ML17305A288
| ML17305A288 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 10/11/1989 |
| From: | Conway W Arizona Public Service Co (Formerly Arizona Nuclear) |
| To: | NRC/IRM |
| Shared Package | |
| ML17305A289 | List: |
| References | |
| 161-02476-WFC-N, 161-2476-WFC-N, NUDOCS 8910190218 | |
| Download: ML17305A288 (126) | |
Text
REGULATORY INFORMATION DISTRIBUTION SYSTEM (RIDS) 8 05000528 05000529 05000530 h
NOTES'tandardized plant.
Standardized plant.
ACCESSION NBR:8910190218 DOC.DATE: 89/10/11 NOTARIZED: NO DOCKET FACIL:STN-50-528 Palo Verde Nuclear Station, Unit 1, Arizona Publi 05000528 STN-50-529 Palo Verde Nuclear Station, Unit 2, Arizona'ubli 05000529 STN-50-530 Palo Verde Nuclear Station, Unit 3, Arizona'ubli 05000530 AUTH.NAME AUTHOR AFFILIATION CONWAY,W.F.
Arizona Public Service Co.
(formerly Arizona Nuclear Power RECIP.NAME RECIPIENT AFFILIATION R
Document Control Branch (Document Control Desk)
I sUBJEOT:
Forwards 1988 annual repts.
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DISTRIBUTION CODE:
M004D COPIES RECEIVED: LTR g ENCL g SIZE: / + l TITLE: 50.71(b)
Annual Financial Report RECIPIENT ID CODE/NAME PD5 PD DAVIS,M.
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1 1
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CGPZACT 'IHE DOCUMENZ CONTROL DESK RDCN Pl-37 (EXT. 20079) Kl ELBGKQR KRR NAME HKN DISTRIK7ZION TOTAL NUMBER SPVCPRF %58%@8 %M~
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4 Arizona Public Service Company P.O. BOX 53999
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PHOENIX, ARIZONA85072-3999 WILLIAMF. CONWAY EXECUTIVEVICEPRESIOENT NUCLEAR 161-02476-WFC/NEM October 11, 1989 Docket Nos.
STN 50-528/529/530 Document Control Desk U.
S. Nuclear Regulatory Commission Mail Station Pl-37 Washington, D.
C.
20555
Dear Sirs:
Subj ect:
Palo Verde Nuclear Generating Station (PVNGS)
Units 1, 2 and 3
Submittal of 1988 Annual Reports File:
89-056-026; 89-017-404 Pursuant to 10 CFR 50.71(b), please find attached, copies of 1988 Annual Reports for the Participants who jointly own the Palo Verde Nuclear Generating Station.
These Participants are Arizona Public Service
- Company, Salt River Project Agricultural Improvement and Power District, El Paso Electric Company, Southern California Edison
- Company, Public Service Company of New Mexico, Southern California Public Authority and Los Angeles Department of Water and Power.
If you have any questions, please contact Mr. A. C. Rogers of my staff at (602) 371-4041.
Sincerely, WFC/NEM/jle Attachments cc:
T. L. Chan J.
B. Martin M. J.
Davis T. J. Polich A. C. Gehr (w/o attachments)
(w/attachments)
(w/o attachments)
(w/attachments)
(w/o attachments) 8910290218 8910 l
PDR ADOCK 05000528
SOVTHPRN ChLIFORNlh EDISON COMPhhV 1988 Annual Report s~~+M1~2<
cP$10!9oP/F gd/g~gJ p
-NOTICE-THE ATTACHED FILES ARE OFFICIAL RE-CORDS OF THE RECORDS REPORTS MANAGEMENTBRANCH. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS 8 ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.
PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAlL.
REMOVAL OF ANY PAGE(S)
FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.
C
-NOTICE-Southern Gallfornia Edison
ANNUALREPORT This is the Annual Report to Preferred Shareholders of Southern California Edison Company (the Company) for the year ended December 31, 1988. This report is being provided to holders of the Company s Cumulative Preferred Stock and $ 1 00 Cumulative Preferred Stock in connection with the Annual Meeting of Shareholders to be held at 10:00 a.m. on Thursday, April20, 1989, at the Industry Hills and Sheraton Resort, One Industry Hills Parkway, City of Industry, California. This report contains the Company's audited financial statements for the 1988 fiscal year and other information of interest to the Company's shareholders.
ABOUT THE COMPANY The Company was incorporated in 1909 under California law and is a public utility primarily engaged in the business of supplying electric energy to a 50,000 square-mile area of central and southern California, excluding the City of Los Angeles and certain other cities. This area includes some 800 cities and communities and a population of more than ten million people. As of December 31, 1988 the Company had 16,660 employees.
On July 1, 1988, the Company became a subsidiary of a new holding company, SCEcorp. Each share of the Company's Common Stock and Original Preferred Stock was converted into Common Stock of SCEcorp. The Cumulative Preferred Stock and $100 Cumulative Preferred Stock were not affected and continue to be securities of the Company. Because all of the currently outstanding Common Stock of the Company is owned by SCEcorp, this Annual Report to Shareholders is being provided only to holders of the Company's preferred stocks.
SOUTHERN CALIFORNIAEDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME Operating Revenue:
Sales.
Other.
Total operating revenue.
Operating Expenses:
Fuel.
Purchased power Provisions for regulatory adjustment clauses-net.
Other operating expenses.
Maintenance Depreciation and decommissioning Income taxes...............................................
Property and other taxes.
Total operating expenses Operating Income..
Other Income and Deductions:
Nuclear plant disallowance (Note 3).
Income taxes nuclear plant disallowance.
Provision for rate phase-In plan Allowance for equity funds used during construction.
Interest income.
Taxes on nonoperating Income.
Othernet.
Total other Incomenet.
Income Before Interest Expense.
Interest Expense:
Interest on long-term debt and amortization.
Other Interest expense..
Allowance for borrowed funds used during construction...........................
Capitalized interest..
Total interest expense-net.
Income Before Cumulative Effect of a Change In Accounting Principle....
Cumulative effect on prior years (to December 31, 1986) of accruing unbilled revenue net of income tax of $58,752,000 (Note 2)...................
Net Income..
Dividends on cumulative preferred and preference stock..
Earnings Available for Common Stock.
972,973 1,234,831 240,681 870,995 375,082 644,036 4121105 169,405 1,091,973 780,599 225,108 850,447 361,201 549,810 555,433 161,618 865,376 775,814 225,539 828,672 352,696 506,230 687,520 143,321 4,920,108 4,576,189 4,385,168 1,012,798 926,110 933,489 170,856 18,125 108,634 (761647)
(653) 220,315 (148,963) 78,616 137,832 73,406 87,936 (78,306) 18,688 169,209 (269,883) 61,665 88,672 105,744 107,379 (35,654) 24,368 82,291 1,233,113 1,095,319 1,015,780 420>615 397,699 107,412 80,953 (11,883)
(42,926) 14,416)'\\9,646 501,728 416,080 731,385 679,239 68,044 731,385 747,283 46,696 50,095 684,689 697,188 432,608 82,592 (29,478)
~27,824 457,898 557,882 557,882 54,684 503,198 Year Ended December 31, 1988 1987 1986 (In thousands)
'k
$5,856,236
$5,448,663
$5,275,547 76,670 53.636 43,110 5,932,906 5,502,299 5,318,657 The accompanying notes are an integral part of these financial statements.
SOUTHERN CALIFORNIAEDISON COMPANY CONSOLIDATED BALANCE SHEETS ASSETS December 31, 1988 1987 (In thousands)
Utility Plant:
Utility plant, at original cost (Note 3).
LessAccumulated provision for depreciation and decommissioning (Note 3)..
Construction work in progress.
Nuclear fuel, at amortized cost.
$15,687,850 4,529,938 11,157,912 676,175 475,764
$14,465,691 3,993,468 10,472,223 1,232,990 547,786 12,309,851 914,532 12,252,999 840,143 11,412,856 11,395,319 47,482 23,483 45,838 157)086 28,978 70,965 231,902 23,222 32,452 615,397 118,540 105,577 621,635 78,242 690,547 125,303 96,767 395,026 81,185 1,412,050 1,571,843 xpense...............
301,741 239,760 132,040 870 628 673,541
$13,909,899
$13,729,205 296,094 435,941 138,593 LessProperty-related accumulated deferred income taxes......
Total utility plant Other Property and Investments:
Nonutility propertyless accumulated provision for depreciation of $13,744,000 and $121,835,000 at respective dates.
Nuclear decommissioning trusts, at cost.
Other investments..
Total other property and investments..
Current Assets:
Cash and equivalents.
Receivables, including unbilled revenue, less allowances of $13,140,000 and $14,829,000 for uncollectible accounts at respective dates.
Fuel stock.
Materials and supplies, at average cost.
Regulatory balancing accounts net.
Prepayments and other current assets Total current assets..
~
~ ~ ~
~
~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ I ~
~
Deferred Charges:
Unamortized debt issuance and reacquisition e Rate phase-in plan Other deferred charges.
Total deferred charges..
Total assets The accompanying notes are an integral part of these financial statements.
SOUTHERN CALIFORNIAEDISON COMPANY CONSOLIDATED BALANCE SHEETS CAPITALIZATIONAND LIABILITIES December 31, 1988 1987 0n thousands)
Capitalization (see accompanying statements):
Common stock, at par value, 217,444,052 and 217,126,601 shares outstanding at respective dates................
Additional paid-in capital........
~.~...
Retained earnings.
Common shareholder's equity (Note 3).
Preferred and preference stock:
Not subject to mandatory redemption.
Subject to mandatory redemption Long-term debt
~ ~..~........~...
~ ~. ~ ~
Total capitalization Other Long-Term Liabilities.
906,017, 15258,872 2,391,703 4,556,592 358,755 239,037 5,212,657 10,367,041 136,810 904,694 1,307,758 2,329,174 4,541,626 361,238 277,538 4,915,328 10,095,730 113,348 Current Liabilities:
Current portion of long-term debt and redeemable preferred and preference stock Short-term debt.
~ ~.
Accounts payable Accrued taxes.
Accrued interest.
~ ~... ~ ~. ~ ~... ~.
Dividends payable...
~..~...~.......
'ccumulated deferred income taxes net......~...
Deferred unbilled revenue and other.......
Total current liabilities
~. ~. ~ ~. ~ ~... ~ ~. ~ ~ ~..~...
144,917 658,255 436,318 435,030 117,142 139,187 166,386 297,217 2,394,452 101,555 665,839 481,628 471;008 106,259 133,281
'35,921 347,445 2,542,936 Deferred Credits:
Accumulated deferred investment tax credits.
Accumulated deferred income taxes net.
Customer advances and other deferred credits...
Total deferred credits.
507,666 256,493 247,437 1,011,596 525,750 176,835 274,606 977,191 Commitments and Contingencies (Notes 1, 3, 8, 9, and 10)
Total capitalization and liabilities.
$13,909,899
$13,729,205 The accompanying notes are an integral part of these fInancial statements.
SOUTHERN CALIFORNIAEDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1988 1987 (In thousands) 1986 Cash Flows From Operating Activities:
Net income..
Adjustments for noncash items:
Depreciation and decommissioning...........................
~
Amortization..
Nuclear plant disallowance net.
Allowance for funds used during construction.
~.. ~. ~.. ~
Rate phase-in plan...
Regulatory deferrals energy exploration projects..
~
Deferred income taxes and investment tax credits..
Othernet.
Changes in working capital components:
Receivables.
Regulatory balancing accounts.
Fuel stock, materials and supplies......~......~.........
~ ~... ~
Prepayments and other current assets.~...~...............
~
Accrued interest and taxes Accounts payable and other current liabilities...........
644,036 147,875 (30,008)
(196,181) 104,574 (5,834) 549,810 156,980 70,347, (116,332)
(149,110) 61,637 143,978 22,439 506,230 129,800 208,218 (135,222)
(90,650) 21,748 266,430 8,391 (75,150) 226,609 2,047'2,943)
(63,242)
~95,538 (252,403)
(31,548) 133,518 (3,723) 8,384 284,631 (18,343) 17,120 3,214 29,159 222,263 48,733 1,387,630 1,625,891 1,774,973 731,385 747,283 557,882 Cash Flows From Financing Activities:
Issuances of long-term debt.
Repayments of long-term debt.
Redemption of preferred and preference stock............
Nuclear fuel financing.
~ ~ ~ ~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
Short-term debt financingsnet.
Capital transfers and dividend payments...............~......
Cash Flows From Investing Activities:
Construction expenditures.
Contributions to decommissioning funds.....
~~....... ~.. ~.~...
0thernet.
~
~
~ ~ ~ ~ ~ ~
~
~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~
~ ~ ~ ~ 0 ~ ~ ~
622,684
'(328,41 2)
(48)?75)
(187569) 58,416
~716 450 431 106 (817,025)
(157,086) 8 357 132,548 (275,026)
(17,712)
(56,191) 175,810
~643,463 684,034 (1,021,177) 5,635 1,428,675 (1,5957936)
(200,525)
(46,518) 232,240
~653,389 735,453 (1,156,387) 15,297 Decrease in cash and equivalents......., ~......, ~.........;.....,
~.
Cash and equivalents, beginning of year....~........~.......
~. ~
Cash and equivalents, end of year.....,........,.....,....,........
(9,230) 32,452 (73,685) 106,137 (101,570) 207,707 8
23 222 3
32,452 3
106,137
~965 754
~1,015,542
~1,141,090 Noncash Investing and Financing Activities:
Conversion of 5.20% convertible preference stock......
Conversion of subordinated debentures.~...................
~..
$2,108 2,973 414 3,136 845 2,849 The accompanying notes are an integral part of these financial statements.
SOUTHERN CALIFORNIAEDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION Not subject to mandatory redemption(b)(c):
Cumulative preferred:
COMMON SHAREHOLDER'S MUITY(See accompanying statements)..
PREFERRED AND PREFERENCE STOCK December 31, 1988 Shares Redemption 88 8ed> 8
~O>I>le Iield Price December 31, 1988
" 1987 (In thousands)
$ 4,556,592
$ 4,541,626
$25 Par Value:
$100 Par Value:
Preference:
$25 Par Value:
Total.
Subject to mandatory redemption(b)(d):
Cumulative preferred:
$100 Par Value:
Preference:
$25 Par Value:
4 08%
4.24 4.32 4.78 5.80 7.58 8.70 8.96 1,000,000 1,200,000 1,653,429 1,296,769 2,200,000 750,000 500,000'00,000 7.325%
7.80 8.54 8.70A 12.31 547,381 483,495 615,000 433,124 430,000 7.375 5.20 convertible
$ 25.50 25.80 28.75
- 25.80 25.25 101.00 104.00 104.00
$103.54 104.62 105.65
- 110.00 105.83 25,000 30,000 41,336 32>419 55,000 75,000 50,000 50,000 358,755 54,738 48,350 61,500 43,312 43,000 25,000 30,000 41,336 32,419 55,000 75,000 50,000 50,000 2,483 361,238 60,000 51,000 63,750 45,937 50,000 28.864 Preferred and preference stock to be redeemed within Total..
LONG-TERM DEBT First and refunding mortgage bonds(d)(e):
Maturity
'ne year Interest Rates 250 900 299,551 (11,883) ~22,013 277,538 239,037 1989 through 1992 1993 through 1997 1998 through 2002 2003 through 2007 2008 through 2020 4>I)% to 8%%.
SII)% to 9%
8V4% to 9%..
9%% to 9.95%..
8%% to 13%..
475,000 11125,000 650,000 278>750 1,267,476 672,000 1,000,000 500,000 284,000 1,084,413 Pollution control bonds(d)(fj:
1999 through 2015 Funds held by trustees Debentures and notes(c)(d):
1992 through 1993 Nuclear fuel indebtedness(d)(g)
Long-term debt due within one year(d).
Unamortized debt discountnet.
Total..
Total Capitalization.
6%% to 10%% and variable......
9.6% to 11%..
3,796,226 947,730 (11,119) 211>550 424,168
'133,054)
(22,844) 3,540,413 897,730 (10,472) 202,973 379,029 P9,542)
~14,803 5,212,657 4,915,328
$10,367,041
$10.095,730 Notes to Consolidated Statements of Capitalization are on the following page.
The accompanying notes are an integral part of these financial statements.
a Preferred stock redemption requIrements.......
Long-term debt maturitles and sInking fund requirements...................................................
Total..
133,054 182,858 174,674 192,088 212,541
$144,917
$194,596
$186,412
$203,826
$224,879 SOUTHERN CALIFORNIAEDISON COMPANY Notes to Consolidated Statements of Capitalization (a) Effective July 1, 1988, SCEcorp became the parent holding company of Southern California Edison Company (the Company). Holders of the Company's common stock became holders of SCEcorp common stock on a share-for-share basIs.
The California Public Utilities Commission's (CPUC) decision authorizing establishment of a holding company requires the Company to maintain a capital structure consistent with the CPUC's most recently authorized capital structure.
(b) In connection with the formation of SCEcorp, each outstanding share of the Company's original preferred stock was'onverted into 2.1 shares of SCEcorp's common stock. The Company's authorized shares of $25 cumulative preferred, $100 cumulative preferred, $25 preference and $100 preference stock are 24,000,000, 12,000,000, 10,000,000, and 2,000,000 shares, respectively. All series of cumulative preferred and preference stock are redeemable. The 430,000 shares of $100 cumulative preferred stock, 12.31% Series, are not subject to redemption until May 1, 1992 other than pursuant to sinking fund provisions. The various series of $100 cumulative preferred stock are subject to certain restrictions on redemption for refunding purposes.
(c) On May 31, 1988, the Company either redeemed or converted Its outstanding shares of 5.20% convertible preference stock and converted all of the outstanding 12'h% convertible debentures at the conversion price of $16.1875.
(d) The table below presents the mandatory redemption requirements for preferred stock, long-term debt maturlties and sinking fund requirements for the five years subsequent to December 31, 1988:
Year Ended December 31, 1989 1990 1991 1992 1993 (In thousands)
$ 11>863
$ 11,738
$ 11s738
$ 11,738
$ 12,338 (e) Substantially all the Company properties are subject to the liens of trust indentures, except for nuclear fuel and fuel oil inventories, which are financed with short-term debt In conformity with CPUC ratemaklng procedures.
(f) Rrst and refunding mortgage bonds and other indebtedness have been issued to governmental agencies in exchange for proceeds from pollution control bonds. These proceeds have been deposited with trustees and are used to finance construction of po!Iution control facilities. Certain pollution control bonds may be redeemed at the discretion of bondholders.
The Company has made arrangements with security dealers for the remarketlng or purchase of the pollution control bonds In such cases. The Company arranged lines of credit for $600 million at December 31, 1988, to refinance these bonds, should remarketing'e unsuccessful.
(g) Nuclear fuel financing Is comprised of:
Foreignwurrency<enominated notes(1).
Commercial paper(2)
Spent nuclear fuel obligation(3)...
Less: Current maturltles..
Total.
December 31, 1988 1987 (In thousands)
$ 62,950
$ 66,000 338,777 288,296 22,441 24,733 424,168 379,029 65,494 2,292
$358,674
$376,737 (1) The Company issued foreign-currency<enomlnated notes totaling $60.4 million In September 1987 to Anance nuclear fuel. The notes mature 24 months from the date of issuance.
Under a currencywxchange agreement, a securities firm.
assumes all forelgnwurrency translation gains and losses. Weighted-average interest rates on the notes are based on the average daily commercial, paper rate and were 7.46% for 1988 and 7.09% for 1987. Forelgnwurrency translation gains or losses have been deferred and are Included in the translated value of the liability.
(2) A portion of the commercial paper used to finance nuclear fuel has been classlfied as long-term debt under refinancing agreements with commercial banks. The long-term portion finances nuclear fuel not scheduled for consumption within 12 months of the balance sheet dates.
(3) Pursuant to the Nuclear Waste Policy Act of 1982, the Company has sIgned a contract with the U.S. Department of Energy for disposal of spent nuclear fuel from the San Onofre Nuclear Generating Station. The interest rate Is Axed at 10.57%.
SOUTHERN CALIFORNIA.EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY Year Ended December 31, 1988 1987 (In thousands) 1986 Common Stockpar value $4% per share, 280,000,000 shares authorized, 217,444,052, 217,126,601, and 216,906,527 outstanding at respective dates(a)(b)
'dditional Paid-In Capital:
Balance at beginning of year.
Premium received on capital stock, conversions and redemptions(b).........................:.
Capital stock expense
~ ~
~.. ~
Capital transfer prior to restructuring and other....
Balance at end of year.
Retained Earnings:
Balance at beginning of year.
Add:
Net income.
$1,307,758 4,635 (21)
~53 500
$1,402,217 2,608 (24)
~97.043
$1,431,041 2,664 (56)
~31,432
$ 1 258 872
$1,307,758
$1,402,2 "17
$2,329,174
$2,132,694
$2,107,228 C
731,385 3,060 559 747,283 2,879,977 557,882(c) 2,665,110 906,017 904,694 903,777 Less:
Dividends declared on:
Common.
Cumulative preferred Preference...~ ~. ~ ~. ~ ~. ~.. ~. ~..~......
~
Other net.
622,160 46,208 488 668,856 513,367 47,730 2,365 563,462 12,659 489,909 51,311 3,062 544,282 11,866 Balance at end of year(d) ~...... ~ ~ ~.
Total Common Shareholder's Equity at End of Year.~......
~~.......~..... ~, ~ ~~,....,. ~ ~,.~.... ~,......~......
$2 391,703
$2,329,174
$2,132,694
$4,556,592
$4,541,626
$4,438,688 (a) As a result of the corporate restructuring described in Note 1 of Notes to Consolidated Financial Statements, all issued and outstanding common stock is now held by SCEcorp and is no longer publicly traded.
(b) During the second quarter of 1988, common stock was issued for the conversIon of most of the outstanding 5.20%
Convertible Preference Stock and all of the 12'h% Convertible Subordinated Debentures, Due 1997. The outstanding shares of 5.20% Convertible Preference Stock that were not converted were redeemed.
(c) Restated from 6751,088,000 to 6557,882,000 to reflect the after-tax writewff of nuclear plant disallowances totaling 6193,206,000.
(See Note 3 of Notes to Consolidated Financial Statements).
(d) Includes appropriated,retained earnings related to certain federally licensed hydroelectric projects of 64,468,000 at December 31, 1988.
The accompanying notes are an integral part of these financial statements.
I
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS NOTE 1Corporate Restructuring and Proposed Merger On July 1, 1988, SCEcorp acquired the outstanding common stock of Southern California Edison Company (the Company) under a merger agreement approved by shareholders on April 21, 1988. The Company's common shareholders became holders of SCEcorp's common stock on a share-for-share basis.
Each share of the Company's outstanding original preferred stock was converted into 2.1 shares of SCEcorp's common stock. The Company's remaining preferred stock and debt securities were not exchanged or transferred to SCEcorp. The Company's equity invest-ment in nonutility subsidiaries was transferred to SCEcorp at book value on July 1, 1988. The accompanying consolidated financial statements have been restated to reflect the financial position and results of operations of the Company as presently structured. The effect on net income of excluding the earnings of nonutility companies that were formerly the Company's subsidiaries is reflected in the table below.
Year Ended December 31, Net income previously reported..
Restatement nuclear plant disallowance (Note 3).
Earnings from nonutility subsidiaries..
Restated net Income 1987 1986 (ln thousands)
$788,626
$768,617 (193,206)
~41,343
~(17,529
$747,283
$557,882 On November 30, 1988, SCEcorp, the Company, and San Diego Gas 8 Electric Company (SDG&E) executed an agreement to merge SDG&E into the Company.
Under the terms of the merger agreement, SCEcorp will exchange 1.3 shares of its newly issued common stock for each SDG&E common share.
SDG&E preferred and preference stock will be exchanged for SCEcorp preferred and preference stock with similar provisions, except that dividends on each series will be increased between 2.5% and 20.0%. The merger is subject to approval by the shareholders of SCEcorp, the Company, and SDG&E, as well as regulatory agencies, including the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
NOTE 2Summary of Significant Accounting Policies Consolidation Policy-The consolidated financial statements include the accounts of the Company, its wholly owned financing subsidiary, SCE Capital Company, and other utility related subsidiaries which are not considered significant for financial reporting purposes.
All significant intercompany transactions have been eliminated, except intercompany profits from energy sales to the Company by unregulat-ed, energy-producing affiliates, which are allowed in rates.
Accounting Principles-The Company is regulated by the CPUC and the FERC. The accompanying consolidated financial statements reflect the ratemaklng policies of these commissions, as applied to the Com-
- pany, in conformity with generally accepted accounting principles applicable to rate-regulated enterprises.
UtilityPlant-The costs of plant additions, including replacements and betterments, are capitalized and included in utility plant. Capitalized costs include direct material and labor, construction overhead, and an allowance for debt and equity funds used to finance construction. The cost of property that is replaced or retiredand related removal costs, less salvage is charged to the accumulated provision for depreciation. Accumulated deferred income taxes related to utility plant are presented as a deduction from utility plant to conform with ratemaking procedures used to determine rate base.
b a
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 2Summary of Significant Accounting Policies(continued)
Allowance for Funds Used During Construction (AFUDC)
AFUDC represents the cost of debt and equity funds that finance construction of utility plant.
Capitalized AFUDC is reported in the consolidated statements of income as a reduction of interest charges for the debt component and as other income for the equity component. AFUDC and plant construction costs are recovered when completed projects are placed into commercial operation, and the recovery of related depreciation is authorized through customer rates.
Before 1987, the cost of debt included in the AFUDC calculation was reduced by the tax benefit realized from deducting the related interest expense from taxable income. As a result of changes in the treatment of interest expense for income tax purposes, pretax interest expense was used to compute the debt component of AFUDC beginning in 1987. The AFUDC rate, which reflects semiannual compounding, was 10.76'/o for 1988 and 11.57/o for 1987 under the pretax method. The rate was 10.53/o for 1986 under the previous net-of-tax method.
Depreciation and Decommissioning Depreciation of utility plant, except nuclear fuel, is computed on a straight-line, remaining-life basis.
The estimated cost of decommissioning the Company's nuclear generating facilities is $713 million and is recovered in rates through annual allowances charged to depreciation expense. Retail rates for 1988, and certain prior years, included annual'decommissioning revenue requirements, which have been deposited in trust funds until decommissioning begins. Trust fund contributions aie invested in high-grade securities. Approximately 80/o of the trust fund contributions qualify as tax deductions.
Nuclear Fuel-The cost of nuclear fuel, including its disposal, is amortized on the basis of generation and is charged to fuel expense.
In accordance with ratemaking procedures adopted by the CPUC, nuclear fuel financing costs are capitalized until the fuel is placed into production.
- Research, Development, and Demonstration (RD&D)
RD&D costs not related to a specific project are expensed in the year incurred. RD&D costs related to specific construction projects are capitalized until it is determined whether they willresult in construction of plant. If construction does not result, the costs are charged to expense.
RD&D costs are reflected in the following table:
t Year Ended December 31, RD&D costs charged to expense.
RD&D costs deferred/capitalized..
Total RD&D costs 1988
$43I414 17,455
$60,869 1987 (In thousands)
$42,893 14,855
$57;748 1986
$47,122 3,888
$51,010 Commencing in 1988, a balancing account has been established for RD&D costs charged to expense.
Under this mechanism, the Company'is required to refund to ratepayers any authorized but unspent RD&D funds at the end of the three-year rate-case cycle ending December 31, 1990.
Unamortized Debt Issuance and Reacquisition Expense Debt premium, discount, and issuance expenses are amortized over the lives of the related issuances.
The expense of reacquiring bonds that are redeemed without refunding are amortized over the period the debt would have remained outstanding. The reacquisition expenses are amor-tized over the lives of the new debt issues when debt is reacquired with refunding.
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 2Summary of Significant Accounting Policies(continued)
Change in Accounting Principle Prior to 1987, electric operating revenue was recorded based on customer billings. On January 1, 1987, the Company began accruing estimated revenue for electricity that had been delivered to customers through the end of each month but had not yet been billed. This accounting change conforms to the Tax Reform Act of 1986, which requires utilities to include unbilled revenue in taxable income commencing in 1987 and results in a better matching of revenue and expense.
Had the new accounting method been in effect for 1986, net income would have been $2.7 million less than the amount reported.
Regulatory Balancing Accounts Operating Revenue-The CPUC has authorized an electric revenue adjustment mechanism (ERANI) balancing ac-count to minimize the effect on earnings of retail sales fluctuations. DNerences between authorized and recorded base rate revenue are accumulated in the account until they are refunded to or recovered from utility customers through CPUC-authorized rate adjustments.
Energy Costs-An energy cost adjustment clause (ECAC) balancing account adjusts results of operations for variations between the recorded cost of fuel and purchased power and revenue designated for recovery of such costs. Undercollected energy costs are accumulated in the balancing account until they are recovered from utility customers through CPUC-authorized rate adjustments.
Previously, 90'h of fuel and purchased power costs were recovered through ECAC, and the remaining 10 k of such, costs were recovered through the annual energy rate (AER). On June 1, 1988, the CPUC suspended the AER rate component. As a result, all fuel and purchased power costs are currently recovered through ECAC.
In 1987, the CPUC authorized a one-time write-down of the cost of fuel oil inventory to market prices. It also authorized the last-in, first-out inventory method for measuring the cost of fuel oil consumption. The $108.7-million write-down, including interest, has been recorded in the ECAC balancing account. On December 31, 1988, the balance remaining to be recovered-was $59.0 million, including interest.
The CPUC has established performance incentives based on target generation levels for the Company's nuclear generating stations. Fuel savings or costs attributable to levels above or below the targeted ranges are divided equally between the Company and customers through adjustments to the ECAC balancing account.
Major Plant Additions Before 1988, the Company used major additions adjustment clause (IvlAAC)balancing accounts to accumulate the differences between revenue required to provide recovery of ownership costs of San OnofreNuclear Generating Station (San Onofre) Units 2 and 3 and Palo Verde Nuclear Generating Station (Palo Verde) Units 1 and 2 and related authorized revenue.
Commencing in 1988, ownership costs of San Onofre Units 2 and 3 are recovered in base rates.
The ownership costs of Palo Verde Units 1, 2, and 3 are also recovered in base rates to the extent they are not deferred in accordance with the Palo Verde rate phase-in plan. Recovery of remaining undercollections. in the MAAC balancing accounts as of December 31, 1988, has been authorized over a three-year period, beginning in 1989.
10
SOUTHERN CALIFORNIAEDISON COMPANY NOTENS TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 2Summary of Significant Accounting Policies(continued)
Interest and 7'axes Interest on regulatory balancing accounts is accrued at the three-month prime commercial paper rate. The weighted-average interest rates were 7.60k for 1988 and 6.57/o for 1987. Income tax effects on the changes in the regulatory balancing accounts are deferred.
Palo Verde Rate Phase-In Plan Palo Verde Units 1, 2, and 3 have been in commercial operation, for ratemaking purposes, since February 1, 1986, September 19, 1986, and January 20, 1988, respectively. The CPUC has adopted a 10-year rate phase-in plan, which defers $200 million of required revenue during the first four years of operation for each unit. Deferrals for each unit, for years one through four, are $80 million,
$60 million, $40 million, and $20 million, respectively. The deferrals and related interest will be recovered on a level basis during the final six years of each unit's phase-In plan.
Statements of Cash Flows Beginning in 1988, the Company presented statements of cash flows in conformity with a new accounting standard. Prior periods have been restated to be consistent with the current presenta-tion. For purposes of the consolidated statements of cash flows, the Company considers short-term temporary cash investments to be cash equivalents. Cash payments for interest were $468.2 million in 1988, $452.6 million in 1987, and $465.7 million in 1986.
Restatements and Reclassiflcatlons-All prior period financial statements and related notes have been restated to reflect consolida-tion of all majority-owned subsidiaries.
The consolidated financial statements also have been restated to reflect the write-off'of utilityplant and related adjustments to the accumulated provision for depreciation, accumulated deferred income taxes, and retained earnings resulting from the CPUC's disallowance of nuclear plant construction co'sts. See Note 3 for a further discussion of the disallowance.
Certain other items in prior periods have also been reclassified to conform them to the financial statement presentations for December 31, 1988.
NOTE 3Regulatory Matters CPUC Disallowances-In October 1986, the CPUC disallowed $258.6 million of the Company's $3.4-billion investment in San Onofre Units 2 and 3. The Company filed for rehearing on $213.4 million of the disallowed costs in'December 1986. In March 1987, the CPUC granted a rehearing on indirect construction cost issues and, in July 1987, issued a decision that reduced the October 1986 disallowance to $198.9 million.
Recovery of the Company's $1.5-billion investment in Palo Verde was reduced by 19.33/o of the amount disallowed for San Onofre Units 2 and 3, under a ratemaking agreement adopted by the CPUC. The CPUC's investment disallowances for San Onofre and Palo Verde total $237 million.
In December 1986, the Financial Accounting Standards Board began requiring regulated enter-prises to write off construction costs not allowed in rate base. The new standard provides for the restatement of prior period financial statements for disallowances occurring before the standard's effective date of January 1, 1988. Accordingly, the 1986 consolidated statement of income includes a one-time, after-tax charge against earnings of approximately $193 million, reflecting the CPUC's final construction-cost disallowances arising from its October 1986 decision.
11
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 3Regulatory Matters(continued)
In addition, revenue accrued to recover prior years'wnership costs, which is associated with the construction costs disallowed by the CPUC, has been written off from the MAAC balancing account. The Company recorded after-tax charges against earnings of approximately $15 million for 1986 and $70 million for 1987.
Energy Cost Proceedings-The CPUC's Division of Ratepayer Advocates (DRA) recommended that the CPUC disallow
$124 million of energy costs incurred between late 1984 and late 1987. Approximately $120 million of the proposed disallowance represents alleged overpayments to nonutility power producers, including electricity purchased by the Company from a 300-MW cogeneration facilityowned by Kern River Cogeneration Company (KRCC). Mission Energy. Company, which is 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 approximately $37 million. In upcoming CPUC hearings, the Company willdemonstrate that the power purchases from KRCC actually saved its customers more than $24 million during the three years under consideration, compared with the "standard offer" contract approved by the CPUC. The DRA also alleges overpayments by the Company under 17 other contracts negotiated with nonutility power producers'that are not SCEcorp affiliates. The Company signed these contracts during the early stages of California's efforts to rapidly develop alternate and renewable energy resources.
At that time the projected prices under these 17 contracts were at or below avoided cost standard contracts over their lives.
In addition to its recommended energy cost disallowance, the DRA has recommended that the CPUC modify its early 1988 decision that authorized formation of a holding company.
Although the probable effect that the outcome of this matter willhave on net income cannot be determined at this time, the Company believes that adoption of the DRA's recommendation to modify the holding company decision is not necessary to protect the public interest and will work diligently to demonstrate that it has reasonably administered the contracts under review. CPUC proceedings are scheduled to take place later this year.
Resale Rates-In accordance with FERC procedures, resale revenue is subject to refund with interest if subsequently disallowed. The Company believes that any refunds resulting from pending rate proceedings, should not have a material effect on net income.
NOTE 4Short-Term Debt The Company maintains unrestricted deposits of approximately $7 million at commercial banks and pays annual commitment fees of up to.1/o to maintain lines of credit which may be utilized at negotiated or bank index rates and which totaled $1.9 billion on December 31, 1988. Approximately
$1.3 billion of these lines of credit support commercial paper and other borrowings to finance general cash requirements; fuel inventories; and undercollections in regulatory balancing accounts.
The remaining $600 million of these lines of credit are available for the long-term refinancing of certain variable-rate pollution-control indebtedness.
.12
NYSE: SCE aoq oy1a Ell In 1988, SCEcorp was formed as the parent holding company of Southern California Edison Company, and The Mission Group of nonutility businesses.
The formation of SCEcorp provides a better corporate separation between utilityand nonutility businesses.
The Boards of Directors of SCEcorp and San Diego Gas &Electric Company (SDG&E) reached agreement to merge SDG&E into Edison. Shareholders approved the merger, and it is expected to be completed during 1990, subject to state and federal regulatory approvals.
SCEcorp is well positioned forthe future with a financially and operation-allystrong electric utilityin a growing service territory, and nonutility subsidiaries with good prospects for earnings growth.
Strong Financial Performance
~ a SCEcorp achieved another year of record earnings per share.
e Nonutilityearnings per share increased 84% from1987, providing 10% of SCEcorp earnings, with earnings growth achieved in each nonutilitybusiness.
x Nonutilityearnings rank second among all electric utilities and electric utilityholding companies.
w Dividends have been paid without.
interruption since incorporation in 1909 and increased 13 times in the past 12 years.
a Total return to shareholders (stock price appreciation pIus dividends) averagedmore than19% forthe past five-year and ten-year periods.
ck 100% of Edison's capital needs were:,
generated internally in 1988, the highest level in over 30 years.
a Bond ratings have been maintained at double-A (very strong) from both Standard 8 Poor's and Moody's since initialratings.
Earnings Per Share
$4 May 1989 84 85 86'7 88
'eflects a one-time restatement fornuclear plant disallowance.
SCEcorp Financial Highlights 1988 1987 1986 1985 1984 Operating Revenues(millions)
$6,253
$5,602 Net Income (millions)
$762
$739 Rate of Return on Common Equity 15.3%
15.5%'arnings Per Share
$3.49
$3.39 Dividends Paid Per Common Share
$2.43
$2.33 Stock Price Year End
$32'k
$30ya Dividend Yield 7 7%
7.8%
Reflects a one time restatement fornuclear plant disallowance.
$5,368
$ 521'1 1o/*
2.39'2.22
$33r/s 67%
$5,217
$702 15.8%
$3.26
$2.10
$26Vs 81%
$4,899
$659 16.3%
$3.18
$1.97
$22s/4 9.0%
~D=zur~'s UtilitySubsidiary SZ~<<4Ã Southern Calilomla Errrson Southern California Edison Edison, the second largest U.S. electric operating utility,serves more than 3.8 millioncustomers in a 50,000-square-mile service territory that covers much of Central and Southern California. With headquarters in Rosemead, California, Edison is a regulated, investor-owned utilityproviding electric service to one of the nation's most robust and properous regional economies.
Strong Customer Growth In 1988, Edison added over 114,000 new customers, the third highest customer growth in its 102-year history.
The growth and vitalityof Edison's service territory contributes to its strong financial position. Edison's service territory contains four of the five Fastest growing counties in California and, ifa separate nation, would have the 15th largest economy of any country in the world.
Quality Customer Service A key element of the company's approach to customers is a strong commitment to excellent service. Last year alone, companywide quality service programs found literally hundreds of ways to give better and more responsive service to customers.
Quality service results in customer satisfaction and ultimately benefits shareholders.
'a
Dividends In June 1988, SCEcorp raised its common stock dividend 4.2% from $238 to $2.48 per share. This was the 13th dividend increase in the past 12 years. Atyear-end 1988, the annual dividend provided a 7.7%
yield on a common stock market price of
$32Ve pershare.
SCEcorp Stock Price and Volume History
$42 38 34 SCEcorp Dividend History
$2.50
~ comumer Price Index 1.50 22 18
.50 14 1976 SCEcorp Stock Data Common stock is traded under the symbol SCE on the New York, PaciFic, London, and Tokyo exchanges.
SCEcorp's newspaper listing symbol is SCEcp. Average daily volume in the U.S. for1988 was 825,000 shares. Unusually large volume in December 1987 and June 1988 resulted from dividend trading strategies.
SCEcorp Five-Year Annual Return Comparison (Stock Appreciation and Dividendsi 20o/
84 85 86 87 88 (Millionsof Shares) 84 85 86 87 88
'See SCEcorp Stock Data.
Management Howard P. Allen Chairman of the Board, President and Chief Executive Officer 10 25 20 15 10 58P DJIA 500 DJUA SCEcorp Stock 15 10 Investor Contact W. James Scilacci It Manager of Investor Relations Telephone (818) 302-2515 SCEcorp P. 0. Box 999
~ Rosemead, CA 91770 Additional information available upon request.
~if Z~CC7<pCF of4TOOeeee fffeenoe)
'l
-t Diversi%ed Resources The company main-tains a significant degree of flexibility by utilizing nine different energy resources to produce electricitygas, oil, coal, nuclear, wind, geothermal, solar, hydro, and biomass more resources than any other utility in the world.
Expanding Transmission Access Edison's transmission system includes five major transmission lines, three lines to the Pacific Northwest and two lines to the Southwest. These lines are capable of transmitting 4,000 MWto Edison or enough power to serve two million people. A recent upgrade to one line and planned construc-tion of two additional lines willincrease the company's transmission capacity 25%.
These transmission facilities enhance system reliabilityand provide greater access to low-cost, out-of-state surplus energy and capacity.
i-A i)
Leaderin Research and Development Edison continues to be a leader in research and development. Current projects include participatidn in the development of a revolutionary new two-way electronic metering and communications network and promotion of pollution-free electric vehicle development.
~C:=en<~'s NonutilitySubsidiaries MISSION ENERGY MISSION FIRST FINANCIAL MISSION LAND MISSION POWER ENGINEERING The Mission Group The Mission Group Earnings Per Share 35C Mission Power Engineering Mission First Finenciel 40c 30 The Mission Group in 1987, the Mission Group was established to consolidate and manage SCEcorp's nonutility businesses.
Its objective is to broaden SCEcorp's earnings base by investing in areas which can provide long-term earnings growth. The Mission Group's four nonutilitysubsidiaries are fn businesses closely related to the electric industry irjcluding: development and ownership of cogeneration and independent power production facilities, financial investments, real estate development, and engineering and construction of electric power generating facilities and transmission systems.
s ness nn+n
'g I~~
Mission Energy Formed in 1986, Mission Energy has already established itself as a national leader in the ownership, develop-ment, and operation of alternative energy resources. Mission Energy provides a cost-effective solution to the generating needs of the 1990s and beyond.
Mission Energy's projects consist largely of cogeneration installations over 100 MWin size and emphasize joint venture projects with low technological risk, sound economics, and strong contractual relationships withwell-established partners. Mission Energy is presently a partner in projects totalling almost 2,000 megawatts, or enough energy to serve the needs of more than one millionpeople.
r 19C 1986 1987 1988 Mission Lend Mission Energy 20
Mission First Finanoiai Formed in 1987, Mission First Financial engages in longer-term, financially-oriented investment opportunities such as high-quality securities, leverage leasing, project financing, and energy-related venture capital.
Mission First Financial participated in a sale and leaseback oF a nuclear power plant in Pennsylvania and a paper mill/
cogeneration plant in Minnesota.
Mission First Financial is also managing a hedged utility-oriented dividend capture program.
Mission Land Mission Land was formed in 1986 with its predecessor companies dating back to the early 1900s. Its principal business is development oF industrial warehouses and distribution buildings.
Mission Land owns and manages six industrial parks in separate regions in Southern California and Arizona, which contain more than two millionsquare feet of leasable space. Additionally, Mission Land has entered into several joint-venture land developments in Illinois, Indiana, and California.
Mission Power Engineering Formed in 1986, Mission Power Engineering performs consulting, engineering and construction including electric generating units, transmission lines, and substations.
Mission Power has been awarded contracts with a total value of more than $400 million.This subsidiary has grown steadily and last year ranked 26th among the nation's top 500 engineering/design firms.
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 4Short-Term Debt(continued)
The Company's short-term debt is comprised of:
December 31, General purpose..
Balancing accounts.
Fuel.
Total borrowlngs supported by lines of credit.
Less: Amount reclassified as long-term.
Unamortized discount.
Net short-term debt.
1988 1987 (In millions) 67.1
$ 35.8 400.0 400.0 535.3 518.3 1,002.4 954.1 338.8 288.3 5.3 658.3
$665.8 NOTE 5Income Taxes The Company and its subsidiaries are included in SCEcorp's consolidated federal income tax and combined state franchise tax returns. Under income tax allocation agreements, each affiliate calculates its tax liability separately.
Current and Deferred Taxes Income tax expense includes the current tax liability from operations, and deferred income taxes provided on certain items of income and expense which are reported in dmerent periods for tax and financial reporting purposes.
The current and deferred components of income tax expense are:
Year Ended December 31, 1988 1987 1986 (In thousands)
Current:
Federal.
State..
$278,598 105,580 384,178
$395,064
$349,034 121,075 117,177 516,139 466,211 Deferredfederal and state:
Investment and energy tax creditsnet.
Depreciation..
, Regulatory balancing accounts..
Debt reacquisition expenses.
Fuel contract settlements.
Nuclear plant disallowance..
Cumulative effect of accounting change.
Capitalized exploration and development expenses.
Unbilled revenue..
Rate phase-In'lan.
Fixed charges.
Contributions in aid of construction.
Other.
Total income tax expense..
5 Classification of income taxes:
Included in operating expenses.
Included In other income.;
Nuclear plant disallowance..
Related to cumulative effect of accounting change..
Total Income tax expense.
(18,085) 149,249 (797460)
(2,507)
(1,980)
(24,420) 78,743 7,994 (28,836) 23,876 784,574 5488,752
$412,105 76,647
$488,752 (15,824),
172,710 (33,463)
(1,390) 16,002 (78,616) 58,752 9
(27,467) 68,797 (14,178)
(14,000)
~33.587 97,736
$613,875
$555,433 78,306 (78,616) 58,752
$613,875 61,737 170,594 (21,400) 81,968 9,528 (61,665)
(31,338) 46,398 (45,538)
~14,988 195,298
$661,509
$687,520 35,654 (61,665)
$661,509 13
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 5Income Taxes (continued)
Accumulated deferred investment tax credits are amortized over the lives of the related properties.
Cash payments for income taxes were $500.8 million in 1988, $497.1 million in 1987, and $311.8 million in 1986.
The following table reconciles the differences between recorded state and federal income taxes and amounts determined on income before taxes by applying the federal statutory tax rate. The federal and composite federal and state statutory income-tax rates are 34/o and 40.138/o, respec-tively, for 1988; 40'/o and 46.138'/o, respectively, for 1987; and 46'/o and 51.184'/o, respectively, for 1986.
Year Ended December 31, Expected federal Income tax expense at statutory rate..........
Increase (decrease)
In Income tax expense resulting from:
Allowance for equity and borrowed funds used during construction..
Federal deduction for state taxes on income........................
Depreciation timing difference not deferred..........................
State tax provision.
Prior years'ecommissioning.
Nuclear plant disallowance..
All other differences.
Total income tax expense.
Pretax'income..
(61163)
(35,886) 70,224 105,547 (15,714)
~44,403) 488,752 (62,202)
(53,208) 102,536 115,669 55,042 67,246 (29,362)
(47,046) 96,042 117,614 (4,730)
~63.1 06 613,875 661,509
$1,220,137
$1,361,158
$1,219,391 1988 1987 1986 (In thousands) 4141847 544,463 560,920 Effective tax rate (total Income tax expense ~ pretax Income).....
40.14/o 45 1O/o 54.2o/
Deferred income taxes for tax depreciation prior to 1981 and certain construction overheads have not been provided because the tax effects of such timing differences are not allowed for retail ratemaking purposes until the taxes become payable. The cumulative net amount of these timing differences was $1.8 billion on December 31, 1988, and 1987.
Ratemaking Investigation-In 1986, the CPUC began an investigation to evaluate the effects of the Tax Reform Act of 1986 on ratemaking procedures.
Revenue for recovery of income tax expense for 1987 and subsequent periods was collected subject to refund pending a CPUC decision.
In October 1988, the Company refunded approximately $51 millionthrough the ERAM balancing account, in compliance with an August 1988 CPUC interim resolution. Final CPUC approval of the amounts refunded is pending. Because the Company had previously provided a reserve for this item, refunds to customers have not and are not expected to have any significant effect on net income.
New Accounting Standard Under accounting rules currently in effect, deferred income tax balances are not adjusted to reflect changes in tax law or rates. However, a new accounting standard will require such adjust-ments beginning in 1990.
The new standard requires significant balance sheet adjustments.
The Company will record additional deferred'income taxes related to the equity component of AFUDC, which is currently recorded on an after-tax basis; the debt component of AFUDC, which was recorded on a net-of-tax 14
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 5Income Taxes (continued) basis prior to 1987; and other temporary differences for which deferred income taxes have not been provided.
Additional balance sheet adjustments will be recorded for the net reduction in deferred income tax liabilities resulting from income tax rate changes; the recognition of deferred income tax assets attributable to the reduction of the book basis of property by unamortized investment tax credits; and to classify property-related accumulated deferred taxes as a liability instead of a reduction of utility plant.
The majority of additional deferred-tax assets and liabilities willbe offset by recording regulatory assets and liabilities representing the anticipated effects of these adjustments on customer rates.
Such regulatory assets and liabilities willbe adjusted as they are recovered or refunded through the ratemaking process and for changes in tax rates or laws.
NOTE 6Employee Benefit Plans Pension Plan-The Company has a trusteed noncontributory defined-benefit pension plan, covering substan-tially all full-time employees who fulfillminimum service requirements. Benefits are based on years of accredited service and average compensation.
The Company's policy is to fund the plan on a level premium actuarial method, provided that annual contributions meet the minimum funding requirements of the Employee Retirement Income Security Act and do not exceed the maximum deductible amount under income tax regulations. Prior service costs from pension plan amendments are funded over 30-year periods.
In 1987, a new accounting standard for defined-benefit plans was implemented that changed the basis for determining pension expense.
Before 1987, pension cost was based on the. actuarial method used to determine annual contributions to the plan". For 1986, pension expense amounted to
$48.6 million.
Pension expense under the new standard includes the following components:
Year Ended December 31, 1988 1987 (In thousands)
Net pension expense:
Service cost for benefits earned.
Interest cost on projected benefit obligation..
Actual return on plan assets..
Net amortization and deferral..
Pension liability pursuant to accounting standards......
Regulatory adjustment..
Net pension cost recognized.
43,340 102,249 (1336687) 40,610 52,512
~6,46 6) 46,096 46,629 91,025 (130,723) 46,699 53,630
~3,46I 50,149 In conformity with the accounting principles for rate-regulated enterprises, regulatory adjust-ments have been recorded to reflect, in net income, the pension costs calculated under the actuarial method used for ratemaking purposes.
The difference. between. pension costs calculated for ac-counting and ratemaking purposes has been recorded as a deferred charge on the consolidated balance sheets.
15
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 6Employee Benefit Plans (continued)
The plan's funded status is presented below:
Oecember 31, 1988 1987 (In thousands)
Actuarial present value of benefit obligations:
Vested benefits..
Nonvested benefits..
Accumulated benefit obligation Value of projected future compensation levels.....
Projected benefit obligation Plan assets at fair value..
905,190 68,531 973,721 435,363
$1,409,084
$1,326,635 800,952 57,306 858,258 372,095
$1,230,353
$1,201,550 S
(82,449)
(49,021) 89,640 (28,803)
(101,562) 95,163 Benefit obligation ln excess of plan assets..
Unrecognized net gain.
Unrecognized net obligation being amortized over 17 years..............................
Accrued pensIon liability.
$~35.202 Assumptions for defined benefit pension plan:
Discount rate..
8.0%
8.5%
Rate of increase in future compensation.
6.0%
60%
Expected long-term rate of return on assets.
85%
8.5%
Assets of the plan consist primarilyof common stocks, corporate and government bonds, short-term investments, and guaranteed investment contracts.
~$
44,330)
Employee Stock Plans-The Company maintains an Employee Stock Ownership Plan (ESOP) and a Stock Savings Plus Plan (SSPP), designed to supplement employees'etirement income. Contributions to the ESOP were funded primarily by federal income tax benefits and contributions by employees.
Company contributions to the SSPP were $ 1 6.9 million in 1988, $16.6 million in 1987, and $15.4 million in 1986.
NOTE 7Jointly Owned Utility Projects The Company owns undivided interests in several generating stations and transmission sys-tems, for which each participant provides its own financing. The proportionate share of expenses pertaining to such projects is included in the appropriate operating expense category in the Other Post-Employment Benefits Health care and life insurance are provided for retired employees and their dependents.
Group life insurance is provided through an insurance company. Health care is provided by a combination of Company facilities and insurance programs. The costs of these benefits for retirees were $22.8 million in 1988, $18.0 million in 1987, and $15.4 million in 1986.
16
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
El Dorado Transmission System.
Four Corners Coal Generating StationUnits 4 and 5.....
Mohave Coal Generating Station..
Pacific Intertie DC Transmission System.............................
Palo Verde Nuclear Generating Station...............................
San Onofre Nuclear Generating Station:
Unit 1 Units 2 and 3.
Common facilitiesUnits 2 and 3..
Common facilitiesUnits 1, 2, and 3..............................
Yuma Axis Generating Station.
Total.
537,022 2,759,741 819,030 176,130 12,369 153,999 477,523 114,846 28,854 10,516 23,261 18,084 1,863 3,599 69
$137,154
$6.539,145
$1,127,745 NOTE 7Jointly Owned Utility Projects (continued) consolidated statements of income. The table below presents the investments in each included in the consolidated balance sheet as of December 31, 1988:
ln thousands Plant In Accumulated Under Service Depreciation Construction 21,649 8,590 108 401,142 122,613 11,395 233,708 95,919 877 115,047 34)075 69,550 1,463,307 80,810 8,348 project as Ownership Interest 60.00%(a) 48.00 56.00 50.00 15.80 80.00 75.05 75.05 75.87 33.30 (a) Represents a composite rate.
NOTE 8Leases The Company leases automotive,
- computer, office, and miscellaneous equipment through operating rental agreements with varying terms, provisions, and expiration dates. At December 31, 1988, estimated remaining rental commitments for noncancelable operating leases were as follows:
Year Ended December 31,
~ln thousands) 1989.
~"
$ 28,284 1990..
25,227 1991.
~ -
.~...........................
22,354 1992
~
~
1 8,926 1 993.
~ - --
~ -- - -
- ---.--.-"--....~......................
14,637 For periods thereafter.........................................................
16,266 Total future rental commitments.
$125,694 On June 10, 1987, a wholly owned subsidiary purchased the leasing company from which the Company leased its nuclear fuel, by assuming the leasing company's commercial paper obligations.
On March 1, 1988, the Company assumed the commercial paper obligations of the affiliated nuclear fuel lessor and terminated the nuclear fuel lease agreement.
Lease liabilities supported by commer-cial paper borrowings, which had been classified as long-term obligations, have been reclassified as long-term debt to conform. with the financial'statement presentation of nuclear fuel financing on December 31, 1988. The long-term debt amount represents the estimated repayment of commercial paper based upon expected nuclear fuel consumption subsequent to one year after the balance sheet date and is supported by refinancing agreements with commercial banks.
NOTE 9Commitments Construction Program and Fuel Supply-As of December 31, 1988, the Company's construction expenditures are estimated to be $802 million for 1989, $704 million for 1990, and $713 million for 1991. In addition, minimum long-term commitments of approximately $1,607 million existed as of December 31, 1988, under fuel supply contracts.
17
SOUTHERN CALIFORNIAEDISON COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 9Commitments (continued)
Long-Term Purchased Power and Transmission Contracts-The Company has contracted to purchase portions of the generating output of certain facilities and to purchase firm transmission service when appropriate. Although there is no investment in such facilities, these contracts provide for minimum payments based, in part, on the debt service requirements of the provider, whether or not the facility or transmission line is operable.
None of these power contracts provide, or are expected to provide, more than 5/o of current or estimated future operating capacity.
The cost of power and firm transmission service obtained under these contracts, including payments made when a facilityor transmission line is not operating, is included in purchased power and other operating expenses, respectively, in the consolidated statements of income. Purchased power costs are generally recoverable through the ECAC balancing account procedure. Selected information pertaining to these contracts on December 31, 1988, is summarized as follows:
Purchased 1?ansmlsslon Power Service 1990-2017 1990-2016 473.5-627.5 5.54/~100.0/o (In thousands)
$ 46,468 9,033 13,854 6,030 2,500 4,529 2,500 4,422 2,500 4,267 59,375 86,118
$127,197
$114,399 Years contracts expire.
Share of effective operating capacitymegawatts Share of energy output..
Required minimum annual payments 1989.
1990.
1991.
1992 1993.
Thereafter.
Total.
Purchased power costs were $ 1 21.5 million in 1988, $118.0 million in 1987, and $115.3 million in 1986. Transmission costs were $11.4 million in 1988, $11.2 million in 1987, and $12.0 million in 1986.
NOTE 10Contingencies Nuclear Insurance-On August 22, 1988, Congress amended the Price-Anderson Act, extending it until August 1, 2002. It increased to $7.6 billion from $720 millionthe limit on public liability claims that could arise from a nuclear incident. Participants in San Onofre and Palo Verde have purchased the maximum private primary insurance available, which currently is $200 million. The balance is to be covered by the industry's retros'pective rating plan, using deferred premium charges.,This secon-dary level of financial protection Is required by the Nuclear Regulatory Commission (NRC). The maximum amount of the deferred premium that may be charged for each nuclear incident is $63 million per reactor, but not more than $10 million per reactor may be charged in any one year for each incident. The Company could be required to pay a maximum of $183.6 million per nuclear incident, on the basis of its ownership interests in San Onofre and Palo Verde, but it would have to pay no more than $29.1 million per incident in any one year. Such amounts include a 5'lo surcharge that would be applicable in the event that additional funds are needed to satisfy public liability claims, and are subject to adjustment for inflation.
Property damage insurance covers losses up to $500 million at San Onofre and Palo Verde.
Decontamination liabilityand property damage coverage in excess of the primary $500 million layer has also been purchased, exceeding NRC requirements.
Insurance covering part of the additional expense of replacement power, which could result from an accident related nuclear unit outage, is also provided. After the first 21 weeks of such an outage, a maximum weekly indemnity of $2.7 million for a single unit for 52 weeks begins. An additional $1.4 million per week is provided for the 18
SOUTHERN CALIFORNIA'DISONCOMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
NOTE 10Contingencies (continued)
~
next 52 weeks. These policies are issued primarily by mutual insurance companies owned by utilities with nuclear facilities. If losses at any nuclear facility covered by the arrangement were to exceed the accumulated funds available for these insurance
- programs, the Company could be assessed retrospective premium adjustments of up to $54.0 million per year. Insurance premiums are charged to operating expenses.
Antitrust Lltigation-In 1978, five resale customers filed a suit in federal district court, alleging violation of antitrust laws. The complaint seeks monetary damages, a trebling of such damages, and certain injunctive relief. The complaint alleges that the Company engaged in anticompetitive behavior by charging more for electricity it sold to resale customers than it charged certain classes of retail customers.
The complaint also alleges that the Company acted alone and in concert with other utilities to prevent or limit such resale customers from obtaining bulk power supplies from other sources to reduce or replace the resale customers'urchases from the Company. The plaintiffs estimate that their actual damages, before trebling, were approximately $99.5 million from February 1, 1978, through December 31; 1985. The trial began on July 8, 1986, and concluded on September 26, 1986.
The Company filed findings of fact and conclusions of law with the court on November 21, 1986. A decision is pending.
In 1983, another resale customer also filed a suit in federal district court, alleging violation of certain antitrust laws. The customer alleges that it has been denied access to lower-cost power and was overcharged for power purchases as well as other operational and financial damages.
On July
'7, 1988, the Company received the customer's antitrust damage study alleging total damages of approximately $135 million before trebling. A trial date of November 14, 1989, has been set.
The foregoing proceedings involve complex issues of law and fact. Although the Company is unable to predict the final outcome, it has categorically denied the resale customers'llegations.
19
SOUTHERN CALIFORNIAEDISON COMPANY Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Earnings Summary Earnings available for common stock in 1988 decreased
$12.5 million or 1.8% compared to the prior year. The decrease is primarily attributable to the reduction in the California Public Utilities Commission's (CPUC) authorized rate of return on common equity from 13.9% in 1987 to 12.75% In 1988. Several items offset the negative impact of the CPUC's reduction in authorized return on common equity, including the CPUC's approval of non-fuel expense levels that more accurately reflect current operating costs, management's continued emphasis on cost containment and a CPUC award for favorable coal-plant operating performance.
Operating Revenue and Sales Approximately 98% of operating revenue represents retail sales that are subject to rate regulation by the CPUC. The remaining revenue is from sales to wholesale customers, which are regulated by the Federal Energy Regulatory Commission (FERC).
Operating revenue increased by $430.6 million, or 7.8%, over last year, reflecting a 3.6%
increase in kilowatt-hour sales. The increase in revenue is attributable to a 3.9% increase in retail sales volume that resulted from the addition of more than 114,000 new customers and the effect of rate changes.
Resale sales volume declined 5.4% due to the availability of alternative energy sources to resale customers.
Increases in operating revenue of 3.4% in 1987 and 2.6% in 1986 reflect, in addition to rate changes, a 5.1% retail sales volume increase in 1987 and a 1.2% sales volume decline in 1986.
The table below presents the changes in major components of operating revenue which contributed to the overall variation from prior years.
Increase (Decrease)
From Prior Years December 31, 1988 1987 1986 (In Millions)
Operating Revenue Sales Base rate changes Balancing account rate changes Safes vofume changes-Retail Sales volume changes-Resale.
Other.
Total.
$664.8 (456.9) 206.2 (6 5) 23.0
$430.6 (6.5) 30.2 255.6 (106.3) 10.6
$183.6
$ 61.8 97.9 91.3 (117.2) 3.0
$136.8 Rate changes that became effective January 1, 1989, are projected to increase revenue by $77.7 million, or 1.3%. The CPUC approved an attrition increase of $116.4 millionto recognize increases in nonfuel expenses and to increase the Company's authorized rate of return on common equity to 13.0%
from 12.75%. In separate proceedings, the CPUC authorized a $77.1-million rate decrease after the Company completed fullrecovery ofuranium contract settlement payments and granted a $38.4 million rate increase for additional plant investment in the San Onofre Nuclear Generating Station.
Operating Expenses Operating expenses for 1988 increased by $343.9 million, or 7.5%, over 1987, compared with increases of $191.0 million, or 4.4% in 1987, and $173.8 million, or 4.1% in 1986. Fuel expense declined $119.0 million, or 10.9% in 1988, compared with an increase of $226.6 million in 1987, and a decrease of $812.4 million in 1986. The reduction in fuel expense for 1988 is the result of increased nuclear generation which displaced higher cost natural gas generation. The Company operated higher cost non-nuclear fuel-burning power plants less because of an increase in mandatory 20
purchases of power from nonutility producers at CPUC-mandated rates that exceeded rates for economy purchases.
Purchased power expense increased by $454.2 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.
l~
Provisions for regulatory adjustment clauses for 1988 reflect net overcollections of $240.7 million. The overcollections are attributable to growth in kilowatt-hour sales; CPUC-authorized recovery of previously deferred energy costs through the Energy Cost Adjustment Clause; and amortization of deferred costs under an adjustment clause that was established to recover costs of major system additions.
System growth, Including the addition of the Balsam Meadow Hydro Project, which commenced commercial operation in December 1987, and Palo Verde Nuclear Generating Station (Palo Verde)
Unit 3, which was placed into commercial operation in January 1988, contributed significantly to the increase of $20.5 million in other operating expenses.
Depreciation and decommissioning expense increased during 1988 by $94.2 millionofwhich $84.8 millionis attributed to higher levels ofdecommissioning expense authorizedby the CPUC. The remain-der of the increase results from increased depreciation due to system growth, as described above.
Taxes on operating income for 1988 decreased
$143.3 million, compared to 1987 resulting primarily from lower corporate tax rates instituted by the Tax Reform Act of 1S86. However, the lower tax rates were offset by reduced electricity rates for customers and, therefore, had little or no effect on net income.
Other Income and Income Deductions Utilities capitalize an allowance for funds used during construction (AFUDC) which represents the cost of debt and equity capital used to finance construction of plant additions. Completion of the Balsam Meadow Hydro Project and Palo Verde Unit 3 contributed significantly to a $86.3 million decline in AFUDC compared to 1987. AFUDC has declined steadily over the past three years, as the construction of major projects has been completed and the facilities placed into service.
The $20.7 millionincrease in 1988 interest income over 1987, resulted from higher interest rates on invested cash and increases in the average amounts of cash investments and regulatory-asset balances.
Significant Accounting Changes In accordance with changes in accounting standards for rate-regulated enterprises, in the first quarter of 1988 the Company recorded a noncash write-off against income of approximately $193 million, net of related income tax effects, for disallowed costs on its investment in nuclear facilities.
As permitted by the new accounting standard, the Company adopted these changes by restating the financial results for 1986, the period in which the write-offs would have been recorded had the present accounting rules been in effect.
As discussed further in Note 5 of the Notes to Consolidated Financial Statements, major balance sheet adjustments willbe recorded in accordance with new income tax accounting requirements that become effective in 1990. These changes are not expected to significantly affect future earnings.
FINANCIALCONDITION
'N Liquidityand Capital Resources The Company's, liquidity is affected primarily by construction expenditures and by capital requirements relating to debt and capital stock maturities. The capital resources available to meet these requirements include internal cash generation and external financings.
The majority ofthe Company's capital requirements continue to be met by cash generated through operations.
For 1988, nearly 75% of cash requirements were internally generated, compared with approximately 89% in 1987 and 97% in 1986. The decline in 1988 Is attributed to a 24.1% reduction in cash from operations net of a S.4% decrease in cash requirements. Cash flow and liquidityfor 1988 21
were unfavorably affected by revenue deferred to future years under the Palo Verde Rate Phase-in Plan, which willincrease through 1990, and decline in subsequent years. Additional items impacting cash flowunfavorably are increased income tax payments resulting from the Tax Reform Act of 1986, and contributions of more than $157 million to nuclear decommissioning trusts related to 1988 and certain prior years. A decline in construction expenditures and the recovery of balancing account undercollections partially offset these adverse factors.
The Company raised $622.7 million through long-term debt issuances during 1988, primarily to finance the redemption of more costly debt, repay bond maturities, and to meet sinking fund require-ments. Market conditions and other factors, including limitations imposed by the Company's Articles of Incorporation and Trust Indenture, influence external financings. As of December 31, 1988, the Com-pany could issue approximately $3.8 billionofadditional firstand refunding mortgage bonds or approxi-mately $1.7 billionof preferred stock at current interest and dividend rates under its Trust Indenture and Articles of Incorporation.
In conformity with CPUC-ratemaking procedures, short-term borrowings are utilized primarilyto finance fuel-oil inventory, regulatory balancing account undercollections, and nuclear fuel. The principal and interest related to these special purpose short-term borrowings are recovered through regulatory balancing-account mechanisms.
Note 4 of "Notes to Consolidated Financial Statements" discusses available lines of credit and related short-term borrowlngs.
Capital Requirements The Company's primary capital requirements consist of expenditures under its construction program and debt and capital stock maturities. It is anticipated that the majority of these capital requirements willbe financed through internally generated cash with supplemental financing through the issuance of long-term debt.
The following table presents the Company's projected capital requirements for calendar years 1989 through 1993:
Construction expenditures.
Maturitles of long-term debt.
Redemptions of preferred stock.
Capital requirements.
1989
$802.5 133.0 11.9
$947.4 1990 1991 1992 (In Millions)
$703.5
$712.9
$760.1 182.9 174.7 192.1 11.7 11.7 11.7
$898.1
$899.3
$963.9 1993
$694.2 212.5 12.3
$919.0 Capital Structure The Company's capital structure as of December 31, 1988 is reflected in the table below:
Common equity.
43.9%
Preferred stock.
5.8 Long-term debt.
50.3 Total.
100.0%
Proposed Merger As discussed in Note 1 of Notes to Consolidated Financial Statements, on November 30, 1988, SCEcorp, the Company, and San Diego Gas & Electric Company (SDG&E) executed an agreement to merge SDG&E into the Company.
Under the terms of the merger agreement, SCEcorp will exchange 1.3 shares of its newly issued common stock for each SDG&E common share. SDG&E preferred and preference stock willbe exchanged for SCEcorp preferred and preference stock with similar provisions, except that dividends on each series willbe increased between 2.5% and 20.0%.
The merger is subject to the approval of shareholders and various regulatory agencies, including the CPUC and the FERC. The Company is working to complete the approval process in early 1990.
22
SOUTHERN CALIFORNIAEDISON COMPANY Quarterly Financial Data (In millions) 1988'perating Revenue.
Operating Income Net Income...
Earnings Available for Common Stock......................
Common Dividends Declared...........
First
$1,305 186 120 108 130 Second
$1,315 210 141 130 136 Third
$1,876 433 363 351 135 Fourth
$1,437 184 107 96 221 Total
$5,933 1,013 731 685 622 Operating Revenue.
Operating Income Net Income...
Earnings Available for Common Stock......................
Common Dividends Declared.............
~.
First Second
$1,286
$1,333 209 245 165'"
194 153 181 124 129 1987 Third
$1,491 248 215 202 130 Fourth
$1,392 224 173 161 130 Total
$5,502 926 747 697 513
'uarterly fluctuations compared to 1987 are primarilythe result of a December 1987 CPUC rate decision which ordered the Company to change the way itbills large customers, concentrating a larger percentage of these customers'nnual charges Into the summer months.
- Includes $68 million resulting from an accounting change. (See Note 2 of Notes to Consolidated Financial Statements.)
23
RESPONSIBILITY FOR FINANCIALREPORTING The management of Southern California Edison Company (the Company) is responsible for preparing the accompanying consolidated financial statements.
The statements were prepared in accordance with generally accepted accounting principles and include amounts based on manage-ment's estimates and Judgments.
Management also is responsible for the accuracy of all other information in the annual report, including its consistency with the financial statements.
The Company's consolidated fiinancial statements have been audited in accordance with gener-ally accepted auditing standards by Arthur Andersen 8 Co., a firm of independent public ac-countants, which has expressed its opinion regarding the fairness of these consolidated financial statements in the accompanying report.
The management of the Company maintains systems of internal control that provide reasonable ass'urance that assets are safeguarded, transactions are properly executed in accordance with management's authorization,.and accounting records may be relied upon for the preparation of financial statements and other financial information. The design of internal control systems involves management's judgment concerning the relative cost and expected benefits of specific control measures.
These systems are augmented by internal audit programs through which the adequacy and effectiveness of internal controls, policies and procedures are evaluated and reported to management.
In addition, Arthur Andersen &Co., as part of its audit of the Company's consolidated financial statements, evaluate the internal control structure to determine the nature, timing and extent of its audit tests.
Management believes the Company's systems of internal control are adequate to accomplish the objectives discussed herein.
The Audit Committee of the Board of Directors, composed entirely of nonemployee directors, meets periodically with the independent public accountants, internal auditors and management.
This committee, which recommends to the Board of Directors the annual appointment of the independent public accountants, also considers the audit scope and nature of other services provided, discusses the adequacy of internal controls, reviews fiinancial reporting issues and is advised of management's actions regarding these matters. Both the independent public accountants and internal auditors have unrestricted access to the Audit Committee.
Management also Is responsible for fostering a climate in which the Company's affairs are conducted in accordance with the highest standards of personal and corporate conduct. This high ethical standard is reflected in the Company's Standards of Conduct, which are distributed periodi-cally to all employees of the Company. The Standards of Conduct address, among other things, complying with all laws and regulations applicable to the Company's business, avoiding potential conflicts of interests, and maintaining the confidentiality of proprietary information. The management of the Company maintains programs to assess compliance with these standards.
JQHN E. BRYSQN Executive Vice President and Chief Financial Officer HOWARD P. ALLEN Chairman of the Board, President and Chief Executive Officer February 6, 1989 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors, Southern California Edison Company:
We have audited the accompanying consolidated balance sheets and statements of capitaliza-tion of Southern California Edison Company (a California corporation hereinafter referred to as the "Company" ) and its subsidiaries as of December 31, 1988 and 1987, and the related consolidated statements of income, common shareholder's equity and cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of'the Company and its subsidiaries as of December 31, 1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the accompanying financial statements, the Company has given retroactive effect to the July 1, 1988 corporate restructuring which established it as a
subsidiary of SCEcorp and to its change in the method of accounting for its majority-owned subsidiaries. Also, as discussed in Notes 2 and 3 to the financial statements, the Company changed its method of accounting for unbilled revenues as of January 1, 1987 and, effective January 1, 1988, has retroactively changed its method of accounting for 'disallowances of plant costs.
ARTHUR ANDERSEN & Co.
Los'ngeles, California February 6, 1989 25
SOuTHERN CALIFORNIAEDISON COMPANY SELECTED FINANCIALAND OPERATIONAL DATA 1984-1988 Year Ended December 31, 1988 1987
'986'985 (In thousands) 1984" Summary of Operations Total operating revenue.................................
Total operating expenses Fuel and purchased power expenses Income taxes.
Allowance for equity and borrowed funds used during construction............................
Total Interest expense net........................
Net income..
Earnings available for common stock...........
Financial rate of return on common equity'.
Ratemaklng rate of return on common equity earned.
Ratemaking rate of return on common equity authorized...................................
Ratio of earnings to fixed charges...............
Balance Sheet Data Total assets'.
Gross utility plant'.
AccumUlated provision for depreciation and decommissioning'.
Percent of gross utility plant.........................
Common shareholder's equity'....................
Preferred and preference stock:
not subject to mandatory redemption.......
subject to mandatory redemption.............
Long-term debt.
Capital structure:
Common shareholder's equity'..................
Preferred and preference stock not subject to mandatory redemption
)
subject to mandatory redemption..........
Long-term debt'perating and Sales Data Area peak demand (MW)...............................
Area generating capacity at peak (MW).......
Total energy requirement (KWH)(000)...........
Percent energy requirement:
Thermal.
Renewable/alternative (including hydro)....
Purchased power and other sources........
Kilowatt-hour sales (000).................".'.............
Average annual KWH sales per residential customer.
Customers..
Employees..
$ 5,932>906 4,920,108 2,207,804 412>105 30,008 513>611
= 731>385 684,689 14.88%
$ 5,502,299 4,576,189 1,872,572 555,433 116,332 459,006 747,283 697,188 15.32%
$ 5,318,657 4,385,168 1,641,190 687,520 135,222 487,376 557,882 503,198 11.07%
$ 5,181,830 4,211,369 2,383,497 714,726 157,694 498,097 765,811 694,113 15.93%
$ 4,899,152 3,932,527 2,084,941 639,875 194,787 530,322 732,428 659,385 16.50%
12.20%
12.75%
3.21 11 97%
12.42%
13.90%
14.60%
3.38 -
3.30 13.22%
16.0P/o 3.76 14 24%
16 00'/o 3.38
$13,909,899 16,839>789
$13,729,205 16,246,467
$13,439,611 15,370,139
$13,092,936 14,541,307
$11,906,508 13,382,809 358,755 239>037 5,212,657 361,238 277,538 4,915,328 361,654 299,049 5,078,378 462,500 395,074 5,175,617 463,258 422,286 4,722,079 43.9%
45 0%
43.6% '2.4%
43.1%
3.5 2.3 50.3%
15,987 18,893 75)823,860 3.6 2.7 48.7%
14,775 18,206 74,142,513 3.6 2.9 49.9%
14,599 18,320 73,208,697 4.4 3.8 49 4%
14,587 17,776 73,755,963 4.7 4.3 47 9%
15,189 17,354 72,431,625 61.9%
70.8%
4.0 4.7 34.1%
24.5%
67,885,761 65,539,481 55.6%
58.7%
54.1%
7.9 6.0 7.5 36.5%
35.3%
38.4%
64,197,405 64,984,566 63,310,047 6,264 3,831)656 16,660 6,117 3,717,262 17,086 5,999 3,589,414 17,553 6,099 3,490,325 17,182 6,147 3,400,182 16,844 4,529>938 3,993,468 3,555,071 3,1 52,141 2,763,651 26.9%
24.6%
23.1%
~
21.7%
20.7%
$ 4,556>592
$ 4,541,626
$ 4,438,688
$ 4,445,090
$ 4,246,788
'estated for nuclear plant construction cost disallowances described in Notes to Consolidated Financial Statements.
-Amounts for 1984 represent the unconsolidated financial data of the Company prior to restructuring.
26
COMPANY DIRECTORS Howard P. Allen Roy A. Anderson Norman Barker, Jr.
Warren Christopher Camilla C. Frost Walter B. Gerken William R. Gould Joan C. Henley Jack K. Horton Carl F. Huntsinger Charles D. Miller J. J. Pinola James M. Rosser Henry T. Segerstrom E. L. Shannon, Jr.
Robert H. Smith Edward Zapanta B
Chairman of the Board, President and Chief Executive Officer, SCEcorp and the Company Chairman
- Emeritus, Lockheed Corporation,
- Burbank, California Chairman of the Board, Pacific American Income Shares, Inc., Los Angeles, California Chairman, O'Melveny 8 Myers, Los Angeles, California Chairman of the Executive Committee, Los Angeles County Museum of Art, Los Angeles, California Chairman of the Executive Committee, Pacific Mutual Life Insurance Company, Newport Beach, California Chairman Emeritus and Consultant to the Company (Retired Chairman of the Board and Chief Executive Officer of the Company), Long Beach, California General Partner and
- Manager, Miramonte Vineyards, Temecula, California Chairman of the Executive Committee, SCEcorp and the Company, and Consultant to the Company (Retired Chair-man of the Board and Chief Executive Officer of the Com-pany), Los Angeles, California General Partner, DAE Limited Partnership, Ltd. (Agricultural Management),
Ojai, California Chairman of the Board and Chief Executive Officer, Avery International Corporation (Manufacturer of Self-Adhesive Products), Pasadena, California Chairman of the Board and Chief Executive Officer, First Interstate Bancorp, Los Angeles, California President, California State University, Los Angeles, Los Angeles, California Managing Partner, C. J. Segerstrom
& Sons (Real Estate Development), Costa Mesa, California President, Chief Executive Officer and Director, Santa Fe International Corporation (Oil Service, Engineering, Petro-leum Exploration.and Production), Alhambra, California Pi'esident and Chief Executive Officer, Security Pacific National Bank, and Vice Chairman of the Board, Security Paciffc Corporation, Los Angeles, California Physician and Neurosurgeon, Monterey Park and East Los Angeles, California
- Willnot stand for re-election in 1989 27
COMPANY EXECUTIVE OFFICERS Howard P. Allen David J. Fogarty John E. Bryson Michael R. Peevey P. L. Martin L. T. Papay Kenneth P. Baskin Glenn J. Bjorklund R. H. Bridenbecker John R. Bury*
Richard K. Bushey Robert Dietch John R. Fielder Charles B. McCarthy, Jr.
Michael L. Noel Harold B. Ray Jennifer Moran Chairman of the Board, President and Chief Executive Officer Executl've Vice President Executive Vice President and Chief Financial Officer Executive Vice President Senior Vice President Senior Vice President Vice President, Nuclear Engineering, Safety and Licensing Vice President, Power Supply Vice President, Customer Service Vice President and General Counsel Vice President and Controller Vice President, Engineering, Planning and Research Vice President, Information Services Vice President and Site Manager, San Onofre Nuclear Generating Station Vice President and Treasurer Vice President, Fuel and Material Management Secretary of the Corporation
- Effective March 1, 1989, Mr. Bury has elected to retire and David N. Barry III will become Vice President and General Counsel.
28
SHAREHOLDER INFORMATION Stock Listing:
The Cumulative Preferred Stock, 4.08/o Series, 4.24/o Series, 4.32'/o Series, 4.78/o Series and 5.80/o Series, and the $100 Cumulative Preferred Stock, 7.58/o Series, 8.54/o Series, 8.70/o Series and 8.96/o Series are listed for trading on the American and Pacific Stock Exchanges.
The issued and outstanding common stock of the Company is wholly-owned by SCEcorp and as a result is not listed for trading on any stock exchange.
Stock Transfer Agent:
Registrar of Stock:
Southern California Edison Company Secretary's Department 2244 Walnut Grove Avenue P. O. Box 400
- Rosemead, California 91770 (800) 347-8625 Through December 31, 1988 Security Pacific National Bank Los Angeles, California Effective January 1, 1989 Southern California Edison Company Secretary's Department 2244 Walnut Grove Avenue P. O. Box 400
- Rosemead, California 91770 (800) 347-8625
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1:
ANew 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 ofNonutilitySubsidiaries: The Mission Group 24:
Financial Review 26:
Responsibility forFinancial Reporting and Report of Independent Public Accountants 2,7:
Consolidated Financial Statements 33:
Notes to Consolidated Financial Statements 41:
Quarterly Financial Data 42:
Selcctcd 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 thc San Gabriel Valley, near the corporate headquarters of SCEcorp and its clcctric utilitysubsidiary, Southern California Edison Company.
<<. $ 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 followingshareholder approval, more clearly separates the regulated utilityoperations 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 utilitythat serves 3.8 millioncustomers in Central and Southern California. More than 10 million people live within its 50,000-square-mile service territoryone 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 willcontinue a long tradition of providing good service to customers and a competitive return to shareholders.
SCEcorp Highlights 1988 incrcasc 1987 (decrcasc)
Five-year compound(
annual growth rate For the year (000):
Revenue Net income Common stock dividends paid Weighted-average shares of common stock
$6,252,719
$761,831
$530,409 218,332
$5,601,926
$738,531
$507,808 218,014 11.6%
7.0%
3.2 4.3 4.5 8.4 0.1 1.9 At year-end:
Assets (000)
Liabilities (000)
Common shareholders'quity (000)
Common shareholders Employees
$ 14,866,276
$8,010,685
$5,064,848 148,427 16,995 14,350,664'7,798,136
$ 4,833,734'56,154 17,255 3.6 5.2 2.7 5.1 4.8 6.0 (4.9)
(1.3)
(1.5) 0.8 Per sharc:
Earnings Dividends Book value Market price
$3.49
$2.48
$23.18
$32'/s
$3.39 2.9 2.3
$2.38 4.2, 5.5
$22.16'.6 4.3
$30 t/i 6.1 10.3 Financial ratios:
Rate of return on common equity Dividend payout Dividend yield Price-earnings Total shareholder return (price appreciation and dividends) 15.3%
69.6%
7.7%
9.3 14.1%
15.5%
- 68.7%
7.8%
9.0 (3.1)%
Reflect restatement for nuclear plant disallowance.
Earnings Per Share (SCEcorp) ln dollars Annual Dividend Rate Per Share (SCEcorp)
In dollars 3.18 3.26 3.49 3.39 Q
g Nonutility 2.48 2.39'onsumer PflCC mdcx Utility
.84 83 84 85 86 87 88
'Reflects rcstarcmcnt fornuclear plant disallowance 76 77 77 78 79 80 81 82 83 84 85 86 87 88
The Year at a Glance a SCEcorp's earnings pcr sharc of common stock increased 2.9% to a record high of $3.49 in 1988.
a Thc boards of directors of SCEcorp and San Diego Gas K Electric Company (SDG8tE) approved an agree-ment to merge SDGS.E into Edison. Thc company is working to complete thc approval process lor thc pro-posed merger in early 1990, subject to the approval of shareholders of thc companies, the California Public UtiliticsCommission (CPUC), thc Federal Energy Reg-ulatory Commission and other regulatory agencies.
a The board of directors of SCEcorp raised the common-stock annual dividend 4.2% in Junc to $2.48, the 13th increase in thc past 12 years.
a The return to SCEcorp's common shareholders from stock price appreciation and dividends was 14.1% in 1988. The annual return to sharcholdcrs has avcragcd more than 19% for thc past 5-year and 10-year periods, exceeding the Dow Jones industrial and utilityavcr-agcs, as well as thc SSP 500 index.
a SCEcorp's nct income rose to a record $761.8 million and revenue to a record $6.3 billion.
a Thc Mission Group of nonutility subsidiaries earned net income of $77.8 million, or 35 cents pcr share, from revenue of $333.1 million;nonutility earnings were 10.0% of SCEcorp's total earnings.
a Southern California Edison, thc utilitysubsidiary, internally gcneratcd 100% of the funds ncedcd to mcct capital rcquircmcnts, up from 77% in 1987, and thc highest level in morc than 30 years.
a Thc utility's sales to retail customers increased 3.9%
to 66 billion kilowatt-hours (kwh); total clcctric sales, which include sales to municipal and utilitycustom-ers, rose 3.6% to 68 billion kwh.
a Thc utilityrecorded a nct gain of 114,394 ncw custom-ers, the third-largest annual incrcasc in Edison's history.
a Edison customers set a record peak demand for electri-city of 15,987 megawatts (MW)on September 6, 1988, breaking the previous mark of 15,189 MWsct in 1984.
a Thc CPUC authorized thc rccovcry of $465 millionin fuel and purchased-power cxpcnscs, $ 116 millionfor inflation and capital costs in an attrition allowance and an increase in Edison's authorized return on common equity from 12.75% to 13.0% for 1989. Thc CPUC also found that $295 millionof Edison's added investment in San Onofre Nuclear Gcncrating Station Units 2 and 3, since they began operating commercially, was reasonable.
a Edison achieved its cost-containmcnt goals of reducing capital cxpcnditurcs and limitinggrowth in operation and maintenance cxpcnses to below the annual rate of inflation.
Sources and Distribution of Revenue (SCEcorp)
Sources In percent 34 Commercial 30 Rcsidcntial 18 industrial 8 Public authorities 5 Other electric 5 invcstmcnt and other Distribution In percent 36 Fuel and purchased power 24 Operation and maintenance ls Dividends and intcrcst 7 Taxes and other ll Dcprcciation and decommissioning 4 Reinvcstcd earnings
Letter to Shareholders Another Outstanding Year Cost Containment Few years in thc 102-year history of our company have matched 1988 for major changes, major challenges, and major achievements. It was a year of notable successes.
1988 saw us achieve record earnings, $3.49 pcr com-mon share compared with $3.39 in 1987, and our 13th dividend increase in thc last 12 years. The return to our common shareholders in 1988 from dividends and stock-price appreciation was 14.1'k, and has averaged morc than 19/o annually for the last 10 years. Wc added 114,000 new customers to our electric system, the third-largest increase ever in our service territory.
Merger Agreemcnt with SDGgtE In late Novcmbcr, our board of directors and that of San Diego Gas K Electric Company (SDGS.E) approved a definitivagrccmcnt to merge SDGS.E into our electric utilitysubsidiary, Southern California Edison Com-pany. Under terms of the agrecmcnt, each SDGgtE common sharc willbc exchanged for 1.3 newly issued SCEcorp common shares. Existing SDGSE prcferrcd issues willbe exchanged for newly issued SCEcorp pre-ferred shares. The merger rcquircs approval of share-holders of both companies, as well as regulatory approvals by thc California Public UtiliticsCommis-sion (CPUC), Federal Energy Regulatory Commission (FERC), and other reguLatory agencies. Wc arc working to complete the approval process in carly 1990.
Our merger proposal has received opposition in the San Diego area, largely based on the issue of loss of a hometown headquarters company. Our position is that lower electric rates, better service, and increased com-munity support arc morc important to consumers than having a locally hcadquartered utilitywith higher electric rates. We plan to demonstrate the substantial customer and community benefit for San Dicgans in our regulatory procccdings, and are confidcnt that when the facts arc known, our mcrgcr willbc accepted.
Although the San Diego merger was a major focus in 1988, we also made internal changes necessary to ensure that this cntcrprise willcontinue to be finan-cially strong, service-oriented and competitive in its operations. Wc restructured the organization to increase productivity and eliminate duplication and unneces-sary expcnsc. Wc reduced the number of offiecrs,
- managers, and administrative and fiel pcrsonncl throughout the company, streamlining every depart-ment. This reflect much attention, care, and cffectivc hard work by Edison people and kccps us on track to meet our fivc-year corporate goal to reduce Edison's 1992 revenue requirements by $900 millionfrom a business-as-usual level. Growth of Edison's operating and maintenance expenses for 1988 werc under the rate of inflation. Edison rcduccd cmploymcnt by 426 posi-tions, or 2.5'/0, through attrition and retirements, with few layoffs.
Health-care costs have bccn increasing nationally for major corporations and for our company at about 20'/o a year. To have a bcnefits program that would bc morc responsive to employee nccds, and yet help control escalating health-care costs, we implemented a eom-prchensivc ncw program that cnablcs our employees to match bcncfits with personal and family nccds.
Quality Scrvicc Our Edison companywidc quality service programs found literallyhundreds of ways to give bcttcr and more responsive service to our customers. For cxamplc, we expanded surveys to dctcrminc customer nccds, reduced response times on tclcphone calls from cus-tomers, crcatcd a more understandable customer bill, changed electric-circuit switching procedures to reduce outages during maintenance work, and trained employ-ees in better scrvicc, work tcchniqucs and practices.
Holding Company As described on Page I, SCEcorp came into existence on July 1 as thc parent holding company of Southern California Edison, our clcctric utilitysubsidiary, and The Mission Group of nonutility businesses.
Nuclear Operations By every mcasurc, our San Onofrc Nuclear Generating Station had an excellent year. The station aehicvcd rec-ord energy output, tight cost control, recognition from fcdcral regulators for safe and professional nuclear operations, and a record 3.8-million work hours with-out a lost-time injury accident.
Gcncrating Resources, Purcltased Power and Fuel Our nine different energy production resources help protect our customers from unforcsccn changes in world energy markets. Our coal, nuclear and oil-and gas-fired plants remain our primary generating rcsourccs. Our coal and nuclear plants achicvcd another year of record production. Increases in thc cost of nat-ural gas and reduction in the reliability of its supply arc causing us to change our gas supply practices. Wc arc engaged in efforts to obtain morc gas from different sources. Our hydro production was down because of thc second year of drought conditions. Purcltased power in balanced amounts remains an important and cost-cffcctive rcsourcc. Alternative and rcncwable generation resources also remain important, but in many cases are not cost-compctitivc today.
Customer Self*Generation Through CPUC actions and our own efforts, we arc reducing the threat of large commercial and industrial customers bypassing the Edison system. This has bccn a major company effort, because ifthese large custom-ers leave thc system, the remaining customers willbe required to pay higher rates to cover fixed costs.
Operations. Edison Vice President Glenn J. Bjorklund moved from System Planning and Research to Power Supply, and Edison Vice President Robert Dietch took on Mr. Bjorklund's former responsibilities in addition to his position as vice president of Enginccring and Construction.
In Dcccmbcr, thc board of directors elected two ncw officer. Effcctivc January I, 1989, John R. Fielder became Vice President-Information Scrviccs of South-ern California Edison. Effective March 1, 1989, David N. Barry IIIbccomcs Vice President and Gcncral Counsel of SCEcorp and Southern California Edison, succeeding John R. Bury, who retires after 35 years of dedicated service.
At our annual mccting in Aprilwe willmark the rctiremcnt from our board of directors of Jack K. Hor-ton, who provided our company with wise leadership and counsel as President beginning in 1959, as Chair-man beginning in 1968, and as Chairman of the Execu-tive Committcc since 1980. He has been a friend and an inspiration to all of us, and we willmiss him.
1988 was a good year for our company. Much still has to be done. With thc wise counsel and policy direction of our board of directors, the leadership of an extra-ordinarily able team of officer and managers, and thc outstanding efforts of all our employccs, we willmeet 1989's challenges. On behalf of shareholders, I thank our pcoplc 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 sharc, or 10% of SCEcorp's total earnings, up from 5.6% in 1987, and an increase of 84%. The Mission Group subsidiarics-Mission Energy, Mission Land, Mission Power Engi-neering, and Mission First Financialarc an important part of our financial strength. They have cxcccdcd our cxpcctations and arc cxpccted to grow in thc future.
Management Wc have fewer officers than any other major electric utilityentcrprisc. Your company's top management team consists of Executive Vice Presidents David J.
Fogarty, John E. Bryson, Michael R. Pccvcy and myself, with ages ranging from 45 to 63, and disciplines of engineering, law and economics. Cross-training is an important part of our management strategy. Edison Senior Vice Prcsidcnt Larry T. Papay moved from Power Supply to a ncw position ovcrsccing Nuclear Howard P. Allen Chairman, President and Chief Executive Officer February 21, 1989
to Pacific Northwest San Francisco Q CALIFORNIA NEVADA UTAH Big Creek ~
Las Vegas;q Four Corners (coal)
Hoover Dam ~
A Mohavc(coal)
A RosemeadA )I A ~
0 0
Los Angeies ~.A -AA
@ San Onofrc ARIZONA Phoenix 0 i
I
'N Palo Verde San Diego 0 MEXICO Southern California Edison Company service territory Extra-high-voltage transmission lines
~ Hydroelectric A Fossil INuclear
= Geothermal 5 Wind
+ So)ar
& Biomass
operations Review: Southern California Edison Company Southern California Edison Company, thc utilitysub-sidiary of SCEcorp, provided more electricity to morc customers during 1988 than ever before in its 102-year history. The company also strengthened its commit-ment to quality service while rigorously controlling costs. Its success in serving customers and providing shareholders with a competitive return rcflectcd thc effective hard work and dedication of its 16,660 employees.
During an extended heat wave, customers'emand for electricity rose to a record peak of 15,987 mega-watts (MW)on September 6, breaking thc previous mark of 15,189 MWset in 1984. The primary reason for this record was the heavy usc of air condition-ing, as residential customers sought relief from the fourth consecutive day of 100-degree-plus temperatures.
Focus on Large Customers Growth in Service Territory Edison serves more than 3.8 millioncustomers in a 50,000-square-mile service territory that covers much of Central and Southern California. With headquarters in Rosemead, California, Edison is a regulated, investor-owncd utilityproviding electric service to onc of the nation's most robust and prosperous regional economics.
Thc company had a nct gain of 114,394 ncw custom-ers in 1988, the third-highest increase in its history.
Rcsidcntial customers reprcsentcd about 87% of thc total growth. In the next five years, Edison projects growth of approximately 450,000 customers.
The increase in customers was thc primary reason for a 3.9% rise in retail electric sales to 66.0 billion kilowatt-hours (kwh) from 63.5 billionkwh in 1987.
Edison's total electric sales in 1988, including sales to other utilities and municipalities, rose 3.6% to 67.9 billionkwh from 65.5 billionkwh in 1987.
For several years, the company has faced thc possibility that some large commercial and industrial customers would lcavc its system and gcncratc their own clcctric-ity. This problem essentially results from carlicr state and federal regulatory and legislative decisions that had distorted electricity pricing since thc late 1970s. But with support from the California Public UtiliticsCom-mission (CPUC), Edison has made substantial strides in 1988 toward stemming the potential loss of these large customers.
Thc electricity price structure, which the current CPUC is reforming, has subsidized rcsidcntial custom-ers at the expense of many commercial and industrial customers. Consequently, many large customers have paid significantly more than what it costs Edison to serve them, and in some cases more than it would cost them to gencratc their own electricity. If these large customers leave the Edison system, thc result would be fixed costs spread over a smaller customer base, New Customers (Utility)
In thousands Peak Demand and Reserve Margin (Utility)
In thousands ofmegawatts 75 90 99 128 114 22%
17 4 178 22V 18.3 18.2, 2SSS 18.9 lsd Reserve margin Peak demand 50 83 84 85 86 87 88 83 84 85 86 87 88
Pocus:
Specialized Service for Large Customers This major industrial customer deferred installation of a 3.1-megawatt generating unit at its plastics manufacturing facilityin Tor-rance, California. The customer qualified for a lower electric rate, negotiated by Edison and approved by the California Public Utilities Commission (CPUC). As a result, the utility willcontinue 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, followingEdison'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. a A major industrial customer (right) took advantage of Edison's lower rates and specialized services at its plastics operations in Torrance. Two Edison cmployces (above) advise a represcntativc of thc company.
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increasing clcctricity prices to remaining customcrs-particularly rcsidcntial customers.
A number of actions taken by Edison and the CPUC have helped correct this problem. In rcsponsc to Edi-son's rcqucst in its 1988 general rate case, thc CPUC has begun to establish cost-based rates that more closely reflect the actual costs of serving each cus-tomer class. On January 1, 1988, the commission incrcascd rcsidcntial rates an average of 4.9'/o and decreased rates for large commercial and industrial customers an average of 4.7/o. Thc CPUC also has given Edison more flexibilitin negotiating special rates and services for large customers who are planning to generate their own clcctricity.
Edison's 200 largest customers represent 20/o of its revenues. Because of their importance, thc company has cstablishcd a highly trained group of professionals who serve as single points of contact for each of these large customers.
As a result of these efforts, large commercial and industrial customers in 1988 deferred or cancelled more than 200 proposed gcncrating projects, representing 325 MW. Ifthese self-generation projects had been built, Edison's sales would have fallen about 2.4 billion kwh, the equivalent of approximately $ 185 millionin annual rcvenuc, and rates for thc remaining customers would have increased.
This is an example of how past public policy deci-sions, which were made with good intentions, can be harmful to thc public interest ifnot reviewed and revised on a timely basis.
Empliasis on Cost Control and Productivity In 1988, the company continued its major effort to reduce costs and increase productivity without sacrific-ing high-quality service to customers. These strong cost-containment efforts are ncccssary to ensure that Edison remains financially strong and competitive in today's business environment.
Under its fiv-year cost-containment plan begun in 1987, the company is committed to reduce by $900 mil-lion its projected revenue requirements from customers by 1992. Edison achieved its cost-containment goals in 1988 by reducing planned-construction expenses, low-ering inventory requirements, and tightly controlling increases in operations and maintenance cxpcnditures below the annual rate of inflation.
A good example of Edison's efforts to reduce and control costs was the complete revision of its health care program. These costs, like those of other major corporations nationwide, have been rising at more than 20/o annually since 1980. In response, Edison dcvclopcd an innovativc and comprehensive flexible-benefits program, called SCEflex, which gives employees the ability to choose thc benefits that best suit their personal and family needs. Atthc same time, it allows Edison and employees to better control bene-fits and health-care costs. In gcncral, the savings result from more favorable rates negotiated with doctors and hospitals, a ncw system of managed care that reduces the number of unnecessary medical procedures and a totally new benefit and health.care plan. In all, SCE-flex willcontinue to provide Edison employccs with one of the best bcnefiit and health-care programs in the nation, while also achieving substantial savings and cost control in this high-cost area.
In another major effort to streamline operations and control costs during the year, Edison began consolidat-ing its telephone and customer-accounting centers from four locations to two. This was possible bccausc of thc interconnection of the tclcphone ccntcrs, which handle morc than 6 millioncalls annually. As a result, all Edison rcprcsentativcs can now answer calls from customers residing anywhere in thc 50,000-square-mile service territory. The consolidation willresult in morc cfficicntusc of pcrsonncl, as well as save about $7 millionin capital expcnditurcs and $ 1.3 millionan-nually in operating costs. To achieve this consolidation, Edison made a special effort to minimize hardship on employees by offering them similar positions at the two remaining centers and by providing other job opportunitics.
In 1988, the company continued to rcstructurc and streamline a number of departments, and to incrcasc the cfficicncy of its work force. Total employment for Edison at year-end dropped 426 to 16,660. According to the most recently available data on the ratio of custom-ers to employccs, Edison ranks first among the nation's 15 largest electric utilities in productivity.
Commitment to Quality Scrvicc Quality service has been the foundation of Edison's management philosophy throughout its historybut never morc so than today. Since its early days, the com-pany's motto has been, "Good Service, Square Dealing, Courteous Treatment." During 1988, Edison cmployccs again demonstrated this commitmcntboth at fiel locations and in office throughout the service territory.
When severe wind and rainstorms struck in January, February, and Dcccinbcr, Edison emergency crews and other pcrsonncl mobilized quickly and worked around the clock to restore service to more than P/4 million affected customers. During the extended heat wave in early Scptcmbcr, when temperatures soared to 110 dcgrces and demand for clcctricityrcachcd new rec-ords, more than 1,300 employees worked an additional 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.
/
Employees in departments throughout Edison also developed innovative programs to improve customer service. As an example, quality-service teams in many departments hclpcd coordinate procedures to cnsurc morc rapid and cfficicnt rcsponscs to customers. To measure the lcvcl of customer satisfaction, and respond better to their nccds, Edison actively sought morc feed-back from customers through surveys and intcrvicws.
The company also expanded programs that recognize and reward managers and cmployecs whose suggestions increase productivity, lower costs, or provide bet ter service.
Among other important steps taken to enhance qual-ity service in 1988 werc:
~ Introduction of a ncw customer bill that prcscnts more information in a simpler, clearer way;
~ Installation of a ncw tclccommunications circuit-switching system bctwccn voice and data networks, which has increased cmploycc productivity, rcduccd costs and improved customer service;
~ Support for thc sixth consccutivc year in paying the winter electric bills of 8,800 low-income, elderly and disabled customers through Edison's Winter Energy Assistance Fund and gcncrous voluntary contributions from customers;
~ Notifyingcustomers of a 24-hour telephone service to respond to their rcqucsts, such as starting or stop-ping service, answering questions on billingand report-ing electric outagcs;
~ Assistance to nearly 46,000 low-income and needy customers by providing various energy-management services, including bilingual help and free installation of energy-efficicnt cquipmcnt;
~ Implementation of a good-neighbor program under which customer-contact pcrsonncl refer elderly cus-tomers who nccd assistance such as medical care, meals and transportation to various community agcncics;
~ Introduction of a toll-free telephone number for shareholders, which has provided faster and morc con-venient scrvicc; and
~ Expansion of service to a rapidly growing number of non English-speaking customers through community programs, as well as toll-free telephone service by Edi-son rcprcscntatives who arc fluen in Spanish, Chinese, Vietnamese and Cambodian.
Diversity in Generating Rcsourccs The company historically has sought diverse generat-ing resources to provide customers with reliable clcc-tric service at reasonable cost. Using nine different resources, more than any other utilityin the world, Edison has great flexibilitin adjusting to unforcsccn changes in world energy markets.
Nuclear Plants Edison's nuclear power plants in Southern California and Arizona had another exccllcnt year, generating more than 21'/o of customers'lectric-ity needs, up from 20/o in 1987. The output reflect the strong operating performance of the San Onofre Nuclear Generating Station and the first fullyear of operation for all thrcc units at the Palo Verde Nuclear Generating Station in Arizona.
Edison's thrcc nuclear units at the San Onofrc plant generated more than 16'/o of the electricity needed to serve Edison customers in 1988. Their output saved customers the cost of about 21 millionbarrels of oil or the cquivalcnt in natural gas, resulting in fuel savings of about $275 million. Edison manages and operates the three San Onofrc units, owning 80/o of thc 450-MWUnit 1 and 75'/o of Units 2 and 3, which liavc a combined capacity of 2,200 MW.
On average, thc three units at San Onofre produced 74'/o of their capacity for the year, exceeding thc national average for nuclear pbnts. Unit I, which com-menced commercial operation in 1968, was out of service for more than six months in 1988 for refueling and completion of electrical modifications required by the federal Nuclear Regulatory Commission (NRC).
Unit 2 operated at 95'/o of its capacity for the year, and was the third-highest producer of electricity among thc nation's 109 nuclear units. Unit3 operated at 66'/o of capacity, and completed its third refueling during 1988.
In 1988, thc lifetime generation of San Onofre plant exceeded 100 billion kwh of electric generation, saving customers thc cost of more than 160 millionbarrels of oil or thc equivalent in natural gas.
Edison has bccn given high marks for thc safe and professional operation of thc San Onofrc units by thc NRC and the Institute of Nuclear Power Operations.
Focus:
Expansion of Hydroelectric Resources Edison dedicated the Balsam Meadow hydro-ele'ctric facilityin June, making it the newest
, and largest addition to the Big Creek system in the Sierra Nevada. The company designed and managed the $277 millionproject, which n
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 reliabltt, 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. n Maintenance workers (right) inspect generator at thc John S. Eastwood powcrhousc of thc Balsam Meadow hydro facility, built 1,000 feet underground in thc Sierra Nevada. Two employccs (above) measure thc depth of thc forebay above thc hydro facility.
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Thc company also owns a 15.8% interest in the Palo Verde Nuclear Generating Station near Phoenix, Ari-zona, whose three 1,221-MW units comprise thc largest nuclear plant in thc country. These units, managed by Arizona Public Service Company, went into commer-cial operation on February I, 1986, Scptcmbcr 19, 1986, and January 20, 1988, respectively.
Total generation from the three Palo Verde units was the highest among all nuclear plants in the United States. In addition, Unit 3 had the highest production nationwide for an individual nuclear unit. Palo Verde Units 1, 2 and 3 operated at capacity factors of 62%,
63% and 95%, respectively. Both Units 1 and 2 com-pleted their first refueling outages in 1988; Unit 3 will have its first refueling in 1989.
Fossil-Fuel Power Plants The company's 54 oil and natural gas units, with 10,000 MW of capacity, provided 26% of customers'lectric nccds in 1988. Thc two coal-fired plants located outside California produced an additional 15%. Edison operates and owns 56% of thc Mohave Generating Station in Nevada and owns 48%
of thc Four Corners Generating Station's Units 4 and 5 in New Mexico. The Mohave plant operated at 73% of its maximum capacity and Four Corners at 80%new production records for both plants. Edison was awarded
$7.9 millionin 1988 under the CPUC's coal-plant incentive program. Though the CPUC suspended this program in July, it requested Edison to dcvclop and recommend an alternative incentive plan in 1989.
Hydroelectric Plants Low precipitation in 1987 and 1988 limited the company's hydroelectric generation to 4% of customers'lectricity needs in 1988. The Big Creek hydro system in California's Sierra Nevada is the primary source of this low-cost power, rcprcsenting 1,000 MWof capacity. Begun in 1911, this extensive hydro system now consists of six lakes, 12 major dams, nine major tunnels and nine powerhouscs. In June, the company dedicated the 207-MW Balsam Meadow hydro project, the largest and most recent addition to the Big Creek system.
In addition, Edison has an allotment of 277 MWof hydroclcctric capacity from thc Hoover Dam on the Colorado River.
Purchased Power The purchase of power from a diversity of outside sources gives Edison added flcxibil-ity in meeting its customers'lectric nccds. Edison's total electricity purchases mct 34% of customers'eeds during the year, compared with 24% in 1987.
This growth resulted primarily from a large increase in purchases from nonutility power producers in California.
Economy-Energy Purchases:
The company made short-term "spot-market" purchases of low-cost elec-tricityfrom the Pacific Northwest and Southwest, which saved customers nearly $ 100 millionin 1988, compared with the cost of generation using natural gas.
Economy-energy purchases supplied about 9% of Gcncration Mix(Uti(ity)
In percent Construction Expenditures (Uti(ity)
In billions ofrlollars 5.1 61 17 26 21 i5 4
18 25 Oiiand gas 15 Nuclear 10 Coal 5 Hydro 18 Purchases:
other util itics 27 Purchases:
other power producers 39%
12%
38%
11%
3.7 20% Gcncration 15% I?ansmission 57% Distribution 8% Other 1978 1988 1998 (Projccrcd) 1984-1988 (Rccordcd) 1989-1993 (Projcctcd)
customers'otal electric needs in 1988 and had an average cost of 1.8 cents per kwh, compared with 1.6 cents in 1987.
During 1988, Edison purchased and exchanged power as an active member of thc Wcstcrn Systems Power Pool (WSPP), thc largest power pool in the nation. Thc company played a major role in establishing WSPP in 1987 as a two-year expcrimcnt by 24 public-and inves-tor-owned utilities in 10 Wcstcrn states. Pool members use a centralized computer to efficientl buy and sell low-cost surplus power, and make better use of existing generation and transmission facilities. Market forces, rather than regulatory agencies, determine power prices under this program. To date, results of the experi-ment have been favorable, and efforts are under way to have the Federal Energy Regulatory Commission (FERC) extend it another two years.
Firm-Energy Purchases:
Purchases under long-term contracts with other utilities supplied 7/o of custom-ers'lectricity needs at an average cost of 4.1 cents per kwh.
In June, after several years of negotiating, Edison reached agreement on a 20-year sales-and-exchange contract with thc Bonneville Power Administration (BPA). The contract provides thc company with 250 MWof capacity and 1.2 billion kwh annually beginning July 1, 1989. The agreemcnt also willprovide Edison with an additional 250 MWduring times of unexpect-edly high electr'ic demand. Thc contract, approved by the FERC and CPUC, willsave Edison customers an estimated $30 millionor more annually, compared with the least-cost alternative of refurbishing some of Edison's existing oil and gas generating units now on standby status.
Purchases from NonutilityPower Producers:
Alter-native and renewable energy projects, developed by nonutilitypower producers, supplied about 18/0 of customers'eeds during 1988nearly a 90'/0 increase over 1987.
In 1978, the fcdcral Public UtilityRegulatory Policies Act (PURPA) was enacted to encourage the develop-ment of alternative and renewable energy sources by requiring electric utilitics to purchase power from quali-fyingnonutility producers. Each state was required to establish its own implementation rules. In Cali-fornia, CPUC policy at that time required Edison and other utilities to buy power from qualifying facilities under long-term contracts. Generally, this power was not needed to meet customer demand, and was much more costly than power Edison can now produce or purchase from other utilitics.
In 1988, electricity purchased from qualifying facili-ties cost an average of 6.3 cents per kwh, higher than Edison's average costs for both economy-and firm-power purchases from other utilities. The higher costs for power supplied by qualifying facilities cost Edison's customers an estimated $200 millionin 1988 and will cost an estimated $260 millionin 1989. This is another example of well-meaning public policy that turned out to bc wrong because it was not rcvicwcd and modifie on a timely basis.
At thc end of 1988, there were 344 nonutility power projects, with a combined generating capacity of 2,446 MW, providing power to Edison under these contracts. Edison also has signed contracts, under CPUC orders, for an additional 133 projects repre-senting another potential 1,884 MWof capacity, Edison cstimatcs that less than half of thc electric capacity of these remaining projects willgo into service, primarily because of changes in federal tax laws, air-quality con-siderations, and siting and permit requircmcnts.
Major Power Sale:
In August, Edison also reached agrcemcnt on a 10-year contract to scil bctwccn 300 MWand 700 MWof its excess generating capacity to the Sacramento Municipal UtilityDistrict, beginning in January 1990. The company estimates that thc pro-ceeds from this sale willearn Edison customers between $35 millionand $70 millionannually, depend-ing on thc amount of electricity needed by the Sacra-mento utility.
Higher Fuel and Purchased-Power Costs Fuel and purchased-power costs represent Edison's largest cxpcnse in supplying electricity to customers.
Under California regulation, Edison is allowed to rccovcr these costs from ratepayers on a dollar-for-dollar basis so long as they arc reasonably incurred.
Thc costs arc subject to periodic reasonableness reviews by thc CPUC.
These combined costs rose from $ 1.87 billionin 1987 to $2.21 billionin 1988. The increase resulted primarily from substantial increases in purchases from nonutility power producers.
Natural gas was the primary fuel used in Edison's gas and oil generating units, except for periods of partial natural gas curtailment in January and August, and later in the year when Edison switched to oil because oil prices declined below gas prices. For the first time
16 FOCI1S:
Transmission Capacity Increases to Northwest
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~J Edison willobtain greater access to low-cost power from the Pacific Northwest after com-pletion of a joint project in March 1989 to expand the 850-mile direct-current (DC) line of the Pacific Intertie transmission system.
The installation of new equipment converting DC into alternating current (AC)willresult in 1,100 megawatts of additional capacity to serve Southern California consumers. The DC line is jointlyowned by Edison, the Los Angeles Department ofWater and Power, and the municipal utilities of Glendale, Pasadena and Burbank. Completion of the $171-million expansion project willboost Edison's transmission capacity over this line from 421 MWto 643 MW.
The Pacific Intertie is the major linkfor exchanging power between California and-the Pacific Northwest. Builtin the 1960s, itincludes two AC lines and one DC line, all capable of transmitting large amounts of electricity in either direction at extra-high voltages. Aproposal to build a third AC line, known as the California-Oregon Transmission Project, would add 1,600 MWof transmission capacity by 1992, including Edison's 281-MW share. Ifthis third AC line is approved, Edison's total share of trans-mission capacity from these lines to the Pacific Northwest willrise to 1,900 MW. a Morc efficient equipment (above J installed at a facilityin 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 thc Pacific Northwest.
7 I
18 since thc gas shortages of thc 1970s, thc company's tra-ditional supplier of natural gas restricted its normal gas supplies during the summer, forcing Edison to use more expensive fuels.
In 1988, coal and nuclear fuel prices remained steady, while Edison paid slightly more for oil. However, thc average cost of natural gas increased significantly from an average price of $2.55 per millionBtu in 1987 to $3.25 in 1988primarily because fixed charges from the company's primary supplier remained unchanged despite a lower volume of purchases. To protect its cus-tomers, Edison is seeking to develop alternate sources of natural gas from other than its traditional supplier to increase reliabilityof its gas supply and reduce costs.
Better Service Through Resource Planning and Research The company's resource-planning strategy gives it maximum flexibilitto respond to rapid changes in supply and demand. In the next decade, Edison willadd ncw transmission capacity to gain access to low-cost power, and serve customer needs without construction of major new power plants. To minimize costs, the emphasis willbe on greater purchases of electricity, better energy management, and refurbishing and bringing back into service oil and gas plants now on standby status.
In addition, Edison's research programs focus on giving customers more choice, lower cost and better service. For example, Edison is testing a two-way electronic metering and communications network that links the utilitywith residential customers. This net-work provides customers with informational services and ncw options for reducing electricity costs by allow-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-ing and disconnecting electric service from Edison officesrather than sending an employee to thc cus-tomer's location.
In cooperation with other utilities and governmental agencies, Edison also is promoting thc development of pollution-free electric vehicles and new advances in battery technology. Increased use of electric vehicles in Southern California would reduce air pollution, traffic noise and gasoline consumption. In addition, nighttime battery charging would increase off-peak electric load, resulting in morc efficien use of Edison's generating capacity.
In July, the company began a two-year test program of energy-storage technology at a 10-MW project in Chino, California. The $13.5-million facilityis the world's largest battery-energy storage system and charges batterics at night when electricity demand is low and power is less expensive. Thc facility then sup-plies electricity during the day when costs and electric-ity use arc much higher. After the completion of this research and development program, Edison willdeter-mine the commercial feasibility of this technology.
After successfully completing a six-year test pro-gram, Edison in Scptembcr discontinued operations at Solar One, the world's largest central-receiver power plant using 1,818 sun-tracking mirrors on 130 acres near Daggctt, California. A pioneering project in thc nation's alternate and renewable energy efforts, the 10-MWSolar Onc demonstrated the tcchnical capabilities of electrical power production from rcflcctcd sunlight.
However, the plant is not cost-competitive because lower-cost alternative generation is available.
The 100-MW Cool Water Coal Gasification Plant is on a standby status after completion of its five-year demonstration program. Located near Daggctt, Califor-nia, the plant converts coal into a clean synthetic gas used in turbines to generate clcctrieity. Cool Water is the world's cleanest coal plant and has received numer-ous awards for its environmental and technological successes.
It operated at 70/o of capacity in 1988, but is not commercially competitive because morc cost-cffective alternatives arc available.
Although many of these renewable and alternative rcsourccs are not cost-competitive today, they will remain important components of Edison's diverse cncrgy-resource mix, especially ifoil and gas become scarce or costly in the future.
Emphasis on Employee Development New and revised employee training programs con-tinued to help employees improve their performance, while enhancing existing skills and the dedication to customer service Edison employees have always exhibited. This incrcasc in professional work skills helped make 1988 a successful year. In 1988, about 4,400 employees participated in various training programs.
Providing a safe and healthful work environment
'ontinues to be a high priorityat Edison. During 1988, industrial accidents declined 7/o from 1987 while lost workdays decreased 15%%d.TheEdiso nElectric Institute presented 13 safety achievement awards to Edison
organizations whose employees worked 1 millionor more hours without a lost-time accident.
AffirmativeAction The minority rcprescn tation in the work force rose from 27.4% in 1983 to 31.7%
in 1988, while thc proportion of female cmployccs increased from 22.9% to 25.2%. Even with this prog-ress, the company seeks to improve its record of insur-ing greater upward mobilityfor these cmployccs in management positions.
In 1979, the company established a Women and MinorityBusiness Development Program. From then until the end of 1988, thc number of women-and minority-owned cntcrpriscs qualifie to do business with Edison grew from 207 to 1,548. Annual payments to these firms rose from $18.7 millionin 1983 to $92 millionin 1988. The company and CPUC have agreed to a new goal of awarding 20% of Edison's annual purchases under competitive conditions to womcn-and minority-owned businesses within five years.
In addition, Edison reached agreemcnt with four minority-owned businesses in'1988 to manage $35 millionof the employee pension fund. With carlicr agreements, this increased Edison's total pension investmcnts managed by women-and minority-owned firms to $ 135 million, or 10% of thc fund.
A Commitment to Community Scrvicc Both the company and its employees have a long tradi-tion of participating in community and civic organiza-tions in areas scrvcd 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,YWCAand scouting.
Employees showed their spirit of generosity during the 1988 United Way campaign by giving nearly $2.3 millionto help people in need. On a per-capita basis, Edison employees were among the leading contributors to the morc than 900 charitable organizations sup-ported by United Way.
The Edison Electric Institute honored Edison with its Common Goals Award in 1988, citing cxccllent con-tributions made by the company's educational advisory council. This council oversees the company's informa-tional and educational programs to schools.
During 1988, Edison developed educational materials through various school programs in cooperation with teachers, administrators and community leaders. Stu-dents learn about energy conservation, electric safety, disaster preparedness, environmental issues and other energy-related topics.
Edison also provides scholarships and grants to stu-dents throughout its service territory. For example, the company provides four $12,000 scholarships, 20 carccr-dcvelopment awards of $3,000, and 50 educational grants of $500, in addition to two $12,000 scholarship awards for children of employccs. Another important educational program, known as thc Science Connec-tion, uses a 40-foot mobile classroom to stimulate greater interest in science and technology among elementary school children. Throughout Edison's scr-vicc territory, this program provided scientific demon-strations to more than 10,000 youngsters during the year. In recognition of this valuable program, thc Cali-fornia Department of Education gave the company a special award for its support of science education.
Percentdge of male, female, and minority employees at year-end 1983 and 1988 Male Female Black Year-end Year-cnd Year-cnd 1983 1988 1983 1988 1983 1988 Asian American Year.end 1983 1988 American Indian
/0 Year-end 1983 1988 Hispnic
/o Year-end 1983 1988 Total Minorities Year-end 1983 1988 Managcmcntl0 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 Koperative"'3.7 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 Edisont I
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 (I1 Includes the "o/ficials"and "professionals" a//Irmatlve action categories.
(2/ Includes the "technicians," "o//ice aml clerical," "craftsmen," "operators," "laborers" and "service workers" categories.
(3/ Includes all classes ofemployees.
Regulatory Review 1989 AttritionAllowance The CPUC authorized a
$116.4-million annual attrition increase in Edison's base-rate revenues effective January I, 1989. Attrition allowances cover annual changes in costs caused by inflation, capital additions and financings betwccn gen-eral rate case proceedings, which are held at thrcc-year intervals. As part of the attrition allowance, the CPUC authorized an increased rate of return on common equity from 12.75'/o in 1988 to 13.0'/o in 1989.
San Onofre Units 2 and 3 Costs since Commercial Operation The CPUC authorized an annual revenue increase of $39 million, effective January 1, 1989, as part of its decision allowing Edison to begin rccovcring
$295 million, or 97/o of its invcstmcnt costs incurred at San Onofre Units 2 and 3 after thc units began com-mercial operation. The decision affirmed an agreemcnt between Edison and the CPUC's Division of Ratepayer Advocates (DRA), which was negotiated to avoid a lengthy, expensive review of these costs.
Allegations ofPurchased-Power Overpayments The DRA has recommended that the CPUC disallow $ 124 millionof energy costs incurred bctwcen late 1984 and late 1987. Approximately $ 120 millionof the proposed disallowance represents alleged overpayments to non-utilitypower producers, including electricity pur-chased by Edison from a 300-MW cogcncration facility owned by Kern River Cogeneration Company (KRCC).
Mission Energy Company, which is one of SCEcorp's nonutility subsidiaries, is a partner in the KRCC facility.Thc DRA's proposed disallowance in relation to power purchases from KRCC is approximately
$37 million.
In upcoming CPUC hearings, Edison willdemon-strate that the power purchases from KRCC actually saved its customers more than $24 millionduring the three years under consideration, compared with the "standard offer" contract approved by the CPUC.
The DRA also allcges ovcrpaymcnts by Edison under 17 other contracts Edison negotiated with nonutility power producers that are not SCEcorp affiliate. Edison signed these contracts during the carly stages of Cali-fornia's efforts to rapidly develop alternate and renew-ablc energy resources. Thc prices Edison projected to pay under these 17 contracts were at or below avoided cost over thc lifeof the contracts. Hearings on thc 17 contracts have not been scheduled as of this date but willbe heard in later proceedings.
In addition to its recommended cncrgy cost disallow-ance, the DRA has recommended that the CPUC mod-ifyits early 1988 decision that authorized Edison to form a holding company. Edison believes that adoption of the DRA's recommendations to modify the holding company decision is not necessary to protect the public interest and willwork diligently to demonstrate that it has reasonably administcrcd the contracts under review. CPUC proceedings arc scheduled to take place later in 1989.
Balsam Meadow Hydroelectric Project In October 1988, the CPUC's Division of Ratepayer Advocates completed a review of the costs for thc 207-MW Balsam Meadow hydroelectric project. The DRA found that Edison had prudently constructed thc project and rec-ommended that the entire amount of its investment be covered in customer rates. A decision by thc CPUC is expected in May 1989.
Fuel and Purcliased Power Rate Adjustments The CPUC periodically reviews thc reasonableness of fuel and purchased-power costs and adjusts rates to rcflcct changes in Edison's costs. Based on the utility's fore-cast of higher energy costs from June 1988 through May 1989, thc CPUC adjusted rates twice in 1988, granting a
$200-million rcvcnue incrcasc effective June 1, and an additional $265-million increase effective October 1.
Suspension ofIncentive For Fuel and Purchased-Power Expenses On Junc I, 1988, the CPUC suspended the annual energy rate (AER) that was established in 1981 to provide utilities a regulatory incentive to minimize fuel and purchased-power cxpcnses. Under the AER, utilitics arc rewarded for keeping fuel and purchased-power expenses below the'levels authorized by thc CPUC, and arc at risk for such costs that exceed those levels. This temporary suspension was ordered because uncertain natural-gas supplies and prices beyond Edison's control resulted in wide cost fluctuations. Thc AER is expected to be reinstated on January 1, 1990.
Devers-Valley-Serrano transmission Line In November 1988, the CPUC's Division of Ratepayer Advocates completed a review of thc costs of the 500-KVDevers-Valley-Serrano Project, which became operational in mid-1987. Thc DRA found that Edison had prudently constructed the project, and that the full amount should be collected in customer rates. A deci-sion by thc commission is expected in May 1989.
Devers-Palo Verde No. 2 11 ansmission Line Thc CPUC has conditionally approved Edison's request to build the Devers-Palo Verde No. 2 transmission linc.
Scheduled for operation in Junc 1993, this transmission line would increase access to Southwest power markets for Edison and 11 other California utilitics. Thc project must bc rc-evaluated in the context of the proposed Edison-San Diego Gas and Electric (SDG8tEj merger bcforc construction can begin.
Federal Energy Regulatory Commission Proposal In mid-1987] the chairman of the Fcdcral Energy Regula-tory Commission {FERC) announced that the commis-sion would consider changes to its rules implementing the Federal Power Act and thc Public UtilityRegula-tory Policics Act. These changes would essentially dcrcgulate new sources of nonutility clcctrical genera-tion by creating a new special class of generation called "independent power producers."
Edison opposes many of these proposed changes that arc inconsistent with the Federal Power Act, because they discriminate against utilitycustomers. In addi-tion, they would reduce the long-term reliabilityof the nation's clcctricity supply. The issue is still pending before thc FERC and at year-end, thc U.S. House of Representatives and U.S. Senate were reviewing the matter.
Seasonal Rate Effects Edison pctitioncd thc CPUC to modify an earlier decision relating to a new seasonal rate structure. The rate structure was intcndcd to en-courage conservation and load management by creating higher rates during summer and lower rates thc rest of the year for many commercial, industrial and agricultural customers.
However, the new seasonal rate structure had the effect of distorting the company's quarterly earnings patterns, although itdid not affect Edison's overall 1988 earnings. SCEcorp's 1988 third-quarter summer-time earnings, for example, werc 85'/0 higher than earnings in thc third quarter of 1987, while earnings in thc first, second and fourth quarters were significantly lower. Without the seasonal charge, third-quarter earn-ings would have increased only 3'lo. Thc CPUC will review Edison's request to modify thc rate structure in 1989.
Clean-Air Plan The South Coast AirQuality Man-agement District, which includes the countics 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 thc year 2007. The plan would impose unreasonably high costs on Edison customers by requiring that Edison install uneconomic and unproven new technology on its oil-and gas-fired gcncrating plants. Edison has joined with other businesses in the Los Angeles Basin in presenting an alternative plan that would achieve thc compliance goals in 10 years instead of 20, and at onc-third thc cost to consumers and the economy com-pared with the district's plan. Edison willcontinue to participate in the district's public-review process in the hope of saving Edison customers unnecessary
- costs, preventing an adverse economic impact on the area and working to comply with federal air-quality standards.
Merger Filing In mid-December, Edison and SDGS,E filejoint applications with the CPUC and thc FERC, seeking approval of the mcrgcr of SDGS.E into Edison.
Hearings arc cxpcctcd to begin in mid-1989. Edison and SDG8tE willbc seeking regulatory approval for thc merger from other agencies in 1989. As is typically the case in these matters, thcrc have been a number of intervenors in both the state and federal proceedings.
Legislative Rcvicw Price-Anderson Nuclear LiabilityAct In August, the Prcsidcnt signed a billextending the Price-Anderson Act for 15 years. Although thc act increases insurance costs for nuclear utilities, it provides a tenfold increase in financial protection to the public in the unlikely event of a major accident at a nuclear power plant in the United States. At the same time, the act's $7.6-bil-lion level of potential compensation that is available to the public serves to limitfinancial liabilityfor opera-tors of nuclear power plants.
Under the cxtcnsion, owners of the 109 operating nuclear reactors in the United States must continue to carry thc maximum available private insurance cover-age for an accident at one of their own reactors. This maximum coverage was increased to $200 millionper reactor at thc cnd of 1988. Ifdamages were to exceed thc private insurance coverage, Price-Anderson would provide additional funds by levying assessmcnts of up to $63 millionper reactor against all nuclear plant owners. Under the ncw law, thc per-reactor assess-ments would be limited to $ 10 millionannually until the $63-million limitis mct.
22 A Review of NonutilitySubsidiaries: The Mission Group NonutilityEarnings Pcr Sharc Cents per share Mission Power Engineering Mission First Financial 19 Mission Land The Mission Group was formed in 1987 to manage the corporation's four principal nonutility subsidiaries, which are primarily engaged in cncrgy-related busi-nesses.
Since then, these subsidiaries have continued to pursue business opportunitics and now operate in eight states.
At year-end, SCEcorp's equity investment in The Mission Group totaled $505.4 million. Revenues for 1988 werc $333.1 million, producing a net income of
$77.8 million, or 35 cents per share. This compares with 1987 revenues of $ 107.6 million, which produced a net income of $41.3 million, or 19 cents pcr share.
Mission Group earnings represent 10.0% of SCEcorp's 1988 earnings, compared with 5.6% the previous year.
Mission Energy Company Mission Energy is a national leader in the ownership, development and operation of major cogeneration proj-ects. It provides management of engineering and con-struction, operation and maintenance, and assistance in obtaining permitting and financing for power facili-ties. Mission Energy concentrates on joint-venture projects with low technological risk, sound economics, and well-established partners.
At the end of 1988, Mission Energy jointlyowned and operated nine projects with 1,300 megawatts (MW) of capacity in three states. Five of those projects, with a total of 830 MWof capacity, began operation during 1988. Thc thrcc largest arc thc 385-MW Watson cogener-ation plant in Carson, California, the 300-MW Syca-more cogeneration plant and the 300-MW Kern River cogeneration plant, both near Bakersfield, California.
Another four projects with 330 MWof capacity are under construction.
Mission Energy is the largest of The Mission Group subsidiaries. Revenues for 1988 werc $88.2, million, producing a nct income of $38.6 million, or 18 cents per sharc. This compares with 1987 rcvcnucs of $38.2 million,producing a nct income of $16.4 million, or 7.5 cents per share. At year-cnd, equity investment in the company totaled $265.7 million.
Mission Energy 1987 i988
Mission First Financial Company Mission First Financial provides energy-related venture capital and invests in leveraged-leasing transactions, project financing, and high-quality securities. This sub-sidiary holds financial interests in Beaver Valley Nuclear Unit 2 near Pittsburgh, Pennsylvania, and a paper milland cogcncration facilitydcvclopcd through a joint venture with Minnesota Power Company and Pentair, Inc., a Midwestern paper company.
This subsidiary also has devclopcd a customized cash-managcmcnt program to provide attractive yields on funds held pending longer-term investmcnts. In addition, thc company has an equity investmcnt in Metricom, a California-based electronics firm that is developing and marketing a solid-state clcctric meter and customer communications system.
No new business was consummated in 1988 because
'of low-lease volume and aggressive pricing by com-petitors, but the company is well positioned to take advantage of investmcnt opportunities in 1989.
In 1988, Mission First Financial produced substan-tiallyhigher financial contributions than 1987, because it was the first fullyear of operation. Revcnucs for 1988 were $21.7 million, producing a net income of $13.7 million, or 6 cents per share. This compares with 1987 revenues of $ 10.8 million, producing a net income of
$6.8 million, or 3 cents per share. At year-cnd, equity investment in thc company totaled $90.5 million.
Mission Land Company Mission Land develops industrial parks with mcdium-sized warehouses and distribution buildings. The firm owns and manages six industrial parks in Southern California and Arizona, which contain morc than 2, millionsquare feet of leasablc space. In addition, Mis-sion Land has entered into joint ventures in California, Illinoisand Indiana.
During 1988, Mission Land completed several major transactions involving the sale of industrial and resi-dential properties. It became a partner with the Lusk Company in thc California Commcrce Center, the second largest master-planned industrial park in Southern California. Mission Land maintained an aver-age vacancy rate of only 3% in its industrial parks throughout the year, a major accomplishment in a highly competitive market.
Revenues for 1988 werc $48.7 million, producing a nct income of $20.2 million, or 9 cents pcr share. This compares with 1987 revenues of $33.2 million, produc-ing a net income of $17.4 million, or 8 cents per share.
Atyear-end, the equity investment in this company totaled $ 131.5 million.
Mission Power Engineering Company Mission Power Engineering performs consulting, engi-neering and construction in the energy field, including electric generating units, transmission lines, and sub-stations. Since its formation in 1984, the company has been awarded contracts with a total value of about
$400 million. In 1988, Mission Power Engineering con-tinued to grow as it performed work on 11 new power plants. For its achievements in 1987, the company was ranked 36th out of the top 400 national design and con-struction firms, according to a 1988 trade publication.
Revenues for 1988 were $174.4 million,producing a net income of $ 7.6 million, or 3 cents pcr share. This compares with 1987 revenues of $25.8 millionthat pro-duced a net income of $1.7 million, or about 1 cent per share. At year-end, equity investmcnt in this subsidiary totaled $ 14.1 million.
Financial Review
\\
t The corporation reported a record financial perfor-mance in 1988 and provided sharcholdcrs with a com-petitive return on their investmcnt.
SCEcorp Record Net Income and Revenues SCEcorp's earn-ings rose 3.2% to a record $761.8 millionin 1988, compared with $738.5 millionin 1987, and revenue grew to another record of $6.3 billion, compared with
$5.6 billionin 1987.
SCEcorp's earnings per share for 1988 increased 10 cents to a record $3.49 from $3.39 in 1987. This increase is particularly noteworthy because it was achieved despite a reduction by the California Public Utilities Commission (CPUC) in Edison's authorized rate of return on common equity from 13.9% to 12.75%. The reduction, by itself, would have lowcrcd earnings 33 cents per sharc, but thc company overcame this through tight controls on operating expenses, approval by the CPUC of expense levels that morc accurately reflect Edison's costs, a CPUC award for favorable coal-plant operating performance, and higher earnings from Thc Mission Group of nonutility sub-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 thc utility.
Thc Mission Group earnings per sharc for 1988 werc 35 cents, or 10.0% of SCEcorp's total earnings, com-pared with 19 cents per sharc, or 5.6%, for 1987. Non-utilityearnings increased 84% above those in 1987, with earnings growing in each nonutility business.
Higher earnings resulted from Mission Energy bringing 830 megawatts of new cogeneration and geothermal projects into operation, the sale of industrial and resi-dential property by Mission Land, increased construc-tion activity by Mission Power Engineering, and a full year of operation for Mission First Financial.
Dividend Increase The board of directors in June increased thc common stock dividend for the 13th time in 12 years. The new annual dividend rate of $2.48 pcr share is 4.2% higher than the previous year's $2.38.
The current dividend provided a 7.7% yield, based on a year-end market price of $32s/s pcr sharc.
Tbtal Sitaraholder Return Thc return to SCEcorp common shareholders from stock price appreciation and dividends was 14.1% in 1988. The annual return has averaged more than 19% for the past 5-year and 10-year periods, exceeding the Dow Jones industrial and utilityavcragcs, as well as thc SKP 500 index.
Stock Price Range (SCEcorp)
In dollars 38Ve 37 Net Income (SCEcorp)
In millionsofdollars 702 739 762 21Vs El 24Vs 28Vi 22th 25Ve 27Vs 34Vs Year.cntl closing pllcc 29Vs 617 659 521 17Vis 17 Vs 83 84 85 86 87 88 83 84 85 86 87 88
'Reflects restatement fot nuclear plant disallowance
25 Southern California Edison Company Financial and Regulatory Returns The CPUC autho-rizes Edison to earn a return on its regulatory rate base, which is the value of assets used to serve customers.
This authorized regulatory return is designed to allow the utilityto recover its cost of capital, which is composed of long-term debt, prcfcrrcd stock and the authorized regulatory return on common equity.
In 1988, Edison's authorized regulatory return on rate base was 10.75'/o, and its authorized regulatory return on common equity was 12.75'/o. Thc company's recorded regulatory return on rate base was 10.6'/o, and its recorded regulatory return on common equity was 12.2'/o.
However, SCEcorp's recorded financial return on common equity, as shown in financial reports, is based on thc holding company's total operations. Several items can cause it to differ from Edison's authorized regulatory return on common equity. In 1988, thcsc factors included earnings from nonutility subsidiaries; federal invcstmcnt tax credits; and CPUC-established awards for high output from thc utility's two coal-fired power plants. In 1988, thc corporation's recorded finan-cial return on common equity was 15.3/o, compared with 15.5'/o in 1987.
Corporate Financing In 1988, Edison internally gen-erated 100/o of thc funds it needed to meet capital requirements, its highest pcrccntage in more than 30 years. The utilityraised $663 millionin U.S. capital markets during the year, primarily to financ the redemption of more costly debt, repay maturing bonds and mcct sinking-fund requircmcnts.
Credit-Line Restructuring Edison lowcrcd thc cost of its credit lines in July by arranging for a $300-mil-lion line of credit through a syndicate of foreign banks.
This was thc lowest-cost European credit linc ncgoti-atcd by any U.S. utilityin 1988. Edison also renegoti-ated the cost and structure of its existing $ 1.6 billion in credit lines.
By negotiating these credit arrangements, Edison willsave its customers $600,000 annually while main-taining $ 1.9 billion in credit lines with 40 domestic and foreign banks to meet a variety of financial obligations.
Credit Watch Edison's early warning credit-watch system, the first of its kind in the utilityindustry, con-tinued to reduce the number of bad-debt write-offs by carly identification of high-risk commercial and industrial customers in danger of business failure. Thc system saves money for customers by ensuring that Edison's rcvcnucs are protected through deposits of cash, posting of surety bonds or more frequent pay-ments by these customers.
In 1988, the early warning system reduced potential bad debt by $860,000. It has avoided potential losses of
$ 8 millionsince it began seven years ago.
Internal Generation ofFunds (Utility) 5-Year Annual-Return Comparison (Stock price appreciation and dividends)
In percent 100 ln percent 19.5 77 15.1 15.8 17.0 65 38 SS.P 500 index DIIA DIVA SCEcorp stock 83 84 85 86 87 88
Responsibility for Financial Reporting Report of Independent Public Accountants The management of SCEcorp (thc "corporation") is responsible for preparing thc accompanying consolidated financial state-ments. The statcmcnts were prcparcd in accordance with gen-erally acccptcd accounting principles and include amounts based on management's estimates and judgments. Managcmcnt also is responsible for the accuracy of all other information in thc annual rcport, including its consistency with the financial statements.
Thc corporation's consolidated financial statements have been audited in accordance with generally accepted auditing standards by Arthur Andersen 8t Co., a firm of independent public accountants, which has cxpresscd its opinion regarding the faimcss of these consolidated financial statements in the accompanying rcport.
The managcmcnt of the corporation and its subsidiaries maintains systems of internal control that provide reasonable assurance that assets are safcguardcd, transactions arc properly executed in accordance with managcmcnt's authorization, and accounting records may be relied upon for thc preparation of fi-nancial statcmcnts and other financial information. Thc design of internal control systems involves managcmcnt's judgment concerning thc relative cost and cxpccted benefits of specifi control mcasurcs. These systems arc augmented by internal audit programs through which the adequacy and effectivcncss of internal controls, policies and proccdurcs arc evaluated and reported to management. In addition, Arthur Andcrsen 8. Co.,
as part of its audit of the corporation's consolidated financial statements, cvaluatcs the internal control structure to deter-mine the nature, timing and extent of its audit tests. Manage-ment bclicvcs the corporation's and its subsidiaries'ystems of internal control arc adcquatc to accomplish the objcctivcs dis-cussed herein.
The Audit Committee of the Board of Directors, composed entirely of noncmployce directors, meets periodically with the independent public accountants, internal auditors and manage-ment. This committee, which recommends to thc Board of Directors the annual appointment of thc indcpcndcnt public accountants, also considers thc audit scope and nature of other 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 indcpcndcnt public accountants and internal auditors have unrcstrictcd access to thc Audit Committcc.
Managcmcnt also is responsible for fostering a climate in which the corporation's and its subsidiaries'ffairs arc con-ducted in accordance with thc highest standards of personal and corporate conduct. This high ethical standard is reflcctcd in the corporation's Standards of Conduct, which arc distributed peri-odically to all cmployces of thc corporation and its subsidi-aries. The Standards of Conduct address, among other things, complying with all laws and regulations applicable to thc cor-poration's and its subsidiaries'usiness, avoiding potential conflicts of intcrcsts, and maintaining the confidentialit of proprietary information. The management of the corporation and its subsidiaries maintains programs to assess compliance with these standards.
Los Angeles, California February 6, 1989 ARTliURANDERSEN h CO.
To thc Sharcholdcrs and thc Board of Directors, SCEcorp:
I Wc have audited the accompanying consolidated balance shccts and statements of capitalization of SCEcorp (a California corpo-ration hcrcinafter rcfcrred to as the "corporation") and its sub-sidiaries as of Dcccmber 31, 1988, and 1987, and the related con-solidated statements of income, rctaincd earnings and cash flows for each of thc three years in thc period ended Dcccmbcr 31, 1988. Thcsc financial statements arc the responsibility of the corporation's management. Our responsibility is to cxprcss an opinion on these financial statcmcnts based on our audits.
Wc conducted our audits in accordance with generally ac-cepted auditing standards. Those standards require that we plan and perform thc audit to obtain reasonable assurance about whcthcr the financial statements arc frcc of material misstatc-mcnt. An audit includes examining, on a test basis, cvidcncc supporting the amounts and disclosures in the financial statc-mcnts. An audit also includes assessing the accounting princi-ples used and significant estimates made by managcmcnt, as well as evaluating thc overall financial statement presentation.
Wc believe that our audits provide a rcasonablc basis for our opinion.
In our opinion, thc financial statcmcnts rcfcrred to above prcscnt fairly, in all material respects, thc financial position of thc corporation and its subsidiaries as of December 31, 1988, and 1987, and thc results of their operations and their cash flows for each of thc three years in thc period ended Dcccmbcr 31, 1988, in conformity with generally accepted accounting principles.
As discussed in Notes I and 2 to the accompanying financial statcmcnts, thc corporation has given retroactive eflcct to its restructuring, which took place on July I, 1988, and to thc change in the method of accounting for its majority.owned sub-sidiaries. Also, as discussed in Notes 2 and 3 to the financial statcmcnts, thc corporation changed its method of accounting for unbilled rcvcnucs as of January I, 1987, and, effective Janu-ary I, 1988, rctroactivcly changed its method of accounting for disallowanccs of plant costs.
John E. Bryson Executive Vice President and Chief Financial Officer February 6, 1989 Howard P. Allen Chairman of the Board, President and Chief Executive Officer
Gonsolidated Statements of Income 27 SCEcorp and Subsidiaries In thousands, except per share amounts Year cndcd Deccmbcr 31, 1988 1987 1986 Electric revenue Investment and other
$5,931,682 321,037
$5i501 057
$5 316i325 100,869 51,762
'Ibtal operating rcvenuc 6,252,719 5,601,926 5,368,087 Fuel Purchased power Provisions for regulatory adjustment clauses net Other operating expenses Maintenance Depreciation and decommissioning Income taxes Property and other taxes 972,973 1,235,110 240,681 1,068i886 375,444 646,569 446,395 170,293 1,091,973 780,599 225,108 885,849 361,484 551,348 578,228 162,546 865,376 775,814 225,539 846,652 353,170 507,503 702,442 144,435 Total operating cxpenscs Operating income 5,156,351 4,637,135 4,420,931 1,096,368 964,791 947,156 Nuclear plant disallowance (Note 3)
Income taxes nuclear plant disallowance Provision for phase-in plan Allowance for equity funds used during construction Interest income Taxes on nonoperating income Othernct 170,856 18,125 121,708 (79,547)
(162)
(148,963) 78,616 137,832 73,406 93,213 (80,490) 20,144 (269,883) 61,665 88,672 105,744 110,971 (35,654) 25,320 Total other incomenct 230,980 173,758 86,835 Income before intcrcst and other expenses 1,327,348 1,138,549 1,033,991 Interest on long-term debt and amortization Other interest expense Allowance for borrowed funds used during construction Capitalized interest Prefcrrcd and preference stock dividend requircmcnts of subsidiary 439,842 108,498 (11,883)
(17,636) 46,696 404,767 82,059 (42,926)
(25,933) 50,095 433,103 83,274 (29,478)
(28,319) 54,684
'Ibtal interest and other cxpenscs net 565i517 468 06'2 513,264 Income before cumulative effect of a change in accounting principle Cumulative effect on prior years (to December 31, 1986) of accruing unbilled revenue net of income taxes of $58,752,000 (Note 2) 761,831 670,487 68,044 520,72,7 Net income 761,831 738,531 520,727 Weighted-average shares of common stock outstanding (000)
Earnings pcr share (Note 2):
Before cumulative effect of a change in accounting principle Cumulative effect of a change in accounting principle
$3.49
$3.08
.31 218,332 218,014 217,780
$2.39
'Ibtal earnings pcr share The accompanying notes are an integral part o/ these financial statcinents.
$3.49
$3.39
$2.39
28 Consolidated Balance Sheets SCEcorp and Subsidiarios In thousands ASSETS December 31, 1988 1987 Utilityplant, at original cost (Note 3)
Less Accumulated provision for depreciation and decommissioning (Note 3)
Construction work in progress Nuclear fuel, at amortized cost
$ 15,687,850 4,529,938 11,157,912 676,175 475,764
$ 14,465,691 3,993,468 10,472,223 1,232,990 547,786 Less Property-related accumulated deferred income taxes
'Ibtal utilityplant 12,309,851 914,532 12,252,999 840,143 11,395,319 11,412,856 Nonutilitypropertyless accumulated provision for depreciation of $22,570,000 and $130,681,000 at respective dates Nuclear decommissioning trusts, at cost Investments in partncrships Investments in leveraged leases Other investments
'Ibtal other property and investments Cash and equivalents Receivables, including unbilled revenue, less allowances of $13,187000 and
$15,355,000 for uncollectible accounts at rcspcctive dates Fuel stock Materials and supplies, at average cost Regulatory balancing accounts net Prepayments and other current assets Total current assets Unamortized debt issuance and reacquisition expense Rate phase-in plan Other deferred charges 107,851 157,086 480,458 148,027 31,978 925,400 228,367 700,343 125,303 96,767 395,026 113,556 1,659,362 296,094 435,941 154,160 105,850 286,006 128I858 26,483 547,197 163,426 625,789 118,540 105,577 621,635 80,474 1,715,441 301,741 239,760 133,669
'Ibtal deferred charges
'Ibtal assets 886,195 675,170
$14,866,276
$ 14,350,664 The accompanying notes are on integral part of these financial statements.
29 SCEcorp and Subsidiaries In thousands CAPITALIZATIONAND LIABILITIES Dcccmbcr 31, 1988 1987 Common shareholders'quity (Note 3)
Preferred and preference stock of subsidiary:
Not subject to mandatory redemption Subject to mandatory redemption Long-term debt of subsidiaries
$ 5,064,848 358,755 239,037 5,421,747
$ 4,833,734 361,238 277,538 5,150,883
'Ibtal capitalization (see accompanying statements)
Other long-term liabilities 11,084,387 10,623,393 136,810 113,348 Current portion of subsidiaries'ong-term debt and redeemable subsidiary prcfcrrcd and prcfercncc stock Short-term debt Accounts payable Accrued taxes Accrued interest Dividends payable Accumulated deferred income taxes net Deferred unbilled revenue and other
'Ibtal current liabilities 165,975 658,418 464,817 435,030 117,477 139,187 166,754 304,470 2,452,128 101,555 672,501 458,048 471,008 106,666 133,281 236,662 354,184 2,533,905 Accumulated deferred investmcnt tax credits Accumulated deferred-income taxes net Customer advances and other deferred credits Total deferred credits Commitments and contingcncics (Notes 1, 3, 8, 9, and 10) 545,728 398,827 248,396 1,192,951 555,676 248,690 275,652 1,080,018
'Ibtal capitalization and liabilities The accompanying notes are an integral part of these financial statements.
$14,866,276
$ 14,350,664
30 Consolidated Statements of Cash Flows SCEcorp and Subsidiaries
~
In thousands Year ended December 31, 1988 1987 1986 Cash flows from operating activities:
Nct income Adjustments for noncash items:
Depreciation and decommissioning Amortization Nuclear plant disallowance net Allowance for funds used during construction Rate phase-in plan Regulatory deferrals energy exploration projects Deferred income taxes and investment tax credits Equity in income from partnerships Income from leveraged leases Othernet Changes in working capital components:
Receivables Regulatory balancing accounts Fuel stock, materials and supplies Prepayments and other current assets Accrued interest and taxes Accounts payable and other current liabilities Net cash provided by operating activities Cash flows from financing activities:
Issuances of long-term debt Repayment of long-term debt Redemption of subsidiary preferred and preference stock Nuclear fuel financing Short-term debt financingsnet Dividends paid Net cash used by financing activities 761,831 646,569 156,732 (30,008)
(196,181) 176r614 (87,070)
(17,056)
(20,420)
(74,554) 226,609 2,047 (12,689)
(63,314)
(43,292) 1,425,818 631,343 (350,383)
(48,775)
(18,569) 51,917 (530,409)
(264,876) 738,531 551,348 157,304 70,347 (116,332,)
(149,110) 61,637 198,417 (51,739)
(10,289) 22,443 (241,227)
(31,548) 133,518 (3,713) 8,607 267,883 1,606,077 374,787 (325,967)
(17,712)
(56,191) 182,461 (507,808)
(350,430) 520,727 507,503 12,9,800 208,2,18 (135,222)
(90,650) 21,748 281,863 (21,319) 8,390 (41,445) 17,120 5,584 31,860 222,418 38,784 1,705,379 1,472,532, (1,595,936)
(200,525)
(46I518) 231,750 (484,320)
(623,017)
Cash flows from investing activities:
Construction expenditures Contributions to decommissioning funds Investments in leveraged leases net Investments in partnerships Distributions from partncrships Proceeds from sale of assets Othernet (834,630)
(157,086)
(200)
(168,332) 55,998 27,637 (19,388)
(102,865)
(164,037) 37,838 23,900 (18,217)
(19,884) 11,289 (1 034t348)
(lr158 243)
Nct cash used by investing activities (1,096,001)
(1,257,729)
(1,166,838)
Increase (decrease) in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year 64,941 163,426
$ nSP67 (2,082) 165,508 163,426 (84,476) 249,984 165,508 Noncash investing and financing activities:
Conversion of subsidiary 5.20% convertible preference stock Conversion of subordinated debentures Conversion of partnership notes to equity The accompanying nates are an integral part of these Ilnanciai statements.
$2,108 2,973 414 3,136 18,670 845 2,849
Consolidated Statements of Capitalization Notes to consolidated statements ofcapitalization are on Page 32.
31 SCEcorp and Subsidiaries In thousands Common shareholders'quity:
Common stockno par value400,000,000 shares authorized; 218,461,932 and? 18,134,481 outstanding at rcspcctivc dates (b)
Retained earnings (See accompanying statements)
'Ibtal Preferred and preference stock of subsidiary:
December 31, 1988 December 31, 1988
$ 2,463,762 2,601,086 5,0G4,848 1987
$ 2,4S7,819 2,375,915 4,833,734 Not subject to mandatory redemption (c) (d):
Cumulative referred:
Scrics Shares Rcdcmption
~Outstandin Price
$25 par value; 4.08%
4.24 4.32 4.78 5.80 1,000,000 1,200,000 1,653,429 1,296,769 2,200,000
$ 25.50 25.80 28.75 25.80 25.25 25,000 30,000 41,336 32,419 55,000 25,000 30,000 41,336 32,419 55,000
$100 par value:
Prcfcrencc:
$25 par value:
'Ibtal 7.58 8.70 8.96 750,000 500,000 500,000 5.20 convertible 101.00 104.00 104.00 75,000 50,000 50,000 358,755 75,000 50,000 50,000 2,483 361,238 Subject to mandatory redemption (c) (e):
Cumulative referred:
$ 100 par value:
7.325%
7.80 8.54 8.70A 12.31 547,381 483,495 615,000 433,124 430,000 Prcfcrcnce:
$25 par value:
7.375 Prcfcrred and prcfcrcncc stock to bc rcdccmcd within onc year
'Ibtal Long-term debt of subsidiaries:
Maturit First and refunding mortgage bonds (c)(f):
1989 through 1992, 1993 through 1997 1998 through 2002 2003 through 2007
?008 through 2020
$ 103.54 104.62 105.65 110.00 105.83 Intcrcst rates 4s/s% to 8/4%
6s/s% to 9%
8'/4% to 9%
9s/s% to 9.95%
8s/s% to 13%
54,738 48,350 61/00 43,312 43,000 (11,8G3) 239,037 475,000 1,125,000 650,000 278,750 1,267,47G 60,000 51,000 63,750 45,937 50,000 28,864 (22,013) 277,538 672,000 1,000,000 500,000 284,000 1,084,413 1999 through 2015 Pollution control bonds (e) (g):
Funds held by trustees Dcbcntures and notes (d)(c)(h):
1990 through 1999 Nuclear fuel indebtedness (c) (i)
Long-term debt due within onc year (c)
Unamortized debt discount nct
&Y4% to 10/s% and variable 8.25% to 11% and variable 947,730 (11,119) 441,698 424,1G8 (154,112)
(22,844) 897,730 (10,472) 438,528 379,02,9 (79,542)
(14,803)
'Ibtal
'Ibtal capitalization The accompanying notes are on integral part of these financial sratemenrs.
5,421,747 5,150,883
$ 11,084/87
$ 10,623,393
Notes to Consolidated Statements of Capitalization SCEcorp and Subsidiaritts (a) Effective July I, 1988, SCEcorp bccamc the parent holding company of Southern California Edison Company (Edison) and Thc Mission Group. Holders of Edison common stock be-came holders of SCEcorp common stock on a sharc-for-sharc basis. The California Public UtiliticsCommission's (CPUC) decision authorizing thc establishment of a holding company requires Edison to maintain a capital structure consistent with the CPUC's most recently authorized capital structure.
(b) AtDecember 31, 1988, 1,490,000 shares of common stock werc rcservcd for issuance under thc 1987 Long-Term Inccntivc Compensation Plan.
(c) In connection with the formation of SCEcorp, each out-standing sharc of Edison's original prcfcrrcd stock was con-vcrtcd into 2.1 shares of SCEcorp's common stock. Edison's authorized shares of $25 cumulative prcfcrred, $100 cumula-tive preferred, $25 preference and $100 prcfcrcnce stock arc 24,000,000, 12,000,000, 10,000,000, and 2,000,000 shares, rc-spcctivcly. Allseries of cumulative preferred and prefcrcncc stock are redecmablc. Thc 430,000 shares of $ 100 cumulative preferred stock, 12.31% Series, arc not subject to redemption until May I, 1992. Thc various series of $ 100 cumulative prc-ferrcd stock arc subject to certain restrictions on redemption for refunding purposes.
(d) On May 31, 1988, Edison either redeemed or converted its outstanding shares of 5.20% convcrtiblc prcfcrencc stock at
$25 pcr share and converted all of thc outstanding 12>>/s% con.
vcrtible debcnturcs at the conversion price of $ 16.1875.
(e) The table below presents thc mandatory redemption re-quirements for prcfcrred stock, long.term debt maturitics and sinking fund rcquircments for the five years subsequent to Dcccmbcr 31, 1988:
(g) Edison has issued first and refunding mortgage bonds and other indebtedness to govcrnmcntal agencies in exchange for proceeds from pollution control bonds. Thcsc proceeds have bccn dcpositcd with trustccs and are used to finance construc-tion of pollution control facilities. Certain pollution control bonds may be rcdccmcd at the discretion of the bondholders.
Edison has made arrangemcnts with security dealers for the remarkcting or purchase of thc pollution control bonds in such cases. Edison arranged lines of credit for $600 millionat December 31, 1988, to refinance these bonds, should remar-kcting bc unsuccessful.
(h) One of SCEcorp's unregulated subsidiaries has debt out-standing in the amount of $99.0 millionat Dcccmbcr 31, 1988, and $1070 millionat December 31, 1987, supported by lines of credit aggregating $280.0 millionat Dcccmbcr 31, 1988, and
$235.0 millionat Dcccmber 31, 1987.
(i) Nuclear fuel financing is comprised of:
In thousands Dcccmbcr 31, 1988 1987 Foreign.currency denominated noiesu>>
$ 62,950
$ 66,000 Commercial paper>>i>>
338r777 288r296 Spent nuclear fuel obligstionts>>
22,441 24,733 Less: Current maturitics 424,168 65,494 379,029 2,292 Total
$358,6/4
$376,737 (II Edison issued foreign currency.denon>>inc>>cd notes totaling
$604 millionin September 1987 to finance nuclear fuel. The notes moture 24 months from the date ofissuance. Under a currency exchange agreement, a securities firm assumes oil foreign.currency translation goins and losses. IIreighted.average in>>crest rates on the notes arc based on the overoge doily commercial paper rate anri werc 7.46'Yo for 1988 and 7.09'/o for 1987. Foreign.cunency translation gains or losses have been deferred and ore included in the transiatcrl value of thc liobility.
In thousands Year cndcd December 31, 1989 1990 1991 1992 1993 Preferred stock redemption requirements
$ 11,863
$ 11,738
$ 11,738
$ 11,738
$ 12,338 Long.term debt maiutities and sinking lund requirements 154,112 212,905 204,737 222,157 242,535 (2l A portion of the commerciol paper used to finance nuclear fuel has bccn classified as long term debt under refinancing ogree.
ments with commercial banks. The long. term portion finances nuclear fuel not scheduled for consumption within 12 months of thc balance sheet dates.
(3) Pursuant to the Nuclear IVoste Policy Act of 1982, Edison has signed a contract with the V.S. Department of Energy for dis.
posal of spent nuclear fuel from the San Onofte Nuclear Generating Station. Thc in>>crest rateis fixed at 10.57%.
Total
$ 165,975
$224,643
$216,475
$233,895
$254,873 (f) Substantially all utilityproperties are subject to thc liens of trust indcnturcs, cxccpt for nuclear fuel and fuel oil invcn-torics, which are financed with short. term debt in conformity with CPUC ratcmaking procedures.
Consolidated Statements of Retained Earnings 33 SCEcorp and Subsidiaries In thousands, except per share amounts Balance at beginning of year
'et income Dividends declared on common stock Loss on reacquired capital stock and other Year ended December 31, 1988
$2,375,915 761,831 (536,660) 1987
$2,150,751 738,531 (513,367) 1986
$2,128,646 520,727(a)
(489,909)
(8,713)
Balance at end of year Dividends declared pcr common sharc
$2,601,086(b)
$2,375,915
$2,150,751
$2.45t/g
$2.35t/s
$2.25 (aj Restated from S713 933 000 to S520 727000 to reflect thc after tax write of/ofnuclear plant disailowanccs totaling S193 206 000. (See Note 3 of "Notes to Consolidated Financial Statements" ).
(bj Includes appropriated retained earnings related to certain federally licensed hydroelectric projects of Saa68000 at December 31, 1988.
The accompanying notes arc an integral part of these financial statements.
Notes to Consolidated Financial Statements SCEcorp and Subsidiaries Note 1. Corporate Restructuring and Proposed Mcrgcr On July 1, 1988, SCEcorp acquired the outstanding common stock of Southern California Edison Company (Edison) under a merger agrccment approved by share-holders on April21, 1988. Edison shareholders became holders of SCEcorp's common stock on a sharc-for-share basis. Each share of Edison's outstanding original preferred stock was converted into 2.1 shares of SCEcorp's common stock. Edison's remaining preferred stock and debt securities werc not exchanged or trans-ferred to SCEcorp. Edison's equity investment in non-utilitysubsidiaries was transferred to SCEcorp at book value on July 1, 1988.
On November 30, 1988, SCEcorp, Edison, and San Diego Gas 8t Electric Company (SDG8tE) executed an agreement to merge SDG8tE into Edison. Under thc terms of the merger agrccmcnt, SCEcorp willexchange 1.3 shares of its newly issued common stock for each SDGKE common sharc. SDG8tE preferred and prefer-ence stock willbe exchanged for SCEcorp preferred and preference stock with similar provisions, except that dividends on each series willbe increased bctwecn 2.5% and 20%. The merger is subject to approval by the shareholders of SCEcorp, Edison, and SDG8tE, as well as regulatory agencies, including the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC).
Note 2. Summary of Significant Accounting Policies Consolidation Policy Thc consolidated financial statements include thc accounts of SCEcorp and its subsidiaries. The principal subsidiaries are Edison and The Mission Group, which is thc parent company for all subsidiaries not subject to rate regulation. SCEcorp uses the equity method of accounting to report invcst-mcnts of 50% or less in partnerships primarily engaged in cogeneration, geothermal and other energy-rclatcd facilities which arc exempt from utilityregulation. All significant intercompany transactions have been elimi-nated, except intercompany profits from energy sales to Edison by unregulated, energy-producing affiliate, which are allowed in rates.
Accounting Principles Edison is regulated by the CPUC and the FERC. Thc accompanying consolidated financial statcmcnts rcflcct the ratemaking policies of these commissions, as applied to Edison, in conformity with generally accepted accounting principles applicable to rate-regulated enterprises.
UtilityPlant The costs of plant additions, including replacements and bcttcrments, arc capitalized and in-cluded in utilityplant. Capitalized costs include direct material and labor, construction overhead, and an allowance for debt and equity funds used to financ construction. Thc cost of property that is replaced or retiredand related removal costs, less salvage is charged to thc accumulated provision for depreciation.
Accumulated dcfcrrcd income taxes related to utility plant are prescntcd as a deduction from utilityplant to conform with ratcmaking procedures used to dctcrmine rate base.
Construction Financing Costs Allowance for funds used during construction (AFUDC) represents thc cost of debt and equity funds that finance construction of utilityplant. Capitalized AFUDC is reported in thc consolidated statements of income as a reduction of in-
34 terest charges for thc debt component and as other in-come for the equity component. AFUDC and plant construction costs are recovered when completed proj-ects arc placed into commercial operation, and the re-covery of related depreciation is authorized through customer rates.
Before 1987, the cost of debt included in the AFUDC calculation was reduced by thc tax benefi realized from deducting the related interest expense from tax-able income. As a result of changes in the treatment of interest expense for income tax purposes, pretax inter-est expense was used to compute thc debt component of AFUDC beginning in 1987. The AFUDC rate, which reflects semiannual compounding, was 10.76% for 1988 and 11.57% for 1987 under the prctax method. The rate was 10.53% for 1986 under the previous nct-of-tax method.
Intcrcst on loans that finance partnership construc-tion projects is capitalized until the projects arc operational. Such capitalized interest is included in investmcnts in partnerships in the consolidated bal-ance sheets.
Depreciation and Decommissioning Depreciation of utilityplant, except nuclear fuel, is computed on a straight-line, remaining-life basis. Depreciation of non-utilityproperties is computed on a straight-line basis over their estimated useful lives.
The estimated cost of decommissioning Edison's nuclear gcncrating facilitics is $713 millionand is re-covered in rates through annual allowances charged to depreciation expense. Retail rates for 1988, and certain prior years, included annual decommissioning revenue requirements, which have been deposited in trust funds until decommissioning begins. Aust fund contribu-tions are invested in high-grade sccuritics. Approxi-mately 80% of the trust fund contributions qualify as tax deductions.
Nuclear Fuel The cost of nuclear fuel, including its disposal, is amortized on the basis of generation and is charged to fuel expense. In accordance with ratc-making procedures adopted by the CPUC, nuclear fuel financing costs are capitalized until the fuel is placed into production.
Research, Development, and Demonstration (RDAD)
RDM) costs not related to a specific project are ex-pensed in the year incurred. RD8tD costs related to specific construction projects arc capitalized until it is determined whether they willresult in construction of plant. Ifconstruction docs not result, the costs arc charged to expense.
RDS.D costs arc reflected in the followingtable:
Year ended December 31,
~ In thousands 1988 1987 1986 Total RDS.D costs
$60,869
$57,748
$51,010 Commencing in 1988, a balancing account has been cstablishcd for RD8tD costs charged to expense. Under this mechanism, Edison is required to refund to ratepayers any authorized but unspent RD8tD funds at thc end of the three-year rate-case cycle ending December 31, 1990.
Unamortized Debt Issuance and Reacquisition Expense Debt premium, discount, and issuance expenses are amortized over the lives of the related issuanccs. The expense of reacquiring bonds that arc redecmcd without refunding are amortized over the period thc debt would have remained outstand-ing. The reacquisition cxpcnses arc amortized over the lives of the new debt issues when debt is reac-quired with refunding.
Changcin Accounting Principle Prior to 1987, elec-tric operating revcnuc was recorded based on customer billings. On January I, 1987, Edison began accruing esti-mated revenue for electricity that had been delivered to customers through the cnd of each month but had not yct been billed. This accounting change conforms to the Tax Reform Act of 1986, which requires utilities to include unbilled revenue in taxable income commenc-ing in 1987 and results in a bet ter matching of revenue and expense.
Had thc ncw accounting method bccn in effect for 1986, net income would have been $2.7 millionless than thc amount reported, resulting in a one-cent decline in earnings pcr sharc.
Regulatory Balancing Accounts Operating Revenue:
The CPUC has authorized an electric revenue adjustment mechanism (ERAMJ balancing account to minimize the cffcct on earnings of retail sales fluctuations. Differences betwccn autho-rized and recorded base rate revenue are accumulated in the account until they are refunded to or recovered from utilitycustomers through CPUC-authorized rate adjustmcnts.
RDSD costs charged to expense
$43,414
$42,893
$47,122 RDSD costs deferred/capitalized 17,455 14,855 3,888
Energy Costs:
An energy cost adjustmcnt clause (ECAC) balancing account adjusts results of operations for variations betwccn thc recorded cost of fuel and purchased power and rcvcnuc dcsignatcd for recovery of such costs. Undercollectcd cncrgy costs arc accumu-lated in the balancing account until they are recovered from utilitycustomers through CPUC-authorized rate adjustments. Previously, 90'/0 of fuel and purchased power costs werc recovered through ECAC, and the re-maining 10/o of such costs were recovered through the annual energy rate (AER). On Junc 1, 1988, thc CPUC suspended the AER rate component. As a result, all fuel and purchased power costs are currently rccovercd through ECAC.
In 1987, the CPUC authorized a one-time write-down of the cost of fuel oil inventory to market prices. It also authorized the last-in, first-out inventory method for measuring the cost of fuel oil consumption. The
$108.7-million write-down, including intcrcst, has been recorded in thc ECAC balancing account. On Decem-ber 31, 1988, the balance remaining to bc recovered was
$59.0 million, including interest.
The CPUC has established performance inccntivcs based on target generation levels for Edison's nuclear generating stations. Fuel savings or costs attributable to levels above or below the targeted ranges are divided equally between SCEcorp and Edison's customers through adjustments to the ECAC balancing account.
Major Plant Additions:
Bcforc 1988, Edison used major additions adjustment clause (MAAC)balancing accounts to accumulate thc differences bctwccn reve-nue required to provide recovery of ownership costs of San Onofrc Nuclear Generating Station (San Onofre)
Units 2 and 3 and Palo Verde Nuclear Generating Sta-tion (Palo Verde) Units I and 2 and rclatcd authorized revenue.
Commencing in 1988, ownership costs of San Onofre Units 2 and 3 are recovered in base rates. Thc own-ership costs of Palo Verde Units 1, 2, and 3 arc also rc-covercd in base rates to the extent they are not defcrrcd in accordance with the Palo Verde rate phase-in plan.
Recovery of remaining undercollections in the MAAC balancing accounts as of December 31, 1988, has been authorized over a three-year period, beginning in 19'89.
Interest and Taxes:
Interest on regulatory balancing accounts is accrued at the three-month prime commer-cial paper rate. The wcightcd-average interest rates were 7.60/o for 1988 and 6.57/0 for 1987. Income tax effects on thc changes in the regulatory balancing accounts are defcrrcd.
Palo Verde Rate Phase-In Plan:
Palo Vcrdc Units 1, 2, and 3 have been in commercial operation, for ratemaking purposes, since February 1, 1986, Septem-ber 19, 1986, and January 20, 1988, rcspectivcly. Thc CPUC has adopted a 10-year rate phase-in plan, which defers $200 millionof required revenue during thc first four years of operation for each unit. Dcferrals for each unit, for years one through four, are $80 million, $60 million, $40 million, and $20 million, rcspcctively. The deferrals and related interest willbe rccovcrcd on a level basis during thc final six years of each unit's phase-in plan.
Statements of Cash Flows Beginning in 1988, SCEcorp presented statements of cash flows in confor-mitywith a new accounting standard. Prior periods have been restated to bc consistent with thc current presentation. For purposes of thc consolidated state-ments of cash flows, SCEcorp considers short-term temporary cash investments to be cash equivalents.
Cash payments for intcrcst were $485.5 millionin 1988, $455.1 millionin 1987, and $466.3 millionin 1986.
Restatements and Reclassifications Allprior period financial statements and related notes have been re-stated to reflect consolidation of all majority-owned subsidiaries and thc corporate restructuring. The con-solidated financial statcmcnts also have bccn rcstatcd to reflect the write-offof utilityplant and related ad-justments to thc accumulated provision for dcprccia-tion, accumulated deferred income taxes, and retained earnings resulting from thc CPUC's disallowance of nuclear plant construction costs, Sce Note 3 for a fur-ther discussion of the disallowance.
Certain other items in prior periods have also been reclassifie to conform them to the financial statcmcnt prcscntations for December 31, 1988.
Note 3. Regulatory Matters CPUC Disallowances In October 1986, the CPUC disallowed $258.6 millionof Edison's $3.4-billion in-vestment in San Onofre Units 2 and 3. Edison filefor rehearing on $213.4 millionof the disallowed costs in December 1986. In March 1987, thc CPUC granted a rehearing on indirect construction cost issues and, in July 1987, issued a decision that rcduccd the October 1986 disallowance to $198.9 million.
36 Recovery of Edison's $1.5-billion invcstmcnt in Palo Verde was rcduccd by 19.33/o of thc amount disallowed for San Onofre Units 2 and 3, under a ratemaking agreement adopted by the CPUC. Thc CPUC's invest-ment disallowances for San Onofre and Palo Verde total
$237 million.
In December 1986, thc Financial Accounting Stan-dards Board began requiring regulated enterprises to write off construction costs not allowed in rate base.
The new standard provides for the restatement of prior-period financial statements for disallowanccs occurring before the standard's effective date of January 1, 1988.
Accordingly, the 1986 consolidated statement of in-come includes a one-time, after-tax charge against earnings of approximately $ 193 million, rcflccting thc CPUC's final construction-cost disallowanccs arising from its October 1986 decision.
In addition, revenue accrued to recover prior years'wnership costs, which is associated with the con-struction costs disallowed by the CPUC, has bccn written off from the MAACbalancing account. Edison recorded after-tax charges against earnings of approxi-mately $ 15 millionfor 1986 and $70 millionfor 1987.
Energy Cost Proceedings Thc CPUC's Division of Ratepayer Advocates (DRA) rccommcnded that the CPUC disallow $ 124 millionof energy costs incurred between late 1984 and late 1987. Approximately $ 120 millionof the proposed disallowance represents allcgcd overpayments to nonutilitypower producers, including electricity purchased by Edison from a 300-MW cogcn-cration facilityowned by Kern River Cogcncration Company (KRCC). Mission Energy Company, which is 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-mately $37 million. In upcoming CPUC hearings, Edi-son willdemonstrate that the power purchases from KRCC actually saved its customers morc than $24 mil-lion during the three years under consideration, com-pared with thc "standard offer"contract approved by the CPUC. Thc DRA also allcgcs ovcrpaymcnts by Edi-son under 17 other contracts Edison negotiated with nonutilitypower producers that are not SCEcorp affili-ates. Edison signed these contracts during the carly stages of California's efforts to rapidly develop alter-nate and renewable energy rcsourccs. The prices Edison 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-ance, the DRA has recommended that thc CPUC modify its early 1988 decision that authorized Edison to form a holding company.
Although the probablc effect that thc outcome of this matter willhave on nct income cannot be determined at this time, Edison believes that adoption of thc DRA's recommendation to modify the holding company deci-sion is not necessary to protect the public interest and Edison willwork diligently to demonstrate that it has reasonably administcrcd the contracts under review.
CPUC proceedings arc scheduled to take place later this year.
Resale Rates In accordance with FERC procedures, resale rates are subject to refund with interest ifsubse-quently disallowed. Edison believes that any refunds resulting from pending rate proceedings, should not have a material effect on net income.
Note 4. Short-Term Debt In millions Gcncral purpose Leveraged leases Balancing accounts Fuel Total borrowings supported by lines of credit Amount reclassified as long.term Vnamortized discount Other short-term borrowings Nct short-term debt 1988 1987 67.1 3S.8 99.0 107.0 400.0 400.0 535.3 518.3 1,101.4 1,061.1 (437.8)
(395.3)
(5.3)
.1 6.7 658.4 672..5 Note 5. Income Taxes SCEcorp's subsidiaries are included in its consolidated fcdcral income tax and combined state franchise tax re-turns. Under income tax allocation agreements, each subsidiary calculates its tax liabilityseparately.
SCEcorp maintains unrestricted deposits of approxi-mately $7 millionat commercial banks and pays an-nual commitment fees of up to.I'/o to maintain lines of credit which may bc utilized at negotiated or bank in-dex rates and which totaled $2.2 billionon December 31, 1988. Approximately $ 1.6 billionof these lines of credit support commercial paper and other borrowings to financ general cash requirements; leveraged leases; fuel inventories; and undercollcctions in regulatory balancing accounts. The remaining $600 millionof these lines of credit arc avai)able for thc long-term refinancin of certain variable-rate pollution-control indebtcdncss issued by Edison.
Short-term debt of subsidiaries is comprised of:
Deccmbcr 31,
37 Current and Deferred Taxes Income tax expense includes the current tax liabilityfrom operations, and deferred income taxes provided on certain items of income and cxpcnse which are reported in different periods for tax and financial reporting purposes.
The current and deferred components of income tax expense arc:
Year ended December 31, In thousands Current:
Federal State DclcrrcdIcdcrai and state:
Invcstmcnt and cncrgy tax credits nct Dcprcciation Regulatory balancing accounts Debt reacquisition cxpcnscs Lcvcragcd Icascs Fuel contract sct tlcmcnts Nuclear plant disallowance Cumulative cffcct of accounting change Capitalized exploration and dcvclopmcnt cxpcnscs Unbillcd rcvcnuc Phase-in plan Fixed charges Contributions in aid of 1988 1987 1986
$241,917
$319,429
$342,253 107,411 124,055 119,972 349,328 443,484 462,225 (11,210) 173,380 (79,460)
(2,507) 38,950 (1,980) 40,351 188,186 (33,463)
(1,390) 23,784 16,002 (78,616) 69,931 176,280 (21,400) 81,968 9,528 (61,665) 58,752 (31,338)
(24,420)
(27,467) 78,743 68,797 46,398 7,994 (14,178)
(45,538) construction Other (28,836)
(14,000) 25,960 (31,388)
(9,958)
Classification oi income taxes:
Included in operating cxpcnscs
$446,395
$578,228
$702,442 Included in other income 79/547 80,490 35,654 Nuclear plant disallowance (78,616)
(61,665)
Related to cumulative cffcct of accounting change 58,752
'Ibtal income tax expense
$525,942,
$638,854
$676,431 Accumulated defcrrcd investment tax credits (ITC) are amortized over the lives of the related properties.
Cash payments for income taxes were $421.9 million in 1988, $466.7 millionin 1987, and $316.3 millionin 1986.
Thc followingtable reconciles the differences be-tween recorded state and federal income taxes and amounts determined on income before taxes by apply-ing the federal statutory tax rate. The federal and com-posite fcdcral and state statutory income-tax rates arc 176,614 195,370 214,206 Total income tax cx ense
$S25,942
$638,8S4
$676,431 34% and 40.138%
respectively, for 1988; 40% and 46.138%, respectively, for 1987; and 46% and 51.184%,
respectively, for 1986.
Year ended Dcccmbcr 31, In thousands Expcctcd fcdcral income tax expense at statutory rate $
Increase (dccrcasc) in income tax cxpcnsc resulting from:
Allowance for equity and borrowed funds used during construction Fcdcral deduction for state taxes on income Depreciation timing diffcrcncc not deferred State tax provision Prior years'ecommissioning Nuclear plant disallowance Subsidiary preferred and prcfcrcncc dividends Allother diffcrcnccs 1988 1987 1986 437,843 550,954 550,693 (6,163)
(29,362)
(62,202)
(40,005)
(49,480)
(54,493) 70,224 117,662 96,042 123,700 102,536 118,464 (15,714)
(4,730) 55,042 15,876 (53,781 20,038 (68,308 25,155 (58,764)
Deferred income taxes for tax depreciation prior to 1981 and certain construction overheads have not bccn provided because the tax effects of such timing differ-ences are not allowed for retail ratemaking purposes until the taxes become payablc. Thc cumulative nct amount of these timing differences was $ 1.8 billionon December 31, 1988, and 1987.
Ratamaking Investigation In 1986, the CPUC began an investigation to evaluate the effects of the Tax Reform Act of 1986 on ratemaking proccdurcs. Reve-nue for recovery of income tax cxpcnse for 1987 and subsequent periods was collected subject to refund pending a CPUC decision.
In October 1988, Edison refunded approximately $51 millionthrough the ERAM balancing account, in com-pliance with an August 1988 CPUC interim resolution.
Final CPUC approval of the amounts refunded is pending. Because Edison had previously provided a reserve for this item, refunds to customers have not and are not cxpccted to have any significant effect on nct income.
Total income tax cxpcnsc 525,942 638,854 676,431 Prctax income
$ 1,287,773
$ 1,377,385
$ 1,197,158 Effective tax rate (total income tax cxpcnsc~prctax income) 40.8%
46.4%
56.5%
38 New Accounting Standard Under accounting rules currently in effect, deferred income tax balances are not adjusted to reflec changes in tax law or rates. How-ever, a new accounting standard willrequire such ad-justments beginning in 1990.
The new standard requires significant balance shcct adjustmcnts. The corporation willrecord additional de-ferred income taxes related to the equity component of AFUDC, which is currently rccordcd on an after-tax 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.
Additional balance shcct adjustments willbe rc-cordcd for the net reduction in deferred income tax liabilities resulting from income tax rate changes; the recognition of deferred income tax assets attributablc to the reduction of the book basis of property by un-amortized investment tax credits; and to classify prop-erty-related accumulated deferred taxes as a liability instead of a reduction of utilityplant.
The majority of additional deferred-tax assets and liabilitieswillbe offset by recording regulatory assets and liabilities representing the anticipated effect of these adjustmcnts on customer rates. Such regulatory assets and liabilities willbc adjusted as they arc re-covered or refunded through thc ratemaking process and for changes in tax rates or laws.
Note 6. Employee Benefit Plans Pension Plan SCEcorp has a trustecd noncontribut-ory defined-benefi pension plan, covering substan-tiallyall full-timecmployccs who fulfillminimum service requirements. Benefit are based on years of accredited service and average compensation.
SCEcorp's policy is to fund the plan on a level premium actuarial method, provided that annual contribu-tions mcct the minimum funding requirements of thc Employee Retirement Income Security Act and do not exceed thc maximum deductible amount under in-come tax regulations. Prior service costs from pension plan amendmcnts are funded over 30-year periods.
In 1987, a new accounting standard for dcfined-bcnefit plans was implcmcnted that changed the basis used for determining pension expense. Before 1987, pension cost was based on the actuarial method used to determine annual contributions to thc plan. For 1986, pension expense amounted to $48.6 million.
In thousands Nct pension expense:
Service cost for bcncfits carncd Intcrcst cost on projected benefi obligation Actual return on plan assets Net amortization and dcfcrral Pension liabilitypursuant to accounting standards Rc lato adjustment Net cnsion cost rcco nizcd 1988 1987
$ 43,340
$ 46,629 102,249 91,025 (133,687)
(130,723) 40,610 46,699 52,512, 53,630 (6,416)
(3,481)
$ 46,096
$ 50,149 In conformity with the accounting principles for rate-rcgulatcd cnterpriscs, regulatory adjustments have been recorded to reflect, in net income, the pension costs calculated under the actuarial method used for ratemaking purposes. The difference bctwecn pension costs calculated for accounting and ratemaking pur-poses has been rccordcd as a deferred charge on the consolidated balance sheets.
The plan's funded status is presented below:
In thousands December 31, 1988 1987 Actuarial present value of bcncfit obligations:
Vested bcncfits 905,190 800,95?
Nonvcstcd benefit 68,531 57,306 Accumulated benefit obligation 973,72,1 858,258 Value of projected future compensation levels 435,363 372,095 Projected benefi obligation
$ 1,409,084
$ 1,230,353 Plan assets at fair value
$ 1,326,635
$ 1,201,550 Benefit obligation in excess of plan assets Unrecognized net gain Unrccognizcd nct obligation being amortized over 17 years (82,449)
(28,803)
(49,021)
(101,562) 89,640 95,163 Accrued pension liabilit (41,830)
(35,202)
Assumptions fordefine bcncfit pension plan:
Discount'ate 8.0/o Rate of incrcasc in future compensation Expcctcd long-term rate of return on assets 8.5'/o 6.0'/o 8.5?o 8.5 /o Assets of the plan consist primarily of common stocks, corporate and government bonds, short-term investmcnts, and guarantccd investmcnt contracts.
Pension expense under the new standard includes the followingcomponents:
Year cndcd'Dccembcr 31,
39 Employee Stock Plans SCEcorp maintains an Employee Stock Ownership Plan (ESOP) and a Stock Savings Plus Plan (SSPP), which arc designed to sup-plement employccs'ctircmcnt income. Contributions to the ESOP were funded primarily by federal income tax benefit and contributions by employees. SCEcorp contributions to the SSPP werc $16.9 millionin 1988,
$16.6 millionin 1987, and $15.4 millionin 1986.
Other Post-Employment Benefits Health care bcnc-fits and life insurance arc provided for retired employ-ees and their depcndcnts. Group lifeinsurance is provided through an insurance company. Health care is provided by a combination of SCEcorp facilitics and insurance programs. The costs of these bencfiits for re-tirees werc $22.8 millionin 1988, $ 18.0 millionin 1987, and $15.4 millionin 1986.
Note 7. Jointly Owned UtilityProjects Edison owns undivided intcrcsts in several generating stations and transmission systems, for which each par-ticipant provides its own financing. Thc proportionate share of expenses pertaining to such projects is in-eluded in the appropriate operating expense category in the consolidated statements of income. Thc table below prcscnts the invcstmcnts in each project as included in the consolidated balance sheet as of December 31, 1988:
in thousands Plant in Service Accumulated Depreciation Under Construction Ownership Intcrcst El Dorado Transmission System Four Corners Coal Generating StationUnits 4 and 5 Mohave Coal Gcncrating Station Pacific Intcrtic DC Transmission System Palo Verde Nuclear Gcncrating Station San Onofrc Nuclear Generating Station:
Unit I Units 2 and 3 Common faciliticsUnits 2 and 3 Common faciliticsUnits I, 2 and 3 Yuma Axis Gcncratln Station S
21,649 401,142 233,708 115,047 1,463,307 537,02,2, 2,759,741 819,030 176,130 12,369 8,590 122,613 95,919 34,075 80/810 153,999 477,523 114,846 28,854 10,516 108 11,395 877 69/550 8,348 23,261 18,084 1,863 3,599 69 60.00% (a j 48.00 56.00 50.00 15.80 80.00 75.05 75.05 75.87 33.30 Total (A Rcprescnrs a composite rate.
$6,539,145
$ 1,127,745
$ 137,154 Note 8. Lcascs Investmentsin Leveraged Leases During 1987, a wholly owned, nonutility subsidiary became thc lessor in several levcragcd-lease agreements, under which its undivided interests in a nuclear power plant and a paper millfacility, having economic lives of 40 and 34 years, respectively, were leased for terms of 29 and 25 years, respectively. Alloperating, maintenance, and decommissioning costs arc thc responsibility of thc lessees. Thc facilitics'otal cost was $609 millionat Dcccmber 31, 1988, and 1987.
Thc equity investment in these facilities represcntcd 24% of the purchase price. The remaining 76% was nonrecourse debt, which is secured by first liens on thc leased property. The lendcrs accept their security intcr-ests as their only remedy in the event of default by the lessee. The components of the net investment in leveraged leases are provided in the followingtable:
in thousands December 31, 1988 1987 Rentals rcccivablc (nct of principal and interest on nonrecourse debt)
$243,999
$243,960 Less: Unearned income 95,972, 115,102 Invcstmcnt in lcvcragcd leases Current portion of rentals rcccivablc Less: Deferred income taxes 148,027 128,858 4,642 74,453 40,768 Nct Invcstmcnt in lcvcragcd lcascs
$ 73,574
$ 92,732
40 Year ended December 31, 1989 1990 1991 1992.
1993 For periods thcraftcr In thousands
$ 29,997 26,088 22,981 19,112 14,637 16,266 Operating Lease Commitments SCEcorp lcascs auto-motive, computer, offic, and miscellaneous cquipmcnt through operating rental agrccmcnts with varying terms, provisions, and expiration dates. At December 31, 1988, cstimatcd remaining rental commitmcnts for noncancelable operating leases were as follows:
vidcr, whether or not the facilityor transmission linc is operable. None of these power contracts provide, or are expected to provide, more than 5'/o of current or esti-mated future operating capacity.
The cost of power and firm transmission service ob-tained under these contracts, including payments made when a facilityor transmission linc is not operating, is included in purchased power and other operating ex-penses, rcspcctively, in the consolidated statements of income. Purchased power costs are generally recover-able through thc ECAC balancing account proccdurc.
Sclectcd information pertaining to these contracts on December 31, 1988, is summarized as follows:
Total future rental commitmcnts
$ 129,081 Purchased Transmission Power Service On Junc 10, 1987, onc of Edison's wholly owned sub-sidiaries purchased the leasing company from which Edison lcascd its nuclear fuel by assuming thc com-pany's commercial paper obligations. On March I, 1988, Edison assumed the commercial paper obligations of the affiliate nuclear fuel lessor and terminated the nuclear fuel lease agrccmcnt. Lease liabilities supported by commercial paper borrowings, which had been classified as long-term obligations, have been reclassi-fied as long-term debt to conform with thc financial statement presentation of nuclear fuel financing on December 31, 1988. The long-term debt amount represents thc estimated repayment of commercial paper based upon expected nuclear fuel consumption subsequent to one year after the balance sheet date and is supported by refinancing agreemcnts with commercial banks.
Years contracts expire Share of effective operating capacitymegawatts Share of cncr out ut 1990-2017 1990-2016 473.5-627.5 5.54'/o-100'/o Required minimum annual payments 1989 1990 1991 1992.
1993 Thereafter Total ln thousands
$ 46,468 9,033 13,854 6,030 2,500 4,529 2,500 4,42.2 2,500 4,267 59,375 86,118
$ 127,197
$ 114,399 Purchased power costs were $ 121.5 millionin 1988,
$ 118.0 millionin 1987, and $ 115.3 millioni'n 1986.
Transmission costs werc $11.4 millionin 1988, $ 11.2 millionin 1987, and $ 12,.0 millionin 1986.
Note 9. Commitments Note 10. Contingcncics Construction Program and Fuel Supply As of De-cember 31, 1988, SCEcorp's construction expenditures arc estimated to be $905 millionfor 1989, $712 million for 1990, and $713 millionfor 1991. In addition, mini-mum long-term commitmcnts of approximately $1,607 millionexisted as of Deccmbcr 31, 1988, under fuel supply contracts.
Long-Term Purchased Power and Transmission Contracts Edison has contracted to purchase por-tions of thc generating output of certain facilities and to purchase firm transmission service when appropri-ate. Although there is no investment in such facilitics, these contracts provide for minimum payments based, in part, on the debt service requirements of the pro-Nuclear?nsuranee On August 22, 1988, Congress amended the Price-Anderson Act, cxtcnding ituntil August I, 2002. It increased to $7.6 billionfrom
$720 millionthe limiton public liabilityclaims that could arise from a nuclear incident. Participants in San Onofrc and Palo Verde have purchased the maximum private primary insurance available, which currently is $200 million.The balance is to be covered by the industry's retrospective rating plan, using deferred premium charges. This secondary level of financial protection is rcquircd by the Nuclear Regulatory Com-mission (NRCI. The maximum amount of the dcferrcd premium that may be charged for each nuclear incident
41 is $63 millionper reactor, but not more than $ 10 mil-lion per reactor may be charged in any one year for each incident. Edison could be required to pay a max-imum of $183.6 millionper nuclear incident, on the basis of its ownership interests in San Onofrc and Palo Verde, but it would have to pay no more than $29.1 millionpcr incident in any onc year. Such amounts in-clude a 5% surcharge that would be applicable in the event that additional funds are needed to satisfy public liabilityclaims, and are subject to adjustment for inflation.
Edison's property damage insurance cov'crs losses up to $500 millionat San Onofre and Palo Verde. De-contamination liabilityand property damage coverage in excess of the primary $500 millionlayer has also been purchased, exceeding NRC requirements.
Insurance covering part of the additional cxpcnse of replacement power, which could result from an acci-dent related nuclear unit outage, is also provided. After the first 21 weeks of such an outage, a maximum weekly indemnity of $2.7 millionfor a single unit for
- 52. wccks begins. An additional $ 1.4 millionpcr week is provided for the next 52 weeks. These policies are is-sued primarily by mutual insurance companies owned by utilities with nuclear facilities. Iflosses at any nuclear facilitycovered by the arrangement were to exceed the accumulated funds available for these insurance programs, Edison could be assessed retro-spective premium adjustments of up to $54.0 million per year. Insurance premiums arc charged to operating expenses.
Antitrust Litigation In 1978, five resale customers filed a suit against Edison, in federal district court, al-leging violation of antitrust laws. The complaint seeks monetary damages, a trebling of such damages, and certain injunctive relief. The complaint allegcs that Edison cngagcd in anticompetitive behavior by charging morc for clcctricityit sold to resale customers than it charged certain classes of retail customers. Thc com-plaint also allcges that Edison acted alone and in con-cert with other utilities to prevent or limitsuch resale customers from obtaining bulk power supplies from other sources to reduce or replace the resale customers'urchases from Edison. The plaintiffs estimate that their actual damages, before trebling, werc approxi-mately $99.5 millionfrom February I, 1978, through Deccmbcr 31, 1985. The trial began on July 8, 1986, and concluded on Scptcmber 26, 1986. Edison filefindings of fact and conclusions of law with the court on November 21, 1986. A decision is pending.
In 1983, another resale customer also filesuit, in federal district court, alleging violation of certain anti-trust laws. The customer alleges that it has been de-nied access to lower-cost power and was overcharged for power purchases as well as other operational and financial damages. On July 17, 1988, Edison received the customer's antitrust damage study alleging total damages of approximately $ 135 millionbefore trebling.
A trial date of November 14, 1989, has been set.
The foregoing proceedings involve complex issues of law and fact. Although Edison is unablc to predict thc final outcome, it has categorically denied the resale customers'llegations.
Quarterly Financial Data Unaudited SCEcorp and Subsidiaries In millions, except per share data Operating revenue Operating income Net income Per sharc:
Earnings Dividends declared 1988" 1987 Total Fourth Third Second First Total Fourth Third Second First
$6,253
$ 1,539
$2,029
$ 1,353 1,096 196 476 228 762 107 392 146
$ 1,332
$5,602
$ 1,414
$ 1,518
$ 1,354
$ 1,316 196 965 233 258 249 225 117 739 171 212 187 169'.49
.49 1.79
.67
.54 3.39
.78
.97
.86
.78*
2.45'/s
.6?
.62
.62
.59'/s 2.35'/s
.59'/i
.59'/s
.59~/s
.57 Common stock prices High Low
$34/s
$34'/z
$33'/s
$34'/s
$34
$37
$33s/s
$33s/e
$32,s/e
$37
$29'/s
$31 /s
$30/4
$30
$29'/e
$27/e
$27/s
$29/e
$28'/e
$31 /4 Includes $68 million,or 31 cents per sharc, resulting from an accounting chonge. (See Note 2 of "Notes to Consolidated Finoncial Statements.")
"Quarterly fluctuations compored to 1987 are primarily thc tesult of a December 1987 CPUC talc decision which ordered Edison to change thc way it bills lotge customcts, concentrating a larger percentage of these customets'nnual chotgcs into the summer months.
Selected Financial Data 1984-1988 SCEcorp and Subsidiaries.
~
In thousands, except percent, per share and ratio data SCEcorp 1988 1987 1986 (a) 1985 1984 (b)
Consolidated operating rcvcnuc Consolidated operating expcnscs Consolidated nct income Weighted-avcragc shares of common stock outstanding (000)
Per sharc data:
Earnings Dividends declared Book value (a)
Market value at year.end Dividend payout mtio (paid basis)
Rate of return on common equity (a)
Price/earnings ratio Ratio of earnings to fixed charges Total assets (a)
Common stockpaid-in capital Retained earnings Common shareholders'quity (a)
Preferred and prefcrcncc stock of subsidiary not subject to mandatory rcdcmption subject to mandatory redemption Long-term debt of subsidiaries
$G,252,719 5/156@51 761,831 218,332
$3.49 2.45'/s 23.18 32'/s G9.6%
15.33%
9.3 2.86
$ 14,866,276 2,463,762 2/601,086 5,064,848 358,755 239,037 5,421,747
$5,601,926 4,637,135 738,531 218,014
$339 2.35'/s 22.16 30'/2 68.7%
15 5 is/
9.0 2.91
$ 14,350,664 2,4S7,819 2,375,915 4,833,734 361,238 277,538 5,150,883
$5,368,087 4,420,931 520,727
? 17/780
$2.39 2.25 21.13 33//s 92 9s 11.09%
14.2 2.71
$ 13,683,053 2,454,318 2,150,751 4,605,069 361,654 299,049 5,122,243
$5,217,167 4,240,175 702,409 215,696
$3.26 2.13 21.04 26s/s 644/
15.75s 8.2 2.97
$ 13,256,054 2,450/754 2,128,646 4,579,400 462,500 395,074 5,175,624
$4/899,152 3,932,527 659,385 207,576
$3.18 2.01 19.89 22s/s 61.9%
16.28%
7.2 2.70
$ 11,906,508 2,355,984 1,886,804 4,246,788 463,258 422,286 4,722,079 Southern California Edison Company Financial data:
Earnings availablc for common stock Earnings pcr sharc (c)
Financial rate of return on common equity (a)
Ratemaking rate of return on common equityearned Ratemaking rate of return on common equityauthorized Internal gcncration of funds
$684,689 3.14 14.88%
12.20%
12.75%
100%
$697,188 3.20 15.3?.%
11.97%
13.90%
77'/
$503,198 2.31 1 1.07%
12 42,%
14.60%
74%
$694,113 3.22 15.93%
13 22,o/
16.00%
65%
$655,917 3.16 16.50%
14.24%
16.00%
67%
Operating and sales data:
Area peak demand (MW)
Area generating capacity at peak (MW)
Kilowatt-hour sales (000)
Customers Employccs 15,987 18,893 67,885,761 3,831,656 16,660 14,775 18,206 65,539,481 3,717,262 17,086 14,599 18,320 64,197,405 3,589,414 17,553 14/587 17,776 64,984,566',490,325 17,182 15,189 17,354 63,310,047 3,400,182 16,844 The Mission Group Common shareholder's equity Net income Earnings pcr share (c)
Percent of SCEcorp's earnings per sharc
$505@71 77,7G3 35c 10 0%
$292,108 41,343 19e 5 6'/
$ 166,381 17,529 8e 3.3%
$ 134,310 8,296 4c 1.2%
$83,861 3,468 2c 0 6'/
(a) Restated for nuclear plant construction. cost disallowances describcdin "iVotes io Consolidated Financial Statements" on pages 35-3G.
(b) Represents Edison's unconsolidated financial data, which would bc substantially similar io SCEcorp's consolidated financial data.
(c) Based on weighted.average shares of SCEcorp common stock ouistaniiing.
43
~
Wlanagement's Discussion and Analysis of Results of Operations and Financial Condition SCEcorp became the parent holding company of South-ern California Edison Company (Edison) through a corporate reorganization approved by Edison sharchold-crs during 1988. Unless stated otherwise, this discus-sion addresses the consolidated results of operations and financial condition of SCEcorp. SCEcorp is comprised of Edison and The Mission Group, thc parent company for all subsidiaries not subject to rate regulation.
Results of Operations Earnings Summary Earnings pcr share for 1988 in-crcascd 10 cents to $3.49 from $3.39 in 1987 despite a reduction by the California Public Utilities Commis-sion (CPUC) in Edison's authorized rate of return on common equity from 13.9/0 to 12.75'/0. Nct income rose 3.2, /0 to a record $761.8 millionand revenue to another record of $6.3 billion, compared to $5.6 billion in 1987. Factors contributing to the increased earnings include CPUC approval of 1988 expense levels that morc accurately reflec Edison's costs, continued em-phasis on cost containment, a CPUC award for favor-able coal-plant operating performance, and higher earnings from The Mission Group.
The Mission Group's contribution to earnings per share for 1988 was 35 cents, or 10.0/0, of total SCEcorp earnings, compared with 19 cents pcr share, or 5.6'/0, for 1987. The Mission Group's net income rose to $ 77.8 millionfrom $41.3 millionin 1987. Nonutilityearnings pcr sharc increased by approximately 84'/o above those in 1987, with earnings growth in each nonutility busi-ness. Higher earnings resulted from the addition of 830 MWof new cogeneration and geothermal projects by Mission Energy Company, the sale of industrial prop-erty by Mission Land Company, increased construction contracting activity by Mission Power Engineering Com-pany, and the first fullyear of operation for Mission First Financial.
Electric Operating Revenue and Sales Approxi-mately 98'/o of electric operating revenue represents retail sales that are subject to rate regulation by thc CPUC. The remaining revenue is from sales to wholesale customers, which are regulated by the Federal Energy Regulatory Commission (FERC).
Electric operating revenue increased by $430.6 mil-lion, or 7.8'/0, over last year, reflectin a 3.6'/o increase in kilowatt-hour sales. The increase in revenue is at-tributable to a 3.9/o increase in retail sales volume that resulted from the addition of more than 114,000 ncw customers and thc cffcct of rate changes.
Resale sales volume declined 5.4/o duc to the availability of alter-native energy sources to resale customers. Increases in electric operating revenue of 3.5/0 in 1987 and 2.6'/0 in 1986 reflect, in addition to rate changes, a 5.1'/o retail sales volume increase in 1987 and a 1.2'/o sales volume decline in 1986.
Rate changes that became effective January I, 1989, are projected to increase rcvcnue by $77.7 million, or 1.3/0. The CPUC approved an attrition incrcasc of
$ 116.4 million to recognize increases in nonfucl cx-penscs and to increase Edison's authorized rate of return on common equity to 13.0'/0 from 12.75'/0. In separate proceedings, thc CPUC authorized a $77.1-mil-lion rate decrease after Edison completed fullrecovery of uranium contract scttlcmcnt payments and granted a $38.4 millionrate increase for additional plant invest-ment in thc San Onofrc Nuclear Generating Station.
Investment and other operating revenue incrcascd by
$220.2 million, or 218.3'/o, rcflccting growth in nonutil-ity businesses.
Continued increases in revenue from nonutility businesses arc expected during 1989.
Operating Expenses Operating expenses for 1988 incrcascd by $519.2, million, or 11.2'/o, over 1987, compared with incrcascs of $216.2, million, or 4.9/0, in 1987, and $180.8 million, or 4.3'/o, in 1986.
Thc net increase in operating expenses resulted pri-marily from utilityoperations. Fuel expense declined
$ 119.0 million, or 10.9'/0, in 1988, compared with an increase of $226.6 millionin 1987, and a decrease of
$812.4 millionin 1986. Thc reduction in fuel expense for 1988 is the result of incrcascd nuclear generation which displaced higher cost natural gas generation.
Additionally, the utilityoperated higher cost non-nuclear fuel-burning power plants less because of an incrcasc in mandatory purchases of power from nonutility pro-ducers at CPUC-mandated rates that excecdcd rates for economy purchases.
Purchased power cxpcnsc in-creased by $454.5 million, or 58.2'/0, over 1987. The effect on earnings of fuel and purchased power cost fluctuations is minimized by regulatory adjustmcnt mechanisms established by the CPUC and thc FERC.
44 Provisions for regulatory adjustment clauses for 1988 reflec nct ovcrcollections of $240.7 million.The overcollcctions are attributable to growth in kilowatt-hour sales; CPUC-authorized recovery of previously deferred cncrgy costs through the Energy Cost Adjust-mcnt Clause; and amortization of deferred costs under an adjustment clause that was established to recover costs of major system additions.
Depreciation and decommissioning expense in-creased during 1988 by $95.2 million, of which $84.8 millionis attributed to higher levels of decommission-ing expense authorized by the CPUC. The remainder of thc increase results from increased depreciation due to system growth.
Taxes on operating income for 1988 decreased
$ 131.8 million, compared to 1987 resulting primarily from lower corporate tax rates instituted by the Tax Reform Act of 1986. However, the lower tax rates werc offset by reduced electricity rates for customers and, thcrcfore, had littleor no effect on nct income; An increase in contracted nonutility engineering and construction services contributed approximately $138 millionto the $183.0 millionincrease in other operat-ing expenses for 1988. Thc remainder of the increase is principally due to Edison's system growth.
Other Income and Income Deductions Utilities capi.
talize an allowance for funds used during construction (AFUDC) which reprcscnts the cost of debt and equity capital used to finance construction of plant additions.
Completion of the Balsam Meadow Hydro Project and Palo Verde Nuclear Generating Station (Palo Verde)
Unit 3 contributed significantly to an $86.3 million decline in AFUDC compared to 1987. AFUDC has declined steadily over the past three years, as the construction of major projects has been completed and the facilities placed into service.
The $28.5 million increase in 1988 interest income over 1987, resulted from higher intcrcst rates on in-vested cash, and increases in the average amounts of cash investments and regulatory-asset balances.
Significant Accounting Changes In accordance with changes in accounting standards for rate-regulated en-terprises, in the first quarter of 1988 Edison recorded a noncash write-offagainst income of approximately
$193 million, net of rclatcd income tax effects, for dis-allowed costs on its investment in nuclear facilitics. As permitted by the ncw accounting standard, Edison adopted these changes by restating the financial results for 1986, thc period in which thc write-offs would have been recorded had thc present accounting rules been in effect.
As discussed further in Note 5 of the "Notes to Con-solidated Financial Statements," major balance sheet adjustments willbe recorded in accordance with new income tax accounting requirements that become effective in 1990. These changes arc not expected to significantly affect future earnings.
Financial Condition Liquidityand Capital Resources SCEcorp's liquidity is affected primarily by construction expenditures and by capital requirements relating to debt and capital stock maturities. The capital resources available to meet these requircmcnts include internal cash genera-tion and external financings.
The majority of SCEcorp's capital requirements con-tinue to be met by cash generated through operations.
For 1988, nearly 80'/o of cash rcquircments were inter-nally generated, compared with approximately 87'/0 in 1987 and 96/0 in 1986. The decline in 1988 is attributed to an 18.4'/o reduction in cash from operations net of a 10.9'/o dccrcase in cash requirements. Cash flowand li-quidity for 1988 were unfavorably affected by revenue deferred to future years under thc Palo Verde Phase-in Plan, which willincrease through 1990, and decline in subsequent years. Additional items impacting cash flowunfavorably are increased income tax payments resulting from the Tax Reform Act of 1986, and con-tributions of more than $157 million to nuclear decom-missioning trusts related to 1988 and certain prior years. A decline in construction expenditures and the recovery of balancing account undcrcollections par-tially offset these adverse factors.
Through the issuance of long-term debt during 1988, SCEcorp raised $631.3 millionof which Edison raised
$622.7 million, primarily to finance the redemption of more costly debt, repay bond maturities, and to mcct sinking fund requirements. Market conditions and
45 other factors, including limitations imposed by Edison's Articles of Incorporation and Trust Indenture, influence external financings. As of Dcccmber 31, 1988, Edison could issue approximately $3.8 billionof addi-tional first and refunding mortgage bonds or approxi-mately $ 1.7 billionof preferred stock at current interest and dividend rates under its itust Indenture and Articles of Incorporation.
In conformity with CPUC-ratcmaking proccdurcs, short-term borrowings are utilized primarily to finance fuel-oil inventory, regulatory balancing account undcr-collections, and nuclear fuel. The principal and interest related to these special purpose short-term borrowings are recovered through regulatory balancing-account mechanisms. Note 4 of "Notes to Consolidated Finan-cial Statements" discusses availablc lines of credit and related short-term borrowings.
Capital Requirements SCEcorp, on an unconsolidated basis, requires capital for common stock dividend payments, investment in nonutility subsidiaries and general and administrative expenses. These require-ments arc provided by dividend payments from Edison.
SCEcorp's primary capital rcquircmcnts consist of expenditures under its subsidiaries'onstruction pro-grams and debt and capital stock maturitics. Such com-mitmcnts are projected to total $4.9 billionfrom 1989 to 1993. It is anticipated that the majority of these capi-tal requirements willbe financed through internally generated cash with supplemental financing through the issuance of long-term debt.
Capital Structure The capital structure of SCEcorp as of December 31, 1988, is reflcctcd in the table below:
Common equity Preferred stock Lon -term debt Total 45.7%
5.4 48.9 100.0%
Proposed Merger As discussed in Note 1 of "Notes to Consolidatd Finan-cial Statements," on November 30, 1988, SCEcorp, Edi-son, and San Diego Gas &Electric Company (SDG8tE) executed an agreement to merge SDG81E into Edison.
Under the terms of thc merger agreement, SCEcorp willexchange 1.3 shares of its newly issued common stock for each SDGS.E common sharc. SDG81E pre-ferred and preference stock willbe exchanged for SCEcorp preferred and prcfercncc stock with similar provisions, except that dividends on each series willbe increased bctwcen 2.5% and 20.0%.
The merger is subject to thc approval of shareholders and various regulatory agencies, including thc CPUC and thc FERC. SCEcorp is working to complete the approval process in carly 1990.
Balancing Accounts and Rate Phase-in Plan (Utility)
Projcctcd Capital Requirements (SCEcorp j In millionsofdollars In millions ofdollars 830 91 862 240 831 436 Rate phase.in plan 1
71 166 225 216 994 949 255 Dcbtand capital. stock maturitics 739 622 395 Regulatory balancing accounts 905 712 713 760 694 Construction expenditures 1986 1987 1988 89 90 91 92 93
46
~J gg <<r4y~+W.
'g r
/~at First row (from left)r Joan C. Hanlcy, Jack K. Horton, Howard P. Allen, WilliamR. Gould, Camilla C. Frost.
Second row: Carl F. 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.
Board ofDirectors 47 SCEcorp Howard P. Allen Chairman of the Board President and Chief Executive Officer Roy A.Anderson Chairman Emeritus Lockheed Corporation Burbank, California Norman Barker, Jt; Chairman of thc Board Pacific American Income Shares, Inc.
(A Closed-End Bond Fund)
Los Angclcs, California Warren Christopher Chairman O'Melveny St Myers Los Angclcs, California Camilla C. Frost Chairman of the Executive Committee Los Angeles County Museum ofArt Los Angeles, California Walter B. Gcrken Chairman of thc Executive Committee Pacific Mutual LifeInsurance Company Newport Beach, California WilliamR. Gould Chairman Emeritus and Consultant (Rctircd Chairman of thc Hoard and Chief Exccutivc Office Southern California Edison Company)
Long Beach, California Joan C. Hanley General Partner and Manager Miramonte Vineyards Tcmecula, California Carl F. Huntsinger General Partner DAELimited Partnership, Ltd.
(Agricultural Managcmcnt)
Ojai, California Charles D. Miller Chairman of the Board and Chief Executive Officer AveryInternational Corporation
'Manufacturer of Self-Adhesive Products)
Pasadena, California J.J. Pinola Chairman of the Board and Chief Executive Officer First Interstate Bancorp Los Angeles, California James M.Rosser President California State University, Los Angeles Los Angeles, California Henry T. Segerstrom Managing Partner C.J. Segcrstrom 8. Sons (Real Estate Development)
Costa Mesa, California E. LShannon, Jt President, Chief Executive Officeand Director Santa Fe International Corporation (OilService, Engineering, Petroleum Exploration and Production)
Alhambra, California Robert H. Smith President and Chief Executive Officer Security Pacific National Bank and Vice Chairman of the Board Security Pacific Corporation Los Angeles, California Jack K.Horton*
Chairman of the Executive Committee and Consultant (Retired Chairman of the Board and Chief Executive Officer Southern California Edison Company)
Los Angeles, California Edward Zapanta Physician and Ncurosurgcon Monterey Park and East Los Angclcs, California "Willnot stand forre-election in l9S9.
48 Executive Officers SCEcorp Howard P. Allen Chairman of the Board President and Chief Executive Office David J. Fogarty Executive Vice President John E. Bryson Executive Vice Prcsidcnt and Chief Financial Office Micltacl R. Pcevey Executive Vice President Richard K.Bushcy Vice President and Controller John R. Bury ')
Vice President and General Counsel David N. Barry III(~)
Vice President and General Counsel Michael L.Noel Vice President and Treasurer Jennifer Moran Secretary of the Corporation (I) Mr. Buryretired c//ective March I, 1989.
(2) Mr. Harry was elected Vice President and General Counsel effective March I, 1989.
Southern California Edison Company Howard P. Allen Chairman of the Board President and Chief Executive Officcr David J. Fogarty Executive Vice President John E. Bryson Executive Vice President and Chief Financial Officcr Michael R. Peevcy Executive Vice President P.L. Martin Senior Vice President L.T.Papay Senior Vice Prcsidcnt Kenneth P. Baskin Vice President (Nuclear Engineering, Safety and Licensing)
Glenn J. Bjorklund(')
Vice President (Power Supply)
Robert H. Bridcnbcckcr Vice President (Customer Service)
John R.Buryt )
Vice President and General Counsel David N. Barry III( 1 Vice President and General Counsel Riclrard K.Bushey Vice President and Controller Robert Dictch<41 Vice Prcsidcnt (Engineering, Planning and Rcscarch)
John R.Fielder
)
Vice Prcsidcnt (Information Services)
Charles B. McCarthy, Jr.
Vice President and Site Manager, San Onofre Nuclear Gcncrating Station Michael L.Noel Vice President and Trcasurcr Harold B. Ray Vice President (Fuel and Material Management)
Jennifer Moran Sccrctary of the Corporation (I) Effective January 1,1989.
(2) Mr.Ituryrctircd cffcctivcMarch 1,1989.
(3) Mr. Itarry was elected Vice Prcsidcnt and Ccn eral Counsel c//ccti vc March I, 1989.
(4) h1r. Dietch assumed addi tional responsibility/or System Planning and Research e//ective January 1,1989.
(5) Mr. Fielder was clcctcd Vice Prcsidcnt-in/ormation Services e//ective January I, 1989.
NonutilitySubsidiaries H. Frederick Christie Prcsidcnt and Chief Executive Office, The Mission Group J. Jack Adrian President, Mission Power Engineering Company Thomas R. McDanicl President, Mission First Financial Edward A.Mycrs, Jr.(')
Prcsidcnt, Mission Energy Company James S. Pignatclli>>
)
President, Mission Energy Company Robert E. Umbaugh Prcsidcnt, Mission Land Company (I) Mr. Myers retired cf/ective AprilI, 1988.
(2) Ef/ective APril1,1988.
'=== Shareholder Information SCEcorp and Subsidiaries Corporate Offitccs:
Investor Relations:
SCEcorp 2244 Walnut Grove Avenue Roscmcad, California 91770 (818) 302-1297 Southern California Edison Company 2244 Walnut Grove Avenue Roscmead, California 91770 (818) 302-1212 Thc Mission Group 3010 Old Ranch Parkway Seal Beach, California 90740 (213) 431-8488 Transfer Agent:
Southern California Edison Company maintains shareholder records and acts as transfer agent and registrar for SCEcorp common stock and Edison preferred stock.
Security analysts, investment professionals or other organizations may contact:
Manager of Investor Relations P.O. Box 999 Rosemead, California 91770 (818) 302-2515 Stock Listing:
SCEcorp common shares are listed and traded on the New York, Pacific, London and Tokyo stock exchanges under the trading symbol SCE. Most Edison preferred shares are listed on the American and Pacific stock exchanges under thc same symbol.
Newspaper Listing:
SCEcorp's symbol is SCEcp and Southern California Edison preferred stock's symbol is SoCalEd.
Sharcholdcr Services and Information:
Dividend Reinvcstmcnt:
Shareholder Services may be called at (800) 347-8625 between 8:00 a.m. and 4:30 p.m.
Pacific Time every business day. Thc following may be handled by telephone:
~ Stock transfer and name change rcquircmcnts
~ Address changes
~ Replacement of dividend checks
~ Duplicate 1099 forms and W-9 tax certificatio forms
~ Notices of lost or destroyed stock certificate
~ Duplicate dividend reinvestmcnt statements and information regarding the plan.
SCEcorp's Dividend Rcinvestmcnt and Stock Purchase Plan permits the automatic reinvestmcnt of dividends and voluntary cash investments. For information, contact Shareholder Services.
Annual Mccting:
The annual shareholders'eeting willbe at 10 a.m., Thursday, April20, 1989, at the Industry Hills and Sheraton Resort, One Industry Hills Parkway, City of Industry, California.
Shareholders may also direct questions in writing to:
Sharcholdcr Services P.O. Box 400 Rosemead, California 91770 This annual report ami thc statements and statistics contained herein have been assembled forgctteral information purposes and are not intended to induce, or to be used in connection with, any sale or purchase of securities. Under no circumstancesis this report or any part ofits contents to be considered a prospectus, or as an o//cr to scil, or thc soiicitation of an o//er to buy, any securities.
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1988 ANNUAL REPORT
~~~ > sap/W NOTICE """""
to/i,/Pl THE ATTACHED FILES ARE OFFICIAL RE-CORDS OF THE RECORDS
& REPORTS MANAGEMENTBRANCH. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS & ARCHIVES SERVICES SECTION P1-122 WHITE FLINT.
PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.
REMOVAL OF ANY PAGE(S)
FROM DOCUMENT FOR REPRO-DUCTION MUST BE REFERRED TO FILE PERSONNEL.
-NOTICE-
APS DIRECTORS e'oe Acosta, 65, Robert C. Acosta, P.C. (certified public accountants),
Phoenix, Arizona Dino DeConcini, 55, attorney at Iaw, Phoenix, Arizona
- 0. Mark De Michele, 55, president and chief executive officer of the Company, Phoenix, Arizona Karl Eller, 60, chairman of the board, The Circle K Corporation, Phoenix, Arizona Marianne Moody Jennings, 35, professor of business law, College of Business Administration, Arizona Sate University, Tempe, Arizona.
Jack M. Morgan, 65, attorney at law, Farmington, New Mexico Marvin R. Morrison, 65, farmer, cattle feeder and dairyman, Morrison Brothers Ranch, Higley, Arizona Jaron B. Norberg, 51, executive vice president and chief financial officer of the Company, Phoenix, Arizona John R. Norton III, 60, chairman and chief executive officer, J.
R. Norton Company
'(agricultural production), Phoenix, Arizona Donald M. Riley, 45, president and general
- manager, Gilpin's Enterprises, Inc. (general contractor), Yuma, Arizona
. Wilma W. Schwada, 62, civic leader and homemaker, Tempe, Arizona Verne D. Seidel, 63, managing partner of HMS Properties (property -management),
Flagstaff, Arizona Richard Snell, 58, chairman of the board, president and chief executive officer, Ramada Inc.,
Phoenix, Arizona Keith L. Turley, 65, chairman of the board of the Company; chairman of the board, president and chief executive officer of Pinnacle West Capital Corporation, Phoenix, Arizona Morrison F. Warren, 65, professor emeritus of education, Arizona State University, Tempe, Arizona Ben F. Williams, Jr., 59, mayor of the City of Douglas and attorney at law, Douglas, Arizona Thomas G. Woods, Jr., 62, consultant to the Company; formerly executive vice president of the Company for the Arizona Nuclear Power Project (retired February 1985), Phoenix, Arizona (Age on Annual Meeting date, April18, 1989)
Member of the Executive Committee.
INDEPENDENT AUDITORS'EPORT Arizona Public Service Company:
We have audited the accompanying balance sheets of Arizona Public Service Company as of December 31, 1988 and 198V and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31; 1988. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all'material
- respects, the financial position of the Company at December 31, 1988 and 1987 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1988 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 198V the Company changed its method of accounting for unbilled revenues.
Phoenix, Arizona February 21, 1989 31
ARIZONAPUBLICSERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
- 12. Supplementary Income Statement Information.
Other taxes charged to operations during each of the three years in the period ended December 31, 1988 are as follows:
Year Ended December 31, Ad valorem..
Sales
~
Other Total other taxes 1988 1987 1986 (Thousands of Dollars)
$ V9,730
$ -71,35V
$ 55,V98 69,107, 62,783 58,606 11 860 10 214 9 189
$160 697
$144 854
$123 593
- 13. Selected Quarterly Financial Data (Unaudited).
Operating Operating Revenues (a)
Income Quarter (Thousands of Dollars)
Net Income Earnings for Common Stock 1988 First Second Third Fourth 1987 First Second Thtrd Fourth
$313,389 336,723 469,092 322,819
$291,020 329,665 394,498 307,747
$ 83,142 92,333 157,827 69,VV8
$ 65,1Vl 81,122 108,539 724532
$ 57,168 57,294 125,466 31,283
$ 74,320(b) 75,185 101,453 62,915
$ 48,V19 48,936 11V,1VV 23,060
$65,109(b) 67,267 94,068 54,4V9 (a) Operating revenues for 1987 and'or the first three quarters of 1988 have been restated to conform to year-end 1988 presentation.
(b) Includes cumulative effect as of January 1, 1987 of accruing unbilled revenues, net of income taxes, of $16,110,000.
30
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
Principal actuarial assumptions used were 1988 1987 Discount rate 9.0%
9.0%
Rate of increase in compensation levels..
6.5%
6.5%
Expected long-term rate of return on assets 10.44%
10.15%
I In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for active and retired employees.
Life insurance benefits are provided through an insurance company whereas health care costs are paid as expenses are incurred under a self-insured plan. The cost of providing those benefits for both active and retired employees amounted to approximately
$21,991,000,
$22,721,000, and
$18,591,000, of which approximately $8,564,000, $8,922,000, and $6,285,000 were charged to expense in 1988, 1987 and 1986, respectively. Remaining amounts were either capitalized as a component of construction costs or billed to participants of jointly-owned facilities. The cost of providing such benefits solely to retired employees is not significant.
ll. Commitments and Contingencies.
Nuclear Insurance The Palo Verde participants have insurance for public liability payments resulting from nuclear energy hazards to the full limitof liabilityunder federal law. This potential liabilityis covered by primary liabilityinsurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industrywide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident is approximately
$66 million, subject to an annual limit of $10 million per incident.
Based upon the Company's 29.1% interest in the three Palo Verde units, the Company's maximum potential assessment per incident is approximately
$58 million, with an annual payment limitation of $8.73 million. The insureds under this liabilityinsurance include the Palo Verde participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard."
The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $1.725 billion, a substantial portion of which must first be applied to decontamination.
The Company has also secured insurance against portions of any increased cost of generation or purchased power resulting from the accidental outage of any of the three units if the outage exceeds 21 weeks.
Litigation The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business, including a lawsuit seeking to invalidate the Company's contract with various municipalities for the purchase of efHuent to be used as cooling water for Palo Verde. In the opinion of management, the ultimate disposition of these matters willnot have a material adverse effect on the operations or financial position of the Company.
Purchase Commitments The Company has significant purchase commitments in connection with its continuing construction program. Construction expenditures in 1989 have been estimated at $280 million.
29
ARIZONAPUBLIC SERVICE'OMPANY NOTES TO FINANCIALSTATEMENTS (continued)
The new statement will be effective beginning in 1990, although earlier adoption is encouraged.
SFAS No. 96 willbe implemented by recording a cumulative effect adjustment as of the beginning of the year in which the new standard is first adopted. The Company expects adoption of SFAS No.
96 to have little impact on earnings and has not yet made a
determination as to the timing of implementation.
- 10. Pension Plan and Other Benefits.
The Company's pension plan, a defined benefit plan, covers virtually all employees.
The benefits are based on years of service and compensation utilizing the final average pay plan benefit formula. It is the Company's policy to fund the plan on a current basis to the extent deductible under existing tax regulations. Pension cost, including administrative cost, for 1988, 1987, and 1986 was approximately $4,368,000,
$1,484,000, and $2,751,000, respectively, of which approximately
$1,899,000,
$601,000, and
$602,000, respectively was charged to expense; the remainder was either capitalized as a component of construction costs or billed to participants of jointly-owned facilities. Plan assets consist primarily of common stocks, U.S. obligations and bonds.
Net periodic pension cost (income) included the following (thousands of dollars):
1988 1987 Service cost-benefits earned during the period...
Interest cost on projected benefit obligation......
Return on plan assets Net amor tization and deferral Net periodic pension cost (income)
$ 12,589 22,945 (48,832) 15 54V
$ 12,580 20,095 (17,634)
~15 V90) 2 249
~V49)
The following table sets forth the plan's funded status and amounts recognized in the
'ompany's Balance Sheets (thousands of dollars):
1988 1987 Actuarial present value of benefit obligation, including vested benefits of $148,824 and $137,857 Effect of projected future compensation increases......
Projected benefit obligation Plan assets, at fair value Plan assets in excess of projected benefit obligation.....
Unrecognized net (gain) loss from past experience different from that assumed..
Unrecognized prior service cost Unrecognized net asset at January 1, 1986 being recognized over 20.2 years Accrued pension liabilityincluded in other deferred credits
$178,019 92 202 270,221 333 840 63,619 (21,686) 7,135
$165,869 V9 852 245,721 299 OV8 53,352 989 90
~625 V)
~4110)
~55 825)
~68 541)
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
- 9. Income Tax Expense.
The components of income tax expense for each of the three years in the period ended December 31, 1988 are as follows:
Year Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Currently payable:
Federal.....
State Other Total current
$ 68,457 12,254 V5 711
$ 50,078 3,428 285 53 V36
$ 46,463 17,951 1 648 66 057 Deferred:
Depreciation net...
Palo Verde cost deferral....
~..
Taxes, pension costs and othernet Sale of utilityplant Investment tax creditnet Total deferred Total.....
62,347 18,989 65,561 (84,697) 28 568 72,709 49,178 (4,594)
~9107) 86,128 45>279 18,995
~1824) 108 186 143 578 90 V68
~188 897 6197 314 8156 820 The difFerence between income tax expense and the amount obtained by multiplying income before income taxes by the statutory federal income tax rate for each of the three years in the period ended December 31, 1988 are as follows:
Year Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Federal income tax expense at statutory rate (34% in 1988, 40% in 1987 and 46% in 1986)............
Increases (reductions) in tax expense resulting from:
Tax under book depreciation......
Allowance for funds used during construction...
Palo Verde cost deferral.....
Investment tax credit amortization State income taxnet of federal income tax benefit..
~ \\
~
~
~
~
~
~
0
~
~
~
~
Other Total provision for federal and state income tax expense 22,316 (4,103)
(4,815)
(8,287) 80,935 (27,430)
(20,965)
(8,273) 18,855 (60,711)
(11,505)
(5,975) 28,429 620 18,481 91 13,239 4 685 8183 897
~197 814 6156 820
$154,737
$204,475
$198,232 In December 1987, the FASB issued SFAS No. 96, "Accounting for Income Taxes." SFAS No. 96 retains the concept of comprehensive interperiod tax allocation; however, the way in which deferred income taxes are computed has changed from the existing "deferred" method to a liabilityconcept. Adjustments to balances of accumulated deferred income taxes willhave to be made to record income tax rate changes, allowance for funds used during construction, investment tax credits and other temporary difFerences not previously deferred. It is expected that the additional deferred income tax assets and liabilities will be ofFset primarily by regulatory assets and liabilities representing the expected future revenue requirement impact of these adjustments.
27
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
- 7. Jointly-Owned Facilities.
At December 31, 1988, the Company-owned interests in jointly-owned electric generating and transmission facilities are as follows (dollars in thousands):
Percent owned by Company Plant in Service Accumulated Depreciation Net Plant in Service Construction Work in Progress Generating Facilities:
Palo Verde Nuclear Generating Station-Units 1,2and8....,
Four Corners Steam Generating Plant-Units4 and 5..'.....
Navajo Steam Generating Plant-Unitsl,2and3.....
Transmission Facilities:
ANPP 500KV Transmission System Navajo Southern Transmission System Palo Verde-Yuma 500KV System...........
Total o
~
~
~
~
~
~
~
~
15.0%
128,V05 30,624 98,081 4,264 14.0%
126,VS1 II 49>959 76,772 336 35.8%(b) 61,681 S1.4%(c) 27,449 23.9%(d) 15 581
~2793 264 5,585 11,590 1 985 56,096 15,859 18 596
~248 370
$2 544 894 277 150 165
$17 457 (a)
$2,433,167
$148,6V7
$2,284,490
$12,265 (a) The Company owns 29.1% ofUnits 1 and 8 and approximately 1V%ofUnit2 (see Note 8).
(b) Weighted average of interests varying from 34.6% to 43.95%.
(c) Weighted average of interests varying from 14% to 100%.
(d) Weighted average of interests varying from 11% to 100%.
The foregoing dollar amounts correlate to the Company's percentage interest in each facility. The Company's share of related operating and maintenance expenses is included in Operating Expenses.
8, Leases.
In 1986, the Company entered into sale and leaseback transactions under which it sold approximately 42% ofits 29.1% share ofPalo Verde Unit2 resulting in net proceeds of$487,296,000.
The resulting gain of approximately $140,220,000 has been deferred and is being amortized to operations expense over the original lease term. The leases require semi-annual payments of approximately $22,061,000 through December 1996, $23,605,000 through June 1997 and $26,963,000 through December 2015, and include options to renew the leases for two additional years and to purchase the property at fair market value at the end of the lease terms. The leases are being accounted for as operating leases. Lease expense for 1988, 1987 and 1986 amounted to $45,458,000,
$4S,445,000 and $9,985,000, respectively, of which $10,312,000,
$39,421,000 and $9,060,000 were deferred as allowed by an order from the ACC. Lease expense for 1988 was deferred untilApril 1, 1988 when Unit2 rates became efFective (see Note 2).
26
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
- 6. Lines of Credit.
The Company's lines of credit at December 31, 1988 and 1987 are summarized below,. No amounts were outstanding under the lines at December 31, 1988 and 1987.
Commercial paper backup lines Other bank lines Total 1988 1987 (Thousands of Dollars)
$200,000
$200,000 102 000, 226 000
$302 000 3426 000 The commitment fees for the commercial paper backup lines and virtually all of the other bank lines (exclusive of the credit agreement referred to below) were 3/16% per annum in 1988 and 3/8% per annum in 1987. As of December 31, 1987, other bank lines included $200,000,000 available under a credit agreement between the Company and various banks which carried a commitment fee of 1/4% per annum.
By statute the Company's short-term borrowings cannot exceed 7% of total capitalization without the consent of the ACC.
P 25
ARIZONAPUBLICSERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued) irrevocable letter of credit issued by a bank. These bonds bear interest at such rate, determined weekly, as willcause the bonds to have a market value which approximates, as nearly as possible, their par value.
(c) On May 15, 1985 the Company borrowed from a governmental authority the proceeds of a $55,200,000 issue of adjustable-rate annual tender pollution control revenue refunding bonds for the purpose of refunding $55,200,000 in aggregate principal amount of previously issued pollution control bonds due April 1, 1986. The new issue is supported by a long-term irrevocable letter of credit issued by a bank. The bonds bear an interest rate, determined annually, which willcause the bonds to have a market value which approximates, as nearly as possible, their par value.
(d) Represented pollution control funds deposited with a revenue bond tr'ustee which were disbursed as needed to pay the costs of acquiring, constructing, reconstructing, improving, maintaining, equipping or furnishing the facilities financed.
(e) Represents domestic commercial paper and borrowings under a
$120,000,000 Eurocommercial paper program agreement among the company and various financial institutions that 'is supported by a revolving credit agreement which expires in 1991. At December 31, 1988, the outstanding balance consisted of $89,500,000 of Eurocommercial paper and $30,500,000 of domestic commercial paper. At December 31, 1987, the outstanding balan'ce consisted of $86,000,000 of Eurocommercial paper and $34,000,000 of domestic commercial paper.
Commercial paper interest rates are negotiated at the time of borrowing. Interest rates applicable to borrowings under the revolving credit agreement are LIBOR plus 0.30% to 0.45%,
with'commitment fees of 0.15% on the unused credit line.
(f) Represents the present value of future lease payments (discounted at the interest rate of 7.48%) on a combined cycle plant sold and leased back from the independent owner-trustee formed to own the facility. The lease requires semi-annual payments of $2,582,000 through, June 2001, and includes renewal and purchase options based on fair market value. This plant is included in plant in service at its original cost of $54,405,000; accumulated depreciation at December 31, 1988 was $28,155,000.
Aggregate annual payments due on long-term debt and for sinking fund requirements through 1993 are as follows: 1989,
$37,985,000;
- 1990,
$98,193,000;
- 1991,
$173,365,000;
- 1992,
$143,551,000; and 1993, $34,551,000. See Note 4 for sinking fund requirements and redemptions of redeemable preferred stock.
Substantially all utility plant (other than nuclear fuel, transportation equipment and the combined cycle plant mentioned above) is subject to the lien of the first mortgage bonds. The indenture respecting the first mortgage bonds includes provisions which would restrict the payment of dividends on common stock under certain conditions which did not exist at December 31, 1988.
24
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
- 5. Long-Term Debt.
Details of long-term debt outstanding at December 31, 1988 and 1987 are as follows:
December 31, 1988 1987 (Thousands of Dollars)
First Mortgage Bonds:
Maturing through 1993:
4.V% due March 1, 1989 4.8% due November 1, 1991 4.45% due June 1, 1992 4.40% due December 1, 1992 4.5% due September 1, 1993..........
Maturing 1994 through 1998 - 6.25% to 12%
Maturing 1999 through 2003 - 7.45% to 12.875%
Maturing 2004 through 2008 - 6% to 13.25%
Maturing 2015 through 201V - 9% to 11.5%
Unamortized discount and premium Total first mortgage bonds..
Pollution Control Indebtedness:
Maturing August 1, 2009 (a)
Maturing December 1, 2009 (b)
Maturing May 1, 2013 (b)
Maturing May 1, 2014 (c)
Maturing February 1, 2015 (a)
~
Less securities held by trustee (d)
Total pollution control indebtedness 12.5% guaranteed debentures due February 15, 1992 Revolving credit agreements (e)
Term loan due June 1'990 (LIBOR plus R%).....
Capitalized lease obligation (f)....
Other
~
~
~
~
~
~
~
~
~
~
~
~
~
Total long-term debt Less current maturities:
4.7% first mortgage bonds due March 1, 1989 Sinking fund requirements on first mortgage bonds..
Capitalized lease obligation (f)
Other.
Total current maturities Total long-term debt less current maturities 20,000 35,000 25,000 25,000 15,000 500,000 221,979 252,000 450,000
~4402) 20,000 35,000 25,000 25,000 15,000 500,000 249,645 252,000 450,000
~4598) 1 589 577 1 567 047 106,980 147,000 65,750 55,200 49,400 106,980 147,000 65,V50 55,200 49,400
~11 104) 424 380 413 226 75,000 120,000 80,000 41,458 552 V5,000 120,000 80,000 43,410 1 063 2 280 917 2 299 746 20,000 15,333 2,100 552 15,333 1,952 511 37 985 17 796 82 242 932 62 281 950 (a) Adjustable-rate annual tender pollution control revenue refunding bonds supported by a long-term irrevocable letter of credit issued by a bank. The bonds bear an interest rate, determined annually, which willcause the bonds to have a market value which approximates, as nearly as possible, their par value.
(b) Consisting of borrowings from a governmental authority which h'as funded that amount through issuance of a series of par value demand bonds supported by a long-term 23
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
Redeemable preferred stock transactions during each of the three years in the period ended December 31, 1988 are as follows (dollars in thousands):
Description Balance, December 31, 1985 Retirements:
$10.00 Series H
$10.70 Series I
$9.70 Series L
$11.95 Series M Balance, December 31, 1986 Issuances:
$8.48 Series S
$8.50 Series T Retirements:
$10.00 Series H
$8.80 Series K
$9.70 Series L
$12.50 Series P.
Balance, December 31, 1987 Retirements:
$10.00 Series H
$8.80 Series K
$9.70 Series N Balance, December 31, 1988'umber of Shares 2,194,211 (16,000)
(209,934)
(96,000)
~85 000) 1,787,277 500,000 500,000 (16,000)
(67,500)
(384,000)
~100 000) 2,219,V7V (16,000)
(22,500)
~51 800) 2 129 497 Par Value Amount
$219,421 (1,600)
(20,993)
(9,600)
~8500) 178,728 50,000 50,000 (1,600)
(6,750)
(38,400)
~10 000) 221,978 (1,600)
(2,250)
~5180) 212 948 22
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(c) Redeemable at $105.04 through September 1, 1989, and thereafter declining by $0.36 per year to'par after September 1, 2002. Applicable sinking fund provisions require the redemption of 16,000 shares at par annually (representing annual payments of $1,600,000).
(d) Redeemable at $106.00 through February 28, 1989; at $103.00 through February 28, 1994; and at $101.00 thereafter. Applicable sinking fund provisions require the redemption of 22,500 shares at par annually (representing annual payments of $2,250,000). The Company may, but is not required to, redeem an additional 22,500 shares at par on March 1 in any year.
(e) Redeemable after June 1,
1992 at the option of the Company at $106.11 through June 1, 1993, declining by $0.68 per year to $100.00 after June 1, 2001. Applicable sinking fund provisions require the redemption at par value between 1988 and 2002 of all shares according to a predetermined schedule.
(f) Redeemable after June 1, 1994 at the option of the Company at $105.45, declining each year by a predetermined amount to
$100.00 after June 1, 2004. Applicable sinking fund provisions require the redemption at par value-between 1990 and 2004 of all shares according to a predetermined schedule.
(g) Not redeemable prior to June 1, 1992 with the proceeds of borrowed funds or stock issues having a lower cost ofmoney than this Series'ividend rate. Otherwise, redeemable at the option of the Company at $108.48 per share prior to June 1, 1992, at $104.24 prior to June 1, 1993, at $102.12 prior to June 1, 1994 and at $100.00 per share thereafter. Applicable sinking fund provisions require the redemption at par of 100,000 shares annually beginning June 1, 1993.
(h) Alloutstanding shares to be redeemed at par on September 1, 1994.
If there were to be any arrearage in dividends on any of its preferred stock or in the sinking fund requirements applicable to any of its redeemable preferred stock (each such dividend being cumulative and of equal ranking with other such dividends, and each such requirement being cumulative and, of equal ranking with other such requirements),
the Company could not pay dividends on its common stock or acquire any shares thereof for consideration. Ifany such dividend arrearage were to equal six or more quarterly dividends, the holders of preferred stock, in addition to their other voting rights and voting by the classes prescribed for this purpose, could elect a total of six directors (all'series of serial preferred stock, regardless of par value and whether redeemable or non-redeemable, comprising one such class and being entitled to elect two of the six directors). See Note 3 in regard to other voting rights of holders of preferred stock.
The combined aggregate amount of redemption requirements for the above issues each year through 1993 are as follows: $6,440,000 in 1989; $9,873,000 in 1990; $9,873,000 in 1991; $9,141,000 in 1992; and $18,273,000 in 1993.
21
Description Balance, December 31, 1985 Premiums and Expenses - Net Balance, December 31, 1986
$3.58 Series 0.
Premiums and Expenses - Net Balance, December 31, 1987 Premium and Expenses - Net....
Balance, December 31, 1988.......
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
I The holders of preferred stock are entitled to one vote for each share held of record.
Special requirements for favorable votes of holders of preferred stock, voting by the classes respectively prescribed for the several purposes, pertain to (i) certain conversions or exchanges of outstanding preferred stock, (ii) the authorization of any stock ranking prior to the preferred stock, (iii) making any change in the terms and provisions of preferred stock that would adversely afFect the rights and preferences of the holders thereof, (iv) the issuance of any additional shares of preferred stock except under prescribed circumstances or (v) a merger, consolidation or sale of substantially all the assets of the Company. The foregoing voting rights attach to both redeemable and non-redeemable preferred stock, as do the rights that would arise out of dividend arrearages as discussed in Note 4.
Changes in common and non-redeemable preferred stock and premiums and expenses during each of the three years in the period ended December 31, 1988 are as follows,(dollars in thousands):
Non-redeemable Preferred Stock Premiums Common Stock (cumulative) and Number Par Value Number Par Value Expenses of Shares Amount of Shares Amount'et'1,264,947
$178,162 4,374,199
$218,561
$1,040,909 825)
V1,264,947 178,162 4,374,199 218,561 1,040,084 (2,000,000)
(50,000)
~5720) 711264,947 178,162 2,374,199 168,561 1,034,364 106) 71 264 947 3178 162 2 374 199 6168 561
~1034 258
- Premiums and expenses net also includes those of redeemable preferred stock issues (see Note 4).
- 4. Redeemable Preferred Stock.
The balances at December 31, 1988 and 198V of preferred stock which is redeemable at the option of the holders or pursuant to sinking fund obligations, in addition to being callable by the Company, are as follows:
0 Number of Shares Par Value Call'utstanding at Outstanding at Price December 31, Per December 31, Per 1988 1987 Share 1988 1987 Share(a)
(Thousands of Dollars)
Redeemable Preferred Stock (cumulative)
Serial preferred; (b)
~
'10.00 Series H 56,67V V2,6VV
$8.80 Series K 254,600 277,100
$12.90 Series N 318,200 370,000
$11.50SeriesR'....
500,000 500,000
$8.48 Series S 500,000 500,000
$8.50 Series T 500 000 500 000 Total 2 129 477 2 219 777 (a) In each case plus accrued dividends.
(b) See Note 3 for authorized number of shares.
$100.00 100.00 100.00 100.00 100.00 100.00 5,668 25,460 31,820 50,000 50,000 50 000 212 948 7,268 (c) 27,710 (d) 37,000 (e) 50,000 (f) 50,000 (g) 50 000 (h)
~221 9'18 20
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
A specific rate application designed for recovery of Unit 3 costs has not yet been filed with the ACC.
However, the Company intends to file such a rate application and an application for an extension of the deferral period prior to June 30, 1989.
Effective January 1, 1988, SFAS No. 90, "Regulated Enterprises Accounting for Abandonments and Disallowances of Plant Costs," requires any disallowance, direct or indirect, of the cost of a recently completed plant to be recognized as a loss.
- 3. Common and Non-redeemable Preferred Stock.
The balances at December 31, 1988 and 1987 of common stock redeemable except pursuant to call by the Company at its option, are Number of Shares Outstanding at December 31, 1988 1987 and of preferred stock, which is not as follows.
Call Price Per Share(a)
Par Value Outstanding at December 31, Pcr Share 1988 1987 (Thousands ofDollars)
~178 162
~178 162 Common Stock.........
Non-redeemable Preferred Stock (cumulative):
$1.10 preferred.......
$2.50 preferred.......
$2.36 preferred.......
$4.35 preferred.......
Serial preferred
$2.40 Series A.......
$2.625 Series C......
$2.275 Series D......
$3.25 Series E.......
Serial preferred
$8.32Series J.......
Adjustable rate Series Q..........
Serial preferred Total.........
~
~
100,000,000 Vl 264 94V 71 264 94V 3
2.50
$ 27.50 51.00 51.00 102.00
$ 25.00 3,898 50.00 5,163 50.00 2,000 100.00 V,500 3,898 5,163 2,000 7,500 155,945 103,254 40,000 V5,000 160,000 105,000 120,000 150,000 1,000,000 155,945 103,254 40,000 V5,000 240,000 240,0'00,000 320,000 240,000 240,000 200,000 320,000 50.00 12,000 50.00 12,000 50.00 10,000 50.00 16,000 12,000 12,000 10,000 16,000 50.50 51.00 50.50 51.00 4,000,000(b)
(c) 500,000 500,000 100.00 50,000 50,000 100.00 50,000 25.00 3168 561 (d) 500,000 500,000 50,000 10,000,000 2 374 199 2 374 199 168 561 Einancial Accounting Standards In October
- 1987, the Financial Accounting Standards Board
("FASB") issued SFAS No.
92, "Regulated Enterprises Accounting for Phase-in Plans," which precludes the Company from recording an equity return on cost deferrals. The Company has not been able to accrue an equity return for Unit 3, which adversely afFected net income by approximately $2 millionper month in 1988 as compared to 198V.
(a) In each case plus accrued dividends.
(b) This authorization also covers outstanding redeemable preferred shares shown in Note 4, as well as the non-redeemable shares indicated above.
(c) At $103.00 through August 31, 1992; and at $101.00 thereafter.
(d) Bears dividends at a rate, adjusted on a quarterly basis, 2% below the rate borne by certain United States Treasury securities, but in no event less than 6% per annum or greater than 12% per annum. Redeemable at the option of the Company at $103.00 through February 28, 1993; and at $100.00 thereafter.
19
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
Pursuant to the Nuclear Waste Policy Act of 1982 ("Act"),contracts have been entered into h th U.S. D tment of Energy for disposal of spent nuclear fuel. The Act provides for an assessment of $0.001 per kilowatt-hour of nuclear generation. This amount is charged to nuclear fuel expense and recovered through the Company's fuel adjustment clauses.
2, ACC and Related Matters.
Prudence Audit On September 4, 1986, the ACC issued an order establishing the format for a prudence audit of Palo Verde costs. Ernst & Whinney, a national accounting firm, is overseeing the prudence au i, a repor on d
d't t on which is expected sometime in 1989. Pursuant to the order, the tr ction C
b 'tt d for review ten areas in which itbelieves its performance in the cons ruc ion IC H
of Palo Verde exceeds the prudence audit standard of "reasonableness.
A procedural framewor has not been established within which the ACC would formally consider the reasonableness of P l V d
ts Any Palo Verde costs disallowed by the ACC for inclusion in the Company's rates (whether as a result of the prudence audit or otherwise) willbe recognized as a oss y
Company at such time as it becomes probable that the costs will be disallowed for ratemaking purposes.
Although the Company is unable to predict the ultimate outcome of this matter, management believes that overall, Palo Verde was planned and constructed in a prudent manner.
l Pursuant to an order issued by the ACC in April 1988, the Company estimates that up to
$124 million of revenues collected through December 31, 1988 are to be deemed interim or d'he outcome of the prudence audit. In the opinion of management, the amount, ifany, of such revenues to be refunded willnot be material to the Company s nancia statements.
Construction Inmit As an incentive to complete construction and commence operation of Palo Verde, in November 1984, the ACC issued an order that set a construction cost limitof $2.86 billionfor the Companyss are o ao er e.
h f P I V rde. Amounts expended in excess of the construction cost limitare of presume e impru en d to b tly incurred for ratemaking purposes (although no presumption o
that the prudence will attach to expenditures made up to such limit). Management believes a
e Company's share of Palo Verde construction costs will not exceed the limitwhen the costs are finalized.
Palo Verde Unit 8 On April 1, 1988, the ACC issued an order in the rate case in which the Company requested l
tail electric rates to recover, the costs of Unit 2 and other increased costs i nin costs of service. The new rates (including recovery of costs deferred and decommissioning cos
)
became effective April 1, 1988; however, as previously discussed, rates attributable to the inclusion of portions of Unit 1 and Unit 2 costs in the Company's rate base are to be deemed interim or temporary pending the outcome of the prudence audit.
Palo Verde Unit 8 On April 6, 1988, the ACC issued an accounting and ratemaking order that allows the C
f ACC purposes to defer and capitalize substantially all Unit 3 operating costs (excluding fuel) and to accrue a carrying charge on its ownership interest in Unit 3 a third of the facilities common to all three Palo Verde units. The ACC ordered the period for I
d f ls to commence on January 8, 1988 and to terminate on December 31, 1989, unless the Company files an application for an extension of the deferra perio wi ACC at least six months prior to December 31, 1989. Unit 3 cost deferrals amounted to approximately $123 millionbefore income taxes at December 31, 1988.
18
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
January 1, 1987 of the change, net of income taxes, is $16.1 millionand is reported as a separate component of 1987 net income. The pro forma effect of this change on the reported earnings of the prior period presented is not significant.
Retail rate schedules include adjustment clauses which permit recovery of costs of certain fuel and purchased power. Regulatory hearings are held periodically to adjust the rates applicable under fuel adjustment clauses to more nearly match actual fuel costs. Temporary net under or over-recoveries of costs resulting from application of the adjustment clauses are recognized as a deferred fuel asset or liability, respectively, with an offsetting amount recognized in purchased power and interchange expense.
- f. Allowance for funds used during construction In accordance with the regulatory accounting practice prescribed by the FERC and the ACC, the Company capitalizes an allowance for the cost of funds used to finance its construction program ("AFC"). AFC, which does not represent current cash earnings, is defined as the cost of borrowed funds and a reasonable rate of return on equity funds used during construction. The calculated amount is capitalized's a
part of the cost of utilityplant.
AFC has been calculated using composite rates of 12.75% from January 1986 through October 1986; 11.25% for November and December 1986; 11.20% for 1987; and 11.25% thereafter.
The Company compounds AFC semi-annually and ceases to accrue AFC when construction is completed and the property is placed in service.
- g. Income taxes The Company uses accelerated depreciation methods for income tax purposes.
As prescribed by the ACC, deferred income taxes are provided for certain timing differences arising from the recording, for income tax and financial reporting purposes, of depreciation of property placed in service after January 1, 1977. In accordance with an ACC order, the Company defers amounts equal to the change in income taxes arising from substantially all other timing differences, which prior to October 1983 were reflected currently in income. At December 31, 1988 the Company had flowed through to income currently approximately $205 million of income tax benefits arising from income tax timing differences for which deferred taxes have not been provided.
In compliance with an ACC order, the Company defers amounts equal to the reduction in Federal income taxes arising from investment tax credits and amortizes these amounts to other.
income over the estimated life of the related assets.
In 1981, the Company sold to another corporation certain federal income tax benefits in exchange for cash. The Company, pursuant to an order of the ACC, has recorded the proceeds of the sale as a deferred credit and is amortizing the amount of such proceeds on a straight-line basis over approximately 30 years.
The Company is included in.the consolidated income tax returns of Pinnacle West. Income taxes are allocated to the Company based on its separate company income or loss. Income taxes paid to Pinnacle West amounted to $67,575,000 and$ 93,156,000 in 1988 and 1987, respectively..
- h. Research and development costs The Company expenses research and development costs on a current basis, except that costs which may result in additions to utilityplant are deferred for subsequent inclusion in plant or to be written offifthe applicable project is abandoned.
- i. Reacquired debt costs In,accordance with the regulatory accounting practices prescribed by the ACC, the Company defers the excess of the reacquisition price of reacquired debt over the net carrying amount and amortizes these amounts to expense over the remainder of the origirial" life of the issues reacquired.
- j. Nuclear fuelNuclear fuel is charged to fuel expense using the unit of production method under which the number of units of thermal energy produced in the current period is related to the total thermal units expected to be produced over the remaining life of the fuel.
ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS
- 1. Summary of Significant Accounting Policies.
- a. System of accounts The accounting records of Arizona Public Service Company (the "Company" ) are maintained in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission ("FERC").
- b. Consolidation All the shares of common stock of the Company are owned by Pinnacle West Capital Corporation ("Pinnacle West" ). The financial statements for 1986 and 1987 were consolidated and included the accounts of the Company and those of its wholly-owned subsidiaries. All significant intercompany balances and transactions, were eliminated. As of December 31, 1988 the Company had dissolved these subsidiaries and assumed their assets and liabilities. As a result, the financial statements for 1988 are not consolidated.
The financial impact of these dissolutions was not significant and the financial statements are comparable for the periods shown.
Certain prior year items have been reclassified to conform to 1988 presentation.
- c. Statements of Cash FlowsThe Company has adopted Statement of Financial Accounting Standards
("SFAS") No.
95, "Statement of Cash Flows," in
- 1988, and has conformed its 1987 and 1986 financial statements to include statements'f cash flows. For purposes of the statements of cash flows, the Company considers all temporary cash investments and marketable securities to be cash equivalents. Temporary cash investments and marketable secur'ities have maturities or put dates of three months or less.
- d. Plant and depreciation Property is stated at original cost as defined for regulatory purposes.
The cost of additions to utility plant and replacements of retirement units is capitalized. Replacements of minor items of property are charged to expense as incurred. In addition to direct costs, capitalized items include the present value of certain future lease payments (see Note 5), research and development expenditures pertaining to construction projects, indirect charges for engineering, supervision, transportation and similar costs, and an allowance for funds used during construction.
Costs of depreciable units of plant retired are eliminated from plant accounts and such costs plus removal expenses less salvage are charged to accumulated depreciation. Contributions in aid of construction are credited to plant cost:
Depreciation on utilityproperty is provided on a straight-line basis at rates authorized by the Arizona Corporation Commission (the "ACC") annually. The applicable r'ates for 1986 through 1988 ranged from 0.68% to 9.86%.
Decommissioning costs for the Palo Verde Nuclear Generating Station ("Palo Verde" ) are recovered through rates and charged to depreciation expense. Total decommissioning costs for all three Palo Verde units are estimated at approximately $615 million (in 1986 dollars) of which the Company's share (29.1%) is approximately $179 million.
Decommissioning expense recovered in retail rates is being deposited in external trust funds until the decommissioning of nuclear facilities takes place. At December 31, 1988
$4,349,000 had been deposited in the external trust funds and is included in the Company's Investments and Other Assets.
'1
- e. Revenues and fuel costs Effective January 1, 1987, the Company changed its method of recording revenues. Prior to that date, the Company recorded revenues as billed to its customers on a monthly cycle billing basis. The unbilled revenue for those kilowatt hours delivered to customers after meter reading dates became part of operating revenues in the followingmonth.
In order to better match revenues with expenses, the Company changed its method of accounting to 'accrue an estimate of revenue for sales unbilled at the end of each month. This change also serves to conform the Company's accounting treatment with the treatment of unbilled revenues as taxable under the Tax Reform Act of 1986. The cumulative effect as of 16
ARIZONAPUBLIC SERVICE COMPANY STATEMENTS OF CASH FLOiVS Year Ended December 31, 1988 1987 1986 (Thousands of Dollars)
Cash Flows from Operations:
Income before cumulative efFect of accounting change Items not requiring cash:
Depr'eciation and amortization Nuclear fuel amortization Allowance for equity funds used during construction Deferred income taxes net Deferred investment tax credit net.......
~
~.
~
Deferred fuel Palo Verde cost deferral Changes in certain current assets and liabilities:
Accounts receivable net..........
Utilityrevenues accrued..
Materials, supplies and fossil fuel Other current assets..
Accounts payable Taxes accrued.............,....
~
~
~
~
~
~
~
~
~
~
~
Interest accrued..
Other current liabilities Other net Total e
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
Cumulative eiFect of accounting change............
Net cash provided Cash Flows from Financing:
Preferred stock..
Long-term debt Short-term borrowings net Dividends paid on common stock Dividends paid on preferred stock Repayment of preferred stock Repayment and reacquisition of long-term debt.....
Net cash used Cash Flows from Investing:
Capital expenditures Allowance for equity funds used during construction..
Palo Verde Unit 2 sale and leaseback 0ther 0
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
Net cash used Net increase (decrease) in cash and marketable securities Cash and marketable securities at beginning of period..
Cash and marketable securities at end of period.....
~.
$ 271,211
$ 297,763
$ 274,120 194,334 51,165 (12,069) 118,606 (9)107)
(58)
(146,911) 8,644 (6,029)
(8,605) 3,842 (V,836) 10,851 1,278 (133) 18 187 487,370 487 370 160,298 31,722 (59,015) 131)009 (1,824) 5V,595 (156,250)
(6,990)
(34,995) 1,650 161,462 13,735 (27,729)
(336)
(12,819) 13 102 568,878 16 110 584 488 139,541 21,V62 (93,734) 62,420 28,563 50,341 (63,788) 16,915 (23,331)
(168,05V)
(1,711) 38,816 (20,180)
= 19,318 6 817 287,812 287 812 11,668 49,500 (210,944)
(33,003)
(9,030)
~31 406) 99,562 383,318 (37,000)
(205,242)
(33,136)
(106,750)
~328 156) 521,738 19,000 (209,968)
(39,V38)
(40,693)
~537 114) 7 876 ~13 648 3
6 770
~223 215) ~227 404) ~286 775)
(277,228)
(403,488)
(568,056) 12,069 59,015 96,810 487,296
~4763) ~5738) ~18 188)
~269 922) ~350 211) ~2138)
(5,767) 6,873 (1,101) 13 643 6 770 7 871 Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (excluding capitalized interest)
Income taxes See Notes to Financial Statements.
$ 193,289 67,575
$ 156,760 93,156
$ 164,672 26,390
ARIZONAPUBLIC SERVICE COMPANY STATEMENTS OF RETAINEDEARNINGS Year Ended December 31, Retained earnings at beginning of AddNet income..
Total DeductDividends:
'ommon stock (Notes.3, 4 and 5)
Preferred stock (see below)
Total
~
~
~
~
~
~
Retained earnings at end of year Dividends on preferred stock:
$1.10 preferred
$2.50 preferred
$2.36 preferred
$4.85 preferred Serial preferred:
$2.40 Series A
$2.625 Series C.
$2.275 Series D
$8.25 Series E
$10.00 Series H
$10.70 Series I
$8.32 Series J
@.80 Series K
$9.70 Series L
$11.95 Series M..
$12.90 Series N
$3.58 Series 0 Adjustable Rate Series P Adjustable Rate Series Q
$11.50 Series R....,
$8.48 Series S.
$8.50 Series T.
Total See Notes to Financial Statements.
year 1988 1987 1986 (Thousands of Dollars)
$698,051
$617,370 271 211 313 873 964 262 931'243
$592,834 "274 120 866 454 210,944 205,242 209,805 33 319 32 950 244 263 238 192 3719 999 6693 051 39 279 249 084 3617 370 172 258 94 326 1V2 1V2 258 258 94 94 326 326 576 630 455 1,040 674 4,160 2 372 576 630 455 1,040 994 942 4,160 3,083 3,880 426 42773 7,160
-11250 3,360 5,750 576 630 455 1,040 833 4,160 2,686 858 4,885 2,983 315 3,263 5,824 2,544 1 098 4,561 3,538 5,973 4,240 4 250 3 33319 3 32950 3 89279 14
ARIZONAPUBLIC SERVICE COMPANY BALANCESHEETS.
LIABILITIES December 31, 1988 1987 (Thousands of Dollars)
Capitalization (Notes 3, 4 and 5):
Common stock Fremiums and expenses net Retained earnings Common stock equity....,
~
~
~
~
~
~
Nonredeemable preferred stock......,......
,Redeemable preferred stock Long-term debt less current maturities..
Total Capitalization 1V8,162 1,034,258 719 999 1,982,419 168,561 212,948 2 242 932 4 556 860 178,162
, 1,0344364 693 051 1,905,5VV 168,561 221,978 2 281950 4 578 066 Current Liabilities:
Notes payable to banks..... ~....
Commercial paper..............
Current maturities of long-term debt Accounts payable Accrued taxes..............,
Accrued interest,,
Deferred fuel.........'........
Other Total Current Liabilities
~
~
~
~
~
~
~
~
~
(Note 5)
Deferred Credits and Other:
Deferred income taxes Deferred investment tax credit..
Unamortized gain-sale ofutilityplant (Note 8)
Unamortized credit related to sale of tax benefits Customers'dvances for construction 0ther
~
~
~
~
~
~
~
~
~
~
~
~
~
~
Total Deferred Credits and Other Commitments and Contingencies (Notes 2 and ll) 15,000 34,500 37,985 V4,127 V4,914 53,440 33,543 35 509 359 018 650,V39 192,135 126,120 38,583 26,044 41 465
- 1 075 086 17,796 V6,612 64,063 52,162 33,601 35 326 279 560 521,797 201,242 131,659 40,2VO 26,077 39 917 960 962 Total
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
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~
~
~
~
~
~
~
~
~
~5990 964 5 818 588 13
ARIZONAPUBLICSERVICE COMPANY BALANCESHEETS UtilityPlant (Notes 5, 7 and 8):
Electric plant in service and held for future use..
Less accumulated depreciation and amortization..
Total
'Construction work in progress Nuclear fuel, net of amortization of $83,308,000 and UtilityPlantnet
$48,055,000 December 31, 1988 1987 (Thousands of Dollars)
$6,008,411 1 218 699
$4,993,S6S 1 088 856 4,789,V12 251,223 71 71S 3,905,007 1,154,829 88 199 5 112 648 5'098 085 Investments and Other Assets (at cost)
Current Assets:
Cash and marketable securities..
Accounts receivable:
Service customers Other Allowance for doubtful accounts....
Accrued utilityrevenues (Note 1)
Materials and supplies (at average cost)
Fossil fuel (at average cost)
Other Total Current Assets
~
'I
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
51 198 V,876 87,839 22,985 (2,840) 41,024 79,686 25,2VS 9 968 271 816 46 480
'13,643 84,781 S4,S65 (2,518) 34,995 66,V66 26,8VS 18 810 272 715 Deferred Debits:
Deferred income taxes Palo Verde cost deferral (Note 2)
Unamortized costs of reacquired debt..
Unamortized debt issue costs Other Total Deferred Debits..........
Total See Notes to Financial Statements.
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
~
121,V24 361,042 25,996 16,5VO 29 975 111,388 219,689 29,301 1V,643 28 887 85 990 964 5 818 588 555 807 406'408 12
ARIZONAPUBLIC SERVICE COMPANY STATEMENTS OF INCOME Year Ended December 31, 1988 1987 (Thousands of Dollars) 1 442 028 1 322 930 1 255 057 1986 207,387 180,597 178,814 33,592 44,773 54,891
~4) 55 154 57 320 240 975 280 524 291 025 1 201 048 1 042 406 964 082 244,913 108,153 194,334 157,350 160,697
~67 479) 213,510 102,319 160,298 178,850 144,354
~84 289) 157,196 98,032 139,541 182,316 123,593
~25 526) 797 968 715 042 675 152 403 080 327 364 288 880 93,734 38,262 25,496 16 855 12,069, 59,015 79,432 71,961 (26,547)
(6,004) 6 740 1 484 71 694 126 456 173 847 474 774 453 820 462 727 190,587 5,122 6,781 214,029 6,973 5,851 202,173 4,988 6,251
~9849) ~46433) ~88246) 203 563 156 057 188 607 271,211 297,763 274,120 16 110 313,873 32 950 280 923 0
271,211 33 319 237 892 274,120 39 279 234 841 See Notes to Financial Statements.
Electric Operating Revenues Fuel Expenses:
Fuel for electric generation Purchased power, Deferred fuel Total Operating Revenues Less Fuel Expenses..........
Other Operating Expenses:
Operations excluding fuel expenses Maintenance
~
Depreciation and amortization.... ~.........
~.
Income taxes (Note 9)
Other taxes (Note 12)..
Palo Verde cost deferral (Note 2)..............
Total Operating Income Other Income (Deductions):
Allowance for equity funds used during construction Palo Verde cost deferral (Note 2)..............
Income taxes (Note 9)
Other - net Total Income Before Interest Deductions..............
Interest Deductions:
Interest on long-term debt Interest on short-term borrowings.............
Debt discount, premium and expense...........
Allowance for borrowed funds used during construction Total Income Before Cumulative Effect of Accounting Change Cumulative Effect as of January 1, 1987 of Accruing Unbilled Revenues, Net of Income Taxes of
$12,460,000 (Note 1)
Net Income Preferred Stock Dividend Requirements.......
Earnings for Common Stock
In December
- 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes." The Company will adopt the new standard in 1989 or 1990 and expects it to have little impact on earnings.
See Note 9 of Notes to Financial Statements.
Net income reflects accounting practices unique to regulated public utilities and represents a composite of cash and non-cash items, including AFC and the cost deferrals associated with Palo Verde Units 2 and 3 (see Statements of Cash Flows).
Effects of Inflation In contrast to the analysis of increases in operating revenues in the table at the beginning of "Operating Results," it is sometimes difficult, in the case of operation and maintenance expenses, to distinguish between effects of volume increases and rises in unit costs.
Certain inflationary effects, such as those on costs of generating fuel, are passed through to customers pursuant to rate adjustment procedures currently in effect (see "Liquidity and Capital Resources" above). Nevertheless, the Company attempts to minimize such effects by means that include increasing the availability of its nuclear and coal-fired units to result in a more economical fuel mix. This increase has been achieved by an intensive maintenance program, the cost of which is not covered by the adjustment clauses. There are a number of other major expense items that are also beyond the scope of the adjustment clauses. Inflationary pressures on these items have given rise to a significant earnings attrition between general rate increases.
10
seasonal rates on annual average revenue per kilowatt-hour. The year-to-year changes in non-energy related electric revenues reflect changes in the revenues collected for the capacity sold to other utilities.
Fuel expenses increased in 1988 and 1987 as increased system energy requirements more than ofFset lower unit fuel costs resulting from increased nuclear generation attributable to Palo Verde Units 2 and 3.
Variations in purchased power expense reflect contractual commitments with other utilities for purchasing power as a means of augmenting the Company's own generating sources from time to time. The decrease in purchased power from 1986 to 1988 was primarily due to decreased purchases as a result of increased nuclear generation.
Nearly all of the Company's fuel costs, are either recovered currently'or deferred pursuant to the PPFAM and, accordingly, do not materially afFect earnings.
Recovery or refund of such deferred amounts is subject to an ACC review and approval process which requires a hearing.
See "Liquidityand Capital Resources" for further discussion.
Palo Verde Unit 2 commenced commercial operation on September 19, 1986. The Company began expensing the costs of operating and 'maintaining Unit 2 and ceased accruing an allowance for funds used during construction
("AFC") on such investment at that time.
Pursuant to an ACC accounting and ratemaking order, the Company deferred Unit 2 operating costs (excluding fuel) and accrued a carrying charge on such deferrals until April 1, 1988, the efFective date of new rates to cover the costs relating to Unit 2. As a result, earnings were not significantly afFected by the increased costs and reduced AFC. In accordance with Statement of Financial Accounting Standards No. 92, "Regulated Enterprises Accounting for Phase-In Plans," ("SFAS No. 92") between January 1, 1988 and April 1, 1988, the Company did not accrue, for financial reporting purposes, an equity return on Unit 2 cost deferrals, the net income efFect of which was approximately $8 million.
Palo Verde Unit 3 commenced commercial operation on January 8, 1988. The Company began expensing the costs of operating and maintaining Unit 3 and ceased accruing AFC on such investment at that time. On April 6, 1988, the ACC issued an accounting and ratemaking order that allows the Company, for ACC purposes, to defer and capitalize substantially all Unit 3 operating costs (excluding fuel) and to accrue a carrying charge on its ownership interest in Unit 3 and one-third of the facilities common to all three Palo Verde units. The ACC ordered the period for accumulating such deferrals to commence on January 8, 1988 and to terminate on December 31, 1989, unless the Company files an application for an extension of the deferral period with the ACC at least six months prior to December 31, 1989, in which case the accounting and ratemaking order willcontinue in efFect after December 31, 1989, at least until the ACC rules on the application for an extension. A specific rate application designed for recovery of Unit 3 costs has not yet been filed with the ACC. However, the Company intends to file such a rate application and an application for an extension of the deferral period prior to June 30, 1989. Although the ACC is allowing the Company to accrue a carrying charge on Unit 3, SFAS No. 92, as previously discussed, precludes the accrual of an equity return on Unit 3 cost deferrals, which adversely affected net income by about
$2 million per month in 1988 as compared to 1987.
EfFective January 1, 1987, the Company changed its method of recording revenues to include revenue related to electricity delivered to customers but not yet billed at year-end. The cumulative efFect, as of January 1, 1987, of the change, net of income taxes, was $16.1 million and is reported as a separate component of 1987 net income. See Note le of Notes to Financial Statements for further discussion.
Year Ended December 31, 198S 1987 1986 (Thousands, of Dollars)
Energy related:
Volume increases (decreases)
(1)
Revenue per kilowatt-hour increases (decreases)
(2)
Non-energy related:
Revenue increases (decreases)
(3)
Total increase......... ~...
$ 89,942
$ (1,334)
(19,694) 53,657
$ 88,021 32,879
~2875)
$ 67 873 (1) Calculated by summing the results of multiplying the year-to-year increases in units sold in each customer class by the weighted, average of the applicable rate levels in effect for the prior year.
(2).Calculated by summing the results of multiplying the year-to-year increases in the weighted average of rate levels in each customer class times the applicable" number of units sold in the current year.
(3) Includes revenues for miscellaneous services and'transmission for others.
In 1988, the volume-related increases occurred in the residential, business and resale customer classes.
The increases were largely due to customer growth, increased sales per customer as a result of warmer summer weather, increased sales to copper mines and increased sales for resale. In 1987, the volume-related increase in electric revenues was primarily due to increased customers and sales per customer in the residential and commercial classes.
Th' increase in residential sales per customer was largely due to colder weather conditions in the winter months of 1987. In 1986, the volume-related decrease was largely due to lower sales to resale customers. Price-related revenue increases and decreases reflect the timing and amounts of base rate changes, the operation of the Company's PPFAM, the incentive for customers to migrate over time to that rate which produces the lowest bill,,and the effect of weather and
~1807)
$119 093 general rate order is granted by the ACC. The Company willalso pursue additional wholesale or interchange sales opportunities to offset the estimated loss of $20 million in revenues in 1989 resulting from the partial expiration of the'agreement.
Operating Results Net income decreased in 1988 to $271,211,000 compared to $313,873,000 and $274,120,000 in 1987 and 1986, respectively.
The largest single factor in the decline in 1988 earnings as compared to 1987 was the Company not accruing an equity return on 'Palo Verde Unit 2 and Unit 3 cost defer'rais pursuant to SFAS No. 92 (as described below). Another significant factor was the change in method of accounting for revenues which resulted in a one-time earnings increase in January 198V. Also contributing to the earnings dechne in 1988 was the Company's allowed rate of return on equity being reduced from 14.0% to 12.5% effective April 1, 1988 in the Palo Verde Unit 2 rate decision."The above impacts were somewhat offset by the net inco'me effect of increased revenues, which were largely due to customer growth and increased sales per customer in 1988.
The earnings increase in 198V as compared to 1986 is primarily attributable to the change in method of accounting for revenues as discussed previously, decreased interest costs and the earnings impact of increased revenues arising principally from colder weather conditions in the winter months of 1987. The followingparagraphs discuss these issues in more detail.
Total operating revenues include the effects of rate increases and adjustment clauses on prices of units sold. Operating revenues also reflect volume changes in unit sales. The foregoing factors contributed to annual increases (decreases) in electric" operating revenues over the preceding calendar year as follows:
Palo Verde Rate Matters On September 4, 1986, the ACC issued an order establishing the format for a prudence audit of Palo Verde costs. Ernst & Whinney, a national accounting firm, is overseeing the prudence audit, a report on which is expected in the near future. Pursuant to the order, the Company submitted for review ten areas in which itbelieves its performance in the construction of Palo Verde exceeds the prudence audit standard of "reasonableness."
A procedural framework has not been established within which the ACC would formally consider the reasonableness of Palo Verde costs. Any Palo Verde costs disallowed by the ACC for inclusion in the Company's rates (whether as a result of the prudence audit or otherwise) willbe recognized as a loss by the Company at such time as it becomes probable that the costs will be disallowed for ratemaking purposes.
Although the Company is unable to predict the ultimate outcome of this matter, management believes that, overall, Palo Verde was planned and constructed in a prudent manner.
Pursuant to an order issued by the ACC in April 1988, the Company estimates that up to
$124 million of revenues collected through December 31, 1988 related to Palo Verde Units 1 and 2 are to be deemed interim or temporary pending the outcome of the prudence audit. In the opinion of management, the amount, ifany, of such revenues to be refunded willnot be material to the Company's financial statements.
In November 1984, the ACC issued an order that set a construction cost limitof $2.86 billion for the Company's share of Palo Verde, with any amounts expended above that figure to be presumed as imprudently incurred for ratemaking purposes (although no presumption of prudence will attach to expenditures made up to such limit). Management believes that the Company's share of Palo Verde construction costs will not exceed the limitwhen the costs are finalized.
See "Operating Results" for a discussion of ACC matters regarding Palo Verde Unit 3.
Purchased Power and Fuel Adjustment Mechanism The Company's purchased power and fuel adjustment mechanism ("PPFAM") provides for the recovery of the Company's actual generating fuel and purchased power expenses from its retail customers.
The PPFAM can result in under-or over-recovered balances as a result of variations in the level of fuel and purchased power expenses.
Over-recovered balances, which are anticipated to be returned by the Company over time to retail customers through operation of the PPFAM, account for the $33.5 million and $33.6 million "Deferred fuel" liability in the Company's Balance Sheets as of December 31, 1988 and 1987, respectively.
The Company is currently operating under a format that requires an annual ACC hearing to review the Company's experienced and projected under-or over-recoveries of fuel and purchased power costs from retail customers through prevailing rates. The latest hearing was completed in January 1989. Although the ACC staK recommended the immediate elimination of the PPFAM, the Company recommended that the PPFAM continue or, in the alternative, that deferred fuel accounting be adopted, with any under-or over-recoveries to be addressed in the next request by the Company to the ACC for a change in retail electric rates. A decision in this hearing is expected sometime in 1989. Ifthe ACC eliminates the PPFAM, the Company would request recovery of any changes in such fuel and purchased power costs in a general rate request.
Other The Company is currently operating under an agreement with Southern California Edison Company ("SCE") whereby approximately 350 megawatts of capacity is sold from Unit 4 of the Cholla Power Plant. A portion of this agreement (44%)'expires on June 1, 1989 with the remainder expiring as of June 1,
1990. The Company plans to seek an accounting order deferring the Cholla 4 costs that will no longer be recovered by the SCE agreement until a
MANAGEMENT'SDISCUSSION ANDANALYSISOF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS Liquidityand Capital Resources The Company has capital requirements for its ongoing construction program, currently estimated to be
$280 million for 1989, and for the refunding or redemption of maturing securities (see Notes 3, 4 and 5 in Notes to Financial Statements).
In 1988, the Company financed approximately 81% of its capital expenditures with internally generated funds after the payment of dividends and should be able to finance approximately two-thirds of its capital expenditures internally in the period 1989 through 1991. This situation may deteriorate, however, if the Company does not receive adequate rate relief for the recovery or deferral of costs. of Unit 3 of the Palo Verde Nuclear Generating Station ("Palo Verde" ) (see "Operating Results" for further discussion).
The Company has a degree of flexibility in adjusting its construction program to its financing capability; however, that flexibilityis somewhat limited and its long-term liquiditywill depend on its access to the capital markets, which in turn will depend on sufficiency of rates to provide adequate coverages on its senior securities and an adequate rate of return on common stock equity. Adequate earnings and coverages are critical to the maintenance of satisfactory credit ratings on the Company's senior sec'urities and, as calculated in accordance with the governing instruments, are prerequisite to the Company's.
legal ability to issue such securities.
Provisions in the Company's mortgage bond indenture and articles of incorporation restrict it from issuing additional first mortgage bonds or preferred stock, respectively, unless its earnings (as defined) cover by at least the prescribed number of times the amount of interest (as to bonds) and the amount of interest plus preferred stock dividend requirements (as to preferred stock) on the securities to be outstanding after completion of the new issue. Further, the indenture limits the amount of additional bonds which could be issued to a perceritage of net, "property additions" and property previously pledged as security for certain bonds heretofore redeemed or retired. As of December 31, 1988, management estimates that the applicable documents would have allowed the issuance of either $1.1 billion of additional first mortgage bonds, on the basis of net property additions (as compared to approximately $2.0 billion on the basis of coverages), or $596 millioriof preferred stock.
See page 5 with respect to the Company's capitalization at December 31, 1988. Ifinterest and dividend rates on new issues of long-term debt and preferred stock rise in the future, the Company's average cost of capital willrise accordingly. During 1986 the Company entered into sale and leaseback transactio'ns under which it sold and leased back approximately 42% of its 29.1% ownership interest in Palo Verde Unit 2. The leases are accounted for a's operating leases and, accordingly; are not reflected in the Company's capitalization (see Note 8 of Notes to Financial Statements).
By statute, the Company's short-term borrowings may not exceed 7% of its total capitalization without the consent of the Arizona Corporation Commission (the "ACC"). Such borrowings are an important source of funds, particularly between permanent financings, and the statute could limit the Company's financing flexibilityfrom time to time. However, the'ompany's own general policy relating to short-term borrowings is consistent with that of the statute.
The ACC has regulatory authority over the Company in matters relating to retail electric rates and the issuance of securities. Accordingly, the Company's liquidity and operating results may be significantly affected by the outcome of the following pending or anticipated ACC matters referred to throughout this discussion.
OTHER FINANCIALAND OPERATING STATISTICS 1988 1987 1986 1985 (Dollars in Thousands, Except Per Hour Amounts) '984 Capitalization:
Common equity Non-redeemable preferred stock....
Redeemable preferred stock
~
~
~
~
~
~
~
~
~
~
~
Long-term debt....
Total e
~
~
~
~
~
~
~
~
~
~
Utilityplantgross...
Utilityplantnet....
Number of employees at year-end..........
Average wage per hour Electric resources (kw)
Peak load (kw)
Electric sales total (mwh)'........,..
Number of customers at year-end..........
$ 1,932,419
$ 1,905,577
$ 1,835,616
$ 1,811,405
$ 1,695,923 168,561 212,948 2 242932 168,561 221,978 2 281 950 218,561 178,V28 1 92S 491 218J 561 219,421 2 205 940 218,561 282,V40 1 684 746
$ 6,414,655
$ 5,112,648
$ 6,229,446
$ 5,880,435
$ 5,V12,507
$ 51093,035
$ 41904,325
$ 4,8 V3,823
$ 5,0881243
$ 4,344,083 8,135 17.02 4I311,800 3,371,600 SI926 16.09 SI925,600 3,159,300 8,966 8,324 15.2S '14.48 3,592,100 3,570,800 3,194,600 3,197,800 V,358 13.61 3,425,900 2,970,600 17,V60,896 15,404,312 14,180,458 14,348,204 14,133,513 582,003 566,384 545,018 521,567 499,751
~4556 860
~4578 066
~4161 396
~4455 S27
~3881 970 OPERATING REVENUES 1988 1987 1986 (Thousands of Dollars) 1985 1984 Electric Residential Commercial Industrial Irrigation Other'...
Total'..
~
~
~
~
~
~
~
545,082 501,666 166,S46 14,989 114 180 466,816 441,236 1411 V29 21,54V 85 816 505,525 467,643 146J 925 16,641 88 630
, 438,265
~
401,439
, 135,254 22,853 107 010 1,342,263 1,225,364 1,15V,144 1,104,821 378,536 343,971 126,187 25,540 116 971 991,205 Transmission for others
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~
~
~
~
~
Miscellaneous services Total operating revenues'V,187 82 5VS 14,254 83 312 19,692 VS 221 16,602 62 361 13,023 21 316
~1442 023
~1322 980
~1255 05V
~1183 V84 1 025 544
'ertain prior year items have been reclassifie to conform to 1988 presentation.
ARIZONAPUBLIC SERVICE COMPANY SELECTED FINANCIALDATA.
Electric Operating Revenues'lectric Operating Expenses:
Operation and maintenance'epreciation and
'mortization............
Taxes Palo Verde cost deferral....
Total Operating Income..........
Other Income"...
~ ~.......
Interest Deductions - Net Income from Continuing Operations Before Cumulative Effect of Accounting Change Loss from Discontinued Operations - Net of Tax" Cumulative Effect of Accounting Change-Netof Tax"......
Net Income...............
Preferred Stock Dividend Requirements Earnings for Common Stock...
Total Assets.. ~......
~ ~.....
Long-term Debt and Redeemable Preferred Stock..
Common Stock Data:
Book value per share..... '..
Earnings (loss) per average common share outstanding:
Continuing Operations Before Accounting Change..
0
~
~
~
~
~
~
~
~
~
Discontinued Operations..
Cumulative Effect of Accounting Change - Net Total a
~
~
~
~
~
~
~
~
~
~
~
~
Dividends declared per share Common shares outstanding:
Year-end.............
Average...............'
Number of common shareholders... ~........
594,041 194,334 318,047
~67 479) 596,353 160,298 32S,204
~84 289) 546,253 139,541 305,909
~25 526) 457,26V 99,221 320,312 389,242 87,494 285,548 1 OS8 94S 995 566 966 1VV SV6 800,,
V62 284 40S,OSO 32V,S64 288,880 306,984 263,260 V1,694 126,456 1VS,84V 190,04V 190,818 20S 56S 156 057 188 607 1V1 608 156 508 271,211
,297,76S 274,120 16 110 325,423, 297,5VO (26,503) 2714211 31S,SV3 274,120 S25,423 271,067 SS S19 32 950 89 279 44 412 48 875 2
287 892 2
280 928 2
2S4 841 2
281 011 2
222 692
$ 5)990)964
$ 5,818,588
$ 5)595,883
$ 51251IS2V
$ 4,653,774
$ 2,455,880
$ 2,503,928
$ 2,107,219
$ 2,425,861
$ 1,96V,486 27.12 26.74 25.V6 25.42 24.18 3.34 4
S.Vl S,SO 4
S.96 0.2S S.65 (O.S9)
S.S4 4
S.94 3.80 0
S.96 4
S.26 2.96 2.88 2.94 2.7S 2.60 V1,264,94 V V1,264,94V 71,264,947 V1,264,94 V V1,264,94 V V1,264,947
] 044 71,264,947 71,0S1,228 V0,128,329 68,308,131 124,274 1984 1987 1986 1985 (Dollars in Thousands, Except Per Share Amounts) 2 144202S 6 1822930
~1255057 2 118SV84 2 1025544
'ertain prior year items have been reclassifie to conform to 1988 presentation.
" Federal and state income taxes are included in Taxes, Other Income and Cumulative Effect of Accounting Change.
Total income tax 'expense was as follows:
- 1988,
$183,897,000;
- 198V,
$197,314,000; 1986, $156,820,000; 1985, $165,279,000; 1984, $137,072,000.
Palo Verde cost deferral included in Other Income for 1988, 1987 and 1986 was $79,432,000,
$71,961,000 and $38,262,000, respectively; there was no such deferral in 1985 or 1984,
'" Allthe shares of common stock of the Company are owned by Pinnacle West Capital Corporation,
We did all this without impacting service to customers.
Top-quality customer service remains APS'umber one priority; customer satisfaction is the foundation for the future in an increasingly competitive market.
Our cost-cutting activities are vital to maintaining both our financial and rate stability, the latter a commitment we have made to our customers. The retail rate increase of 2.1 percent we were granted in April 1988 was our first increase in base rates since November 1986. We willfile in 1989 and hope to gain Arizona Corporation Commission approval of a rate increase to take efFect in January 1991.
We took a leadership role in our state's economic development in 1988 with an aggressive program designed to attract industries to our state, with special focus on Arizona's smaller communities.
As a result, we brought six new commercial or industrial businesses into our service area and created more than $100 million in capital investments and some 1,100 new jobs for Arizonans. We'e intensifying our efForts in 1989.
Our management team has made a commitment to turning our company into one that is more flexible, more aggressive and dynamic. Our challenge for 1989 is to increase revenues and to cut further our operating expenses while absorbing any inflationary increases, while seeking out new, non-traditional sources of future revenue.
In addition, an aggressive marketing program launched in 1987 is being revitalized with the recognition that satisfying customers requires providing solutions to their energy-related problems. Thus we are working closely with customers to develop partnerships on energy needs.
For example, one new efFort in 1989 is an Electronic Equipment Protection marketing program that recognizes the micro-chip sensitivity of today's high-tech business world by ofFering customers highest quality surge suppressor equipment.
The effort is not limited to marketing programs. All our employees are exceptional people who have committed to making customer service their number one priority. We are confident that as with challenges we'e faced in the past we can and millmanage today's challenges and pressures.
We invite you to study the detailed financial information in the following pages and to attend our Annual Meeting of Stockholders on April 18 in Phoenix.
'incerely, Keith L. Turley Chairman of the Board
- 0. Mark De Michele President and Chief Executive Officer
To Our APS Preferred Shareholders:
A year ago we faced many challenges: an important rate case, a request for an accounting order for Palo Verde Unit 3, a need to reduce expenses and the reality of an increasingly competitive energy market.
We are pleased to report that we achieved our authorized rate of return in 1988; we saw the successful conclusion of a long and arduous rate
- case, including approval of the Unit 3 accounting order; and we earned
$238 million, after payment of preferred dividends, from revenues of $1.4 billion; and billed electric sales increased to 17.8 million megawatt-hours, a 15 percent jump from 1987 levels of 15.4 million.
Additionally, we had the best employee safety record ever; our Four Corners Plant set new operating records; and Palo Verde Nuclear Generating Station units operated well above national averages, setting both domestic and international marks.
By the end of 1988, Palo Verde Unit 3 had generated more than 10 million megawatt-hours of electricity, more than any other nuclear plant in the country in any previous year.
Yet to be released this year is the final report of a Palo Verde Prudence Audit ordered by the Arizona Corporation Commission. During the audit we provided all documentation requested by the auditors and believe we made a good case. The final audit report is expected to be issued in the near future. We are convinced that Palo Verde is well-designed and well-built and are optimistic about the audit's final outcome.
So that we may continue to meet the challenges ahead we are continuing a rejuvenated marketing strategy and a renewed emphasis on service quality, combined with comprehensive cost reduction efForts throughout our company.
Coupled with these are a broad range of activities designed to streamline our operation, enabling it to function more effectively in an increasingly competitive marketplace.
As a part of this streamlining, a major stafF reduction was completed early in the year in which a total of 922 positions were eliminated. Of these, 503 were employees who left the company; the remainder were budgeted jobs left unfilled. Our goal is to eliminate another 300 positions through attrition by 1990.
We were also able to reduce our construction expenditures for 1988 by some $56 million, and expect 1989 capital expenditures to be down more than $40 million from our projections a year ago... for the first time in 25 years, we did not need to arrange any new, long-term external financing.
ABOUTTHE COMPANY Arizona Public Service Company (the "Company" or "APS") is engaged principally in the generation and sale of electricity. APS, a successor to a series of small utility operations originating in 1886,'was incorporated in 1920 under th'e laws of Arizona and has operated under its present name since 1952. The Company's electric service reaches approximately 1,597,000 people, or about 45 percent of the state's population, in an area that includes all or part of 11 of Arizona's 15 counties.
All the shares of common stock of the Company are owned by Pinnacle West Capital Corporation ("Pinnacle West" ) (formerly AZP Group, Inc.), which becaine the Company's corporate
- parent, effective in April 1985, pursuant to a
corporate restructuring.
The restructuring did not affect the Company's preferred stock or any of its outstanding debt securities, all of which remain obligations of the Company.
ANNUALREPORT This report is published to provide general information concerning the Company and not in connection with any sale, offerfor sale, or solicitation of an offer to buy, any securities.
ANNUALMEETING OF STOCKHOLDERS All stockholders are invited to attend the Company's sixty-ninth annual meeting at 10:00 a.m. on Tuesday, April 18, 1989 at the, Sheraton Phoenix, illNorth Central Avenue, Phoenix, Arizona.
APS OFFICERS Leslie N. Brockhurst, 42, Vice President, Human Resources
- 0. Mark De Michele, 55, President and Chief Executive Officer Walter F. Ekstrom, 51, Executive Vice President, Engineering, Operations Karl Eller, 60, Chairman of the Executive Committee David W. Ellis, 50, Vice President, Engineering Kathryn A. Forbes, 38, Vice President and Controller Jerry G. Haynes, 54, Vice President, Nuclear Production WilliamJ. Hemelt, 35, Treasurer and Assistant Secretary Russell D. Hulse, 61, Vice President, Resources Planning Charles D. Jarman, 53, Vice President, Construction Donald B. Earner, 37, Executive Vice President, Nuclear Nancy C. Loftin, 35, Secretary and Corporate Counsel Jaron B. Norberg, 51, Executive Vice President and Chief Financial Officer WilliamJ. Post, 38, Vice President, Finance and Rates Shirley A. Richard, 42, Executive Vice President, Customer Service, Marketing and Corporate Relations Keith L. Turley, 65, Chairman of the Board (Age on Annual Meeting date, April 18, 1989) and Constr'uction
SHAREHOLDER INFORMATION Stock Listing The adjustable rate cumulative preferred stock, Series Q (Symbol ARPQ) is listed for trading on the New York Stock Exchange. The common stock of the Company is wholly-owned by Pinnacle West and as a result is not listed for trading on any stock exchange. Prior to April 29, 1985 the Company's common stock was publicly held and was traded on the New York and Pacific Stock Exchanges. At the close of business on April 28, 1985 the Company's common stock was held by 123,776 shareholders.
The chart below sets forth the dividends per share paid on the Company's common stock for each of the four quarters of 1988 and 1987.
Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Common Stock Dividends Per Share 1988
$0.74 0.74 0.74 0.74 1987
$0.72 0.72 0.72 0.72 Transfer Agent and Registrar Pinnacle West Capital Corporation Stock Transfer Department P.O. Box 52134 Phoenix, Arizona 85072-2134 (602) 222-6951 General Counsel Snell & Wilmer Phoenix, Arizona Auditors Deloitte Haskins & Sells Phoenix, Arizona Pinnacle West Capital Corporation Stock Purchase and Dividend Reinvestment Plan A Prospectus describing this plan is available upon request.
Write: Office of the Secretary, Station 1930, at the address below.
Form 10-K A copy of our Annual Report to the Securities and Exchange Commission, Form 10-K, will be available after March 31, 1989, without charge, upon written request of shareholders.
Write:
Office of the Secretary, Station 1930, at the address below.
MAILINGADDRESS:
P.O. Box 53999 Phoenix, Arizona 85072-3999