $3.26 per share were a expenses.

new record.

- Unit 1 at Palo Verde Nuclear Generating

• Our common stock price per share Station in Arizona, in which your Company reached $28 in December, the highest level owns a 15.8 percent interest, went through a in Company history, only to be surpassed in successful start-up period and began February 1986 at $29/8.

commercial service on February 1,1986.

• We raised our common stock dividend

- A 300-megawatt cogeneration facility, in from $2.04 annually to $2.16 annually. This was which an Edison non-utility subsidiary owns a the tenth increase in the last nine years.

50 percent interest, began commercial opera

• Total return to shareholders in dividends tion in August as California's largest such facil and stock appreciation was 26 percent; the ity. It ran at more than a 90 percent capacity average annual total return to shareholders for factor for the balance of the year.

the past five years slightly exceeded 26

- Total available renewable and alternative percent.

generating resources substantially exceeded

• Our revenues exceeded $5 billion for the our 1980 forecast, providing 10 percent of our first time in our history, making us the nation's energy needs in 1985 second largest electric utility.

In addition, your Company:

In addition to these financial accomplish-

- became the first corporation in the world to ments, 1985 was notable because of achieve-issue dollar-denominated Shogun" bonds ments in numerous other areas:

in Japan, at significant interest savings

• Our coal-fired power plants, despite a to our customers; tragic accident at the Mohave Generating Sta-

- obtained a new two-tier natural gas rate tion in June, achieved levels of production that saved our customers millions of dollars; which, on a four-year average capacity factor

- settled, at a cost of $350 million, a lawsuit basis, will qualify for a bonus award under an with a major oil supplier that will result in net incentive formula established by the California savings to our customers of more than $1 bil Public Utilities Commission (CPUC).

lion compared with the cost of continuing to

• With the completion of construction at Units purchase fuel oil under the disputed contract; 2 and 3 of the San Onofre Nuclear Generating

• reached agreements with two uranium sup Station, and the return to service of Unit 1 fol-pliers to terminate long-term contracts, entered lowing upgrading work, we operated all three in 1976 and 1977, for total settlement payments units simultaneously for the first time and have of $82 million. This will free the Company to reduced personnel at the Station by 55 per-purchase uranium on more favorable terms at cent. The Station's three units together oper-an estimated savings of $190 million over ated at about the industry average capacity 10 years.

factor during the year. That occurred despite All of these achievements and those de the problems generally associated with scribed in the text of this report add up to bringing two new units into full production. It another banner year for your Company in pro also was achieved despite the need to operate viding a competitive return to shareholders Unit 3 at reduced power to postpone the unit's and excellent service to customers.

2

Our Company motto, penned in 1905-"Good Developing ways to store energy gener Service, Square Dealing, Courteous Treatment" ated when demand is low for use at times of

-still guides us today. In independent attitude peak demand.

surveys conducted for the Company, custom-

- Examining ways to extend the life of older ers recognize our efforts by giving us increas-plants at less cost than building new ones.

ingly high marks for good service.

• Assisting our customers to shift their con Our 17,200 employees work as a team, and sumption of electricity to low-use periods our successes in 1985 are due to their dedica-when electricity costs less. Our energy man tion, professionalism and hard work. We're agement programs will allow us to defer the proud of these people and thank them for construction of new generating facilities of their fine efforts.

about 1,800 megawatts capacity by 1995 The electric utility business has been chang-more than Edison's share of the output of San ing dramatically in the last decade, posing Onofre Units 2 and 3 combined.

many new challenges. We have developed Last year, 35 percent of the electricity we strategies in all phases of our business to an-provided our customers was purchased, pri ticipate change and remain flexible. These manly from out-of-state hydro-and coal-pow strategies have strengthened your Company fi-ered sources. That saved our customers about nancially, operationally, in employee morale,

$382 million in fuel costs, compared with using and in the performance of its public service.

natural gas or fuel oil in our own generating For example, we have been aggressively plants. Our three nuclear units at San Onofre diversifying our generating resources to saved our customers about $260 million in fuel strengthen system flexibility and reliability, and costs last year.

to reduce our dependence on fuel oil and nat-Your Company obtains electricity from nine ural gas. To implement this strategy, we are:

different primary energy sources, more than

• Increasing electric production obtained any other utility company in the world. Our di from hydro, coal, nuclear, cogeneration, geo-versified resource strategy helps to keep our thermal, biomass, wind, solar and coal gasifi-.

customers' rates low. At the end of 1985 our cation facilities.

customer rates were 3.5 percent lower than in

• Expanding extra-high-voltage transmission 1982, and when adjusted for inflation, were 15 line capacity to the Pacific Northwest and the percent lower than in 1982. Our strategy of re Southwest so that we can purchase more sur-ducing dependence upon fuel oil and natural plus power, primarily generated by hydroelec-gas, along with the decline in natural gas tric and coal plants. This power is less costly prices, contributed to this improvement. Close than the power we can generate at our own attention to cost control and to improving the oil-and gas-fired generating plants and saves productivity of our employees and facilities our customers millions of dollars each year.

also helped.

• Entering into long-term firm power We still face major challenges. One impor contracts for supply of peak-period generating tant issue is the CPUC review of the construc capacity from the Northwest and Southwest tion costs of San Onofre Units 2 and 3. Those sources, at lower cost than building new power costs are currently reflected in our customer plants or extending the lives of existing ones.

rates, but the CPUC has yet to determine that

• Installing newly developed, high-technol-the costs were reasonably incurred. If the ogy devices to improve the efficiency of our Commission determines that some costs were existing steam plants and other electrical unreasonable, as requested by its Public Staff facilities.

Division, there would be a charge against the Company's income, which could be substantial.

• Asistng or cstomrs o shft heircon

We have submitted extensive evidence to In addition, we made one change in senior the Commission demonstrating that the con-management. Michael R. Peevey, formerly struction project was well managed and jus-senior vice president, was elected executive tifying the expenses incurred in construction of vice president, effective January 1,1986.

those two plants, backed by testimony from All of us at Edison are proud of the accom nationally recognized experts in the areas of plishments of 1985, and it is a privilege and nuclear construction, regulatory policy and honor to serve as leaders of your Company.

environmental affairs.

On behalf of your Board of Directors, the The issues are complex and are more fully officers and all of our employees, we thank you described in the "Regulatory and Legislative for your continued support and pledge our Review" section of this annual report, begin-continued efforts to build upon our foundation ning on page 25. Suffice to say, we are vigor-of success.

ously opposing the Public Staff's position and, as a result of our testimony, the Staff has been forced to concede significant errors in its analysis and substantially reduce its original recommended disallowance.

Company non-utility subsidiaries have made a limited number of investments in cogenera tion, geothermal power and real estate. These are described in the "Year in Review" section of this report. We will continue to evaluate care fully the changing business environment for regulated electric utilities and may make ad ditional investments in non-utility enterprises, where our skills and market opportunities create the potential for attractive returns.

We are fortunate to have gained the ser vices of two new Directors, Dr. James M.

Rosser, president of California State University at Los Angeles, and J. J. Pinola, chairman and chief executive officer of First Interstate Bancorp. We lost through retirement in May the counsel of Gerald H. Phipps, who served your Company with distinction as a Director for 21 years. T. M. McDaniel, Jr., who served as H. Frederick Christie Howard P. Allen president of your Company from 1968 to 1978 President Chairman of the Board and as a Director beginning in 1962, has cho-and Chief Executive Officer sen not to stand for re-election to the Board of February 20,1986 Directors in 1986. We will miss his valuable counsel and dedicated service.

4d

Year In Review During 1985, Southern California The first refueling of Units 2 and 3 Edison Company worked to further was completed during 1985, and plant diversify its own generating resources modifications also were performed to and its outside sources of purchased further increase plant safety and power, strengthened its high priority efficiency.

effort to provide excellent service to Since the startup of Units 2 and 3, its customers, added a near-record and the restart of Unit 1, these units number of new customers, worked have displaced the energy equivalent effectively with regulatory and legislative of about 45 million barrels of oil or natu bodies, and achieved outstanding ral gas, saving customers over $800 financial results.

million in fuel costs.

Edison has an 80 percent ownership Generating Resources interest in Unit 1 and a 75 percent inter est in Units 2 and 3, for a total share of Today Edison uses nine different about 2,000 MW at the San Onofre site.

basic energy resources to generate The Company is responsible for electricity-more than any other utility managing and operating all three units.

in the world. They are uranium, solar, (See Regulatory and Legislative wind, geothermal, biomass, water, Review' section on page 25 for a dis coal, oil and natural gas.

cussion of San Onofre regulatory matters.)

Nuclear Power San Onofre: With the completion of Palo Verde: The Palo Verde Nuclear Units 2 and 3, and the return to service Generating Station, located near of Unit 1, the Company reached an Phoenix, Arizona, will be the largest operating milestone on April 18 when nuclear facility in the United States for the first time all three units at the San when its three 1,222-MW units are com Onofre Nuclear Generating Station pro-pleted. Edison has a 15.8 percent own duced power. These three units gener-ership interest (579 MW) in the project, ated nearly 12 percent of the electricity which Arizona Public Service Company needed by Edison customers during manages.

1985.Duig18,etnietsigaWOLSLAGSSOAPAT 1985 urig 185,extesiv tetin atA third-party developer designed and Unit 1 began commercial operation significant power levels prepared Unit 1 built the world's largest solar plant near in 1968 and generated electricity at a for commercial operation on February Barstow, Calif. The first 13.8-MW stage in 968an geeraedeletriit ata 1 1986. Units 2 and 3 are scheduled to of the plant using solar parabolic troughs capacity factor above the national aver-began operation in December 1984, fol age until early 1982, when it was taken lowed by the second 30-MW stage in out of service for seismic upgrading, December1985.

fire protection improvements and other modifications required by the federal Nuclear Regulatory Commission (NRC).

With NRC approval, the 450-mega watt (MW) Unit 1 returned to service in November 1984. In late November 1985, the Company took the unit out of operation for a scheduled six-month outage for additional modifications re-t quired by the NRC and for refueling l

Unit 2tcompleted its second year of service to Edison customers in August; Unit 3 will mark its second anniversary in April 1986. Each of these units has a capacity of approximately 1,100 MW.

A TP4DITION OF SERVICE TO INDUSTRIAL CUSTOMERS Nxp G

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go into operation in late 1986 and late While some of the renewable technol 1987, respectively.

ogies-such as solar, wind, geothermal, (See "Regulatory and Legislative biomass and fuel cells-have been Review" section on page 25 for a dis-made cost-competitive because of cussion of Palo Verde regulatory tax credits and other special incen matters.)

tives (many of which are no longer available), Edison's extensive experi Renewable and Alternative Energy ence should position it well to take fur Since its decision in 1980 to acceler-ther advantage of these technologies ate the development and use of renew-whenever they are economically attrac able and alternative resources, Edison tive options for the Company's has been a leader in developing these customers.

resources itself and in working with in dependent third-party developers who Cogeneration Projects: Cogeneration use such technologies.

is an energy technology in which a In 1985 these sources of energy, single source of fuel is used to produce excluding Edison hydroelectric gen-both electricity and thermal energy, eration, provided 4 percent of the generally steam. Unlike many other Company's energy needs. In another electricity sources classed as renew decade, they are expected to account able and alternative, cogeneration relies for about 22 percent of Edison's pro-on well-developed technology and in jected energy requirements.

many cases is capable of producing The Company's renewable and alter-energy at competitive costs without native energy facilities actually on-line special financial incentives. Both the and producing electricity at the end of CPUC and the CEC have encouraged 1985, and projects under contract, but the development of cogeneration proj not yet built, are reflected in the table ects because of their enhanced fuel below. However, the Company esti-efficiency.

mates that only about 60 percent of the Cogeneration has emerged as the third-party projects under contract will mainstay of Edison's renewable and al-G uorgcaDeuoreia ve be built because of rapidly declining ternative resources program. Some monies with Edison's Chairman and oil prices, expiration of certain energy 55 cogeneration projects are currently Chief Executive Officer Howard P. Allen tax credits and stiffening permitting re-at the Company's 10-megawatt Solar quirmens ofthealiorni EnrgyOne generating plant near Daggett dur quirementsing his statewide tour of energy facili Commission (CEC).

ties. The governor also visited the adjacent Cool Water Coal Gasification Southern California Edison plant and the Kern River Cogeneration Renewable/Alternative Commitments and facility near Bakersfield.

- Resources Under Contract But Not Built On-Line No. of Megawatts No. of Megawatts Projects Capacity Projects Capacity Third Parties Biomass 35 656 15 21 Cogeneration 42 1,903 55 369 Geothermal 28 839 3

60 Small Hydro 37 36 21 52 Solar 7

227 15 45 Wind 64 202 52 83 Third Party Total 213 3,863 161 630 SCE-Owned 14 248 29 187 TOTAL 227 4,111 190 817 Modifications to Northrop Corporation's energy sys tem at its assembly line facility for the F/A-18 Hornet fighter are discussed by Patti Potter, Edison energy services representative, and Earl Locke, manager of plant engineering. Edison has cooperated with North rop, a major aerospace customer, in various pro grams to save energy, including the use of more efficient motors and air conditioning units.

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A TR4DITION OF SERVICE TO PUBLIC AUTHORITIES iNN

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operational and providing 369 MW of capacity. In addition, Edison has con tractual commitments for 42 additional projects with 1,903 MW of capacity.

Solar Projects: Edison now obtains power from four solar technologies parabolic troughs, central receiver sta tion, parabolic dishes and photovolta ics. These solar projects are all located in the California high desert northeast of Los Angeles.

A third-party developer has de signed and built the world's largest solar electric generating system (SEGS) which began operation during the year. The plant utilizes parabolic troughs with reflective mirrors to heat oil. It is used to make steam to turn a turbine generator, which provides elec-SOLAR PARABOLIC DISH-Edison for disn cstoers Th firt fcilty earHeseria Caif. ha geer-began testing an advanced solar tricity for Edison customers. The firstat its Cool 13.8-MW stage went into commercial ated electricity since connection to Water energy compiex near Daggett.

operation in December of 1984, and a Edison's grid in November 1982.

The mirrors tocus the sun's rays on a opertionhighiy efficient engine-generator to pro second 30-MW stage of the project duce 25 kilowatts of eiectricity. The dish was completed and began operation in Wind: Strong and frequent winds operates at about 30 percent efficiency December of 1985.

make the San Gorgonio and Tehachapi for converting sunlight into electricity, about twice as much as any other solar The 10-MW Solar One project, the passes two of the most suitable loca-operating system.

world's largest central-receiver solar tions in Southern California for produc plant, successfully completed its first ing electricity from wind. At year-end, year of full-time power production at the Company was purchasing 83 MW the end of July. Edison operates the of effective capacity from private de pilot plant, which is jointly funded by the velopers at 52 operating wind park U.S. Department of Energy, Edison and projects, including over 7,200 individ the Los Angeles Department of Water ual wind machines.

and Power.

The Company's Wind Energy Test In August, Edison began testing an Center near Palm Springs continues to advanced parabolic dish unit that con-serve as a focal point for testing of verts sunlight into electricity and oper-experimental wind turbine generator ates at about 30 percent efficiency, designs. This testing allows Edison to twice as much as any operating solar obtain data on their performance and energy system.

reliability for developing more efficient Although this single 25-kilowatt dish wind turbines.

produces much less electricity than other solar systems, a cluster of 2,000 Geothermal: Edison's 10-MW Salton modular units could provide up to 50 Sea pilot plant in the Imperial Valley MW of power during daylight hours.

utilizes one of the largest and hottest Photovoltaic power systems convert geothermal resources in the country.

sunlight directly into electricity without Despite the high salt content of the Sal moving parts. The 1-MW ARCO Solar ton Sea brines, Edison and its partners have advanced the new technology significantly, but falling oil prices have prevented it from being commercially competitive.

Service crew foreman Bob Hartsfield (foreground)

The operation of another 10-MW pilot and lineman splicer Jim Mearig prepare to inspect plant in the Imperial Valley, the Brawley an underground electric vault in front of the historic Geothermal Electric Project, was dis County Court House in Santa Barbara, which first received electricity in 1887. The Company provides continued after successful completion reliable electric service to more than 37,000 public of a five-year test program. Its operation authorities.

9

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was not continued because the chemis-Edison and small hydro developers try of the Brawley brines resulted in currently are operating 42 projects with higher than acceptable operating costs.

119 MW capacity and Edison has com mitments for an additional 50 projects Waste-To-Energy: Edison continued with 84 MW total capacity to negotiate power purchase agree ments with outside developers on Non-Utility Joint Venture Projects various waste-to-energy projects, Under federal law, utilities are al including the use of municipal and owed to participate up to 50 percent in agricultural refuse, the burning of the development of third-party renew methane gas at landfill sites and using able and alternative resource projects.

gas from waste treatment facilities.

Edison has entered into such projects At the end of 1985, there were 15 through unregulated subsidiaries.

projects in operation with a capacity of These are non-utility projects and are 21 MW, plus signed contracts for not eligible for recovery of costs and re another 35 projects representing turn through traditional utility ratemak 656 MW ing. Instead, they are shareholder Such projects and cooperative investments, which Edison believes will efforts by Edison, city governments earn a favorable return that will more and public officials hopefully will con-than justify the risk of such investments.

tribute to finding environmentally acceptable solutions to the problem of Cogeneration: California's largest municipal waste disposal in Southern cogeneration facility, the 300-MW Omar California.

Hill project, went into commercial operation in August at Texaco's Kern Fuel Cell: During 1985, Edison be-River oil field near Bakersfield, Calif. In came the first utility in the nation to use addition to generating electricity, the methane gas from a municipal landfill plant produces steam for injection into to operate a fuel cell unit and generate the ground to enhance the recovery of FUEL CELL UNIT-Edison operates electricity. Fuel cells, originally devel-heavy crude oil.

the first fuel cell in the nation powered oped to produce electricity for the U.S.

Omar Hill, developed by non-utility by methane gas from an abandoned space program, convert chemical en-subsidiaries of Edison and Texaco late demotan uithich ergy directly into electricity without Inc., marks the Company's first joint operates qienwhu c

causing pollution.

ity directly from the fuel by a chemical Located at a hotel complex in Indus-reaction.

try Hills, about 20 miles east of Los Angeles, this experimental 40-kilowatt unit has successfully operated more than 4,300 hours0.00347 days <br />0.0833 hours <br />4.960317e-4 weeks <br />1.1415e-4 months <br />, supplying part of the hotel's electricity and hot water needs.

Small Hydro Projects: Third-party developers are pursuing small hydro applications on various watersheds in Edison's service territory as well as in water conveyance facilities. Edison, too, is developing new small hydro projects.

Workmen install a high-efficiency fluorescent lamp at the South Coast Plaza Mail in Costa Mesa, while Syl via Smith, SCE energy services specialist, discusses the mall's ongoing energy conservation and load management programs with Richard Shafer, director of engineering. The major shopping center, which has more than 200 retail stores, features many energy saving techniques that contribute to its overall high operating efficiency.

A TR4DITION OF SERVICE TO AGRICULTURAL CUSTOMERS

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venture in a major cogeneration proj-LOW-INCOME ect. The $154 million plant took less ASSISTANCE PROGRAM-Dina Hunter than 18 months to build, was completed (far right), supervisor of five months ahead of schedule and SCE's Energy Assistance was 6 percent under budget.

Program, examines pack was ages of energy-efficient The Sycamore project, a second fluorescent light bulbs at a 300-MW cogeneration project in the distribution center. The Kern River oil field involving non-utility Company distributed Y

about 100,000 of these subsidiaries of Edison and Texaco, is in bulbs free of charge to the process of obtaining permits and is qualified low-income fami scheduled for operation by June 1987.

lies throughout its service Other joint venture agreements for tourg 1985vto en enhanced oil field recovery cogenera-reduce their electric bills.

tion have been reached between Edi son non-utility subsidiaries and other parties to develop a 225-MW project in the Midway Sunset field, west of Bakersfield, and an 80-MW project in the Wilmington field, near Long Beach.

Geothermal: A 15-MW geothermal project near Beowawe, Nevada, began operation in December under a partner ship between non-utility subsidiaries VOLUNTEER PROGRAM of Edison and Chevron, Inc. Unlike

-Two Edison volunteers, the Salton'Sea and Brawley plants Earl Lasley (foreground) corroive eothrmaland Tony Aguilar, speak to using highly corrosivea class at Santa Ana High resources, the Beowawe site has much School to urge students to cleaner geothermal fluids and steam.

stay in school and com plete their education. More Because its equipment is not subject than 200 Edison volun to the same corrosive brines as the teers visited 15,000 stu Imperial Valley geothermal sites, the dents at junior high and Beowawe plant has lower operating costs hg Cools hruhu and thus is commercially competitive.

territory during 1985.

It is the largest geothermal facility in Nevada, generating enough electricity to meet the needs of 15,000 people.

Large Hydro Resources The Big Creek hydroelectric system, which was begun in 1910, is the main stay of the Company's hydro facilities with a capacity of 788 MW. Edison plans to construct additional generat ing units at five of the eight Big Creek powerhouses that will add 500 MW by the early 1990s.

Two Edison hydraulic test representatives, Mike 4

McCulley (left) and Danny Johnson, test the effi ciency of an irrigation pump-a service available for all agricultural customers from Edison since 1924 on a 42,000-acre farm in Central California's San Joaquin Valley. In this highly productive valley, the Company tests about 925 pumps annually. Many of the Company's more than 26,000 agricultural custom ers benefit from reduced rates for irrigation pumping offered during off-peak periods of electric demand.

13

IAl

As an expansion of Edison's Big in generation, transmission, storage, Creek system, the Balsam Meadow distribution, pollution control and con project in the Sierra Nevada Mountains servation of electrical energy. These progressed on schedule and within activities enhance Edison's operating budget during 1985. The 200-MW plant flexibility by providing more resource was 50 percent complete at year-end.

options to respond to changing busi It is being built by blasting and tunnel-ness conditions. Two significant areas ing through solid granite to connect in which Edison is engaged are coal Huntington Lake and Shaver Lake. The gasification and energy storage.

power plant will be located 1,000 feet underground. The facility is scheduled Coal Gasification to begin operation in January 1988 and The Cool Water Coal Gasification will be Edison's largest hydro plant.

plant completed a successful first year of operation. It is the nation's first Mohave Generating Station commercial-scale project using the A tragic accident occurred June 9 at most advanced technologies to gener the coal-fired Mohave Generating ate electricity from coal.

Station in Laughlin, Nevada, when a The plant converts 1,000 tons of coal high-pressure steam line burst at Unit per day into a clean-burning gas used 2, resulting in six fatalities and injuries in turbines to produce 100 MW. It is in to 10 other employees.

the second year of a five-year test and The entire Edison family was sad-evaluation program to determine its dened by the loss of life and injuries commercial feasibility.

caused by the accident. Many employ-In addition to taking the power pro ees and outside agencies worked duced by the plant, Edison provided heroically to rescue the injured and the site for the project and is the plant provide them with emergency medical manager Other participants in the proj treatment.

ect include Texaco Inc., Bechtel Power Both generating units at the 1,580-Corporation, General Electric Company, COMMUNITY ASSISTANCE MW plant were removed from service.

the Electric Power Research Institute sRoroeLbrer (far rit)

During the six-month outage, the Com-and the Japan Cool Water Partnership.

senior cons iospeas to pany replaced 600 feet of 30-inch steel the Company's efforts to help meet the piping on each of the two units and special needs of elderly customers.

conducted an extensive safety inspec-s to serie pers akeipre tion. The units were returned to service them of the services offered by Edison in December to help them save money and energy.

Edison's share of the $20 million cost of cleanup and repair, as a 56 percent owner in the plant, was $11 million.

Other owners include the Los Angeles Department of Water and Power, the Salt River Project and the Nevada Power Company.

Research and Development Edison continues to pursue a wide variety of research and development programs, including new technologies An Edison crew, including John Trappe (foreground) and Al Kaustinen, pulls an underground cable to provide electric service for a new housing develop ment in Moreno Valley, located in an area east of Los Angeles known as the "Inland Empire," which in cludes Riverside and San Bernardino counties. The Inland Empire is one of the fastest-growing residen tiai areas in California and represented about 40 per cent of the growth in new residential customers for Edison's service territory during 1985.

Energy Storage transmission lines and one direct cur Among the more promising new rent (DC) line, all capable of trans technologies in Edison's research and mitting large amounts of electricity in development program is compressed either direction at extra-high voltages.

air energy storage. This technology The operation of the Pacific I ntertie sys would allow the Company to pump air tem benefits both regions, allowing the with huge compressors using less ex-Northwest to market its surplus power, pensive power during off-peak periods which saves Edison customers hun and store it in large underground reser-dreds of millions of dollars, and also voirs. This compressed air, in turn, making California power sources avail would later be released to drive a tur-able to the Northwest.

Generation Fuel Mix bine generator during peak periods of During 1985, the DC line of the electric demand when costs for generat-Pacific Intertie was upgraded, increas 1975 1985 1995 ing power are much higher The cost ing Edison's share of the line's trans (Poetd difference in electricity between peak mission capacity to 430 MW. Additional 16%

Oil & Gas and non-peak periods makes energy expansion, expected to be completed Renewable!

storage technology an attractive option.

in 1990, will increase Edison's transmis 1%

8%

(Including The Company began exploratory sion capability by another 236 MW.

58%

Hydro) drilling for an underground reservoir The California-Oregon Transmission Nuclear late in the year If a suitable site is found, Project for a third 500-KV AC line to the 6%

C. oal it plans to develop a 50-MW unit that Pacific Northwest is being developed would be operational in the mid-1990s.

jointly by California utilities, including Edison, and the federal Western Area Purchases:

8%i Oturhes Purchased Power Power Administration. When completed Utiltiesin the early 1990s, it will add about 300 The purchase of less expensive elec-MW to Edison's transmission capability.

8%

Other Purchases:

tricityfrom the Pacific Northwest and The completion of these upgrades 22%

Renewable/

Southwest continues to save money for in transmission capacity, plus other Alternative Edison customers. These purchases, smaller upgrades in the existing AC 1 2%

4 %

typically surplus energy from power lines, will increase the total transfer Edison's long-term resource goals call plants using hydro and coal resources, capacity between California and the for a balanced generation fuel mix with are less costly than electricity gener-Pacific Northwest to about 7,900 MW, a substantial reduction in dependence ated from oil-and gas-fired plants.

with the Company's share climbing on oil as a generation resource. Since The Company obtained 35 percent of to approximately 1,770 MW.

1975, the Company has reduced its usage of oil and gas by nearly one -third its electricity during 1985 through the purchase of power from outside Bonneville Power Transmission sources. By comparison, Edison pur-Policy: The federal Bonneville Power chased only 16 percent of its electricity Administration (BPA) introduced an from these outside sources in 1975. The interim policy in late 1984 which acts to 1985 purchases saved Edison custom-arbitrarily limit access to the Pacific In ers about $382 million compared to tertie in the Northwest. This has sub using natural gas fuel in its generating stantially reduced price competition plants. Nevertheless, the average cost among Pacific Northwest utilities as of purchased power rose sharply to 2.8 sellers of electricity to California and cents per kilowatt-hour (KWH) in 1985 virtually eliminated sales by Canadian from 2.2 cents in 1984, partly because utilities who no longer can gain access.

the Bonneville Power Administration's The result has been an unfair increase restrictive transmission access policy in electric rates to Southern California resulted in higher costs from the Pacific customers of an estimated $100 million Northwest.

annually.

Electricity rates in the Pacific North Northwest Transmission west are among the lowest in the The Pacific Intertie transmission sys-nation, thanks to inexpensive hydro tem built in the 1960s is the major artery electric power from facilities built by for transmitting power between the federal taxpayer subsidy. As federal Pacific Northwest and California. It in-taxpayers, Edison customers should cludes two alternating current (AC) not be forced by BPA to subsidize low 16

electricity rates in the Pacific Northwest TRANSMISSION by BPA's exporting of unfair and inequi-CONSTRUCTION-A helicopter by lowers a segment of a new trans table costs to California. To correct this mission tower into place as part unfair situation, the Company, together ot Edison's 82-mile extension of with other utilities and California regula-a 500-KV line from its Devers Sub station near Palm Springs to the tors, are negotiating with BPA to obtain Serrano Substation in Orange an Intertie access policy that provides County. The major project will be fair and equitable costs to all custom ers, not just to Pacific Northwest customers.

Fuel Supply and Costs Fuel and purchased power continue to represent the single largest cost of providing electrical service to Edison customers, amounting to $2.4 billion in 1985, or about 41 cents of each reve nue dollar This compares to the Com pany's record $2.6 billion paid for fuel and purchased power in 1981, which represented 62 cents out of each reve nue dollar.

The Company used natural gas and oil at its power plants in 1985 to pro duce 39 percent of the electricity NEW TRANSMISSION needed by customers, up from 30 per-EQUIPMENT-Two Edison engi cent in 1984 when more inexpensive neers discuss a "damping" de hydroelectric power was available. This vice (background) that will allow Edison to increase the efficiency is the energy equivalent of approxi-and power transfer capability ot a mately 50 million barrels of fuel oil. Be-transmission line. The device V*

cause of the availability of natural gas, prevents electrical impulses pro duced by some transmission Edison only used 2.3 million barrels of lines from feeding back into oil in 1985.

power plants and damaging Ten years ago, natural gas was not generating equipment.

expected to be available for electric generation in 1985, and Edison pro jected the need to burn more than 70 million barrels of fuel oil. This is another example of how the electric business has changed.

Oil and Uranium Contracts In the 1970s, when there was serious concern about the rising price and reliability of fuel supply, the Company and regulatory authorities recognized the need for long-term fuel contracts to protect the interests of customers.

These contracts were prudent and seemed mandatory at the time, although today, in hindsight, they are no longer necessary. Oil and uranium prices have decreased dramatically in the world market, and adequate supplies are more readily available. Edison, at considerable one-time costs, terminated the contracts in a manner that ultimately will save customers over $1.2 billion.

The Company has filed with appro-Uranium Contracts: To take advan priate regulatory agencies to recover tage of significant decreases in the the costs of these contract terminations.

market price of uranium fuel, Edison negotiated early termination of uranium Chevron Settlement: Edison paid fuel contracts for $82 million with two Chevron Corporation $350 million in suppliers during the year. As a result, May to settle litigation begun in 1982 the Company now can purchase lower when the Company terminated an oil-cost uranium from other sources, which supply contract before completion of its will reduce its future nuclear fuel ex 1 0-year term.

penses by an estimated $190 million.

Under terms of the contract signed in In early 1986, the Company applied Projected Peak Demand and 1976, Chevron agreed to supply Edison to the CPUC and the Federal Energy Reserve Margin with up to 40 million barrels of low-sul-Regulatory Commission to recover the fur fuel oil each year. Although the ar-

$82 million in payments made to 24 Megawatts (Thousands) rangement provided a secure source of Homestake Mining Company and Bear UReserve Margin competitively priced oil for many years, Creek Uranium Company.

Peak Demand the world oil supply increased dramati 0

Scally in the 1980s, and oil prices fell. At Energy Sales the same time, the natural gas shortages 16 of the 1970s ended, and Edison was Total energy sales forthe year were able to increase purchases of less 65.0 billion KWH, a 2.6 percent in expensive power from the Pacific crease over sales in 1984. Over the last 12 Northwest and Southwest. The combi five years the growth rate in KWH sales nation of the events caused Edison to has been 1.6 percent per year, and the 8

terminate the Chevron contract. If the Company projects a 1.7 percent annual contract had not been terminated, growth rate over the next 10 years.

Edison customers would have paid The net gain in meters (customers) 7$1.4 billion more for electricity because during 1985 was 92,587, the second other sources of energy were far less highest growth in the past 21 years, 0

expensive than the oil under contract.

and a 23 percent increase over 1984.

1 985 1987 1989 1991 1993 1995 With the settlement, however, the Coin-The Company's residential custom (Recorded) pany saved its customers over $1 billion.

ers accounted for 28 percent of total Edison's long-range target reserve mar-The settlement also included a new sales. There was a 1.6 percent increase gin of 16 to 20 percent will be temporar-1 0-year contract under which Chevron in residential consumption over 1984, ily exceeded because of near-term capacity additions. However, the Coin-agreed to supply oil at the market price largely the result of the addition of pany expects to reach its target reserve on short notice. Edison will pay Chevron 78,263 new residential customers dur margin by the early 1990s.

$9 million annually for the standby ing 1985.

service, an amount partially offset by Industrial sales declined 1.0 percent lower oil inventory costs.

from 1984, in part because some In December, unseasonably cold companies bypassed Edison through weather resulted in gas suppliers cut-development of onsite cogeneration ting off deliveries of natural gas to Edi-projects to meet all, or part, of their son and forcing the Company to burn electricity requirements.

1.5 million barrels of oil. This reduced Commercial sales grew 4.1 percent, Edison's oil inventory to 6.1 million bar-while sales to agricultural customers rels, the lowest level since 1969. At that decreased 1.3 percent from the previ time, Chevron delivered oil under this ous year.

standby option contract, which was the first purchase of oil by the Company in Peak Demand more than three and one-half years.

The peak customer demand for elec On May 13,1985, Edison filed an ap-tricity during the year was 14,587 MW, plication with the CPUC to recover the which occurred on August 30. This is

$350 million Chevron settlement pay-below the record peak of 15,189 MW, ment over a two-year period.

18

set during a heat wave on September The Company has a variety of ongoing 5, 1984. Over the next 10 years, Edison programs that reinforce with all employ projects a 2 percent annual growth rate ees the long-standing motto of "Good in peak demand, reaching 17,870 MW Service, Square Dealing, Courteous in 1995.

Treatment," and which emphasize "treating the customer as you yourself Non-Utility Real Estate Subsidiary would want to be treated."

Various surveys conducted by out Edison's non-utility real estate sub-side firms are utilized on a continuing sidiary is engaged primarily in the basis to monitor customer opinion and development and management of perception of Edison's service. The industrial parks. At year-end, it had Company's 1985 survey data indicate developed and was managing about that 80 percent of Edison's customers 2 million square-feet of space in three have a favorable opinion of Edison's industrial parks. It also owns a 79 per-service. Even so, there are still opportu cent interest in Calabasas Park Com-nities for improvement. The Company is pany, which holds land for residential committed to continually seek new development, and a 51 percent interest ways to better serve its customers in in Ontario Airport Industrial Park today's changing and challenging Company.

consumer environment.

During 1985, the subsidiary sold a As demographics change within number of its holdings at Calabasas Edison's service territory, there likewise Park. Its intent is to sell all interest in residential development and to con centrate on industrial park develop ment. In addition to its developed industrial properties, it holds over 200 acres of land zoned for industriall a

m development which it plans to develop in the coming years.a y

Customer Service Edison's goals are to provide reliable electric service at reasonable cost, and to treat all customers in an efficient, an' professional and courteous manner.pe BALSAM MEADOW HYDRO-Work men place concrete for a hydroelectric 6000 FTpowerhouse, located 1,000 feet under Pt ground that wi connect with a water stunnel blasted through solid granite. Ex cavatton and construction progressed on schedue durng 1985 at the 200 smegawatt project which is part of Edi sons Bg Creek hydroelectric complex ment.

In the Serra Nevada.

industril properies, WtHOUdSoE0 ace-o5an2oedfr0nusra

are changing service needs of His-Edison People panics, Asians, the elderly, and in households where both parents work The significant financial, operating full-time. The Company continues and public service successes of 1985 to develop programs to meet these could not have been accomplished needs, such as the Senior Consumer without the hard work of the 17,200 em Energy Program introduced in 1985 to ployees who make up the Edison fain provide advice to elderly customers of ily. These people are dedicated to services offered by Edison and outside providing reliable service at a reason agencies to help them save money and able cost to 9.5 million people living in energy. Other examples are the infor-Edison's 50,000 square-mile service Rate Comparison with mational materials and translation ser-territory.

25 Largest U.S. Cities vices provided in Spanish, Vietnamese Nowhere is this commitment more 500 KWH/Month and several other foreign languages.

evident than during fire, heat and wind Monthly Bill storms when service crews and sup

• 1. Seattle..............$

8.76 Energy Management port personnel work arou nd-the-c lock

• 2. Memphis.............

27.66 The Company's Energy Management

3. New Orleans..........

30.68

4. Indianapolis...........31.94 programs are designed to help cus-As the electric utility business be

5. Milwaukee............3260 tomers conserve energy and hold comes more complex, the Company

6. Washington,D.C........3500 down their electricity bills, while also in-continues to expand and upgrade its

7. Columbus.............

37.25

'8. Los Angeles............ 37.51 creasing Edison's operating efficiency training of employees to improve their

9. San Antonio............ 37.72 by shifting the use of electricity from professional, technical, communica

10. Chicago..............

3832

11. Denver..............nd38.90 tions and interpersonal skills to in

12. Jacksonville...........39.65 demand, thereby deferring the need for crease their productivity and to help Edison................40.09 new generating plants.h rsnt

13. Dailas...............40.48 At the end of 1985, the Company's tefcetly.

14. Detroit........

41.06 Average/25 Cities........

41.50 total energy management programs

15. Houston.................

41.53 represented savings of nearly 1,000 Affirmative Action

16. Baltimore.*........... 41.57 MW in electric capacity, roughly euiv-The Company increased the

17. San Francisco..........4. 2.46

18. El Paso..........

43.13 alent to a large nuclear generating unit.

proportion of both minorities and

19. Pho 'enix................ 5.71 By 1995, Edison's continuing energy females in its workforce during 1985.

20. levland...........4 37.2

21. Hollu................51.0 management efforts will reduce the The minority representation rose to 29.1

21. H nolul 375.51

22. Boston................

55.00 amountofneededcapacityadditions percentfrom28.1 percentin.984, and

23. Philadelphia............

5 8.35 by another 880 MW.

female employees increased to 24.2

24. San Diego.............. 65.00 In addition to providing information to

25. New York............... 68.87

• Muicialy onedutlitescustomers on ways to save energy, the ous year During the five-year period

• Muiciallowed tiltie i

Company offers financial incentives to from 1980 to the end of 1985, minorities The average Edison residential cus-partially offset customer purchases of in management positions increased to tomer uses approximately 500 KWH of energy-efficient equipment and appli-19.2 percent from 14.9 percent, and electricity per month and pays 3 percent ances. Edison also continued CPUC-female management positions climbed less than the average for residential approved programs to increase the t

87pretfo 20pret customers at the same usage level in t

87pretfo 20pret the 25 largest cities in the United conservation efforts of low-income and Edison established a Female and States. At year-end 1985, Edison's cus-senior citizen customers, completed Minority Business Development pro tomer rates were 3.5 percent lower thlan more than 40,000 free home energygrmwtiispoceendvsonn in 1982, when the Company's ratesgrmwtiispoceendvsonn peaked.

surveys and distributed energy-efficient 1979. Since then, the number of female equipment.

PERCENTAGE OF MALE, FEMALE Asian American Total AND MINORITY Male Female Black American Indian Hispanic Minorities EMPLOYEES AT YEAR-END Year-End Year-End Year-End Year-End Year-End Year-End Year-End 1980 and 1985 1980 1985 1980 1985 1980 1985 1980 1985 1980 1985 1980 1985 1980 1985 management") t 88.0 81.3 12.0 18.7 3.0 3.8 5.1 6.5 0.5 0.5 6.2 8.5 14.9 19.2 Non-Management( 2t 76.1 72.7 23.9 27.3 9.0 9.5 2.8 3.8 0.9 1.2 16.6 20.2 29.3 34.6 Total Company (3 )

79.8 75.8 20.2 24.2 7.1 7.5 3.6 4.7 0.8 0.9 13.4 16.0 24.8 29.1 (1) Management employees include ihe "Officials and Managers" and "Professionals" Affirmative Aciion Categories.

(2) Non-Management employees include the "Technicians," "Office and Clerical," 'Craftsmen," 'Operators "Laborers," and

and minority enterprises qualified to do During 1985, there were over 160 volun business with Edison has risen by more teer Edison employees and more than than 268 percent, from 207 to 762. The 1,000 students.

value of contracts awarded to these

• Adopt-A-School-In this business!

firms increased from $3.7 million in educational partnership program, 1979 to $57.7 million during 1985.

companies collaborate with high schools and share their expertise and Community Involvement resources. During 1985, Edison repre sentatives worked with 18 schools, Edison has a long and proud tradi-speaking in classrooms, sharing films tion of community involvement both by and instructional materials, assisting in the Company and by many members of career counseling, serving on advisory the Edison family. Edison encourages councils and providing support in other its employees to participate in commu-educational programs.

nity affairs and in programs such as During the Company's 20th annual Scouting, the Special Olympics, YMCA, United Way campaign to help the YWCA and United Way.

needy and underprivileged, Edison The Company also provides financial employees in 1985 voluntarily contrib support to a wide variety of worthy uted a record $2.6 million, a 12.9 per programs in communities throughout cent increase over 1984. Nearly 86 its service territory. These include percent of Edison employees par cultural and educational activities, as ticipated, with an average per capita well as programs to assist youngsters, contribution of $155, representing one senior citizens, the needy and under-of the most generous groups of United privileged. Edison also actively assists Way donors in Southern California.

some community programs, including:

• Student and Employee Develop ment Program-Edison employee volunteers visit junior high and high schools, urging students to stay in FIREFIGHTING ASSISTANCE An Edison lineman waters down school and complete their education.

a power pole to help maintain More than 200 Edison volunteers spoke electric service during one of the to over 15,000 students during the year.

major tires in Southern Califor Junior Achievement-This program nia. The Company's dedicated service crews and support per-4/

helps give high school students experi-sonnel work around the clock un ence in learning about the free enter-der difficult conditions to maintain or restore service to customers prise system by running a business, during severe wind, rain, tire and more tha heat storms.

I s ort D

I-i

• ~

~

~

~

~

~

~

S Adp--colIntiEuies educational patesipporm

Stock Price Comparison Financial Review Dividend Increase 2501ndexOne of the Company's principal 250 Index The Company continued to objectives is to provide a competitive strengthen its financial condition during return to common stockholders. In 201)Ithe year:

keeping with this objective, the Board SCE -

Earnings per share of common of Directors in June 1985 approved the

'F stock increased to an all-time high of tenth dividend increase by the Coin DJA $3.26, theffhcneuieya frc pany in the last nine years. Over that 150 Ord earnings.

time, dividend increases have ex

• The quality of earnings reached its ceeded the rate of inflation as mea highest level in 10 years -the percent-sured by the Consumer Price Index.

100 age of earnings exclusive of non-cash The new dividend rate of $2.16 a share Allowance for Funds Used During Con-annually is 5.9 percent higher than the P_________________

struction increased to 78 percent.

old rate of $2.04 annually.

50.

- The common stock dividend was in-The current dividend provided an 8.1 creased by 5.9 percent to $2.16 a year.

percent yield on Edison's year-end

- The market price of common stock 1985 common stock market price of 0 I lreached an all-time high of $281/2 in

$26 8per share.

1981 1982 1983 1984 1985 December 1985. This level was then Over the past five years, the Company's surpassed in February 1986 at $29/8.

Dividend Reinvestment and Stock stock price has outperformed both the Dow Jones Utility Average and the Dow Total return to common stock share-Purchase Plan Modified Jones Industrial Average.

holders in dividends and stock ap-In October 1985, the Board of Direc preciation was 26 percent and has tors approved a modification to the averaged slightly over 26 percent Dividend Reinvestment and Stock compounded annually over the past Purchase Plan. Beginning with the Jan fiv Preaxneetsoeae.ece uary 1986 dividend payment, shares

- Prtaxinteestcovragereahed were purchased by the Company in the 4.4 times, the highest level achieved in open market. Prior to that time the Rate of Return on Common Equity 20 years.

Company had issued new shares for 20%

• Internal generation of funds dividend reinvestment stock reached 68 percent of capital require-purchases.

Autoriedments, the highest level in over 25 The Plan was changed for two rea 16 years.

sons. First, the tax law provisions, which allowed individuals to defer from Record Earnings and Revenues taxable income up to $750 ($1,500 for a 12h opn' rcr e hr couple filing a joint return) of reinvested earnings of $3.26 were 2.5 percent dividends, expired on December 31, higher than the $3.18 per share earned 1985. These provisions required that 8

198 1982.

1983 1984as 1985td ro Th Companyd has beenete abn towl earsa tight cost controls, lower maintenance sued stock rather than in open market expense, timely rate relief and reduced purchases. Second, the Company's 4interest costs. Edison's earnings per cash flow has improved, which, in turn, Sshare have grown at a compound has reduced the need for new equity annual rate of 13 percent over the past capital.

Ifive years.

More than 44,000 shareholders, or The rate of return on common equity about 27 percent of the holders of Edi was 15.75 percent, slightly below the 16 son common stock, were participating The Company has been able to earn at percent level authorized by the CPUC.

in the Dividend Reinvestment and or near its authorized return ievei over the past five years because of strict Net income for 1985 totaled $774 Stock Purchase Plan at year-end.

internal cost controls, emphasis on million on operating revenues of $5.17 These participants held approximately employee productivity and timely rate billion. Both were records for the Co-23 million shares representing over 10 relief. The Company earned a 15.75 percent rate of return on common pany. They compare with net income of percent of the total number of shares equity in 1985, compared with a cTuc

$732 million on operating revenues of authorized rate of 16 percent.

$4.90 billion in 1984.

22

outstanding. During 1985, Plan partici-The lowest cost capital raised by the Total Capitalization pants purchased approximately 2.9 Company in 1985 was $279 million of million shares by investing nearly $71 tax-exempt bonds issued to finance

$11 (Billions) million in dividends and optional pollution control equipment at the San 10 Common Equity Preferred Equity payments.

Onofre and Palo Verde nuclear plants.

The Company plans to continue the The average cost of these funds was modified Dividend Reinvestment and about 5 percent.

Stock Purchase Plan as an investment These tax-exempt financings, com option for its shareholders even though bined with the refinancing of high-cost the tax deferral benefits expired at coupon debt, reduced the Company's year-end 1985.

interest costs, which are reflected in customer rates, by $27 million annually.

4 New Capital Market Opened Capital was raised in 1985 through In October, Edison became the first the issuance of debt in the United 47 9% 463%

45.%

private corporation in the world to sell States, Europe and Japan, and through 2

"Shogun" bonds in Japan. "Shogun" sales of common stock through the Div bonds are unsecured debt issued in idend Reinvestment and Stock Pur Japan with interest and principal pay-chase Plan. Details of the Company's 0

able in U.S. dollars rather than in yen.

1985 financing activities are set forth in 1981 1982 1983 1984 1985 This $100 million issue will produce an accompanying table on page 24.

Including the $336 million of net new meaningful savings for Edison's cus-capital raised in 1985, the Company's compredwit bons wichtotal capitalization at year-end was tomers compared$10.2 billion, an 8.2 percent increase could-have been sold in the United over 1984. Edison's capitalization States or Europe at that time. At least as nearly matched the 45 percent/

10 percent/45 percent capital structure importantly, it introduced Edison to one adopted by the cPuc in the Company's of the largest and most rapidly growing 1985 General Rate Case.

capital markets in the world as a poten tial future source of funds for the Company.

Capitalization The Company's total capitalization at year-end was $10.2 billion, comprising 45.1 percent Common Equity, 8.5 percent Preferred and Preference Stock, and 46.4 percent Debt.

Corporate Financings In 1985, Edison completed $1.1 bil lion of long-term financings-the largest financing program in the Com pany's history. Of this amount, $336 million represented "new money" to finance the construction of new plant and facilities. The remainder was used to replace maturing bonds and to re duce borrowing costs by refinancing debt issued at high interest rates with lower interest rate bonds.

"SHOGUN" SIGNING CER EMVONY-Edison's Chairman and Chief Executive Officer Howard P.

Allen (center) loins hands with Jiro Yamana (left), senior managing director of Daiwa Securities Co. Ltd., and A. Richard Janiak, managing director of Smith Barney, Harris Upham International Inc., during ceremonies commemorating the issuance of "Shogun" bonds. Edison was the first corporation to sell these Japanese bonds on which the interest and principal are paid in U.S.

dollars rather than yen.

23

Pretax Interest Coverage Future Financings 1985 FINANCING ACTIVITIES TmsImproved internal generation of Term Amount Times funds has reduced the need for new Issue (years)

(millions) money to fund Edison's construction NEW ISSULES program. However, additional financ-March Lings are planned to replace high-cost First and Refunding Mort debt and preferred stock with new debt gage Bonds, Series 85A; 13%

30

$225 at lower rates. In early 1936, the Coi-June 3 overagEurodebenture; 11%

7 100 panypurhasd

$15 mllin ofits13%

August Series 85A mortgage bonds through a Pollution Control Revenue tender offer, and announced the re-Retunding Bonds-Variable mption of three issues of preferred te stock-the $75 million 12% Series, the Fntewef moneyFrs tod funddin Edsorcnsrcto

$50 million 9.20% Series, and the $50 gage Bonds, Series 85;10%

5 125 amillion 8.85% Series. If interest rates re-First and Refunding Mort Serie 85Ads mortgag bonds through a020 main favorable, Edison plans to con tinue its high-coupon bond refunding program by calling additional high-Poun Contr Revenue 191 18 93 1984 1985 ccluio Contrt anerplcigntuit coupon debt and replacing it withBonds-Variable Rate; 4.%

23 135 Lower interest rates, refunding of high-lower-cost debt.

Ongoing coupon debt and reduced borrowingTofnneteenesthCi-DvdndRnetmtad needs have created a steady improve-Com ment in the Company's pretax interest pany will select among the United Stock Purchase Plan coverage. This ratio increased to States, European and Japanese capital REEPIN 4.4 times in 1985, the highest level in m

RETIREMNS 20 years.

~markets to find the lowest-cost alterna-O EIEET tive available to the Company.

Bonds:

Project Financings Series L, 5%/, due 1985 (Retired)

$(30)

Series NN, 151/40/, due 2005 In addition to the $1.1 billion in Edison (redeemed)

(224) financings, Kern River Cogeneration Series M, 41/8%, due 1985 Internal Generation of Funds (Retired)

(60)

Compnya prtnrshi bewee anSeries 00, 131/%, due 2010 100%Edison subsidiary, Southern Sierra (redeemed)

67)

Energy Company, and a Texaco Inc.

31/8% Series, due 1985 subsidiary has thus far raised $125 mil-(Retired)

(6)

Pollution Control Revenue 80lion of debt to finance the Omar Hill Bonds (redeemed) 80Cognenration project.

1984 Series C; 5.6%

(79) 67%1984 Series

5.6%

(25) 88% Thi fnaningisnotguaaneedby1985 Series A; 5.9%

(41) 60 Edison; that is, the lenders look only to Eurodebentures:

the project's assets, not the assets of 14%, due 1987 (redeemed)

(51) 49%

the partners or their parent companies, 143/4%, due 1988 (redeemed)

(51) as collateral for the financing.

Ongoing 40(30) to participate in similar project financ-New Capital Raised in 1985

$ 336 20 20%

1%ings to fund other alternative energy lnldsdebt reacquisition expenses.

S 18projects.

0 1981 1982 1983 1984 1985 With major new generating facilities included in customer rates, there has been a substantial improvement in Edison's internal generation of funds.

In 1985, the Company met 68 percent of its capital requirements internally, the highest level in more than 25 years.

24

Regulatory and Legislative Review The Company's testimony identifies San Onofre Units 2 and 3 serious defects in the analysis by the Proposed Disallowance San Onofre Units 2 and 3 Public Staff and their consultants and Reasonableness Review presents a compelling rebuttal of their

$4.5 Billion Recorded Plant Cost In May 1985, the Public Staff Division arguments. As a consequence of the 5050

[_

of the CPUC, based on studies by its Company's filing, the Public Staff in De-Risk Sharing S435 Million consultants, recommended that $760 cember acknowledged it had made a Shareholder/ [435 Million

$971 Million CustomerI Proposed million of the cost of San Onofre Units 2 fundamental error in its analysis and re-Dislane and 3 be disallowed from rate base.

duced its specific recommended disal-I eciUQ

$729 Million)

Subsequent revisions, including the in-lowances from $830 million to $536 troduction of a unique and unprece-million.

dented "risk sharing" proposal, Edison's filing shows that the units S31 Billion changed the amount of the proposed were built to meet the highest Stan-t975 Edison Cost Estimate disallowances three times. The Public dards of safety and environmental pro-(Nearly9Years Betore Staff is currently recommending that an tection, and were constructed faster Completion) estimated $971 million of the $4.5 bil-and at less cost than any other two-unit lion construction costs of Units 2 and 3 nuclear project completed in recent not be allowed to be recovered from years. This record was achieved de customer rates.

spite record-high interest rates, dou Edison's share of the recommended ble-digit inflation, costly and changing In November 1985, the cPuc Public disallowance as a 75 percent owner regulatory requirements, and unique Staff introduced an unprecedented would be approximately $729 million.

site constraints and seismic risk-sharing" proposal which, inaddi Of the proposed disallowance, $536 requirements.

tion to disallowing specific costs, also would split equally between customers million, or 55 percent, is based on the Edison firmly believes its testimony and shareholders San Onofre construc Public Staff's 21/2-year, three-phase re-demonstrates that the construction of tion costs in excess of a 1975 Edison view of the construction of the units. The Units 2 and 3 was well managed and projection. The Company's share of the total recommended disallowance would balance of $435 million, or 45 percent, the costs incurred were reasonable.

be about $729 million.

is based on the Public Staff's Novem-However, because the Company can ber 1985 recommendation that, in addi-not forecast the CPUC's ultimate deci tion to disallowing costs found to have sion on this issue, particularly in light of CPUC Public Staff's been "unreasonably incurred," all other the Public Staff's "risk-sharing" pro-Disallowance Recommendations San Onofre construction costs in ex-posal, the Company's independent cess of $3.1 billion (the 1975 Edison public accountants, Arthur Andersen &

$1,200Millions projection of construction costs) should Co., have qualified its opinion on the Risk Sharing

$1,117 be shared equally by customers and Company's financial statements, sub-1 Alleged S287 shareholders.

ject to the outcome of the reasonable-Unreasonableness

$971 In response, Edison submitted to the ness review.

$830 CPUC 30,000 pages of written testi-Public hearings at the CPUC are 80

$760 mony and supporting documents by scheduled to continue through May, Company officers and such nationally with a final decision projected in late recognized experts on energy issues 1986.

as James R. Schlesinger, former secre-Palo Verde Reasonableness Review

$536 tary of the Department of Energy (DOE)

Edison has a 15.8 percent ownership and former chairman of the Atomic En ergycompletion at the Palo Verde Nuclear 200 haus, past administrator of the Generating Station near Phoenix, An Environmental Protection Agency; Vic-zona. Additional participants with owner tor Gilinsky, former commissioner of the ship interests in Palo Verde include M

NRC; Alfred E. Kahn, former chairman utilities from California, Arizona, New of the New York Public Service Mexico and Texas. Arizona Public Ser-Since the cPUC Public Staff's first San Commission; John C. Sawhill, former vice Co an is the roect r

Onotre 2 and 3 disallowance recoi president of New York University and a mendation in May 1985, the Staff has former deputy utility commissions of California, revised its recommendation several forer epuy screaryof OE;Dr.Arizona, New Mexico and Texas have times. The Staff recently reduced its Irwin C. Bupp, director of Cambridge undertaken a oint review of the reason-recommended specific disallowance Energy Research Associates, Inc.; and a

from $830 million to $536 million after J. Ronald Fox, professor of businessfunda JadRoniaiox, prfssr ofivbusines Palo Verde. This review is scheduled to mental errors in the Staff's analysis.

administration, Harvard University be completed by early 1987, and public ThefCompany'shearings will follow.

25

Palo Verde Ratemaking San Onofre Unit 1 Rate Request Following the Company's filings in In response to Edison's earlier filings, May 1985 to recover its costs associ-the CPUC in December authorized the ated with Palo Verde Unit 1, the CPUC Company to expend approximatelyn in October 1985 approved an interim

$200 million to complete NRC-man ratemaking procedure that will allow dated modifications and other improve the Company to collect revenues equal ments to San Onofre Unit 1 during its to the estimated fuel savings generated next three refueling periods.

by Unit 1, which began commercial op-Edison also requested a $43 million eration February 1, 1986. The revenue annual increase in authorized revenues requirements for capital-related costs, and amortization of approximately $37 Funds Required for as well as operation and maintenance million of previously uncollected rave Construction ($ Billions) expenses, will accrue in a balancing nues, effective May 1, 1986, to reflect in account until the CPUC decides on the rates the expenditures for these modifi

$4.7 appropriate level of operation and cations. The application also requested

-$4.3 maintenance expenses, ratemaking a CPUC finding that $194 million in re methods and the conclusion of the placement energy costs were reasona Generation review of the reasonableness of bly incurred when Unit 1 was out of construction costs.

service for upgrades from February In December, the CPUC rejected the 1982 through November 1984.

Transmission recommendation of its Public Staff to Decisions on the rate-related issues 41use an unconventional ratemaking are expected in 1986 and 1987.

method for Palo Verde, which the Com Ditiuin pany had opposed.

San Onofre Unit 1 Repair Costs for Distribution Concurrently, the CPUC directed its Steam Generators Public Staff and the Company to inves-On March 20, the CPUC ordered Edi tigate other ratemaking methods to son to stop the annual collection 6%

11%

Other fulfill the Commission's objectives of Recrde Prjecedensuring cost effectiveness, providing million associated with the repair of Recorded Projected frg o

.yILIy~i~

1981-1985 1986-1990 incentives f gd eipf steam generators at San Onore Unit mance, and allocating the plant's capi-and to set aside these expenses in a Edison's construction program over the tal costs between current and future separate account. The CPUC indicated next five years is estimated to total $4.3 billion, compared to $4.7 billion for the ratepayers. A decision on the Palo that it would determine whether, at a past five years. Additionally, the empha-Verde ratemaking method is antici-later date, the Company could recover sis for construction is expected to shift pated in the latter half of 1986.

these repair expenses through cus away from generation plant to the ex pansion of the Company's transmission tomer rates.

and distribution systems.

1986 Rate Adjustment In December the CPUC issued an Effective January 1,M1986, the Coi-order to show cause to determine pany was authorized a $146.3 million whether the Company should be re annual revenue increase as an attrition quired to refund to customers the $16 allowance to reflect changes in inflation million of repair expenses already and capital costs in the years between collected and permanently forego General Rate Case years. Of that collection of the $24 million of remain amount, $54 million is expected to ing expenses. The Company has re come from a sales increase in 1986, sponded to the CPUC order, and a with the remainder covered by a Janu-decision by the CPUC is anticipated in ary 1, 1986, rate increase to customers early 1986.

of 1.9 percent, or $92 million a year.

The increase is subject to refund Energy Cost Rate Request pending a CPUC review of its overall In 1985, the Company requested a procedures governing rate relief. The

$290 million annual rate increase under CPUC also is looking at reducing Edi-its Energy Cost Adjustment Clause son's authorized rate of return on com-(ECAC), primarily to reflect increased mon equity, currently set at 16 percent.

fuel and purchased power costs, and Since 1984, the CPUC has operated to provide for amortization of various on a three-year General Rate Case cy-balancing accounts. In December, the cle, instead of a two-year cycle.

CPUC determined that Edison should 26

recover its fuel oil inventory costs relicensing cases. Not only would this based on short-term interest rates, preference be unjust and inequitable, it rather than its authorized cost of capi-also would result in higher rates for Edi tal. This action reduced the Company's son's customers. A transfer of own ECAC filing by approximately $40 mil-ership from one group of taxpayers to lion, bringing the energy-related rate another would unfairly benefit munici increase request to $250 million annu-pally owned utilities, which serve only a ally. A decision is expected in the near small fraction of the customers served future.

by Edison.

The Company believes that the mil Resale Customer Rate Increase lions of customers who originally paid Edison sells electricity to six South-for the facilities should continue to re-

$1,000 nvsmonton ern California cities (Anaheim, Azusa, ceive the benefits. The loss of Edison's Banning, Colton, Riverside and Ver-hydro facilities would require the pur-

$4,000 non), the Southern California Water chase or production of more costly re Company and the Arizona Public Ser-placement power, thereby increasing vice Company under rates subject to customer rates.

$3,213 Federal Energy Regulatory Commis-To avoid this possibility, Edison and 3,000 sion (FERC) approval. Recently, for the other investor-owned utilities are sup first time in many years, the Company porting the enactment of legislation in reached a rate settlement with these six the U.S. Congress to protect their cus-2,000 resale cities that also was acceptable tomers' rights. During 1985, there was A

to the other two resale customers, mak-considerable progress toward enacting ing itunnecessary for the Company to legislation in both the U.S. Senate and file a 1986 general rate case with FERC.

House of Representatives that will re-1,000 Under the settlement, Edison will in-solve the issue in a fair manner in 1986.

crease its rates to these customers by

$1,000 Initial Investment about 2 percent, producing total esti-Federal Tax Legislation mated revenues of $260 million annu-Early in 1985 the President proposed 0

ally. A decision by FERC on this major changes to the federal tax sys-1981 1982 1983 1984 1985 settlement is expected in April.

tem, including repeal of the Investment Through dividends and price apprecia Five general rate cases requesting Tax Credit, changes in depreciation tion, Edison common stock has pro increases for 1976, 1979, 1981, 1982 and changes to the treatment of em-vided a compound return to investors of and 1984 currently are being litigated ployee benefits. Certain of these 26 percent annuaiy over the past five years. Assuming reinvestment of divi and remain unresolved. Major issues changes would not be in the best inter-dends, a $1,000 investment in Edison include the proper level of expenses to ests of Edison's shareholders, custom-common stock at the beginning of 1981 be reflected in rates, the appropriate ers and employees, and the Company would have grown over three times by rate of return on common equity to be worked to obtain more favorable authorized, and how revenues should legislation.

be allocated among the various In December the House passed tax customers.

reform legislation which greatly mod ified the President's proposal, but still Hydro Relicensing left many provisions that would have a Edison and other investor-owned negative impact on the Company, its utilities throughout the nation continued customers and employees.

to face the threat of unfairly losing fed-The Senate is expected to pass its erally licensed hydroelectric plants that version of the tax bill in 1986, and the fi they constructed and operated for nal legislation will be resolved by a joint many years. This would deprive cus-House-Senate Conference Committee.

tomers of their right to receive the ben-The Company will continue to seek efits of low-cost power from these amendments to the proposed legisla hydro projects.

tion that will take into account the na The Company's position is that the tional interest, while treating equitably 1920 Federal Power Act does not give the interests of Edison's shareholders, preference to municipally owned customers and employees.

utilities when they are competing against investor-owned utilities in hydro 27

Southern California Edison Company Responsibility for Financial Statements The management of Southern California Edison Company the independent accountants develop and maintain an has prepared and is responsible for the financial statements understanding of the Company's accounting and financial and the other related financial data contained in this Annual controls, and conduct such tests and related procedures Report. The financial statements, which include amounts as they deem necessary to render their opinion as to the based on estimates and judgments of management, fairness of the financial statements.

have been prepared in conformity with generally accepted The Audit Committee of the Board of Directors, composed accounting principles applied on a consistent basis.

entirely of directors who are not officers or employees of To meet its responsibilities with respect to financial the Company, meets periodically with the management of information, the Company maintains a system of internal ac-the Company, the independent public accountants and counting controls which is designed to provide reasonable the internal auditors to make inquiries as to the manner in assurance that assets are safeguarded from loss or unau-which the responsibilities of each are being discharged. In thorized use and that the financial records properly reflect addition, the Audit Committee recommends to the Board the authorized transactions of the Company. This system of Directors the annual appointment of the independent is supported by written policies and procedures, organiza-public accountants with whom the Audit Committee reviews tion structures that provide for appropriate division of the scope of the audit and the nature of other services responsibility and the selection and training of qualified provided as well as the related fees, the accounting prin personnel and is augmented by programs of internal au-ciples being applied by the Company in financial reporting, dits. There are limits inherent in all systems of internal ac-the scope of internal financial auditing procedures, and counting control based on the recognition that the cost of the adequacy of internal accounting controls.

such systems should not exceed the benefits to be de-To further assure independence in performing and rived. The Company believes its system of internal ac-reporting the results of audits, representatives of the inde counting control appropriately balances this cost-benefit pendent public accountants and the Company's staff of relationship.

internal auditors have full and free access to meet with the An independent examination of these financial statements Audit Committee, without members of Company manage has been conducted by Arthur Andersen & Co., inde-ment being present, to discuss any accounting, auditing, pendent public accountants, in accordance with generally or financial reporting matter.

accepted auditing standards. In connection therewith, Report of Independent Public Accountants To the Shareholders and the Board of Directors, Southern California Edison Company:

We have examined the balance sheets and statements of CPUC reasonableness review will have on the Company's capitalization of Southern California Edison Company (a financial position and results of operations.

California corporation, hereinafter referred to as the "Coi-In our opinion, subject to the effects on the balance pany"), as of December 31,1985 and 1984 and the related sheets and statements of capitalization as of December 31, statements of income, common shareholders' equity and 1985 and 1984 and the statements of income, common sources of funds used for construction expenditures for shareholders' equity and sources of funds used for con each of the three years in the period ended December 31, struction expenditures for the years ended December 31, 1985. Our examinations were made in accordance with 1985 and 1984 of such adjustments, if any, as might have generally accepted auditing standards and, accordingly, been required had the outcome of the matter referred to in included such tests of the accounting records and such the preceding paragraph been known, the financial state other auditing procedures as we considered necessary in ments referred to above present fairly the financial position the circumstances.

of the Company as of December 31,1985 and 1984 and As discussed further in Note 2, the California Public the results of its operations and the sources of its funds Utilities Commission (CPUC) Public Staff has issued a used for construction expenditures for each of the three series of reports which recommend disallowances of cer-years in the period ended December 31,1985, in confor tain construction costs related to San Onofre Nuclear mity with generally accepted accounting principles ap Generating Station Units 2 and 3, of which the Company plied on a consistent basis.

owns a 75.05 percent undivided interest. A CPUC decision on this matter is not expected before late 1986. The Com pany has concluded that it is not possible to determine the probable financial effect that the final outcome of the Los Angeles, California, ARTHUR ANDERSEN & 00.

February 7, 1986 28

Southern California Edison Company Statements of Income Year Ended December 31, 1985 1984 1983 (In Thousands)

Operating Revenues:

Sales (Notes 1, 2 and 10)...........................................

$5,141,735

$4,842,959

$4,413,619 O ther............................................................

27,113 56,193 50,637 Total operating revenues..................................5,168,848 4,899,152 4,464,256 Operating Expenses:

Fuel (Note 2)......................................................

1,683,363 1,478,236 1,457,102 Purchased power (Note 8)..........................................

705,724 606,705 570,654 Provisions for regulatory adjustment clauses (Note 1)...................

(607,036)

(460,337)

(21,559)

Other operating expenses (Note 8)..................................

755,325 728,625 604,694 M aintenance......................................................

352,635 419,458 279,916 Depreciation (Note 1)..............................................

454,574 398,623 289,361 Income taxes (Note 4)..............................................

720,938 639,875 497,236 Property and other taxes............................................

130,571 121,342 82,821 Total operating expenses..................................4,196,094 3,932,527 3,760,225 Operating Income..............................................

972,754 966,625 704,031 Other Income:

Allowance for equity funds used during construction (Note 1).............123,179 145,967 268,831 Interest incom e....................................................

83,867 67,601 33,272

-Taxes on non-operating income-credit (Note 4).........................

11,928 29,666 117,160 Other income and income deductions-net...........................

35,664 4,071 9,838 Total other income........................................

254,638 247,305 429,101 Total Income Before Interest Charges..............................1,227,392 1,213,930 1,133,132 Interest Charges:

Interest on long-term debt.......................................

418,515 442,987 425,075 Other interest and amortization (Note 1)..............................

69,285 87,335 114,302 Total interest charges......................................

487,800 530,322 539,377 Allowance for borrowed funds used during construction (Note 1).(34,515)

(48,820)

(97,025)

Net interest charges.......................................

453,285 481,502 442,352 Net Income.....................................................

774,107 732,428 690,780 Dividends on Cumulative Preferred and Preference Stock.........

71,698 73,043 73,477 Earnings Available for Common and Original Preferred Stock......

$ 702,409

$ 659,385

$ 617,303 We ighted -Average Shares of Common and Original Preferred Stock Outstanding (000)..............................................

215,649 207,576 198,348 Earnings Per Share...............................................

$3.26

$3.18

$3.11 Dividends Declared Per Common Share...............................

$2.13

$2.01

$1.83 The accompanying notes are an integral part of these financial statements.

29

Southern California Edison Company Balance Sheets Assets At December 31, 1985 1984 (In Thousands)

Utility Plant:

Utility plant, at original cost (Notes 1 and 6).................................

$11,853,442

$10,905,719 Less-Accumulated depreciation (Notes 1 and 6)..............................

3,152,141 2,763,651 8,701,301 8,142,068 Construction work in progress (Notes 1 and 6).................................

2,041,738 1,849,204 Nuclear fuel, at amortized cost...............................................

95,180 80,108 10,838,219 10,071,380 Less-Property-related accumulated deferred income taxes (Notes 1 and 4)........

531,746 386,515 Total utility plant 10,306,473 9,684,865 Other Property and Investments:

Nonutility property and other investments, at cost-less accumulated depreciation...

38,501 19,470 Special funds (Note 1).....................................................

24,326 79,888 Investments in and advances to subsidiaries (Note 1).............................

162,786 116,584 Total other property and investments........................................

225,613 215,942 Current Assets:

Cash and equivalents (Note 3)...............................................

37,757 68,916 Cash investments-financing subsidiary (Note 1)................................

163,979 153,088 Receivables, less reserves of $9,833,000 and $10,400,000 for uncollectible accounts at respective dates................................................

351,095 371,550 Fue s~c, t cst(frs-in, first-out)...........................................

255,50840,7 Fuel stock, at cost fitfirst is-u25,0 404,378 Materials and supplies, at average cost.......................................

106,178 111,967 Regulatory balancing accounts-net (Notes 1 and 2).............................

792,011 18,355 Accumulated deferred income taxes-net (Note 4)...............................

1,027 Prepayments and other 100,663 78,722 Total current assets 1,807,191 1,208,003 Deferred Charges:

Unamortized debt issuance and reacquisition expense (Note 1).....................

144,977 92,987 Accumulated deferred income taxes-net (Note 4)...............................

80,709 Other deferred charges 109,195 76,224 Total deferred charges 254,172 249,920 Total Assets.......................................................

$12,593,449

$11,358,730 The accompanying notes are an integral part of these financial statements.

30

Southern California Edison Company Capitalization and Liabilities At December 31, 1985 1984 (In Thousands)

Capitalization:

Common stock, at par value, 216,676,897 and 212,552,728 shares outstanding at respective dates 902,821 885,637 Additional paid-in capital 1,543,933 1,470,347 Earnings reinvested in the business.........................................

2,128,646 1,886,804 Common shareholders' equity...........................................

4,575,400 4,242,788 Preferred and preference stock without mandatory redemption requirements........

466,500 467,258 Preferred and preference stock with mandatory redemption requirements............

395,074 422,286 Long-term debt (Note 1).

4,717,411 4,248,647 Total capitalization 10,154,385 9,380,979 Long-term Obligations:

Accumulated provisions for pensions, insurance, etc. (Note 5) 91,126 75,028 Current Liabilities:

Prgferred and preference stock to be redeemed within one year.....................

20,463 18,213 Loig-term debt due within one year...........................................

45,110 101,250 Short-term borrowings (Note 3) 15,000 Short-term borrowings-financing subsidiary (Notes 1 and 3)......................

148,850 141,950 Accounts payable 401,489 395,484 Accrued taxes (Note 4)...................................................

233,722 236,375 Accrued interest 110,394 117,447 Dividends payable 122,347 113,790 Accumulated deferred income taxes-net (Note 4)..............................

391,781 Other 106,240 66,145 Total current liabilities 1,595,396 1,190,654 Deferred Credits:

Accumulated deferred investment tax credits (Note 4)............................

485,614 399,019 Accumulated deferred income taxes-net (Note 4)...............................

32,062 Customer advances and other deferred credits..................................

234,866 313,050 Total deferred credits 752,542 712,069 Commitments and Contingencies (Notes 2, 7, 8 and 9)

Total Capitalization and Liabilities.

$12,593,449

$11,358,730 The accompanying notes are an integral part of these financial statements.

31

Southern California Edison Company Statements of Sources of Funds Used for Construction Expenditures Year Ended December31, 1985 1984 1983 FUNDS PROVIDED BY-(In Thousands)

Operations:

Net income

$ 774,107

$ 732,428

$690,780 Items in net income not affecting working capital Depreciation 454,574 398,623 289,361 Allowance for borrowed and equity funds used during construction...

(157,694)

(194,787)

(365,856)

Deferred income taxes.......................................

192,575 174,496 119,722 Investment tax credits deferred-net.............................

84,134 55,323 69,416 Other-net.................................................

5,102 40,408 82,168 Total funds provided by operations...................................

1,352,798 1,206,491 885,591 Dividends.........................................................

(532,265)

(492,049)

(438,135)

Total funds provided by operations-reinvested.....................

820,533 714,442 447,456 Long-term Financing:

Sales of securities Com m on stock...................................................

90,770 209,321 147,799 Long-term debt..................................................

1,111,880 627,860 130,848 Reduction for preferred and preference stock to be redeemed within one year......................................

(20,463)

(18,213)

(4,500)

Conversion of preference stock......................................

(758)

(1,764)

(1,995)

Increase in other long-term debt.....................................

2,638 26,099 Reduction for long-term debt due within one year.......................

(45,110)

(101,250)

(83,000)

Refunding and early retirement of preferred stock and long-term debt (653,632)

(403,896)

Total funds provided by long-term financing 482,687 314,696 215,251 Total funds provided 1,303,220 1,029,138 662,707 OTHER SOURCES (USES) OF FUNDS Working capital changes:

Cash and equivalents and cash investments..........................

20,268 189,669 (163,163)

Receivables-net..................................................

20,455 (70,859) 5,350 Fuel stock, materials and supplies....................................

154,659 5,835 147,167 Accumulated deferred income taxes-net.............................

392,808 216,663 (18,751)

Preferred and preference stock and long-term debt due within one year...............................................

(53,890) 31,963 29,500 Net short-term borrowings...........................................

21,900 (56,020) 50,678 Accounts payable..................................................

6,005 31,028 (46,784)

Accrued taxes.....................................................

(2,653)

(71,028) 141,264 Regulatory balancing accounts-net.................................

(773,656)

(394,603) 6,931 Other changes in working capital.....................................

19,658 (9,910) 20,135 Net (increase) decrease in working capital...........................

(194,446)

(127,262) 172,327 Fuel contract settlement payments, net of deferred taxes..................................................

(62,402)

Special funds and other-net........................................

30,123 (49,602)

(29,537)

Total other sources (uses) of funds...................................

(226,725)

(176,864) 142,790 Funds Used for Construction Expenditures..............................

$1,076,495

$ 852,274

$805,497 The accompanying notes are an integral part of these financial statements.

32

Southern California Edison Company December 31, 1985 Shares Redemption December 31, Statements of Capitalization Outstanding Price 1985 1984 (In Thousands)

Common Shareholders' Equity-detailed on page 34.............216,676,897

$ 4,575,400

$4,242,788 Preferred and Preference Stock-without mandatory redemption requirements (a)(b):

Original Preferred-5%, prior, cumulative, participating, not redeemable, par value $8/ per share.......................

480,000 4,000 4,000 Cumulative Preferred-par value

$25 per share (i):

4.08% Series.................

1,000,000

$ 25.50 25,000 25,000 4.24% Series.................

1,200,000 25.80 30,000 30,000 4.32% Series.................

1,653,429 28.75 41,336 41,336 4.78% Series.................

1,296,769 25.80 32,419 32,419 5.80% Series.................

2,200,000 25.25 55,000 55,000 8.85% Series.................

2,000,000 25.75 50,000 50,000 9.20% Series.................

2,000,000 25.75 50,000 50,000

$100 Cumulative Preferred-par value

$100 per share:

7.58% Series.................

750,000 102.50 75,000 75,000 8.70% Series.................

500,000 104.00 50,000 50,000 8.96% Series.................

500,000 104.00 50,000 50,000 Preference-par value

$25 per share (b):

5.20% Convertible Series......

149,782 25.00 3,745 4,503

$100 Preference-par value $100 per share.........................

Total Preferred and Preference Stock-without mandatory redemption requirements...

466,500 467,258 Preferred and Preference Stock-with mandatory redemption requirements (a)(c):

0D0 Cumulative Preferred-par value

$100 per share:

7.325% Series................

660,000

$104.29 66,000 69,000 7.80% Series.................

554,995 110.00 55,499 56,999 8.54% Series................682,500 105.65 68,250 75,000 8.70%SeriesA...............511,874 110.00 51,188 52,500 12.00% Series.................750,000 108.33 75,000 75,000 12.31% Series................500,000 105.83 50,000 50,000 Preference-par value $25 per share: 7.375% Series...............

1,984,000 25.00 49,600 62,000 415,537 440,499 Preferred and Preference Stock to be redeemed within one year....

(20,463)

(18,213)

Total Preferred and Preference Stock-with mandatory redemption requirements.....

395,074 422,286 Long-term Debt-Interest Rates First and Refunding Mortgage Bonds (d)(e)(f)(i):

Due 1986 through 1989...............44%-9/5%

290,000 562,050 Due 1990 through 1994...............4/2%-151%

895,000 770,000 Due 1995 through 1999................7%-81/4%

440,030 440,030 Due 2000 through 2004..............81/4%-

113/4%

1,007,750 1,007,750 Due 2005 through 2021...............

9%-16%

1,092,037 1,017,269 First Mortgage Bonds (Calectric)(d)(e)

Due 1986 through 1991...............41/2%-51/5%

46,000 52,000 Debentures Due 1992 through 1993..............1012 %-11%

200,000 Promissory Notes (b)(e)(g)

Due 1989 through 1997..............p 1t%151/2%

233,958 352,304 Pollution Control Indebtedness (f)

Due 2008 through 2009...............Variable 575,400 440,400 Other long-term debt (e)(h) 28,657 28,737 Principal amounts outstanding 4,808,832 4,670,540 Long-term debt due within one year-net (e)..............................................

(45,110)

(101,250)

Unamortized debt premium or (discount)-net (11,364)

(17,041)

Securities held by trustees (f)

(34,947)

(303,602)

Total Long-term Debt........................................................

4,717,411 4,248,647 Total Capitalization e e

c be ma..............................................................

$10,154,385

$9,380,979 Notes to Statements of Capitalization are on page 35.

The accompanying notes are an integral part of these financial statements.

33

Southern California Edison Company Statements of Common Shareholders' Equity 1985 1984 1983 (In Thousands)

Common Stock-par value $41/6 per share, 280,000,000 shares authorized, 216,676,897, 212,552,728 and 201,480,310 outstanding at December 31, of respective years (a)(b):.........................

$ 902,821

$ 885,637

$ 839,501 Additional Paid-in Capital:

Balance at January 1

$1,470,347

$1,307,413

$1,193,318 Premium received on sale of Common Stock and conversions (a)(b):.........................................

73,652 163,774 114,228 Capital stock expense..............................................

(66)

(840)

(133)

Additional Paid-in Capital at December 31,........................

$1,543,933

$1,470,347

$1,307,413 Earnings Reinvested in the Business:

Balance at January 1...............................................

$1,886,804

$1,646,425

$1,393,780 Add:

Net incom e...........................

774,107 732,428 690,780 2,660,911 2,378,853 2,084,560 Less:

Dividends declared on capital stock

..Common-$2.13 per share for 1985 and

$2.01 per share for 1984 and

$1.83 per share for 1983..............................

458,551 417,115 362,935

-O riginal Preferred..............................................

2,016 1,891 1,723 Cum ulative Preferred...........................................

67,676 68,203 68,540 Preference....................................................

4,022 4,840 4,937 532,265 492,049 438,135 Earnings Reinvested at December 31, (c)..........................

$2,128,646

$1,886,804

$1,646,425 Total Common Shareholders' Equity at December 31..................

$4,575,400

$4,242,788

$3,793,339 Notes to Statements of Common Shareholders' Equity are on page 35.

The accompanying notes are an integral part of these financial statements.

34

Southern California Edison Company Notes to Statements of Capitalization (a) As of December 31, 1985, authorized shares (c) For Preferred and Preference Stock with Mandatory Redemption Requirements, the aggregate manda for the Original Preferred, $25 Cumulative Pre-tory redemption requirements for the five years subsequent 1oDecember31, 1985 are as follows.

ferred, $100 Cumulative Preferred, $25 Preference and $100 Preference Stock were 480,000, No. of 24,000,000, 12,000,000, 10,000,000, and 2,000,000 Shares Commencing 1986 1987 1988 1989 1990 shares, respectively. All series of Cumulative Pre-

$100 Cumulative (in Thousands) ferred, $100 Cumulative Preferred and Preference Preferred Stock are redeemable at the option of the Com pay.Te 0,00 hre f 10 umltiePr-7.325%............

30,000 7/31/83

$ 3,000

$ 3,000

$ 3,000

$ 3,000

$ 3,000 pany. The 500,000 shares of $100 Cumulative Pre ferred Stock, 12.31% Series, are not subject to 7.80%.............15,000*

11/30/83 1,500 1,500 1,800 1,800 1,800 such redemption until May 1, 1992. The various 8.54%.............22,500*

6/30/86 2,250 2,250 series of $100 Cumulative Preferred Stock, and the 8.70%A............13,125 6/30/85 1,313 1,313 1,313 1,313 1,313 Preference Stock, 7.375% Series, are subject to 12.00%.............22,500-12/31/86 2,250 2,250 2,250 2.250 2,250 cetan esritinsonrdeptonfo rfudig 12.31%.............

35,000**

4/30/88 3,500 3,500 3,375 certain restrictions on redemption for refunding Peeec purposes.

Preferenc 7.375%............

496,000 2/01/85 12,400 12,400 12,400 12,400 (b) As of December 31, 1985, the conversion price

$20,463

$20,463

$24,263

$26,513

$13,988 of the Preference Stock, 5.20% Convertible Series was $15.75 per share. The 12/2% Convertible Subordinated Debentures Due 1997, issued by Increases to 18,000 shares beginning in 1988.

Southern California Edison Finance Company N.V.,

67,500 shares ware redeemed in 1985 are convertible into Company common stock at series are to be redeemed on February 28, 1986.

the conversion price of $16.1875 per share.

• • • Decreases to 33,750 shares beginning in April 1990.

(d) Substantially all of the properties of the Coin-(f) First and Refunding Mortgage Bonds ano other guaranteed on a subordinated basis by the Com pany are subtect to the liens of Trust Indentures, indebtedness have been issued to governmental pany. The Subordinated Debentures are convert agencies in exchange for the proceeds from the ible into the Company's Common Stock.

(e) Maturities and sinking fund requirements of issuance of Pollution Control Revenue onds and long-term debt for the five years subsequent to Pollution Control Revenue Refunding Bonds. The (h) Pursuant to the Nuclear Waste Policy Act of December 31, 1985 are as follows:

proceeds have been deposited with Trustees and 1982 (Act), the Company has entered into a con are being utilized to defray the construction and tract with the U.S. Department of Energy for dis Year Ended Sinking Fund other specified costs of pollution control facilities posai of spent nuclear fuel for the San DOofre Decewber 31, Maturities Requirements Total and retirement of maturing issues. Such Bonds Nuclear Generating Station. The weighted-aver (In Thousands) may be redeemed at the election of the Bond hold-age interest rates used for the years ended De 1986.........$ 39,860

$5,250

$ 45,110 er. The Company has entered into agreements cember 31,1985 and 1984 were 974% and 9.63%,

1987.......... 148,065 5,250 153,315 with security dealers which provide for the remar-respectively.

19887..........374,292 5,250 79,542 keting or purchase of the Bonds when such elec 19891..........2137,544 5,250 142,794 tions are made.

(i) The $25 Cumulative Preferred Stock, 8 285%

1990....

1.....

349,823 5,725 355,548 and 9.20% Series, are planned to be redeemed on (g) Promissory Notes payable to Southern Califor-March 4, 1986. During January and February nia Edison Finance Company N.V. (Finance) have 1986, the Company reacquired through a tender been issued in exchange for the proceeds from offer and an open-market purchase approximately the issuance of Debentures by Finance. Payment

$125,000,000 principal amount of First and of the principal and interest on $225,000,000 and Refunding Mortgage Bonds, Series 85A, Due

$8,958,000 principal amount of tne Debentures 201 Related deot reacquisition expenses of are, respectively, unconditionally guaranteed ano approximately $23,500,000 were incurred Notes to Statements of Common Shareholders' Equity (a) At December 31, 1985, shares of Common

• These plans include the Dividend Reinvestment Shares Issued 1985 1984 1983 Stock reserved for issuance were as follows:

and Stock Purchase Plan (DRP), Stock Savings DRP......... 2,942,754 5,389,210 4,657,988 Plus Plan (SSPP) and Employee Stock Ownership SSPP.....

2,954,346 1,907,422 Shares Plan (ESOP). Common Stock required for the plans ESOP.-

1,214,803 1,404,400 Conversion of Preference Stock, are provided through open market purchases.

5.20% Series 48,090 112,015 126,554 5 20% Convertible Series..........237,755 121/% Convert Conversion of 12/2% Convertible (b) Transactions in the capital stock accounts dur-ible Deben Subordinted Debentures, Due 1997, ing 198, 1984 and 1983 reflect the issuance of co-tures.......1,133,325 1,402,044 Issued by Southern California mon stock through stock purchase plans, the con Edison Finance Company N.y......664,88 version o130,323, 70,687 and 79,825 shares in the (c) Includes undistributed earnings of unconsoli Stock purchase plans............... 4,238,575*

respective years of Preference Stock, 5.20% Con-dated subsidiaries of $26,165,000 ano appropriated vertible Series (5.20% Series) and conversion of reinvested earnings related to certain federaly Total........................

5,140,918 12i/ 2 % Convertible Subordinated Debentures, Due licensed hydroelectric projects of $4,274,000 at 1997, as follows:

Decemer 31, 1985.

35

Southern California Edison Company Notes to Financial Statements NOTE 1-Summary of Significant Accounting Policies General-Research and Development The accounting records of the Company are maintained in Research and Development (R&D) costs are expensed accordance with the Uniform System of Accounts as pre-currently if they are of a general nature. Plant-related R&D scribed by the Federal Energy Regulatory Commission costs are accumulated in construction work in progress (FERC) and adopted by the California Public Utilities until a determination is made as to whether such projects Commission (CPUC).

will result in construction of electric plant. If no construc tion of electric plant ultimately results, the costs are Utility Plant-charged to expense.

The cost of additions and replacements of units of prop-Year Ended December 31, 1985 1984 1983 erty is capitalized and included in utility plant. The original (In Thousands) cost, less net salvage, of retired property units is charged R&D costs charged to expense.............$44,139

$35,843

$32,588 to accumulated depreciation. The cost of minor additions R&D coats deferred/capitalized.............1,030 3,946 11,687 and repairs is charged to maintenance expense.

Total R&D expenditures...................$45,169

$39,789

$44,275 An allowance for borrowed and equity funds used during Income Taxes construction (AFUDC) is included as a cost of construc-Accounting policies with respect to taxes are set forth in tion. The amount of AFUDC capitalized is also reported in Note 4.

the Statements of Income as a reduction of interest charges for the borrowed funds component of AFUDC and as other income for the equity funds component. Although Unamortized Debt Issuance and AFUDC increases net income, it does not represent cur-Reacquisition Expense rent cash earnings. The AFUDC rate, which is based upon Debt premium, discount, and related issuance expenses a formula prescribed by the FERC, was 10.40%, 10.24%

are amortized over the lives of the issues to which they and 9.95% for 1985, 1984 and 1983, respectively pertain. Reacquisition expenses, including unamortized premium, discount and issuance expense associated with Property-Rrelated accum ulated deferred incom e taxes areof th e

reti red inetalize de wh r e

ued r

1 39 1i 68 deducted from utility plant. This treatment is consistent reudnadorth lives of the newre idebtissues when raqie ihu with the ratemaking method used to determine rate base.

Totl g

R ndtur es

$5 6

$97

$44s275 reacquired with refunding. Such expenses are being recovered in rates. The Company recorded approximately Depreciation-

$52,250,000 and $61,150,000 associated with debt reac For financial reporting purposes, depreciation of utility quisition expenses during 1985 and 1984, respectively.

plant is computed on a straight-line remaining life basis and approximated 4.1%, 4.2% and 4.1%, of average depre-Revenues and Regulatory Balancing Accounts ciable plant for the years 1985,1984 and 1983, respec-Revenues are recorded when customers are billed. As tively. The Companys rates are designed to recover the authorized by the CPUC, the Company has established original cost of utility plant, including the estimated decom regulatory balancing accounts which remove the effect on misomuna prestcfribd the nFEC Nuar Generating24 ationd 9San Onofre) through nderea pen se v earnings of fluctuations in kilowatt-hour sales, fuel and thestmattd reaining ele ci liies.

oed purchased power costs and certain conservation program heditedrexpenses.

An Electric Revenue Adjustment Mechanism December 31,1985, rates reflected the estimated decom misin g cos of $2 9,2600 ap lc betoSn.or base rate revenues caused by, among other things, fluctu i

nations in kilowatt-hour sales levels. An Energy Cost Adjust ment Clause (ECAC) balancing account is used to record Special Funds-monthly entries to adjust the results of operations for varia Restrictions have been placed on a portion of the pro-tions between 90% of recorded fuel and purchased power ceeds from certain pollution control indebtedness pursuant costs and those recovered through rates. Such variations to conditions in the related tax-exempt loan agreement.

are deferred and accumulated in the balancing account The loan conditions require such proceeds to be utilized for until they are refunded to, or recovered from, utility cus the redemption of indebtedness incurred during the period tomers through CUC-authorized rate adjustments. Effec in which the pollution control facilities were constructed.

tive January 1,1986, the ECAC balancing account includes 36

Southern California Edison Company NOTE 2-Regulatory Matters a fuel oil inventory carrying charge based on short-term San Onofre Units 2 and 3 debt interest rates, while for prior years such carrying Rate Treatment and Proposed Disallowance charges were based on the Company's earned rate of When San Onofre Units 2 and 3 were placed in commer return on rate base. The Company has been authorized cial operation in 1983 and 1984, the CPUC did not autho Annual Energy Rate (AER) revenues to recover the remain-rize the Company to recover through customer rates the ing 10% of forecasted fuel and purchased power costs. On full cost of these units. Instead, the CPUC authorized the May 15, 1985, the CPUC issued an interim rate order in recovery of a portion of costs in customer rates and di which the AER component of fuel costs was temporarily re-rected the Company to accrue in a MAAC balancing ac duced to 2%. The AER is expected to be returned to 10%

count the portion of revenues not included in rates. As of during 1986. The ECAC balancing account is also used to December 31,1985, approximately $458 million of reve record monthly entries to adjust the results of operations nues have been recorded in the MAAC balancing account.

for variations between AER costs and AER revenues in These revenues have been included in reported earnings excess of $30,299,000 on an annualized basis as of but not collected from customers. Amounts accrued in the December 31, 1985.

MAAC balancing account represent an asset on the Com pany's balance sheet. When reflected in rates and re The CPUC has established a performance incentive covered from customers, revenues previously accrued in plan for San Onofre Units 2 and 3 which sets a target ca-

flow, butaotits arnng frte Covery is pacity factor range of 55% to 80%. The fuel savings or nied by t CtU for an ns Inclue i e

coats for operations above or below the target capacity ning acco a wto ns incoe wu e factor range are divided equally between the Company's requied.

shareholders and customers.

A Major Additions Adjustment Clause (MAAC) authorized Effective January 1, 1985, the CPUC granted the Coin the Company to include in rates the cost of owning and pany's request for a $300 million annual increase in rates operating San Onofre Units 2 and 3. Under MAAC, a to fully reflect the Company's ownership costs for San balancing account is utilized to record differences in in-Onofre Units 2 and 3. The total authorized customer rates vestment-related costs and rates authorized by the CPUC for these units now approximates the investment-related torrecover such costs.

costs.

Interest is accrued on the regulatory balancing accounts The CPUC is reviewing the Company's investment in San at the most recent three-month prime commercial paper Onofre Units 2 and 3 to determine the reasonableness of rate as published by the Federal Reserve. The implicit construction costs for rate recovery purposes. The Coin weighted-average interest rates used for the years 1985 pany's share of the total costs for these units is approxi Dme 31, 195,aprxmaeyl45iilinnfree and 1984 were 8.12% and 10.09%, respectively. The in-e bn come tax effects of the changes in the regulatory balanc ing accounts are deferred.

Since their initial report in May 1985, the CPUC Public Staff has made three revisions to their recommended amount of Subsidiaries-disallowance of San Onofre Units 2 and 3 construction The Company's investments in unconsolidated subsidiary costs. Most recently the Public Staff reduced their recoin companies are accounted for by the equity method except mended disallowance of the Company's share of construc for the Company's subsidiaries engaged in Eurodebenture tion costs from $839 million to $729 million. Approximately financings. For these subsidiaries, cash investments and

$402 million of the recommended disallowance is based short-term borrowings are presented separately on the on consultant reviews. The remaining $327 million of rec balance sheet of the Company. The Company's other sub-ommended disallowance is based on a "risk sharing" con sidiaries are not considered significant for financial report-cept introduced by the Public Staff on November 1 which ing purposes.

would establish a 1975 Company project cost estimate as the benchmark for rate recovery of construction costs. Un der the "risk sharing" concept, costs in excess of the 1975 Reclassifications -

project cost estimate, after reduction for the recommended Certain items have been reclassified in prior periods to

$402 million disallowance based on consultant reviews, make them comparable to the classifications at December would be shared equally by ratepayers and shareholders.

31,1985.

37

Southern California Edison Company Notes to Financial Statements (Continued)

A finding by the CPUC that a portion of the Company's in-the disallowed costs previously included in reported vestment in these units is "unreasonable" would result in earnings would have to be written off.

the disallowance of costs from the Company's rate base.

The Company would be precluded from recovering and In light of the circumstances described above, including earning a return on such disallowed costs.

the frequent change in the Public Staff's recommenda tions, the unique nature of its "risk sharing" proposal and The Company believes the construction process and costs the possibility that relevant accounting principles will be at San Onofre Units 2 and 3 were reasonable and well amended, it is not possible for the Company to determine managed and has submitted extensive evidence, includ-the probable financial effect that the final outcome of the ing the testimony of nationally known and highly respected CPUC reasonableness review will have on the Company's experts in the fields of nuclear power and regulation, to financial position and results of operations.

demonstrate this fact. The Company vigorously supports this position and opposed the CPUC Public Staff's recom-Palo Verde Units 1, 2 and 3 mendations during hearings which commenced in Decem-Proposed Rate Treatment ber 1985 before the CPUC. A CPUC decision on the ber 985befoe te CPC.

CPU deisio onthePalo Verde Unit 1 was placed into commercial operation on reasonableness issues is not expected before late 1986.

February 1,1986 and Units 2 and 3 are scheduled for commercial operation in the third quarters of 1986 and Under generally accepted accounting principles currently 1987, respectively. On May 31,1985, the Company filed a in effect, amounts excluded from rate base are not gen-MAAC application with the CPUC for rate recovery of the erally written off as a charge against income at the time of Company's share of owning and operating Unit 1. In this fil disallowance, but are depreciated over the remaining ser-ing the Company requested rate recovery on the basis of vice life of the facility. Only when the disallowance is so traditional ratemaking practices commencing when the large that allowed rates will be inadequate to recover the to-unit achieved commercial operation.

tal costs of the facility is the unrecoverable investment writ tenbff as a charge against income. However, the Financial The CPUC Public Staff on June 17,1985 recommended the AccontngStandards Board (FASB) has proposed Accunting SadrsBad(ABhapooeduse of an unconventional ratemaking method for the Coin amendments to its accounting standards for several regu latory-related accounting issues, including a regulator's ratemaking method, which is known as "avoided-cost partial disallowance of construction costs for operating ratemaking," was designed for non-utility power plants. Un plants. The FASB proposed accounting for partial cost dis-der this method, the Company's share of the Palo Verde allowances is to require an immediate write-off of any con-output would be priced based upon the cost of other gen struction costs excluded from rate base. Because of this eration sources, the use of which would be avoided proposal, there is uncertainty regarding whether current accounting standards will apply to any San Onofre disal-through the pt of the V e Units.

cem lowances which may be imposed. The FASB expects its ratemaking" and directed the Company and its staff to in reconsideration of regulatory accounting issues to be com-vestigate other ratemaking methods which fulfill the pleted during 1986.

CPUC's objectives of ensuring cost effectiveness, provid ing operating performance incentives, and fairly allocating If the CPUC adopts a substantial portion of the Public the plant's capital costs between current and future Staff's recommended rate base disallowance and if the ratepayers.

FASB changes the principle of accounting to require an immediate write-off of such amount, the adverse financial However, on August 9,1985, the CPUC authorized the impact of such disallowance would be material to the Company to implement an interim balancing account pro Company's financial condition and also would result in a cedure until the permanent ratemaking method for Palo material charge against earnings. Moreover, even if exist-Verde is determined.

ing accounting standards are not revised, should the CPUC adopt a substantial portion of the Public Staff's rec ommended rate base disallowance, a material charge In addition to considering alternative ratemaking methods, against earnings would result at the time of such disallow-the CPUC is participating in a four state regulatory reason ance because the portion of revenues associated with ableness review of the Palo Verde construction costs.

38

Southern California Edison Company NOTE 3-Short-term Borrowings Fuel Supply Contract Settlements The Company has entered into an agreement with a major In order to continue lines of credit with various banks, the fuel oil supplier to settle litigation arising from the termina-Company presently maintains deposits aggregating ap tion of a fuel supply contract. In accordance with the proximately $7000000 which are not legally restricted as agreement, the Company has paid the supplier $350 mil-to withdrawal. The lines of credit, which are also available lion and has entered into a ten-year option agreement for to support commercial paper, amounted to $572,000,000 the purchase of low sulfur fuel oil. Under the terms of the and $567,000,000 as of December 31,1985 and 1984, option agreement, the Company is required to pay $9 mil-respectively lion annually for the supplier's commitment to deliver fuel oil on relatively short notice at current market prices.

Short-term borrowings and related weighted-average interest rates were $15,000,000 and 8.92% at December The Company has also entered into uranium supply con-have1any outstanding1short-termCborrowings.

tract termination agreements to cancel contractual pur chase obligations with two uranium suppliers. During 1985, The Company has guaranteed commercial paper (included the Company paid an $18.2 million settlement amount re-on the Company's balance sheet) issued by one of its lating to one of the suppliers and $30.7 million as a partial wholly owned subsidiaries engaged in financings. Pro settlement of a $63.9 million termination obligation relating ceeds from the issuance of the commercial paper are used to the other uranium supplier.

for capitalization of an affiliate engaged in Eurodebenture borrowings. The lines of credit available for the issuance These payments have been recorded in the Company's of commercial paper amounted to $96,400,000 and regulatory balancing accounts pending decisions by the

$150,000,000 as of December 31,1985 and 1984, respec CPUC and FERC regarding their recovery in rates.

tively Commercial paper issued in excess of the sub sidiary's lines of credit is supported by the Company's lines of credit.

The Company believes that the terms and conditions of these fuel supply settlement agreements are reasonable Short-term borrowings and related weighted-average and in the best interest of the Company and its ratepayers.

interest rates of the Company's financing subsidiary Although the Company cannot predict with certainty were $148,850,000 and 8.15% at December 31,1985 whether the CPUC and the FERC will allow the Company to and $141,950,000 and 8.60% at December 31,1984.

recover its costs under or resulting from the option and settlement agreements, the Company believes that such costs are a proper item for rate recovery and does not ex-NOTE 4-Income Taxes pect that it will be denied recovery of amounts in future The current and deferred components of income tax rate proceedings that will have a material adverse effect expense are as follows:

on the financial condition of the Company.

Year Ended December 31, 1985 1984 1983 Current:

(In Thousands)

Resale Rates-Federal........................

$ (39,600) $ 140,510

$ 178,246 In accordance with FERC procedures, the Company's re-State..........................

24,841 56,760 58,655 sale rate increases are subject to refund with interest to the (14,759) 197,270 236,901 extent that they are subsequently determined by the FERC Deferred-Federal and State; to be inappropriate. As of December 31, 1985, revenues Investment tax credits-net...........84,134 55.323 69,416 subject to refund, after giving effect to incremental fuel Aceted ost recovery cost adjustment billing credits, aggregated approximately Regulatory balancing accounts........365,329 205,013 (3,919)

$680.1 million. The Company believes that the amount Fuel contract settlements.............91,681 (15,104)

(21,586) of refunds, if any, likely to result from the outstanding proceedings would not have a material effect on the results 7

of operations.

Total income tax expense............ $ 709,010

$ 610,209

$ 380,076 Income taxes included in operating expenses............... $

720,938

$ 639,875

$ 497,236 Income taxes included in other income (11,928)

(29,666)

(117,160)

Total income tax expense...........

$ 709,010

$ 610,209

$ 380,076 39

Southern California Edison Company Notes to Financial Statements (Continued)

NOTE 5-Employee Benefit Plans Total income tax expense includes the current tax liability Pension Plan generated from the Company's operations and deferred The Company maintains a trusteed, non-contributory pen income taxes provided on certain items of income and sion plan, which covers substantially all employees. The expense which are reported in different periods for tax annual normal cost of the plan is funded by the Company and financial statement purposes. Consistent with current with contributions determined on the basis of a level ratemaking procedures, the major items for which deferred premium funding method. Unfunded prior service costs income taxes are provided include the tax effects of regu-relating to 1982 and 1985 plan amendments are being latory balancing account provisions and accelerated de-funded over 30-year periods. Pension costs are provided preciation under the provisions of the Accelerated Cost for on the basis of actuarial determinations and amounted Recovery System.

to $57,859,000, $54,820,000 and $48,701,000 for the years 1985, 1984 and 1983, respectively.

Deferred income taxes for certain property-related timing At January 1, 1985 (a) 1984 differences have not been provided because the tax (In Thousands) effects of such timing difference reversals are not allowed Actuarial present value of accumulated plan benefits:

for retail ratemaking purposes until the taxes become Vested................................$608240

$586,003 payable. The cumulative net amounts of these timing Nonvested...............................49,460 49,143 differences were approximately $2,014,000,000 and

$657,700

$635,146

$1,806,000,000 at December 31, 1985 and 1984, respec-Net assets available for plan benefits..

$795,845

$746,551 tively. The tax effects of these timing differences are ex pected to be recovered in future rates. The cumulative net (a) Latest available data.

amount of timing differences not related to property is insignificant.

Actuarial rate of return assumptions used in determining the actuarial present value of accumulated plan benefits In accordance with the provisions of the Economic Recov-were 7.5% and 7.0% as of January 1,1985 and 1984, ery Tax Act of 1981, all investment tax credits generated respectively.

after 1982 are being deferred and amortized as reductions to income tax expense ratably over the lives of the prop-Employee Stock Plans erty giving rise to the credits.

The Company maintains an Employee Stock Ownership Plan (ESOP) and a Stock Savings Plus Plan (SSPP) to sup The following table reflects the differences between state plement its employees' retirement income. Contributions to athe ESOP are funded primarily by Federal income tax ben determined on income e ortaxes by applying the efits available to the Company and contributions made by etermn on e tax by ralapplyin thepFed-participating employees. The Company's contributions to Federal and state statutory income tax rates Tae pi the SSPP amounted to $13,878,000, $12,539,000 and Fdland 4,rstaettutoyicm a

ae r

6

$5,639,000 for the years 1985, 1984 and 1983, respectively.

and 51.184%, respectively.

Year Ended December 31.

1985 1984 1983 Other Post-Retirement Benefits Expected federal income tax expense at (In Thousands)

The Company provides certain health care and life insur statutory rate...................

$ 682,234

$ 617,613 $ 492,594 ance benefits for retired employees and their dependents.

Increase (Decrease) in income tax Group life insurance benefits are provided through an expense resulting from:

Allowance for equity and borrowed insurance company. Health care benefits are provided funds used during construction....

(72,539)

(89,602)

(168,294) through a combination of Company health care facilities Federal deduction for state and health insurance programs. The cost of providing these taxes on income..................

(54,578)

(46,414)

(24,712)

Depreciation timing differences not deferred.....................

92,900 77,841 45,732 years 1985 and 1984, respectively.

State tax provision.................

118,647 100,900 53,723 All other differences................

(57,654)

(50,129)

(18,967)

Total income tax expense..........

$ 709,010

$ 610,209

$ 380,076 NOTE 6-Jointly-Owned Utility Projects Pretax income.

................... $1,483,117

$1,342,637 $1,070,856 Effetivetaxrate(Totl icometaxThe Company owns undivided interests in several jointly Effective tax rate (Total income tax expense - Pretax income)...........

47.8%

45.4%

35.5% owned generating stations and transmission systems for which each participant must provide its own financing. The Company's proportionate share of expenses pertaining to 40

Southern California Edison Company such projects is included in the appropriate category of At December 31,1985, estimated rental commitments for operating expenses in the Statements of Income. The unrecorded capital leases and noncancelable operating amounts in the table below represent the Company's in-leases consisted of the following:

vestment in each such project as reported on the Balance Capital Operating Sheet as of December 31, 1985:

Year Ended December 31, Leases(a)

Leases Utility Construction 1986 Plant in Accumulated Work in Ownership 1987

$ 3,157

$17,597 Projects Service Depreciation Progress Interest 1,199 15,224 1988......................

583 13,050 (In Thousands) 1989 396 10,809 El Dorado Transmission System.....

21,615

$ 7,293 1

60.0%(a) 1990 35 8,482 Four Corners Coal Generating Station For Periods Thereafter 19,143 Units 4 & 5.....................

367,697 64,530 4,340 48.0 Mohave Coal Generating Station.....

208,630 71,828 6,737 56.0 Total Future Rental Commitments 5,370

$84,305 Pacific Intertie DC Transmission Less amount representing interest....................

645 System..........................

110,127 27,141 3,538 50.0 Palo Verde Nuclear Generating Present value of future minimum rental commitments.

$ 4,725 Station...........................

1,069 63 1,375,138 15.8 San Onofre Nuclear Generating (a) Excludes nuclear fuel, the cost base of which is payable when the fuel is Station: -

consumed. The unrecovered cost base ot the nuclear fuel lease was Unitl...........................

395,308 99,751 42,800 80.0 approximately $551,000,000 at December 31,1985.

Units 2 & 3......................

2,915,941 209,678 7,270 75.05 Common Facilities-Units 2 & 3...

714,161 37,061 1,563 75.05 Common Facilities-Units 1,2&3..

117,938 12,249 30,284 75.87 NOTE 8-Commitments Solar One Generating Station........

18,073 12,391 80.0 Yuma Axis Combined Cycle Construction Program and Fuel Supply Generating Station...............

12,369 8,964 33.3 The Company has significant purchase commitments in Total...............................

$4,882,928

$550,949

$1,471,671 (a) epreentsa cmposte rteof December 19, 1985 (the date of the Company's latest (a) Represents a composite rate.

approved budget), funds required for construction ex penditures are estimated at $1,093,000,000 for 1986, NOTE 7-Leases

$822,000,000 for 1987 and $751,000,000 for 1988. Mini mum long-term commitments of approximately Rental payments charged to operating expenses

$1,736,000,000, which include the amounts required by amounted to $124,153,000, $127,022,000 and $61,714,000, the contract settlements with major fuel suppliers dis for the years 1985, 1984 and 1983, respectively.

cussed in Note 2, existed on December 31,1985 under the Company's fuel supply and transportation arrangements.

The Company leases nuclear fuel to meet a portion of its Nuclear Waste Policy Act energy requirements. Under the terms of the lease agree-Pursuant to the Nuclear Waste Policy Act of 1982, contracts ment, quarterly payments are based upon consumption of have been entered into with the U.S. Department of Energy the nuclear fuel and are designed to return the accumu-(DOE) for disposal of spent nuclear fuel. Under contract lated investment in nuclear fuel and a financing charge on terms, the Company is required to pay a quarterly fee of unrecovered costs to the lessor. Such payments are recov-one mill per kilowatt hour to the DOE for nuclear genera erable through the Company's ECAC procedures.

tion on and after April 7,1983. For generation prior to April 7,1983, payment of a one-time fee equivalent to one mill The nuclear fuel lease, and certain other leased property, per kilowatt hour plus accrued interest is required. This meet the criteria requiring capitalization under generally one-time fee has been recorded as a deferred charge accepted accounting principles for unregulated enter-pending future rate recovery, and including accrued inter prises. Had such leases been capitalized, the Company's est, approximated $27,902,000 at December 31,1985. The Balance Sheets would have included additional assets and Company has elected to pay for this one-time fee by mak liabilities of approximately $556,000,000 and $557,000,000 ing equal payments over forty quarters. Such payments at December 31, 1985 and 1984, respectively. In accor-commenced during the third quarter of 1985. The amounts dance with an accounting standard applicable to rate reg-charged to income for current generation were $8,925,000, ulated enterprises, the Company is required to record the

$7,707,000 and $2,185,000 for the years ended December assets and obligations of such leases on its Balance Sheet 31,1985,1984 and 1983, respectively. Recovery of the ex commencing in 1987.

penses associated with disposal of spent nuclear fuel through the Company's ECAC procedures commenced January 1, 1984.

41

Southern California Edison Company Notes to Financial Statements (Continued)

Long-term Purchased Power and Transmission Additional information as of December 31,1985 pertaining Contracts-to both purchased power and transmission service con Under firm contracts, the Company has agreed to pur-tracts is summarized in the following table:

chase portions of the generating output of certain facilities Purchased Transmission and to purchase firm transmission service where appropri-Power Service ate. Although the Company has no investment in such Dates of Expiration...................1987-1990 1990-2016 facilities, these contracts provide that the Company pay Variable Components of Contracts.........

(a)

(a) certain minimum amounts (which are based at least in part Required Future Minimum Annual Payments (In Thousands) 1986......

..................... $ 68,954

$ 11,502 on the debt service requirements of the provider) whether 1987..............................66,316 11,380 or not the facility or transmission line is operating. None of 1988...

63667 11,201 these power contracts provides, or is expected to provide, 1989 45,966 9,446 1990...........

14,209 6,063 in excess of 5 percent of the Company's current or esti-Later years 101,618 mated future operating capacity The cost of power and Total...............................259,112 151,210 firm transmission service obtained under these contracts, Less Amount Representing Interest to including payments made when a facility or transmission Reduce Total to Present Value...........(60,877)

(79,646) line is not operating, is included in Purchased Power and Total at Present Value..................$198,235

$ 71,564 Other Operating Expenses, respectively, in the Statements Total Purchases for the Years Ended of Income. Purchased power costs are generally recover-December31, able through the Company's ECAC procedure. Selected in-1984 32,023 7,90 formation as of December 31, 1985 pertaining to purchased 1983 7,204 6,397 power contracts is summarized in the following table:

(a) The variable components of certain contracts are based upon a pro-rata share ot actual operating, maintenance, and fuel costs or on the U.S. Gov Share of Effective Operating Capacity-Megawatts(a) 727 ement cost of service.

Share of Energy Output (b)........................

7.9%-100%

Total Estimated Annual Cost..................

$111,610,000 Company's Portion of Estimated Annual Cost Ap'licable to Suppliers' Annual Minimum Debt NOTE 9-Contingencies Service Requirement..........................

$ 18,825,000 Com any's Allocable Portion of Interest of Suppliers lncttded in Annual Minimum Debt Service......

$ 12,974,000 The Price-Anderson Act currently limits the public liability Related Long-Term Debt or Lease Obligations Outstandingimum amount of $650,000,000 for each licensed nuclear (a) Effective operating capacity may vary according to water availability and other conditions.

(b) According to the provisions of a certain contract, the Company's share of purchased by the participants in the San Onofre and energy output from the contracted facility varies at different times.

Palo Verde Nuclear Generating Stations, including the Company, in the maximum available amount, presently

$160,000,000 with the balance to be provided by second ary financial protection required by the Nuclear Regulatory Commission (NRC). Under the agreement with the NRC, the Company could be assessed retrospective premium adjustments, of up to $26,170,000 per year, in the event of nuclear incidents involving any licensed reactor in the United States.

42

Southern California Edison Company Property damage coverage is provided for losses up to charges certain classes of its retail customers ("price

$500,000,000 at the San Onofre and Palo Verde Nuclear squeeze"), and (ii) has taken action alone and in concert Generating Stations. Decontamination liability and property with other utilities to prevent or limit such resale customers damage insurance in excess of the primary $500,000,000 from obtaining bulk power supplies from other sources to layer has also been purchased. Insurance to cover a por-reduce or replace the resale customers' wholesale pur tion of the additional expense of replacement power re-chases from the Company ("foreclosure"). The plaintiffs sulting from an accident-related outage of a nuclear unit is have estimated their actual damages for alleged price also provided. A maximum weekly indemnity in the amount squeeze, before trebling, at approximately $22,780,000 and of $3,000,000 for a single unit for 52 weeks commences foreclosure damages stemming from alleged loss of en after the first 26 weeks of such an outage. An additional ergy and capacity at approximately $82,500,000 before

$1,500,000 per week is provided for the next 52 weeks.

trebling, for the period February 1,1978 to December 31, These policies are primarily provided through mutual insur-1985. On January 10,1986, the judge set a June 3,1986 ance companies owned by utilities with nuclear facilities. If trial date. The foregoing proceedings involve complex is losses at any nuclear facility covered by the arrangement sues of law and fact and, although unable to predict their were to exceed the accumulated funds available for these final outcome, the Company has categorically denied the insurance programs, the Company could be assessed resale customers' allegations.

retrospective premium adjustments of up to $66,486,000 per year. Insurance premiums paid by the Company are charged to Operating Expenses.

NOTE 10-cuarterly Financial Data Government Licenses-The following table presents financial data for each of the The terms and provisions of licenses granted by the quarterly periods in the years 1985,1984 and 1983:

United States cover the Company's major and certain First Second Third Fourth mihor hydroelectric plants, with a total effective operating Quarter Quarter Quarter Quarter capacity of 937.0 megawatts. These licenses also cover 1985 certain storage and regulating reservoirs and related Operating Revenues (000)

. $1,216,783 $1,227,877 $1,451,669 $1,272,519 transmission facilities. The above licenses expire at van-Operating Income (000).

250,721 244J93 264,262 213,578 ous-times between 1986 and 2009. The licenses contain Net Income (000)............

201,518 189,702 209,979 172,909 uEarnings Available for numerous outcomc the Company haommon and Original Company, including the right of the United States to ac-Preferred Stock (000)........

183,397 171,737 192,089 155,186 quire Company properties or, under certain conditions, the Earnings Per Share

.86

.80

.89

.71 FERC to issue a license to a new licensee upon the payment 1984 to the Company of specified compensation. Applica-Operating Revenues (000).

$1,084,158 $1,135,079 $1,410,506 $1,269,408 Operating Income (000).

220,132 249,111 274,717 222,664 tions of the Company for the relicensing of certain hydro-Net Income (000).............189,611 178,560 197,253 167,003 electric plants referred to above with aggregate effective Earnings Available for operating capacity of 31.8 megawatts are pending. Any Common an Origina bisud Preferred Stock (000)........

171,309 160,266 178,968 148,841 new licenses to the Company are expected to ed Earnings Per Share

.84

.78

.86

.70 upon terms and conditions less favorable than those of the 1983 expired licenses.

Operating Revenues (000)...

$1,040.773 $1,045,247 $1,248,670 $1,129,566 Operating Income (000).

161,636 161,440 171,271 209,683 Antitrust Litigation-Net Income (000).............

168,948 172,576 192,077 157,179 Earnings Available for In March 1978, five resale customers filed a suit against Common and Original the Company in federal court alleging violation of certain Preferred Stock (000).......

150,538 154,176 173,735 136,854 antitrust laws. The complaint seeks monetary damages, a Earnings Per Share

.77

.78

.87

.69 trebling of such damages and certain injunctive relief. The complaint alleges that the Company (i) is engaging in anti competitive behavior by charging more for wholesale elec tricity sold to the resale customers than the Company 43

Southern California Edison Company Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Earnings Summary The Company achieved record earnings for the fifth The net effect of changes in rates was to increase the consecutive year Earnings per share in 1985 were $3.26, overall revenue per kilowatt-hour by 3.4% in 1985, 3.8% in as compared to $3.18 in 1984, reflecting a 2.5% increase.

1984 and 2.5% in 1983.

As reflected in the following chart, the percentage of earn-The chart below reflects the changes in the major compo ings exclusive of non-cash Allowances for Funds Used nents of operating revenues which contributed to the over During Construction (AFUDC) has increased from 45% in all increase for the past three years:

1981 to 78% in 1985, the highest level in ten years. Im provement in earnings quality is expected to continue in 1986 and 1987 as construction costs of Palo Verde Units 1, Operating Revenues-Changes 2 and 3 are included in rates.

S800 (Millions)

Quality of Earnings (Per Share)

$4 Allowance for Funds Used During Construction

$3.11

$3.18

$3.26 3

$2.46

$2.56L 78

$548 Base Rate Changes 2Iaz

-400 Sales Volume Changes

-600 E] Balancing Account Rate Changes 1

41983 4984 1985 45%

37%

1645647 Effective Januaryl1 1986, the CPUC authorized an at trition 1981 1982 1983 1984 15 allowance, increasing revenue by $146.3 million to reflect changes in inflation and capital costs since the Company's last general rate case. This increase is subject to refund The Company earned a 15.75% rate of return on common pending review by the CPUC of the Company's authorized equity for 1985, slightly less than the California Public return on common equity in 1986. A more complete de Utilities Commission (CPUC) authorized rate of 16%. This scription of the procedures used to establish the Cor marks the fifth consecutive year that the Company's rate of pany's rate levels for retail sales is discussed in Note 1 of return on common equity has been essentially in line with the "Notes to Financial Statements."

that authorized by the CPUC.

Operating Expenses Operating Revenues and Sales The effect on earnings of fluctuations in the Company's Operating revenues increased over the prior year by $270 fuel and purchased power expenses has been minimized million or 5.5% in 1985, $435 million or 9.7% in 1984, and by regulatory adjustment clauses established by the

$162 million or 3.8% in 1983. This reflected, in addition to CPUC and the Federal Energy Regulatory Commission.

the net effect of changes in rates, increases in kilowatt hour sales of 2.6%, 5.7% and 1.0% for the years 1985, 1984 Increases in other operating expenses continue to be influ and 1983, respectively.

enced by system growth and the operation of San Onofre Units 2 and 3, which were placed in service in August 1983 Changes in rates during the three years included in-and April 1984, respectively. Further increases in other creases in base rates largely from CPUC general rate in-operating expenses are anticipated as Units 1, 2 and 3 at creases and attrition allowances, the establishment of the Palo Verde Nuclear Generating Station commence rates to recover the investment-related costs of San Onofre commercial operation. Palo Verde Unit 1 began operating Units 2 and 3, and decreases in rates providing recovery commercially on February 1,1986. Units 2 and 3 are of energy costs.

44

scheduled for commercial operation in the third quarters Supplementary information concerning the effects of of 1986 and 1987, respectively. Initial ratemaking treatment changing prices is on Page 48.

of operating expenses relating to the Palo Verde units is provided through an interim regulatory balancing account procedure established by the CPUC.

FINANCIAL CONDITION Maintenance expenses have been affected by the Internal Generation of Funds scheduling of major maintenance projects. Specifically, the level of maintenance expenses incurred during 1985 de-Durith p tw

ear, copan has obtint creased by $66.8 million, or 15.9% in comparison to 1984.

Maintenance expenses were greater during 1984 due to The Company's internal generation of funds reached 68%

the performance of previously deferred projects. As a re-of its capital requirements in 1985, the highest level in over sult, 1984 reflects higher than normal maintenance ex penses. Additional factors contributing to the variation in 25ces.oThefhigher leveliof fund generate re maintenance expense include the addition of new facilities, inflation and weather conditions.

Net regulatory balancing account undercollections in Increases in depreciation expense are primarily due to the creased by $774 million during 1985. This increase is sub commercial operation of San Onofre Units 2 and 3. This stantially due to the inclusion of settlement payments trend is expected to continue during 1986 and 1987 as associated with the termination of fuel supply contracts in Palo Verde Units 1, 2 and 3 are placed into commercial the Company's Energy Cost Adjustment Clause balancing operation.

account and an increase in the MAAC balancing account.

The Company has submitted applications with the CPUC Non-operating Items requesting expedited recovery of fuel contract settlement payments.

Utilities are permitted to capitalize the cost of debt and equity funds used to finance the construction of utility plant. This is accomplished through non-cash Allowances for Funds Used During Construction.

The following table shows the Company's projected capital requirements for the years 1986 through 1990; The decline in AFUDC and accompanying non-operating income taxes during 1985 resulted primarily from the inclu-1986 1987 1988 1989 1990 sion in rate base of San Onofre Unit 3 during the second in Millions) quarter of 1984.

Construction Expenditures

$1,093

$822

$751

$796

$ 801 Maturities of Long-Term Debt...

45 153 80 143 355 Redemptions of Preferred Interest income increased during 1985 by $16.3 million, or end Preference Stock 18 19 22 24 12 24.1% in comparison to 1984. This increase is primarily due Capital Requirements.

$1,156

$994

$853

$963

$1,168 to interest accrued on increased undercollections occur ring in the Major Additions Adjustment Clause (MAAC)

The Company's construction expenditures remain at a rel balancing account.

atively high level due to major transmission and hydroelec The before-tax interest coverage for 1985 was 4.4 times, p

a the highest level achieved in 20 years. The continuing up-Generating Station.

ward trend of interest coverage reflects increasing income and decreasing interest expense. The reduction in interest expense is due to the refinancing of debt at lower interest rates and reductions in interest expense associated with regulatory balancing accounts.

45

Southern California Edison Company Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued)

Rate Matters The Company is currently involved in several pending reg-The timing, type and amount of all additional long-term ulatory issues which, if resolved unfavorably, could have a financing is influenced by market conditions, rate relief material adverse impact on the Company's financial condi-and other factors, including limitations imposed by the tion and results of operations. At this time, it is not possible Company's Articles of Incorporation and Trust Indenture.

for the Company to determine the final outcome of these issues, which are more fully discussed in Note 2 of "Notes Capital Structure to Financial Statements." These rate matters include:

The Company's long-term goal is to maintain a capital

" The rate treatment for the portion of San Onofre Units 2 structure with approximately equal amounts of debt and and 3 revenues which have been recorded in the MAAC equity. The Company's capital structure as of December balancing account and included in reported earnings but 31,1985 is shown in the table below:

not collected from customers.

Common Equity...................................

45.1%

. The review by the CPUC of the reasonableness of the Preferred end Preference Stock......

8.5 construction costs for San Onofre Units 2 and 3 and the Long-Term Debt 46.4 Palo Verde units.

Totai......

100.0%

" The potential amendments to utility accounting principles regarding, among other matters, the manner in which In 1985, the Company completed $1.1 billion of long-term regulatory cost disallowances are reflected in reported financing, its most ambitious long-term financing program earnings.

completed in a single year. Of this amount, approximately

• The ultimate rate treatment to be accorded the Com-

$764 million was used to replace maturing bonds and to pany's investment in the Palo Verde Nuclear Generating refinance high cost debt with lower interest rate bonds.

ptanyionveteti.h al ed ula The Company uses short-term borrowings and temporary Station.

investments as a part of normal daily operations. A total of Capital Sources

$572 million is available for short-term borrowings from foreign and domestic banks.

The-Company's estimates of funds available from future operations assume the receipt of adequate and timely rate relief, the timely inclusion of the Palo Verde units in rate base and the realization of its assumptions regarding cost fluctuations, including the cost of capital. The Company's estimates and underlying assumptions are subject to con tinuous review and periodic revision.

46

Southern California Edison Company Operating Revenues and Kilowatt-Hour Sales Class of Service Operating Revenues Kilowatt-Hour Sales (000)

% of (In Thousands)

% of 1985 total 1985 1984 change 1985 total 1985 1984 change Residential..............

28.0

$1,449,424

$1,378,850 5.1 28.6 18,582,806 18,289,564 1.6 Agricultural............

1.6 84,282 81,841 3.0 1.6 1,014,564 1,027,717 (1.3)

Commercial............

31.5 1,625,179 1,501,399 8.2 29.4 19,110,474 18,354,975 4.1 Industrial..............

23.4 1,207,470 1,183,162 2.1 24.2 15,707,038 15,858,234 (1.0)

Public Authorities.......

8.3 427,704 402,087 6.4 7.5 4,885,200 4,738,924 3.1 Interdepartmental.......

98 116 (15.5) 1,106 1,110 (0.4)

Resale.................

6.7 347,578 295,504 17.6 8.7 5,683,378 5,039,523 12.8 Sales of Electric Energy............

99.5 5,141,735 4,842,959 6.2 100.0 64,984,566 63,310,047 2.6 Other Electric Revenues.

0.5 27,113 56,193 (51.8)

Total................

100.0

$5,168,848

$4,899,152 5.5 100.0 64,984,566 63,310,047 2.6 Operating Revenues by Rate Components Rate Components Operating Revenues Percent of Total (In Thousands) 1985 1984 1983 1985 1984 1983 Base Rates-CPUC Jurisdiction.................

$2,411,836

$2,382,081

$2,138,011 46.7 48.6 47.9 Energy Cost Adjustment Billing Factor............

1,587,763 1,413,433 1,789,474 30.7 28.9 40.1 Annual Energy Rate............................

115,027 211,103 163,817 2.2 4.3 3.7 Major Additions Adjustment Billing Factor..........

732,232 395,545 29,651 14.2 8.1 0.7 Other Billing Factors..........................

(52,617) 145,522 33,189 (1.0) 3.0 0.7 Resale Rates (excluding fringe)..................

347,494 295,275 259,477 6.7 6.0 5.8 Sales of Electric Energy.....................

5,141,735 4,842,959 4,413,619 99.5 98.9 98.9 Other Electric Revenues........................

27,113 56,193 50,637 0.5 1.1 1.1 Total.......................................

$5,168,848

$4,899,152

$4,464,256 100.0 100.0 100.0 47

Southern California Edison Company Supplementary Information to Disclose the Effects of Changing Prices (Unaudited)

The Company's primary financial statements are stated on For purposes of determining Earnings Available for Coi the basis of historical costs in accordance with generally mon and Original Preferred Stock at current cost, total accepted accounting principles. As a result of price level operating revenues and all expenses other than deprecia changes occurring in current and prior accounting periods, tion were considered to reflect the average price level for amounts reported on this basis reflect dollars of varying the current year and accordingly remain unchanged from purchasing power and accordingly do not measure the those amounts reported in the Company's primary finan effects of inflation. The following supplementary informa-cial statements. Depreciation expense on the current cost tion is presented for the purpose of providing certain amounts of utility plant was determined by applying the information about the effects of changing prices on Company's average annual depreciation rates to the in reported financial data.

.dexed plant amounts. This method is intended to measure income after reflecting the cost of providing electric This information inherently involves the use of assump tions, approximations and estimates, and therefore, should be viewed in that context and not as precise measure-Under ratemaking procedures prescribed by the regula ments of the effects of inflation on the Company.

tory commissions exercising rate jurisdiction over the Company, only the historical cost of utility plant is recover Currentable in revenues as depreciation expense. Therefore, the prices of utility plant from the date the plant was acquired cost of utility plant stated in terms of current cost that pricees en.T ec retc s of utility plant frmtedtetepat pa credt varies from the historical cost of plant is not considered in to the present. The current cost of utility plant represents establishing rates charged to customers. The amount of the estimated cost of replacing existing plant assets an this variance is reflected as an adjustment of utility plant to was determined by restating its historical cost using in-ntrcvrbecs.Wietertmkn rcs ie dices reported in the Handy-Whitman Index of Public Utility no recogionte cost f reaing utility plant Construction Costs.

n eonto otecretcs frpaiguiiypat based on past ratemaking practices, the Company be lieves it will be allowed to recover and earn a return on the increased cost of its investment when replacements of utility plant occur.

Selected financial data stated in constant dollars are adjusted to reflect the effects of general inflation. Such amounts representhistorical costs restated in terms of dollars of equal purchasing power as measured by the Consumer Price Index for all urban consumers.

48

Southern California Edison Company Adjusted Statement of Earnings Available for Common and As Reported (Changes in (Primary Specific Original Preferred Stock Adjusted for Changing Prices Financial Prices (a) for the Year Ended December 31, 1985 (Unaudited)

Statements)

Current Cost)

(In Thousands)

Total Operating Revenues

$5,168,848

$5,168,848 Operating Expenses:

Depreciation 454,574 933,000 Other operating expenses 3,741,520 3,741,520 Total Other Income.

(254,638)

(254,638)

Net Interest Charges 453,285 453,285 Dividends on Cumulative Preferred and Preference Stock...............................................

71,698 71,698 4,466,439 4,944,865 Earnings available for Common and Original Preferred Stock (b).......................................

$ 702,409

$ 223,983 Other Adjustments For Changing Prices:

Increase in specific prices at current cost of utility plant held during the year (c).

$ 599,804 Adjustment of utility plant to net recoverable cost 190,226 Effect of increase in general price level on utility plant (697,622)

Excess of increase in specific prices over increase in general price level, after adjustment to net recoverable cost 92,408 Gain from decline in purchasing power of net amounts owed.

$ 223,248 (a) In average 1985 dollars.

(b) Excludes adjustment of Utility Plant to Net Recoverable Cost.

(c) At December 31, 1985, current cost of utility plant, net of accumulated depreciation (but exclusive of deferred income taxes) was $19,302,456,000 while related historical cost and net recoverable cost was $10,838,219,000.

49

Southern California Edison Company Supplementary Information (Continued)

Five Year Comparison of Selected Supplementary Financial Data Adjusted for the Effects of Changing Prices (Unaudited)

In Thousands, Except Per Share Amounts (Data adjusted for the effects of changing prices are reported in average 1985 dollars.)

Year Ended December 31, 1985 1984 1983 1982 1981 Total Operating Revenues

-As reported.....................................

$5,168,848

$4,899,152

$4,464,256

$4,302,602

$4,054,356

-in constant 1985 dollars.............................

$5,168,848

$5,073,953

$4,820,319

$4,795,221

$4,795,571 Earnings Available for Common and Original Preferred Stock (a)

- As reported.........................................

$702,409

$659,385

$617,303

$483,358

$422,024

- At current cost......................................

$223,983

$186,431

$143,245

$109,096

$ 85,407 Earnings Per Share on Common and Original Preferred Stock (a)

-As reported.........................................

$3.26

$3.18

$3.11

$2.56

$2.46

-At current cost.......................................

$1.04

$.90

$.72

$.58

$.50 Excess of Increase in Specific Prices Over Increase in General Price Level of Utility Plant after Adjustment to Net Recoverable Cost..................

$ 92,408

$105,664.

$161,577

$ 50,464

$(311,603)

Net Assets at Net Recoverable Cost

- As reported.......................

$4,575,400

$4,242,788

$3,793,339

$3,392,864

$2,968,108

- At current cost......................................

$4,502,730

$4,332,888

$4,027,064

$3,713,250

$3,390,018 Gain from Decline in Purchasing Power of Net Arriounts Owed..

$223,248

$231,155

$217,715

$228,938

$443,095 Dividends Declared Per Common Share

- As reported..........................................

$2.13

$2.01

$1.83

$1.69

$1.55

'in constant 1985 dollars...............................

$2.13

$2.07

$1.97

$1.87

$1.82 Market Price Per Share at Year End

-In historical dollars......................

$26.63

$22.75

$19.88

$17.56

$14.38

-In constant 1985 dollars...............................

$26.21

$23.23

$21.10

$19.35

$16.42 Average Consumer Price Index (BaseYearl967=100)..................................

322.2 311.1 298.4 289.1 272.4 (a) Excludes adjustment of Utility Plant to Net Recoverable Cost.

50

Southern California Edison Company Capital Stock-Dividend and Price Information Quarterly High and Low Sales Prices ($)

Dividends Calendar Ouarter-1985 Calendar Ouarter-1984 Paid Class and Per First Second Third Fourth First Second Third Fourth Series of Stock Share (a)(f)

High Low High Low High Low High Low High Low High Low High Low High Low Common (b)(c)

$.51 24 22V/

27%

23/8 27/8 22/4 28/2 22 201/4 17V/

191/2 171 22/8 18V/

24/a 20%

Original Preferred 1.02 44 411 511/2 42 51 453/4 52 44 382 33 352 33 40 33 42 3872 Cumulative Preferred:

4.08%

.252 9/

82 103 87/s 10/8 91/2 11 9

91/s 8

8/2 7/8 9/

75/

8/8 81/s 4.24%

.262 10 8

10/8 9/a 11V 9

11/8 10 91/2 872 8%

7 87/8 7/

93/

8s 4.32%

.27 10Vs 8

11 9/4 11 a 9%

111/s 9%

95/

81/4 9

7 9

8 95/8 8V 4.78%

.297/s 11%

10 12 10V 12/a 10%

12%

10/8 10/8 9V 10V 82 10 82 1014 8/8 5.80%

.361/

13 11/a 14 122 14 11%

151/s 13 12 1114 11%

102 12 10 12/8 11%

8.85%

.553125 20%

17 23s 19 22 20%

24 20V 19 1714 17%

16 19 16V 19/a 17V 9.20%

.572 211/4 18%

22/a 19%

23V2 20%1a 24 21 20 1814 18%

16%

187/s 17 20 17

$100 Cumulative Preferred:

7.325% (d) 1.83a 7.58%

1.892 68 60 75V 6372 722 69/8 79 69 623 57 60 56 601/4 53V2 64 551/4 7.80% (d) 1.95 8.54%

2.132 822 75 902 86 92/

89V2 96 902 77 70 76 72 752 69 76 69 8.70%

2.17V2 75 68%

85%

72 852 79 93 78 7272 68 70 617/8 70 622 72 61 8.70%-A(d) 2.17V2 8.96%

2.24 78/

71%

88 75 86 802 92 80V2 77 68 74 642 73 65 742 70 12.00%

3.00 110 1022 109 1062 110 7/8 108 1097/

109 105/8 100 102 95 104 942 10472 99 12.31% (d) 3.0775 Preference:

5.20% (e)

.322 3872 351 432 38%

43s 38 441/4 37%

30%

28 29 27 34 28/8 37 /

335/

7.375% (d)

.460938 (a) Ouarterly dividends were paid at the rates indicated in each quarter of 1985 except the third and fourth quarter dividends on Original Preferred Stock and Common Stock which were at the rate of $1.08 and $0.54 per share, respectively.

(b) Dividends declared per share on Common Stock totaled $2.13 and $2.01 for 1985 and 1984, respectively.

(c) As of December 31,1985, there were approximately 163,000 Common Stock shareholders.

(d) There are no prices as these issues are private placements and shares are not traded.

(e) The 5.20% Series Preference Stock is convertible into Common Stock.

(f) The Indenture securing the Company's First and Refunding Mortgage Bonds provides, in substance, that the Company shall not pay any cash dividends except out of its earnings reinvested in the business and net income.

51

Southern California Edison Company Selected Financial Data 1975-1985 1985 1984 Summary of Operations Operating Revenues

$ 5,168,848 $ 4,899,152 (in thousands, Operating Expenses.................................

4,196,094 3,932,527 except percent and Fuel and Purchased Power Costs (a)......................2,389,087 2,084,941 per share data)

Income Taxes (a).....................................

720,938 639,875 Allowance for Borrowed and Equity Funds Used During Construction.......................................

157,694 194,787 Total Interest Charges..................................487,800 530,322 Net Income.........................................774,107 732,428 Earnings Available for Common and Original Preferred Stock 702,409 $

659,385 Weighted Average Shares of Common and Original Preferred Stock Outstanding (000)..............................215,649 207,576 Per Share Data:

Earnings Per Common Share............................

$3.26

$3.18 Dividends Declared Per Common Share

$2.13

$2.01 Dividend Payout Ratio (paid basis).......................64.4%

61.9%

Rate of Return on Common Equity.........................

15.75%

16.3%

Ratio of Earnings to Fixed Charges..........................

3.80 3.38 Balance Sheet Data Total Assets (b).....................................

$12,593,449 $1 1,358,730 (in thousands, Gross Utility Plant....................................

13,990,360 12,835,031 except percent and Accumulated Depreciation..............................

3,152,141 2,763,651 per share data)

Percent of Gross Utility Plant..............................

22.5%

21.5%

Common Stock, at par value..........................$

902,821 $

885,637 Additional Paid-in Capital4..............................

,1,543,933 1,470,347 Earnings Reinvested in the Business.......................

2,128,646 1,886,804 Common Shareholders' Equity..........................4,575,400 4,242,788 Preferred and Preference Stock

-without mandatory redemption requirements 466,500 467,258

-with mandatory redemption requirements (c).395,074 422,286 Long-Term Debt (c)................................$

4,717,411 $ 4,248,647 Capital Structure (percent):

Common Shareholders' Equity...........................

45.1%

45.2%

Preferred and Preference Stock

-without mandatory redemption requirements.....

4.6 5.0

-with mandatory redemption requirements (c).....

3.9 4.5 Long-Term Debt (c)....................................

46.4%

45.3%

Book Value Per Common Share............................

$21.04

$19.89 Operating and Area Peak Demand (MW)................................

14,587 15,189 Sales Data Area Generating Capacity at Peak (MW).....................

17,776 17,354 Total Energy Requirement (KWH) (000).....................

73,751,683 72,431,689 Percent Energy Requirement:

Thermal............................................

58.7%

54.0%

Renewable/Alternative (including hydro).........

6.0 7.6 Purchased Power and Other Sources (d)...................

35.3%

38.4%

Kilowatt-Hour Sales (000)..............................

64,984,566 63,310,047 Average Annual KWH Sales Per Residential Customer....

6,099 6,147 Number of Customers.................................

3,490,32 3,400,182 Number of Employees...................................

17,182 16,844 (a) Included in Operating Expenses.

(b) The years 1975 through 1981 have been restated to reflect the deduction of property-related accumulated deferred income taxes from utility Plant.

(c) Excludes current portion.

52

1983 1982 1981 1980 1979 1978 1977 1976 1975

$ 4,464,256 $ 4,302,602 $4,054,356 $3,661,117 $2,563,974 $2,328,798 $2,064,914 $1,846,540

$1,647,134 3,760,225 3,765,875 3,563,201 3,288,983 2,178,978 2,004,197 1,734,192 1,539,400 1,380,528 2,027,756 2,227,901 2,558,206 2,010,227 1,532,903 1,204,749 1,189,597 903,447 824,826 497,236 177,251 197,865 38,683 100,292 72,803 68,792 59,506 46,623 365,856 303,118 232,552 162,287 118,566 78,421 60,238 47,610 26,773 539,377 420,282 340,977 282,656 205,082 182,658 161,078 144,368 126,185 690,780 555,754 489,912 317,536 346,219 251,683 251,979 226,798 176,781 617,303 $

483,358

$ 422,024 $ 256,586 $ 292,481

$ 202,226

$ 206,330 $ 185,047 $ 137,177 198,348 188,514 171,220 146,482 128,404 114,954 108,694 97,356 95,930

$3.11

$2.56

$2.46

$1.75

$2.28

$1.76

$1.90

$1.90

$1.43

$1.83

$1.69

$1.55

$1.42

$1.30

$1.15

$1.03

$.84

$.84 57.7%

64.5%

61.5%

79.4%

55.7%

63.6%

50.5%

44.2%

58.7%

17.0%

14.9%

14.9%

10.4%

13.6%

10.7%

12.0%

12.4%

9.8%

2.91 2.44 2.72 2.09 2.90 2.53 2.78 2.83 2.63

$11,035,060 $10,157,564

$8,699,721

$7,706,933

$6,949,917 $6,030,045 $5,698,068

$4,993,330 $4,701,910 11,886,610 10,764,078 9,517,670 8,406,309 7,577,670 6,810,891 6,191,733 5,658,433 5,147,333 2,426,368 2,185,667 2,015,212 1,840,233 1,676,148 1,519,174 1,383,009 1,258,327 1,149,311 20.4%

20.3%

21.2%

21.9%

22.1%

22.3%

22.3%

22.2%

22.3%

839,501 $

805,766 $ 730,027 $ 632,115

$ 540,791

$ 521,138 $ 455,387 $ 442,739 $ 395,707 1,307,413 1,193,318 999,764 805,325 638,046 595,701 458,096 427,424 350,505 1,646,425 1,393,780 1,238,317 1,092,137 1,054,296 931,217 862,956 769,425 671,548 3,793,339 3,392,864 2,968,108 2,529,577 2,233,133 2,048,056 1,776,439 1,639,588 1,417,760 469,025 471,020 476,308 482,652 489,822 503,650 518,172 537,753 537,753 440,500 445,000 399,500 399,500 324,500 197,000 197,000 75,000 75,000

$ 4,051,836 $ 3,970,400 $3,444,080 $2,945,824 $2,746,207 $2,477,474 $2,314,874 $2,151,861

$2,033,038 43.3%

41.0%

40.7%

39.8%

38.5%

39.2%

37.0%

37.2%

34.9%

5.4 5.7 6.5 7.6 8.5 9.6 10.8 12.2 13.2 5.0 5.4 5.5 6.3 5.6 3.8 4.1 1.7 1.9 46.3%

47.9%

47.3%

46.3%

47.4%

47.4%

48.1%

48.9%

50.0%

$18.76

$17.48

$16.87

$16.60

$17.11

$16.29

$16.15

$15.34

$14.82 13,464 13,149 13,738 12,841 12,662 12,159 11,564 11,292 10,369 16,365 15,349 15,592 15,504 15,071 14,966 14,278 14,071 13,941 68,020,197 66,578,540 69,179,641 65,459,278 66,216,910 63,877,116 63,344,706 59,427,973 56,279,231 48.5%

55.5%

67.6%

71.2%

82.0%

73.8%

87.4%

75.1%

76.2%

10.4 9.7 5.8 9.2 7.7 9.3 2.5 4.4 8.4 41.1%

34.8%

26.6%

19.6%

10.3%

16.9%

10.1%

20.5%

15.4%

59,892,583 59,326,853 62,451,319 59,915,187 59,517,861 57,027,035 57,726,273 53,685,378 51,327,508 5,879 5,685 5,879 5,939 6,010 5,883 5,630 5,650 5,596 3,325,308 3,275,144 3,232,687 3,163,968 3,082,382 2,986,545 2,900,856 2,814,403 2,749,680 16,292 15,797 14,569 14,157 12,917 12,845 12,671 12,510 12,377 (d) Includes non-Edison owned renewable /alternative sources.

53

Southern California Edison Company Directors and Officers Board of Directors Howard P. Allen, Chairman of the Board and Chief Executive Officer Roy A. Anderson, Chairman of the Executive Committee, Lockheed Corporation, Burbank, California Norman Barker, Jr.,

Former Chairman of the Board, First Interstate Bank of California, and Vice Chairman of the Board, First Interstate Bancorp, Los Angeles, California H. Frederick Christie, President Warren Christopher, Senior Partner, Law Firm of O'Melveny & Myers, Los Angeles, California Camilla C. Frost, Chairman of the Board of Trustees, Los Angeles County Museum of Art, Los Angeles, California Walter B. Gerken, Chairman of the Board and Chief Executive Officer, Pacific Mutual Life Insurance Company, Newport Beach, California William R. Gould, Chairman of the Board Emeritus and Consultant (Retired Chairman of the Board and Chief Executive Officer, Southern California Edison Company), Long Beach, California Joan C. Hanley,

. General Partner and Manager, Miramonte Vineyards, Rancho California, California Jack K. Horton, Chairman of the Executive Committee and Consultant (Retired Chairman of the Board and Chief Executive Officer, Southern California Edison Company), Los Angeles, California

.Carl F. Huntsinger, President and Chief Executive Officer, DAE Holding, Inc.

(Citrus Production), Ojai, California

. M. McDaniel, Jr.,

Retired President, Southern California Edison Company, San Marino, California J. J. Pinola, Chairman of the Board and Chief Executive Officer, First Interstate Bancorp, Los Angeles, California James M. Rosser, President, California State University at Los Angeles, Los Angeles, California Henry T. Segerstrom, Managing Partner, C. J. Segerstrom & Sons (Real Estate Development),

Costa Mesa, California E. L. Shannon, Jr.,

Chairman of the Board and Chief Executive Officer, Santa Fe International Corporation (Oil Service, Engineering, Petroleum Exploration and Production), Alhambra, California H. Russell Smith, Chairman of the Executive Committee, Avery International (Manufacturer of Self-Adhesive Products), Pasadena, California Edward Zapanta, M.D.,

Physician and Neurosurgeon, Monterey Park, California (m)Mr Mc~aniel has chosen not to stand for re-election to the Board of Directors in 1986.

54

Executive Officers Howard P. Allen, Chairman of the Board and Chief Executive Officer H. Frederick Christie, President John E. Bryson, Executive Vice President and Chief Financial Officer David J. Fogarty, Executive Vice President

("Michael R. Peevey, Executive Vice President P. L. Martin, Senior Vice President L. T. Papay, Senior Vice President Kenneth P. Baskin, Vice President (Nuclear Engineering, Safety and Licensing)

Glenn J. Bjorklund, Vice President (Engineering and Construction)

Robert H. Bridenbecker, Vice President (Fuel Supply)

John R. Bury, Vice President and General Counsel Richard K. Bushey, Vice President and Controller Robert Dietch, Vice President (Advanced Engineering)

C. E. Hathaway, Vice President (Human Resources)

Joe T. Head, Jr.,

Vice President (Power Supply)

Charles B. McCarthy, Jr.,

Vice President (Customer Service)

Edward A. Myers, Jr.,

Vice President (System Development)

Michael L. Noel, Vice President and Treasurer Harold B. Ray, Vice President and Site Manager, San Onofre Nuclear Generating Station Robert E. Umbaugh, Vice President (Material and Information Services)

Honor Muller, Secretary

(')Mr. Peevey was elected Executive Vice President effective January 1, 1986.

55

Southern California Edison Company Shareholders Shares Distribution of Record Shareholders and Shares as of December 31, 1985 Preferred Common Preferred Common Total Shareholders 29,537 100.0 163,428 100.0 19,373,449 100.0 216,676,897 100.0 Class of Investor Males 5,392 18.3 37,686 23.1 902,486 4.7 16,859,084 7.8 Females 11,654 39.4 56,400 34.5 1,773,009 9.2 21,265,518 9.8 Joint Accounts 7,832 26.5 46,272 28.3 1,576,697 8.1 19,700,060 9.1 Fiduciaries 2,855 9.7 19,291 11.8 622,565 3.2 8,670,585 4.0 Religious, Charitable, Fraternal and Educational Institutions 171 0.6 526 0.3 77,276 0.4 844,507 0.4 Financial Institutions 608 2.0 1,126 0.7 11,896,881 61.4 145,345,833 67.1 Other 1,025 3.5 2,127 1.3 2,524,535 13.0 3,991,310 1.8 Amount of Holdings 1 to 99 shares 12,113 41.0 38,071 23.3 345,032 1.8 1,437,597 0.7 100 shares 6,480 21.9 10,110 6.2 648,000 3.3 1,011,000 0.5 101 to 499 shares 7,653 25.9 76,010 46.5 1,877,664 9.7 19,736,452 9.1 500 to 999 shares 1,799 6.1 21,456 13.1 1,077,188 5.6 14,317,397 6.6 1,000 or more shares 1,492 5.1 17,781 10.9 15,425,565 79.6 180,174,451 83.1 Geographical Location Service Territory 7,943 26.9 39,545 24.2 2,015,743 10.4 29,522,792 13.6 Remainder of California 9,703 32.9 47,433 29.0 2,776,080 14.3 47,225,199 21.8 United States (except California) and Possessions 11,836 40.1 75,861 46.4 14,574,138 75.3 139,596,133 64.4 Foreign Countries 55 0.1 589 0.4 7,488 332,773 0.2 1986 Annual Shareholders' Meeting:

Dividend Reinvestment and Statistical Supplement:

The annual meeting of shareholders of Stock Purchase Plan Agent:

A comprehensive financial and statistical Southern California Edison Company Southern California Edison Company supplement to this report is available in will be held at 10 a.m., Thursday, April Secretary's Department-Room 240 limited quantity. A copy may be requested 17, 1986, at the Company's Corporate Post Office Box 400 by writing to the Manager of Investor Headquarters, 2244 Walnut Grove Rosemead, California 91770 Relations, Southern California Edison Avenue, Rosemead, California 91770.

Telephone (818) 302-1852 or Company, P.O. Box 800, Rosemead, Telephone (818) 302-1212.

(818) 302-1995 California 91770.

For Investor Relations:

Registrar of Stock:

This Annual Report and the statements and Individual Shareholders contact:

Security Pacific National Bank statistics contained herein have been assembled Southern California Edison Company Los Angeles, California for general informative purposes and are Secretary's Department-Room 240 not intended to induce, or for use in connection Post Office Box 400 Stock Exchange Listings:

with, any sale or purchase of securities.

Rosemead, California 91770 Common Stock:

Underno circumstances is this report or any Telephone (818) 302-1997 New York Stock Exchange part of its contents to be considered a pro Pacific Stock Exchange spectus, or as an offer to sell, or the solicitation Institutional Investors contact:

London Stock Exchange of an offer to buy, any securities.

Manager, Investor Relations Telephone (818) 302-2515 Preferred and Preference Stocks:

Assistant Treasurer American Stock Exchange Telephone (818) 302-1090 Pacific Stock Exchange Stock Transfer Agent:

Ticker Symbol:

Southern California Edison Company SCE (Common Stock)

Secretary's Department-Room 240 Post Office Box 400 Newspaper Stock Table Listing:

Rosemead, California 91770 SCalEd Telephone (818) 302-1393 or (818) 302-1936 56

...... t W~

San Francisco Hydroelectric Fossil (includes coal gasification)

Nuclear Geothermal R

e Wind Center Los AngelesA**

Wind SolarSan Onofre Service territory Biomass Extra high voltage (EHV)

(includes fuel cell) transmission lines Southern California Edison serves more than 92 million people in a 50,000 square-mile service territory.

Southern California Edison Company provides are subject to regulation by the California Public electric service in a 50,000 square-mile area of Cen-Utilities Commission which has the authority, among tral and Southern California. This area, which has a other things, to establish retail rates. and to regulate population of more than 9 million people., includes secuthyissaances,.accouning and depreciation. The some 800 cities and communities.

Company's iresale operations are subject to regula Edison's gross investment in utility plant totals ap-tion by the Federal Energy Regulatory Commission proximately $14.0 billion. Area generating capacity at as to rates on sales for resale, as well as to other peak during 1985 totaled 17,776 megawatts (MW),

matters, including accounting and depreciation.

which included 14,765 MW of Compahy-owned facili-The Company's planning and siting of new plant ties and 3,011 MW of capacity from other sources Of construction are subject to the jurisdictidn of the Cali the Company-owned facilities, 70 percent was corn-fornia Energy Commission. Edison also is subject to prised of oil-and gas-fired generating units. Edison's various governmental licensing reqUirements, to Se interest in coal-fired generating units accounted curities and Exchange Commission filing and disclo for another 11 percent, and 6 percent was in hydroelec-sure requirements and to certain other federal, state tric generation. The Company's interest in a nuclear and local laws and regulations, including those related generating station accounted for the remaining to nuclear energy and nuclear plant construction, 13 percent.

environmental protection, fuel supplies and land use.

The Company, incorporated in 1909 under the laws of California, is a public utility and its retail operations

Southern California Edison Company 2244 Walnut Grove Avenue Rosemead, California 91770

San Diego Gas & Electric Post Office Box 1831 San Diego, California 92112

Compound Annual Compound Annual Growth Rate Growth Rate 5 Years 10 Years 1980

(%)

1979 1978 1977 1976 1975

(%)

$ 308.8 3.5

$ 218.9

$ 180.2

$ 171.3

$ 128.5

$ 106.3 13.2

$ 379.6 1.0

$ 304.5

$ 215.8

$ 224.3

$ 178.3

$ 139.6 11.1

$ (70.8)

$ (85.6)

$ (35.6)

$ (53.0)

$ (49.8)

$ (33.3)

.8

.7

.8

.8

.7

.8

$ 732.3 5.7

$ 640.1

$ 573.1

$ 572.6

$ 489.6

$ 440.5 8.2 36,469,483 8.9 31,188,237 27,592,809 22,648,992 19,281,308 17,000,000 12.6 16.06 5.2 17.35 17.41

$ 17.36

$ 16.72 16.17 2.5 11.6 7.3 7.3 6.7 6.8 11.3

$ 178.1 6.3

$ 200.1

$ 200.3

$ 205.5

$ 175.8 122.3 7.0 4.5%

10.0%

11.6%

11.0%

12.3%

6.0%

6.0%

10.4%

11.4%

13.4%

12.7%

5.9%

(13.1)%

4.3%

3.9%

(2.3)%

5.6%

(14.3)%

1.01 26.3 1.80 2.02 2.32 2.14 0.97 12.9 156.8%

83.1%

71.5%

55.9%

56.5%

124.9%

$15

--$10

$15-/8-$12%

$16/8-$14/4

$16-$13/4

$15-$11s/

$13/8-$10 Quarterly Common Stock Data Year Ended December 31 1985 1984 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price High 24 28 272 28 21/8 19 21 23/4 Low 212 23/8 24/s 25 17 18 17/8 20/

Dividends declared 52.5o 560 560 56o 490 52.50 52.50 52.50 Additional Information Publications: Other publications are provided free of Shareholder inquiries about stock holdings:

charge, including a combination Financial Forecast to Write or call the Office of the Secretary 1990 and Statistical Report for 1975-1985; Form 10K, Financial community inquiries: Call Jennifer Lewis, the annual report to the Securities and Exchange Manager of Investor Relations (619) 696-4487 Commission; a Shareholder Information Handbook; Utility customer inquiries on general energy and Toward 2000: New Strategies, a booklet explain-subjects: Call (619) 239-SDGE ing the company's strategic plan.

ing he ompny' strtegc pan.Utility customer inquiries on specific bill or service For copies, write or call:

related subjects: Call the number listed on the bottom Office of the Secretary San Diego Gas & Electric P.O. Box 1831 San Diego, California 92112 (619) 696-2020 41

Shareholder Reference Guide Selected Financial Data At December 31 1985 1984 1983 1982 1981 Current assets*

$ 366.2

$ 393.8

$ 267.3

$ 303.9

$ 302.4 Current liabilities*

$ 399.7

$ 348.0

$ 426.4

$ 440.5

$ 450.5 Working capital*

$ (33.5) 45.8

$ (159.1)

$ (136.6)

$ (148.1)

Working capital ratio

.9 1.1

.6

.7

.7 Long-term debt*

$ 967.1

$1,034.8

$1,036.4

$ 785.1

$ 727.2 Common shares outstanding 55,822,762 54,063,592 51,693,662 48,266,144 41,499,034 Book value per common share

$ 20.65

$ 19.48

$ 18.52

$ 16.94 16.20 Price/Earnings ratio 8.3 7.6 6.1 5.9 5.3 For Year Ended December 31 Capital expenditures*/**

$ 241.2

$ 197.8

$ 292.0

$ 252.8

$ 209.7 Pre-tax income/revenue 22.7%

19.8%

18.7%

15.3%

10.2%

Return on equity 16.2%

15.8%

18.2%

17.5%

14.5%

Effective federal tax rate 44.5%

38.7%

31.2%

24.0%

4.7%

Earnings per common share 3.25 3.01 3.20 2.90 2.34 Dividend payout ratio (declared) 68.1%

68.8%

60.7%

62.4%

71.1%

Price range of common shares

$281/s-$21/2

$23/4-$17/8

$22-$17

$177/-$11%

$14-$11

• ln millions of dollars.

• • Excluding allowance for funds used during construction.

Shareholder Profile Financial return on equity There were 81,471 common stock shareholders of is measured by earnings record and 12,922 preferred and preference share applicable to common holders as of December 31, 1985. There are thousands shares divided by average 95 shars dvide byaverge 985

.~of other individual shareholders whose accounts are common equity.

dheld by the securities dealers and nominees.

182 Conon stock shareholders:

19831 Who Joint Accounts 28,719 S

Women 24,392 (weighted average) (by percent)

Men 17,332 Fiduciaries 9,254 Financial return rate base Securities dealers, nominees, other 1,774 is operating income divi ded by average rate base.

Where In 1985, it reached its highest point since 1982

.4 United States, except California 42,285 at 12.6 percent.

1'9843 California, except SDG&E service area 24,292 SDG&E service area 14,686 Foreign countries 208 Men8 1733 How much I -

99 shares 15,248

,_~~~ec rte de le s no in es othe 1,774

- 4, _-

_I (weighted average)

(by percent) 100 300 46,058 301 500 10,148 501 1000 6,883 1001 or more shares 3,134 40

Executive Offices Common Stock Investment Plan San Diego Gas & Electric Company SDG&E offers its common stock shareholders a 101 Ash Street Common Stock Investment Plan that allows them to Post Office Box 1831 invest automatically all or a portion of their quarterly San Diego, California 92112 dividends on directly-held shares to purchase addi (619) 696-2000 tional shares without paying brokerage fees.

Annual Meeting in 1986 The plan also allows optional cash investments of I I ~m.,Apri 22as little as $25 per investment to a maximum of 11 a.m., April 22 Electric Building Auditorium

$5,000 per calendar quarter.

101 Ash Street For a plan prospectus, write or call:

San Diego, California Office of the Secretary San Diego Gas & Electric Stock Listing and Trading Information P.O. Box 1831 Common stock: Ticker symbol is SDO. Listed on San Diego, California 92112 New York and Pacific stock exchanges. Newspaper (619) 696-2020 listing is SDieGs.

Preferred and preference stocks: Ticker symbol is SDO. Listed on the American and Pacific stock ex-The pric ose of changes (except for the 4.60% preferred series and the year at $27-significantly

$8.25, $9.125 and $15.44 preference series, which are 1985 2700 above book value.

not listed). Newspaper listing is SDgo.

1984

22.

7 Transfer Agents and Registrars 1

The transfer agent has primary responsibility for stock transfers and the cancellation and issuance of stock 1.9 certificates. The agent should be contacted directly 1981 1250 69 about these subjects.

Common stock transfer agents:

N Book Value California First Bank (in dollars, at December 31) 8155 Mercury Court P.O. Box 2529 San Diego, California 92112 riseerefects thecompany' (619) 230-4487 general financial improve First Interstate Bank of California ment and the success of c/o Schroder Trust Company the active program to in One State Street crease institutional inves New York, New York 10015 ties (also registrar for the common stock)

Preferred stock transfer agents:

California First Bank (listed above) 0 5

10 15 20 25 30 Preference stock transfer agents:

N Low Year-End High First Interstate Bank (in dollars)

(listed above)

Tom Page addressed seve eral hundred Japanese institutional investors at a meeting in Tokyo 7/1.

39

Shareholder Reference Guide he continuing growth tock price appreciation and dividend in

~creases arecomponents of the company's in te nu ber f S

total overall return to shareholders, a pnh 7our utility customers is I

the stock price rose from $22.50 vety attractive to investors."

on January Ito $27 on December 31 and divi Totl owere increased for the ninth consecutive

'6.7 percent, higher than the rate of One reason for the stock price increases is stock trades by the company's institutional holders, says Lee Haney, vice president and treasurer. "They will buy and sell thousands of shares of the company's stock in a day.

Investors' Meetings:

Tota oveall etur to"Although the number of institutional share shareholders exceeded A

R t

Shrhodr holders has increased from 87 in 1984 to 127 management's goal of in 1985, we would like to have even more insti staying in the top 25 per-tutional interest. We are continuing to meet cent of the industry.

with prospective shareholders, not only in the 25te United States but in other countries, such as

epan, where there is considerable interest in Te Sthe American energy industry."

In October 1985, Chairman Thomas Page spoke at a Japanese Institutional Investors Conference in Tokyo that was sponsored by 21 SDG&E Institutional Investor magazine. He was invited m

Top 25 percent of industry to speak by panel coordinator Ernie Liu of (mor five-year period ending December 31) (by percent)

Goldman-Sachs. Page was one of only two Innrepresentatives of the U.S. utility industry.

in1985fortmDividends wr i Other speakers came from different industries invine, forlifo a a thnd or different countries.

scutie year. Fo the A few months later, a group of interested Forurformtionan joning heoSaretFrumwrit rate of increase exceeded Japanese investors traveled to San Diego to the rate of inflation.

2196 meet with management and to learn more about the company.

Survey Results:

n 1Several years ago we set out to make the company better known to the key analysts,"

(declared, in dollars) says Haney. "We did that very well, a survey taken in 1985 told us.

"That survey also revealed that the com The Share Forum pany is not as well known among portfolio The Share Forum is an organization of SDG&E share-managers. They manage pension funds for in holders whose members receive additional infor-dividuals and corporations, thus are the key mation about the company through meetings with to increasing the institutional purchases of our management, tours of utility facilities and periodic stock. Therefore, in 1986, we are going to fo mailings. There are nearly 10,000 members.

cus more on making these managers aware of In 1985, activities of The Share Forum included company goals and results.

meetings with management in San Francisco and "The survey confirmed that the subjects of Irvine, California, and a tour of the Heber geothennal most interest to the institutional investing com research plant.

munity were the regulatory environment and For information on joining The Share Forum, write the customer growth in our utility service terri the Office of the Secretary, San Diego Gas &

tory. The continuing growth in the nu mber Electric. P.O. Box 1831, San Diego, California 92112.

of our utility customers is very attractive to investors.

38

Responsibility Report for the Financial Statements he company is responsible for the financial selection and training of qualified personnel, and statements and other data in this annual report.

written policies and procedures.

To meet its responsibility for the reliability of The company's independent public accountants, the financial statements, the company has developed a Deloitte Haskins & Sells, are engaged to examine the system of internal accounting controls and engages a company's financial statements in accordance with firm of independent public accountants. The board of generally accepted auditing standards for the purpose directors of the company carries out its responsibility of expressing their opinion as to whether the com for the financial statements through its audit pany's financial statements are presented fairly in committee, composed of directors who are not accordance with generally accepted accounting prin officers or employees of the company.

ciples applied on a consistent basis.

Management maintains the system of internal The audit committee of the board of directors meets accounting controls, which it believes is adequate to periodically with management, the independent public provide reasonable, but not absolute, assurance that accountants and the internal auditors to ensure that its assets are safeguarded, transactions are executed each is canying out its responsibilities, and to discuss in accordance with its objectives and the financial auditing, financial reporting and internal control records and reports are reliable for preparing the matters. The independent public accountants and the financial statements in accordance with generally company's internal auditors have full and free access accepted accounting principles. The concept of to the audit committee throughout the year.

reasonable assurance recognizes that the cost of a The management of the company has prepared the system of internal accounting controls should not ex-financial statements and other data in this annual ceed the benefits derived and that management makes report. In the opinion of the company, the financial estimates and judgments of these cost/benefit factors.

statements, which include amounts based on estimates The system of internal accounting controls is sup-and judgments of management, have been prepared in ported by an extensive program of internal audits, conformity with generally accepted accounting principles.

Robert E. Parsley Vice President and Controller Auditors' Opinion Deloitte Haskins & Sells Certified Public Accountants 701 B Street San Diego, California 92101 To the Shareholders and Board of Directors of San Diego Gas & Electric Company:

We have examined the financial statements and schedules of San Diego Gas & Electric Company (pages 19 to

33) for the years ended December 31, 1985, 1984 and 1983. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note 6 to the financial statements, the California Public Utilities Comnission is investigating the reasonableness of the costs incurred to construct San Onofre Nuclear Generating Station Units 2 and 3. The outcome of this investigation cannot presently be detearned; however, the final decision could result in the reversal of revenues previously recorded.

In our opinion, subject to the effects on the 1985 and 1984 financial statements of such adjustments, if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the above-mentioned financial statements and schedules present fairly the financial position of the company at December 31, 1985 and 1984 and the results of its operations and its sources of funds for construction for each of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles applied on a consistent basis.

February 10, 1986 37

Board of Directors Thomas A. Page*

Burt F. Raynes**

Chairman, President and Chief Executive Officer President of Raynes Engineering Corporation, a of SDG&E.

mechanical engineering and product development firm.

Clair W. Burgener*

President of Burgener Properties, Inc., a real estate Charles R. Scott and property development firm.

President and Chief Executive Officer of Intermark, Inc., a La Jolla-based operating and holding company.

Malin Burnham*

Chairman of John Burnham & Co., a mortgage loan,

0. Morris Sievert*

real estate and insurance firm.

President of Deposition Technology, Inc., a manufac turer of high technology materials and a subsidiary of David M. DeMotte*

Material Science Corp., a major steel coil coating President of Dave's Rough Country Off Road Center, company.

a distributor of specialty equipment for the automotive aftermarket.

Fred C. Stalder Private investor; former President, Chairman and Daniel W. Derbes Chief Executive Officer of Central Savings and Loan President of Allied-Signal International Inc. and Association.

Executive Vice President of Allied-Signal Inc.

Catherine Fitzgerald Wiggs William D. McElroy*

Executive Vice President, Personnel and member of Professor of Biology at University of California at the Management Executive Committee of The Broad San Diego.

way Stores, Inc., Division of Carter Hawley Hale Stores, Inc.

Ralph R. Ocampo

• Member of the executive committee San Diego physician and surgeon.

"*Will retire from the board on April 22, 1986 Committees of the Board Audit Finance This commPittee recommends an independent auditor This committee reviews the general investment policy and reviews the overall plan of the audit, financial and investment performnance for the Pension Plan and statements, audit results, scope of internal audit Savings Plan and counsels with management concern procedures and the auditors' evaluation of internal ing the company's capital requirements, proposed controls.

financing programs and capital risk exposure analyses.

Executive Nominating This committee is empowered to act in place of the This com bittee considers and recommends nominees full board, except in certain transactions for various to the board, criteria for board and committee compo board responsibilities which are reserved for the sition and membership and directors' compensation.

board itself.

Strategic Planning Executive Salary Review This commsittee works with management in the This committee reviews the salaries and other forts development, review and evaluation of a strategic of compensation of officers of the company and plan, including a plan to develop or find nonutility makes compensation recommendations to the board.

businesses and business opportunities. It reports and makes recommendations to the board.

36

Stephen L. Baum, 45 James C. Holcombe, 40 Vice President and Vice President-Fuel General Counsel and Power Contracts Stephen Baum joined SDG&E in 1985. Formerly, he James Holcombe, vice president of power supply was senior vice president and general counsel for the since 1983, became the head of the new fuel and Power Authority of the State of New York; general power contracts group in April 1985. He has ex attorney of Orange & Rockland Utilities, Inc.; and an tensive background with the electric utility, serving as associate of Curtis Mallet-Prevost Colt and Mosle.

power supply division manager and electric operations manager. He joined the company in 1967.

Donald E. Felsinger, 38 Vice President-Richard L. Manning, 54 Operation Services Vice President Donald Felsinger was named the head of operation Public Relations services in April 1985 after serving as vice president Richard Manning has been vice president-public of the gas division and of customer service adminis-relations since he joined SDG&E in 1981 after serving tration. Operation services is responsible for all as manager of public affairs for the Western Oil &

company facilities, construction, distribution Gas Association. His responsibilities include man engineering, fleet management and land and aging corporate communications.

environmental. Felsinger joined SDG&E in 1972.

Robert E. Parsley, 64 Ronald K. Fuller, 48 Vice President and Controller Vice President-Governmental Robert Parsley was elected a vice president in April and Regulatory Services 1985. He has been the controller and chief accounting Ronald Fuller was elected vice president of regulatory officer of SDG&E since 1966. All of the accounting services in 1983 and governmental services was added services of the company are his responsibility. Parsley to the division in 1984. He was manager of the joined the company in 1941.

company's governmental relations operations in Washington, D.C. for eight years. He joined the Ronald W. Watkins, 44 company in 1974.

Vice President Administrative Services John E. Hamrick, 59 Ronald Watkins has headed the administrative Vice President-services division since April 1985. He was elected Customer Service vice president in 1979. Prior responsibilities included John Hamrick was elected a vice president in 1973 the gas division, resource management and resource and has headed the customer service division since planning. He joined the company in 1964.

1983. The activities of the seven customer service centers are his responsibility. Hamrick joined the George A. F. Weida, 49 company in 1971.

Vice President Human Resources R. Lee Haney, 46 George Weida joined SDG&E in 1983 as a vice Vice President and Treasurer president. He was named head of the human resources Lee Haney was elected a vice president in 1983 after division in 1984. Previously, he was head of human serving as manager of financial services and then resources for several other major U.S. corporations.

treasurer throughout the financial recovery period in the early 1980s. Haney joined SDG&E in 1972.

William J. Kares, 63 Secretary Chris Harlow, 41 William Kames was elected secretary of SDG&E in Vice President-Corporate 1974 and he is responsible for shareholder services.

Strategy and Systems This includes the administration of the Common Chris Harlow was given the expanded responsibility Stock Investment Plan, responding to inquiries by for corporate strategy and systems in April 1985. He shareholders and recording board and shareholder had been vice president of information services since meetings. Karnes joined the company in 1950.

1981, when he joined the company.

35

Corporate Information S an Diego Gas & Electric Company is an investor-owned utility with 4,860 employ-Officers ees. It was founded in 1881.

The company purchases, generates and dis-Gar D. Cottonn45 tributes electricity to 900,000 customers in San Electric Operations Diego County and the southwestern section of Orange County. It also purchases and distrib-1985 and given the responsibility for managing utes natural gas to 575,000 customers in San Electric Operations. Cotton joined SDG&E in 1975.

Diego County.

SDG&E has three subsidiaries: Pacific Diversified Capital Company, a nonutility op-Alton T. Davis, 48 erations management company; New Albion Senior Vice President Resources Co., an energy resource discovery Gas Operations and development company; and Califia Alton Davis was elected senior vice president in April Company, a financing company.

1985 and given the responsibility for Gas Operations.

Pacific Diversified also has three subsidi-Davis joined SDG&E in 1968. He was elected vice aries: Japatul Corporation, a real estate devel-president of the gas division in 1976 and group vice opment company; Integrated Information president in 1981.

Systems, a computer services company; and Pacific Energy Company, an energy services Richard Korpan, 44 investment company.

Senior Vice President-Finance The utility's service territory covers 4,100 and President, Pacific Diversified square miles and has a population of more Capital Company than two million. Service centers are regionally Richard Korpan was elected senior vice president in located in Southern California to give custom-April 1985. He serves as the company's chief finan cial officer and is responsible for developin the non utility operations for SDG&E. He joined the company as treasurer in 1979 and was elected a group vice president in 1981.

San Diego Pacific Japatul Harold A. Monsor, 64 Gas & Electric

~

Diiersified Corporation Senior Vice President Comnpany apital Consultant to the President Company Harold Monsor was elected senior vice president in April 1985. He joined the company as a vice president K -

in 1983 after serving as a senior officer in several large domestic and international U.S. corporations and heading his own management consulting company.

New Albion Integrated Thomas A. Page, 52 Resources Co.

InSormation Chairman, President and SysteGs Chief Executive Officer Thomas Page was elected president and chief execu tive officer in 1981 and chairman in 1983. A certified public accountant and a licensed professional engineer with an extensive management background, he joined SDG&E in 1978 as a senior officer.

Jack E. Thomas, 53 Pacific Executive Vice President Energy Utility Operations Comnpany Jack Thomas was elected executive vice president in March 1985 and given the responsibility of overseeing all gas and electric utility operations. In 1971, he was elected vice president of the electric division and in 1980 was elected group vice president-customer service. He Joined SDG&E in 1957 as an engineer.

Sa3ig4 Pcfc-aau

The adjusted financial information in this schedule is

b. Purchasing power gain reported in average 1985 dollars. It reflects the effect The purchasing power gain on net amounts owed is an of changes in the specific prices (current costs) of economic benefit that results from being able to repay property, plant and equipment expressed in units of those amounts with cheaper dollars.

constant purchasing power. For most of the com pany's property, plant and equipment, current cost

c. Specific prices vs. general prices amounts were determined by applying the Handy-During 1985, the specific prices (current cost) of Whitman Index of Public Utility Construction Costs to property, plant and equipment, net of accumulated the applicable historical costs. Other current cost in-depreciation, increased by $43 million. General infla formation is expressed in average 1985 dollars as tion increased costs of property, plant and equipment, measured by the Consumer Price Index for all Urban net of accumulated depreciation, by $158 million.

Consumers.

d. Net assets

a. Income from operations Net assets include property, plant and equipment and Current cost income from operations for 1985 is less all other items as reported in the Balance Sheets on than income from operations reported in the Statement page 20. Property, plant and equipment are presented of Income on page 19. This is because depreciation at net recoverable cost because the regulatory process expense on a current cost basis exceeded depreciation allows rate recovery of only the historical cost of util expense in the Statement of Income by $91 million.

ity plant.

Fuel inventories, the cost of fuel used in generation At December 31, 1985, the current cost of property, and gas purchased for resale have not been restated plant and equipment, net of accumulated depreciation, from their historical cost in nominal dollars. By was $4.2 billion (measured in average 1985 units of means of adjustment clauses, regulation limits the purchasing power). That amount is higher than the recovery of fuel and purchased gas costs to actual historical cost amount of $2.5 billion for utility and cost. For this reason, fuel inventories are effectively nonutility property, plant and equipment, net of accu monetary assets. In addition, since only historical mulated depreciation. Therefore, it is reasonable to costs are deductible for income tax purposes, no expect income from operations on a current cost basis adjustments have been made to tax expense.

for 1986 to remain significantly below that reported on a historical cost basis.

33

Five-Year Comparison of Selected Financial Data Adjusted for Effect of Changing Prices (Unaucited)

(In Thousands of Dollars Except Per Share Amounts)

For the Years Ended December 31 1985 1984 1983 1982 1981 Total operating revenue As reported

$1,738,702

$1,620,701

$1,530,207

$1,430,948

$1,159,662 Adjusted for general inflation 1,738,702 1,678,527 1,652,254 1,594,782 1,371,671 Income from operations (excluding adjustment to net recoverable cost) a As reported

$ 202,722

$ 183,467

$ 187,370

$ 157,303

$ 110,156 Adjusted for specific price changes 111,581 87,860 98,151 100,480 50,959 Purchasing power gain from holding net monetary liabilities b

47,421 54,168 50,229 52,327 97,485 Excess of increase in general price level over increase in specific prices of net assets after adjustment to net recoverable cost c

3,631 6,239 795 24,767 98,907 Net assets at year-end at net recoverable cost d

As reported

$1,313,984

$1,213,905

$1,118,607

$ 978,441

$ 833,379 Restated 1,291,931 1,236,555 1,185,966 1,072,280 953,466 Per share information:

Income from operations (after preferred dividend requirements and excluding adjustment to net recoverable cost)

As reported

$ 3.25 3.01

$ 3.20

$ 2.90

$ 2.34 Adjusted for general inflation 1.59 1.19 1.37 1.57

.74 Cash dividends declared As reported

$2.205

$ 2.065

$ 1.925

$1.785

$ 1.64 Adjusted for general inflation 2.205 2.139 2.079 1.989 1.94 Market price at year-end As reported

$27.00

$22.875

$19.625

$17.25

$12.50 Adjusted for general inflation 26.55 23.361 20.834 19.01 14.31 Average Consumer Price Index 322.2 311.1 298.4 289.1 272.4 32

8 Quarterly Financial Data (Unaudited)

These amounts are unaudited, but in the opinion of the company reflect all adjustments necessary for a fair presentation.

(In Thousands Except Per Share Amounts)

Quarter Ended March 31 June 30 September 30 December 31 1984 Operating revenues

$388,855

$374,836

$417,683

$439,327 Operating expenses 332,305 315,243 351,755 369,848 Operating income 56,550 59,593 65,928 69,479 Other income 15,934 8,453 4,946 9,860 Net interest charges 23,877 25,776 27,547 30,076 Net income (before preferred dividend requirements) 48,607 42,270 43,327 49,263 Preferred dividend requirements 6,169 6,026 5,989 5,988 Earnings applicable to common shares

$ 42,438

$ 36,244

$ 37,338

$ 43,275 Average common shares outstanding 51,994 52,489 53,104 53,872 Earnings per common share 0.82 0.69 0.70 0.80 1985 Operating revenues

$447,300

$403,503

$433,102

$454,797 Operating expenses 371,667 337,579 362,918 378,671 Operating income 75,633 65,924 70,184 76,126 Other income 5,090 6,548 6,194 10,237 Net interest charges 29,840 28,720 27,359 27,295 Net income (before preferred dividend requirements) 50,883 43,752 49,019 59,068 Preferred dividend requirements 5,989 5,963 5,923 5,922 Earnings applicable to common shares

$ 44,894

$ 37,789

$ 43,096

$ 53,146 Average common shares outstanding 54,428 54,952 55,383 55,721 Earnings per common share*

0.82 0.69 0.78 0.95

• Because these earnings are based on average common shares outstanding during the quarter, the sum of quarterly earnings per share does not equal annual earnings per share.

31

Notes to Financial Statements sion and replacement power used while the plant was Leases shut down for the modifications.

Nuclear fuel, an office building and a generating The ultimate effect of the California Public Utilities facility are financed by long-term capital leases. If Commission review is not presently determinable; they were included on the Balance Sheets, both assets however, management does not expect the effect to be and liabilities would increase by $242 million at De material to the company's financial position.

cember 31, 1985 and $244 million at December 31, 1984. Generally accepted accounting principles do Nuclear insurance not require capitalization of these leases until 1987.

Public liability claims that could arise from a nuclear Capitalizing these leases would not affect total re incident are currently limited by the Price-Anderson corded expenses.

Act to a maximum amount of $650 million for each The minimum rental commitments payable in fu licensed nuclear facility. The company and the co-ture years under all noncancellable leases are:

owners of the San Onofre units have purchased pri mary insurance of $160 million for this exposure, the (I

Millions of Dollars) maximum amount available in 1985. The remaining 1986

$ 47

$490 million is provided by secondary financial pro-1987 45 tection required by the Nuclear Regulatory Commis-1988 38 sion. This secondary coverage provides for loss shar-1989 36 ing among utilities owning nuclear reactors if a costly 1990 27 accident occurred. Under the agreement with the Thereafter 206 NRC, the company could be assessed retrospective Total future rental commitments

$399 premium adjustments of up to $6 million a year in the event of nuclear incidents involving any of the li-Rent expense totaled $24 million in 1985 and 1984 censed reactors in the United States, if the amount of and $22 million in 1983.

the loss exceeds $160 million.

In addition to public liability insurance, coverage is Purchased power contracts provided for property damage and replacement power Te company is committed to buying electric power costs at San Onofre. Primary property damage cover-under several long-term contracts. The contracts ex age is provided for losses of up to $500 million.

pire on various dates between 1988 and 2013.

Additional decontamination liability and excess At December 31, 1985, the future minimum pay property damage insurance coverage is also provided ments under the contracts were:

($610'million at December 31, 1985). Replacement power insurance provides weekly indemnity payments (In Millions of Dollars) for up to two years, commencing after a waiting 1986

$ 212 period of 26 weeks. These three insurance coverages 1987 240 are provided primarily through mutual insurance 1988 231 companies owned by utilities with nuclear facilities. If 1989 173 losses at any of the nuclear facilities covered by the 1990 119 risk-sharing arrangements were to exceed the accumu-Thereafter 1,706 lated funds available for these insurance programs, the Totl minimum payments

$2,681 company could be assessed retrospective premium adjustments of up to $17.5 million per year.

These payments are fixed charges. The company is required to pay additional amounts for actual deliveries Construction of energy under the contracts.

Approximately $238 million (excluding AFUDC) is Total payments, including energy payments, under planned to be spent for utility plant construction in such contracts were $158 million in 1985, $87 million 1986. Construction funds held by a trustee (see in 1984 and 101 million in 1983.

Balance Sheets, p. 20) represent unspent proceeds from certain first mortgage bonds.

30

6 Contingency Concerning San Onofre from rate base would not be required under generally Nuclear Generating Station Units 2 & 3 accepted accounting principles currently in effect.

The California Public Utilities Commission is in-However, the Financial Accounting Standards Board vestigating the reasonableness of the costs incurred to is proposing an accounting principle that would construct San Onofre nuclear units 2 and 3. The com-require the immediate write-off of the costs excluded mission staff has recommended disallowing approxi-from rate base. Although that proposal is being mately $195 million of the almost $900 million that challenged by the utility industry and others, it may the company had capitalized as of December 31, become a formal requirement by the end of 1986.

1984. Costs that are disallowed would be excluded A commission disallowance as large as that from rate base. This would reduce future revenues. In proposed by the commission staff, requiring the addition, because revenues for 1985 and prior years reversal of revenues, would have a materially adverse were based on full capitalization pending a commis-effect on the company's earnings in the year of the sion decision, a disallowance would probably require disallowance. If, in addition, the FASB adopts its pro reversing revenues previously recorded.

posal, the combined adverse effect of reversing If the disallowance proposed by the staff is agreed revenues and writing off costs would be material to to by the commission and if the reversal of revenues the company's financial condition in the year of the is proportional to the cost disallowance, the after-tax disallowance.

effect on earnings through December 31, 1985 would The company and Southern California Edison Coi be approximately $50 million. Since revenues con-pany have submitted extensive evidence, including the tinue to be recorded based on full capitalization, the testimony of nationally known and highly respected after-tax effect would increase by approximately $25 experts in the fields of nuclear power and regulation, million by the end of 1986 when the commission deci-to demonstrate that the construction process and costs sion is expected.

for these units were reasonable and well managed.

If the commission adopts the staff's recommenda-The company will vigorously support this position and tion, the future revenues, although reduced, would oppose the staff's recommendations.

still be sufficient to recover the full capitalized costs Management cannot predict the ultimate outcome of the units. Therefore, write-off of the costs excluded of this matter.

7 Other Contingencies and Commaitments trol. The calculation of avoided cost will heavily Southwest Powerlink depend upon future natural gas rates for power plant Beginning in 1986, the California Public Utilities gas as set by the commission. Higher natural gas Commission ordered the company to establish a five-rates, for example, would reduce any unfavorable year balancing account for the difference between the balance. Additionally, the amount and price of cost of energy received over the company's Southwest economy energy available to the company and the Powerlink and avoided cost as established by the physical capacity of the Southwest Powerlink, which procedures set forth in the commission's decision, is affected by the operations of other interconnected The commission said that any balance accrued in the utilities, would affect the balance.

account above avoided cost at the end of five years During January 1986, the company applied for a would be presumed to have been imprudently in-rehearing of the commission's decision. Because of curred, subject to evidentiary hearings. The company the uncertainty concerning the outcome of the rehear would be unable to collect and would have to write ing request and the nature of the process of estimating off any balance ultimately found imprudent after such future balances, management cannot predict the hearings. The company would be required to record ultimate outcome of this matter.

reserves for potential losses earlier, if and when losses become probable.

San Onofre Nuclear Generating Station Unit I The company estimates that any unfavorable The California Public Utilities Commission is re balance at the end of the five years could be as high viewing the reasonableness of certain expenditures as $210 million excluding interest. The balance, required for San Onofre Nuclear Generating Station however, will be significantly affected by several Unit 1. These expenditures were for plant modifica factors, most of which are beyond the company's con-tions mandated by the Nuclear Regulatory Commis 29

Notes to Financial Statements 5

Income Taxes the cumulative net amounts of the timing differences Deferred income taxes arise from timing differ-for which deferred taxes have not been provided were ences, which result from including income or deduc-approximately $452 million for federal purposes and tions in the company's income tax returns in a year

$567 million for state purposes. The company pro different than the year they are reported in the finan-vides deferred taxes for all other differences. In addi cial statements. However, deferred taxes are not tion, current tax reductions arising from investment provided for those timing differences that are included tax credits are deferred and recognized over the useful in both the company's tax return and ratemaking lives of the related property.

calculations in the same year. At December 31, 1985, Components of Income Tax Expense (In Thousands of Dollars) 1985 1984 1983 Current federal income tax

$112,340

$ 13,162

$ 18,204 Current state franchise tax 36,166 25,894 16,905 Total current taxes 148,506 39,056 35,109 Deferred-federal and state taxes Regulatory balancing accounts-net (14,010) 609 (6,615)

Construction projects (19,277) 8,502 3,582 Tax over book depreciation 37,553 34,490 30,967 Nuclear fuel financing 3,211 (3,234) 8,031 Capitalized nuclear revenue 9,104 (3,303)

(23,090)

Call premium on refunded debt 7,785 (298) 8,775 State franchise tax (3,678)

(4,514)

(7,623)

Other-net 6,150 (4,497)

(10,891)

Total deferred taxes 26,838 27,755 3,136 Deferred investment tax credits-net 17,346 70,753 61,083 Total income tax expense

$192,690

$137,564

$ 99,328 Federal and state income taxes are allocated between operating income and other income.

(

Reconciliation of Statutory Federal Income Tax Rate to Effective Rate (In Thousands of Dollars) 1985 1984 1983 Income before federal income taxes

$365,013

$299,428

$272,220 Statutory federal income tax rate 46.0%

46.0%

46.0%

Construction costs capitalized (5.3)

(3.6)

(4.0)

Depreciation 2.9 2.3 0.9 Allowance for funds used during construction (0.7)

(3.6)

(13.2)

Other-net 1.6 (2.4) 1.5 Effective federal income tax rate 44.5%

38.7%

31.2%

28

3 Facilities Under Joint Ownership Each participant in the projects must provide its own Interests in electric generating and transmission financing.

facilities under joint ownership with other utilities and The company's share of operating expenses is in governmental bodies were as follows at December cluded in its Statements of Income.

31, 1985:

The company's share of future dismantling and decontamnination costs for the San Onofre units is (In Millions of Dollars) currently estimated to be $78 million. It is expected Southwest that this estimate will be revised and that these costs Project Powerlink San Onofre will be recovered in rates over the estimated lives of Ownership interest (%)

89 20 the plants. Procedures for rate recovery are to be Utility plant in service

$202

$1,058 established by the California Public Utilities Commis Accumulated depreciation

$ 10

$ 100 sion. These procedures will include placing the Construction work in progress S 8 4

amounts collected in a trust fund as they are received.

A Employee Benefit Plans An 8 percent rate of return was used to determine the A non-contributory, funded pension plan is actuarial present value of accumulated plan benefits.

provided for substantially all employees. Pension Eligible employees may make a contribution of costs are based on actuarial determinations and the 1 to I percent of their base pay to the company's pension plan is funded on the same basis. A non-Savings Plan. The company contributes up to 3 per contributory, unfunded pension plan for certain cent of a participant's base compensation. Company officers is also maintained. The accumulated plan contributions are invested in the company's coemcon benefits and net assets as of the latest benefit stock. Employee contributions are invested, as the information date are presented below:

employees elect, in mutual funds or common stock of the company.

(Cn Millions of Dollars) n company contributed approximately $15 As of July 1 1985 1984 million in 1985 and 1984 and $17 million in 1983 Actuarial present value of accumulated to these plans.

plan benefits The company also maintains an employee stock Vested

$135

$127 ownership plan funded by tax credits not otherwise Non-vested 21 15 available to the company.

Total

$156

$142 Net assets available for benefits

$226

$181 27

Notes to Financial Statements

' Summary of Accounting Policies Revenues and regulatory balancing accounts Utility plant and depreciation Revenues consist of billings to customers and the Utility plant represents the buildings, equipment and changes in regulatory balancing accounts. Billings to other facilities used to provide electric and gas service.

customers are based on meters read on a cycle basis The cost of utility plant includes labor, material, throughout each month. Balancing accounts, which contract services and other related items and an are authorized by the California Public Utilities Coi allowance for funds used during construction. The mission, eliminate earnings fluctuations resulting from cost of depreciable retired utility plant plus removal changes in consumption levels for electricity and gas expenses minus salvage value, is charged to accumu-and in the costs for fuel oil, purchased energy and lated depreciation.

gas. The balances of these accounts represent amounts Depreciation expense reflects the straight-line re-that will be recovered from, or repaid to, customers maining useful life method. The provisions for depre-by adjustments to future rates. The CPUC reviews the ciation approximated the following percentages of reasonableness of the amounts in these accounts.

average depreciable plant: 4.08 percent in 1985, 4.09 The CPUC has also ordered the use of a balancing percent in 1984 and 3.97 percent in 1983.

account to record the ownership costs for San Onofre nuclear units 2 and 3 until the issue discussed in Note Allowance for funds used during construction 6 is resolved.

The allowance represents the cost of borrowed and shareholder funds used to finance the construction of Other utility plant and is added to the cost of utility plant.

Certain prior year amounts have been reclassified for AFUDC also increases income, partly as an offset to comparability.

financing costs shown in the Statements of Income, See Note 4 regarding employee benefit plans, Note although it is not a current source of cash.

5 regarding accounting for income taxes and Note 7 regarding accounting for leases.

2 Long-Term Debt Certain first mortgage bonds have variable interest Combined aggregate maturities and sinking fund rate provisions. Bondholders may elect to redeem requirements of long-term debt are $18 million for their bonds at the interest adjustment dates. The next 1986, $50 million for 1987, $20 million for 1988, interest rate adjustment dates will be August 1, 1986

$1 million for 1989 and $30 million for 1990.

for the Series FE bonds, September 1,1986 for the First mortgage bonds are secured by a lien on sub-Series CC bonds and September 1, 1988 for the Series stantially all utility plant. Additional first mortgage DD bonds.

bonds may be issued upon compliance with the provi sions of the bond indenture.

Th2PChsas6reedteueo aacn

Schedules of Financial Information by Segments of Business (In Thousands of Dollars)

At December 31 or for the Years Then Ended 1985 1984 1983 Operating Revenues Unaffiliated customers Electric operations

$1,395,655

$1,292,839

$1,207,078 Gas operations 304,729 280,379 283,553 Total 1,700,384 1,573,218 1,490,631 Intersegment transfers Gas operations*

207,929 251,631 204,673 Adjustments and eliminations (169,611)

(204,148)

(165,097)

Total 38,318 47,483 39,576 Total operating revenues Electric operations 1,395,655 1,292,839 1,207,078 Gas operations 512,658 532,010 488,226 Adjustments and eliminations (169,611)

(204,148)

(165,097)

Total

$1,738,702

$1,620,701

$1,530,207 Operating Income Electric operations

$ 261,199

$ 224,156

$ 149,082 Gas operations 26,668 27,394 25,073 Total

$ 287,867

$ 251,550

$ 174,155 Depreciation and Amortization Electric operations

$ 117,948

$ 101,805 68,377 Gas operations 14,558 13,395 10,903 Total

$ 132,506

$ 115,200 79,280 Utility Plant Additions**

Electric operations

$ 205,469

$ 174,753

$ 273,436 Gas operations 35,750 23,022 18,563 Total

$ 241,219

$ 197,775

$ 291,999 Identifiable Assets Utility plant-net Electric operations

$2,303,025

$2,197,292

$2,142,303 Gas operations 218,618 195,736 185,928 Total 2,521,643 2,393,028 2,328,231 Materials and supplies Electric operations 37,614 39,580 27,017 Gas operations 3,722 3,745 3,137 Total 41,336 43,325 30,154 Fuel inventory Electric operations 30,391 40,606 74,027 Gas operations 259 1,035 2,061 Total 30,650 41,641 76,088 Other identifiable assets Electric operations 204,098 218,683 255,339 Gas operations 31,809 25,349 72,205 Total 235,907 244,032 327,544 Other Assets 256,426 228,669 78,178 Total Assets

$3,085,962

$2,950,695

$2,840,195

• Revenue from interdepartmental transfers of gas allowed by the CPUC in tariff rates.

• • Excluding allowance for funds used during construction.

See notes to financial statements.

The company is an operating public utility engaged principally in the generation, purchase, distribution and sale of electrical energy and the purchase, distribution and sale of natural gas. Income taxes and corporate expenses are allocated to departments in accordance with regulatory accounting requirements.

25

Statements of Long-Term Debt (In Thousands of Dollars)

Balance at December 31 1985 1984 First mortgage bonds (Note 2) 3 /% Series F, due October 1, 1985 18,000 47/% Series G, due October 1, 1987 12,000 12,000 45/% Series H, due October 1, 1990 30,000 30,000 5YV2% Series I, due March 1, 1997 25,000 25,000 7% Series J, due December 1, 1998 35,000 35,000 8 % Series K, due February 1, 2000 40,000 40,000 8% Series L, due September 1, 2001 45,000 45,000 83/8% Series M, due January 15, 2004 75,000 75,000 10% Series P, due July 15, 2006 45,000 45,000 8

% Series Q, due March 15, 2007 50,000 50,000 9 % Series R, due May 1, 2008 50,000 50,000 16% Series S, due March 15, 2010 13,163 13/% Series T, due August 1, 2010 75,000 5V2% Series U-2, due September 1, 1994 11,668 12,068 173/8% Series V, due July 15, 2011 16,714 16,714 16.70% Series W, due November 3, 1987 and 1988 40,000 40,000 16.65% Series X, due September 1, 1986 and 1987 20,000 20,000 16.65% Series Y, due September 1, 1986 and 1987 15,000 15,000 127/% Series Z, due July 15, 2013 39,769 65,000 10% Series AA, due June 1, 2018 150,000 150,000 10% Series BB, due September 1, 2018 150,000 150,000 5.8% Series CC, due May 1, 2008 53,000 53,000 8.50% Series DD, due December 1, 2008 27,000 27,000 9/% Series EE, due September 1, 2020 100,000 5.625% Series FF, due December 1, 2007 35,000 Total 1,065,151 1,061,945 Other long-term debt Foreign term loans 35,000 Pollution control bonds, 63/8% 1977 Series A, due April 1, 2007 9,575 9,575 Pollution control bonds, 7.20% 1979 Series A, due April 1, 2009 5,700 5,700 Sinking fund debentures, 4 2%, due September 1, 1994 1,412 1,441 Other 7,256 7,782 Total 23,943 59,498 Unamortized discount on long-term debt (16,047)

(15,093)

Long-term debt redeemable within one year (Note 2)

(88,000)

(53,000)

Current portion of long-term debt (Note 2)

(17,980)

(18,560)

Total

$ 967,067

$1,034,790 See notes to financial statements.

24

Stitemerts of Capital Stock (In Thousands of Dollars Except Voluntary Redemption Price)

Balance at December 31 1985 1984 Common Equity Common stock, $5 par value, authorized 80,000,000 shares, outstanding: 1985, 55,822,762 shares; 1984, 54,063,592 shares

$ 279,114

$ 270,318 Premium on capital stock 481,238 446,964 Retained earnings 392,632 335,623 Total common equity

$1,152,984

$1,052,905 Preferred Stock Voluntary Not subject to mandatory redemption Redemption Price

$20 par value, authorized 1,375,000 shares 5% Series, 375,000 shares outstanding

$ 24.00

$ 7,500 7,500 4 2% Series, 300,000 shares outstanding 21.20 6,000 6,000 4.40% Series, 325,000 shares outstanding 21.00 6,500 6,500 4.60% Series, 375,000 shares outstanding 20.25 7,500 7,500 Without par value*

$9.84 Series, 160,000 shares outstanding 101.00 16,000 16,000

$7.80 Series, 200,000 shares outstanding 103.00 20,000 20,000

$7.20 Series, 150,000 shares outstanding 102.50 15,000 15,000

$2.68 Series, 1,000,000 shares outstanding 29.25 25,000 25,000

$2.475 Series, 1,000,000 shares outstanding 29.15 25,000 25,000

$4.65 Series, 1,300,000 shares outstanding 32.15 32,500 32,500 Total not subject to mandatory redemption

$161,000

$ 161,000 Subject to mandatory redemption Without par value*

$8.25 Series, 1985, 115,000 shares; 1984, 125,000 shares outstanding 105.225

$ 11,500 12,500

$9.125 Series, 1985, 240,000 shares; 1984, 260,000 shares outstanding 113.50 24,000 26,000

$15.44 Series, 250,000 shares outstanding 115.44 25,000 25,000 Current sinking fund requirement (3,000)

(3,000)

Total subject to mandatory redemption

$ 57,500 60,500

• Authorized 10,000,000 shares total (both subject to and not subject to mandatory redemption).

See notes to financial statements.

23

Statements of Changes in Capital Stock and Retained Eamings (In Thousands of Dollars)

Preferred Stock Not Subject to Subject to Premium For the Years Ended Mandatory Mandatory Common on Capital Retained December 31, 1983, 1984 and 1985 Redemption Redemption Stock Stock Earnings Balance, December 31, 1982

$161,000

$108,000

$241,331

$353,226

$222,884 Net income 187,370 Common stock sold (3,427,518 shares) 17,137 47,652 Preference stock retired (425,000 shares)

(42,500) 12,537 Current sinking fund requirement (2,000) 12 Dividends declared Preferred stock (27,441)

Common stock (97,101)

Balance, December 31, 1983 161,000 63,500 258,468 413,427 285,712 Net income 183,467 Common stock sold (2,369,930 shares) 11,850 33,537 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (24,030)

Common stock (109,526)

Balance, December 31, 1984 161,000 60,500 270,318 446,964 335,623 Net income 202,722 Common stock sold (1,759,170 shares) 8,796 34,274 Current sinking fund requirement (3,000)

Dividends declared Preferred stock (23,785)

Common stock (121,928)

Balance, December 31, 1985

$161,000

$ 57,500

$279,114

$481,238

$392,632 See notes to financial statements.

22

Statemenlts of Sources of Funds for Construction (In Thousands of Dollars)

Excerpts from the For the Years Ended December 31 1985 1984 1983 Financial Review Funds Provided by Operations Net income

$202,722

$183,467

$187,370 a.pThe it of arning Non-cash items in net income allowance for funds used Depreciation and amortization 132,506 115,200 79,280 during construction declined Deferred income taxes and investment to five percent of earnings tax credits-net 69,829 90,922 85,728 compared to fifteen percent Allowance for funds used during construction a

(8,072)

(23,343)

(78,110)

b. In 1983, the gain came Gain on sale of subsidiary b

(14,533) from the sale of a cogenera Other-net 2,468 4,609 7,694 tion subsidiary to Energy Funds provided by operations c

399,453 370,855 267,429 Factors, Inc.

Dividends (145,713)

(133,556)

(124,542)

c. The company again met Fundsits goal of financing more Fund reivesed 23,70 23,29 142887 than 65 percent of its utility Funds Provided (Used) by Long-Term Financing plant additions through Sale of common stock 43,070 45,387 64,789 operations.

Sale of first mortgage bonds d

131,227 77,757 288,177

d. Tax-exempt financings, Retirement of long-term financing d

(183,187)

(53,725)

(17,124) backed by SDG&E first Retirement of preference stock (29,963) mortgage bonds, plus re Refunding of long-term financing tirement of long-term financ Issued 63,262 ings, helped reduce gross Refuded (70023) interest charges in 1985.

Refunded (003 Call premium (14,853)

Funds provided (used) by long-term financing (8,890) 69,419 284,265 Other Funds Provided (Used)

Regulatory balancing accounts-net 27,500 (1,144) 10,327 Investments and other property (5,215)

(7,635) 1,067 Construction funds held by trustee (25,448) 131,290 (154,780)

Cash and temporary investments (5,183)

(142,171)

(3,387)

Receivables 1,806 (3,293)

(10,450)

Fuel inventory 10,991 34,447 35,851 Short-term borrowings (85,000)

(91,000)

Accounts payable 26,222 (47,708) 33,611 Taxes accrued (7,190) 54 11,134 Other-net (27,114) 12,217 32,474 Other funds provided (used)

(3,631)

(108,943)

(135,153)

Total additions to utility plant (excluding allowance for funds used during construction)

$241,219

$197,775

$291,999 See notes to financial statements.

21

Balance Sheets (In Thousands of Dollars)

Excerpts from the Balance at December 31 1985 1984 Financial Review Assets.

a. Construction expend Utility plant-at original cost itures in 1985 remained In service below the limit of 10 Electric

$2,790,158

$2,661,219 percent of capitalization that Gas 347,317 319,025 the company has set as an Common 46,743 36,646 annual goal. The goal has C3 again been met even though Total plant in service 3,184,218 3,016,890 approximately $240 million Plant held for future use 1,009 1,157 was spent on upgrading and Construction work in progress 117,336 52,910 extending facilities.

Total utility plant a

3,302,563 3,070,957

b. Increases in common Accumulated depreciation (780,920)

(677,929) equity from net income and Utility plant-net (Note 2) 2,521,643 2,393,028 sales of common stock ex ceeded dividend payments Investments and other property 57,953 53,499 and preferred stock re Construction funds held by trustee (Note 7) 48,938 23,490 tirements by $97 million Current assets in 1985.

Cash and temporary investments 152,231 147,048

c. Reductions in long-term Receivables (less allowance for doubtful accounts:

debt helped improve the 1985, $1,311; 1984, $1,218) capital structure in 1985.

Customer 122,661 123,276 The company's goal is Other 12,173 13,364 to limit long-term debt to 44 to 46 percent of its Materials and supplies-at average cost 41,336 43,325 capitalization.

Fuel inventory-at average cost 30,650 41,641 Regulatory balancing accounts undercollected-net 22,466 Other 7,180 2,644 Total current assets 366,231 393,764 Deferred charges and other assets 91,197 86,914 Total

$3,085,962

$2,950,695 Capitalization and Liabilities Capitalization (see Statements of Capital Stock and Long-Term Debt)

Common equity b

$1,152,984

$1,052,905 Preferred stock Not subject to mandatory redemption 161,000 161,000 Subject to mandatory redemption 57,500 60,500 Long-term debt (Note 2) c 967,067 1,034,790 Total capitalization c

2,338,551 2,309,195 Current Liabilities Long-term debt redeemable within one year (Note 2) 88,000 53,000 Current portion of long-term debt (Note 2) 17,980 18,560 Accounts payable 138,145 111,923 Dividends payable 37,183 34,366 Taxes accrued 27,011 34,201 Interest accrued 29,813 33,439 Regulatory balancing accounts overcollected-net 5,034 Other 56,528 62,518 Total current liabilities 399,694 348,007 Customer advances for construction 52,006 44,903 Accumulated deferred income taxes-net (Note 5) 107,941 67,411 Accumulated deferred investment tax credits (Note 5) 153,980 148,191 Deferred credits 33,790 32,988 Contingencies and commitments (Notes 6 and 7)

Total

$3,085,962

$2,950,695 See notes to financial statements.

20

Statements of Income (In Thousands Except Per Share Amounts)

Excerpts from the For the Years Ended December 31 1985

-1984 1983 Financial Review Operating Revenues

a. The cost of electric fuel Electric

$1,395,655

$1,292,839

$1,207,078 and purchased power was Gas 343,047 327,862 323,129 up three percent in 1985.

Total operating revenues 1,738,702 1,620,701 1,530,207 This was due to increased Operating Expenses sales volume, less lower OpertingExpesesunit costs.

Electric fuel and purchased power a

535,968 521,621 622,422 Gas purchased for resale b

223,407 213,813 209,912

b. The cost of gas increased Transmission, distribution and storage 40,263 43,725 43,658 in 1985 because of higher Franchise payments 34,443 30,961 30,586 volume; but lower gas prices kept this increase Other operating C

182,867 190,359 164,714 from being greater.

Maintenance d

74,484 73,164 59,595 Depreciation and amortization d

132,506 115,200 79,280

c. This was the first de crease in other operating Property and other taxes d

35,179 32,088 21,420 costs in more than 20 years, Income taxes (Note 5) 191,718 148,220 124,465 despite the effects of system Total operating expenses 1,450,835 1,369,151 1,356,052 growth and inflation.

Operating Income 287,867 251,550 174,155

d. Maintenance expense, Other Income and (Deductions) depreciation and property Allowance for other funds used during construction 5,772 19,241 55,904 taxes increased because Taxes on nonoperating income (Note 5)

(972) 10,656 25,137 of the addition of the South west Powerlink and com Other-net 23,269 9,296 17,755 mercial operation of San Total other income 28,069 39,193 98,796 Onofre Nuclear Generating Income Before Interest Charges 315,936 290,743 272,951 Station units 2 and 3.

Interest Charges Long-term debt 104,449 100,391 86,268 Short-term debt and other 11,065 10,987 21,519 Allowance for borrowed funds used during construction (2,300)

(4,102)

(22,206)

Net interest charges 113,214 107,276 85,581 Net Income (before preferred dividend requirements) 202,722 183,467 187,370 Preferred Dividend Requirements 23,797 24,172 27,449 Earnings Applicable to Common Shares

$ 178,925

$ 159,295

$ 159,921 Average Common Shares Outstanding 55,125 52,868 49,994 Earnings Per Common Share 3.25 3.01 3.20 Dividends Declared Per Common Share 2.205 2.065 1.925 See notes to financial statements.

1985 Revenue Dollar Source Disposition In 1985, 43.7 cents of every revenue dollar went 80.30 Electric Sales 43.70 Fuel and Purchased toward the purchase of Power 19.70 Gas Sales 10.30 Other Operating Expenses ergy. Just five years ago, 13.10 Total Taxes this figure was 63.8 cents.

8.40 Dividends to Shareholders 7.60 Depreciation 7.40 Salaries and Benefits 6.20 Cost of Money net of AFUDC 3.30 Reinvested in Business 19

Financial Review cash flow and also reduces the ultimate rates charged Southwest Powerlink balancing account described in the consumer by avoiding an interim interest cost that Note 7 to the financial statements and the outcome of would ultimately have been included in rates to the the commission's review of the reasonableness of the extent the costs are approved.

construction costs of San Onofre Nuclear Generating Construction: The company manages the level of its Station units 2 and 3. The commission staff has construction activity. The company's program to proposed substantial disallowance of costs associated avoid building any new central generating plants has with the units. The company and Southern California enabled it to achieve its goal of limiting construction Edison are vigorously contesting the staff's position expenditures to a maximum of 10 percent of cap-and a decision is not expected until late 1986. The italization.

outcome cannot be predicted at this time; however, if a significant portion of the proposed disallowances are (taadopted, there would be a material adverse impact Son the company's net income and a lesser impact on Gal 0.0 cash flow.

1985 The company's liquidity is also significantly Sa affected by normal ratesetting activities. Beginning rwith 1986, the conmssion will hear a General Rate sCase every third year, instead of every second year.

Se Rates for the intervening two years will be handled by an attrition allowance, whereby rates are adjusted to i

iireflect changes in expenses and certain financing costs (construction expenditures exclude AFUDe caused by factors such as growth and inflation. The (capitalization includes capital leases and short-term debt) fuel cost component of rates is excluded from the General Rate Case procedure and is based on the This goal has again been met even though approxi-company's actual cost of fuel.

mately $240 million is being spent annually on In 1985 and 1984, the company reduced its debt by upgrading and extending facilities to meet the pop-

$33 million and $57 million, respectively. In 1986, ulation growth in the company's service area and the further reductions of approximately $35 million are increase in commercial and industrial activity. The anticipated. In 1987, if the final resolution of the primary method of minimizing construction expend-commission review of San Onofre includes a signifi itures has been to increase the percentage of power cant disallowance, further debt reductions may be that the company purchases from others. This reduces smaller.

the cost of energy, since power can be purchased from Capital structure: Increases in common equity from other areas of the country for less than the company's net income and sales of common stock (all related to cost of increasing its generating capacity.

the Savings Plan and Common Stock Investment The above techniques have enabled the company to Plan) exceeded dividend payments and preferred stock continue to show strong liquidity, as shown primarily retirements by $97 million in 1985 and $92 million in by the increase in the percentage of new construction 1984. This and the reductions in long-term debt re financed by operations in 1985 and 1984 compared to sulted in the company's capital structure progressing 1983 and prior years.

toward its stated goal as follows:

wihte nt.

h omayanSothr alfri Edisons arerna vigorously cotstn thentaffsupoitio Eandnaidec sio. is nt e

cted9821983 19811985 Goal Goa 6.0Common equity 32%

36%

37% 40%

43% 45-48%

1985 cann Preferred stock 12 12 9

9 8

7-10 o Debt and leases 56 52 54 51 49 44-46 1983 48.9 Additional liquidity is provided by the company's 82 C$60 mrtillion line of credit-which the company has not used since June 1984 except for a three-day period Rats orthin February 1985.

Future changes in capital structure are dependent construction expenditures exclude AFUD (by percent) e ue o

e Outlook: Continued improvement in internal financ-and San Onofre reviews and the details of the ing of construction is largely dependent upon the company's diversification program.

18

Results of Operations of the facilities discussed above and growth in the The company's net income increased $19 million in number of customers.

1985, a 10 percent increase over 1984. This was due Taxes on operating income increased in 1985 and to increased revenues and decreases in various costs.

1984 due to increased operating income, partly offset in 1984 by a lower effective tax rate.

Revenue The total allowance for construction funds (both Electric Operations: Increases in electric revenues debt and equity) decreased in 1985 and 1984 due to were due to changes in the following:

completion in 1984 of the major construction projects discussed above.

(Millions of Dollars)

Other income-net increased in 1985 due to an in For the Years Ended December 31 1985 1984 For he ear Ened ecemer 1 185 984 crease in temporary investments. Other income was General rates

$132.6

$146.7 higher in 1983 than in 1984 due primarily to the gain Fuel cost rates (26.7)

(171.2) from the sale of a subsidiary.

Regulatory balancing accounts:

San Onofre units 2 and 3 (86.8) 65.5 I

Fuelon page 19 are net of interest income on construction Fue cos23.0)

(3.5) funds temporarily invested by the trustee. These inter Other (2.2) 9.2 Sales1 est charges increased in 1984 due to new issuances of Naes volumeandoer 490.9 718.8 long-term debt. They increased again in 1985 because Net increases

$102.8

$ 85.8 the decline in construction funds more than offset the Refer to Notes 1 and 6 to the financial statements for reduction in interest expense from mandatory and discussion of San Onofre units 2 and 3.

voluntary redemptions of long-term debt and the use Gas Operations: Increases in gas revenues were due of lower rate tax-exempt financings. The company's to changes in the following:

embedded cost of debt decreased from 10.5 percent in 1983 and 1984 to 10. 1 percent in 1985, enabling the (Millions of Dollars) company to surpass its goal of achieving 3.75 times For the Years Ended December 31 1985 1984 pretax interest coverage. The company's embedded Rates

$(51.0)

$16.0 cost of debt is expected to continue to decline.

Regulatory balancing accounts:

Consolidated adjustment Quality of Earnings mechanism 25.0 (23.8)

The 1985 increase in net income was particularly Other (1.0)

(1.5) significant in that it occurred despite a decline in Interdepartmental transfers (9.2) 7.9 allowance for funds used during construction from Sales volume and other 51.4 6.1 15 percent of earnings in 1984 to 5 percent in 1985.

Net increases

$ 15.2

$ 4.7 Earnings applicable to common shares, excluding the allowance for funds used during construction, in Costs creased from $136 million in 1984 to $171 million The cost of electric fuel and purchased power in 1985.

increased in 1985 because increases in sales volume exceeded decreases in costs per kilowatt-hour. In 1984 Liquidity and Capital Resources the decrease in cost per kilowatt-hour exceeded the in-In 1985, the company again increased its liquidity.

crease in sales volume. Costs per kilowatt-hour The liquidity of a utility is greatly impacted by rate decreased in both years because of changes in fuel setting and construction activity. Thus, the company mix and reductions in fuel prices.

exerts every effort to influence these factors. For the The cost of gas increased because increases in company, rates are established by the California volume (13 percent in 1985 and 6 percent in 1984) ex-Public Utilities Commission and construction activity ceeded decreases in the price of gas.

is affected by population and industrial growth in the Other operating costs decreased by $7.5 million service area, per capita energy usage and the quantity (4 percent) in 1985, the first decrease in over twenty and price of the various energy sources.

years, despite the effects of system growth and infla-These external factors are critical to the company.

tion. This reversed the upward trend that in 1984 There are methods to mitigate them when they are included the effects of the Southwest Powerlink, the harmful or magnify them when they are beneficial.

Heber Binary Project and commercial operation of Ratesetting: The commission permits the company to San Onofre units 2 and 3.

include disputed costs in its rates while the company Maintenance expense, depreciation and property and the commission are still resolving the ultimate taxes increased in 1985 and 1984 due to the addition treatment of the costs. This improves the company's 17

Financial Review (In Thousands of Dollars Except Per Share Amounts)

For the Years Ended December 31 1985 1984 1983 1982 1981 Operating revenues

$1,738,702

$1,620,701

$1,530,207

$1,430,948

$1,159,662 Operating income 287,867 251,550 174,155 169,861 142,123 Net income (before preferred dividend requirements) 202,722 183,467 187,370 157,303 110,156 Earnings per common share 3.25 3.01 3.20 2.90 2.34 Dividends declared per common share 2.205 2.065 1.925 1.785 1.64 Funds provided by operations 399,453 370,855 267,429 196,084 135,131 Funds provided (used) by long-term financing (8,890) 69,419 284,265 141,173 138,455 Additions to utility plant (excluding allowance for funds used during construction) 241,219 197,775 291,999 252,790 209,729 At December 31 Total assets 3,085,962 2,950,695 2,840,195 2,411,676 2,160,254 Long-term debt and preferred stock subject to mandatory redemption (excludes current portion) 1,112,567 1,148,290 1,099,903 893,043 812,238 The Financial Review should be read in conjunction with the financial statements, notes to financial statements and statistical data contained elsewhere in this report.

After a slight dip in 1984, Earnings in 1985 were $3.25 net earnings turned up-per share-the highest ever ward again in 1985.

for the company.

23198~

3.25_8 1 9318 1984 3.20 2332 (in millions of dollars)

(in dollars)

Revenues for the year 1985 For the first time in the year increased seven percent, end history of the company, surpassing $1.7 billion.

assets exceeded $3 billion.

1121 1984 25 19831530 1983 2840 1981 1161981 (in millions of dollars)

(in millions of dollars) 16 L

San Diego's pleasant year round climate is attracting many people, some of whom are choosing to live downtown. Since everyone is a customer, the high rate of growth is providing both challenges and opportuni ties for SDG&E.

The San Diego Trolley has proved so popular during its five years of operation be tween downtown and the international border to the south that a second line is being built to serve eastern communities. SDG&E is in volved with many aspects of this light rail system. Dur ing construction of the lines, the company coordi nates the relocation of its gas and electric lines. When the lines are completed, SDG&E provides the elec tricity that operates the trol leys and the system's ticket fare machines.

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