ML13331B439

Southern California Edison Co,Annual Rept for 1986

ML13331B439
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Site:	Palo Verde, San Onofre, 05000000
Issue date:	12/31/1986
From:	Allen H, Christie H Southern California Edison Co
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Southern California Edison Company 1986 Annual Report Southern California Edison Company celebrated 1886 its centennial in 1986. Although the Company was incorporated in 1909, its beginnings can be traced to 1886 when predecessor companies first supplied electricity to portions of Central and Southern California. During the first 100 years, Edison's record of innovation, technological achievements, environmental protection, customer service and financial stewardship to shareholders is a testament to the efforts of Edison people, past and present, working together with great dedication, creativity and courage. They have never lost sight of our early operating principle-Good Service, Square Dealing, Courteous Treatment. As we enter our second century of service, we look at the past with pride, but more importantly, to the future with optimism. 19 86

Table of Contents 2: The Year at a Glance 3: Letter to Shareholders 7: Year in Review 21: Financial Review 25: Regulatory Review 27: Legislative Review 28: Centennial -100 Years of Achievements 36:

Responsibility for Financial Statements and Report of Independent Public Accountants 37:

Financial Statements 54:

Management's Discussion and Analysis of Results of Operations and Financial Condition 58:

Selected Financial Data 1976-1986 60:

Board of Directors 62:

Executive Officers

Southern California Edison Company Highlights Five-Year Compound Annual Percent Growth 1986 1985 Change Rate Operating Revenues (000)

$5,311,733

$5,168,848 2.8%

5.6%

Fuel and Purchased Power Costs (000)

$1,653,854

$2,389,087 (30.8)

(8.4)

Earnings Available for Common and Original Preferred Stock (000)

$713,933

$702,409 1.6 11.1 Weighted Average Shares of Common and Original Preferred Stock (000) 217,732 215,649 1.0 4.9 Earnings Per Share

$3.28

$3.26 0.6 5.9 Dividends Paid Per Common Share

$2.22

$2.10 5.7 7.9 Market Price Per Common Share-Year End

$337/s

$26 5/s 27.2 18.7 Book Value Per Common Share

$22.02

$21.04 4.7 5.5 Total Assets (000)

$13,244,952

$12,593,449 5.2 8.8 Funds Used for Construction Expenditures (000)

$1,089,677

$1,076,495 1.2 2.6 Kilowatt-Hour Sales (000) 64,197,405 64,984,566 (1.2) 0.6 Number of Customers 3,589,414 3,490,325 2.8 2.1 Number of Employees 17,553 17,182 2.2 3.8 Area Generating Capacity at Peak (Megawatts) 18,320 17,776 3.1 3.3 Earnings Per Share and Sources and Distribution of Revenues Annual Dividend Rate a Earnings Sources Distribution a Dividends a 34% Commercial a 32% Fuel and Purchased Power

$4 28% Residential 8 23% Operation and Maintenance a 23% Industrial E 17% Dividends and Interest a 9% Public Authorities a 14% Taxes and Other

$3.28 4% Resale a 10% Depreciation

$ 1% Agriculture E 4% Reinvested Earnings 3

1% Other

$2.56 2

1 0

1982The Company's 1986 sources of revenue reflect a fairly balanced contribution from the The Company's 1986 earnings per share reached three major customer classes-commercial, residential and industrial. Fuel and pur an all-time high of $3.28, the sixth consecutive chased power costs continued to represent a major portion of the distribution of revenues.

year of record earnings. A 5.6% increase in the common stock quarterly dividend raised the annual dividend rate to $2.28 per share.

The Year at a Glance Earnings per share of common stock increased moderately over the 1985 level to an all-time high of

$3.28, the sixth consecutive year of record earnings.

The common stock dividend was increased in June by 5.6 percent to $2.28 a year, the l1th increase in the past 10 years.

The market price of common stock reached a record high of $38 in August and closed the year at

$33/8, 27 percent higher than year-end 1985.

Total return to common stock shareholders from stock appreciation and dividends was almost 36 percent; total return over the past five years has averaged 28.5 percent annually.

Customers increased by nearly 100,000, the largest increase in 20 years, and sales to customers within the Company's service territory rose 1.9 percent. However, total kilowatt-hour sales declined 1.2 percent, largely because sales to other utilities declined, and some of Edison's municipal resale customers obtained more of their power from outside the Edison system.

Four non-utility subsidiaries were established to take advantage of business opportunities in areas other than the regulated utility business.

The California Public Utilities Commission (CPUC) disallowed $258.6 million of $3.4 billion of the Company's construction costs for San Onofre Nuclear Generating Station Units 2 and 3. The Company has filed for a rehearing on $213.4 million of the disallowance.

The CPUC and Edison agreed to rate and rate-base treatment for the Company's 15.8 percent interest in the Palo Verde Nuclear Generating Station in Arizona. The agreement, which avoided a lengthy prudency review, phases rates in over 10 years and ties the amount of Edison's investment in Palo Verde that will be put in the rate base to the outcome of the San Onofre prudency review. Based on the current CPUC decision, the disallowance for Edison's $1.5 billion investment in Palo Verde will total

$50 million.

Authorized return on common equity was reduced by the CPUC from 16 percent to 14.6 percent in 1986 and to 13.9 percent in 1987 because of lower levels of inflation and lower interest rates.

Edison issued a record $1.7 billion of debt, all of which was used to refinance higher-cost securities.

This brought total refinancings of higher-cost securities to $2.7 billion since 1984, which will save customers more than $70 million annually.

Fuel and purchased power costs declined 31 percent-primarily because of lower oil and natural gas prices-from $2.39 billion in 1985 to $1.65 billion in 1986, which is reflected in lower costs to customers.

Enactment of the Electric Consumers Protection Act of 1986 ensured fairness in federal relicensing of hydroelectric plants. The new law makes clear that no preference exists favoring municipal utilities over investor-owned utilities when low-cost hydroelectric facilities are relicensed.

2

Fellow Shareholders:

In 1986, we celebrated our corporate centennial We also are seeking to restructure rates. The with the best financial performance in the Com-California Public Utilities Commission (CPUC),

pany's history. We recorded our sixth consecutive for various public policy reasons, over the years year of record earnings and our 11th dividend in-has set industrial rates higher than the cost of pro crease in the past 10 years. Our common stock viding service to industrial customers. In some price reached an all-time high, and total return to cases this has made it economically attractive for our shareholders from stock appreciation and divi-industrial customers to generate their own elec dends was almost 36 percent. Today, we are one tricity and bypass the Edison system. If these cus of the nation's largest and most financially sound tomers bypass the utility system, the result would investor-owned electric utilities.

be more expensive electrical service for the re Our 50,000 square-mile service territory, if a maining customers because the fixed costs of ser separate nation, would have the 14th largest econ-vice would be spread across a smaller base. Our omy of any country in the world. Future economic Company is taking a number of steps to try to cor growth could make our service territory the equiv-rect this inequitable situation and to continue serv alent of the 10th largest economy in the world by ing these large industrial customers so they will the turn of the century.

pay their fair share of the cost of providing Serving well the people who work and live in electric service to all our customers.

our service territory presents a continuing chal-At the same time, we are working closely with lenge. We are proud of the record we have estab-large commercial and industrial customers to in lished in our first century of service, and we are novatively meet their particular needs. We also confident of the future as we enter our second are increasing employee productivity and focus century of "Good Service, Square Dealing, ing, to an even greater extent than previously, on Courteous Treatment."

cost-control programs.

Another matter involves efforts by some non Changes in Business Environment regulated power producers to obtain unlimited use The environment in which we do business as a of our transmission lines in order to sell their regulated electric utility has changed substantially power wherever and whenever they want. This is in the last few years. An unanticipated effect of known as "mandatory wheeling" and would in federal legislation and state implementing regula-crease costs to all but a few of our customers and tions, designed to cope with the energy crisis in reduce electric system reliability for all our cus the 1970s, has been the emergence of unregulated tomers. We are opposing such efforts nationally power producers from whom we are required to and in California.

purchase power at prices often higher than it costs Southern California Edison remains dedicated us to generate it or purchase it elsewhere. The re-to its primary mission as a regulated electric util sult has been an unfair cost burden on our custom-ity. We are, however, also ready to proceed in an ers. We are working with regulatory authorities unregulated environment if public policy makers and the non-regulated producers to reduce this change the rules under which we do business.

impact on our customers.

Last year we established new non-utility subsidi aries to develop business opportunities in several unregulated markets. One of them, Mission En 3

ergy Company, is a co-owner and operator of sev-our appeal to the CPUC for rehearing and a pos eral cogeneration and alternative energy projects sible appeal to the California Supreme Court. For in California and Nevada. Two other subsidiaries a further discussion of the financial implications are engaged, respectively, in industrial park devel-of this matter, please refer to the Financial Review opment, and in engineering and construction of section of this report on page 21 and in Note 2 of electrical facilities; another will specialize in "Notes to the Financial Statements" on page 46.

financial services.

We achieved a major legislative victory in 1986 when Congress passed, and the President signed, Regulatory and Legislative Matters a bill protecting the rights of investor-owned The only major disappointment for the Company utilities who own and operate federally licensed during the year was a regulatory decision in late hydroelectric facilities. The new law should allow 1986. The CPUC, following a four-year prudency our customers to continue to enjoy the benefits of review, by a 3-to-2 vote disallowed $258.6 mil-low-cost power from the hydro facilities that we lion, or 7.6 percent, of $3.4 billion of Edison's in-have built over the past 50 years.

vestment in the San Onofre Nuclear Generating Station Units 2 and 3. This decision was directly Our Second Century contradictory to the findings of the CPUC Admin-We have learned much from our first century of istrative Law Judge who heard all 95 days of service. One important lesson is that things sel public hearings and who recommended that no dom turn out the way experts predict. World en financial penalty be assessed against the construc-ergy markets, forecasts about future electricity tion costs of San Onofre Units 2 and 3. We have demand, laws, regulations affecting our business, appealed to the CPUC for reconsideration of most and many other factors are likely to change tomor of the disallowance, and a ruling on our petition row in ways that are impossible to predict today.

for rehearing is expected in March.

Recognizing this, we have developed strategies to The CPUC decision on San Onofre Units 2 and cope with future changes by building considerable 3 also affects our $1.5 billion investment in the flexibility into our Company.

three nuclear units at Palo Verde, Arizona. In Our future resource plans provide clearly 1986, Edison and the CPUC agreed that the mapped paths into the future no matter how out Commission's decision on San Onofre Units 2 and side conditions change and regardless of how 3 would be used as a basis for avoiding a pro-quickly or slowly demand grows. We are pursuing tracted and costly prudency proceeding of Palo important new research efforts that will give us Verde involving four state regulatory agencies.

the technical ability to respond to more rapidly The agreement established a disallowance level changing customer needs. Our strategy of starting for Palo Verde amounting to 19 cents for each $1 to diversify into non-utility businesses gives us an disallowed at San Onofre Units 2 and 3. Based on opportunity for earnings growth independent of the CPUC decision as it currently stands, $50 mil-possible changes in regulation.

lion, or 3.3 percent, of Edison's $1.5 billion investment in Palo Verde would be disallowed.

The impact that the CPUC decision may have on earnings depends on the timing and outcome of 4

Our commitment to good customer service will Our confidence in the future is strengthened by continue as we enter our second century, for we the proven dedication, abilities and hard work of are convinced that our shareholders and investors our 17,500 employees, the prudent counsel of our are best served if the needs of our customers are Directors and the continued support of you, our well met.

shareholders.

Management Changes Reflecting our diversification efforts, two of our Howard P.

vice presidents resigned from the Company to Chairman of the Board become presidents of new Edison subsidiaries.

and Chief Executive Officer Edward A. Myers, Jr., became president of Mission Energy Company, and Robert E.

Umbaugh became president of Mission Land Company. Their responsibilities at the parent com-H. Frederick Christie pany were assumed by other officers as part of President our program to increase productivity and control costs.

February 19, 1987 Two other officers retired in 1986. Joe T. Head, Jr., vice president of Power Supply, retired in Sep tember after 37 years of dedicated service. His responsibilities were assumed by Dr. L. T. Papay, senior vice president. Honor Muller, corporate secretary, retired at year end after 39 years of valued service.

In November, the Board of Directors elected Jennifer Moran, previously senior counsel in the Law Department, as corporate secretary, effective January 1, 1987.

Confidence for the Future As we enter our second century of service, we stand at the threshold of a new era of change in our industry. We have positioned ourselves to take advantage of new opportunities and meet new challenges, while never forgetting that our main business is providing regulated electric utility ser-H. Frederick Christie Howard P. Allen vice to the 10 million people who live and work in our service territory.

5

Good customer service demands expansion of its bilingual ser a continuing search for new ways vices to communicate better with to respond to the specific needs of non-English-speaking customers.

individual customers. Customer service specialists like Laura Es-Even before the use of modern trada respond to more than five communications technologies, million calls annually from cus-Edison employees, as seen at the tomers at the Company's modern, Long Beach office in 1908, were computerized Customer Tele-dedicated to the Company motto phone Information Centers. Edi-of "Good Service, Square son implemented a new program Dealing, Courteous Treatment."

during 1986 that included the hir ing and training of part-time em ployees to handle calls, and 6

Year in Review on rates during off-peak periods. In addition, the Company has requested Customer Service in its recently filed 1988 General Rate In 1986, Southern California Edison Case that the California Public Over the last 100 years, the Company Company marked another year of Utilities Commission (CPUC) approve has recognized the vital importance of excellence in financial performance lower rates for industrial and commer-providing quality service to its custom and service to customers, and also in-cial customers to reflect more closely ers. This service is constantly being creased its operating flexibility to meet the costs of providing them service, measured and improved. An example the new challenges of a changing busi-This proposed new rate structure, of this commitment is a continuing ness environment and an uncertain combined with new efforts to meet the search for new and more effective world energy market.

specialized needs of large customers, ways to respond to the specialized should reduce future bypass of the needs of individual customers.

Customer Growth and Edison system.

To achieve this, Edison has estab Energylished programs designed to make Enery SlesPeak Demand employees more sensitive to customer Edison recorded strong growth duringpro 1986 in the number of customers in The peak customer demand for elec-grams, screening of new employees serves throughout cusme tricity in 1986 was 14,599 megawatts for a "desire to serve," task forces mile t ro u i

ts 5,0 S u re (MW ) on August 20. On that day, the dedicated to specific service quality California. The number of customers Company had an electric reserve mar-and cost issues, recognition of employ rose by 99,089, the largest fcusers gin of 25.5 percent. The 1986 peak ees providing exemplary service, and 20 years. There was continued in was 0.1 percent above the 1985 high, increased customer communication.

in all sectors, particularly industrial, but below the record peak of 15,189 The Company receives five million iner all secto r partcuarly r intil MW set in 1984 during unusually hot customer service telephone calls annu where the numb o

ercutoers in-summer weather.

ally in its five telephone information creased by 4.6 percent, the highest cnes n18,teCmaysgii growth since 1977. Commercial and residential customer growth increased Energy Management cantly increased the accessibility and byspeed of response at these centers.

bye9percentady..eret The Company's energy management Improving the response time to cus respectively.

Withprograms reduce peak demand by en-tomers is only one of many service im be th of i

cusoers the cpans198 couraging customers to shift their use provements achieved in 1986. Others ber of customers, the Company's 1986 salesof electricity from times of high use to include:

territory grew 1.9 percent.

periods of low use. Through 1986, A new program providing Edison's Totaleio w 1.9 perent these programs, which improve the largest industrial and commercial o tae, li at-h u (KWH ale so utilization of existing generating re-customers with a single person to however, declined 1.2 percent from 65.0 billion KWH in 1985 to 64.2 bil-sources, have reduced the need for coordinate meeting their service lion KWH because of two major fac-nearly 1,300 MW in electric capacity needs in a more efficient way; tors: (1) a drop in "spot market" sales during peak periods, roughly equiva-Extended office hours to better to thr tiitesand(2 dcrasd n-lent to the output of a large nuclear accommodate customers at selected to other utilities and (2) decreased en-geraigut.lcios ergy purchases by Edison's six resale city customers, who obtained an in-Kilowatt-Hour Sales creasing proportion of their power from non-Edison sources, including Class of Service Kilowatt-Hour Sales ownership interest by several in a Utah coal-fired generating station.

% of (In Millions)

Other factors affecting 1986 elec-1986 total 1986 1985 change tricity sales were mild summer temper-Commercial...............31.4 20,145 19,111 5.4 atures that reduced air-conditioning Residential................29.2 18,767 18,583 1.0 use and an increased number of large Industrial.................24.3 15,588 15,707 (0.8) industrial customers who developed Public Authorities...........7.9 5,078 4,885 3.9 their own self-generation and bypassed Agricultural/Other..........1.3 853 1,016 (16.0) the Edison system.

Edison is working aggressively to Real ites.............4.4 2,789 37

(.0 avoid further loss of electricity sales to sale t

er Utilities 1.5 9

1,808 (46.0) large customers. For example, the S

O i

.50 Company began offering industrial Total.................100.0 64,197 64,985 (1.2) customers new discounts during 1986 7

Over the years, Edison has devel oped new equipment for its em ployees to improve productivity and enhance safety. In 1986, the Company introduced a new double-bucket truck, used during electrical outages as well as for regular maintenance, which gives linemen greater maneuverability around power poles. The truck was designed and assembled by Edison personnel.

In the 1890s, linemen carried around their own equipment in a wheelbarrow when working on power poles.

• The completion of 59,000 free chase from other sources. This over energy surveys for residential cus-pricing, which will be about $185 Projected Peak Demand tomers and an additional 34,000 million in 1987 and could reach $350 and Reserve Margin for industrial, commercial and million by 1990, has unfairly increased agricultural customers to promote the cost of electricity to customers.

8 Reserve Margin efficient energy consumption; These unregulated producers are

• Financial incentives offered to often large consumers of electricity.

60,000 customers aimed at partially They are free to either sell the power offsetting the purchase of energy-they generate to Edison, or to use it efficient equipment and appliances; themselves. Some also seek to sell the

• Edison also assisted 60,000 low-power they produce to other large income customers with a variety of industrial and commercial customers energy management services, includ-now served by Edison. If they are suc ing the free installation of energy-cessful in taking customers away from efficient appliances; the utility, the result would be more

• An information program for senior expensive electrical service for the re citizens involving several Edison re-maining customers because the fixed tirees on a part-time basis, covering costs of service would be spread across such subjects as safety, heat and cold a smaller base.

stress and energy use; This situation could be further 1

1

• Toll-free telephone numbers with aggravated because some unregulated (Recorded Edison representatives fluent in Chi-power producers also are seeking man-Peak customer demand for electricity in 1986 nese, Vietnamese and Cambodian to datory wheeling, or uncontrolled occurred August 20 when it reached 14,599 assist the growing number of South-access to investor-owned utility trans-megawatts. On that day the Company had a east Asian immigrants not proficient mission lines. Mandatory wheeling reserve margin of 25.5%. The Company will in English; this program augments would benefit a few customers at the continue to have sufficient reserves to meet the existing capabilities for Spanish-expense of all the rest. Currently, struct are cmpetn speaking customers. The Company subject to certain contractual commit also offers customers written mate-ments and regulatory requirements, rials in Asian languages as well as Edison has the right to determine when Spanish.

to provide transmission service over lines it owns and to give transmission Today's Business service to others only when it will not Environmentinterfere with the Company's primary Envirnmentservice obligation to its customers.

The Public Utility Regulatory Policies woudeure that tamsontsr Act of 1978 (PURPA), which was part ve p d ve f

t would of the legislation enacted to meet the interfere with system reliability and "energy crisis" of the 1970s, fostered increase the overall cost of service.

the entry of non-utility companies into Moreover, mandatory wheeling would the electric generation business. Under provide the benefits of cheaper power PURPA, non-regulated power produc-to large users at the expense of higher ers are allowed to build generating priced electricity for Edison's residen plants, and utilities are mandated to tial, small commercial and agricultural purchase the electrical output of these customers.

plants at prices set by state regulatory The Company is opposing manda bodies.

tory wheeling at the federal and state Today, although fuel oil and natural government levels.

gas prices have decreased signifi-In addition to PURPA, part of the cantly, Edison is required to continue to buy power from some non-regulated datory wheeling is the fact that under power producers, principally in the the current state regulated rate struc biomass and geothermal areas, at ture, larger industrial utility customers prices much higher than the power the pay more for electricity than their cost Company can now produce or pur-of service warrants. This is because, over the last 20 years, rates for large customers were increased by the CPUC above actual costs, partly to 9

A 175-ton transformer is placed during 1986 and will be Edison's in 1925, the longest water tunnel inside the huge powerhouse largest hydro plant when it be-in the world at the time. In one cavern of the Balsam Meadow gins operation in December 1987.

month, miners dug through 692 hydroelectric project, built 1,000 feet of granite, then a recordfor feet underground in the Sierra In an earlier phase of the Big hard-rock tunnel construction.

Nevada as an extension of Edi-Creek hydro project, an Edison This record was surpassed by the son's Big Creek hydroelectric work crew completed construc-Balsam Meadow project when complex. The 200-megawatt tion of the Florence Lake Tunnel crews excavated 1,051 feet project progressed on schedule of tunnel in 22 days.

encourage energy conservation and The 450-MW Unit 1 returned to ser partly to subsidize residential rates.

vice in July after being taken out of Generation Energy Mix Edison's 1988 General Rate Case service in November 1985 to repair pending before the CPUC attempts to damage to piping in the non-nuclear bring rates back into line with the cost part of the plant caused by an equip of service.

ment malfunction. During the outage, Unlike the non-regulated power the Company completed a scheduled producers, Edison and other electric refueling, and made seismic and other utilities have the obligation to provide modifications required by the federal electric service to all customers at reg-Nuclear Regulatory Commission.

ulated rates. In fulfilling this responsi-Edison has an 80 percent ownership Hydro bility and public trust, Edison intends interest in Unit 1, and a 75 percent in-Nulear to do what it can to avoid having un-terest in Units 2 and 3. The Company regulated power producers, who have is responsible for managing and Coal no limit on their profits and no obliga-operating the three San Onofre units.

Purchases tion to serve, from taking advantage of Edison also has a 15.8 percent inter-Other the smaller commercial, residential est in the Palo Verde Nuclear Generat-Utilities and agricultural customers the Com-ing Station, located near Phoenix, Purchases:

pany now serves.

Arizona. The project, managed by the Other Current law prevents Edison from Arizona Public Service Company, 1976 1986 1996 competing on a fair basis with these will be the largest nuclear facility in (Projected) unregulated power producers. Given the United States when its three The Company uses nine different energy an opportunity to do so, the Company 1,221-MW units are completed.

resources to generate electricity, more than any is confident it can meet the needs of its During the year, two Palo Verde other utility in the world. In today's world customers in a fair and equitable units went into commercial operation energy market, this diversity provides Edison manner.

-Unit 1 on February 1 and Unit 2 flexibility in serving customers reliably. The Company has reduced its dependence on oil on September 19. Unit 3 is scheduled and gas from 58% in 1976 to 25% in 1986.

Generating Resources for commercial operation in late 1987.

The Company uses nine different en-Hydro Resources ergy resources to generate electricity, more than any other utility in the Construction continued on schedule world. In today's world energy mar-and under budget on the 200-MW kets, where supply and demand for Balsam Meadow project, a major fuels can change drastically in a short addition to Edison's Big Creek hydro time, this diversity also provides electric complex located northeast Edison more flexibility in serving of Fresno, California, in the Sierra customers reliably at reasonable rates.

Nevada.

Scheduled for operation in Decem Nuclear Power ber 1987, the facility will be Edison's largest hydroelectric unit. The under The Company's three units at its San ground powerhouse will be named the Onofre Nuclear Generating Station John S. Eastwood Power Station, in generated slightly over 14 percent of honor of the engineer who conceived the electricity used by customers in the Big Creek hydroelectric complex.

1986. The output of these three units Edison has requested authorization made the burning of about 24 million from the Federal Energy Regulatory barrels of oil or equivalent natural gas Commission and the CPUC for the unnecessary, saving customers over Balsam Meadow project to operate as

$230 million in fuel costs in 1986.

a "pumped-storage" system. If this During the year, the 1,100-MW San proposed system is approved, water Onofre Units 2 and 3 operated, respec-would be pumped up to a reservoir at tively, at 68 percent and 72 percent of night using less expensive power, then their capacities, surpassing the national released to drive the turbine generator industry average for nuclear units.

during daytime peak periods. This will Unit 2 completed its second refueling help the Company reduce the cost of during 1986, while Unit 3 was taken producing electricity in peak periods out of service January 2, 1987, for its or its customers.

second refueling.

11

Control operator Mark Stuckey adjusts the highly sophisticated, computerized control room equip ment for Unit 2 at the Ormond Beach generating plant in Oxnard.

During 1986, the Company com pleted major modifications to the 750-megawatt unit that enabled it to operate at a lower minimum load, thereby giving it greater flexibility and reducing overall costs to customers.

In an earlier era, switchboard controlling units, such as the one at the Santa Ana River No. I hydro plant that was completed in 1899, were manually operated, requiring a diligent eye and dexterity to maintain proper power levels.

12

Coal Power producers contributing 845 MW to the energy and capacity that a utility Edison system. There are an additional would otherwise generate from its own Edison's coal-fired power plants in 198 projects under contract from plants or obtain from other sources.

Nevada and New Mexico generated unregulated producers, representing In California, the CPUC prescribed 14 percent of the electricity the Com-another potential 3,513 MW.

the terms for utilities to buy power pany produced for its customers in 1986.

For a number of reasons, including from unregulated power producers.

The two units at the Mohave changes in federal tax laws, air quality One pricing formula was based on a Generating Station in Nevada set a rec-considerations, and siting and permit 1983 forecast of oil prices. Before its ord in 1986 by operating at 72 percent requirements, the Company estimates use was suspended by the CPUC in of capacity, well above the national that only about 40 percent of planned April 1985, unregulated power produc average for coal-fired plants. Since projects will actually be built.

ers submitted a large number of new coal is one of Edison's least expensive The California Energy Commission, contracts that obligated Edison to pur generating resources, Mohave's 1986 which is the state licensing agency for chase power at prices significantly production meant significant savings all thermal projects of 50 MW or higher than its current avoided cost.

for Edison customers.

more, issued new guidelines in 1986 This has resulted in unfair and un In 1986, the CPUC granted Edison a on non-regulated power projects that necessary costs to customers for power one-time $27 million reward in rates should reduce unfair costs to custom-from independent producers that is al for the efficient operation of its coal-ers. First, these guidelines give Edison ready on-line and additional costs for fired plants in 1984, based upon a Coal and other California utilities the oppor-power projects not yet built. The Coi Plant Incentive Program established by tunity to meet the electric service pany is working hard in a number of the Commission.

needs of large industrial customers be-ways to protect consumers from this Edison owns 56 percent of the 790-fore they can undertake their own en-unfair pricing, including the close MW Mohave units and 48 percent of ergy projects. Second, all new power monitoring and administration of the two 790-MW coal-fired units at Four purchase contracts between utilities terms of these contracts.

Corners in New Mexico.

and non-regulated producers must take into account the electric generating re-Purchased Power Oil and Natural Gas quirements of utilities. As a conse quence, this allows utilities to reduce In 1986, Edison obtained 37 percent of Oil-and natural gas-fired generating their power purchases from these non-the electricity it provided customers units remain the backbone of Edison's regulated producers when less costly from outside sources, primarily other diversified electric generating system, alternative power is available, such as utilities in the Pacific Northwest and which helps to maintain the reliability purchases of economy energy from the Southwest who use hydro and coal re of electric service to its customers.

Pacific Northwest and Southwest.

sources. Most of these purchases were Edison has 47 oil-and gas-fired The large number of contracts on the "spot market" and were ac generating units with a total capacity between Edison and non-regulated tively sought by Edison because of of slightly over 10,000 MW.

power producers resulted from the im-their lower cost. Even with the sub In 1986, Edison produced 25 per-plementation of PURPA. The legisla-stantial decline in oil and natural gas cent of its customers' electricity from tion required electric utilities to prices, these spot market purchases its oil-and natural gas-fueled power purchase all the renewable/alternative saved customers about $140 million plants. This small utilization of oil and power produced by independent pro-during 1986, compared with using gas resources is because the Company ducers at "avoided cost"-which is natural gas as a fuel in its own gener purchased 37 percent of its power sales defined as the replacement cost of the ating plants.

from outside sources, at less than the cost of generating electricity with oil or gas on its system.

Resources from Non-Regulated Power Producers No-Rguatd owr roucrsUnder Contract But Not Built On-Line Non-Regulated Power Producers No. of Megawatts No. of Megawatts Although the sharp drop in the prices Projects Capacity Projects Capacity of fuel oil and natural gas has reduced Biomass.............

27 592 22 82 the cost-competitiveness of many Cogeneration.........

42 1,476 77 411 renewable and alternative resources, Geothermal..........

22 696 5

100 these technologies continue to repre-Small Hydro.........

28 10 32 54 sent important components of the Com-Solar...............

17 558 21 105 pany's diverse energy resource mix.

Wind...............

62 181 54 93 At the end of 1986, there were 211 non-regulated power projects owned and operated by independent power 13

Edison educational service rep-classroom equipped with lasers, resentatives Jon Sirugo and Jim robots, fiber optics, computers Burns conduct a science demon-and state-of-the-art audiovisual stration for sixth grade students components.

as part of the Company's new "Science Connection" educa-The Company's early education tional program that was inau-programs were more "hands on" gurated in 1986. The program, a than "high tech." Kite safety pro joint project by Edison and the Jet grams, which began in the 1930s, Propulsion Laboratory, with sup-featured on-the-spot lectures by port from the National Aeronau-linemen.

tics and Space Administration, features a mobile high-technology

During the year, Edison worked to of new transmission capacity by access policy, and is working in con increase its long-term access to eco-1991, including Edison's share of junction with other California public nomical, out-of-state power by en-about 280 MW.

and investor-owned utilities to have tering into new long-term contracts.

The completion of all planned im-these policies modified.

The Company signed a 25-year con-provements in these lines will increase tract with Portland General Electric the total transfer capacity between Cal-Fuel and Purchased Company that should save Edison cus-ifornia and the Pacific Northwest to tomers about $200 million during that approximately 7,790 MW, with Edi period. The new contract provides son's transmission capability climbing Edison with up to 300 MW during its from 1,281 MW to over 1,900 MW.

summer peak period and supplies costs dropped 31 percent to $1.65 bil Portland General Electric with access Southwest Transmission lion in 1986 from $2.39 billion in to power to meet its winter peak.

1985, primarily as a result of lower oil In addition, the Company and sev-A major step in expanding transmis-and natural gas prices. Although these eral other California and Pacific sion between California and the South-costs were lower than in any year since Northwest utilities signed an agree-west was taken when Edison filed an 1979, fuel and power purchases con ment with British Columbia Hydro to application with the CPUC to con-tinued to be the single largest compo study the feasibility of a proposed struct a second high-voltage AC line nent of the total cost of providing 900-MW hydroelectric project in from the Palo Verde Nuclear Generat electric service to customers, repre British Columbia.

ing Station near Phoenix, Arizona, to senting 32 cents out of each revenue the Devers Substation, near Palm dollar.

Northwest Transmission Springs. If approved, this proposed During the year, Edison negotiated 1,200-MW line will provide Edison several reductions in the price of its The major link for exchanging power with about 600 MW of new transmis-natural gas purchases that kept sup between California and the Pacific sion capacity in 1990, with the remain-pliers of this fuel competitive with the Northwest is the Pacific Intertie trans-ing 600 MW being shared by other decreasing price of oil. Edison also mission system, which was built California utilities, was able, for the first time, to purchase during the 1960s. It includes two small quantities of low-cost gas alternating current (AC) transmission Bonneville Power Policy diret f

rce s otsd casio lines and one direct current (DC) line, all capable of transmitting large The Bonneville Power Administration nia for delivery to its power plants. As amounts of electricity in either direc-(BPA), a federal power marketing tion at extra-high voltages.

agency in the Pacific Northwest and a price in 1986 of $2.58 per million Btu This transmission system benefits major supplier of power purchased by in 18.Ts rced fue tsan both regions, allowing the Northwest Edison, has adopted various policies sv Edis cer s a to market its surplus power and mak-intended to increase its revenues and

$300 mion ing California energy sources available those of Pacific Northwest utilities Furhmoro to the Northwest. The Pacific Intertie from sales of surplus electricity to transmission system has saved Edison Edison and other California utilities.

ket" power from the Pacific North customers millions of dollars each year Most of this electricity sold by BPA west and Southwest had to compete since its construction.

is generated by low-cost, federally with lower prices for natural gas by re In October, construction began on a subsidized hydroelectric facilities.

ducing the cost of economy energy project to increase the transmission BPA has priced the surplus energy ofrthesedenergyipurchasesainr1986cws capacity of the Pacific Intertie DC line sold to California at levels well above

1. ces per KWh 3 n belw from 1,958 to 2,990 MW. This line its production costs, and has restricted the erage o 2

cent pe is jointly owned by Edison, the Los access to the Pacific Intertie by Pacific Angeles Department of Water and Northwest and western Canadian KWH. This reduced the cost of pur Power and the municipal utilities of utilities. This has increased prices and chased power and saved Edison cus Glendale, Pasadena and Burbank.

reduced electricity sales to California tomers about $100 million.

When the project is completed in 1989, utilities. In October, BPA issued its By comparison, the highest average Edison's transmission capacity over draft proposal for a long-term policy price Edison paid for purchased energy the line will increase from 421 MW to on access to the Pacific Intertie which, and capacity was from independent 643 MW.

if adopted, would further increase power producers at 5.9 cents per During the year, planning also con-these restrictions with an adverse pric As i

ear, th s ofga tinued on the construction of a third impact on California utility customers.

prici formula mate the AC line to the Pacific Northwest.

These policies of BPA have unfairly pc forul powe purche The proposed line, known as the increased purchased power costs to fro nepndn power prces California-Oregon Transmission California electric consumers. Edison dr thet egultry Project, would add about 1,600 MW opposes BPA's rate structure and its Pes Act.

provment ih l wl the ota trasfe capcit beteenCal

To seek new business opportuni ties in areas other than the regu lated utility business, Edison established a non-utility subsid iary, Mission Energy Company, which has become one of the larg est cogeneration companies in the United States. Itsfirst project, a joint venture with a Texaco subsidiary, was the Kern River Cogeneration Project that gener ates 300 megawatts of electricity, then utilizes the exhaust heat from the turbines to produce steam for more efficient oil-recovery operations.

In the late 1930s, Edison also sought new business opportuni ties when it mounted vigorous campaigns to increase kilowatt hour sales to its customers. In one successful program, Edison engineers persuaded many oil field operators to convert their steam-powered pumps to more efficient electric pumps, thereby producing more oilfor sale.

16

The availability of natural gas, pur-first electric utility in the country to business opportunities in several unreg chased power, and to a lesser extent, offer a two-way data communications ulated markets. These non-utility sub renewable and alternative resources network to its customers.

sidiaries are separate from Edison's helped minimize consumption of The Company's new research thrust regulated business and are not eligible fuel oil. The Company burned only also includes greater emphasis on tech-for recovery of costs or return through 1.3 million barrels of oil in 1986, nologies that will help it to become a utility ratemaking.

compared to nearly 58 million in the more diversified supplier of energy The capital committed to these yen peak year of 1977. By comparison, a services. These technologies include tures is modest compared with Edi decade ago Edison projected that it more productive heating and air condi-son's involvement in utility operations.

would need to burn more than 80 mil-tioning systems, more energy-efficient At year-end 1986, Edison's equity in lion barrels of fuel oil in 1986.

household appliances, and advanced these non-utility subsidiaries totaled electrical equipment used by customers.

$147 million. In total, the subsidiaries New Planning and In addition, the Company is testing contributed 6 cents per share to the Research Strategies several promising energy storage tech-Company's 1986 earnings. Although nologies, including a 10-MW project small now, in time and under certain In 186,Edion doped ne stat-that will be the world's largest battery-circumstances these non-regulated In 1986, Edisonadpta ne t

energy system when it goes into opera-business enterprises could become egy in its resourceplanning prcessrt tion in 1988.

more significant contributors to the better prepare the Company for futureCopn'eaigs uncertainties. It focuses on flexibility

Company, the and timely responsiveness to change ColGsfctnMiinEeryomath by including contingencyesoce largest subsidiary, is located in Irvine, plans to meet unforeseen worlduc The Cool Water Coal Gasification California, and is engaged in the de plas t met uforsee wold nd plant, located near Daggett, Califor-velopment of electric generation proj national events or unpredictable changes in energy supply and use. As nia, successfully completed the second ects nationwide through joint-venture chagesin negy uppy nd se.As year of a five-year test program to de-partnerships in the cogeneration and a result, the Company is positioned termine its commercial feasibility. The alternative energy areas. At year end, to provide reliable electric service to 100-MW plant combines new and ex-Mission Energy had 315 MW of customers even with continued isting technologies in an environmen-capacity in operation and another changes in the business environment tally clean process to convert a wide 1,000 MW under development.

and unexpected growth patterns.

variety of coals-including high-sul-Major projects in operation include In addition, Edison moved to In ddiio, Eiso mvedtfur coal -into a synthetic gas used in the 300-MW Omar Hill cogeneration change the direction of its research turbines to generate electricity facility near Bakersfield, and the 15 programs to provide customers with a Emissions from the demonstration MW Beowawe geothermal plant near better value for their energy dollar.

plant have been as low as one-tenth of Elko, Nevada. Major cogeneration This new approach emphasizes im-those allowed by the U.S. Environmen-projects under development in Califor proved reliability and quality of elec-tal Protection Agency for coal plants.

nia include two in the Bakersfield area tric service, greater efficiency and new The testing program has provided the 300-MW Sycamore and 225-MW service options for customers. At the valuable information on this technol-Midway/Sunset projects. There also same time, the new direction com-With today's low fuel prices, are two near Long Beach-the 385 plements the Company's continued however, this demonstration plant is MW Watson and the 80-MW Harbor research on plant operation not commercially competitive with projects.

improvements, alternative fuels and other generating resources. With more Mission Land Company, based in emission controls.

favorable economic conditions in the Garden Grove, California, owns and A major focus of Edison's research future, however, this technology could operates industrial parks in a number program is the development of a be a valuable resource in utilizing of Southern California cities, includ reliable, low-cost communications the country's domestic coal resources ing Paramount, Brea and Garden network between the Company and and protecting air quality.

Grove. There also are plans to develop its customers as a means of providing In addition to Edison, other project other industrial parks in Ontario and them access to a variety of energy service poa and inri participants include Texaco Inc.,

Rancho Cucamonga.

seric pogrmsan inoratonBechtel Power Corporation, General Mission Power Engineering Corn services. This communication system Electric Company, the Electric Power pany, located in Irvine, California, would enable Edison customers to Research Institute and the Japan provides consulting to outside clients reduce their overall energy costs by Cool Water Partnership.

on engineering and construction ser shifting some of their electric con-vices in the energy field. Its projects sumption to low-cost periods.

A test program for 2,500 customers on-Utility Subsidiaries have included transmission lines, sub is scheduled for 1987 to determine the stations, switchyards, cogeneration feasibility of the pilot program known During 1986, the Company established plants, and electric power generating as the Network Communications Sys-four non-utility subsidiaries to develop facilities using geothermal and other The Copany'snew rsesrurthrus tern. If successful, Edison could be thet 17

Edison volunteers put the final touches on their winning 14-foot tall entry in a sand sculpturing contest sponsored by United Way of Orange County to raise funds for the needy and underprivileged.

The Company and its employees have a long tradition of donating money and volunteering their time and energy to numerous civic, charitable, religious and public organizations throughout Edison's service territory. As an early example, after the 1933 Long Beach earthquake Edison employees loaned their electric cooking appliances to the Red Cross for its relief efforts, with the Company providing tents and portable kitchens.

18

Mission Financial Management rose to 19 percent from 13.7 percent.

mental science, solar energy and other Company, as yet inactive, was formed Edison established a Female and energy-related topics. The Company to invest in high-quality securities, Minority Business program within its provides extensive educational mate leasing activities and other financial procurement division in 1979. Since rials to schools within its service tern undertakings.

then, the number of female and minor-tory. It also supports youth ity businesses qualified to do business organizations such as Junior Achieve Edison People with Edison has risen by more than ment and the Explorer Scout program.

300 percent, from 207 to 896. Total During 1986, Edison introduced The The successes of 1986 reflect the hard contracts awarded competitively to Science Connection, a new education work, dedication and innovation of these firms increased in value from program aimed at stimulating student more than 17,500 Edison employees.

$3.7 million in 1979 to $75 million interest in science and technology and They are the Company's greatest asset, during 1986.

acquainting teachers with a variety of whether they are the service crews and high-technology teaching resources. In support personnel working long hours Community Involvement a partnership with the Jet Propulsion to restore power during storms, power Laboratory and the National Aeronau plant operators who keep the generat-In addition to serving customers on the tics and Space Administration, the ing stations running smoothly, or engi-job, the Company and its employees unique project features the use of a 40 neers, accountants, clerical workers, contribute in a variety of ways to im-foot van serving as a mobile class meter readers and thousands of other proving the quality of life in the cities room, equipped with lasers, robots, people working efficiently behind the and communities they serve, fiber optics and computers.

scenes to provide the best possible ser-The Company encourages its em vice to customers and a competitive ployees to participate in many commu-Emergency Alert Service return to shareholders.

nity service activities, such as the In recognition of the many changes YMCA and YWCA, the Special In a new community service offered taking place in the electric utility in-Olympics, scouting and programs for systemwide during 1986, Edison dustry, Edison continues to create and senior citizens. Besides these activi-employees in vehicles with two-way expand training, incentive and recog-ties, the Company also supports a wide radios can now relay calls for help nition programs to improve employee variety of cultural and educational from citizens to emergency agencies, work skills and attitudes to help them programs in communities throughout such as paramedics, police and fire de better respond to new challenges.

its service territory.

partments. These Edison vehicles are identified with a decal reading "Emer Affirmative Action Education Programs gency Alert Service, Radio-Equipped Vehicle."

Edison continued to increase the pro-Edison has a long tradition of provid portion of both minorities and women ing support and assistance to education.

United Way Campaign in its work force during 1986. Minor-For students, the Company has three ity representation rose to 30 percent separate scholarship programs, and In 1986, Edison employees contributed from 29.1 percent in 1985, and female through its Educational Advisory

$2.35 million to the United Way. On a employees increased to 24.7 percent Council, the Company works closely per capita basis, this placed Edison from 24.2 percent in the previous year.

with teachers, administrators and com-people among the leading contributors During the last five years, minorities munity leaders to develop effective in California to United Way and the in management positions increased to educational materials that can be used more than 900 charitable organizations 20 percent from 15.5 percent, while to teach students about electrical it supports.

management positions held by females safety, energy conservation, environ Percentage of Asian American Total Male, Female and Male Female Black American Indian Hispanic Minorities Minority Employees p

i m commu at Year-End Year-End Year-End Year-End Year-End Year-End Year-End Year-End 1981 and 1986 1981 1986 1981 1986 1981 1986 1981 1986 1981 1986 1981 1986 1981 1986 Management 1 )

86.3 81.0 13.7 19.0 3.2 3.9 5.1 6.7 0.5 0.4 6.7 9.0 15.5 20.0 Administrative &

Operative( 2) 76.0 72.1 24.0 27.9 8.9 9.4 3.1 4.0 1.0 1.2 17.3 21.0 30.2 35.6 Total Company (3 t

79.4 75.3 20.6 24.7 7.0 7.4 3.7 4.9 0.8 0.9 13.8 16.8 25.4 30.0 (1) Management employees include the "Officials and Managers" and "Professionals" affirmative action categories.

(2) Administrative and Operative employees include the "Technicians," "Office and Clerical," Craftsmen," "Operators," "Laborers," and AService Workers" categories.

(3) Includes all classes of employees.

19

Edison common stock traded at record-high prices in 1986 and outperformed both the Dow Jones utility average and the Dow Jones industrial average.

Lois Ingham, manager of Inves tor Relations for Edison, dis cusses the trading activity of Edison common stock at the new Pacific Stock Exchange in Los Angeles with Mike Harper, the specialist who executes buy and sell orders for the Company's securities.

In 1917, the Company adopted as one of its fundamental policies the sale of stock directly to cus tomers, employees and the local public. Edison's Securities Depart ment facilitated the sale of stock directly to the public, including the multi-million dollar financing ofBig Creek hydroelectric projects in the 1920s.

20

The rate of return earned on corn Financial Review mon equity was 15.1 percent, exceed-Stock Price Comparison ing the 14.6 percent level authorized The Company recorded significant by the CPUC. However, the return on financial achievements in 1986, common equity would have been 14.8 UC including:

percent without the coal plant incen

• Earnings per share reached an all-tive award authorized by the CPUC.

time high of $3.28 for the sixth con-Contributing to the high level of secutive year of record earnings; earnings for 1986 were lower interest

• The Board of Directors increased the costs and preferred dividends resulting 200 common stock dividend 5.6 percent to from the Company's aggressive re

$2.28 per share annually, the 11th financing program, continued empha increase in the past 10 years; sis on cost control and productivity,

• Total return to common stock share-and the reward for favorable coal plant 150 holders from stock appreciation and operating performance. The increased dividends was almost 36 percent, sig-earnings were achieved despite a nificantly exceeding both the Dow downward adjustment in the Cor Jones utility average and the Dow pany's authorized rate of return on Jones industrial average. The Com-common equity from 16 percent to pany's average compound annual re-14.6 percent and refunds to wholesale OT turn of 28.5 percent over the past five customers resulting from Federal years also has outperformed the Dow Energy Regulatory Commission rate The Company's stock price has increased Jones averages over the same period; decisions, almost 2/ times during the past five years, outpacing both the Dow Jones utility average

• The market price of common stock Earnings also reflected a $15 mil-and the Dow Jones industrial average.

reached an all-time high of $38 per lion, or 7 cents per share, charge share on August 21, 1986; against income related to the portion of

• The quality of earnings reached its the CPUC's investment disallowances highest level since 1974 as the percent-for San Onofre and Palo Verde that the age of earnings exclusive of non-cash Company did not appeal.

Dividend Increases Compared Allowance for Funds Used During In terms of the financial impact of with Inflation Construction increased to 81 percent; the portion of the disallowance being

• Taking advantage of declining appealed, it is currently estimated that a SCE Dividend Rate interest rates, the Company issued a if the appeals were denied in their en-Consumer Price Index record $1.7 billion of debt, all of tirety, write-offs for San Onofre and Index 150 which was used to refinance higher-Palo Verde would total $314 million.

cost securities. The Company reduced This amount, which may be affected its weighted average cost of outstand-by the timing and the outcome of both ing debt to 9.1 percent, lower than any the appeal to the CPUC for rehearing other major California utility; and a possible appeal to the California

• Interest coverage, although down Supreme Court, is comprised of $102 slightly from the 1985 level, at 4.2 million, or 47 cents per share, for past times remains well above the industry revenue collections that would be average; treated as a charge against earnings in

• Internal generation of funds reached 1987 and $212 million, or 97 cents per 80 percent of capital requirements, share, for a one-time rate-base adjust the most favorable level in over 25 ment that would be reflected as a years.

restatement of prior earnings. These amounts and financial reporting 1982 1983 1984 1985 1986 Record Earnings and Revenues methods assume that the appeals will The Board of Directors increased the dividend be decided during 1987, which is on common stock 5.6% to $2.28 per share in Earnings and revenues for 1986 setthe past 10 years.

Earnngsandrevnue fo 196 se curenly ntiipaed.Dividend increases continued to outpace infla new records at $714 million and $5.3 For additional information on the tion as measured by the Consumer Price Index.

billion, respectively.

financial implications of this matter, Earnings per share of common stock please refer to Note 2 of "Notes to of $3.28 were up moderately from Financial Statements" on page 46.

$3.26 earned in 1985. Earnings per share have grown at an annual com pound rate of 5.9 percent over the past five years.

21

Rate of Return Reduced in the plan. These participants pur Pretax Interest Coverage chased approximately 1.7 million The CPUC, in August, concluded its re-shares by investing over $52 million of view of the authorized rate of return on dividends and optional payments.

common equity for all major Califor Tre_5 nia energy utilities. This review was Credit-Watch System Times 5

undertaken because of significantly lower inflation and interest rates. The Edison was the first U.S. utility to op 4.2_____

4 CPUC approved a stipulation negoti-erate an early warning credit system ated between its Public Staff Division that tracks the creditworthiness of its 3.4 and Edison regarding rate of return on 350,000 commercial and industrial 3 common equity and capital structure customers. The system is designed to 2.6 for 1986 and 1987.

identify customers who are in danger I

The approved stipulation reduced of business failure. Once identified, Nil'the Company's authorized return on arrangements are made to ensure that common equity from 16 percent to those customers will remain current on 1 14.6 percent in 1986 and to 13.9 per-their electric bills through cash de cent in 1987. The effect of these re-posits, surety bonds or more frequent duced returns was partially offset by payments. This saves money for all 1982 1983 1984 1995 1986 increasing the equity portion of the Edison customers by reducing the Earnings before income taxes and interest Company's capital structure from 45 amount written off as bad debt.

charges on debt were 4.2 times greater than percent to 47 percent. The impact of In 1986, the Edison credit-watch debt service costs. Even though 1986 interest the decision, independent of other fac-system reduced write-offs by $2.2 mil coverage was down slightly from 1985, a ratio tors, was to reduce authorized earning lion, bringing total savings to $6.5 of 4.2 times is excellent and significantly levels by 17 cents per share in 1986 million since it began five years ago.

higher than the industry average, and by an additional 16 cents per share in 1987.

Capitalization Dividend Increase The Company's total capitalization at year end was$ $10.1 billion. Over the Internal Generation of Funds In keeping with the Company's intent past five years, capitalization has to provide a competitive return to com-grown at an average annual rate of 6.8 mon shareholders, the Board of Direc-percent. The capital structure at tors in June increased the Company's year-end 1986 was composed of 47.3 00%/

common stock dividend for the 11Ith percent common equity, 6.6 percent time in the past 10 years. Over that preferred and preference stock and time, the annual dividend growth rate 46.1 percent long-term debt.

80%

80 has exceeded the rate of inflation by 67% 69%2.5 percentage points. The new annual Corporate Financings 60 dividend rate of $2.28 per share is 5.6 percent higher than the previous an-In 1986, Edison entered the capital 499%nual rate of $2.16 per share. The cur-markets nine times, completing $1.7 640 rent dividend provided a 6.7 percent billion of financings -the largest fi yield on Edison's year-end common nancing program in the Company's 40 18% n in n instock market price of $337/8 per share.

history. None of this amount repre 18%

20 sented requirements for new capital.

m m m mDividend Reinvestment and Rather, the financings were used to 0

Stock Purchase Plan refund higher-cost securities with 1982 1983 1984 1985 1986 lower-cost debt. These refinancings With major new generating facilities included The Company continues to offer a were accomplished through aggressive in customer rates, there has been substantial Dividend Reinvestment and Stock Pur improvement in Edison's internal generation of chase Plan as an investment option for funds. In 1986, the Company met 80% of its its common stock shareholders. At capital requirements internally, the highest level ~ ~

~

~

~

TeCPC in moethn25yar.yerenovr4,0 sheonludes, re about 25 percent of the holders of Edi son common stock, were participating 22

use of call provisions, market tender 1986 Financing Program programs and open market purchases.

Term Amount Weighted Average Cost Since the Company began its re-Series (Years) (Millions) of Long-Term Debt financing program in late 1984 when NEW ISSUES interest rates started to decline, Edison First and Refunding Mortgage Bonds:

has issued more than $2.7 billion of 86A, 91/4%............

30

$ 300 debt, mostly to refinance higher-cost 86B, 81/8%.............32 200 11%

securities, saving customers over $70 86C, 85/%.............33 200 million in interest costs annually.

86D-G, Pollution Control, Var. Rate..............

22 196 During the past three years, the 86H, 8%...............10 200 Company has actively utilized provi-861,73/4%.............

10 200 sions of the federal tax law to pursue 86J, Pollution Control, 7.2%

29 8

the benefits of tax-exempt financing of 86K, 83/8%.............31 125 pollution control equipment at the San Total Bonds Issued....

1,429 Onofre and Palo Verde nuclear plants.

Ca3 The result of these efforts was the is-

-ca a

suance of over $575 million in variable Total New Issues 1,742 7

rate tax-exempt bonds. The variable RETIREMENTS rate structure of these bonds has pro vided Edison with some of the lowest FitanReudgMoggeBds0 viedEisn ih om f helwet N, 41/%.........................(30) 1982 1983 1984 1985 1986t financing costs available in the capital Calectric, 41/2%..................

(8 markets. The average rate for 1986 t lowert ompn's eig averag cos was 4.5 percent.

Ongoing:

Sinking Fund Obligations............

(34) of debt from the peak of 10.5% in 1983 to These financings, along with main-9.1% in 1986, which will save customers over taining a high quality AA bond rating, REDEMPTIONS*

$70 million annually.

have contributed to the reduction of First and Refunding Mortgage Bonds:

Edison's average cost of debt from 85A, 13%, due 2015 10.5 percent at year-end 1983 to 9.1 (tender/purchase)..............

(174) percent at year-end 1986. This is the MM. 111/4%, due 2004 (call)

(218) lowest cost among all the major Cali-PP, 15/%, due 1991 (call).........

(209)

$1,000 Investment in fornia utilities.

ZZ, 123/%, due 2013 (tender)

(220)

Edison Common Stock UU, 12%, due 2012 (tender)....

(163)

Edison is the only major California LL, 91/8%, due 1987 (call)

()

riA eao utility whose bonds have not been 85C, 11/%, due 2015

(

Diiends downgraded by Moody's or Standard (tender/purchase)..............

(175) 0 $1,000 Initial Investment

& Poor's since these agencies first RR, 153/4%, due 2011 (call)

(49) rated the Company's bonds.

Pollution Control Revenue Bonds:

Although the Company's improved 84A, Var. Rate, due 2008 (call).

(196) internal generation of funds has re-QQP, 101/4%, due 2021 (call)

(8) duced the need for new money to fund Eurodebentures:

its construction program, Edison 15%, due 1989 (call)..............

(76) foresees another active financing pro-Cumulative Preferred Stock:

gram in 1987. This program includes

$100 par, 12.00% (call)............

(81) financing for a moderate amount of

$25 par, 9.20% (call).............

(52) newmony a wel a th reempion

$25 par, 8.85% (call)...............

(52) new money as well as the redemption ToaReimntad of high-coupon debt, maturing bond Reemtn.

(7 issues, sinking funds, and the restruc turing of the nuclear fuel financing. To meet these needs, Edison will continue

,Includes debt reacquisition expenses, if any 1982 1983 1984 1985 1986 to monitor the domestic, European and Japanese financial markets to seek the Through price appreciation and dividends, lowet-cot surce ofcapial.Edison common stock provided a return to minvestors of almost 36% in 1986. A $1,000 investment in Edison common stock at the beginning of 1982 would have grown to $3,646 by year-end 1986, a compound annual return of 28.5%.

23

Throughout the 20th Century, Edison employees have been at the forefront of developing new applications of electricity to benefit its customers and communities. At the Orange County Performing Arts Center, Edison energy services represen tative Douglas Quick discusses the operation of a new, sophisticated air conditioning system with Jim Napier, the Center's chief engi neer. Edison has given the Center an energy-efficiency award for a system that freezes water during off-peak periods when electricity is less expensive to generate, creating massive blocks of ice that fill two basement tanks the size of railroad cars, which in turn are used to cool the Center during the heat of the day.

In the early 1900s, Company representatives worked with ice manufacturers to utilize large electric motors to run ammonia compressors, which provided a continuous supply of 25-pound blocks of ice to preserve perish able food and refrigerate fresh produce shipped by rail to distant markets.

24

Palo Verde Ratemaking 1988 General Rate Request Regulatory Review Stipulation Edison applied to the CPUC on San Onofre Units 2 and 3 In October, the CPUC approved a December 26, 1986, for an increase in Reasonableness Review stipulation negotiated by its Public base revenues of $265 million annually, Staff Division and Edison to establish or 4.7 percent, effective January 1, The CPUC's four-year prudency re-ratemaking treatment for the Cor-1988. Fuel and purchased power view to determine the reasonableness pany's 15.8 percent ownership interest expenses are handled in separate pro of the construction and start-up costs in the three-unit Palo Verde Nuclear ceedings and are not included in this for San Onofre Units 2 and 3 resulted Generating Station.

application. The requested increase is in a 3-2 Commission vote to remove Edison agreed to the stipulation to designed to provide an 11.79 percent

$344.6 million of certain costs of the avoid the protracted hearings and sub-rate of return on rate base and a rate of units from rate base. Edison's share of stantial expense that a formal reasona-return on common equity of 14.75 the disallowance is $258.6 million.

bleness review of the Palo Verde percent.

The Company has asked the CPUC construction process might entail. The The Company also requested an for a rehearing on $284.3 million of San Onofre reasonableness review additional $37 million rate increase ef the disallowance-$185.7 million in required four years to complete, and fective January 1, 1988, for previously alleged licensing delay costs and $98.6 the Palo Verde review could be more authorized Palo Verde Units 1 and 2 million in indirect costs. The Com-complicated because four state public costs. Together these actions, if ap pany's appeal challenges the disallow-utility commissions could be involved, proved, would increase rates $302 mil ance of these items because it is The stipulation provides that:

lion, or 5.4 percent, on January 1, 1988.

contrary to uncontested evidence in For every dollar of Edison's San In its application, the Company re the case.

Onofre Units 2 and 3 disallowance, quested that the Commission approve The Commission's decision was 19.3 cents of Palo Verde construction a new rate design that would more unjust in many respects, including:

costs are to be disallowed. Based on closely reflect the costs of providing

• The CPUC's Administrative Law the CPUC's decision on San Onofre as service to various classes of customers.

Judge-the one person who heard all it now stands, the disallowance for Current rates reflect a long-time 95 days of testimony by 37 witnesses Edison's $1.5 billion investment in CPUC practice of keeping residential for the Company and 16 witnesses for Palo Verde would total $50 million, rates low, while increasing industrial the Public Staff Division of the CPUC,

- Palo Verde will be phased into rates and commercial rates above the cost of and read more than 4,300 exhibits and over a 10-year period. A portion of the service. As a result, some commercial briefs-recommended no disallowance; revenue requirement of the investment and industrial customers are finding it

• The disallowances are not supported is being deferred in the first four years, cost-effective to install their own elec by the record of the case; and but will be recovered fully, with inter-tic generation facilities, bypassing the

• The San Onofre Units 2 and 3 were est, over the following six years.

Edison system. The reduction in sales built faster and at less cost than other

• A target capacity factor procedure to these customers results in revenue comparable plants in the nation.

identical to the one applied to San losses which must be absorbed largely (Additional information on the Onofre Units 2 and 3 will be estab-by residential, agricultural and smaller financial implications of this decision lished for Palo Verde. The procedure commercial customers. Therefore, in is available in Note 2 of "Notes to the provides financial rewards if Palo its current rate request, the Company Financial Statements" on page 46.)

Verde's capacity factor (a measure of is asking the CPUC to increase resi The CPUC is also reviewing the operating efficiency) exceeds 80 per-dential rates and decrease industrial

$320 million capital investment that cent and assesses penalties if the rates in order to protect residential the Company has made, or will make, capacity factor falls below 55 percent customers from even higher rates in in San Onofre Units 2 and 3 between during each fuel cycle period, the future.

the units' commercial operating dates and January 1, 1988.

1987 Attrition Allowance San Onofre Unit 1 Rate Matters Effective January 1, 1987, the Cor-The Company is seeking to include in pany was authorized a $2.9 million an-rate base $125 million of capital addi nual revenue increase as an "attrition tions that resulted from seismic design allowance," which is a change in rates upgrading of San Onofre Unit 1, man to reflect changes in inflation and capi tal costs in the years between general rate cases.

25

dated by the Nuclear Regulatory actions were included in an April 1986 Rate of Return on Common Equity Commission, during an outage be-decision on the reasonableness of tween February 1982 and November Edison's 1984 fuel and fuel-related 1984. The Company also is asking the expenses.

AthriedCPUC to determine that $193.5 mil-During 1986, hearings were held on 2% lion of replacement energy costs that the reasonableness of Edison's 1985 20%

resulted from the outage were incurred ECAC operations. A decision is 170%reasonably.

The CPUC is expected to expected in early 1987.

16.3%

15.8%

16 announce a decision in spring 1987.

On February 5, 1987, Edison re 51In 1980 and 1981, the Company quested a $111 million annual rate expended $53 million to repair steam decrease under ECAC, effective June 1, 12 generators at San Onofre Unit 1. In 1987. The projected rate decrease 1986, the CPUC ordered the Company is possible because of lower oil and 8

to refund to customers about $16 natural gas prices and increased avail million of the $29 million already col-ability of lower-cost spot market lected and to permanently forego purchased power.

4 collecting the remaining repair costs.

The Company will retain $13 million Chevron Settlement of the amount already collected, and 1982 1983 1984 1985 1986

$16 million will be refunded through Edison paid Chevron Corporation future rate adjustments. Edison filed a

$350 million in May 1985 to settle liti Ietrn 96 tcompnquty.e earned

% rate lawsuit against Westinghouse Electric gation begun in 1982 when the Coi exceeded the authorized level primarily as a re-Corporation in March 1983 to recover pany terminated an oil supply contract suit of favorable coal plant operating perfor-the costs associated with the steam before completion of its 10-year term.

mance under an incentive program established generator repairs. In April 1984, the As a part of settlement, Chevron by the CPUC. On average Edison has earned court dismissed several of the Com-agreed to supply oil at market price its authorized return on common equity over pany's claims, and in January 1987, the under a new 10-year standby contract, the past five years.

court dismissed most of the remaining and Edison agreed to pay Chevron $9 claims. The Company is currently con-million per year for the standby ser sidering whether to pursue a court vice. The early termination and settle appeal.

ment saved Edison customers more than $1 billion, and the new contract Energy Cost Rate Matters will lower oil inventory costs by pro viding the Company with a reliable The CPUC authorized Edison to and competitively priced alternative collect $27 million in Energy Cost source of oil. Hearings were co Adjustment Clause (ECAC) rates as a pleted in 1986 on Edison's application reward for efficient operation of to the CPUC to recover the settlement the Company's coal-fired plants-payment over a 2 / year period and to Mohave Units I and 2 in Nevada and find the standby contract reasonable.

Four Corners Generating Station Units A decision is expected in spring 1987.

4 and 5 in New Mexico. The CPUC granted this award in 1986 for the Revaluation of Fuel plants' 1984 performance, based on Oil Inventory the Coal Plant Incentive Program established by the Commission. The Edison and the CPUC's Public Staff CPUC, however, disallowed $3 mil-Division agreed to a stipulation that lion of expenses for research-related will resolve the disparity between the fuel oil testing, finding that these price of fuel oil in inventory and the expenses would be more suitably re-current market value of fuel oil. The covered through base rates in a general stipulation requires Edison to revalue rate case proceeding. Both of these the fuel oil inventory, which was pur chased when oil prices were much higher than the current market price.

26

Edison will recover the approximately lives and loss of investment tax

$96.5 million differential through credits. The reduced cash flow and rates, with interest, over a two-year the lower corporate tax rate will Ff period beginning June 1, 1987. The reflected in customer rates. The new CPUC approved the stipulation in tax law should have little impact a Generation U Distribution December 1986, along with similar on earnings.

Billions $5 agreements for the other California

$4.8 electric utilities.

Hydro Relicensing New CPUC Commissioners Federal enactment of the Electric Con sumers Protection Act of 1986 con Stanley W. Hulett, a San Francisco cluded a successful effort by Edison 3

energy consultant, was appointed by and other investor-owned utilities to Governor George Deukmejian to ensure fairness in the federal relicens the Commission in May to replace ing of hydroelectric plants. The new William T. Bagley. G. Mitchell Wilk, law protects the interests of millions of a special assistant to the governor's investor-owned utility customers by chief of staff, was appointed in De-allowing them to continue to benefit cember to replace Priscilla Grew.

from low-cost hydroelectric power.

Hulett's term expires December 31, The Federal Power Act of 1920 gave 1982-1986 19871991 0

1990; Wilk's term expires December preference to municipally owned (Recorded)

(Projected) 31, 1992.

utilities over investor-owned utilities Edison's construction program over the next In December, Hulett was elected in licensing the initial development of five years is estimated to total $4.5 billion, President of the CPUC, succeeding hydroelectric projects. The Act was compared to $4.8 billion for the past five Donald Vial, who will continue to unclear as to whether that preference years. Construction expenditures are projected serveto shift away from generation plant to the serv asa cmmisioer ad wose appiedto elicnsig wen rignal expansion of the Company's transmission and term expires December 31, 1988.

licenses expired. If such a preference distribution systems.

The other commissioner is were to apply upon relicensing, it Frederick Duda, who was appointed would give an unfair advantage to the by Governor Deukmejian in 1984 for a relatively few municipal utility cus term expiring December 31, 1990.

tomers over the millions of investor Victor Calvo, who was appointed to owned utility customers who paid for the Commission by former Governor the hydro facilities and who now enjoy Edmund G. Brown, Jr. in 1981, com-the benefits of low-cost hydro power.

pleted his term on December 31, 1986.

The new law establishes that there is Governor Deukmejian is expected to no statutory preference given to any appoint a successor soon.

applicant, including municipal utilities, when existing hydroelectric facilities Legislative Review are relicensed. Instead, it requires that the Federal Energy Regulatory Tax Reform Act of 1986 Commission, when evaluating competing relicense applications, must The Tax Reform Act of 1986 signifi-determine which applicant is best cantly changed the nation's tax system.

adapted to serve the public interest.

The major impact of this law on Com-The Company appreciates the sup pany operations, other than a lower port of the shareholders, customers, corporate tax rate, will be a modest legislators and regulators who helped decrease in internal cash generation achieve the passage of this important resulting from longer depreciation consumer protection legislation.

27

1986 between rival railroad companies 196-1986 briefly lowered the fare from St.

0Louis to Los Angeles to just one dol lar. While that amazing fare didn't last long, it provided the impetus for a flow of new settlers into this region that continues to this day.

These new residents demanded the samne quality of life they had enjoyed N

A71URY OF S 1892 Transformers are first used to raise generator output voltage for long distance transmission of energy out e w rof the San Antonio or "Pomona" Achievements Hydroelectric Plant.

service within Southern California in the East, especially those "new The Pioneer Years was especially challenging. It was a fangled" electric lights. In addition to 1886-1900 region of rapid growth and change, Visalia's utility, other predecessor and a place where even the geography companies of Edison were orgamzed On the evening of July 4, 1886, a of the land-with its long distances in Santa Barbara and at Highgrove, in predecessor of the Southern California between power plants and population Riverside County, in 1886 (though Edison Company first provided elec-centers, towering mountains and blis-they did not deliver electricity until tricity for street lights in Visalia. Since tering deserts-tested the dedication, the following year).

that important day, generations of dedi-daring and creativity of the people cated electric utility employees have working to establish electric service.

been working hard to provide an ade-In the same year that Edison's first quate and reliable supply of electric ancestral utility began providing power within the 50,000 square-mile electric service, fierce competition area of Central and Southern Califor e

nia that now comprises Edison's ser-e t

or vice territory. Located in that area are California's first commercial hydro more than 800 cities and conbmu-electric plant, built by one of a trio of nities, and nearly 10 million people.

enterprises that comprised Edison's While utility workers across the earliest predecessors, begins opera nation faced difficulties during the tion at Highgrove in Riverside pioneer years of the electric utility Counpy.

industry, the task of providing electric Mrs. Colby, in white, and her assistant came to Edison from General Electric to demonstrate early electric cooking appliances.

A I More than 2,000 real estate agents were registered in Los Angeles County in 1888 and it's not too sur prising that 60 communities and towns sprung up in the greater Los Angeles area that year. Coupled with the convenient travel offered by the new transcontinental railroad systems, a serious blizzard in the East in March of 1888 made California's sunshine seem especially attractive. As still Visalia celebrates the Fourth of July, 1886. Notice a glass globe, part of the commu nity's pioneer electric street light system, hanging over the street in upper left corner.

28

• Consolidation 1901-1919 During the first decade of the Twen tieth Century, the original pioneer electric companies were consolidated into larger regional systems. This amalgamation of electric companies resulted in more reliable and lower cost electric service to Southern Cali fornia communities.

Under the direction of its president, eJohn B. Miller the Edison Electric Company of Los Angeles quickly ex panded. The utility eventually pro vided power to conmmities as far south as Santa Ana, north to Santa Barbara and east to Redlands. To re aflect this expansion, the Company's name was changed to Southern Skilled workmen insta l the last segment of penstock pipe at Big Creek No.

California Edison and it was rein When completed, the pipeline had the longest and steepest drop from reservoir to corporated on July 6, 1909.

water wheel of any powerhouse in the world.

Employees of Edison and other occurs today, many of the Easterners electric utilities continued to build who planned only to vacation on new power plants and expand their the sunny Pacific Coast stayed and Edison's Santa Ana River No. 1 Hydro became new residents.

Plant begins operation, transmitting The population of Los Angeles and power into Los Angeles over the Orange Counties was 33,400 in 1880.

nation's longest (83 miles) power line.

This increased more than five times over to 190,000 in just 10 years. Dur-people to the area. In 1895, the re ing the 1890s, electric companies gion's annual oil output reached one were formed in many communities to million barrels.

meet customer demand for a service In this time period, farmers began A

that quickly became a necessity to benefit from electric water pump of life.

ing, making irrigation of crops easier.

ining At Home During the 1890s, Southern Cali-In 1894, the Redlands Electric Light Is made more enjoyable when the room is brilliantly lighted by fornia's oil industry boomed, and the and Power Company, a predecessor of the rays of the new Edison Mada Lamp. The best substitute for potential for jobs and wealth from Southern California Edison, became sunlight in the home yet pro "black gold" lured thousands ofthe first utility to offer farmers elec-duclatestie e in ec tric pumping. The Redlands utility tnc lighting.

was able to do this because in 1893 it The newoso Matura began operating its Mill Creek No. I alliy anding.

hydroelectric plant, the nation's first ominto-dand three-phase alternating current power us show you the mer plant. This new generating technology its of this new lamp.

could operate motors better and more efficiently, and it was eventually S-0 CW.

adopted by utilities throughout the United States.

Edison customer services included free In 1897, the Edison Electric Com replacement of burned-out light bulbs pany, Southern California Edison's services to meet the Southland's by the delivery boys of the Lamp De-direct predecessor, began operations growing need for electricity for street partmnent. This service was important in Los Angeles.lights, trolley lines, homes and busi in the days prior to the widespread -us nesses. In 1907, Edison Electric Con of the modern standard screw-base er light bulb.

paywresset a world record for long distance power line construction 29

with a 118-mile line to Los Angeles from a Kern River hydroelectric plant. That line was also the first to be supported entirely on steel towers.

The Southland's businesses and in dustries continued to grow rapidly.

California became the nation's leading oil producing state in 1900, with the output concentrated mainly in South ern California. San Pedro Harbor operations increased following a ten-year expansion program com pleted in 1903. That year President Theodore Roosevelt also signed the Panama Canal Treaty, which paved Los Angeles No. 3 Steam Plant was the nerve center of the Edison system in 1912.

other business enterprises did much to lighting engineers developed flood foster growth in Southern California.

lighting systems to enable movie SMr.

Huntington's business ventures directors to use indoor studios for included electric, water and gas filming.

utilities in addition to electric railways.

During this period, electricity He helped to establish the Pacific usage also was increasing rapidly in the Light and Power Company in 1902 in farming areas of Central California.

order to build power plants to assure The Mount Whitney Power Company, adequate electric power for his trolley a predecessor of Southern California During Electrical Prosperity Week in operations.

Edison established in 1899, sold most 1915 the Company fitted out an electric The aerospace industry of Southern wagon with this display of electric California began in 1906 when avia appliances.

tion pioneer Glenn Curtiss built a the way for construction of a project commercial aircraft at his manufactur that would dramatically increase ac-ing facility in Santa Ana. A few years4 tivity at California ports.toelectricrailway In 1901, the Pacific Electric Rail-P way was established by Henry E.

Edison's Kern River-Los Angeles Huntington to provide trolley service a

lei p

e itoe in the greater Los Angeles area. The Ta si L

iThe aos inst (o

miouern troley srvie an Mr.Huningtn's and highest voltage (75 KV) power line. It is the first line in the nation entirely supported on steel towers for its entire length.

later, Donald Douglas started manu facturing aircraft in Santa Monica, and he built the first planes to fly around the world. His aircraft gave Raising a power pole in 1912 required a the United States a decided strategic lot of muscle power.

advantage when the nation entered 7uWorld War I in 1917.

of its power to farmers in the San By 1910 another major industry was Joaquin Valley for crop irrigation. That forming in Hollywood as early movie utility built power plants along the makers began operations that would Kaweah and Tile Rivers to enable the soon have a significant impact on en-region's farmers to benefit from low tertinmet te wold oer.Edisn's cost hydroelectric generation.

Another predecessor company of Linemen work on one of the historic Edison, the Nevada Power, Mining Kern River 75,000-volt transmission and Milling Company, was organized line towers.

30

in 1904 and immediately began con-ect to build a massive 250-mile-long struction of hydroelectric plants along gravity-flow aqueduct to bring water Bishop Creek. This company pro-to Los Angeles from the Owens vided power for the mining operations Valley. The aqueduct was completed in the Nevada towns of Tonopah and Goldfield, as well as to other mining camps along the California-Nevada Edison predecessor, the Pacfic Ight border.

and Power Corporation, energizes Although most of those mining Big Creek Power House No. I and the towns eventually became ghost towns, Big Creek-Eagle Rock Transmission the hydroelectric plants still operate n

'l s

d e

c c

today.droeectint operat e

line, marking the initial startup of the oeaincls down, the power from those hydro electric plants at Bishop Creek was sold in various communities not already served by electric companies.

new growth in the Los Angeles area.

The Southland's continued growth Also in 1913, Huntington's Pacific led to demands for more electricity, Light and Power Company finished and also for more plentiful water sup-the construction of Big Creek Power in 197 just before construction of plies. The area's low annual rainfall Houses No. 1 and No. 2. The abun-additional units began.

dant water resources of the Sierra Nevada mountain range thus began producing power for Central and Difficult Decades Southern California. Since that time, 1920-19 Big Creek facilities have been ex panded to provide as much low-cost Humorist Will Rogers was popular hydro power to customers as possible.

throughout the nation in the 1920s.

The development of Big Creek was But he was especially popular in a challenging effort. Huntington had Southern California, where he lived.

to build a railroad, the San Joaquin Rogers provided comic relief to Cali and Easter, in order to haul supplies fornia residents and others throughout and men to the remote area of Big the nation who were facing serious Creek. That feat was accomplished in difficulties in the years before and July 1912, less than six months after during The Great Depression.

work began, even though Huntington In 1923 and 1924, a drought caused had none of the bulldozers and other economic problems for farmers and moder earthmoving equipment for electric utilities and their custom used today.

ers, since Edison relied almost en Long Beach Steam Plant's operators in their white nahal-style uniforms stand before Unit No.p1 on Its first day of operation.

was insufficient to meet the water needs of the growing numbers of homes and businesses, while still pro viding enough water for farmyands.

An unusually dry weather cycle at the turn of the century endangered farmers' wheat crops and focused the public's attention on the possibility of serious water shortages. After much public discussion, Los Angeles voters approved a multi-million-dollar proj Pacific Electric's "Big Red Cars" introduced rapid transit to Southern Cafornia and provided reliable transportation to millions of Soutllanders for more than 50 years.

31

tirely on hydroelectric power plants One of the few causes for cele for electricity. In the latter part of the bration during this period was the 1920s, the Company expanded its completion of the magnificent Hoover steam generating plant at Long Beach Dam in 1936, which is still today re to prevent future problems due to garded as one of the largest and most water shortages.

successful engineering marvels in the Major earthquakes struck Southern world.

California in 1925 and 1933, destroy-The Edison Electric Company had ing homes, businesses and one considered building hydroelectric fa power plant. Many Edison employees cilities on the Colorado River as early volunteered to help with relief as 1902, but transmission of power efforts, and the Company donated would have been difficult and costly, supplies to Red Cross food stations.

and those plans were shelved. In 1921, Hoover Dam, envisioned by engineers in 1930, became a reality in 1936.

Edison's proposals to build its own fa cilities, a compromise was reached in 1930 that designated Edison as the utility that would operate some of Hoover Dam's generators for itself and other investor-owned utilities.

The same compromise allowed the Los Angeles Department of Water and Power to generate power for the par ticipating states, municipal utilities and the Metropolitan Water District.

I J In 1931, a $49 million contract was In 1922, during the expansion of the Big Creek project, workmen carved the approved, and construction began on "Million Dolar Mile" section of road through granite along the precipitous gorge the world's highest dam-726 feet of the San Joaquin River.

of te Sn Jaqui Rierthat would create the world's largest Another catastrophe occurred with manmade lake. The project was com the collapse of the City of Los 1927 pleted in October 1936, and nearly a Angeles' St. Francis Dam, 45 miles Edison predecessor the Southern million residents of the Los Angeles northwest of Los Angeles, which led Sierras Power Company drills the area crowded downtown streets to to extensive flooding. As soon as an first geothermal power production well view the first delivery of electricity Edison line patrolman notified Edison in the United States.

from Hoover Dam. Today, this project Dispatcher J. D. Poe of the dam's collapse at a few minutes after mid-Edison, in cooperation with the U.S.

night on March 13, 1928, Poe Geological Survey, sent surveyors immediately phoned warnings to to select potential sites for hydro communities in the path of the raging electric plants along the Colorado floodwaters. Poe's quick thinking was River. Edison officials were pleased credited with saving many lives, with the results and filed federal applications to build dams and gener ating facilities at several locations. wl EdBut several utilities and agencies wanted to be involved in developing power resources along the Colorado River. After much debate in Con gress, the Boulder Canyon Act of 1928 passed. Although it ruled out Work on the Long Beach Steam Plant Display installer stands beside the No 3 continued despite the Great Display Department's truck in 1929.

Depression as the Company sought to keep its workforce employed 32

continues to provide power to the cus tomers of Edison and other utilities.

During this period of history, the decades of the 1920s and 1930s, the service territories of Southern Califor nia utilities changed. In May 1922, the Edison Company completed the transfer of distribution facilities within the City of Los Angeles to that city's Bureau of Power and Light, which today is known as the Los Angeles Department of Water and Southern Cafornia became the nation's fastest growing area at the end of WW II.

Power.

In August 1939, Edison and the tricity needs during this so-called City of Los Angeles exchanged addi-War and Postwar "postwar baby boom." These new tional distribution facilities. The city, 1941-1960 large-scale generating plants also helped to lower electricity prices be On December 7,1941, Japanese war cause of economies of scale. Electric planes bombed Pearl Harbor The ity was plentiful, and appliance U.S. now was at war with Japan, manufacturers continued to introduce Germany and Italy. Business and in-new products for the home.

dustry all across the nation focused efforts on aiding the war effort.

In Southern California, individuals Edison begins a research project to and companies such as Southern

-ibut beenro annexed bysson Los Anglesnc fornia Edison participated in scrap dioxide at its steam plants. This drives to collect copper, iron, steel, voluntary effort was the first research brass and rubber for war materials.

program of its kind in the indstiry.

People learned to live with less and supported government food and gas Edison's generating capacity soared rationing programs. Edison also taught its customers how to "light-from one million kilowatts at the end proof' their homes to comply with of World War to nearly seven mil blackout regulations.

lion kilowatts in 1965. Although oil In one of the more unusual events and gas-fired steam plants accounted Edison's "Fifth and Grand" General in Edison's history, Soviet Union offi-for the bulk of this new generating ca Office building oSaened its doors in 1931.

cials visited Edison's Long Beach pacity, Edison also doubled the output which had purchased the Los Angeles Steam Plant to coordinate the dis-of its Big Creek hydroelectric facili Gas and Electric Corporation in early mantling of a generating unit. The ties between the end of World War 1941-1960.

1937, gave to Edison facilities outside federal government officially seized of the city limits that formerly be-the unit and ordered Edison to turn it longed to L.A. Gas and Electric. in over to the Soviet Union, a U.S. ally return, Edison gave to the city dis-during the war.

tribution facilities in areas that had The U.S. and its allies prevailed.

been annexed by Los Angeles since Germany surrendered in May 1945.

the original sales agreement between Three months later, after atomic Edison and the city in 1922.

bombs fell on Hiroshima and Nagasaki, Japan also surrendered.

)V~twhatSuburbs sprouted up across the rwig Commdities country as returning U.S. troops started families and used GI loans to buy homes. Many of the veterans who had trained at California military bases relocated their families to this E

c its system from 50 to "Busy Buttons" was tb r

astate, again boosting the Southland's 60-cye operatio during the 194 Edison service in the 'wenties and population.

period, which involved rebuilding every Thirties.

Edison and other utilities across the customer meter.

country began building massive new power plants to meet growing elec 33

The Modem Era construction of the San Onofre 1960-1986 Nuclear Generating Station. That first San Onofre unit was dedicated in In California, the 1960s was a de-January 1968. Units 2 and 3 went cade of dramatic growth. In 1962, into operation in 1983 and 1984, California surpassed New York as the respectively.

most populous state. On December 31, the Cooa majrtm 1963, California Electric Power Co.,

whic seved ome450000 eope m sion link with the Pacific Northwest, which served some 450,000 people in a 41,500 square-mile service territory, mergd wih Edson.the purchase of low-cost surplus hy merged with Edison.

droelectric power from the federally owned Bonneville Power Administra con. A second transmission link to the Pacific Northwest was completed in 1970 as a joint project with the Los operation in 1r8.

Angeles Department of Water and ficial ocean reef, designed to enhance Power. At the time it was the highest marine life, was constructed off the capacity and longest direct current California coast as a joint venture transmission line in the world.

between Edison and the California Electric utilities have faced Department of Fish and Game.

dramatic changes in recent years, in-Another of Edison's many envn cluding increased public concern for mental projects involves the success the environment, a more unstable ful use of by-product heat from world energy market, a shift away coastal generating stations to cultivate from the construction of large-scale lobsters and abalone. The warm water power plants, development of altena-accelerates their growth. Edison has tive and renewable energy resources, provided thousands of juvenile and a changing business environment, abalone to the California Fish and This boiler at the Garden State Paper Southern California Edison has re-Game for placement in ocean waters.

Company was Edison's first industrial sponded well to these changes and is World energy supplies were plenti cogeneration installation in modern recognized as one of the most suc times.

cessful and innovative electric utility Southern California Edison con-companies in the world. comple EdiseneandethetLoenAngelestDepart tinued to expand its facilities to meet Edison began environmental studies the increasing demands for electricity related to air quality in the late 1940s maen ofWate an Powe0ontl dedi by its customers and turned to nuclear and has implemented a variety of en-current transmission line extending power to meet some of tha increasing vironmental programs since that time.

from near Portland, Oregon, to Syl demand. in 1963 the Company began For example, California's largest arti-manrLoAges.Tiwsth highest capacity and longest distance DC transmission line in the world, and the first extra-high-voltage DC line built in the United States.

ful and prices stable for the period ex tending from the end of World War ca until 1973, when the oil embargo dra matically increased the price of oil, a primary fuel for generating plants.

Edison responded to the volatile changes in the world oil markets by promoting conservation and develop ing a wide range of energy resources.

Since the 1973 oil embargo, Edison and other utilities have encouraged customers to practice energy conser The current Rosemead General Office was completed and occupied in

n.

34

vation and load management ("give your appliances the afternoon off").

Edison developed a number of conser 1980 7 r Edison is the first electric utility in the i(#

nation to make a large-scale commit-J ment to the development of renewable and alternate energy resources.

vation programs to help residential and business customers reduce their energy consumption. These programs help to make maximum use of exist ing resources and reduce the need for building new generating facilities.

Although Edison was involved in Solar One, the in ft commecial solar-thermal power plant, produced its several alternative and renewable en-first power in 1M.

ergy projects before October 1980, Totakadvanageobusin ssop during that month the Company pub-o t

hk ad o ins op licly made a large-scale commitment prtnfsbeodheraioalul-18 to develop renewable and alternate ity area, Edison established four Edison and Texaco, Inc., jointly place energy resources. Today, Edisonapo non-utility subsidiaries in 1986. The into operation the world'sfirst vides electricity to its customers from subsidiaries are Mission Energy Coi-commercial-scale coal gasification vids eecricty o ts ustmes fom pany, which is involved in cogenera-plant that converts coal into a clean nine different energy resources, tion and alternate energy projects; burning gas to produce electricity.

more than any other electric utility in Mission Land Company, which is in the world.

eolved in commercial land develop-by the Company's president, John B.

ment; Mission Power Engineering Miller, in 1905. That motto has not Company, which provides energy en-changed. The people of Edison pro nvide more than reliable electric ser 1evice at a reasonable cost. They help uti s the communities in which they work Edison hasin received EEI'sto top honore hv agnun cn nine primary energy resources-liv lished inr 1922 morenmnt times aharan water, oil, natural gas, uranium, coal, geothermal, wind, solar and bio-coitted to providing quality ser mass-more resources than any other vice to customers; and their success electric utility in world.

over the years has benefitted share holders by enabling them to earn a fair return on their investment.

gineering and construction services; and Mission Financial Management Company, which will engage in finan cial investments.

Edison introduced a new company logo Edison and its employees have re and uniform in 1v984.

sponded well to the dramatic changes In 1982, Southern California Edison of recent years. Their combined ef won the prestigious Thomas A. Edi-fomts have enabled the Company to son Award from the Edison Electric gain recognition for innovation within Institute, an association of electric the electric utility industry, and for utilities throughout the United States.

being a good corporate citizen in the The Southern California Edison Comn Edison has received EEI's top honor communities it serves.

pany has won the prestigious Thomas four times since the award was estab-Edison's long-standing motto of A. Edison Award more times than any Go er

,other utiit The gold medals for the lished in 1922, more times than any ore Sure an 2 award (left) and the 1963 award other utility. Edison won the award Courteous Treatment" was first stated (center) are displayed next to the that first year, 1922, and again in Charles A. Coffin Medal won in 1922.

1944, 1963 and 1982.

The 1944 Award was a cedrificate rather than a medal because of war time shortages.

35

Southern California Edison Company Responsibility for Financial Statements Report of Independent Public Accountants The management of Southern California Edison Company is To the Shareholders and the Board of Directors, responsible for the information and representations con-Southern California Edison Company:

tained in the financial statements and the related financial information presented in this report. The financial state-We have examined the balance sheets and statements of ments have been prepared in conformity with generally ac-capitalization of Southern California Edison Company cepted accounting principles applied on a consistent basis (a California corporation, hereinafter referred to as the and include amounts based on judgments and estimates "Company"), as of December 31, 1986 and 1985 and the of management.

related statements of income, common shareholders' equity The Company maintains internal accounting control sys-and sources of funds used for construction expenditures for tems and related policies and procedures designed to pro-each of the three years in the period ended December 31, vide reasonable assurance that assets are safeguarded, that 1986. Our examinations were made in accordance with gen transactions are executed in accordance with management's erally accepted auditing standards and, accordingly, in authorization and properly recorded, and that accounting cluded such tests of the accounting records and such other records may be relied upon for the preparation of financial auditing procedures as we considered necessary in the statements and other financial information. The design of circumstances.

internal accounting control systems involves management's As discussed further in Note 2, the California Public judgment concerning the relative cost and expected benefits Utilities Commission (CPUC) has issued a decision dated of specific control measures. These systems are augmented October 29, 1986 in connection with its review of $3.4 bil by programs of internal audits through which the adequacy lion of the Company's investment in San Onofre Nuclear and effectiveness of internal accounting controls, policies, Generating Station Units 2 and 3. This decision ordered that and procedures are evaluated and reported to management.

$258.6 million of the Company's investment should be dis The Company's financial statements have been examined allowed. In addition, as a result of a stipulation agreed to by in accordance with generally accepted auditing standards by the Company and adopted by the CPUC on October 1, 1986, independent public accountants who have expressed their

$50 million of the Company's investment in Palo Verde opinion with respect to the fairness of these statements.

Nuclear Generating Station Units 1, 2 and 3 would be disal The Audit Committee of the Board of Directors, lowed based on the above CPUC decision. The Company composed entirely of non-employee directors, meets peri-has appealed $254.6 million of the San Onofre and stipu odically with the independent public accountants, internal lated Palo Verde disallowances by filing an application for auditors and management. This Committee, which rehearing with the CPUC. It is not possible for the Coi recommends the annual appointment of the independent pany to determine the probable financial effect that the final public accountants, also considers the audit scope and outcome of the CPUC proceedings in this matter will nature of other services provided, discusses the adequacy have on the Company's financial position and results of of internal accounting controls, reviews financial and operations.

reporting issues and is advised of management actions on In our opinion, subject to the effects of such adjustments, these matters. Both the independent public accountants and if any, as might have been required had the outcome of the the internal auditors have full and free access to the Audit matter referred to in the preceding paragraph been known, Committee.

the financial statements referred to above present fairly the financial position of the Company as of December 31, 1986 and 1985 and the results of its operations and the sources of its funds used for construction expenditures for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.

Los Angeles, California, ARTHUR ANDERSEN & CO.

February 11, 1987.

36

Southern California Edison Company Statements of Income Year Ended December 31, 1986 1985 1984 (In Thousands)

Operating Revenues:

Sales (Notesl and 2).........................................

$5,275,547

$5,141,735

$4,842,959 Other......................................................

36,186 27,113 56,193 Total operating revenues................................

5,311,733 5,168,848 4,899,152 Operating Expenses:

Fuel (Notes l and 2)..........................................

878,040 1,683,363 1,478,236 Purchased power (Note 8).....................................

775,814 705,724 606,705 Provisions for regulatory adjustment clauses-net (Note 1).............

168,812 (607,036)

(460,337)

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

809,000 755,325 728,625 M aintenance................................................

352,696 352,635 419,458 Depreciation (Note 1).........................................

504,701 454,574 398,623 Income taxes (Note 4)........................................

711,493 720,938 639,875 Property and other taxes.......................................

143,274 130,571 121,342 Total operating expenses................................

4,343,830 4,196,094 3,932,527 Operating Income.............................................

967,903 972,754 966,625 Other Income:

Allowance for equity funds used during construction (Note 1)............

105,744 123,179 145,967 Interest income..............................................

96,533 83,867 67,601 Taxes on non-operating income-credit (Note 4)...................

10,743 11,928 29,666 Other income and income deductions-net........................

41,071 35,664 4,071 Total other income.....................................

254,091 254,638 247,305 Total Income Before Interest Charges...........................

1,221,994 1,227,392 1,213,930 Interest Charges:

Interest on long-term debt and amortization (Note 1)................

432,608 426,783 449,834 Other interest charges.........................................

50,247 61,017 80,488 Total interest charges...................................

482,855 487,800 530,322 Allowance for borrowed funds used during construction (Note 1)......

(29,478)

(34,515)

(48,820)

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

453,377 453,285 481,502 Net Income..................................................

768,617 774,107 732,428 Dividends on Cumulative Preferred and Preference Stock..............

54,684 71,698 73,043 Earnings Available for Common and Original Preferred Stock........

$ 713,933

$ 702,409

$ 659,385 Weighted-Average Shares of Common and Original Preferred Stock Outstanding (000).......................................

217,732 215,649 207,576 Earnings Per Share............................................

$3.28

$3.26

$3.18 Dividends Declared Per Common Share...........................

$2.25

$2.13

$2.01 The accompanying notes are an integral part of these financial statements.

37

Southern California Edison Company Balance Sheets Assets At December 31, 1986 1985 (In Thousands)

Utility Plant:

Utility plant, at original cost (Notes 1, 2 and 6)...............

$13,676,746

$11,853,442 Less-Accumulated depreciation (Notes I and 6).............................

3,586,080 3,152,141 10,090,666 8,701,301 Construction work in progress (Notes 1 and 6)................................

1,342,169 2,041,738 Nuclear fuel, at amortized cost............................................

95,627 95,180 11,528,462 10,838,219 Less-Property-related accumulated deferred income taxes (Notes I and 4)........

708,436 531,746 Total utility plant.....................................................

10,820,026 10,306,473 Other Property and Investments:

Non-utility property and other investments, at cost-less accumulated depreciation 45,546 38,501 Special funds (Note 1) 24,326 Investments in and advances to subsidiaries (Note 1)............................

207,282 162,786 Total other property and investments......................................

252,828 225,613 Current Assets:

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

33,603 37,757 Cash investments-financing subsidiary (Note 1)..............................

65,545 163,979 Receivables, less reserves of $11,874,000 and $9,833,000 for uncollectible accounts at respective dates.............................................

364,396 351,095 Fuel stock, at cost (first-in, first-out) (Note 1).................................

233,528 255,508 Materials and supplies, at average cost......................................

123,480 106,178 Regulatory balancing accounts-net (Notes 1 and 2)...........................

739,050 792,011 Prepayments and other...................................................

72,808 100,663 Total current assets...................................................

1,632,410 1,807,191 Deferred Charges:

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

303,599 144,977 Rate phase-in plan (Note 2)...........................................

90,650 Other deferred charges (Note 8)...........................................

145,439 109,195 Total deferred charges.................................................

539,688 254,172 Total Assets

$13,244,952

$12,593,449 The accompanying notes are an integral part of these financial statements.

38

Southern California Edison Company Capitalization and Liabilities At December 31, 1986 1985 (In Thousands)

Capitalization:

Common stock, at par value, 216,906,527 and 216,676,897 shares outstanding at respective dates.........................................

903,777 902,821 Additional paid-in capital................................................

1,546,541 1,543,933 Earnings reinvested in the business.........................................

2,343,957 2,128,646 Common shareholders' equity...........................................

4,794,275 4,575,400 Preferred and preference stock without mandatory redemption requirements........

365,654 466,500 Preferred and preference stock with mandatory redemption requirements............

299,049 395,074 Long-term debt.......................................................

4,667,891 4,717,411 Total capitalization..................................................

10,126,869 10,154,385 Long-term Obligations:

Accumulated provisions for pensions, insurance and other (Note 5)................

95,680 91,126 Current Liabilities:

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

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

103,315 45,110 Short-term borrowings (Note 3)...........................................

328,000 15,000 Short-term borrowings-financing subsidiary (Notes I and 3)...................

48,800 148,850 Accounts payable.......................................................

415,118 401,489 Accrued taxes (Note 4)..................................................

460,171 233,722 Accrued interest........................................................

109,034 110,394 Dividends payable......................................................

127,783 122,347 Accumulated deferred income taxes-net (Note 4)............................

340,952 391,781 Other................................................................

134,174 106,240 Total current liabilities.................................................

2,085,560 1,595,396 Deferred Credits:

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

544,866 485,614 Accumulated deferred income taxes-net (Note 4).............................

121,943 32,062 Customer advances and other deferred credits.................................

270,034 234,866 Total deferred credits..................................................

936,843 752,542 Commitments and Contingencies (Notes 2, 7, 8 and 9)

Total Capitalization and Liabilities...................................

$13,244,952

$12,593,449 The accompanying notes are an integral part of these financial statements.

39

Southern California Edison Company Statements of Sources of Funds Used for Construction Expenditures Year Ended December 31, 1986 1985 1984 (In Thousands)

FUNDS PROVIDED BY Operations:

Net income...............................................

$ 768,617

$ 774,107

$ 732,428 Items in net income not affecting working capital Depreciation..........................................

504,701 454,574 398,623 Allowance for equity and borrowed funds used during construction...................................

(135,222)

(157,694)

(194,787)

Rate phase-in plan....................................

(90,650)

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

266,571 192,575 174,496 Deferred investment tax credits-net......................

59,252 84,134 55,323 Other-net.........................................

19,894 5,102 40,408 Total funds provided by operations...........................

1,393,163 1,352,798 1,206,491 Dividends............................................

(544,282)

(532,265)

(492,049)

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

848,881 820,533 714,442 Long-term Financing:

Sales of securities Common stock..........................................

3,504 90,770 209,321 Long-term debt..........................................

1,427,026 1,111,880 627,860 Reduction for preferred and preference stock to be redeemed within one year..........................................

(18,213)

(20,463)

(18,213)

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

(845)

(758)

(1,764)

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

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

(103,315)

(45,110)

(101,250)

Refunding and early retirement of preferred stock and long-term debt-net......................................

(1,730,888)

(653,632)

(403,896)

Total funds provided by (used for) long-term financing...........

(422,731) 482,687 314,696 Total funds provided.....................................

426,150 1,303,220 1,029,138 OTHER SOURCES (USES) OF FUNDS Working capital changes:

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

102,588 20,268 189,669 Receivables-net..........................................

(13,301) 20,455 (70,859)

Fuel stock, materials and supplies............................

4,678 154,659 5,835 Accumulated deferred income taxes-net......................

(50,829) 392,808 216,663 Preferred and preference stock and long-term debt due within one year..

55,955 (53,890) 31,963 Short-term borrowings......................................

212,950 21,900 (56,020)

Accounts payable..........................................

13,629 6,005 31,028 Accrued taxes...........................................

226,449 (2,653)

(71,028)

Regulatory balancing accounts-net..........................

52,961 (773,656)

(394,603)

Other changes in working capital..............................

59,865 19,658 (9,910)

Net (increase) decrease in working capital....................

664,945 (194,446)

(127,262)

Fuel contract settlement payments, net of deferred taxes..........

(62,402)

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

(1,418) 30,123 (49,602)

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

663,527 (226,725)

(176,864)

Funds Used for Construction Expenditures........................

$1,089,677

$1,076,495

$ 852,274 The accompanying notes are an integral part of these financial statements.

40

Southern California Edison Company Statements of Capitalization December 31, 1986 Shares Redemption December 31, Outstanding Price 1986 1985 (In Thousands)

Common Shareholders' Equity-detailed on page 42................ 216,906,527

$ 4,794,275

$ 4,575,400 Preferred and Preference Stock-without mandatory redemption requirements (a)(b):

Original Preferred-5%, prior, cumulative, participating, not redeemable, par value $81/ 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..................

50,000 9.20% Series..................

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:

5.20% Convertible Series.........

115,957 25.00 2,899 3,745

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

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

365,654 466,500 Preferred and Preference Stock-with mandatory redemption requirements (a)(c):

$100 Cumulative Preferred-par value

$100 per share (i):

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

.630,000

$104.04 63,000 66,000 7.80% Series..................

524,995 110.00 52,500 55,499 8.54% Series..................

660,000 105.65 66,000 68,250 8.70% Series A................

485,624 110.00 48,562 51,188 12.00% Series..................

75,000 12.31% Series..................

500,000 105.83 50,000 50,000 Preference-par value $25 per share: 7.375% Series.................

1,488,000 25.00 37,200 49,600 317,262 415,537 Preferred and Preference Stock to be redeemed within one year........

(18,213)

(20,463)

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

299,049 395,074 Long-term Debt First and Refunding Mortgage Bonds (d)(e)(f)(i):

Interest Rates Due 1987 through 1990..................

41/4%-10%

395,000 475,000 Due 1991 through 1995..................

5/%-8/8%

610,000 810,000 Due 1996 through 2000................

7%-8%%

890,030 490,030 Due 2001 through 2005..................

8/4%-9.95%

647,250 857,750 Due 2006 through 2021..................

71%-16%

and Variable 1,456,912 1,092,037 First Mortgage Bonds (Calectric) (d) (e)

Due 1987 through 1991.................

42%-5/8%

38,000 46,000 Debentures Due 1992 through 1993................

1012%-11%

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

Due 1989 through 1997................

11%-13%

156,109 233,958 Pollution Control Indebtedness (f)(i)

Due 2008 through 2009................

Variable 379,400 575,400 Other Long-term Debt (e)(h).........................................

10.57%

26,797 28,657 Principal amounts outstanding..........................................................

4,799,498 4,808,832 Long-term debt due within one year (e).........................

(103,315)

(45,110)

Unamortized debt premium or (discount)- net.............................................

(17,069)

(11,364)

Securities held by trustees (f)..........................................................

(11,223)

(34,947)

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

4,667,891 4,717,411 Total Capitalization....................................................................

$10,126,869

$10,154,385 Notes to Statements of Capitalization are on page 43.

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

41

Southern California Edison Company Statements of Common Shareholders' Equity 1986 1985 1984 (In Thousands)

Common Stock-par value $4V6 per share, 280,000,000 shares authorized, 216,906,527, 216,676,897 and 212,552,728 outstanding at December 31 of respective years (a)(b):........................

$ 903,777

$ 902,821

$ 885,637 Additional Paid-In Capital:

Balance at January 1......................................... $1,543,933

$1,470,347

$1,307,413 Premium received on sale of Common Stock and conversions (a)(b):......................................

2,664 73,652 163,774 Capital stock expense.........................................

(56)

(66)

(840)

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

$1,546,541

$1,543,933

$1,470,347 Earnings Reinvested in the Business:

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

$2,128,646

$1,886,804

$1,646,425 Add:

Net income...............................................

768,617 774,107 732,428 2,897,263 2,660,911 2,378,853 Less:

Dividends declared on capital stock Common-$2.25 per share for 1986,

$2.13 per share for 1985 and

$2.01 per share for 1984..........................

487,778 458,551 417,115 Original Preferred........................................

2,131 2,016 1,891 Cumulative Preferred.....................................

51,311 67,676 68,203 Preference..............................................

3,062 4,022 4,840 544,282 532,265 492,049 Loss on reacquired Preferred Stock.............................

9,024 Earnings Reinvested at December 31 (c)........................

$2,343,957

$2,128,646

$1,886,804 Total Common Shareholders' Equity at December 31................

$4,794,275

$4,575,400

$4,242,788 Notes to Statements of Common Shareholders' Equity are on page 43.

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

42

Southern California Edison Company Notes to Statements of Capitalization (a) As of December 31, 1986, authorized (c) For Preferred and Preference Stock with Mandatory Redemption Requirements, the aggregate shares for the Original Preferred, $25 Cumula-mandatory redemption requirements for the five years subsequent to December 31, 1986 are as tive Preferred, $100 Cumulative Preferred, $25 follows:

Preference and $100 Preference Stock were 480,000, 24,000,000, 12,000,000, 10,000,000, No. of Year Ended December 31, and 2,000,000 shares, respectively. All series Shares Commencing 1987 1988 1989 1990 1991 of Cumulative Preferred, $100 Cumulative Pre-

$100 Cumulative (In Thousands) ferred and Preference Stock are redeemable at Preferred the option of the Company. The 500,000 shares of $100 Cumulative Preferred Stock, 12.31%

7.325%............30,000 7/31/83

$ 3,000

$ 3,000

$ 3,000

$ 3,000

$ 3.000 Series, are not subject to such redemption until 7.80%.............15,000*

11/30/83 1,500 1,800 1,800 1,800 1,800 May 1, 1992. The various series of $100 8.54%.............22,500**

6/30/86 2.250 2,250 2,250 Cumulative Preferred Stock, and the Prefer-8.70%A............13,125 6/30/85 1,313 1,313 1,313 1,313 1,313 ence Stock, 7.375% Series, are subject to cer-12.31%.............35,000***

4/30/88 3,500 3,500 3,375 3,375 tain restrictions on redemption for refunding Preference purposes.

7.375%...........496,000 2/01/85 12,400 12,400 12,400

$18,213

$22,013

$24,263

$11,738

$11,738 (b) As of December 31, 1986, the conversion price of the Preference Stock, 5.20% Convert ible Series was $15.75 per share. The 12/2%

• Increases to 18,000 shares beginning in 1988.

Convertible Subordinated Debentures Due

• • 45,000 shares relating to 1987 and 1988 have been acquired through open market purchases.

1997, issued by Southern California Edison

• • • Decreases to 33.750 shares beginning in April 1990.

Finance Company N.V., are convertible into Company common stock at the conversion During 1986, the Company made optional redemptions of 22,500, 15,000 and 13,125 shares of the price of $16.1875 per share.

$100 Cumulative Preferred Stock, 8.54% Series, 7.80% Series and 8.70%A Series, respectively.

Such optional redemptions reduce the final series of mandatory redemption requirements.

(d) Substantially all of the properties of the (f) First and Refunding Mortgage Bonds and on $150,000,000 and $6,109,000 principal Company are subject to the liens of Trust other indebtedness have been issued to govern-amount of the Debentures are, respectively, un Indentures.

mental agencies in exchange for the proceeds conditionally guaranteed and guaranteed on a from the issuance of Pollution Control Reve-subordinated basis by the Company. The Sub (e) Maturities and sinking fund requirements nue Bonds and Pollution Control Revenue ordinated Debentures are convertible into the of long-term debt for the five years subsequent Refunding Bonds. The proceeds have been Company's Common Stock.

to December 31, 1986 are as follows:

deposited with Trustees and are being utilized to defray the construction and other specified (h) Pursuant to the Nuclear Waste Policy Act Year Ended Sinkisg Fund costs of pollution control facilities and retire-of 1982 (Act), the Company has entered into a December 31, Maturities Requirements Total ment of maturing issues. Such Bonds may be contract with the U.S. Department of Energy (In Thousands) redeemed at the election of the Bond holders.

for disposal of spent nuclear fuel for the San 1987...

$ 98,065

$5,250

$103,315 The Company has entered into agreements Onofre Nuclear Generating Station.

1988........

74,292 5,250 79,542 with security dealers which provide for the re 1989........

62,544 5,250 67,794 marketing or purchase of the Bonds when such (i) The $25 Cumulative Preferred Stock, 8.85%

1990.

349,823 5,725 355,548 elections are made.

and 9.20% Series and the $100 Cumulative P

dPreferred, 12.00% Series were redeemed 1991.....16,14 6230 172364 (g) Promissory Notes payable to Southern during 1986. The Company also reacquired California Edison Finance Company N.Y.

$1,391,000,000 of high interest rate long-term (Finance) have been issued in exchange for the debt through tender offers and open market proceeds from the issuance of Debentures by purchases.

Finance. Payment of the principal and interest Notes to Statements of Common Shareholders' Equity (a) At December 31, 1986, shares of Common

• These plans include the Dividend Reinvest-Shares Issued 1986 1985 1984 Stock reserved for issuance were as follows:

ment and Stock Purchase Plan (DRP), Stock DRP...........-

2,942,754 5,389,210 Savings Plus Plan (SSPP) and Employee Stock SSP........

2,954,346 Shares Ownership Plan (ESOP). Common Stock cur-ESOP 1,214,803 Conversion of Preference Stock, rentiy required for the plans are provided 5.20%.Series..

53,656 48,090 112,015 5.20% Convertible Series to 184,064 through open market purchases.

t s%

Convert Conversion of 121/% ConvertibleibeDen Subordinated Debentures, (b) Transactions in the capital stock accounts ures.......

175,974 1,133,325 1,402,044 Due 1997, Issued by Southern during 1986, 1985 and 1984 reflect the issuance California Edison Finance of common stock through stock purchase (c) Includes undistributed earnings of uncon Company N.Y................488,588 plans, the conversion of 33,825, 30,323, and solidated subsidiaries of $25,328,000 and Stock purchase plans...........4,238,575*

70,687 shares in the respective years of Prefer-appropriated reinvested earnings related to ence Stock, 5.20% Convertible Series (5.20%

certain federally-licensed hydroelectric projects Total....................

4,911,227 Series) and conversion of 121/% Convertible of $4,274,000 at December 31, 1986.

Subordinated Debentures, Due 1997, as follows:

43

Southern California Edison Company Notes to Financial Statements NOTE 1-Summary of Significant Accounting Policies Depreciation For financial reporting purposes, depreciation of utility Regulation-plant, other than nuclear fuel, is computed on a straight The Company is regulated by the California Public Utilities line, remaining life basis using the composite service lives Commission (CPUC) and the Federal Energy Regulatory by classes of depreciable property.

Commission (FERC). Accounting records are maintained Estimated nuclear generating station decommissioning in accordance with the Uniform System of Accounts pre-costs, aggregating $328,085,000 as of December 31, 1986, scribed by the FERC and adopted by the CPUC. The finan-are being recovered in rates through an annual allowance cial statements reflect the ratemaking policies of these and charged to depreciation expense.

commissions in conformity with generally accepted account ing principles applicable to rate-regulated enterprises.

Nuclear Fuel The cost of owned and leased nuclear fuel, including its dis Utility Plant-posal, is amortized on the units of production method on the The cost of additions, including replacements of units of basis of generation over its service life. Nuclear fuel costs property and betterments, is capitalized and included in are recovered through regulatory balancing account utility plant. Costs include contracted work, direct material mechanisms.

and labor, construction overhead, and an allowance for funds used during construction.

Special Funds Maintenance, repairs, and minor replacements of and Restrictions were placed on a portion of the proceeds from additions to property, are charged to maintenance expense.

certain pollution control indebtedness pursuant to conditions The cost of property replaced, renewed, or otherwise in the related tax-exempt loan agreement. In compliance retired, plus removal or disposal costs, less salvage, is with loan conditions, such proceeds were utilized for the re charged to accumulated depreciation.

demption of indebtedness incurred during the period in Property-related accumulated deferred income taxes which the pollution control facilities were constructed.

are deducted from utility plant in conformity with the rate making method used to determine rate base.

Research and Development (R&D)

R&D costs are expensed as incurred if they are of a general Allowance for Funds Used During nature. R&D costs relating to specific projects in advance of Construction (AFUDC)-

construction are capitalized until a determination is made as AFUDC represents the cost of debt and equity funds, net of to whether such projects will result in the construction of applicable income taxes, that finance the construction of electric plant. If the construction of electric plant does not new facilities. The amount of AFUDC capitalized is also re-ultimately result, the costs are charged to expense.

ported in the Statements of Income as a reduction of interest Year Ended December 31, 1986 1985 1984 charges for the borrowed funds component and as other in-(In Thousands) come for the equity funds component. Although AFUDC R&D costs charged to expense........$47,122

$44,139

$35,843 increases net income, it does not represent cash earnings.

R&D costs deferred/capitaied.......

3,888 1

The cash recovery of AFUDC, as well as other costs of Total R&D expenditures.............$10

$39 construction, occurs when completed projects are placed into commercial operation and related depreciation is autho rized to be recovered through rates.

The AFUDC rate, which is compounded semiannually, was 10.53 percent for 1986, 10.40 percent for 1985, and 10.24 percent for 1984. These rates were calculated in accordance with a prescribed FERC formula.

44

Southern California Edison Company Income Taxes-The one-time write-down, aggregating $96.5 million, will Deferred income taxes are provided for certain benefits real-be recorded in the ECAC balancing account pending future ized from depreciation deductions utilized for tax purposes, rate recovery.

regulatory balancing accounts, debt reacquisition expenses, The CPUC has established performance incentive mecha and certain other specific items. Income tax accounting nisms for San Onofre Nuclear Units 2 and 3 and the Palo policies are discussed further in Note 4.

Verde Nuclear Generating Station which set forth a targeted range of generation levels. Fuel savings or costs attributable Unamortized Debt Issuance and to generation levels above or below the target range are di Reacquisition Expense-vided equally between shareholders and customers.

Debt premium, discount, and related issuance expenses are amortized over the lives of the issues to which they pertain.

Major Plant Additions Debt reacquisition expenses are amortized over the remain-Major Additions Adjustment Clause (MAAC) balancing ing lives of the retired indebtedness when reacquired with-account mechanisms have been established to account for out refunding and over the lives of the new debt issues when the difference between revenues specifically authorized to reacquired with refunding.

provide recovery of San Onofre Units 2 and 3 and Palo Verde Units 1 and 2 ownership costs and those actually Revenues-incurred.

Revenues are recorded based on cycle billings rendered to Interest and Taxes customers each month.

cInterest on regulatory balancing accounts is accrued at the Reguatoy Baancng Acouts-most recent three-month prime commercial paper rate as Operating Revenues-published by the Federal Reserve. The weighted-average in The CPUC has authorized an Electric Revenue Adjustmentrates for the years 1986 and 1985 were 6.65% and Mechanism that removes the effect on earnings of fluctua-the reulaty aan incountar eferre Bille rv tions in kilowatt-hour sales to retail customers. Under this mechnis, dffeence bewee auhoried nd ecoded nues and incurred costs are utilized in the determination of mechanism, differences between authorized and recorded tablinoe base rate revenues are accrued in a regulatory balancing account.

account.Subsidiaries Energy Costs-Investments in unconsolidated subsidiary companies are An Energy Cost Adjustment Clause (ECAC) balancing ac-accounted for by the equity method except subsidiaries count adjusts results of operations for variations between the engaged in Eurodebenture financings. For these sub recorded fuel and purchased power costs and revenues sidiaries, cash investments and short-term borrowings collected to recover such costs. Differences are accumulated are presented separately on the Balance Sheet. Other sub in the balancing account until they are recovered from or re-sidiaries are not considered significant for financial report funded to customers through future rate adjustments. In 1986, ing purposes.

the ECAC balancing account included a fuel oil carrying charge based on short-term interest rates. In prior periods, Reclassifications such carrying charges were based on the earned rate of Certain items have been reclassified in prior periods to con return on rate base.

form them to the classifications at December 31, 1986.

Commencing in 1987, the CPUC has authorized a one time write-down of the cost of fuel oil inventory to market prices and the subsequent use of the last-in, first-out method for measuring the recoverable cost of fuel oil consumption.

45

Southern California Edison Company Notes to Financial Statements (Continued)

NOTE 2-Regulatory Matters A 10-year rate phase-in plan, which provides for the de ferral during the first four years of operations of $200 Nuclear Generating Facilities million of investment related revenue for each of the Palo Verde Units 1, 2 and 3-three units commencing on their commercial operation Stipulated Rate Treatment and Disallowance-date. Revenue deferred for each unit under the plan for Palo Verde Units 1 and 2 have been in commercial operation years 1 through 4 is $80 million, $60 million, $40 mil for ratemaking purposes since February 1, and September lion and $20 million, respectively. Such deferrals are 19, 1986, respectively. Unit 3 is scheduled for commercial to be recovered, with interest, during the final six years operation in late 1987. On May 31, 1985, an application was of the phase-in plan.

filed with the CPUC for rate recovery of Unit 1 operating A target capacity factor operating performance incentive and ownership costs. This filing requested rate recovery on mechanism substantially identical to the procedure in the basis of traditional ratemaking practices commencing effect for San Onofre Units 2 and 3.

when the unit achieved commercial operation.

Because Palo Verde Units 1 and 2 were placed in com On June 17, 1985, in response to a CPUC order to inves-mercial operation before the investigation of alternative tigate ratemaking alternatives for the investment in Palo ratemaking methods could be completed, the CPUC autho Verde, the CPUC Public Staff recommended an unconven-rized the implementation of an interim balancing account tional ratemaking method for the output of the Palo Verde procedure for the costs of owning and operating Units 1 units. This ratemaking method, which is known as and 2. With CPUC approval of the stipulation, a reclassifi "avoided cost," was designed for non-utility power plants.

cation from the interim balancing account to a deferred asset Under this method, generation is priced based upon the cost account was made during 1986 to record the phase-in plan of other generation sources, the use of which would be deferrals for Units 1 and 2. The deferred asset balance avoided through the operation of the Palo Verde units. On aggregates $90.6 million, including interest, as of Decem December 18, 1985, the CPUC rejected the use of "avoided ber 31, 1986.

cost" ratemaking and directed the Company and the CPUC The Financial Accounting Standards Board is considering Public Staff to investigate other ratemaking methods which the appropriate accounting treatment for rate phase-in plans.

satisfy the CPUC's objectives of ensuring cost effectiveness The FASB expects to issue revised accounting standards for and fairly allocating the plant's costs between current and such plans during 1987.

future ratepayers.

As more fully discussed below, the CPUC issued its deci In response to the Commission's directive and to avoid the sion on the reasonableness of $3.4 billion of the Company's protracted hearings and substantial expense that a formal investment in San Onofre Units 2 and 3 ordering that reasonableness review might have entailed, the Company

$258.6 million of costs be disallowed for ratemaking pur and the Public Staff negotiated an agreement on Palo Verde poses. Based on this decision, $50 million of the estimated ratemaking issues and, on June 25, 1986, filed a joint

$1.5 billion investment in Palo Verde would also be stipulation with the CPUC. The stipulation, approved by disallowed.

the CPUC on October 1, 1986, provides for:

• A disallowance of the Company's Palo Verde investment San Onofre Units 2 and 3 for ratemaking purposes based on 19.33% of the amount Rate Treatment disallowed in the San Onofre Units 2 and 3 reasonable-When San Onofre Units 2 and 3 were placed in commercial ness review.

operation in 1983 and 1984, respectively, the CPUC did not authorize recovery of the full cost of these units through customer rates. Instead, the CPUC authorized the recovery of a portion of costs and directed the accrual, in a MAAC balancing account, of the portion of revenues not included in rates. These accrued revenues have been included in reported earnings without benefiting cash flow.

Since January 1, 1985, the total authorized customer rates for San Onofre Units 2 and 3 have approximated invest ment-related costs.

46

Southern California Edison Company CPUC Disallowance-the remaining disallowance of San Onofre and Palo Verde The CPUC has concluded its review of $3.4 billion of the construction costs and $212 million will be recorded as a Company's investment in San Onofre Units 2 and 3 to one-time restatement as discussed below.

determine the reasonableness of construction costs for rate The Financial Accounting Standards Board recently recovery purposes.

adopted a new accounting standard requiring the write-off of On October 24, 1986, the Administrative Law Judge construction costs disallowed and excluded from rate base.

(AU) who presided over the reasonableness review proceed-The new accounting standard, which becomes effective for ings issued his recommended decision in this case. The the Company on January 1,1988, provides for the restate ALJ's decision recommended that none of the San Onofre ment of prior period financial statements for cost disallow Units 2 and 3 investment costs be disallowed for rate-ances occurring prior to the effective date of the new making purposes.

standard.

On October 29, 1986, the CPUC issued its decision in Accordingly, assuming that the Company's appeals are this proceeding. Based on the Company's 75.05% ownership decided in 1987, as anticipated, in 1988 financial statement interest, the CPUC disallowance for ratemaking purposes presentations including 1986 and 1987 financial statements, would be $258.6 million of the $3.4 billion investment in the disallowance will result in a one-time restatement of the San Onofre Units 2 and 3 under review. Under the Palo 1986 financial statements. If the Company's appeals are de Verde stipulation discussed above, $50 million of the Com-nied in their entirety, in its 1988 financial statement presen pany's estimated $1.5 billion Palo Verde investment would tations, the Company will record an after-tax charge against also be disallowed for ratemaking purposes. The Company's 1986 earnings in the amount of $212 million (including the share of the disallowances for San Onofre Units 2 and 3 and after-tax effect of the uncontested $54 million disallow Palo Verde is $308.6 million.

ance), or 97 cents per share, to reflect the one-time rate base On December 8, 1986, the Company filed an application adjustment. The related restatement of shareholders' equity for rehearing of $213.4 million of the $258.6 million disal-will be reflected in the 1988 presentation of 1986 and 1987 lowance with the CPUC. The uncontested $45.2 million of financial statements.

San Onofre disallowance has been increased by 19.33% in If the Company's appeals are decided after 1987, the new compliance with the stipulated ratemaking agreement for accounting standard requires that any resulting write-offs be Palo Verde investment costs, bringing the total uncontested treated as a charge against earnings in the year of the deci disallowance to $54 million. In the fourth quarter of 1986, sion. Under these circumstances, only the after-tax effect of an after-tax write-off of $15 million, or 70 per share, was re-the uncontested $54 million investment disallowance would corded to reverse earnings previously flowed through the in-be recorded as a one-time restatement in 1986.

come statement related to the uncontested $54 million The Company cannot determine the probable financial disallowance.

effect that the final outcome of this matter will have on its The ultimate amount of disallowance may be affected by financial position and results of operations.

the timing and outcome of our appeal to the CPUC for re hearing or by a possible appeal to the California Supreme Fuel Supply Contract Settlements and Proposed Court. If our appeals are decided in 1987, as anticipated, Disallowance and are denied in their entirety, the Company currently esti-During 1985, an agreement was reached with a major fuel mates that an additional after-tax write-off in the amount of oil supplier to settle litigation arising from the termination

$314 million will be recorded, of which $102 million, or 47 of a fuel supply contract. In accordance with the agreement, cents per share, will be recorded in 1987 to reverse earnings

$350 million was paid to the supplier and a ten-year option previously reflected in the income statement related to agreement for the purchase of low sulfur fuel oil was entered into. Under the terms of the option agreement,

$9 million is paid annually for the supplier's commitment to deliver fuel oil on relatively short notice at current market prices.

47

Southern California Edison Company Notes to Financial Statements (Continued)

Uranium supply contract termination agreements have The Company believes that the terms and conditions of been reached to cancel contractual purchase obligations with these fuel supply settlement agreements are reasonable and two uranium suppliers. As of December 31, 1986, the Com-in the best interest of the Company and its ratepayers. Al pany has paid an $18.2 million settlement amount relating to though unable to determine whether the CPUC will allow one of the suppliers and $55.8 million as a partial settlement recovery of costs under or resulting from the option and set of a $63.9 million termination obligation relating to the tlement agreements, the Company believes that such costs other uranium supplier.

are a proper item for rate recovery and does not expect that On July 29, 1986, the CPUC Public Staff recommended it will be denied recovery of amounts that will have a mate that $95 million of the settlement with the major fuel oil rial adverse effect on its financial condition. The portion supplier be disallowed. During 1986, hearings took place in of such settlement costs attributable to wholesale customers which the Company presented its rebuttal to the Public was included in resale rates effective March 7, 1986.

Staff's recommendations. Approximately $54 million of the Settlement payments for fuel oil and uranium contracts proposed disallowance, alleged to be unreasonable by the have been recorded in a regulatory balancing account pend Public Staff, represents the difference between the settle-ing a decision by the CPUC regarding rate recovery.

ment payment and an amount referred to in a memorandum prepared for internal use by the Company. The proposed Tax Reform disallowance is also based on the Public Staff's allegations As explained more fully in Note 4, the CPUC is investigat that the FERC rate settlement reached in 1986 with the ing the regulatory impact of the Tax Reform Act of 1986.

Company's resale customers provided for, on a jurisdic-Commencing January 1, 1987, revenue designed to recover tionally comparable basis, a settlement amount less than the federal income tax expense is being collected subject to re full $350 million fuel oil settlement. The Public Staff also fund pending the outcome of the investigation.

alleges that the settlement is in excess of an amount equiva lent to that paid by another California utility during 1984 in Resale Rates connection with a similar litigation settlement. The remain-In accordance with FERC procedures, resale rate increases der of the disallowance includes interest through June 1, are subject to refund with interest to the extent that they are 1987 and approximately $29 million based on a 10% risk-subsequently determined by the FERC to be inappropriate.

sharing proposal. Opening briefs were filed in December As of December 31, 1986, revenues subject to refund aggre 1986 and closing briefs were filed in January 1987. In its gated approximately $782 million. The Company believes opening brief, the Public Staff proposed several new bases that the amount of refunds, if any, likely to result from the for disallowance including amounts ranging from $35 mil-outstanding proceedings would not have a material effect on lion to as much as $100 million. The Public Staff also pro-results of operations.

posed that the allowable portion of settlement cost be recovered without interest over four years. A decision is ex-NOTE 3-Short-term Borrowings pected by mid-1987.

The Public Staff has also recommended that payments Unrestricted deposits aggregating approximately $7 million under the 10-year purchase option agreement with the fuel are maintained at commercial banks in order to continue oil supplier be disallowed as unreasonable because they al-various lines of credit for general corporate purposes. In ad lege that the fuel oil supply contract is currently unnecessary dition, commencing in 1986, fuel oil inventory is being and that the payments are not cost effective. As an alterna-financed by commercial paper borrowings supported by new tive, the Public Staff proposes that the Company recover the and separate lines of credit. Commercial paper issued by a option agreement payments to the extent that they are offset wholly-owned subsidiary is being used for the capitalization by savings from reduced fuel oil inventory levels.

of an affiliate engaged in Eurodebenture borrowings. The The reasonableness of the uranium contract settlements subsidiary's commercial paper has been guaranteed by the is being addressed as part of a Commission investigation on Company and is presented on its Balance Sheet.

uranium procurement practices for which hearings com menced in August 1986.

48

Southern California Edison Company Amounts and weighted average interest rates for the lines For ratemaking purposes, property-related accumulated of credit are as follows:

deferred federal income taxes are deducted from rate base General and amortized or otherwise applied as a reduction (or in 1986 Purpose Fuel Oil Subsidiary Total crease) in federal income tax expense in future years. Accu (In Millions)

Lines of Credit..........

$501.0

$300.0

$ 50.0

$851.0 Amount Outstanding.....

115.0 213.0 48.8 376.8 over the lives of the related properties. Tax deductions relat Weighted Average ing to construction overheads such as interest, pension pro Interest Rate..........

7.0%

6.4%

6.4%

6.8%

visions and taxes charged to construction are accounted for 1985 as current reductions in income tax provisions. Deferred Lines of Credit..........

$572.0

$ 96.4* $668.4 income taxes for such deductions and tax depreciation prior Amount Outstanding.....

15.0 148.9 163.9 Weighted Average to 1981 have not been provided because the tax effects of Interest Rate..........

8.9%

8.2%

8.2%

such timing difference reversals are not allowed for retail

• Borrowings in excess of subsidiary lines of credit are supported by general rate-making until the taxes become payable. The cumulative purpose lines of credit.

net amounts of these timing differences were $1,803 million NOTE 4-Income Taxes at December 31, 1986 and $2,014 million at December 31, 1985.

CurrentThe following table reflects the differences between state The current and deferred components and federal income taxes reported and the tax amount Te curen anfefoedcmpnntofwnomsaxepes determined on income before taxes by applying the federal are as follows:

statutory tax rate. The federal and the composite federal Year Ended December 31, 1986 1985 1984 and state statutory income tax rates are 46 percent and (In Thousands) 51.184 percent, respectively.

Current:

Federal......................$324,733

$(39,600)

$140,510 Year Ended December 31, 1986 1985 1984 State........................

90 2

5676 (in Thousands) 433,03 (14,759) 197,270 Expected federal income tax Deferred-Federal and State:

expense at statutory rate.......$ 675,908 $ 682,234 $ 617,613 Investment tax credits-net.

59,252 84,134 55,323 Increase (Decrease) in income tax Accelerated cost recovery expense resulting from:

system property...............170,848 145,957 129,808 Allowance for equity and Debt reacquisition expenses.

81,968 24,453 31,180 borrowed funds used Regulatory balancing accounts.

(39,744) 365,296 205,013 during construction.........

(62,202)

(72,539)

(89,602)

Fuel contract settlements...........

9,528 91,681 (15,104)

Federal deduction for state Other........................

(14,125) 1 6

taxes on income............(55,355)

(54,578)

(46,414) 267,727 23,769 41.j2,939 Depreciation timing differences Total income tax expense.

$709010 not deferred...............101,896 92,900 77.841 Income taxes included in State tax provision............120,337 118,647 100,900 operating expenses.............$711,493

$720,938

$639,875 Income taxes included in Total income tax expense.... $j9Q0Z70 $j79]0

_602 other income...................

(10,743)

(11,928)

(29,666)

Pretax income.............

$1 49 367 $IL8 1

$IL,342 637 Total income tax expense....

$0,5

$709.,010

$610,209 Effective tax rate (Total income tax expense - Pretax income) 47.7%

47.8%

45.4%

Total income tax expense includes the current tax liability generated from operations and deferred income taxes pro vided on certain items of income and expense which are reported in different periods for tax and financial reporting purposes. Consistent with current ratemaking procedures, the major items for which deferred income taxes are pro vided include regulatory balancing account provisions, accelerated depreciation under the provisions of the Accel erated Cost Recovery System, and debt reacquisition costs.

49

Southern California Edison Company Notes to Financial Statements (Continued)

Tax Reform-NOTE 5-Employee Benefit Plans The Tax Reform Act of 1986 (Act) retroactively repealed ITC for property placed into service after December 31, Pension Plan 1985, except for property then under construction for which A trusteed, non-contributory pension plan is maintained there are various transitional rules. However, the Act re-which covers substantially all employees. The annual nor quires a 100% reduction in depreciable basis for any tran-mal cost of the plan is funded by contributions determined sitional ITC. Because the Company defers the recognition of on the basis of a level premium funding method. Unfunded ITC, its elimination has not significantly impacted earnings.

prior service costs relating to 1982 and 1985 plan amend Commencing in 1987, the Act requires the capitalization ments are being funded over 30-year periods. Pension costs of construction overhead and financing costs for determin-are provided on the basis of actuarial determinations and ing the depreciable basis of certain properties for tax pur-amounted to $48,579,000, $57,859,000 and $54,820,000 for poses. This change will increase taxable income and reduce the years 1986, 1985, and 1984, respectively.

the differences between construction costs for tax and financial accounting purposes.

At January 1, 1986 (a) 1985 The Act will also reduce federal income tax rates to 40 (In Thousands) percent in 1987 and 34 percent in 1988 and later years. The Vested...............................$653,216

$608,240 provisions of the Act are not expected to adversely affect Non-vested............................

49A net income.

Under present accounting standards, deferred income tax Net assets available for plan benefits............$972,063 balances are not adjusted to reflect changes in income tax (a) Latest available data.

law or rates. However, an amendment to present accounting Actuarial rate of return assumptions used in determining requirements has been proposed which would require adjust-the present value of accumulated plan benefits were 8%

ment of deferred tax balances to reflect the effects of such and 7.5% as of January 1, 1986 and 1985, respectively.

changes commencing in 1988.

Effective in 1987, a new accounting standard will modify Ratemakingpension plan accounting practices. Under existing regulatory ThR PCa ntatemakanginvestigationt eemn h policies, earnings will not be affected but assets or liabilities The CPUC has initiated an investigation to determine the wl ercgie oteetn htcmltv eso effects of tax reform on ratemaking practices. The investiga-contrbutionae aove elow the lve emin tion will consider whether and to what extent reductions in derithe araoeto bed the ew tandrd.

certain non-property related deferred tax balances should be conveyed to customers through reduced rates. Any refunds ultimately required by the CPUC should not adversely affect Employee Stock Plns earnings but would prevent the retention of the benefits of Savings Plus Plan (SSPP) are maintained to supplement em the tax rate reductions by the Company.

ployees' retirement income. Contributions to the ESOP are funded primarily by Federal income tax benefits and con tributions made by participating employees. Contributions to the SSPP amounted to $15,445,000, $13,878,000 and

$12,539,000 for the years 1986, 1985 and 1984, respectively.

50

Southern California Edison Company Other Post-Retirement Benefits-NOTE 7-Leases Certain health care and life insurance benefits are provided for retired employees and their dependents. Group life Rental payments charged to operating expenses amounted to insurance benefits are provided through an insurance com-

$130,497,000, $112,284,000 and $127,022,000 for the years pany. Health care benefits are provided through a combina-1986, 1985 and 1984, respectively.

tion of Company facilities and insurance programs. The cost The Company leases nuclear fuel to meet a portion of its of providing these benefits to retirees was $15,415,000, energy requirements. Under the terms of the lease agree

$13,100,000 and $8,900,000 for the years 1986, 1985 and ment, quarterly payments are based upon consumption of 1984, respectively.

the nuclear fuel and are designed to return the accumulated investment in nuclear fuel and a financing charge on unre NOTE 6-Jointly-Owned Utility Projects covered costs to the lessor. Such payments are recoverable through the ECAC procedure.

The Company owns undivided interests in several jointly-The nuclear fuel lease meets the criteria requiring capital owned generating stations and transmission systems for ization under generally accepted accounting principles for which each participant must provide its own financing. The unregulated enterprises. Had this lease been capitalized, the proportionate share of expenses pertaining to such projects Balance Sheets would have included additional assets and is included in the appropriate category of operating expenses liabilities of approximately $524 million and $551 million at in the Statements of Income. The amounts in the table December 31, 1986 and 1985, respectively. In accordance below represent the investment in each such project as re-with an accounting standard applicable to rate regulated en ported on the Balance Sheet as of December 31, 1986:

terprises, the assets and obligations of the nuclear fuel lease Utility Construction will be recorded on the Balance Sheet commencing in 1987.

Plant Accumulated Work in Ownership Projects in Service Depreciation Progress Interest At December 31, 1986, estimated rental commitments for (In Thousands) non-cancelable operating leases consisted of the following:

El Dorado Transmission System............. $

21,373

$ 7,424 54 60.0%(a)

YearEndedDecember31, Four Corners Coal (In Thousands)

Generating Station 1987.........................................$20,996

-Units 4 & 5........385,234 82,812 9,585 48.0 1988..........................................18,788 Mohave Coal Generating Station...

209,534 79,127 2,270 56.0 199..........................................16,15 Pacific Intertie DC 1990..........................................14,131 Tansmission System..

109,563 29,719 2,800 50.0 For Periods Thereafter........................

Palo Verde Nuclear GenratngStaion 98,20 1,55 49,31 1.8 Total Future Rental Commitments..................

$98,005 Generating Station... 983,200 16,557 497,301 15.8 San Onofre Nuclear Generating Station:-

NOTE 8-Commitments Unit 1..............

499,132 115,480 24,066 80.0 Units 2 & 3.........

2,919,505 310,269 24,565 75.05 Common Facilities-Construction Program and Fuel Supply Units 2 & 3........812,722 64,135 6,250 75.05 Significant purchase commitments exist in connection with Common Facilities-the continuing construction program. As of December 31, Units 1, 2 & 3.....

165,154 17,282 9,768 75.87 Solar One Generating 1986, budgeted construction expenditures are estimated at Station..............

18,068 15,855 80.0

$1,033,228,000 for 1987, $883,567,000 for 1988 and Yuma Axis Combined

$893,893,000 for 1989. Minimum long-term commitments Cycle Generating Station.............

12,369 9,4 33.3 Total.1.............. $691835 854 17c45

$576,659 (a) Represents a composite rate.

51

Southern California Edison Company Notes to Financial Statements (Continued) of approximately $1,478,000,000, exclusive of the amounts transmission line is not operating, is included in Purchased required by the contract settlements with major fuel sup-Power and Other Operating Expenses, respectively, pliers discussed in Note 2, existed on December 31, 1986 in the Statements of Income. Purchased power costs are under fuel supply and transportation arrangements.

generally recoverable through the ECAC balancing account procedure. Selected information as of December 31, 1986 Nuclear Waste Policy Act-pertaining to purchased power contracts is summarized in Pursuant to the Nuclear Waste Policy Act of 1982, contracts the following table:

have been entered into with the U.S. Department of Energy (DOE) for disposal of spent nuclear fuel. Under contract Share of Effective Operating Capacity terms, a quarterly fee of one mill per kilowatt-hour is paid Share f O

)

().....................

10 to the DOE for nuclear generation on and after April 7, Total Estimated Annual Cost (a)..................$110,141,000 1983. For generation prior to April 7, 1983, payment of a Company's Portion of Estimated Annual Cost one-time fee equivalent to one mill per kilowatt-hour plus Applicable to Suppliers' Annual Minimum Debt accrued interest is required. This one-time fee has been Service Requirement (a)......................$

18,369,000 recorded as a deferred charge pending future rate recovery, Company's Allocable Portion of Interest of Suppliers Included in Annual Minimum Debt Service........

$ 17,693,000 and including accrued interest, approximated $26,091,000 Related Long-Term Debt or Lease Obligations at December 31, 1986. The obligation for this one-time Outstanding.................................None fee is being discharged by equal payments over 40 quarters.

(a) Amounts have been reduced from those reported previously due to the Such payments commenced during 1985. The amounts exclusion of a contract which is no longer long-term.

charged to income for current generation were $10,740,000, (h) According to the provisions of a certain contract, the Company's share

$8,95,00 ad $,707000fortheyear ened eceberof energy output from the contracted facility varies at different times.

$8,925,000 and $7,707,000 for the years ended December 31, 1986, 1985 and 1984, respectively. Expenses associated Additional information as of December 31, 1986 pertaining with disposal of spent nuclear fuel are recovered through to both purchased power and transmission service contracts the ECAC procedure.

is summarized in the following table:

Purchased Transmission Long-term Purchased Power and 'lransmission Contracts-Power (a)

Service Under firm contracts, the Company has agreed to purchase Dates of Expiration....................1987-1990 1990-2016 portions of the generating output of certain facilities and to Variable Components of Contracts..........

(b)

(b)

Required Future Minimum Annual Payments (In Thousands) purchase firm transmission service where appropriate.

1987..............................$

57,378

$ 11,524 Although there is no investment in such facilities, these con-1988................................56,310 11,588 tracts provide for the payment of certain minimum amounts 1989...............................41,547 9,812 (which are based at least in part on the debt service require-1991...................................174,473 ments of the provider) whether or not the facility or trans-Later years...........................

mission line is operating. None of these power contracts TOta.................................168,252 138,797 provides, or is expected to provide, in excess of 5 percent of Less Amount Representing Interest to current or estimated future operating capacity. The cost of Total at Present Value 35,761

(

power and firm transmission service obtained under these Total Purchases for the Years Ended contracts, including payments made when a facility or December 31, 1986..............................

$115,322

$ 12,007 1985...............................

91,421 10090 1984...............................

32,023 7,970 (a) Amounts have been reduced from those reported previously due to the exclusion of a contract which is no longer long-term.

(b) The variable components of certain contracts are based on a pro-rata share of actual operating, maintenance, and fuel costs or on the U.S.

Government cost of service.

52

Southern California Edison Company NOTE 9-Contingencies The above licenses expire at various times between 1987 and 2009. The licenses contain numerous restrictions and Nuclear Insurance-obligations on the part of the Company, including the right The Price-Anderson Act currently limits the public liability of the United States to acquire Company properties or, claims that could arise from a nuclear incident to a max-under certain conditions, the FERC to issue a license to a imum amount of $690 million for each licensed nuclear new licensee upon the payment to the Company of specified facility. Private insurance for this exposure has been pur-compensation. Applications for the relicensing of certain chased by the participants in the San Onofre and Palo Verde hydroelectric plants referred to above with aggregate effec Nuclear Generating Stations, in the maximum available tive operating capacity of 61 megawatts are pending.

amount, presently $160 million with the balance to be pro-Any new licenses received are expected to be issued upon vided by secondary financial protection required by the Nu-terms and conditions less favorable than those of the clear Regulatory Commission (NRC). Under the agreement expired licenses.

with the NRC, retrospective premium adjustments of up to

$26,170,000 per year could be assessed in the event of nu-Antitrust Litigation clear incidents involving any licensed reactor in the United In March 1978, five resale customers filed a suit in federal States. The Price-Anderson Act is scheduled to expire in court alleging violation of certain antitrust laws. The com 1987; however, Congress is considering proposals to amend plaint seeks monetary damages, a trebling of such damages and extend the act.

and certain injunctive relief. The complaint alleges that the Property damage coverage is provided for losses up to Company (i) is engaging in anticompetitive behavior by

$500 million at the San Onofre and Palo Verde Nuclear charging more for electricity sold to the resale customers Generating Stations. Decontamination liability and property than is charged to certain classes of its retail customers damage insurance in excess of the primary $500 million

("price squeeze"), and (ii) has taken action alone and in layer has also been purchased. Insurance to cover a portion concert with other utilities to prevent or limit such resale of the additional expense of replacement power resulting customers from obtaining bulk power supplies from other from an accident-related outage of a nuclear unit is also pro-sources to reduce or replace the resale customers' purchases vided. A maximum weekly indemnity in the amount of from the Company ("foreclosure"). The plaintiffs estimated

$3,100,000 for a single unit for 52 weeks commences after their actual damages for alleged price squeeze, before tre the first 26 weeks of such an outage. An additional bling, at approximately $22,780,000 and foreclosure dam

$1,550,000 per week is provided for the next 52 weeks.

ages stemming from alleged loss of energy and capacity at These policies are primarily provided through mutual insur-approximately $76,800,000 before trebling, for the period ance companies owned by utilities with nuclear facilities.

February 1, 1978 to December 31, 1985. The trial began on If losses at any nuclear facility covered by the arrangement July 8,1986, and concluded on September 26, 1986. Find were to exceed the accumulated funds available for these ings of Fact and Conclusions of Law were filed by the Coi insurance programs, the Company could be assessed retro-pany with the Court on November 21, 1986. No date has spective premium adjustments of up to $59,803,000 per been given for the decision. The foregoing proceedings in year. Insurance premiums are charged to Operating volve complex issues of law and fact and, although the Expenses.

Company is unable to predict their final outcome, it has categorically denied the allegations of these resale Government Licenses-customers.

The terms and provisions of licenses granted by the United States cover the Company's major and certain minor hydro electric plants, with a total effective operating capacity of 943 megawatts. These licenses also cover certain storage and regulating reservoirs and related transmission facilities.

53

Southern California Edison Company Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Operating Revenues and Sales Approximately 96 percent of the Company's operating reve Earnings Summary nues are subject to the jurisdiction of the CPUC. The re Record earnings per share of $3.28 were achieved for 1986, maining 4 percent represents sales to wholesale customers up moderately from $3.26 in 1985. Net income declined which are regulated by the FERC.

slightly for 1986 reflecting the CPUC's reduction of the Operating revenues increased over the prior year by $143 Company's authorized rate of return from 16 percent to 14.6 million or 2.8 percent despite a 1.2 percent decline in percent, a charge to earnings related to the uncontested por-kilowatt-hour sales resulting from mild temperatures and re tion of the CPUC's nuclear plant investment cost disallow-duced sales to resale and industrial customers who obtained ances and refunds to wholesale customers resulting from more of their power from outside the Edison system or from Federal Energy Regulatory Commission (FERC) decisions.

self-generation. Increases in operating revenues totaling The effects of these regulatory adjustments were partially

$270 million or 5.5 percent in 1985 and $435 million or 9.7 offset by a favorable coal plant incentive reward. Reduc-percent in 1984 reflect, in addition to the effect of rate tions in interest and preferred dividends resulting from the changes, increases in kilowatt-hour sales of 2.6 percent and Company's aggressive refinancing program contributed to 5.7 percent, respectively.

the higher level of Earnings Available for Common and The net effect of changes in rates was to increase the Original Preferred Stock.

overall revenue per kilowatt-hour by 3.9 percent in 1986, As shown in the chart below, earnings exclusive of non-3.4 percent in 1985, and 3.8 percent in 1984.

cash Allowance for Funds Used During Construction The chart below shows the changes in the major compo (AFUDC) as a percentage of total earnings increased to 81 nents of operating revenues which contributed to the overall percent in 1986, the highest level since 1974. Continued im-increase for the past three years.

provement in earnings quality is expected in 1987 and 1988 Effective January 1, 1987, the CPUC authorized an attr as major nuclear and hydroelectric projects are placed into tion allowance increasing annual revenues by $2.9 million.

commercial operation and included in rate base.

The attrition allowance recognizes increases in rate base and Quality of Earnings Operating Revenues-Changes n

Allowance for Funds Used j

iBase Rate Changes During Construction 4

Sales Volume Changes Per Share

$4 w Balancing Account Rate Changes Millions

$600

$3.26

$3.28

$279m82in1r9853ercntin898 an9$355ilionor9.

3.4 ecn n1985, an 9386preti 94 540 Effetiv January185 19698 1

198, th PU2 ut oieda0ati tinalwneicesn5nua4eeusb 29mlin

Southern California Edison Company operating costs and reduced capital costs. The decline in come tax expense will be accompanied by a reduction capital costs resulted from the CPUC's downward adjust-in customer rates and thus is expected to have little or no ment in the Company's authorized return on common equity impact on net income.

from 14.6 percent in 1986 to 13.9 percent in 1987 and lower Any refunds which may result from the CPUC's investi interest rates from refinancing activities.

gation to determine the effects of tax reform on ratemaking Revenues collected in 1987 for the recovery of federal practices are not expected to significantly affect net income income tax expense are subject to refund pending the out-but would prevent the Company from retaining the benefits come of a CPUC investigation of the effects of the Tax of reduced deferred tax balances resulting from declines in Reform Act of 1986 on customer rates.

corporate income tax rates.

Operating Expenses Other Income Fuel expenses declined over $800 million compared to the Utilities are permitted to capitalize the cost of debt and prior year reflecting reduced natural gas prices and in-equity funds used to finance the construction of utility plant.

creased use of lower cost nuclear and coal generation. In This is accomplished through non-cash Allowances for addition, 1985 fuel expenses were greater due to fuel Funds Used During Construction.

contract settlement payments.

The decline in AFUDC and accompanying non-operating The effect on earnings of fluctuations in the Company's income taxes from prior year levels resulted from a 34 per fuel and purchased power expenses have been minimized by cent or $700 million decline in Construction Work In regulatory adjustment clauses established by the CPUC and Progress. The decline is due primarily to the transfer of the FERC.

Palo Verde Units 1 and 2 to Utility Plant during 1986.

Increases in maintenance, other operating, and deprecia-Interest income increased by $12.7 million over 1985 tion expenses continue to be influenced by system growth, reflecting interest accrued on increased balancing account including the commercial operation of Palo Verde Nuclear undercollections and revenue deferred pursuant to the Palo Generating Station Unit 1 on February 1, 1986 and Unit 2 on Verde Phase-in Plan.

September 19, 1986. These trends are expected to continue as the costs of operating and maintaining Palo Verde Units 1 Pending Cost Disallowance Appeal and 2 are reflected in future periods and when Unit 3 is The Company has submitted a petition for rehearing on placed into commercial operation, which is scheduled for

$213.4 million of its $258.6 million share of San Onofre nu late 1987.

clear plant investment costs disallowed by the CPUC. The Recovery of depreciation expense attributable to San impact this matter may have on earnings depends on the Onofre Units 2 and 3 and Palo Verde Units 1 and 2 is autho-timing and outcome of our appeal to the CPUC for rehear rized through the Major Additions Adjustment Clause and ing and a possible appeal to the California Supreme Court.

the Palo Verde Phase-In Plan. Increases in depreciation ex-For a further discussion of the financial implications of this pense related to these units which are not recovered through matter, refer to Note 2 of "Notes to Financial Statements."

current rates are recorded in balancing and deferred asset accounts pending future rate recovery and, therefore, do not affect earnings.

The reduction in income tax expense is attributable to decreases in pre-tax income and deferred income tax provisions.

As explained more fully in Note 4 of "Notes to Financial Statements," the decline in the corporate tax rate under the Tax Reform Act of 1986 (Act) will reduce income tax ex pense in 1987 and future years. The reduction in federal in 55

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

FINANCIAL CONDITION Capital Requirements The following table presents the Company's projected Internal Generation of Funds capital requirements for 1987 through 1991:

During the past three years, the Company has obtained the 1987 1988 1989 199 1991 majority of its required working capital from operations.

(In millions)

Almost 80 percent of the Company's capital requirements Construction Expenditures

$1,033

$ 884 $ 894 $ 889 $ 810 in 1986 were provided by internally generated funds, the Maturities of Long-Term Debt.........

103 80 68 356 172 highest level in over 25 years. The increased level of funds Redemptions of Preferred generated internally is primarily attributable to placing com-and Preference Stock...

18 22 24 12 12 pleted nuclear facilities into rate base and tax benefits Capital Requirements.

$1,154

$ 986 $ 986 $1,257

$ 994 resulting from growth in the Company's investment in plant assets.

Projected construction expenditures include major The Tax Reform Act of 1986 will have a negative effect transmission and hydroelectric projects.

on the Company's internal generation of funds. The negative impact results from the retroactive repeal of the investment Capital Structure tax credit and reduced allowable deductions for depreciation.

The Company's long-term goal is to maintain a capital struc Any refund of prior years' deferred tax balances ultimately ture with approximately equal amounts of debt and equity.

required by the CPUC to reflect corporate tax rate reductions The Company's capital structure as of December 31, 1986 is resulting from the Act would have a further negative impact reflected in the table below:

on internally generated funds.

The Company's cash flow and liquidity will also be ad-Common Equity 47.3%

versely affected by revenues deferred to future ratemaking Preferred and Preference Stock...............6.6 periods pursuant to the Palo Verde Phase-In Plan. The Long-Term Debt.......................46.1 timing and amount of revenue deferred under this plan is discussed in Note 2 of "Notes to Financial Statements."R Liquidity and Capital Resources The Company completed $1.4 billion of long-term financ The Company's liquidity is affected principally by its con-ings during 1986. The proceeds of these financings and struction program, financing associated with regulatory additional short-term borrowings were used primarily to balancing accounts and by other capital requirements includ-refinance higher cost securities.

ing debt and capital stock maturities. The capital resources Effective January 1, 1986, the CPUC amended its energy available to meet those requirements include funds from in-cost ratemaking policy to provide recovery of fuel oil inven ternal generation and external financing. Internally gener-tory financing costs based upon short-term debt interest ated funds depend upon economic conditions and the rates. Recovery of such costs was previously based on the adequacy of timely rate relief. External financing through Company's earned rate of return on rate base. In conformity short-term borrowings and security issuances is influenced with the revised procedures, the Company utilizes short by market conditions and other factors including limitations term borrowings to finance fuel oil inventory. The $313 mil imposed by the Company's Articles of Incorporation and lion increase in short-term borrowings in 1986 is attributable Trust Indenture. At December 31, 1986, the Company could primarily to fuel oil inventory financing. Details of the issue approximately $4.4 billion of additional First and Company's lines of credit and related short-term borrowings Refunding Mortgage Bonds or $4.3 billion of preferred are discussed in Note 3 of "Notes to Financial Statements."

stock at current interest and dividend rates.

56

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

% of (In Thousands)

% of 1986 total 1986 1985 change 1986 total 1986 1985 change Residential..........

28.4

$1,510,925

$1,449,424 4.2 29.2 18,766,947 18,582,806 1.0 Agricultural..........

1.4 73,260 84,282 (13.1) 1.3 851,862 1,014,564 (16.0)

Commercial..........

33.4 1,777,551 1,625,179 9.4 31.4 20,145,578 19,110,474 5.4 Industrial............

23.0 1,219,822 1,207,470 1.0 24.3 15,587,730 15,707,038 (0.8)

Public Authorities....

8.7 461,366 427,704 7.9 7.9 5,077,729 4,885,200 3.9 Interdepartmental....

81 98 (17.3) 970 1,106 (12.3)

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

4.4 232,542 347,578 (33.1) 5.9 3,766,589 5,683,378 (33.7)

Sales of Electric Energy..........

99.3 5,275,547 5,141,735 2.6 100.0 64,197,405 64,984,566 (1.2)

Other Electric Revenues........

0.7 36,186 27,113 33.5 Total.............

100.0

$5,311,733

$5,168,848 2.8 100.0 64,197,405 64,984,566 (1.2)

Operating Revenues by Rate Components Rate Components Operating Revenues Percent of Total (In Thousands) 1986 1985 1984 1986 1985 1984 Base Rates-CPUC Jurisdiction...........

.$2,522,565

$2,411,836

$2,382,081 47.5 46.7 48.6 Energy Cost Adjustment Billing Factor......

1,798,697 1,587,763 1,413,433 33.8 30.7 28.9 Annual Energy Rate.....................

12,173 115,027 211,103 0.2 2.2 4.3 Major Additions Adjustment Billing Factor...

801,276 732,232 395,545 15.1 14.2 8.1 Other Billing Factors....................

(91,765)

(52,617) 145,522 (1.7)

(1.0) 3.0 Resale Rates (excluding fringe)............

232,601 347,494 295,275 4.4 6.7 6.0 Sales of Electric Energy................

5,275,547 5,141,735 4,842,959 99.3 99.5 98.9 Other Electric Revenues..................

36,186 27,113 56,193 0.7 0.5 1.1 Total...............................

$5,311,733

$5,168,848

$4,899,152 100.0 100.0 100.0 57

Southern California Edison Company Selected Financial Data 1976-1986 1986 1985 Summary of Operations Operating Revenues................................

$ 5,311,733

$ 5,168,848 (in thousands, Operating Expenses..................................

4,343,830 4,196,094 except percent and Fuel and Purchased Power Costs (a).....................

1,653,854 2,389,087 per share data)

Income Taxes (a)....................................

711,493 720,938 Allowance for Equity and Borrowed Funds Used During Construction.....................................

135,222 157,694 Total Interest Charges................................

482,855 487,800 Net Income........................................

768,617 774,107 Earnings Available for Common and Original Preferred Stock...................................

713,933 702,409 Weighted-Average Shares of Common and Original Preferred Stock Outstanding (000)....................

217,732 215,649 Per Share Data:

Earnings Per Common Share........................

$3.28

$3.26 Dividends Declared Per Common Share................

$2.25

$2.13 Dividend Payout Ratio (paid basis)...................

67.7%

64.4%

Rate of Return on Common Equity.....................

15.06%

15.75%

Ratio of Earnings to Fixed Charges.......................

3.83 3.80 Balance Sheet Data Total Assets (b)....................................

$13,244,952

$12,593,449 (in thousands, Gross Utility Plant..................................

15,114,542 13,990,360 except percent and Accumulated Depreciation............................

3,586,080 3,152,141 per share data)

Percent of Gross Utility Plant..........................

23.7%

22.5%

Common Stock, at par value.........................

903,777 902,821 Additional Paid-In Capital...........................

1,546,541 1,543,933 Earnings Reinvested in the Business....................

2,343,957 2,128,646 Common Shareholders' Equity........................

4,794,275 4,575,400 Preferred and Preference Stock

-without mandatory redemption requirements............

365,654 466,500

-with mandatory redemption requirements (c).........

299,049 395,074 Long-Term Debt (c).................................

$ 4,667,891

$ 4,717,411 Capital Structure (percent):

Common Shareholders' Equity......................

47.3%

45.1%

Perferred and Preference Stock

-without mandatory redemption requirements........

3.6 4.6

-with mandatory redemption requirements (c).......

3.0 3.9 Long-Term Debt (c)...............................

46.1%

46.4%

Book Value Per Common Share........................

$22.02

$21.04 Operating and Area Peak Demand (MW)............................

14,599 14,587 Sales Data Area Generating Capacity at Peak (MW).................

18,320 17,776 Total Energy Requirement (KWH) (000).................

73,208,690 73,755,963 Percent Energy Requirement:

Therm al.........................................

55.6%

58.7%

Renewable/Alternative (including hydro)..............

7.9 6.0 Purchased Power and Other Sources (d)................

36.5%

35.3%

Kilowatt-Hour Sales (000)............................

64,197,405 64,984,566 Average Annual KWH Sales Per Residential Customer......

5,999 6,099 Number of Customers................................

3,589,414 3,490,325 Number of Employees...............................

17,553 17,182 (a) Included in Operating Expenses.

(b) The years 1976 through 1981 have been restated to reflect the deduction of property-related accumulated deferred income taxes from Utility Plant.

58

1984 1983 1982 1981 1980 1979 1978 1977 1976

$ 4,899,152 $ 4,464,256 $ 4,302,602 $4,054,356 $3,661,117 $2,563,974

$2,328,798

$2,064,914 $1,846,540 3,932,527 3,760,225 3,765,875 3,563,201 3,288,983 2,178,978 2,004,197 1,734,192 1,539,400 2,084,941 2,027,756 2,227,901 2,558,206 2,010,227 1,532,903 1,204,749 1,189,597 903,447 639,875 497,236 177,251 197,865 38,683 100,292 72,803 68,792 59,506 194,787 365,856 303,118 232,552 162,287 118,566 78,421 60,238 47,610 530,322 539,377 420,282 340,977 282,656 205,082 182,658 161,078 144,368 732,428 690,780 555,754 489,912 317,536 346,219 251,683 251,979 226,798 659,385 $

617,303

$ 483,358

$ 422,024 $ 256,586

$ 292,481

$ 202,226

$ 206,330

$ 185,047 207,576 198,348 188,514 171,220 146,482 128,404 114,954 108,694 97,356

$3.18

$3.11

$2.56

$2.46

$1.75

$2.28

$1.76

$1.90

$1.90

$2.01

$1.83

$1.69

$1.55

$1.42

$1.30

$1.15

$1.03

$.84 61.9%

57.7%

64.5%

61.5%

79.4%

55.7%

63.6%

50.5%

44.2%

16.3%

17.0%

14.9%

14.9%

10.4%

13.6%

10.7%

12.0%

12.4%

3.38 2.91 2.44 2.72 2.09 2.90 2.53 2.78 2.83

$11,358,730 $11,035,060 $10,157,564

$8,699,721

$7,706,933

$6,949,917

$6,030,045

$5,698,068

$4,993,330 12,835,031 11,886,610 10,764,078 9,517,670 8,406,309 7,577,670 6,810,891 6,191,733 5,658,433 2,763,651 2,426,368 2,185,667 2,015,212 1,840,233 1,676,148 1,519,174 1,383,009 1,258,327 21.5%

20.4%

20.3%

21.2%

21.9%

22.1%

22.3%

22.3%

22.2%

885,637 $

839,501 $

805,766

$ 730,027 $ 632,115

$ 540,791

$ 521,138

$ 455,387

$ 442,739 1,470,347 1,307,413 1,193,318 999,764 805,325 638,046 595,701 458,096 427,424 1,886,804 1,646,425 1,393,780 1,238,317 1,092,137 1,054,296 931,217 862,956 769,425 4,242,788 3,793,339 3,392,864 2,968,108 2,529,577 2,233,133 2,048,056 1,776,439 1,639,588 467,258 469,025 471,020 476,308 482,652 489,822 503,650 518,172 537,753 422,286 440,500 445,000 399,500 399,500 324,500 197,000 197,000 75,000

$ 4,248,647 $ 4,051,836 $ 3,970,400

$3,444,080 $2,945,824

$2,746,207 $2,477,474

$2,314,874

$2,151,861 45.2%

43.3%

41.0%

40.7%

39.8%

38.5%

39.2%

37.0%

37.2%

5.0 5.4 5.7 6.5 7.6 8.5 9.6 10.8 12.2 4.5 5.0 5.4 5.5 6.3 5.6 3.8 4.1 1.7 45.3%

46.3%

47.9%

47.3%

46.3%

47.4%

47.4%

48.1%

48.9%

$19.89

$18.76

$17.48

$16.87

$16.60

$17.11

$16.29

$16.15

$15.34 15,189 13,464 13,149 13,738 12,841 12,662 12,159 11,564 11,315 17,354 16,365 15,349 15,592 15,504 15,071 14,966 14,278 14,071 72,431,689 68,020,197 66,578,540 69,179,641 65,459,278 66,216,910 63,877,116 63,344,706 59,427,973 54.0%

48.5%

55.5%

67.6%

71.2%

82.0%

73.8%

87.4%

75.1%

7.6 10.4 9.7 5.8 9.2 7.7 9.3 2.5 4.4 38.4%

41.1%

34.8%

26.6%

19.6%

10.3%

16.9%

10.1%

20.5%

63,310,047 59,892,583 59,326,853 62,451,319 59,915,187 59,517,861 57,027,035 57,726,273 53,685,378 6,147 5,879 5,685 5,879 5,939 6,010 5,883 5,630 5,650 3,400,182 3,325,308 3,275,144 3,232,687 3,163,968 3,082,382 2,986,545 2,900,856 2,814,403 16,844 16,292 15,797 14,569 14,157 12,917 12,845 12,671 12,510 (c) Excludes current portion.

(d) Includes non-Edison owned renewable/alternative sources.

59

Southern California Edison Company Board of Directors Howard P. Allen Chairman of the Board and ChiefExecutive Officer Roy A. Anderson Chairman of the Executive Committee, Lockheed Corporation, Calabasas, California Norman Barker, Jr.

Former Chairman of the Board, First Interstate Bank of California, 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 Executive Committee, Los Angeles County Museum of Art, Los Angeles, California Walter B. Gerken Chairman of the Board, 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 General Partner ofDAE Limited Partnership, Ltd. (Agricultural Management), Ojai, 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, Calfornia 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

">Mr. Smith, having reached retirement age, is not a nominee for re-election to the Board of Directors in 1987.

60

EDISON'S BOARD OF DIRECTORS (seated from left): Joan C. Hanley; Jack K. Horton; Howard P. Allen; H. Frederick Christie; William R. Gould; Camilla C. Frost. Standing from left: Edward Zapanta, M.D.; Walter B. Gerken; Roy A Anderson; Henry T. Segerstrom; Norman Barker, Jr.; Warren Christopher; H. Russell Smith; E. L. Shannon, Jr.; Carl F. Huntsinger; James M. Rosser; J. J. Pinola.

61

Southern California Edison Company 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 (System Planning and Research)

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 (Engineering and Construction)

C. E. Hathaway Vice President (Human Resources)

Charles B. McCarthy, Jr.

Vice President (Customer Service)

Michael L. Noel Vice President and Treasurer Harold B. Ray Vice President and Site Manager, San Onofre Nuclear Generating Station

()"Honor Muller Corporate Secretary

(')Jennifer Moran Corporate Secretary

(')Mrs. Muller retired effective December 31, 1986.

(')Ms. Moran was elected Corporate Secretary effective January 1, 1987.

62

Southern California Edison Company Distribution of Record Shareholders and Shares as of December 31, 1986 Shareholders Shares Preferred

% Common Preferred Common Total 19,473 100.0 157,695 100.0 13,984,774 100.0 216,906,527 100.0 Class of Investor Males 3,749 19.2 36,061 22.9 562,253 4.0 15,865,748 7.3 Females 8,063 41.4 54,422 34.5 1,098,217 7.9 20,392,883 9.4 Joint Accounts 4,673 24.0 43,609 27.7 894,626 6.4 18,598,049 8.6 Fiduciaries 1,885 9.7 19,861 12.6 377,111 2.7 8,946,409 4.1 Religious, Charitable, Fraternal and Educational Institutions 115 0.6 530 0.3 51,019 0.4 767,505 0.4 FinancialInstitutions 384 2.0 1,095 0.7 8,964,232 64.1 148,611,388 68.5 Other 604 3.1 2,117 1.3 2,037,316 14.5 3,724,545 1.7 Amount ofHoldings I to 99 shares 10,015 51.4 38,571 24.4 267,804 1.9 1,410,148 0.7 100 shares 3,343 17.2 11,236 7.1 334,300 2.4 1,123,600 0.5 101 to 499 shares 4,070 20.9 70,266 44.6 985,437 7.0 18,171,053 8.4 500 to 999 shares 1,102 5.7 20,612 13.1 658,355 4.7 13,675,930 6.3 1,000 or more shares 943 4.8 17,010 10.8 11,738,878 84.0 182,525,796 84.1 Geographical Location Service Territory 5,070 26.0 38,098 24.2 1,505,697 10.8 27,679,961 12.8 Remainder of California 6,366 32.7 45,834 29.1 3,241,642 23.2 45,823,636 21.1 United States (except California) and Possessions 7,996 41.1 73,219 46.4 9,232,464 66.0 143,173,120 66.0 Foreign Countries 41 0.2 544 0.3 4,971 0.0 229,810 0.1 1987 Annual Shareholders' Meeting:

Dividend Reinvestment and Statistical Supplement:

The annual meeting of shareholders of Stock Purchase Plan Agent:

A comprehensive financial and statisti Southern California Edison Company Southern California Edison Company cal supplement to this report is avail will be held at 10 a.m., Thursday, Secretary's Department-Room 240 able in limited quantity. A copy may April 16, 1987, at the Industry Hills Post Office Box 400 be requested by writing to the Manager and Sheraton Resort, One Industry Rosemead, California 91770 of Investor Relations, Southern Hills Parkway, City of Industry, Telephone (818) 302-1852 or California Edison Company, P.O.

California 91744.

(818) 302-1995 Box 800, Rosemead, California 91770.

For Investor Relations:

Registrar of Stock:

This Annual Report and the statements Individual Shareholders contact:

Security Pacific National Bank and statistics contained herein have Southern California Edison Company Los Angeles, California been assembledfor general informa Secretary's Department-Room 240 Stock Exchange Listings:

tive purposes and are not intended to Post Office Box 400 induce, orfor use in connection with, Rosemead, California 91770 Coo Stock any sale orpurchase of securities.

Telephone (818) 302-1997 NewiYor Stock Exchange Under no circumstances is this report Institutional Stock Exchange or any part of its contents to be con Inttinalr Investor s eatontatso d nSokE cag sidered a prospectus, or as an offer Manager, Investor Relations Telphne(88)30-215Preferred and Preference Stocks:

to sell, or the solicitation of an offer Telephone (818) 302-2515American Stock Exchange to buy, any securities.

Stock Tkansfer Agent:

Pacific Stock Exchange Southern California Edison Company licker Sybol:

Secretary's Department-Room 240

(

m Post Office Box 400 Rosemead, California 91770 Newspaper Stock Table Listing:

Telephone (818) 302-1393 or SCaIEd (818) 302-1936 64

Quarterly Financial Data Quarterly financial information for 1986 and 1985 are re-declared and paid quarterly. The Indenture securing the First flected in the table below. The Company's common stock is and Refunding Mortgage Bonds provides, in substance, that traded on the New York, Pacific and London Stock Ex-cash dividends shall not be paid except out of earnings rein changes. There were approximately 158,000 common stock vested in the business and net income.

shareholders of record at December 31, 1986. Dividends are Per Share Stock Prices Operating Operating Net Dividends Revenues Income Income Earnings Declared High Low (In Millions, Except Per Share Data) 1986 First Quarter............

$1,240

$250

$199

$.84

$.54

$317/8

$25 /

Second Quarter..........

1,211 235 194

.83

.57 32 1/s 28/8 Third Quarter............

1,550 267 217

.94

.57 38%

30%

Fourth Quarter...........

1,311 216 159

.67

.57 36 317/8 Total................

$5,312

$968

$769

$3.28

$2.25 1985 First Quarter............$1,217

$251

$201

$.86

$.51

$24

$22Vs Second Quarter............

1,228 244 190

.80

.54 27/8 23/8 Third Quarter............

1,452 264 210

.89

.54 27/8 22%

Fourth Quarter...........

1,272 214 173

.71

.54 28V2 22 Total................

$5,169

$973

$774

$3.26

$2.13 63

• Hydroelectric Geothermal 0 Biomass A Fossil (includes coal gasgifcation)

I Wind U Service territory

• Nuclear 0 Solar Extra high voltage (EHV)transmission lines Southern California Edison serves sources. Of the Company-owned Federal Energy Regulatory Commis nearly 10 million people in a facilities, 68 percent was composed sion, as well as other matters, includ 50,000 square-mile service territory of oil-and gas-fired generating units.

ing accounting and depreciation.

Edison's interest in nuclear and coal-The Company's planning and siting Southern California Edison Company fired generating units accounted for 15 of new plant construction are subject provides electric service in a 50,000 percent and 11 percent, respectively, to the jurisdiction of the California En square-mile area of Central and and 6 percent was in hydroelectric ergy Commission. Edison also is sub Southern California. This area, which generation.

ject to various governmental licensing has a population of nearly 10 million The Company, incorporated in 1909 requirements, to Securities and Ex people, includes some 800 cities and under the laws of California, is a pub-change Commission filing and disclo communities.

lic utility and its retail operations are sure requirements and to certain other Edison's gross investment in utility subject to regulation by the California federal, state and local laws and plant totals approximately $15.0 bil-Public Utilities Commission which regulations, including those related lion. Area generating capacity at peak has the authority, among other things, to nuclear energy and nuclear plan during 1986 totaled 18,320 megawatts to establish retail rates and to regulate construction, environmental protec (MW), which included 14,709 MW security issuances, accounting and tion, fuel supplies and land use.

of Company-owned facilities and depreciation. The Company's resale 3,611 MW of capacity from other operations and hydroelectric develop ment are subject to regulation by the

Southern California Edison Company 2244 Walnut Grove Avenue, Rosemead, CA 91770 Telephone: (818) 302-1212