ML13331B452

Southern California Edison Co 1988 Annual Rept

ML13331B452
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Site:	San Onofre
Issue date:	12/31/1988
From:	Allen H Southern California Edison Co
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7

1:

A New Corporate Structure 2:

SCEcorp Highlights 3:

The Year at a Glance 4:

Letter to Shareholders 7:

Operations Review: Southern California Edison Company 22:

A Review of Nonutility Subsidiaries: The Mission Group 24:

Financial Review 26:

Responsibility for Financial Reporting and Report of Independent Public Accountants 27:

Consolidated Financial Statements 33:

Notes to Consolidated Financial Statements 41:

Quarterly Financial Data 42:

Selected Financial Data: 1984-1988 43:

Management's Discussion and Analysis of Results of Operations and Financial Condition 46:

Board of Directors 48:

Executive Officers COVER: Colorful beams of light illuminate an urban landscape in the San Gabriel Valley, near the corporate headquarters of SCEcorp and its electric utility subsidiary, Southern California Edison Company.

A New Corporate Structure A historic change for the corporation took place in 1988 with the formation of SCEcorp, the parent holding company of Southern California Edison Company.

This new corporate structure, which went into effect on July 1 following shareholder approval, more clearly separates the regulated utility operations of Edison from the operations of SCEcorp's nonutility subsidiaries. With its headquarters in Rosemead, California, SCEcorp is primarily an energy-services company whose subsidiaries have combined assets of $14.9 billion.

SCEcorp's principal subsidiary is Edison, a 102-year-old electric utility that serves 3.8 million customers in Central and Southern California. More than 10 million people live within its 50,000-square-mile service territory-one of the nation's most dynamic and prosperous regional economies.

The nonutility subsidiaries of SCEcorp that operate as The Mission Group are engaged primarily in businesses related to the corporation's expertise in the energy industry. The Mission Group subsidiaries have projects in eight states, including electric power generation, engineering and construction of electric facilities, real estate development, and financial investments.

Under the new corporate structure, SCEcorp will continue a long tradition of providing good service to customers and a competitive return to shareholders.

2 SCEcorp Highlights Five-year compound annual Increase growth 1988 1987 (decrease) rate For the year (000):

Revenue

$6,252,719

$5,601,926 11.6%

7.0%

Net income

$761,831

$738,531 3.2 4.3 Common stock dividends paid

$530,409

$507,808 4.5 8.4 Weighted-average shares of common stock 218,332 218,014 0.1 1.9 At year-end:

Assets (000)

$14,866,276

$14,350,664-3.6 5.2 Liabilities (000)

$8,010,685

$7,798,136 2.7 5.1 Common shareholders' equity (000)

$5,064,848

$4,833,734*

4.8 6.0 Common shareholders 148,427 156,154 (4.9)

(1.3)

Employees 16,995 17,255 (1.5) 0.8 Per share:

Earnings

$3.49

$3.39 2.9 2.3 Dividends

$2.48

$2.38 4.2 5.5 Book value

$23.18

$22.16*

4.6 4.3 Market price

$32/8

$30/2 6.1 10.3 Financial ratios:

Rate of return on common equity 15.3%

15.5%*

Dividend payout 69.6%

68.7%

Dividend yield 7.7%

7.8%

Price-earnings 9.3 9.0 Total shareholder return (price appreciation and dividends) 14.1%

(3.1)%

• Reflects restatement for nuclear plant disallowance.

Earnings Per Share (SCEcorp)

Annual Dividend Rate Per Share (SCEcorp)

In dollars In dollars 3 49 2.48 3.11 3.18 j 126 09 Nonutility 2.39*

Consumer price index Utility

.84 83 84 85 86 87 88 76 77 77 78 79 80 81 82 83 84 85 86 87 88 Renlcts restatement for nuclear plant disallowance

3 The Year at a Glance

. SCEcorp's earnings per share of common stock

. Southern California Edison, the utility subsidiary, increased 2.9% to a record high of $3.49 in 1988.

internally generated 100% of the funds needed to meet capital requirements, up from 77% in 1987, and the

. The boards of directors of SCEcorp and San Diego highest level in more than 30 years.

Gas & Electric Company (SDG&E) approved an agree ment to merge SDG&E into Edison. The company is m The utility's sales to retail customers increased 3.9%

working to complete the approval process for the pro-to 66 billion kilowatt-hours (kwh); total electric sales, posed merger in early 1990, subject to the approval which include sales to municipal and utility custom of shareholders of the companies, the California Public ers, rose 3.6% to 68 billion kwh.

Utilities Commission (CPUC), the Federal Energy Reg ulatory Commission and other regulatory agencies.

w The utility recorded a net gain of 114,394 new custom ers, the third-largest annual increase in Edison's

. The board of directors of SCEcorp raised the common-history.

stock annual dividend 4.2% in June to $2.48, the 13th increase in the past 12 years.

a Edison customers set a record peak demand for electri city of 15,987 megawatts (MW) on September 6, 1988,

" The return to SCEcorp's common shareholders from breaking the previous mark of 15,189 MW set in 1984.

stock price appreciation and dividends was 14.1% in 1988. The annual return to shareholders has averaged

. The CPUC authorized the recovery of $465 million in more than 19% for the past 5-year and 10-year periods, fuel and purchased-power expenses, $116 million for exceeding the Dow Jones industrial and utility aver-inflation and capital costs in an attrition allowance and ages, as well as the S&P 500 index.

an increase in Edison's authorized return on common equity from 12.75% to 13.0% for 1989. The CPUC also

. SCEcorp's net income rose to a record $761.8 million found that $295 million of Edison's added investment and revenue to a record $6.3 billion.

in San Onofre Nuclear Generating Station Units 2 and 3, since they began operating commercially, was

. The Mission Group of nonutility subsidiaries earned reasonable.

net income of $77.8 million, or 35 cents per share, from revenue of $333.1 million; nonutility earnings were

. Edison achieved its cost-containment goals of reducing 10.0% of SCEcorp's total earnings.

capital expenditures and limiting growth in operation and maintenance expenses to below the annual rate of inflation.

Sources and Distribution of Revenue (SCEcorp)

Sources Distribution In percent In percent 34 Commercial 36 Fuel and purchased power 30 Residential 24 Operation and maintenance 18 Industrial 18 Dividends and interest 8 Public authorities 7 Taxes and other 5 Other electric 11 Depreciation and decommissioning 5 Investment and other 4 Reinvested earnings

4 Letter to Shareholders Another Outstanding Year Cost Containment Few years in the 102-year history of our company have Although the San Diego merger was a major focus in matched 1988 for major changes, major challenges, and 1988, we also made internal changes necessary to major achievements. It was a year of notable successes.

ensure that this enterprise will continue to be finan 1988 saw us achieve record earnings, $3.49 per com-cially strong, service-oriented and competitive in its mon share compared with $3.39 in 1987, and our 13th operations. We restructured the organization to increase dividend increase in the last 12 years. The return to our productivity and eliminate duplication and unneces common shareholders in 1988 from dividends and sary expense. We reduced the number of officers, stock-price appreciation was 14.1%, and has averaged managers, and administrative and field personnel more than 19% annually for the last 10 years. We added throughout the company, streamlining every depart 114,000 new customers to our electric system, the third-ment. This reflects much attention, care, and effective largest increase ever in our service territory.

hard work by Edison people and keeps us on track to meet our five-year corporate goal to reduce Edison's 1992 revenue requirements by $900 million from a Merger Agreement with SDG&E business-as-usual level. Growth of Edison's operating and maintenance expenses for 1988 were under the rate In late November, our board of directors and that of San of inflation. Edison reduced employment by 426 posi Diego Gas & Electric Company (SDG&E) approved a tions, or 2.5%, through attrition and retirements, with definitive agreement to merge SDG&E into our electric few layoffs.

utility subsidiary, Southern California Edison Com-Health-care costs have been increasing nationally for pany. Under terms of the agreement, each SDG&E major corporations and for our company at about 20%

common share will be exchanged for 1.3 newly issued a year. To have a benefits program that would be more SCEcorp common shares. Existing SDG&E preferred responsive to employee needs, and yet help control issues will be exchanged for newly issued SCEcorp pre-escalating health-care costs, we implemented a com ferred shares. The merger requires approval of share-prehensive new program that enables our employees to holders of both companies, as well as regulatory match benefits with personal and family needs.

approvals by the California Public Utilities Commis sion (CPUC), Federal Energy Regulatory Commission (FERC), and other regulatory agencies. We are working Quality Service to complete the approval process in early 1990.

Our merger proposal has received opposition in the Our Edison companywide quality service programs San Diego area, largely based on the issue of loss of a found literally hundreds of ways to give better and hometown headquarters company. Our position is that more responsive service to our customers. For example, lower electric rates, better service, and increased com-we expanded surveys to determine customer needs, munity support are more important to consumers than reduced response times on telephone calls from cus having a locally headquartered utility with higher tomers, created a more understandable customer bill, electric rates. We plan to demonstrate the substantial changed electric-circuit switching procedures to reduce customer and community benefits for San Diegans in outages during maintenance work, and trained employ our regulatory proceedings, and are confident that ees in better service, work techniques and practices.

when the facts are known, our merger will be accepted.

Nuclear Operations Holding Company By every measure, our San Onofre Nuclear Generating As described on Page 1, SCEcorp came into existence Station had an excellent year. The station achieved rec on July 1 as the parent holding company of Southern ord energy output, tight cost control, recognition from California Edison, our electric utility subsidiary, and federal regulators for safe and professional nuclear The Mission Group of nonutility businesses.

operations, and a record 3.8-million work hours with out a lost-time injury accident.

5 Operations. Edison Vice President Glenn J. Bjorklund Generating Resources, Purchased Power and Fuel moved from System Planning and Research to Power Supply, and Edison Vice President Robert Dietch took Our nine different energy production resources help on Mr. Bjorklund's former responsibilities in addition protect our customers from unforeseen changes in to his position as vice president of Engineering and world energy markets. Our coal, nuclear and oil-and Construction.

gas-fired plants remain our primary generating In December, the board of directors elected two new resources. Our coal and nuclear plants achieved another officers. Effective January 1, 1989, John R. Fielder year of record production. Increases in the cost of nat-became Vice President-Information Services of South ural gas and reduction in the reliability of its supply ern California Edison. Effective March 1, 1989, David are causing us to change our gas supply practices. We N. Barry III becomes Vice President and General are engaged in efforts to obtain more gas from different Counsel of SCEcorp and Southern California Edison, sources. Our hydro production was down because of succeeding John R. Bury, who retires after 35 years of the second year of drought conditions. Purchased dedicated service.

power in balanced amounts remains an important At our annual meeting in April we will mark the and cost-effective resource. Alternative and renewable retirement from our board of directors of Jack K. Hor generation resources also remain important, but in ton, who provided our company with wise leadership many cases are not cost-competitive today.

and counsel as President beginning in 1959, as Chair man beginning in 1968, and as Chairman of the Execu tive Committee since 1980. He has been a friend and Customer Self-Generation an inspiration to all of us, and we will miss him.

1988 was a good year for our company. Much still has Through CPUC actions and our own efforts, we are to be done. With the wise counsel and policy direction reducing the threat of large commercial and industrial of our board of directors, the leadership of an extra customers bypassing the Edison system. This has been ordinarily able team of officers and managers, and the a major company effort, because if these large custom-outstanding efforts of all our employees, we will meet ers leave the system, the remaining customers will be 1989's challenges. On behalf of shareholders, I thank required to pay higher rates to cover fixed costs.

our people for their dedication and hard work in 1988.

I look forward to leading them again this year.

Mission Group Earnings of The Mission Group, our nonutility busi nesses, contributed 35 cents per share, or 10% of SCEcorp's total earnings, up from 5.6% in 1987, and an increase of 84%. The Mission Group subsidiaries Mission Energy, Mission Land, Mission Power Engi neering, and Mission First Financial-are an important part of our financial strength. They have exceeded our expectations and are expected to grow in the future.

Management We have fewer officers than any other major electric utility enterprise. Your company's top management team consists of Executive Vice Presidents David J.

Fogarty, John E. Bryson, Michael R. Peevey and myself, with ages ranging from 45 to 63, and disciplines of Chairman, President and engineering, law and economics. Cross-training is an Chief Executive Officer important part of our management strategy. Edison Senior Vice President Larry T. Papay moved from February 21,1989 Power Supply to a new position overseeing Nuclear

6 San NEVADA UTAH Prancisco Las Vegas Four Corners coal)

Hoover Dam 0 A Mohave (coal)

Rosemead AZARI Z ONA Los AngelesPhei Phoenix Palo Verde San Diego,:"

MEXICO Southern California Edison Company service territory Extra-high-voltage transmission lines

• Hydroelectric A Fossil

& Nuclear

- Geothermal T Wind

1. Solar

& Biomass

7 Operations Review: Southern California Edison Company Southern California Edison Company, the utility sub-During an extended heat wave, customers' demand sidiary of SCEcorp, provided more electricity to more for electricity rose to a record peak of 15,987 mega customers during 1988 than ever before in its 102-year watts (MW) on September 6, breaking the previous history. The company also strengthened its commit-mark of 15,189 MW set in 1984. The primary reason ment to quality service while rigorously controlling for this record was the heavy use of air condition costs. Its success in serving customers and providing ing, as residential customers sought relief from the shareholders with a competitive return reflected the fourth consecutive day of 100-degree-plus temperatures.

effective hard work and dedication of its 16,660 employees.

Focus on Large Customers Growth in Service Territory For several years, the company has faced the possibility that some large commercial and industrial customers Edison serves more than 3.8 million customers in a would leave its system and generate their own electric 50,000-square-mile service territory that covers much ity. This problem essentially results from earlier state of Central and Southern California. With headquarters and federal regulatory and legislative decisions that had in Rosemead, California, Edison is a regulated, investor-distorted electricity pricing since the late 1970s. But owned utility providing electric service to one of with support from the California Public Utilities Com the nation's most robust and prosperous regional mission (CPUC), Edison has made substantial strides economies.

in 1988 toward stemming the potential loss of these The company had a net gain of 114,394 new custom-large customers.

ers in 1988, the third-highest increase in its history.

The electricity price structure, which the current Residential customers represented about 87% of the CPUC is reforming, has subsidized residential custom total growth. In the next five years, Edison projects ers at the expense of many commercial and industrial growth of approximately 450,000 customers.

customers. Consequently, many large customers have The increase in customers was the primary reason paid significantly more than what it costs Edison to for a 3.9% rise in retail electric sales-to 66.0 billion serve them, and in some cases more than it would cost kilowatt-hours (kwh) from 63.5 billion kwh in 1987.

them to generate their own electricity. If these large Edison's total electric sales in 1988, including sales to customers leave the Edison system, the result would be other utilities and municipalities, rose 3.6% -to 67.9 fixed costs spread over a smaller customer base, billion kwh from 65.5 billion kwh in 1987.

Peak Demand and New Customers (Utility)

Reserve Margin (Utility)

In thousands In thousands of megawatts 128 18.9 114 1.4 18% Reserve 4

2 14%

22%

25%

23%

margin 99 722%

I0 Peak demand 75 83 84 85 86 87 88 83 84 85 86 87 88

8 Focus:

This major industrial customer deferred Specialized installation of a 3.1-megawatt generating unit v

at its plastics manufacturing facility in Tor Service rance, California. The customer qualified for a for Large Customers lower electric rate, negotiated by Edison and approved by the California Public Utilities Commission (CPUC). As a result, the utility will continue serving this large industrial customer that otherwise would have left the utility's electric system.

In addition, Edison has sought lower electric bills for industrial and commercial customers by changing an overall rate structure that has subsidized residential cus tomers since the 1970s. A new rate structure for all customers, approved by the CPUC, went into effect on January 1, 1988, following Edison's request to bring rates more in line with its actual costs of service to different classes of customers.

Furthermore, the company provides a variety of energy-related services to its 200 largest customers. Highly trained account representatives serve as a single point of contact in promptly meeting all of their energy needs and advising them on ways to cut costs. u A major industrial customer (right) took advantage of Edison's lower rates and specialized services at its plastics operations in Torrance. Two Edison employees (above) advise a representative of the company.

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10 increasing electricity prices to remaining customers-major corporations nationwide, have been rising at particularly residential customers.

more than 20% annually since 1980. In response, A number of actions taken by Edison and the CPUC Edison developed an innovative and comprehensive have helped correct this problem. In response to Edi-flexible-benefits program, called SCEflex, which gives son's request in its 1988 general rate case, the CPUC employees the ability to choose the benefits that best has begun to establish cost-based rates that more suit their personal and family needs. At the same time, closely reflect the actual costs of serving each cus-it allows Edison and employees to better control bene tomer class. On January 1, 1988, the commission fits and health-care costs. In general, the savings result increased residential rates an average of 4.9% and from more favorable rates negotiated with doctors and decreased rates for large commercial and industrial hospitals, a new system of managed care that reduces customers an average of 4.7%. The CPUC also has the number of unnecessary medical procedures and a given Edison more flexibility in negotiating special totally new benefits and health-care plan. In all, SCE rates and services for large customers who are planning flex will continue to provide Edison employees with to generate their own electricity.

one of the best benefit and health-care programs in the Edison's 200 largest customers represent 20% of its nation, while also achieving substantial savings and revenues. Because of their importance, the company cost control in this high-cost area.

has established a highly trained group of professionals In another major effort to streamline operations and who serve as single points of contact for each of these control costs during the year, Edison began consolidat large customers.

ing its telephone and customer-accounting centers As a result of these efforts, large commercial and from four locations to two. This was possible because industrial customers in 1988 deferred or cancelled more of the interconnection of the telephone centers, which than 200 proposed generating projects, representing handle more than 6 million calls annually. As a result, 325 MW. If these self-generation projects had been all Edison representatives can now answer calls from built, Edison's sales would have fallen about 2.4 billion customers residing anywhere in the 50,000-square-mile kwh, the equivalent of approximately $185 million in service territory. The consolidation will result in more annual revenue, and rates for the remaining customers efficient use of personnel, as well as save about $7 would have increased.

million in capital expenditures and $1.3 million an This is an example of how past public policy deci-nually in operating costs. To achieve this consolidation, sions, which were made with good intentions, can be Edison made a special effort to minimize hardship on harmful to the public interest if not reviewed and employees by offering them similar positions at the revised on a timely basis.

two remaining centers and by providing other job opportunities.

In 1988, the company continued to restructure and Emphasis on Cost Control and Productivity streamline a number of departments, and to increase the efficiency of its work force. Total employment for In 1988, the company continued its major effort to Edison at year-end dropped 426 to 16,660. According to reduce costs and increase productivity without sacrific-the most recently available data on the ratio of custom ing high-quality service to customers. These strong ers to employees, Edison ranks first among the nation's cost-containment efforts are necessary to ensure that 15 largest electric utilities in productivity.

Edison remains financially strong and competitive in today's business environment.

Under its five-year cost-containment plan begun in Commitment to Quality Service 1987, the company is committed to reduce by $900 mil lion its projected revenue requirements from customers Quality service has been the foundation of Edison's by 1992. Edison achieved its cost-containment goals in management philosophy throughout its history-but 1988 by reducing planned-construction expenses, low-never more so than today. Since its early days, the com ering inventory requirements, and tightly controlling pany's motto has been, "Good Service, Square Dealing, increases in operations and maintenance expenditures Courteous Treatment." During 1988, Edison employees below the annual rate of inflation.

again demonstrated this commitment-both at field A good example of Edison's efforts to reduce and locations and in offices throughout the service control costs was the complete revision of its territory.

health care program. These costs, like those of other

When severe wind and rainstorms struck in January,

• Expansion of service to a rapidly growing number of February and December, Edison emergency crews and non English-speaking customers through community other personnel mobilized quickly and worked around programs, as well as toll-free telephone service by Edi the clock to restore service to more than 1/4 million son representatives who are fluent in Spanish, Chinese, affected customers. During the extended heat wave in Vietnamese and Cambodian.

early September, when temperatures soared to 110 degrees and demand for electricity reached new rec ords, more than 1,300 employees worked an additional Diversity in Generating Resources 52,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> to replace damaged transformers and make other repairs, and restore electric service.

The company historically has sought diverse generat Employees in departments throughout Edison also ing resources to provide customers with reliable elec developed innovative programs to improve customer tric service at reasonable cost. Using nine different service. As an example, quality-service teams in many resources, more than any other utility in the world, departments helped coordinate procedures to ensure Edison has great flexibility in adjusting to unforeseen more rapid and efficient responses to customers. To changes in world energy markets.

measure the level of customer satisfaction, and respond better to their needs, Edison actively sought more feed-Nuclear Plants Edison's nuclear power plants in back from customers through surveys and interviews.

Southern California and Arizona had another excellent The company also expanded programs that recognize year, generating more than 21% of customers' electric and reward managers and employees whose suggestions ity needs, up from 20% in 1987. The output reflects increase productivity, lower costs, or provide better the strong operating performance of the San Onofre service.

Nuclear Generating Station and the first full year of Among other important steps taken to enhance qual-operation for all three units at the Palo Verde Nuclear ity service in 1988 were:

Generating Station in Arizona.

• Introduction of a new customer bill that presents Edison's three nuclear units at the San Onofre plant more information in a simpler, clearer way; generated more than 16% of the electricity needed to

• Installation of a new telecommunications circuit-serve Edison customers in 1988. Their output saved switching system between voice and data networks, customers the cost of about 21 million barrels of oil or which has increased employee productivity, reduced the equivalent in natural gas, resulting in fuel savings costs and improved customer service; of about $275 million. Edison manages and operates

• Support for the sixth consecutive year in paying the the three San Onofre units, owning 80% of the 450 winter electric bills of 8,800 low-income, elderly and MW Unit 1 and 75% of Units 2 and 3, which have a disabled customers through Edison's Winter Energy combined capacity of 2,200 MW.

Assistance Fund and generous voluntary contributions On average, the three units at San Onofre produced from customers; 74% of their capacity for the year, exceeding the

• Notifying customers of a 24-hour telephone service national average for nuclear plants. Unit 1, which com to respond to their requests, such as starting or stop-menced commercial operation in 1968, was out of ping service, answering questions on billing and report-service for more than six months in 1988 for refueling ing electric outages; and completion of electrical modifications required by

• Assistance to nearly 46,000 low-income and needy the federal Nuclear Regulatory Commission (NRC).

customers by providing various energy-management Unit 2 operated at 95% of its capacity for the year, and services, including bilingual help and free installation was the third-highest producer of electricity among the of energy-efficient equipment; nation's 109 nuclear units. Unit 3 operated at 66% of

• Implementation of a good-neighbor program under capacity, and completed its third refueling during 1988.

which customer-contact personnel refer elderly cus-In 1988, the lifetime generation of San Onofre plant tomers who need assistance-such as medical care, exceeded 100 billion kwh of electric generation, saving meals and transportation-to various community customers the cost of more than 160 million barrels of agencies; oil or the equivalent in natural gas.

• Introduction of a toll-free telephone number for Edison has been given high marks for the safe and shareholders, which has provided faster and more con-professional operation of the San Onofre units by the venient service; and NRC and the Institute of Nuclear Power Operations.

12 Focus:

Edison dedicated the Balsam Meadow hydro Expansion of electric facility in June, making it the newest Hydroelectric and largest addition to the Big Creek system Resources in the Sierra Nevada. The company designed and managed the $277 million project, which was built by blasting four miles of tunnels through solid granite to connect Huntington and Shaver Lakes. The 207-megawatt power station is 1,000 feet below ground in a huge excavated cavern and was named in honor of John S. Eastwood, the visionary engineer who originally conceived the Big Creek hydroelectric system in the late 1800s.

Edison commemorated Big Creek's 75 years of continuous operation in October.

This immense hydroelectric complex now consists of six major lakes, 16 tunnels extending a total of 48 miles, and nine powerhouses with 24 generating units. Big Creek is an important source of reliable, low-cost power for Edison, representing 1,000 megawatts of capacity, or enough power to serve 500,000 people.

By using computers and fiber optics communications, Edison was able to reduce costs and increase efficiency in operating all of Big Creek's generating units from a single control center. m Maintenance workers (right) inspect generator at the John S. Eastwood powerhouse of the Balsam Meadow hydro facility, built 1,000 feet underground in the Sierra Nevada. Two employees (above) measure the depth of the forebay above the hydro facility.

15 customers' total electric needs in 1988 and had an In 1988, electricity purchased from qualifying facili average cost of 1.8 cents per kwh, compared with ties cost an average of 6.3 cents per kwh, higher than 1.6 cents in 1987.

Edison's average costs for both economy-and firm During 1988, Edison purchased and exchanged power power purchases from other utilities. The higher costs as an active member of the Western Systems Power for power supplied by qualifying facilities cost Edison's Pool (WSPP), the largest power pool in the nation. The customers an estimated $200 million in 1988 and will company played a major role in establishing WSPP in cost an estimated $260 million in 1989. This is another 1987 as a two-year experiment by 24 public-and inves-example of well-meaning public policy that turned out tor-owned utilities in 10 Western states. Pool members to be wrong because it was not reviewed and modified use a centralized computer to efficiently buy and sell on a timely basis.

low-cost surplus power, and make better use of existing At the end of 1988, there were 344 nonutility power generation and transmission facilities. Market forces, projects, with a combined generating capacity of rather than regulatory agencies, determine power 2,446 MW, providing power to Edison under these prices under this program. To date, results of the experi-contracts. Edison also has signed contracts, under ment have been favorable, and efforts are under way to CPUC orders, for an additional 133 projects repre have the Federal Energy Regulatory Commission senting another potential 1,884 MW of capacity. Edison (FERC) extend it another two years.

estimates that less than half of the electric capacity of these remaining projects will go into service, primarily Firm-Energy Purchases: Purchases under long-term because of changes in federal tax laws, air-quality con contracts with other utilities supplied 7% of custom-siderations, and siting and permit requirements.

ers' electricity needs at an average cost of 4.1 cents per kwh.

Major Power Sale:

In August, Edison also reached In June, after several years of negotiating, Edison agreement on a 10-year contract to sell between 300 reached agreement on a 20-year sales-and-exchange MW and 700 MW of its excess generating capacity to contract with the Bonneville Power Administration the Sacramento Municipal Utility District, beginning (BPA). The contract provides the company with 250 in January 1990. The company estimates that the pro MW of capacity and 1.2 billion kwh annually beginning ceeds from this sale will earn Edison customers July 1, 1989. The agreement also will provide Edison between $35 million and $70 million annually, depend with an additional 250 MW during times of unexpect-ing on the amount of electricity needed by the Sacra edly high electric demand. The contract, approved by mento utility.

the FERC and CPUC, will save Edison customers an estimated $30 million or more annually, compared with the least-cost alternative of refurbishing some of Higher Fuel and Purchased-Power Costs Edison's existing oil and gas generating units now on standby status.

Fuel and purchased-power costs represent Edison's largest expense in supplying electricity to customers.

Purchases from Nonutility Power Producers: Alter-Under California regulation, Edison is allowed to native and renewable energy projects, developed by recover these costs from ratepayers on a dollar-for nonutility power producers, supplied about 18% of dollar basis so long as they are reasonably incurred.

customers'needs during 1988-nearly a 90% increase The costs are subject to periodic reasonableness over 1987.

reviews by the CPUC.

In 1978, the federal Public Utility Regulatory Policies These combined costs rose from $1.87 billion in 1987 Act (PURPA) was enacted to encourage the develop-to $2.21 billion in 1988. The increase resulted primarily ment of alternative and renewable energy sources by from substantial increases in purchases from nonutility requiring electric utilities to purchase power from quali-power producers.

fying nonutility producers. Each state was required Natural gas was the primary fuel used in Edison's gas to establish its own implementation rules. In Cali-and oil generating units, except for periods of partial fornia, CPUC policy at that time required Edison and natural gas curtailment in January and August, and other utilities to buy power from qualifying facilities later in the year when Edison switched to oil because under long-term contracts. Generally, this power was oil prices declined below gas prices. For the first time not needed to meet customer demand, and was much more costly than power Edison can now produce or purchase from other utilities.

16 Focus:

Edison will obtain greater access to low-cost Transmission power from the Pacific Northwest after com Capacity pletion of a joint project in March 1989 to Increases to expand the 850-mile direct-current (DC) line Northwest of the Pacific Intertie transmission system.

The installation of new equipment converting DC into alternating current (AC) will result in 1,100 megawatts of additional capacity to serve Southern California consumers. The DC line is jointly owned by Edison, the Los Angeles Department of Water and Power, and the municipal utilities of Glendale, Pasadena and Burbank. Completion of the $171-million expansion project will boost Edison's transmission capacity over this line from 421 MW to 643 MW.

The Pacific Intertie is the major link for exchanging power between California and the Pacific Northwest. Built in the 1960s, it includes two AC lines and one DC line, all capable of transmitting large amounts of electricity in either direction at extra high voltages. A proposal to build a third AC line, known as the California-Oregon Transmission Project, would add 1,600 MW of transmission capacity by 1992, including Edison's 281-MW share. If this third AC line is approved, Edison's total share of trans mission capacity from these lines to the Pacific Northwest will rise to 1,900 MW.

More efficient equipment (above) installed at a facility in Sylmar, California, converts DC power used in transmission to AC that customers use. The DC line (right) of the Pacific Intertie transmission system supplies customers with low-cost power from the Pacific Northwest.

14 l owns a 15.8% interest in the Palo Hydroelectic P.

S4tation near Phoenix, Ari 4%

of custome Verde Nuclear GeneTatn Statits nari the largest C

ie ed sy zona, whose three l, 221-MW units comprise th largesthdr I

n a, plant in the country. These units, managed by primary source nuclearpati h

o ay went into Commer-1,000 MW of c.

Arizona public Service Company, went 19t 1986, pro sste cial operation On Februay 1, 1986, September 19, 1986, 1,000 MWof1 cialoperatioo respectively-nine major tu and january 20, 1988, e t e Palo Verde unh o

Total generation from the thre pl in the united whedsompaoet the highest among all nuclear Plants inteUie hed c oany teahes adion, anit 3 had the highest production the Big Creelt States. In a individual nuclear unit. Palo Verde in addition nationwide for an ateivida cpcity factors Of 62%'

hydroelectric Units 1, 2 and 3 operated at capacit and 2 com-ColoadoiRio 63 n 5,respectively. Both U nits ' and 2 com-ol ra o pleted their first refueling outages in 1988 Unit 3 willI have itsdiversity of h ave its first refueling in 1989.

dir s ity O er Plants The company's 54 oil and ity in meet Fossil-Fuel POW0 MW of capacity, provided total electr natural gas units, with 10,000 MWd of 19.

The two nees rs' lecric eed inI rouce anneeds duril 26% of customer side California pr This grow' coal-fired plants located outside of theurchases additional 15%. Edison opera Nevada and owns 48%

Californi Mohave Generating Station in Stadainds Units 4 and 5 of the Four Corners enerating Stati td a d of Eciorny in~

~ ~

NwM iCo. The Mohave Plant operated at 3% o in New Mexi capacity and Four Corners at 80% -new short-ter its maximum cas oth plants. Edison was awarded tricity i production records r

the CPUCs coal-plant which s

$7.9 million in 1988 under the CPUC suspended this compri ineniv pogram. Though the CPUC suspended this incentiven july, it requested Edison to develop and Econort program Itt.

incentive plan in 1989.

recommend an alternative icniepa n18.Eoo Consts Generation Mix (Utility) in bill In percent 26 25 Oil and gas 15 Nuclear 61 10 Coal 5 Hyro 105 27 Purchases 9

other power producers 17 18 1

1998

-o 1988 (Projected)

~-~

~

t A

~

A K:

18 since the gas shortages of the 1970s, the company's tra-In July, the company began a two-year test program ditional supplier of natural gas restricted its normal gas of energy-storage technology at a 10-MW project in supplies during the summer, forcing Edison to use Chino, California. The $13.5-million facility is the more expensive fuels.

world's largest battery-energy storage system and In 1988, coal and nuclear fuel prices remained steady, charges batteries at night when electricity demand is while Edison paid slightly more for oil. However, the low and power is less expensive. The facility then sup average cost of natural gas increased significantly-plies electricity during the day when costs and electric from an average price of $2.55 per million Btu in 1987 ity use are much higher. After the completion of this to $3.25 in 1988-primarily because fixed charges from research and development program, Edison will deter the company's primary supplier remained unchanged mine the commercial feasibility of this technology.

despite a lower volume of purchases. To protect its cus-After successfully completing a six-year test pro tomers, Edison is seeking to develop alternate sources gram, Edison in September discontinued operations at of natural gas from other than its traditional supplier to Solar One, the world's largest central-receiver power increase reliability of its gas supply and reduce costs.

plant using 1,818 sun-tracking mirrors on 130 acres near Daggett, California. A pioneering project in the nation's alternate and renewable energy efforts, the 10 Better Service Through Resource Planning and Research MW Solar One demonstrated the technical capabilities of electrical power production from reflected sunlight.

The company's resource-planning strategy gives it However, the plant is not cost-competitive because maximum flexibility to respond to rapid changes in lower-cost alternative generation is available.

supply and demand. In the next decade, Edison will add The 100-MW Cool Water Coal Gasification Plant is new transmission capacity to gain access to low-cost on a standby status after completion of its five-year power, and serve customer needs without construction demonstration program. Located near Daggett, Califor of major new power plants. To minimize costs, the nia, the plant converts coal into a clean synthetic gas emphasis will be on greater purchases of electricity, used in turbines to generate electricity. Cool Water is better energy management, and refurbishing and the world's cleanest coal plant and has received numer bringing back into service oil and gas plants now on ous awards for its environmental and technological standby status.

successes. It operated at 70% of capacity in 1988, but In addition, Edison's research programs focus on is not commercially competitive because more cost giving customers more choice, lower cost and better effective alternatives are available.

service. For example, Edison is testing a two-way Although many of these renewable and alternative electronic metering and communications network that resources are not cost-competitive today, they will links the utility with residential customers. This net-remain important components of Edison's diverse work provides customers with informational services energy-resource mix, especially if oil and gas become and new options for reducing electricity costs by allow-scarce or costly in the future.

ing them to shift their usage to low-cost times. These all-electronic devices also are expected to reduce costs by allowing remote meter-reading-as well as connect-Emphasis on Employee Development ing and disconnecting electric service from Edison offices-rather than sending an employee to the cus-New and revised employee training programs con tomer's location.

tinued to help employees improve their performance, In cooperation with other utilities and governmental while enhancing existing skills and the dedication to agencies, Edison also is promoting the development of customer service Edison employees have always pollution-free electric vehicles and new advances in exhibited. This increase in professional work skills battery technology. Increased use of electric vehicles in helped make 1988 a successful year. In 1988, about Southern California would reduce air pollution, traffic 4,400 employees participated in various training noise and gasoline consumption. In addition, nighttime programs.

battery charging would increase off-peak electric load, Providing a safe and healthful work environment resulting in more efficient use of Edison's generating continues to be a high priority at Edison. During 1988, capacity.

industrial accidents declined 7% from 1987 while lost workdays decreased 15%. The Edison Electric Institute presented 13 safety achievement awards to Edison

19 organizations whose employees worked 1 million or Employees showed their spirit of generosity during more hours without a lost-time accident.

the 1988 United Way campaign by giving nearly $2.3 million to help people in need. On a per-capita basis, Affirmative Action The minority representation Edison employees were among the leading contributors in the work force rose from 27.4% in 1983 to 31.7%

to the more than 900 charitable organizations sup in 1988, while the proportion of female employees ported by United Way.

increased from 22.9% to 25.2%. Even with this prog-The Edison Electric Institute honored Edison with its ress, the company seeks to improve its record of insur-Common Goals Award in 1988, citing excellent con ing greater upward mobility for these employees in tributions made by the company's educational advisory management positions.

council. This council oversees the company's informa In 1979, the company established a Women and tional and educational programs to schools.

Minority Business Development Program. From then During 1988, Edison developed educational materials until the end of 1988, the number of women-and through various school programs in cooperation with minority-owned enterprises qualified to do business teachers, administrators and community leaders. Stu with Edison grew from 207 to 1,548. Annual payments dents learn about energy conservation, electric safety, to these firms rose from $18.7 million in 1983 to $92 disaster preparedness, environmental issues and other million in 1988. The company and CPUC have agreed energy-related topics.

to a new goal of awarding 20% of Edison's annual Edison also provides scholarships and grants to stu purchases under competitive conditions to women-dents throughout its service territory. For example, the and minority-owned businesses within five years.

company provides four $12,000 scholarships, 20 career In addition, Edison reached agreement with four development awards of $3,000, and 50 educational minority-owned businesses in 1988 to manage $35 grants of $500, in addition to two $12,000 scholarship million of the employee pension fund. With earlier awards for children of employees. Another important agreements, this increased Edison's total pension educational program, known as the Science Connec investments managed by women-and minority-owned tion, uses a 40-foot mobile classroom to stimulate firms to $135 million, or 10% of the fund.

greater interest in science and technology among elementary school children. Throughout Edison's ser vice territory, this program provided scientific demon A Commitment to Community Service strations to more than 10,000 youngsters during the year. In recognition of this valuable program, the Cali Both the company and its employees have a long tradi-fornia Department of Education gave the company a tion of participating in community and civic organiza-special award for its support of science education.

tions in areas served by Edison in Central and Southern California. For years, employees have voluntarily par ticipated in such activities as the Special Olympics, the Junior Chamber of Commerce, Junior Achievement, YMCA, YWCA and scouting.

Percentage of Asian American Total male, female, and Male Female Black American Indian Hispanic Minorities minority employees at year-end Year-end Year-end Year-end Year-end Year-end Year-end Year-end 1983 and 1988 1983 1988 1983 1988 1983 1988 1983 1988 1983 1988 1983 1988 1983 1988 Managementl) 83.5 79.3 16.5 20.7 3.7 4.2 5.9 7.6 0.5 0.4 7.5 9.8 17.6 22.0 Administrative

& operative(2 )

73.7 72.2 26.3 27.8 9.5 9.6 3.3 4.3 1.1 1.4 18.7 21.9 32.6 37.2 Total Edison(3 )

77.1 74.8 22.9 25.2 7.5 7.6 4.2 5.5 0.9 1.0 14.8 17.6 27.4 31.7 (1) Includes the "officials" and "professionals" affirmative-action categories.

(2) Includes the "technicians," "office and clerical," "craftsmen," "operators," "laborers" and "service workers" categories.

(3) Includes all classes of employees.

20 In addition to its recommended energy cost disallow Regulatory Review ance, the DRA has recommended that the CPUC mod ify its early 1988 decision that authorized Edison to 1989 Attrition Allowance The CPUC authorized a form a holding company. Edison believes that adoption

$116.4-million annual attrition increase in Edison's of the DRA's recommendations to modify the holding base-rate revenues effective January 1, 1989. Attrition company decision is not necessary to protect the public allowances cover annual changes in costs caused by interest and will work diligently to demonstrate that it inflation, capital additions and financings between gen-has reasonably administered the contracts under eral rate case proceedings, which are held at three-year review. CPUC proceedings are scheduled to take place intervals. As part of the attrition allowance, the CPUC later in 1989.

authorized an increased rate of return on common equity from 12.75% in 1988 to 13.0% in 1989.

Balsam Meadow Hydroelectric Project In October 1988, the CPUC's Division of Ratepayer Advocates San Onofre Units 2 and 3 Costs since Commercial completed a review of the costs for the 207-MW Balsam Operation The CPUC authorized an annual revenue Meadow hydroelectric project. The DRA found that increase of $39 million, effective January 1, 1989, as Edison had prudently constructed the project and rec part of its decision allowing Edison to begin recovering ommended that the entire amount of its investment be

$295 million, or 97% of its investment costs incurred covered in customer rates. A decision by the CPUC is at San Onofre Units 2 and 3 after the units began com-expected in May 1989.

mercial operation. The decision affirmed an agreement between Edison and the CPUC's Division of Ratepayer Fuel and Purchased Power Rate Adjustments The Advocates (DRA), which was negotiated to avoid a CPUC periodically reviews the reasonableness of fuel lengthy, expensive review of these costs.

and purchased-power costs and adjusts rates to reflect changes in Edison's costs. Based on the utility's fore Allegations of Purchased-Power Overpayments The cast of higher energy costs from June 1988 through May DRA has recommended that the CPUC disallow $124 1989, the CPUC adjusted rates twice in 1988, granting a million of energy costs incurred between late 1984 and

$200-million revenue increase effective June 1, and an late 1987. Approximately $120 million of the proposed additional $265-million increase effective October 1.

disallowance represents alleged overpayments to non utility power producers, including electricity pur-Suspension of Incentive For Fuel and Purchased-Power chased by Edison from a 300-MW cogeneration facility Expenses On June 1, 1988, the CPUC suspended the owned by Kern River Cogeneration Company (KRCC).

annual energy rate (AER) that was established in 1981 Mission Energy Company, which is one of SCEcorp's to provide utilities a regulatory incentive to minimize nonutility subsidiaries, is a partner in the KRCC fuel and purchased-power expenses. Under the AER, facility. The DRA's proposed disallowance in relation utilities are rewarded for keeping fuel and purchased to power purchases from KRCC is approximately power expenses below the levels authorized by the

$37 million.

CPUC, and are at risk for such costs that exceed those In upcoming CPUC hearings, Edison will demon-levels. This temporary suspension was ordered because strate that the power purchases from KRCC actually uncertain natural-gas supplies and prices beyond saved its customers more than $24 million during the Edison's control resulted in wide cost fluctuations. The three years under consideration, compared with the AER is expected to be reinstated on January 1, 1990.

"standard offer" contract approved by the CPUC.

The DRA also alleges overpayments by Edison under Devers-Valley-Serrano 'ransmission Line In 17 other contracts Edison negotiated with nonutility November 1988, the CPUC's Division of Ratepayer power producers that are not SCEcorp affiliates. Edison Advocates completed a review of the costs of the 500 signed these contracts during the early stages of Cali-KV Devers-Valley-Serrano Project, which became fornia's efforts to rapidly develop alternate and renew-operational in mid-1987. The DRA found that Edison able energy resources. The prices Edison projected to had prudently constructed the project, and that the full pay under these 17 contracts were at or below avoided amount should be collected in customer rates. A deci cost over the life of the contracts. Hearings on the 17 sion by the commission is expected in May 1989.

contracts have not been scheduled as of this date but will be heard in later proceedings.

21 Devers-Palo Verde No. 2 Tansmission Line The year 2007. The plan would impose unreasonably high CPUC has conditionally approved Edison's request to costs on Edison customers by requiring that Edison build the Devers-Palo Verde No. 2 transmission line.

install uneconomic and unproven new technology on Scheduled for operation in June 1993, this transmission its oil-and gas-fired generating plants. Edison has line would increase access to Southwest power markets joined with other businesses in the Los Angeles Basin for Edison and 11 other California utilities. The project in presenting an alternative plan that would achieve must be re-evaluated in the context of the proposed the compliance goals in 10 years instead of 20, and at Edison-San Diego Gas and Electric (SDG&E) merger one-third the cost to consumers and the economy com before construction can begin.

pared with the district's plan. Edison will continue to participate in the district's public-review process in the Federal Energy Regulatory Commission Proposal In hope of saving Edison customers unnecessary costs, mid-1987, the chairman of the Federal Energy Regula-preventing an adverse economic impact on the area and tory Commission (FERC) announced that the commis-working to comply with federal air-quality standards.

sion would consider changes to its rules implementing the Federal Power Act and the Public Utility Regula-Merger Filing In mid-December, Edison and SDG&E tory Policies Act. These changes would essentially filed joint applications with the CPUC and the FERC, deregulate new sources of nonutility electrical genera-seeking approval of the merger of SDG&E into Edison.

tion by creating a new special class of generation called Hearings are expected to begin in mid-1989. Edison and "independent power producers."

SDG&E will be seeking regulatory approval for the Edison opposes many of these proposed changes that merger from other agencies in 1989. As is typically the are inconsistent with the Federal Power Act, because case in these matters, there have been a number of they discriminate against utility customers. In addi-intervenors in both the state and federal proceedings.

tion, they would reduce the long-term reliability of the nation's electricity supply. The issue is still pending before the FERC and at year-end, the U.S. House of Legislative Review Representatives and U.S. Senate were reviewing the matter.

Price-Anderson Nuclear Liability Act In August, the President signed a biltextending the Price-Anderson Seasonal Rate Effects Edison petitioned the CPUC to Act for 15 years. Although the act increases insurance modify an earlier decision relating to a new seasonal costs for nuclear utilities, it provides a tenfold increase rate structure. The rate structure was intended to en-in financial protection to the public in the unlikely courage conservation and load management by creating event of a major accident at a nuclear power plant in higher rates during summer and lower rates the rest the United States. At the same time, the act's $7.6-bil of the year for many commercial, industrial and lion level of potential compensation that is available to agricultural customers.

the public serves to limit financial liability for opera However, the new seasonal rate structure had the tors of nuclear power plants.

effect of distorting the company's quarterly earnings Under the extension, owners of the 109 operating patterns, although it did not affect Edison's overall nuclear reactors in the United States must continue to 1988 earnings. SCEcorp's 1988 third-quarter summer-carry the maximum available private insurance cover time earnings, for example, were 85% higher than age for an accident at one of their own reactors. This earnings in the third quarter of 1987, while earnings in maximum coverage was increased to $200 million per the first, second and fourth quarters were significantly reactor at the end of 1988. If damages were to exceed lower. Without the seasonal charge, third-quarter earn-the private insurance coverage, Price-Anderson would ings would have increased only 3%. The CPUC will provide additional funds by levying assessments of up review Edison's request to modify the rate structure in to $63 million per reactor against all nuclear plant 1989.

owners. Under the new law, the per-reactor assess ments would be limited to $10 million annually until Clean-Air Plan The South Coast Air Quality Man-the $63-million limit is met.

agement District, which includes the counties of Los Angeles, Orange, Riverside and San Bernardino, has presented a plan to bring the Los Angeles Basin into compliance with federal air-quality standards by the

22 A Review of Nonutility Subsidiaries: The Mission Group The Mission Group was formed in 1987 to manage the

-ummmmmmmmme corporation's four principal nonutility subsidiaries, Mission Energy Company which are primarily engaged in energy-related busi nesses. Since then, these subsidiaries have continued Mission Energy is a national leader in the ownership, to pursue business opportunities and now operate in development and operation of major cogeneration proj eight states.

ects. It provides management of engineering and con At year-end, SCEcorp's equity investment in The struction, operation and maintenance, and assistance Mission Group totaled $505.4 million. Revenues for in obtaining permitting and financing for power facili 1988 were $333.1 million, producing a net income of ties. Mission Energy concentrates on joint-venture

$77.8 million, or 35 cents per share. This compares projects with low technological risk, sound economics, with 1987 revenues of $107.6 million, which produced a and well-established partners.

net income of $41.3 million, or 19 cents per share.

At the end of 1988, Mission Energy jointly owned Mission Group earnings represent 10.0% of SCEcorp's and operated nine projects with 1,300 megawatts (MW) 1988 earnings, compared with 5.6% the previous year.

of capacity in three states. Five of those projects, with a total of 830 MW of capacity, began operation during 1988. The three largest are the 385-MW Watson cogener ation plant in Carson, California, the 300-MW Syca more cogeneration plant and the 300-MW Kern River Nonutility Earnings Per Share cogeneration plant, both near Bakersfield, California.

Another four projects with 330 MW of capacity are Cents per share under construction.

35 Mission Energy is the largest of The Mission Group Mission Power subsidiaries. Revenues for 1988 were $88.2 million, Engineering Mission First producing a net income of $38.6 million, or 18 cents Financial per share. This compares with 1987 revenues of $38.2 million, producing a net income of $16.4 million, or 7.5 ission.

cents per share. At year-end, equity investment in the company totaled $265.7 million.

Energy 1

Mission 1987 1988

23 During 1988, Mission Land completed several major Mission First Financial Company transactions involving the sale of industrial and resi dential properties. It became a partner with the Lusk Mission First Financial provides energy-related venture Company in the California Commerce Center, the capital and invests in leveraged-leasing transactions, second largest master-planned industrial park in project financing, and high-quality securities. This sub-Southern California. Mission Land maintained an aver sidiary holds financial interests in Beaver Valley age vacancy rate of only 3% in its industrial parks Nuclear Unit 2 near Pittsburgh, Pennsylvania, and a throughout the year, a major accomplishment in a paper mill and cogeneration facility developed through highly competitive market.

a joint venture with Minnesota Power Company and Revenues for 1988 were $48.7 million, producing a Pentair, Inc., a Midwestern paper company.

net income of $20.2 million, or 9 cents per share. This This subsidiary also has developed a customized compares with 1987 revenues of $33.2 million, produc cash-management program to provide attractive yields ing a net income of $17.4 million, or 8 cents per share.

on funds held pending longer-term investments. In At year-end, the equity investment in this company addition, the company has an equity investment in totaled $131.5 million.

Metricom, a California-based electronics firm that is developing and marketing a solid-state electric meter and customer communications system.

Mission Power Engineering Company No new business was consummated in 1988 because of low-lease volume and aggressive pricing by com-Mission Power Engineering performs consulting, engi petitors, but the company is well positioned to take neering and construction in the energy field, including advantage of investment opportunities in 1989.

electric generating units, transmission lines, and sub In 1988, Mission First Financial produced substan-stations. Since its formation in 1984, the company has tially higher financial contributions than 1987, because been awarded contracts with a total value of about it was the first full year of operation. Revenues for 1988

$400 million. In 1988, Mission Power Engineering con were $21.7 million, producing a net income of $13.7 tinued to grow as it performed work on 11 new power million, or 6 cents per share. This compares with 1987 plants. For its achievements in 1987, the company was revenues of $10.8 million, producing a net income of ranked 36th out of the top 400 national design and con

$6.8 million, or 3 cents per share. At year-end, equity struction firms, according to a 1988 trade publication.

investment in the company totaled $90.5 million.

Revenues for 1988 were $174.4 million, producing a net income of $7.6 million, or 3 cents per share. This compares with 1987 revenues of $25.8 million that pro Mission Land Company duced a net income of $1.7 million, or about I cent per share. At year-end, equity investment in this subsidiary Mission Land develops industrial parks with medium-totaled $14.1 million.

sized warehouses and distribution buildings. The firm owns and manages six industrial parks in Southern California and Arizona, which contain more than 2 million square feet of leasable space. In addition, Mis sion Land has entered into joint ventures in California, Illinois and Indiana.

24 Financial Review The corporation reported a record financial perfor-The Mission Group earnings per share for 1988 were mance in 1988 and provided shareholders with a com-35 cents, or 10.0% of SCEcorp's total earnings, com petitive return on their investment.

pared with 19 cents per share, or 5.6%, for 1987. Non utility earnings increased 84% above those in 1987, with earnings growing in each nonutility business.

SCEcorp Higher earnings resulted from Mission Energy bringing 830 megawatts of new cogeneration and geothermal Record Net Income and Revenues SCEcorp's earn-projects into operation, the sale of industrial and resi ings rose 3.2% to a record $761.8 million in 1988, dential property by Mission Land, increased construc compared with $738.5 million in 1987, and revenue tion activity by Mission Power Engineering, and a full grew to another record of $6.3 billion, compared with year of operation for Mission First Financial.

$5.6 billion in 1987.

SCEcorp's earnings per share for 1988 increased 10 Dividend Increase The board of directors in June cents to a record $3.49 from $3.39 in 1987. This increased the common stock dividend for the 13th time increase is particularly noteworthy because it was in 12 years. The new annual dividend rate of $2.48 per achieved despite a reduction by the California Public share is 4.2% higher than the previous year's $2.38.

Utilities Commission (CPUC) in Edison's authorized The current dividend provided a 7.7% yield, based on a rate of return on common equity from 13.9% to year-end market price of $32/8 per share.

12.75%. The reduction, by itself, would have lowered earnings 33 cents per share, but the company overcame 7btal Shareholder Return The return to SCEcorp this through tight controls on operating expenses, common shareholders from stock price appreciation approval by the CPUC of expense levels that more and dividends was 14.1% in 1988. The annual return accurately reflect Edison's costs, a CPUC award for has averaged more than 19% for the past 5-year and favorable coal-plant operating performance, and higher 10-year periods, exceeding the Dow Jones industrial earnings from The Mission Group of nonutility sub-and utility averages, as well as the S&P 500 index.

sidiaries. In December, the CPUC increased the autho rized regulatory return on common equity for 1989 to 13.0% from 12.75% because of higher interest rates facing the utility.

Stock Price Range (SCEcorp)

Net Income (SCEcorp)

In dollars In millions of dollars 38%

9 2

I37 702 69 342 617 Year-end 521 closing price 27%/

21%

I 29 Vs 124/

8 25 V4 I %

1 22 Vs8 17 3/6 171/s 83 84 85 86 87 88 83 84 85 86 87 88

• Reflects restatement for nuclear plant disallowance

25 years. The utility raised $663 million in U.S. capital Southern California Edison Company markets during the year, primarily to finance the redemption of more costly debt, repay maturing bonds Financial and Regulatory Returns The CPUC autho-and meet sinking-fund requirements.

rizes Edison to earn a return on its regulatory rate base, which is the value of assets used to serve customers.

Credit-Line Restructuring Edison lowered the cost This authorized regulatory return is designed to allow of its credit lines in July by arranging for a $300-mil the utility to recover its cost of capital, which is lion line of credit through a syndicate of foreign banks.

composed of long-term debt, preferred stock and the This was the lowest-cost European credit line negoti authorized regulatory return on common equity.

ated by any U.S. utility in 1988. Edison also renegoti In 1988, Edison's authorized regulatory return on rate ated the cost and structure of its existing $1.6 billion base was 10.75%, and its authorized regulatory return in credit lines.

on common equity was 12.75%. The company's By negotiating these credit arrangements, Edison recorded regulatory return on rate base was 10.6%,

will save its customers $600,000 annually while main and its recorded regulatory return on common equity taining $1.9 billion in credit lines with 40 domestic and was 12.2%.

foreign banks to meet a variety of financial obligations.

However, SCEcorp's recorded financial return on common equity, as shown in financial reports, is based Credit Watch Edison's early warning credit-watch on the holding company's total operations. Several system, the first of its kind in the utility industry, con items can cause it to differ from Edison's authorized tinued to reduce the number of bad-debt write-offs by regulatory return on common equity. In 1988, these early identification of high-risk commercial and factors included earnings from nonutility subsidiaries; industrial customers in danger of business failure. The federal investment tax credits; and CPUC-established system saves money for customers by ensuring that awards for high output from the utility's two coal-fired Edison's revenues are protected through deposits of power plants. In 1988, the corporation's recorded finan-cash, posting of surety bonds or more frequent pay cial return on common equity was 15.3%, compared ments by these customers.

with 15.5% in 1987.

In 1988, the early warning system reduced potential bad debt by $860,000. It has avoided potential losses of Corporate Financing In 1988, Edison internally gen-

$8 million since it began seven years ago.

erated 100% of the funds it needed to meet capital requirements, its highest percentage in more than 30 5-Year Annual-Return Comparison Internal Generation of Funds (Utility)

(Stock price appreciation and dividends)

In percent In percent 100 19.5 17.0 15.8 77 15.1 74 77

1.

67 65 index stock 8

S&P 500 DJIA DUA SCEcorp 83 84 85 86 87 88

26 Responsibility for Financial Reporting Report of Independent Public Accountants The management of SCEcorp (the "corporation") is responsible To the Shareholders and the Board of Directors, SCEcorp:

for preparing the accompanying consolidated financial state ments. The statements were prepared in accordance with gen-We have audited the accompanying consolidated balance sheets erally accepted accounting principles and include amounts and statements of capitalization of SCEcorp (a California corpo based on management's estimates and judgments. Management ration hereinafter referred to as the "corporation") and its sub also is responsible for the accuracy of all other information in sidiaries as of December 31, 1988, and 1987, and the related con the annual report, including its consistency with the financial solidated statements of income, retained earnings and cash statements.

flows for each of the three years in the period ended December The corporation's consolidated financial statements have 31, 1988. These financial statements are the responsibility of been audited in accordance with generally accepted auditing the corporation's management. Our responsibility is to express standards by Arthur Andersen & Co., a firm of independent an opinion on these financial statements based on our audits.

public accountants, which has expressed its opinion regarding We conducted our audits in accordance with generally ac the fairness of these consolidated financial statements in the cepted auditing standards. Those standards require that we plan accompanying report.

and perform the audit to obtain reasonable assurance about The management of the corporation and its subsidiaries whether the financial statements are free of material misstate maintains systems of internal control that provide reasonable ment. An audit includes examining, on a test basis, evidence assurance that assets are safeguarded, transactions are properly supporting the amounts and disclosures in the financial state executed in accordance with management's authorization, and ments. An audit also includes assessing the accounting princi accounting records may be relied upon for the preparation of fi-ples used and significant estimates made by management, as nancial statements and other financial information. The design well as evaluating the overall financial statement presentation.

of internal control systems involves management's judgment We believe that our audits provide a reasonable basis for our concerning the relative cost and expected benefits of specific opinion.

control measures. These systems are augmented by internal In our opinion, the financial statements referred to above audit programs through which the adequacy and effectiveness present fairly, in all material respects, the financial position of of internal controls, policies and procedures are evaluated and the corporation and its subsidiaries as of December 31, 1988, reported to management. In addition, Arthur Andersen & Co.,

and 1987, and the results of their operations and their cash as part of its audit of the corporation's consolidated financial flows for each of the three years in the period ended December statements, evaluates the internal control structure to deter-31, 1988, in conformity with generally accepted accounting mine the nature, timing and extent of its audit tests. Manage-principles.

ment believes the corporation's and its subsidiaries' systems of As discussed in Notes 1 and 2 to the accompanying financial internal control are adequate to accomplish the objectives dis-statements, the corporation has given retroactive effect to its cussed herein.

restructuring, which took place on July 1, 1988, and to the The Audit Committee of the Board of Directors, composed change in the method of accounting for its majority-owned sub entirely of nonemployee directors, meets periodically with the sidiaries. Also, as discussed in Notes 2 and 3 to the financial independent public accountants, internal auditors and manage-statements, the corporation changed its method of accounting ment. This committee, which recommends to the Board of for unbilled revenues as of January 1, 1987, and, effective Janu Directors the annual appointment of the independent public ary 1, 1988, retroactively changed its method of accounting for accountants, also considers the audit scope and nature of other disallowances of plant costs.

services provided, discusses the adequacy of internal controls, reviews financial reporting issues and is advised of manage ment's actions regarding these matters. Both the independent

-k,

public accountants and internal auditors have unrestricted access to the Audit Committee.

ARTHUR ANDERSEN & CO.

Management also is responsible for fostering a climate in Los Angeles, California which the corporation's and its subsidiaries' affairs are con-February 6,1989 ducted in accordance with the highest standards of personal and corporate conduct. This high ethical standard is reflected in the corporation's Standards of Conduct, which are distributed peri odically to all employees of the corporation and its subsidi aries. The Standards of Conduct address, among other things, complying with all laws and regulations applicable to the cor poration's and its subsidiaries' business, avoiding potential conflicts of interests, and maintaining the confidentiality of proprietary information. The management of the corporation and its subsidiaries maintains programs to assess compliance with these standards.

John E. Bryson Howard P. Allen Executive Vice President Chairman of the Board, and Chief Financial Officer President and Chief Executive Officer February 6, 1989

27 Consolidated Statements of Income SCEcorp and Subsidiaries in thousands, except per share amounts Year ended December 31, 1988 1987 1986 Electric revenue

$5,931,682

$5,501,057

$5,316,325 Investment and other 321,037 100,869 51,762

'btal operating revenue 6,252,719 5,601,926 5,368,087 Fuel 972,973 1,091,973 865,376 Purchased power 1,235,110 780,599 775,814 Provisions for regulatory adjustment clauses-net 240,681 225,108 225,539 Other operating expenses 1,068,886 885,849 846,652 Maintenance 375,444 361,484 353,170 Depreciation and decommissioning 646,569 551,348 507,503 Income taxes 446,395 578,228 702,442 Property and other taxes 170,293 162,546 144,435 Ibtal operating expenses 5,156,351 4,637,135 4,420,931 Operating income 1,096,368 964,791 947,156 Nuclear plant disallowance (Note 3)

(148,963)

(269,883)

Income taxes-nuclear plant disallowance 78,616 61,665 Provision for phase-in plan 170,856 137,832 88,672 Allowance for equity funds used during construction 18,125 73,406 105,744 Interest income 121,708 93,213 110,971 Taxes on nonoperating income (79,547)

(80,490)

(35,654)

Other-net (162) 20,144 25,320

'Ibtal other income-net 230,980 173,758 86,835 Income before interest and other expenses 1,327,348 1,138,549 1,033,991 Interest on long-term debt and amortization 439,842 404,767 433,103 Other interest expense 108,498 82,059 83,274 Allowance for borrowed funds used during construction (11,883)

(42,926)

(29,478)

Capitalized interest (17,636)

(25,933)

(28,319)

Preferred and preference stock dividend requirements of subsidiary 46,696 50,095 54,684

'lbtal interest and other expenses-net 565,517 468,062 513,264 Income before cumulative effect of a change in accounting principle 761,831 670,487 520,727 Cumulative effect on prior years (to December 31, 1986) of accruing unbilled revenue-net of income taxes of $58,752,000 (Note 2) 68,044 Net income

$ 761,831

$ 738,531

$ 520,727 Weighted-average shares of common stock outstanding (000) 218,332 218,014 217,780 Earnings per share (Note 2):

Before cumulative effect of a change in accounting principle

$3.49

$3.08

$2.39 Cumulative effect of a change in accounting principle

.31

'Total earnings per share

$3.49

$3.39

$2.39 The accompanying notes are an integral part of these financial statements.

28 Consolidated Balance Sheets SCEcorp and Subsidiaries In thousands December 31, 1988 1987 ASSETS Utility plant, at original cost (Note 3)

$15,687,850

$14,465,691 Less-Accumulated provision for depreciation and decommissioning (Note 3) 4,529,938 3,993,468 11,157,912 10,472,223 Construction work in progress 676,175 1,232,990 Nuclear fuel, at amortized cost 475,764 547,786 12,309,851 12,252,999 Less-Property-related accumulated deferred income taxes 914,532 840,143 Total utility plant 11,395,319 11,412,856 Nonutility property-less accumulated provision for depreciation of $22,570,000 and $130,681,000 at respective dates 107,851 105,850 Nuclear decommissioning trusts, at cost 157,086 Investments in partnerships 480,458 286,006 Investments in leveraged leases 148,027 128,858 Other investments 31,978 26,483 Tbtal other property and investments 925,400 547,197 Cash and equivalents 228,367 163,426 Receivables, including unbilled revenue, less allowances of $13,187,000 and

$15,355,000 for uncollectible accounts at respective dates 700,343 625,789 Fuel stock 125,303 118,540 Materials and supplies, at average cost 96,767 105,577 Regulatory balancing accounts-net 395,026 621,635 Prepayments and other current assets 113,556 80,474 Total current assets 1,659,362 1,715,441 Unamortized debt issuance and reacquisition expense 296,094 301,741 Rate phase-in plan 435,941 239,760 Other deferred charges 154,160 133,669 Ibtal deferred charges 886,195 675,170 Ibtal assets

$14,866,276

$14,350,664 The accompanying notes are an integral part of these financial statements.

29 SCEcorp and Subsidiaries In thousands December 31, 1988 1987 CAPITALIZATION AND LIABILITIES Common shareholders' equity (Note 3)

$ 5,064,848

$ 4,833,734 Preferred and preference stock of subsidiary:

Not subject to mandatory redemption 358,755 361,238 Subject to mandatory redemption 239,037 277,538 Long-term debt of subsidiaries 5,421,747 5,150,883 Ibtal capitalization (see accompanying statements) 11,084,387 10,623,393 Other long-term liabilities 136,810 113,348 Current portion of subsidiaries' long-term debt and redeemable subsidiary preferred and preference stock 165,975 101,555 Short-term debt 658,418 672,501 Accounts payable 464,817 458,048 Accrued taxes 435,030 471,008 Accrued interest 117,477 106,666 Dividends payable 139,187 133,281 Accumulated deferred income taxes-net 166,754 236,662 Deferred unbilled revenue and other 304,470 354,184 Ibtal current liabilities 2,452,128 2,533,905 Accumulated deferred investment tax credits 545,728 555,676 Accumulated deferred income taxes-net 398,827 248,690 Customer advances and other deferred credits 248,396 275,652 Tbtal deferred credits 1,192,951 1,080,018 Commitments and contingencies (Notes 1, 3, 8, 9, and 10)

'Ibtal capitalization and liabilities

$14,866,276

$14,350,664 The accompanying notes are an integral part of these financial statements.

30 Consolidated Statements of Cash Flows SCEcorp and Subsidiaries In thousands Year ended December 31, 1988 1987 1986 Cash flows from operating activities:

Net income

$ 761,831

$ 738,531 520,727 Adjustments for noncash items:

Depreciation and decommissioning 646,569 551,348 507,503 Amortization 156,732 157,304 129,800 Nuclear plant disallowance-net 70,347 208,218 Allowance for funds used during construction (30,008)

(116,332)

(135,222)

Rate phase-in plan (196,181)

(149,110)

(90,650)

Regulatory deferrals-energy exploration projects 61,637 21,748 Deferred income taxes and investment tax credits 176,614 198,417 281,863 Equity in income from partnerships (87,070)

(51,739)

(21,319)

Income from leveraged leases (17,056)

(10,289)

Other-net (20,420) 22,443 8,390 Changes in working capital components:

Receivables (74,554)

(241,227)

(41,445)

Regulatory balancing accounts 226,609 (31,548) 17,120 Fuel stock, materials and supplies 2,047 133,518 5,584 Prepayments and other current assets (12,689)

(3,713) 31,860 Accrued interest and taxes (63,314) 8,607 222,418 Accounts payable and other current liabilities (43,292) 267,883 38,784 Net cash provided by operating activities 1,425,818 1,606,077 1,705,379 Cash flows from financing activities:

Issuances of long-term debt 631,343 374,787 1,472,532 Repayment of long-term debt (350,383)

(325,967)

(1,595,936)

Redemption of subsidiary preferred and preference stock (48,775)

(17,712)

(200,525)

Nuclear fuel financing (18,569)

(56,191)

(46,518)

Short-term debt financings-net 51,917 182,461 231,750 Dividends paid (530,409)

(507,808)

(484,320)

Net cash used by financing activities (264,876)

(350,430)

(623,017)

Cash flows from investing activities:

Construction expenditures (834,630)

(1,034,348)

(1,158,243)

Contributions to decommissioning funds (157,086)

Investments in leveraged leases-net (200)

(102,865)

Investments in partnerships (168,332)

(164,037)

(19,884)

Distributions from partnerships 55,998 37,838 Proceeds from sale of assets 27,637 23,900 Other-net (19,388)

(18,217) 11,289 Net cash used by investing activities (1,096,001)

(1,257,729)

(1,166,838)

Increase (decrease) in cash and equivalents 64,941 (2,082)

(84,476)

Cash and equivalents, beginning of year 163,426 165,508 249,984 Cash and equivalents, end of year

$ 228,367

$ 163,426

$ 165,508 Noncash investing and financing activities:

Conversion of subsidiary 5.20% convertible preference stock

$2,108 414

$ 845 Conversion of subordinated debentures 2,973 3,136 2,849 Conversion of partnership notes to equity 18,670 The accompanying notes are an integral part of these financial statements.

31, Consolidated Statements of Capitalization SCEcorp and Subsidiaries Notes to consolidated statements of capitalization are on Page 32.

In thousands December 31, 1988 1987 Common shareholders' equity:

Common stock-no par value-400,000,000 shares authorized; 218,461,932 and 218,134,481 outstanding at respective dates (b)

$ 2,463,762

$ 2,457,819 Retained earnings (See accompanying statements) 2,601,086 2,375,915 Total 5,064,848 4,833,734 Preferred and preference stock of subsidiary:

December 31,1988 Not subject to mandatory Shares Redemption redemption (c) (d):

Series Outstanding Price Cumulative preferred:

$25 par value:

4.08%

1,000,000 25.50 25,000 25,000 4.24 1,200,000 25.80 30,000 30,000 4.32 1,653,429 28.75 41,336 41,336 4.78 1,296,769 25.80 32,419 32,419 5.80 2,200,000 25.25 55,000 55,000

$100 par value:

7.58 750,000 101.00 75,000 75,000 8.70 500,000 104.00 50,000 50,000 8.96 500,000 104.00 50,000 50,000 Preference:

$25 par value:

5.20 convertible 2,483 Total 358,755 361,238 Subject to mandatory redemption (c) (e):

Cumulative preferred:

$100 par value:

7.32'5%

547,381

$103.54 54,738 60,000 7.80 483,495 104.62 48,350 51,000 8.54 615,000 105.65 61,500 63,750 8.70A 433,124 110.00 43,312 45,937 12.31 430,000 105.83 43,000 50,000 Preference:

$25 par value:

7.375 28,864 Preferred and preference stock to be redeemed within one year (11,863)

(22,0131 2tal 39,037 277,538 Long-term debt of subsidiaries:

Maturity Interest rates First and refunding mortgage bonds (e) (f):

1989 through 1992 43/%

to 8 475,000 672,000 1993 through 1997 6/g% to 9%

1,125,000 1,000,000 1998 through 2002 84% to 9%

650,000 500,000 2003 through 2007 9%% to 9.95%

278,750 284,000 2008 through 2020 8%% to 13%

1,267,476 1,084,413 Pollution control bonds (e) {g):

1999 through 2015 6 % to 103/4% and variable 947,730 897,730 Funds held by trustees (11,119)

(10,472)

Debentures and notes (dJfe)(h).

1990 through 1999 8.25% to 11% and variable 441,698 438,528 Nuclear fuel indebtedness (e) (i) 424,168 379,029 Long-term debt due within one year (e)

(154,112)

(79,542)

Unamortized debt discount-net (22,844)

(14,803) tal 5,421,747 5,150,883 Stal capitalization

$11,084,387

$10,623,393 The accompanying notes are an integral part of these financial statements.

32 Notes to Consolidated Statements of Capitalization SCEcorp and Subsidiaries (a) Effective July 1, 1988, SCEcorp became the parent holding (g) Edison has issued first and refunding mortgage bonds and company of Southern California Edison Company (Edison) other indebtedness to governmental agencies in exchange for and The Mission Group. Holders of Edison common stock be-proceeds from pollution control bonds. These proceeds have came holders of SCEcorp common stock on a share-for-share been deposited with trustees and are used to finance construc basis. The California Public Utilities Commission's (CPUC) tion of pollution control facilities. Certain pollution control decision authorizing the establishment of a holding company bonds may be redeemed at the discretion of the bondholders.

requires Edison to maintain a capital structure consistent Edison has made arrangements with security dealers for the with the CPUC's most recently authorized capital structure.

remarketing or purchase of the pollution control bonds in such cases. Edison arranged lines of credit for $600 million at (b) At December 31, 1988, 1,490,000 shares of common stock December 31, 1988, to refinance these bonds, should remar were reserved for issuance under the 1987 Long-Term Incentive keting be unsuccessful.

Compensation Plan.

(h) One of SCEcorp's unregulated subsidiaries has debt out (c) In connection with the formation of SCEcorp, each out-standing in the amount of $99.0 million at December 31, 1988, standing share of Edison's original preferred stock was con-and $107.0 million at December 31, 1987, supported by lines verted into il shares of SCEcorp's common stock. Edison's of credit aggregating $280.0 million at December 31, 1988, and authorized shares of $25 cumulative preferred, $100 cumula-

$235.0 million at December 31, 1987.

tive preferred, $25 preference and $100 preference stock are 24,000,000, 12,000,000, 10,000,000, and 2,000,000 shares, re-(i) Nuclear fuel financing is comprised of:

spectively. All series of cumulative preferred and preference stock are redeemable. The 430,000 shares of $100 cumulative December 31, preferred stock, 12.31% Series, are not subject to redemption In thousands 1988 1987 until May 1, 1992. The various series of $100 cumulative pre-Foreign-currency-denominated notes1 )

$ 62,950

$ 66,000 ferred stock are subject to certain restrictions on redemption Commercial paper12 1 338,777 288,296 for refunding purposes.

Spent nuclear fuel obligation13 )

22,441 24,733 424,168 379,029 (d) On May 31, 1988, Edison either redeemed or converted its Less: Current maturities 65,494 2,292 outstanding shares of 5.20% convertible preference stock at Total

$358,674

$376,737

$25 per share and converted all of the outstanding 12 /2% con-(1) Edison issued foreign-currency-denominated notes totaling vertible debentures at the conversion price of $16.1875.

$60.4 million in September 1987 to finance nuclear fuel. The notes mature 24 months from the date of issuance. Under a currency-exchange agreement, a securities firm assumes all (e) The table below presents the mandatory redemption re-foreign-currency translation gains and losses. Weighted-average quirements for preferred stock, long-term debt maturities and interest rates on the notes are based on the average daily sinking fund requirements for the five years subsequent to commercial paper rate and were 7.46% for 1988 and 709% for 1987. Foreign-currency translation gains or losses have been December 31, 1988:

deferred and are included in the translated value of the liability.

Year ended December 31, (2) A portion of the commercial paper used to finance nuclear fuel has been classified as long-term debt under refinancing agree In thousands 1989 1990 1991 1992 1993 ments with commercial banks. The long-term portion finances Preferred stock nuclear fuel not scheduled for consumption within 12 months redemption of the balance sheet dates.

requirements $ 11,863 $ 11,738 $ 11,738 $ 11,738 $ 12,338 (3) Pursuant to the Nuclear Waste Policy Act of 1982, Edison has Long-term debt signed a contract with the U.S. Department of Energy for dis maturities and posal of spent nuclear fuel from the San Onofre Nuclear sinking fund Generating Station. The interest rate is fixed at 10.57%.

requirements 154,112 212,905 204,737 222,157 242,535 Total

$165,975 $224,643 $216,475 $233,895 $254,873 (f) Substantially all utility properties are subject to the liens of trust indentures, except for nuclear fuel and fuel oil inven tories, which are financed with short-term debt in conformity with CPUC ratemaking procedures.

33 Consolidated Statements of Retained Earnings SCEcorp and Subsidiaries In thousands, except per share amounts Year ended December 31, 1988 1987 1986 Balance at beginning of year

$2,375,915

$2,150,751

$2,128,646 Net income 761,831 738,531 520,727(a)

Dividends declared on common stock (536,660)

(513,367)

(489,909)

Loss on reacquired capital stock and other (8,713)

Balance at end of year

$2,601,086(b)

$2,375,915

$2,150,751 Dividends declared per common share

$2.45/2

$2.35 2

$2.25 (a) Restated from $713,933,000 to $520,727,000 to reflect the after-tax write-off of nuclear plant disallowances totaling $193,206,000. (See Note 3 of "Notes to Consolidated Financial Statements").

(b) Includes appropriated retained earnings related to certain federally licensed hydroelectric projects of $4,468,000 at December 31. 1988.

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

Notes to Consolidated Financial Statements SCEcorp and Subsidiaries Note 1. Corporate Restructuring and Proposed Merger all subsidiaries not subject to rate regulation. SCEcorp uses the equity method of accounting to report invest On July 1, 1988, SCEcorp acquired the outstanding ments of 50% or less in partnerships primarily engaged common stock of Southern California Edison Company in cogeneration, geothermal and other energy-related (Edison) under a merger agreement approved by share-facilities which are exempt from utility regulation. All holders on April 21, 1988. Edison shareholders became significant intercompany transactions have been elimi holders of SCEcorp's common stock on a share-for-nated, except intercompany profits from energy sales to share basis. Each share of Edison's outstanding original Edison by unregulated, energy-producing affiliates, preferred stock was converted into 2.1 shares of which are allowed in rates.

SCEcorp's common stock. Edison's remaining preferred stock and debt securities were not exchanged or trans-Accounting Principles Edison is regulated by the ferred to SCEcorp. Edison's equity investment in non-CPUC and the FERC. The accompanying consolidated utility subsidiaries was transferred to SCEcorp at book financial statements reflect the ratemaking policies of value on July 1, 1988.

these commissions, as applied to Edison, in conformity On November 30, 1988, SCEcorp, Edison, and San with generally accepted accounting principles applicable Diego Gas & Electric Company (SDG&E) executed an to rate-regulated enterprises.

agreement to merge SDG&E into Edison. Under the terms of the merger agreement, SCEcorp will exchange Utility Plant The costs of plant additions, including 1.3 shares of its newly issued common stock for each replacements and betterments, are capitalized and in SDG&E common share. SDG&E preferred and prefer-cluded in utility plant. Capitalized costs include direct ence stock will be exchanged for SCEcorp preferred and material and labor, construction overhead, and an preference stock with similar provisions, except that allowance for debt and equity funds used to finance dividends on each series will be increased between construction. The cost of property that is replaced or 2.5% and 20%. The merger is subject to approval by retired-and related removal costs, less salvage-is the shareholders of SCEcorp, Edison, and SDG&E, as charged to the accumulated provision for depreciation.

well as regulatory agencies, including the California Accumulated deferred income taxes related to utility Public Utilities Commission (CPUC) and the Federal plant are presented as a deduction from utility plant to Energy Regulatory Commission (FERC).

conform with ratemaking procedures used to determine rate base.

Note 2. Summary of Significant Accounting Policies Construction Financing Costs Allowance for funds Consolidation Policy The consolidated financial used during construction (AFUDC) represents the cost statements include the accounts of SCEcorp and its of debt and equity funds that finance construction of subsidiaries. The principal subsidiaries are Edison and utility plant. Capitalized AFUDC is reported in the The Mission Group, which is the parent company for consolidated statements of income as a reduction of in-

34 terest charges for the debt component and as other in-RD&D costs are reflected in the following table:

come for the equity component. AFUDC and plant Year ended December 31, construction costs are recovered when completed proj In thousands 1988 1987 1986 ects are placed into commercial operation, and the re covery of related depreciation is authorized through RD&D costs charged to expense

$43,414 $42,893 $47,122 customer rates.

RD&D costs deferred/capitalized 17,455 14,855 3,888 Before 1987, the cost of debt included in the AFUDC Total RD&D costs

$60,869 $57,748 $51,010 calculation was reduced by the tax benefit realized from deducting the related interest expense from tax-Commencing in 1988, a balancing account has been able income. As a result of changes in the treatment of established for RD&D costs charged to expense. Under interest expense for income tax purposes, pretax inter-this mechanism, Edison is required to refund to est expense was used to compute the debt component ratepayers any authorized but unspent RD&D funds at of AFUDC beginning in 1987. The AFUDC rate, which the end of the three-year rate-case cycle ending reflects semiannual compounding, was 10.76% for 1988 December 31, 1990.

and 11.57% for 1987 under the pretax method. The rate was 10.53% for 1986 under the previous net-of-tax Unamortized Debt Issuance and Reacquisition method.

Expense Debt premium, discount, and issuance Interest on loans that finance partnership construc-expenses are amortized over the lives of the related tion projects is capitalized until the projects are issuances. The expense of reacquiring bonds that operational. Such capitalized interest is included in are redeemed without refunding are amortized over investments in partnerships in the consolidated bal-the period the debt would have remained outstand ance sheets.

ing. The reacquisition expenses are amortized over the lives of the new debt issues when debt is reac Depreciation and Decommissioning Depreciation of quired with refunding.

utility plant, except nuclear fuel, is computed on a straight-line, remaining-life basis. Depreciation of non-Change in Accounting Principle Prior to 1987, elec utility properties is computed on a straight-line basis tric operating revenue was recorded based on customer over their estimated useful lives.

billings. On January 1, 1987, Edison began accruing esti The estimated cost of decommissioning Edison's mated revenue for electricity that had been delivered to nuclear generating facilities is $713 million and is re-customers through the end of each month but had not covered in rates through annual allowances charged to yet been billed. This accounting change conforms to depreciation expense. Retail rates for 1988, and certain the Tax Reform Act of 1986, which requires utilities to prior years, included annual decommissioning revenue include unbilled revenue in taxable income commenc requirements, which have been deposited in trust funds ing in 1987 and results in a better matching of revenue until decommissioning begins. Trust fund contribu-and expense.

tions are invested in high-grade securities. Approxi-Had the new accounting method been in effect for mately 80% of the trust fund contributions qualify 1986, net income would have been $2.7 million less as tax deductions.

than the amount reported, resulting in a one-cent decline in earnings per share.

Nuclear Fuel The cost of nuclear fuel, including its disposal, is amortized on the basis of generation and is Regulatory Balancing Accounts charged to fuel expense. In accordance with rate making procedures adopted by the CPUC, nuclear fuel Operating Revenue:

The CPUC has authorized an financing costs are capitalized until the fuel is placed electric revenue adjustment mechanism (ERAM) into production.

balancing account to minimize the effect on earnings of retail sales fluctuations. Differences between autho Research, Development, and Demonstration (RD&D) rized and recorded base rate revenue are accumulated RD&D costs not related to a specific project are ex-in the account until they are refunded to or recovered pensed in the year incurred. RD&D costs related to from utility customers through CPUC-authorized rate specific construction projects are capitalized until it adjustments.

is determined whether they will result in construction of plant. If construction does not result, the costs are charged to expense.

35 Energy Costs:

An energy cost adjustment clause Palo Verde Rate Phase-In Plan: Palo Verde Units (ECAC) balancing account adjusts results of operations 1, 2, and 3 have been in commercial operation, for for variations between the recorded cost of fuel and ratemaking purposes, since February 1, 1986, Septem purchased power and revenue designated for recovery ber 19, 1986, and January 20, 1988, respectively. The of such costs. Undercollected energy costs are accumu-CPUC has adopted a 10-year rate phase-in plan, which lated in the balancing account until they are recovered defers $200 million of required revenue during the first from utility customers through CPUC-authorized rate four years of operation for each unit. Deferrals for each adjustments. Previously, 90% of fuel and purchased unit, for years one through four, are $80 million, $60 power costs were recovered through ECAC, and the re-million, $40 million, and $20 million, respectively. The maining 10% of such costs were recovered through the deferrals and related interest will be recovered on a annual energy rate (AER). On June 1, 1988, the CPUC level basis during the final six years of each unit's suspended the AER rate component. As a result, all phase-in plan.

fuel and purchased power costs are currently recovered through ECAC.

Statements of Cash Flows Beginning in 1988, In 1987, the CPUC authorized a one-time write-down SCEcorp presented statements of cash flows in confor of the cost of fuel oil inventory to market prices. It mity with a new accounting standard. Prior periods also authorized the last-in, first-out inventory method have been restated to be consistent with the current for measuring the cost of fuel oil consumption. The presentation. For purposes of the consolidated state

$108.7-million write-down, including interest, has been ments of cash flows, SCEcorp considers short-term recorded in the ECAC balancing account. On Decem-temporary cash investments to be cash equivalents.

ber 31, 1988, the balance remaining to be recovered was Cash payments for interest were $485.5 million in

$59.0 million, including interest.

1988, $455.1 million in 1987, and $466.3 million in The CPUC has established performance incentives 1986.

based on target generation levels for Edison's nuclear generating stations. Fuel savings or costs attributable Restatements and Reclassifications All prior period to levels above or below the targeted ranges are divided financial statements and related notes have been re equally between SCEcorp and Edison's customers stated to reflect consolidation of all majority-owned through adjustments to the ECAC balancing account.

subsidiaries and the corporate restructuring. The con solidated financial statements also have been restated Major Plant Additions:

Before 1988, Edison used to reflect the write-off of utility plant and related ad major additions adjustment clause (MAAC) balancing justments to the accumulated provision for deprecia accounts to accumulate the differences between reve-tion, accumulated deferred income taxes, and retained nue required to provide recovery of ownership costs of earnings resulting from the CPUC's disallowance of San Onofre Nuclear Generating Station (San Onofre) nuclear plant construction costs. See Note 3 for a fur Units 2 and 3 and Palo Verde Nuclear Generating Sta-ther discussion of the disallowance.

tion (Palo Verde) Units I and 2 and related authorized Certain other items in prior periods have also been revenue.

reclassified to conform them to the financial statement Commencing in 1988, ownership costs of San Onofre presentations for December 31, 1988.

Units 2 and 3 are recovered in base rates. The own ership costs of Palo Verde Units 1, 2, and 3 are also re-Note 3. Regulatory Matters covered in base rates to the extent they are not deferred in accordance with the Palo Verde rate phase-in plan.

CPUC Disallowances In October 1986, the CPUC Recovery of remaining undercollections in the MAAC disallowed $258.6 million of Edison's $3.4-billion in balancing accounts as of December 31, 1988, has been vestment in San Onofre Units 2 and 3. Edison filed for authorized over a three-year period, beginning in 1989.

rehearing on $213.4 million of the disallowed costs in December 1986. In March 1987, the CPUC granted a Interest and Taxes:

Interest on regulatory balancing rehearing on indirect construction cost issues and, in accounts is accrued at the three-month prime commer-July 1987, issued a decision that reduced the October cial paper rate. The weighted-average interest rates 1986 disallowance to $198.9 million.

were 7.60% for 1988 and 6.57% for 1987. Income tax effects on the changes in the regulatory balancing accounts are deferred.

36 Recovery of Edison's $1.5-billion investment in Palo Although the probable effect that the outcome of this Verde was reduced by 19.33% of the amount disallowed matter will have on net income cannot be determined for San Onofre Units 2 and 3, under a ratemaking at this time, Edison believes that adoption of the DRA's agreement adopted by the CPUC. The CPUC's invest-recommendation to modify the holding company deci ment disallowances for San Onofre and Palo Verde total sion is not necessary to protect the public interest and

$237 million.

Edison will work diligently to demonstrate that it has In December 1986, the Financial Accounting Stan-reasonably administered the contracts under review.

dards Board began requiring regulated enterprises to CPUC proceedings are scheduled to take place later write off construction costs not allowed in rate base.

this year.

The new standard provides for the restatement of prior period financial statements for disallowances occurring Resale Rates In accordance with FERC procedures, before the standard's effective date of January 1, 1988.

resale rates are subject to refund with interest if subse Accordingly, the 1986 consolidated statement of in-quently disallowed. Edison believes that any refunds come includes a one-time, after-tax charge against resulting from pending rate proceedings, should not earnings of approximately $193 million, reflecting the have a material effect on net income.

CPUC's final construction-cost disallowances arising from its October 1986 decision.

Note 4. Short-Term Debt In addition, revenue accrued to recover prior years' ownership costs, which is associated with the con-SCEcorp maintains unrestricted deposits of approxi struction costs disallowed by the CPUC, has been mately $7 million at commercial banks and pays an written off from the MAAC balancing account. Edison nual commitment fees of up to 1% to maintain lines of recorded after-tax charges against earnings of approxi-credit which may be utilized at negotiated or bank in mately $15 million for 1986 and $70 million for 1987.

dex rates and which totaled $2.2 billion on December 31, 1988. Approximately $1.6 billion of these lines of credit Energy Cost Proceedings The CPUC's Division of support commercial paper and other borrowings to Ratepayer Advocates (DRA) recommended that the finance general cash requirements; leveraged leases; CPUC disallow $124 million of energy costs incurred fuel inventories; and undercollections in regulatory between late 1984 and late 1987. Approximately $120 balancing accounts. The remaining $600 million of million of the proposed disallowance represents alleged these lines of credit are available for the long-term overpayments to nonutility power producers, including refinancing of certain variable-rate pollution-control electricity purchased by Edison from a 300-MW cogen-indebtedness issued by Edison.

eration facility owned by Kern River Cogeneration Short-term debt of subsidiaries is comprised of:

Company (KRCC). Mission Energy Company, which is December 31, one of SCEcorp's nonutility subsidiaries, is a partner in the KRCC facility. The DRA's proposed disallowance in relation to power purchases from KRCC is approxi-General purpose

67.

35.8 mately $37 million. In upcoming CPUC hearings, Edi-Leveraged leases 99.0 107.0 son will demonstrate that the power purchases from Balancing accounts 400.0 400.0 KRCC actually saved its customers more than $24 mil-Fuel lion during the three years under consideration, com-Total borrowings supported by pared with the "standard offer" contract approved by lines of credit 1,101.4 1,061.1 the CPUC. The DRA also alleges overpayments by Edi-Amount reclassified as long-term (437.8)

(395.3) son under 17 other contracts Edison negotiated with Unamortized discount (5.3) nonutility power producers that are not SCEcorp affili ates. Edison signed these contracts during the early Net short-term debt

$ 658.4

$ 672.5 stages of California's efforts to rapidly develop alter nate and renewable energy resources. The prices Edison Note 5. Income Taxes projected to pay under these 17 contracts were at or below avoided cost standard contracts over their lives.

In addition to its recommended energy cost disallow-federal income tax and combined state franchise tax re ance, the DRA has recommended that the CPUC turns. Under income tax allocation agreements, each modify its early 1988 decision that authorized Edison subsidiary calculates its tax liability separately.

to form a holding company.

37 Current and Deferred Taxes Income tax expense 34% and 40.138%, respectively, for 1988; 40% and includes the current tax liability from operations, and 46.138%, respectively, for 1987; and 46% and 51.184%,

deferred income taxes provided on certain items of respectively, for 1986.

income and expense which are reported in different Year ended December 31, periods for tax and financial reporting purposes.

In thousands 1988 1987 1986 The current and deferred components of income tax expense are:

Expected federal income tax expense at statutory rate $ 437,843 $ 550,954 $ 550,693 Year ended December 31, Increase (decrease) in In thousands 1988 1987 1986 income tax expense Current:

resultingfrom:

Federal

$241,917 $319,429 $342,253 boowe fus usd State 107,411 124,055 119,972borwdfnsue Stte10,41 2405 19,72during construction (6,163)

(29,362)

(62,202) 349,328 443,484 462,225 Federal deduction for state Deferred-federal and state:

taxes on income (40,005)

(49,480)

(54,493)

Investment and energy tax Depreciation timing credits-net (11,210) 40,351 69,931 difference not deferred 70,224 96,042 102,536 Depreciation 173,380 188,186 176,280 State tax provision 117,662 123,700 118,464 Regulatory balancing accounts (79,460)

(33,463)

(21,400)

Prior years' Debt reacquisition expenses (2,507)

(1,390) 81,968 decommissioning (15,714)

Leveraged leases 38,950 23,784 Nuclear plant Fuel contract settlements (1,980) 16,002 9,528 disallowance (4,730) 55,042 Nuclear plant disallowance (78,616)

(61,665)

Subsidiary preferred and Cumulative effect of preference dividends 15,876 20,038 25,155 accounting change 58,752

-All other differences (53,781)

(68,308)

(58,764)

Capitalized exploration and Total income tax expense $ 525,942 $ 638,854 $ 676,431 development expenses (31,338)

Unbilled revenue (24,420) (27,467)

Pretax income

$1,287,773 $1,377,385 $1,197,158 Phase-in plan 78,743 68,797 46,398 Effective tax rate (total income Fixed charges 7,994 (14,178)

(45,538) tax expense*pretax income) 40.8%

46.4%

56.5%

Contributions in aid of construction (28,836) (14,000)

Deferred income taxes for tax depreciation prior to Other 25,960 (31,388)

(9,958) 1981 and certain construction overheads have not been 176,614 195,370 214,206 provided because the tax effects of such timing differ

'Ibtal income tax expense

$525,942 $638,854 $676,431 ences are not allowed for retail ratemaking purposes until the taxes become payable. The cumulative net Classification of income taxes:

amount of these timing differences was $1.8 billion on Included in operating expenses

$446,395 $578,228 $702,442 December 31, 1988, and 1987.

Included in other income 79,547 80,490 35,654 Nuclear plant disallowance (78,616)

(61,665)

Ratemaking Investigation In 1986, the CPUC began Related to cumulative effect of an investigation to evaluate the effects of the Tax accounting change 58,752 Toaccontg chane

$55,4 568,5266,3 -

Reform Act of 1986 on ratemaking procedures. Reve

'btal income tax expense

$525,942 $638,854 $676,431and subsequent periods was collected subject to refund Accumulated deferred investment tax credits (ITC) pending a CPUC decision.

are amortized over the lives of the related properties.

In October 1988, Edison refunded approximately $51 Cash payments for income taxes were $421.9 million million through the ERAM balancing account, in com in 1988, $466.7 million in 1987, and $316.3 million in pliance with an August 1988 CPUC interim resolution.

1986.

Final CPUC approval of the amounts refunded is The following table reconciles the differences be-pending. Because Edison had previously provided a tween recorded state and federal income taxes and reserve for this item, refunds to customers have not amounts determined on income before taxes by apply-and are not expected to have any significant effect on ing the federal statutory tax rate. The federal and com-net income.

posite federal and state statutory income-tax rates are

38 New Accounting Standard Under accounting rules Pension expense under the new standard includes the currently in effect, deferred income tax balances are not following components:

adjusted to reflect changes in tax law or rates. How-Year ended December 31, ever, a new accounting standard will require such ad justments beginning in 1990.

The new standard requires significant balance sheet Net pension expense.

adjustments. The corporation will record additional de-Service cost for benefits earned

$ 43,340 $ 46,629 ferred income taxes related to the equity component of Interest cost on projected benefit AFUDC, which is currently recorded on an after-tax obligation 102,249 91,025 basis; the debt component of AFUDC, which was re corded on a net-of-tax basis prior to 1987; and other temporary differences for which deferred income taxes have not been provided.53,630 hav nt benproidd.Regulatory adjustment (6,416)

(3,481)

Additional balance sheet adjustments will be re corded for the net reduction in deferred income tax liabilities resulting from income tax rate changes; the recognition of deferred income tax assets attributable in conformity with the accounting principles for rate to the reduction of the book basis of property by un-regulated enterprises, regulatory adjustments have amortized investment tax credits; and to classify prop-been recorded to reflect, in net income, the pension erty-related accumulated deferred taxes as a liability costs calculated under the actuarial method used for instead of a reduction of utility plant.

ratemaking purposes. The difference between pension The majority of additional deferred-tax assets and costs calculated for accounting and ratemaking pur liabilities will be offset by recording regulatory assets poses has been recorded as a deferred charge on the and liabilities representing the anticipated effect of consolidated balance sheets.

these adjustments on customer rates. Such regulatory The plan's funded status is presented below:

assets and liabilities will be adjusted as they are re-December 31, covered or refunded through the ratemaking process In thousands and for changes in tax rates or laws.

Actuarial present value of benefit obligations:

Note 6. Employee Benefit Plans Vested benefits

$ 905,190 $ 800,952 Nonvested benefits 68,531 57,306 Pension Plan SCEcorp has a trusteed noncontribut-Accumulated benefit obligation 973,721 858,258 ory defined-benefit pension plan, covering substan-Value of projected future compensation tially all full-time employees who fulfill minimum levels 435,363 372,095 service requirements. Benefits are based on years of Projected benefit obligation

$1,409,084

$1,230,353 accredited service and average compensation. SCEcorp's Plan assets at fair value

$1,326,635

$1,201,550 policy is to fund the plan on a level premium Benefit obligation in excess actuarial method, provided that annual contribu-of plan assets

$ (82,449) $ (28,803) tions meet the minimum funding requirements of Unrecognized net gain (49,021)

(101,562) the Employee Retirement Income Security Act and do Unrecognized net obligation being not exceed the maximum deductible amount under in-amortized over 17 years 89,640 95,163 come tax regulations. Prior service costs from pension Accrued pension liability

$ (41,830) $ (35,202) plan amendments are funded over 30-year periods.

Assumptions for defined benefit pension plan:

In 1987, a new accounting standard for defined benefit plans was implemented that changed the basis Rate of increase in used for determining pension expense. Before 1987, future compensation 6.0%

6.0%

pension cost was based on the actuarial method used to Expected long-term rate determine annual contributions to the plan. For 1986, of return on assets 8.5%

8.5%

pension expense amounted to $48.6 million.

Assets of the plan consist primarily of common stocks, corporate and government bonds, short-term investments, and guaranteed investment contracts.

39 Employee Stock Plans SCEcorp maintains an Other Post-Employment Benefits Health care bene Employee Stock Ownership Plan (ESOP) and a Stock fits and life insurance are provided for retired employ Savings Plus Plan (SSPP), which are designed to sup-ees and their dependents. Group life insurance is plement employees' retirement income. Contributions provided through an insurance company. Health care is to the ESOP were funded primarily by federal income provided by a combination of SCEcorp facilities and tax benefits and contributions by employees. SCEcorp insurance programs. The costs of these benefits for re contributions to the SSPP were $16.9 million in 1988, tirees were $22.8 million in 1988, $18.0 million in 1987,

$16.6 million in 1987, and $15.4 million in 1986.

and $15.4 million in 1986.

Note 7. Jointly Owned Utility Projects cluded in the appropriate operating expense category in the consolidated statements of income. The table Edison owns undivided interests in several generating below presents the investments in each project as stations and transmission systems, for which each par-included in the consolidated balance sheet as of ticipant provides its own financing. The proportionate December 31, 1988:

share of expenses pertaining to such projects is in Plant in Accumulated Under Ownership In thousands Service Depreciation Construction Interest El Dorado Transmission System 21,649 8,590 108 60.00% (a)

Four Corners Coal Generating Station-Units 4 and 5 401,142 122,613 11,395 48.00 Mohave Coal Generating Station 233,708 95,919 877 56.00 Pacific Intertie DC Transmission System 115,047 34,075 69,550 50.00 Palo Verde Nuclear Generating Station 1,463,307 80,810 8,348 15.80 San Onofre Nuclear Generating Station:

Unit 1 537,022 153,999 23,261 80.00 Units 2 and 3 2,759,741 477,523 18,084 75.05 Common facilities-Units 2 and 3 819,030 114,846 1,863 75.05 Common facilities-Units 1, 2 and 3 176,130 28,854 3,599 75.87 Yuma Axis Generating Station 12,369 10,516 69 33.30 Total

$6,539,145

$1,127,745

$137,154 (a) Represents a composite rate.

Note 8. Leases ests as their only remedy in the event of default by the lessee. The components of the net investment in Investments in Leveraged Leases During 1987, a leveraged leases are provided in the following table:

wholly owned, nonutility subsidiary became the lessor in several leveraged-lease agreements, under which its December 31, undivided interests in a nuclear power plant and a In thousands 1988 1987 paper mill facility, having economic lives of 40 and 34 Rentals receivable (net of principal years, respectively, were leased for terms of 29 and 25 and interest on nonrecourse debt)

$243,999

$243,960 years, respectively. All operating, maintenance, and Less: Unearned income 95,972 115,102 decommissioning costs are the responsibility of the Investment in leveraged leases 148,027 128,858 lessees. The facilities' total cost was $609 million at Current portion of rentals receivable 4,642 December 31, 1988, and 1987.

Less: Deferred income taxes 74,453 40,768 The equity investment in these facilities represented Net investment in leveraged leases

$ 73,574

$ 92,732 24% of the purchase price. The remaining 76% was nonrecourse debt, which is secured by first liens on the leased property. The lenders accept their security inter-

40 Operating Lease Commitments SCEcorp leases auto-vider, whether or not the facility or transmission line is motive, computer, office, and miscellaneous equipment operable. None of these power contracts provide, or are through operating rental agreements with varying expected to provide, more than 5% of current or esti terms, provisions, and expiration dates. At December mated future operating capacity.

31,1988, estimated remaining rental commitments for The cost of power and firm transmission service ob noncancelable operating leases were as follows:

tamed under these contracts, including payments made Yearende Deembe 31,in housnds when a facility or transmission line is not operating, is Year ended December 31, In thousands included in purchased power and other operating ex 1989

$ 29,997 penses, respectively, in the consolidated statements of 1990 26,088 income. Purchased power costs are generally recover 1991 22,981 able through the ECAC balancing account procedure.

1992 19,112 1993 14,637 Selected information pertaining to these contracts on 1993 14,637 December 31, 1988, is summarized as follows:

For periods theraf ter 16,266 Total future rental commitments

$129,081 Purchased Transmission Power Service On June 10, 1987, one of Edison's wholly owned sub-Years contracts expire 1990-2017 1990-2016 sidiaries purchased the leasing company from which Share of effective operating Edison leased its nuclear fuel by assuming the com-capacity-megawatts 473.5-627.5 pany's commercial paper obligations. On March 1, 1988, Edison assumed the commercial paper obligations of Required minimum annual payments In thousands the affiliated nuclear fuel lessor and terminated the 1989

$ 46,468

$ 9,033 nuclear fuel lease agreement. Lease liabilities supported 1990 13,854 6,030 by commercial paper borrowings, which had been 1992 2,500 4,422 classified as long-term obligations, have been reclassi-1993 2,500 4,267 fied as long-term debt to conform with the financial Thereafter 59,375 86,118 statement presentation of nuclear fuel financing on Total

$127,197

$114,399 December 31, 1988. The long-term debt amount represents the estimated repayment of commercial reprsens th esimatd rpaymnt f comerialPurchased power costs were $121.5 million in 1988, paper based upon expected nuclear fuel consumption

$118.0 million in 1987, and $115.3 million in 1986.

subsequent to one year after the balance sheet date and is supported by refinancing agreements with mission costs we $1. million in 19881 commercial banks.whether or nd the milio insi8n.

Note 9. Commitments Note 10. Contingencies Construction Program and Fuel Supply As of De-Nuclear Insurance On August 22, 1988, Congress cember 31, 1988, SCEcorp's construction expenditures amended the Price-Anderson Act, extending it until are estimated to be $905 million for 1989, $712 million August 1, 2002. It increased-to $7.6 billion from for 1990, and $713 million for 1991. In addition, mini-

$720 million-the limit on public liability claims that could arise from a nuclear incident. Participants in San million existed as of December 31,1988, under fuelet x

supply contracts.

private primary insurance available, which currently is $200 million. The balance is to be covered by the LongTerm Purchased Power and 7kansmission industry's retrospective rating plan, using deferred Contracts Edison has contracted to purchase por-premium charges. This secondary level of financial tions of the generating output of certain facilities and protection is required by the Nuclear Regulatory Con to purchase firm transmission service when appropri-mission (NRC). The maximum amount of the deerred ate. Although there is no investment in such facilities, premium that may be charged for each nuclear incident these contracts provide for minimum payments based, in part, on the debt service requirements of the pro-

41 is $63 million per reactor, but not more than $10 mil-Antitrust Litigation In 1978, five resale customers lion per reactor may be charged in any one year for filed a suit against Edison, in federal district court, al each incident. Edison could be required to pay a max-leging violation of antitrust laws. The complaint seeks imum of $183.6 million per nuclear incident, on the monetary damages, a trebling of such damages, and basis of its ownership interests in San Onofre and Palo certain injunctive relief. The complaint alleges that Verde, but it would have to pay no more than $29.1 Edison engaged in anticompetitive behavior by charging million per incident in any one year. Such amounts in-more for electricity it sold to resale customers than it clude a 5% surcharge that would be applicable in the charged certain classes of retail customers. The com event that additional funds are needed to satisfy public plaint also alleges that Edison acted alone and in con liability claims, and are subject to adjustment for cert with other utilities to prevent or limit such resale inflation.

customers from obtaining bulk power supplies from Edison's property damage insurance covers losses other sources to reduce or replace the resale customers' up to $500 million at San Onofre and Palo Verde. De-purchases from Edison. The plaintiffs estimate that contamination liability and property damage coverage their actual damages, before trebling, were approxi in excess of the primary $500 million layer has also mately $99.5 million from February 1, 1978, through been purchased, exceeding NRC requirements.

December 31, 1985. The trial began on July 8, 1986, and Insurance covering part of the additional expense of concluded on September 26, 1986. Edison filed findings replacement power, which could result from an acci-of fact and conclusions of law with the court on dent related nuclear unit outage, is also provided. After November 21,1986. A decision is pending.

the first 21 weeks of such an outage, a maximum In 1983, another resale customer also filed suit, in weekly indemnity of $2.7 million for a single unit for federal district court, alleging violation of certain anti 52 weeks begins. An additional $1.4 million per week is trust laws. The customer alleges that it has been de provided for the next 52 weeks. These policies are is-nied access to lower-cost power and was overcharged sued primarily by mutual insurance companies owned for power purchases as well as other operational and by utilities with nuclear facilities. If losses at any financial damages. On July 17, 1988, Edison received nuclear facility covered by the arrangement were to the customer's antitrust damage study alleging total exceed the accumulated funds available for these damages of approximately $135 million before trebling.

insurance programs, Edison could be assessed retro-A trial date of November 14, 1989, has been set.

spective premium adjustments of up to $54.0 million The foregoing proceedings involve complex issues of per year. Insurance premiums are charged to operating law and fact. Although Edison is unable to predict the expenses.

final outcome, it has categorically denied the resale customers' allegations.

Quarterly Financial Data SCEcorp and Subsidiaries Unaudited In millions, 1988**

1987 except per share data Total Fourth Third Second First Total Fourth Third Second First Operating revenue

$6,253

$1,539

$2,029

$1,353

$1,332

$5,602

$1,414

$1,518

$1,354

$1,316 Operating income 1,096 196 476 228 196 965 233 258 249 225 Net income 762 107 392 146 117 739 171 212 187 169*

Per share:

Earnings 3.49

.49 1.79

.67

.54 3.39

.78

.97

.86

.78*

Dividends declared 2.45/2

.62

.62

.62

.59/2 2.35/2

.59V2

.59V2

.59V2

.57 Common stock prices High

$34/2

$34V2

$33/8

$34/2

$34

$37

$33%

$33/8

$32%/

$37 Low

$29V/

$314

$304

$30

$29V/

$27%/

$27/8

$29%/

$28V/

$31%

• Includes $68 million, or 31 cents per share, resulting from an accounting change. (See Note 2 of "Notes to Consolidated Financial Statements.")

• Quarterly fluctuations compared to 1987 are primarily the result of a December 1987 CPUC rate decision which ordered Edison to change the way it bills large customers, concentrating a larger percentage of these customers' annual charges into the summer months.

42 Selected Financial Data 1984-1988 SCEcorp and Subsidiaries In thousands, except percent, per share and ratio data 1988 1987 1986 (a) 1985 1984 (b)

SCEcorp Consolidated operating revenue

$6,252,719

$5,601,926

$5,368,087

$5,217,167

$4,899,152 Consolidated operating expenses 5,156,351 4,637,135 4,420,931 4,240,175 3,932,527 Consolidated net income 761,831 738,531 520,727 702,409 659,385 Weighted-average shares of common stock outstanding (000) 218,332 218,014 217,780 215,696 207,576 Per share data:

Earnings

$3.49

$3.39

$2.39

$3.26

$3.18 Dividends declared 2.451 2.35v2 2.25 2.13 2.01 Book value (a) 23.18 22.16 21.13 21.04 19.89 Market value at year-end 32%

30V2 337/

26/8 22 Dividend payout ratio (paid basis) 69.6%

68.7%

92.9%

64.4%

61.9%

Rate of return on common equity (a) 15.33%

15.51%

11.09%

15.75%

16.28%

Price/earnings ratio 9.3 9.0 14.2 8.2 7.2 Ratio of earnings to fixed charges 2.86 2.91 2.71 2.97 2.70 Total assets (a)

$14,866,276

$14,350,664

$13,683,053

$13,256,054

$11,906,508 Common stock-paid-in capital 2,463,762 2,457,819 2,454,318 2,450,754 2,355,984 Retained earnings 2,601,086 2,375,915 2,150,751 2,128,646 1,886,804 Common shareholders' equity (a) 5,064,848 4,833,734 4,605,069 4,579,400 4,246,788 Preferred and preference stock of subsidiary

-not subject to mandatory redemption 358,755 361,238 361,654 462,500 463,258

-subject to mandatory redemption 239,037 277,538 299,049 395,074 422,286 Long-term debt of subsidiaries 5,421,747 5,150,883 5,122,243 5,175,624 4,722,079 Southern California Edison Company Financial data:

Earnings available for common stock

$684,689

$697,188

$503,198

$694,113

$655,917 Earnings per share (c) 3.14 3.20 2.31 3.22 3.16 Financial rate of return on common equity (a) 14.88%

15.32%

11.07%

15.93%

16.50%

Ratemaking rate of return on common equity-earned 12.20%

11.97%

12.42%

13.22%

14.24%

Ratemaking rate of return on common equity-authorized 12.75%

13.90%

14.60%

16.00%

16.00%

Internal generation of funds 100%

77%

74%

65%

67%

Operating and sales data:

Area peak demand (MW) 15,987 14,775 14,599 14,587 15,189 Area generating capacity at peak (MW) 18,893 18,206 18,320 17,776 17,354 Kilowatt-hour sales (000) 67,885,761 65,539,481 64,197,405 64,984,566 63,310,047 Customers 3,831,656 3,717,262 3,589,414 3,490,325 3,400,182 Employees 16,660 17,086 17,553 17,182 16,844 The Mission Group Common shareholder's equity

$505,371

$292,108

$166,381

$134,310

$83,861 Net income 77,763 41,343 17,529 8,296 3,468 Earnings per share (c) 35c 19C 8C 4c 2c Percent of SCEcorp's earnings per share 10.0%

5.6%

3.3%

1.2%

0.6%

(a) Restated for nuclear plant construction-cost disallowances described in "Notes to Consolidated Financial Statements" on pages 35-36.

(b) Represents Edison's unconsolidated financial data, which would be substantially similar to SCEcorp's consolidated financial data.

(c) Based on weighted-average shares of SCEcorp common stock outstanding.

43 Management's Discussion and Analysis of Results of Operations and Financial Condition SCEcorp became the parent holding company of South-Electric operating revenue increased by $430.6 mil ern California Edison Company (Edison) through a lion, or 7.8%, over last year, reflecting a 3.6% increase corporate reorganization approved by Edison sharehold-in kilowatt-hour sales. The increase in revenue is at ers during 1988. Unless stated otherwise, this discus-tributable to a 3.9% increase in retail sales volume that sion addresses the consolidated results of operations and resulted from the addition of more than 114,000 new financial condition of SCEcorp. SCEcorp is comprised customers and the effect of rate changes. Resale sales of Edison and The Mission Group, the parent company volume declined 5.4% due to the availability of alter for all subsidiaries not subject to rate regulation.

native energy sources to resale customers. Increases in electric operating revenue of 3.5% in 1987 and 2.6% in Results of Operations 1986 reflect, in addition to rate changes, a 5.1% retail sales volume increase in 1987 and a 1.2% sales volume Earnings Summary Earnings per share for 1988 in-decline in 1986.

creased 10 cents to $3.49 from $3.39 in 1987 despite a Rate changes that became effective January 1, 1989, reduction by the California Public Utilities Commis-are projected to increase revenue by $77.7 million, or sion (CPUC) in Edison's authorized rate of return on 1.3%. The CPUC approved an attrition increase of common equity from 13.9% to 12.75%. Net income

$116.4 million to recognize increases in nonfuel ex rose 3.2% to a record $761.8 million and revenue to penses and to increase Edison's authorized rate of another record of $6.3 billion, compared to $5.6 billion return on common equity to 13.0% from 12.75%. In in 1987. Factors contributing to the increased earnings separate proceedings, the CPUC authorized a $77.1-mil include CPUC approval of 1988 expense levels that lion rate decrease after Edison completed full recovery more accurately reflect Edison's costs, continued em-of uranium contract settlement payments and granted phasis on cost containment, a CPUC award for favor-a $38.4 million rate increase for additional plant invest able coal-plant operating performance, and higher ment in the San Onofre Nuclear Generating Station.

earnings from The Mission Group.

Investment and other operating revenue increased by The Mission Group's contribution to earnings per

$220.2 million, or 218.3%, reflecting growth in nonutil share for 1988 was 35 cents, or 10.0%, of total SCEcorp ity businesses. Continued increases in revenue from earnings, compared with 19 cents per share, or 5.6%,

nonutility businesses are expected during 1989.

for 1987. The Mission Group's net income rose to $77.8 million from $41.3 million in 1987. Nonutility earnings Operating Expenses Operating expenses for 1988 per share increased by approximately 84% above those increased by $519.2 million, or 11.2%, over 1987, in 1987, with earnings growth in each nonutility busi-compared with increases of $216.2 million, or 4.9%, in ness. Higher earnings resulted from the addition of 1987, and $180.8 million, or 4.3%, in 1986.

830 MW of new cogeneration and geothermal projects The net increase in operating expenses resulted pri by Mission Energy Company, the sale of industrial prop-marily from utility operations. Fuel expense declined erty by Mission Land Company, increased construction

$119.0 million, or 10.9%, in 1988, compared with an contracting activity by Mission Power Engineering Com-increase of $226.6 million in 1987, and a decrease of pany, and the first full year of operation for Mission

$812.4 million in 1986. The reduction in fuel expense First Financial.

for 1988 is the result of increased nuclear generation which displaced higher cost natural gas generation.

Electric Operating Revenue and Sales Approxi-Additionally, the utility operated higher cost non-nuclear mately 98% of electric operating revenue represents fuel-burning power plants less because of an increase retail sales that are subject to rate regulation by in mandatory purchases of power from nonutility pro the CPUC. The remaining revenue is from sales to ducers at CPUC-mandated rates that exceeded rates wholesale customers, which are regulated by the for economy purchases. Purchased power expense in Federal Energy Regulatory Commission (FERC).

creased by $454.5 million, or 58.2%, over 1987. The effect on earnings of fuel and purchased power cost fluctuations is minimized by regulatory adjustment mechanisms established by the CPUC and the FERC.

44 Provisions for regulatory adjustment clauses for 1988 Significant Accounting Changes In accordance with reflect net overcollections of $240.7 million. The changes in accounting standards for rate-regulated en overcollections are attributable to growth in kilowatt-terprises, in the first quarter of 1988 Edison recorded a hour sales; CPUC-authorized recovery of previously noncash write-off against income of approximately deferred energy costs through the Energy Cost Adjust-

$193 million, net of related income tax effects, for dis ment Clause; and amortization of deferred costs under allowed costs on its investment in nuclear facilities. As an adjustment clause that was established to recover permitted by the new accounting standard, Edison costs of major system additions.

adopted these changes by restating the financial results Depreciation and decommissioning expense in-for 1986, the period in which the write-offs would have creased during 1988 by $95.2 million, of which $84.8 been recorded had the present accounting rules been in million is attributed to higher levels of decommission-effect.

ing expense authorized by the CPUC. The remainder of As discussed further in Note 5 of the "Notes to Con the increase results from increased depreciation due to solidated Financial Statements," major balance sheet system growth.

adjustments will be recorded in accordance with new Taxes on operating income for 1988 decreased $131.8 income tax accounting requirements that become million, compared to 1987 resulting primarily from effective in 1990. These changes are not expected to lower corporate tax rates instituted by the Tax Reform significantly affect future earnings.

Act of 1986. However, the lower tax rates were offset by reduced electricity rates for customers and, therefore, Financial Condition had little or no effect on net income.

An increase in contracted nonutility engineering and Liquidity and Capita) Resources SCEcorp's liquidity construction services contributed approximately $138 is affected primarily by construction expenditures and million to the $183.0 million increase in other operat-by capital requirements relating to debt and capital ing expenses for 1988. The remainder of the increase is stock maturities. The capital resources available to principally due to Edison's system growth.

meet these requirements include internal cash genera tion and external financings.

Other Income and Income Deductions Utilities capi-The majority of SCEcorp's capital requirements con talize an allowance for funds used during construction tinue to be met by cash generated through operations.

(AFUDC) which represents the cost of debt and equity For 1988, nearly 80% of cash requirements were inter capital used to finance construction of plant additions.

nally generated, compared with approximately 87% in Completion of the Balsam Meadow Hydro Project and 1987 and 96% in 1986. The decline in 1988 is attributed Palo Verde Nuclear Generating Station (Palo Verde) to an 18.4% reduction in cash from operations net of a Unit 3 contributed significantly to an $86.3 million 10.9% decrease in cash requirements. Cash flow and i decline in AFUDC compared to 1987. AFUDC has quidity for 1988 were unfavorably affected by revenue declined steadily over the past three years, as the deferred to future years under the Palo Verde Phase-in construction of major projects has been completed and Plan, which will increase through 1990, and decline in the facilities placed into service.

subsequent years. Additional items impacting cash The $28.5 million increase in 1988 interest income flow unfavorably are increased income tax payments over 1987, resulted from higher interest rates on in-resulting from the Tax Reform Act of 1986, and con vested cash, and increases in the average amounts of tributions of more than $157 million to nuclear decom cash investments and regulatory-asset balances.

missioning trusts related to 1988 and certain prior years. A decline in construction expenditures and the recovery of balancing account undercollections par tially offset these adverse factors.

Through the issuance of long-term debt during 1988, SCEcorp raised $631.3 million of which Edison raised

$622.7 million, primarily to finance the redemption of more costly debt, repay bond maturities, and to meet sinking fund requirements. Market conditions and

45 other factors, including limitations imposed by Capital Structure The capital structure of SCEcorp Edison's Articles of Incorporation and Trust Indenture, as of December 31, 1988, is reflected in the table below:

influence external financings. As of December 31, 1988, Common equity 45.7%

Edison could issue approximately $3.8 billion of addi-Preferred stock 5.4 tional first and refunding mortgage bonds or approxi mately $1.7 billion of preferred stock at current interest and dividend rates under its Trust Indenture Total 100.0%

and Articles of Incorporation.

In conformity with CPUC-ratemaking procedures, Proposed Merger short-term borrowings are utilized primarily to finance fuel-oil inventory, regulatory balancing account under-As discussed in Note 1 of "Notes to Consolidatd Finan collections, and nuclear fuel. The principal and interest cial Statements," on November 30,1988, SCEcorp, Edi related to these special purpose short-term borrowings son, and San Diego Gas & Electric Company (SDG&E) are recovered through regulatory balancing-account executed an agreement to merge SDG&E into Edison.

mechanisms. Note 4 of "Notes to Consolidated Finan-Under the terms of the merger agreement, SCEcorp cial Statements" discusses available lines of credit and will exchange 1.3 shares of its newly issued common related short-term borrowings.

stock for each SDG&E common share. SDG&E pre ferred and preference stock will be exchanged for Capital Requirements SCEcorp, on an unconsolidated SCEcorp preferred and preference stock with similar basis, requires capital for common stock dividend provisions, except that dividends on each series will be payments, investment in nonutility subsidiaries and increased between 2.5% and 20.0%.

general and administrative expenses. These require-The merger is subject to the approval of shareholders ments are provided by dividend payments from Edison.

and various regulatory agencies, including the CPUC SCEcorp's primary capital requirements consist of and the FERC. SCEcorp is working to complete the expenditures under its subsidiaries' construction pro-approval process in early 1990.

grams and debt and capital stock maturities. Such com mitments are projected to total $4.9 billion from 1989 to 1993. It is anticipated that the majority of these capi tal requirements will be financed through internally generated cash with supplemental financing through the issuance of long-term debt.

Balancing Accounts and Projected Capital Rate Phase-in Plan (Utility)

Requirements (SCEcorp)

In millions of dollars In millions of dollars 830 831 1,071 91 240 166 937 929 949 225 216 255 Debt and 436 Rate capital-stock phase-in maturities plan 739 905 622 760 712 713 694 Construction expenditures 395 Regulatory balancing accounts 1986 1987 1988 89 90 91 92 93

46 First row (from left): Joan C. Hanley, Jack K. Horton, Howard P. Allen, William R. Gould, Camilla C. Frost.

Second row: Carl E Huntsinger, Henry T. Segerstrom, Warren Christopher, Walter B. Gerken, Norman Barker, Jr., Edward Zapanta.

Third row: Charles D. Miller, Roy A. Anderson, Robert H. Smith, James M. Rosser, E. L. Shannon, Jr., J. J. Pinola.

47 Board of Directors SCEcorp Howard P. Allen Carl E Huntsinger Chairman of the Board General Partner President and Chief Executive Officer DAE Limited Partnership, Ltd.

(Agricultural Management)

Roy A. Anderson Ojai, California Chairman Emeritus Lockheed Corporation Charles D. Miller Burbank, California Chairman of the Board and Chief Executive Officer Avery International Corporation Norman Barker, Jr (Manufacturer of Self-Adhesive Products)

Chairman of the Board Pasadena, California Pacific American Income Shares, Inc.

(A Closed-End Bond Fund)

J. J.Pinola Los Angeles, California Chairman of the Board and Chief Executive Officer First Interstate Bancorp Warren Christopher Los Angeles, California Chairman O'Melveny & Myers James M. Rosser Los Angeles, California President California State University, Los Angeles Camilla C. Frost Los Angeles, California Chairman of the Executive Committee Los Angeles County Museum of Art Henry T. Segerstrom Los Angeles, California Managing Partner C. J. Segerstrom & Sons (Real Estate Development)

Walter B. Gerken Costa Mesa, California Chairman of the Executive Committee Pacific Mutual Life Insurance Company E. L. Shannon, Jr Newport Beach, California President, Chief Executive Officer and Director Santa Fe International Corporation William R. Gould (Oil Service, Engineering, Petroleum Exploration Chairman Emeritus and Consultant and Production)

(Retired Chairman of the Board and Chief Executive Officer Alhambra, California Southern California Edison Company)

Long Beach, California Robert H. Smith President and Chief Executive Officer Joan C. Hanley Security Pacific National Bank General Partner and Manager and Vice Chairman of the Board Miramonte Vineyards Security Pacific Corporation Temecula, California Los Angeles, California Jack K. Horton*

Edward Zapanta Chairman of the Executive Committee and Consultant Physician and Neurosurgeon (Retired Chairman of the Board and Chief Executive Officer Monterey Park and East Los Angeles, California Southern California Edison Company)

Los Angeles, California

• Will not stand for re-election in 1989.

48 Executive Officers SCEcorp Howard P. Allen Michael R. Peevey Michael L. Noel Chairman of the Board Executive Vice President Vice President and Treasurer President and Chief Executive Officer Richard K. Bushey Jennifer Moran David J. Fogarty Vice President and Controller Secretary of the Corporation Executive Vice President John R. Buron (1) Mr Bury retired effective March 1,1989.

E(2)

Mr. Barry was elected Vice President and ice Ree eGeneral Counsel effective March 1, 1989.

Executive Vice President and Chief Financial Officer David N. Barry 11112)

Vice President and General Counsel Southern California Edison Company Howard P. Allen Glenn J. Bjorklundt')

Charles B. McCarthy, Jr.

Chairman of the Board Vice President (Power Supply)

Vice President and Site Manager, President and Chief Executive Officer San Onofre Nuclear Robert H. Bridenbecker Generating Station David J. Fogarty Vice President ( Customer Service)

Executive Vice President Michael L. Noel John R. Bury (2)

Vice President and Treasurer John E. Bryson Vice President and General Counsel Executive Vice President Harold B. Ray and Chief Financial Officer David N. Barry IIIw3 a

Vice President (Fuel and Vice President and General Counsel Material Management)

Michael R. Peevey Executive Vice President Richard K. Bushey Jennifer Moran Vice President and Controller Secretary of the Corporation P. L. Martin Senior Vice President Robert Dietc

)

(1) Effective January 1,1989.

(2) Mr Bury retired effective March 1,1989.

Vice President (3) Mr. Barry was elected Vice President and L. T. Papay (Engineering, Planning General Counsel effective March 1, 1989.

Senior Vice President and Research)

(4) Mr. Dietch assumed additional responsibility for System Planning and Kenneth P. Baskin John R. Fielder)

Research effective January 1, 1989.

(5) Mr. Fielder was elected Vice President Vice President Vice President (Information Services)

Information Services effective anuary 1, (Nuclear Engineering, Safety 1989.

and Licensing)

Nonutility Subsidiaries H. Frederick Christie Thomas R. McDaniel James S. Pignatelli t2 )

President and Chief Executive Officer, President, Mission First Financial President, Mission Energy Company The Mission Group Edward A. Myers, J( )

Robert E. Umbaugh J. Jack Adrian President, Mission Energy Company President, Mission Land Company PresidenteissroniPowt Peineerng Conyo (1) Mr. Myers retired effecrive April 1, 1988.

n er(2)

Effective April 1, 1988.

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