-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EEGyGzCNk0fgorzxa6kcYBcTyhs5NKGrMbtZPGq0LdaXdZsDQkHRjiHM9LWBh4Lv E12uposWDbUkcqnuERbyCA== 0000827052-99-000048.txt : 19990325 0000827052-99-000048.hdr.sgml : 19990325 ACCESSION NUMBER: 0000827052-99-000048 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDISON INTERNATIONAL CENTRAL INDEX KEY: 0000827052 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 954137452 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09936 FILM NUMBER: 99571637 BUSINESS ADDRESS: STREET 1: 2244 WALNUT GROVE AVE, STE 374 STREET 2: P O BOX 999 CITY: ROSEMEAD STATE: CA ZIP: 91770 BUSINESS PHONE: 8183022222 FORMER COMPANY: FORMER CONFORMED NAME: SCECORP DATE OF NAME CHANGE: 19920703 10-K 1 EDISON INTERNATIONAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 ------------------------------------------------------ Commission File Number 1-9936 EDISON INTERNATIONAL (Exact name of registrant as specified in its charter) California 95-4137452 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2244 Walnut Grove Avenue (626) 302-2222 Rosemead, California 91770 (Registrant's telephone (Address of principal (Zip Code) number, including area code) executive offices) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock New York and Pacific Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of registrant's voting stock held by non-affiliates was approximately $8,918,769,279.18 on or about March 19, 1999, based upon prices reported on the New York Stock Exchange. As of March 19, 1999, there were 347,202,697 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents listed below have been incorporated by reference into the parts of this report so indicated. (1) Designated portions of the Annual Report to Shareholders for the year ended December 31, 1998.....................Parts I, II and IV (2) Designated portions of the Joint Proxy Statement relating to registrant's 1999 Annual Meeting of Shareholders..........................................Part III TABLE OF CONTENTS Item Page - ---- ---- Part I 1. Business............................................................... 1 Business of Edison International................................... 1 Competitive Environment........................................ 1 Regulation of Edison International............................. 2 Environmental Matters.......................................... 3 Business of SCE.................................................... 5 California Electric Utility Restructuring...................... 5 Regulation of SCE.............................................. 9 Rate Matters................................................... 9 Fuel Supply and Purchased Power Costs.......................... 14 Year 2000 Issue................................................ 15 Business of the Nonutility Companies............................... 16 2. Properties of SCE...................................................... 21 Existing Utility Generating Facilities......................... 21 SCE Construction Program and Capital Expenditures.............. 23 Nuclear Power Matters.......................................... 23 3. Legal Proceedings...................................................... 26 Tradename Litigation........................................... 26 Geothermal Generators Litigation............................... 26 PMNC Litigation................................................ 26 Wind Generators' Litigation.................................... 27 Geothermal Generators' Litigation.............................. 27 Electric and Magnetic Fields (EMF) Litigation.................. 28 San Onofre Personal Injury Litigation.......................... 29 Mohave Generating Station Environmental Litigation............. 29 4. Submission of Matters to a Vote of Security Holders.................... 30 Executive Officers of the Registrant................................... 30 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................................... 36 6. Selected Financial Data................................................ 36 7. Management's Discussion and Analysis of Results of Operations and Financial Condition..................................... 36 7a. Quantitative and Qualitative Disclosures About Market Risk............. 36 8. Financial Statements and Supplementary Data............................ 36 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 36 Part III 10. Directors and Executive Officers of the Registrant..................... 36 11. Executive Compensation................................................. 37 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 37 13. Certain Relationships and Related Transactions......................... 37 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Financial Statements................................................... 37 Form 8-K.............................................................. 38 Report of Independent Public Accountants on Supplemental Schedules................................................ 39 Supplemental Schedules................................................ 40 Signatures............................................................ 46 Exhibit Index......................................................... 47 PART I In this form 10-K, Edison International uses the words estimates, expects, anticipates, believes, and other similar expressions that are intended to identify forward-looking information that involves risks and uncertainties. Actual results or outcomes could differ materially as a result of such important factors as further actions by state and federal regulatory bodies that set rates and implement restructuring of the electric utility industry; the effects of new laws and regulations relating to restructuring and other matters; the effects of increased competition in the electric utility business, including the beginning of direct customer access to retail energy suppliers and the unbundling of revenue cycle services such as metering and billing; changes in prices of electricity and fuel costs; changes in market interest or currency exchange rates; foreign currency devaluations; new or increased environmental liabilities; the effects of the Year 2000 on the computer systems of Edison International and its affiliates; and other unforeseen events. Item 1. Business Business of Edison International Edison International was incorporated on April 20, 1987, under the laws of the State of California for the purpose of becoming the parent holding company of Southern California Edison Company (SCE), a California public utility corporation. As of December 31, 1998, Edison International owned all of the issued and outstanding common stock of SCE and of other subsidiaries engaged in nonutility businesses (Nonutility Companies). These Nonutility Companies are: Edison Mission Energy (EME), which is engaged in developing, acquiring, owning, and operating electric power generation facilities worldwide; Edison Capital, a provider of capital and financial services for energy and infrastructure projects; Mission Land Company (Mission Land), which is in the business of managing and selling real estate projects; and Edison Enterprises, which provides integrated energy services, utility outsourcing, and consumer products and services. Edison International is engaged in the business of holding, for investment, the stock of its subsidiaries. At year-end 1998, SCE had 13,177 full-time employees. At year-end 1998, Edison International had 20 full-time employees, Edison Mission Energy had 1,180 full-time employees, Edison Capital had 85 full-time employees, and Edison Enterprises had 3,888 full-time employees. The principal executive offices of Edison International are located at 2244 Walnut Grove Avenue, Rosemead, California 91770, and its telephone number is (626) 302-2222. Competitive Environment SCE currently operates in a highly regulated environment in which it has an obligation to deliver electric service to customers in return for an exclusive franchise within its service territory. This regulatory environment is changing. In the generation sector, SCE has experienced competition from nonutility power producers; and regulators are restructuring California's electric utility industry to facilitate additional competition. (See "Business of SCE -- California Electric Restructuring" below for a description of these changes.) Edison International's Nonutility Companies face competitive conditions as well. EME competes with many other companies (including independent power producers that are affiliates of utilities) in selling electric power and steam as well as with electric utilities and others in installing new generating capacity. Edison Capital competes with other investors, including money center banks, major finance and lease companies, and affiliates of public utilities and other Fortune 500 companies, in the highly structured transaction market. Edison Enterprises, through its various businesses, is engaged in a variety of competitive retail products and services (see "Business of the Nonutility Companies"). 1 Regulation of Edison International Edison International and its subsidiaries are exempt from all provisions, except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (Holding Company Act) on the basis that Edison International and SCE are incorporated in the same state and their business is predominately intrastate in character and carried on substantially in the state of incorporation. It is necessary for Edison International to file an annual exemption statement with the SEC, and the exemption may be revoked by the SEC upon a finding that the exemption may be detrimental to the public interest or the interest of investors or consumers. Edison International has no intention of becoming a registered holding company under the Holding Company Act. Edison International is not a public utility under the laws of the State of California and is not subject to regulation as such by the California Public Utilities Commission (CPUC). (See "Business of SCE --Regulation of SCE" below for a description of the regulation of SCE by the CPUC.) The CPUC decision authorizing SCE to reorganize into a holding company structure, however, contains certain conditions, which, among other things: ensure the CPUC access to books and records of Edison International and its affiliates which relate to transactions with SCE; require Edison International and its subsidiaries to employ accounting and other procedures and controls to ensure full review by the CPUC and to protect against subsidization of nonutility activities by SCE's customers; require that all transfers of market, technological, or similar data from SCE to Edison International or its affiliates, be made at market value; preclude SCE from guaranteeing any obligations of Edison International without prior written consent from the CPUC; provide for royalty payments to be paid by Edison International or its subsidiaries in connection with the transfer of product rights, patents, copyrights, or similar legal rights from SCE; and prevent Edison International and its subsidiaries from providing certain facilities and equipment to SCE except through competitive bidding. In addition, the decision provides that SCE shall maintain a balanced capital structure in accordance with prior CPUC decisions, that SCE's dividend policy shall continue to be established by SCE's Board of Directors as though SCE were a comparable stand-alone utility company, and that the capital requirements of SCE, as determined to be necessary to meet SCE's service obligations, shall be given first priority by the Boards of Directors of Edison International and SCE. On December 16, 1997, the CPUC adopted a decision which established new rules governing the relationship between California's natural gas local distribution companies, electric utilities, and certain of their affiliates. While SCE and its affiliates have been subject to affiliate transaction rules since the establishment of its holding company structure in 1988, these new rules are more detailed and restrictive. On December 31, 1997, SCE filed a preliminary compliance plan which set forth SCE's implementation of the new affiliate transaction rules. This preliminary compliance plan was supplemented by an additional filing made on January 30, 1998. In September 1998, the CPUC issued a Resolution accepting certain portions of SCE's compliance plan and rejecting others. SCE filed a revised compliance plan in October 1998 as ordered. No party protested that revised plan. The new affiliate transaction rules apply to all transactions by SCE with affiliates engaging in the production of products that use electricity or the providing of services that relate to the use of electricity. Edison International is not subject to these new affiliate transaction rules and continues to be subject to the prior rules. The new affiliate transaction rules are structured to address CPUC concerns regarding market power and cross-subsidization arising out of the new competitive electricity market in California. The new rules are categorized into nondiscrimination standards, disclosure and information standards, and separation standards. The new rules also set forth requirements and restrictions on the utility's offering of certain products and services. The CPUC has modified certain of the rules in response to petitions from various parties. SCE is still awaiting CPUC decisions on its compliance plan (which includes SCE's interpretation of the rule governing affiliate use of the utility's name and logo, on a petition for limited exemptions from that rule, and on SCE's filing relating to utility products and services that produce other operating revenue. The CPUC decision concerning the name and logo rule may affect the disposition of a pending complaint 2 against SCE filed by the CPUC's Office of Ratepayer Advocates (ORA) and The Utility Reform Network with the CPUC, which complaint alleges a violation of that rule by Edison Source in a bulk mailing in 1998. Environmental Matters Legislative and regulatory activities in the areas of air and water pollution, waste management, hazardous chemical use, noise abatement, land use, aesthetics, and nuclear control continue to result in the imposition of numerous restrictions on Edison International's operation of existing facilities, on the timing, cost, location, design, construction, and operation by Edison International of new facilities, and on the cost of mitigating the effect of past operations on the environment. These activities substantially affect future planning and will continue to require modifications of Edison International's existing facilities and operating procedures. Edison International is unable to predict the extent to which additional regulations may affect its operations and capital expenditure requirements. The Clean Air Act (CAA) provides the statutory framework to implement a program for achieving national ambient air quality standards in areas exceeding such standards and provides for maintenance of air quality in areas already meeting such standards. The CAA as amended in 1990, and as implemented within the South Coast Air Quality Management District (SCAQMD) and other California districts, required SCE to reduce emissions of oxides of nitrogen from its generating stations. During 1998, SCE sold all of its oil- and gas-fueled generating stations within the Mohave Desert Air Quality Management District, Ventura County Air Pollution Control District, and in the Santa Barbara County Air Pollution Control District. SCE has sold all but one of its oil- and gas-fired generating stations within the SCAQMD. The remaining plant, the Pebbly Beach Generating Station, supplies power to Santa Catalina Island. After the sale of its oil- and gas-fueled generating stations, SCE commenced operation of the facilities under operation and maintenance contracts with the individual owners except for two plants that ceased operation during 1998. SCE will continue to operate or, where applicable, commence operating those divested facilities as active generating stations for the required two-year period specified by California's restructuring statute implementing deregulation of electric utilities in the state. SCE's operation of the stations under these operation and maintenance contracts is at the direction and expense of the new owners. SCE is responsible for maintaining the environmental permits for the plants. The new owners, not SCE, are responsible for the purchase and installation of emissions control equipment, and for obtaining trading credits required for the plants under the Regional Clean Air Incentives Market within the SCAQMD. The CAA does not require any other significant emissions control expenditures that are identifiable at this time. The Environmental Protection Agency (EPA) plans to issue its final rulemaking regarding regional haze regulations in mid-1999. The EPA and SCE are also expected to conclude a cooperative tracer study of sulfur dioxide emissions from the Mohave Generating Station (Mohave) in early 1999. The study is currently evaluating potential impact from Mohave emissions on haze within the Grand Canyon National Park. On February 19, 1998, the Sierra Club and the Grand Canyon Trust filed suit in the U.S. District Court of Nevada against SCE and the other co-owners of Mohave alleging violations, over the last five years of the CAA, the Nevada State Implementation Plan, and applicable air quality permits relating to opacity and sulfur dioxide emission limits. (See, "Southern California Edison Company-Mohave Generating Station Environmental Litigation" below for additional discussion.) SCE has asked Business for Social Responsibility and Environment Now, two well respected organizations, to convene a collaborative of interested stakeholders to discuss the best way to resolve this issue. In anticipation of this dialogue, SCE has proposed to install a dry scrubber, baghouse, and low-NOx burners at Mohave by 2008. This proposal, however, is subject to discussion and modification as part of the collaborative. The acid rain provisions of the amended CAA also put an annual limit on sulfur dioxide emissions allowed from power plants. SCE has received more sulfur dioxide allowances than required for its projected operations. Until the collaborative process is completed and a firm requirement adopted, SCE expects to meet all of the present regulations through improved operations at Mohave. 3 The CAA also requires the EPA to carry out a three-year study of risk to public health from the emissions of toxic air contaminants from electric utility steam generating plants, and to regulate such emissions if required. The study's final report to Congress concluded that mercury from coal-fired utilities is the hazardous air pollutant of greatest potential concern and merits additional research and monitoring to better understand the risks of mercury exposure. Other pollutants that may potentially need further study are dioxins and arsenic from coal-fired plants, and nickel from oil- fired plants. The EPA concluded that the impacts from emissions from gas-fired utilities are negligible and that there is no need for further evaluation of the risks of hazardous air pollutants. Regulations under the Clean Water Act require permits for the discharge of certain pollutants into U.S. waters. Under this act, the EPA issues effluent limitation guidelines, pretreatment standards, and new source performance standards for the control of certain pollutants. Individual states may impose more stringent limitations. SCE incurs additional expenses and capital expenditures in order to comply with guidelines and standards applicable to steam electric power plants. SCE presently has discharge permits for all applicable facilities. The Safe Drinking Water and Toxic Enforcement Act prohibits the exposure to individuals of chemicals known to the State of California to cause cancer or reproductive harm and the discharge of such listed chemicals into potential sources of drinking water. Additional chemicals are continuously being put on the state's list, requiring constant monitoring. The Resource Conservation and Recovery Act (RCRA) provides the statutory authority for the EPA to implement a regulatory program for the safe treatment, recycling, storage, and disposal of solid and hazardous wastes. An unresolved issue remains regarding the degree to which coal wastes should be regulated under the RCRA. Increased regulation may result in increased expenses relating to the operation of Mohave. The Toxic Substances Control Act and accompanying regulations govern the manufacturing, processing, distribution in commerce, use, and disposal of polychlorinated biphenyls, a toxic substance used in certain electrical equipment. Current costs for disposal of this substance are immaterial. Edison International records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. Edison International reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operations and maintenance, monitoring, and site closure. Unless there is a probable amount, Edison International records the lower end of this reasonably likely range of costs (classified as other long-term liabilities at discounted amounts). Edison International's recorded estimated minimum liability to remediate its 49 identified sites is $171 million. The ultimate costs to clean up Edison International's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process, such as: the extent and nature of contamination; the scarcity of reliable data for identified sites; the varying costs of alternative cleanup methods; developments resulting from investigatory studies; the possibility of identifying additional sites; and the time periods over which site remediation is expected to occur. Edison International believes that, due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $247 million. The upper limit of this range of costs was estimated using assumptions least favorable to Edison International among a range of reasonably possible outcomes. SCE has sold all of its gas- and oil-fueled generation plants and has retained some liability associated with the divested properties. 4 The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $88 million of its recorded liability, through an incentive mechanism (SCE may ask to include additional sites). Under this mechanism, SCE will recover 90% of cleanup costs through customer rates (shareholders fund the remaining 10%), with the opportunity to recover these costs from insurance carriers and other third parties. SCE has successfully settled insurance claims with all responsible carriers. Costs incurred at SCE's remaining sites are expected to be recovered through customer rates. SCE has recorded a regulatory asset of $141 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. Edison International's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that Edison International may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can be made for these sites. Edison International expects to clean up its identified sites over a period of up to 30 years. Remediation costs in each of the next several years are expected to range from $4 million to $10 million. Recorded costs for 1998 were $7 million. Based on currently available information, Edison International believes that it is unlikely that it will incur amounts in excess of the upper limit of the estimated range and, based upon the CPUC's regulatory treatment of environmental-cleanup costs, Edison International believes that costs ultimately recorded will not materially affect its results of operations or its financial position. There is no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates. Edison International's projected environmental capital expenditures are $900 million for the 1999-2003 period. These expenditures are mainly for aesthetic treatment, including undergrounding certain transmission and distribution lines. Business of SCE SCE was incorporated in 1909 under the laws of the State of California. SCE 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 approximately 800 cities and communities and a population of more than 11 million people. SCE had 13,177 full-time employees at year-end 1998. During 1998, 31% of SCE's total operating revenue was derived from residential customers, 33% from commercial customers, 15% from sales to the power exchange (PX), 9% from industrial customers, 6% from public authorities, 5% from agricultural and other customers, and 1% from resale customers. SCE comprises the major portion of the assets and revenue of its parent holding company, Edison International. As previously discussed, SCE's regulatory environment is currently undergoing change. The following is a discussion of the changes affecting SCE in its transition to a new market structure. California Electric Utility Restructuring Restructuring Decision -- The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure; competition and customer choice began on April 1, 1998. Key elements of the CPUC's restructuring decision included: creation of the PX and Independent System Operator (ISO); availability of customer choice for electricity supply and certain billing and metering services; performance-based ratemaking (PBR) for those utility services not subject to competition; voluntary divestiture of at least 50% of utilities' gas-fueled generation; and implementation of the Competition Transition Charge (CTC). 5 Restructuring Statute -- In September 1996, the State of California enacted legislation, Assembly Bill 1890 (AB 1890), to provide a transition to a competitive market structure. The statute substantially adopted the CPUC's restructuring decision by addressing stranded-cost recovery for utilities and providing a certain cost-recovery time period for the transition costs associated with utility-owned generation-related assets. The statute mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Transition costs related to power-purchase contracts are being recovered through the terms of their contracts while most of the remaining transition costs will be recovered through 2001. SCE expects to be able to recover its revenue requirement during the 1998-2001 transition period. The statute also contained provisions for the recovery (through 2006) of reasonable employee-related transition costs, incurred and projected, for retraining, severance, early retirement, outplacement, and related expenses. Rate Reduction Notes -- In December 1997, after receiving approval from both the CPUC and the California Infrastructure and Economic Development Bank, a limited liability company created by SCE issued approximately $2.5 billion of rate reduction notes. Residential and small commercial customers, whose 10% rate reduction began January 1, 1998, are repaying the notes over the expected ten-year term through non-bypassable charges based on electricity consumption. There were originally seven classes of Notes. The first class, in the amount of $246.3 million, matured in December 1998. The remaining notes consist of six classes with maturities ranging from one to nine years, and bear interest ranging from 6.14% to 6.42%. On November 3, 1998, California voters rejected the voter initiative designated as Proposition 9. Approximately 73% of the total votes cast were voted against the proposition. Proposition 9 would have prohibited the collection of the non-bypassable charges for the payment of the rate reduction notes and would have severely restructured SCE's recovery of transition costs. 1998 Activities -- During 1998, SCE implemented changes to comply with the restructuring elements required by the CPUC and with the restructuring statute. Beginning January 1, 1998: o SCE's rates were unbundled into separate charges for energy, transmission, distribution, the CTC, public benefit programs, and nuclear decommissioning. The transmission component is being collected through FERC-approved rates, subject to refund. o SCE's costs associated with hydroelectric plants are being recovered through a performance-based mechanism. The mechanism sets the hydroelectric revenue requirements and establishes a formula for the duration of the electric industry restructuring transition period, or until market valuation of the hydroelectric facilities, whichever occurs first. The mechanism provides that power sales revenue from hydroelectric facilities in excess of the hydroelectric revenue requirement be credited against the costs of transition to a competitive market environment. o SCE's transition costs are being recovered through a non-bypassable CTC. This charge applies to all customers who were using or began using utility services on or after the CPUC's December 1995 restructuring decision date. SCE has estimated transition costs to be approximately $10.6 billion (1998 net present value) from 1998 through 2030. This estimate is based on incurred costs, forecasts of future costs, and assumed market prices. Changes in the assumed market prices could materially affect these estimates. Potential transition costs are comprised of $6.4 billion from SCE's qualifying facilities contracts, which resulted from prior legislative and regulatory mandates, and $4.2 billion (including the effects of the sale of SCE's gas- and oil- fueled generation plants) from costs pertaining to certain generating assets and regulatory commitments consisting of costs incurred (whose recovery has been deferred by the CPUC) from providing service to customers. Such commitments include the recovery of income tax benefits previously flowed through to customers, postretirement benefit transition costs, accelerated recovery of San Onofre Units 2 and 3 and the Palo Verde units, and certain other costs. The 6 issue was separated into two phases; Phase 1 addressed the rate-making issues and Phase 2 addressed the quantification issues. o Major elements of the CPUC's CTC Phase 1 and Phase 2 decisions were: the establishment of a transition cost balancing account and annual transition cost proceedings; the setting of a market rate forecast for 1998 transition costs; the requirement that generation-related regulatory assets be amortized ratably over a 48-month period; the establishment of calculation methodologies and procedures for SCE to collect its transition costs from 1998 through the end of the rate freeze; and the reduction of SCE's authorized rate of return on certain assets eligible for transition cost recovery (primarily fossil- and hydroelectric-generation related assets) beginning July 1997, five months earlier than anticipated. SCE has filed an application for rehearing on the 1997 rate of return issue. The CPUC recently issued a decision agreeing in part with Edison. Although a lower rate of return was applied to the hydro and fossil assets for the period July 28, 1997 through November 21, 1997, the return was set at 7.35% rather than the 7.22% that was adopted in the earlier decision. This increase will result in an additional $425,000 in earnings compared to the original decision. o Residential and small commercial customers who have begun receiving a 10% rate reduction are repaying the rate reduction notes issued in December 1997 through non-bypassable charges based on electricity consumption. (See "California Electric Utility Restructuring-Rate Reduction Notes" above for additional discussion.) Effective April 1, 1998: o The ISO assumed operational control of the transmission system on March 31, 1998, after the ISO and PX began accepting bids and schedules for electricity purchases. The restructuring implementation costs related to the start-up and development of the PX, which are paid by the utilities, will be recovered from all retail customers over the four-year transition period. SCE's share of the charge is $45 million, plus interest and fees. SCE's share of the ISO's start-up and development costs (approximately $16 million per year) will be paid over a ten-year period. o Customers can choose to purchase energy from new retailers called Electric Service Providers (ESPs). As of December 31, 1998, approximately 47,000 customers are purchasing their energy from ESPs. All other customers are purchasing energy from SCE, and SCE is in turn purchasing the energy it supplies to them from the PX. Regardless of whom the customers choose to supply their energy, SCE provides transmission and distribution services to all customers within its service territory. All customers of SCE transmission and distribution services also are paying the CTC, regardless of their choice of energy supplier. o Customers have options regarding metering, billing, and related services (referred to as revenue cycle services) provided by California's investor-owned utilities. ESPs can provide their customers with one consolidated bill for their services and the utility's services, request the utility to provide such a consolidated bill to the customer, or elect to have both the ESP and the utility bill for respective charges. Customers with maximum demand above 20 kWh (primarily industrial and medium and large commercial) can choose SCE or any other supplier to provide their metering service. Beginning in January 1999, all customers may make these choices. SCE may experience a reduction in revenue security as a result of this unbundling. o In September 1998, the CPUC issued a decision requiring SCE to provide credits beginning on January 1, 1999, to customers who elect to obtain revenue cycle services from an ESP. The credits are based on the net cost savings to SCE as a result of no longer providing these services. The CPUC, however, has also begun a proceeding to consider whether the RCS credits should be increased to reflect the prices likely to prevail in a competitive market for RCS services. If the CPUC adopts credits based on this premise, SCE has advocated that the 7 resulting difference between payments for the credits and costs actually avoided be recovered from all customers in a competitively neutral manner. During 1998, SCE sold all of its gas- and oil- fueled generation plants. The total sales price of the 12 plants was $1.2 billion, over $500 million more than the combined book value. Net proceeds of the sales were used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. Accounting for Generation-Related Assets -- If the CPUC's electric industry restructuring plan continues as described above, SCE would be allowed to recover its transition costs through non-bypassable charges to its distribution customers (although its investment in certain generation assets would be subject to a lower authorized rate of return). In 1997, SCE discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities based on new accounting guidance. The financial reporting effect of this discontinuance was to segregate these assets on the balance sheet; the new guidance did not require SCE to write off any of its generation-related assets, including related regulatory assets. However, the new guidance did not specifically address the application of asset impairment standards to these assets. SCE has retained these assets on its balance sheet because AB 1890 and the restructuring plan referred to above make probable their recovery through a non-bypassable CTC to distribution customers. The regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments and unamortized losses on reacquired debt. The new accounting guidance also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. During the second quarter of 1998, additional guidance was developed related to the application of asset impairment standards to these assets. Using this guidance resulted in SCE reducing its remaining nuclear plant investment by $2.6 billion (as of June 30, 1998) and recording a regulatory asset on its balance sheet for the same amount. For this impairment assessment, the fair value of the investment was calculated by discounting future net cash flows. This reclassification had no effect on SCE's results of operations. If during the transition period events were to occur that make the recovery of these generation-related regulatory assets no longer probable, SCE would be required to write off the remaining balance of such assets (approximately $2.4 billion, after tax, at December 31, 1998) as a one-time, non-cash charge against earnings. If events occur during the restructuring process that result in all or a portion of the transition costs being improbable of recovery, SCE could have additional write-offs associated with these costs if they are not recovered through another regulatory mechanism. At this time, SCE cannot predict what other revisions will ultimately be made during the restructuring process in subsequent proceedings or the effect, after the transition period, that competition will have on its results of operations or financial position. Transmission Owners Tariff and Wholesale Distribution Access Tariff -- On March 31, 1997, SCE filed a transmission owners tariff with the FERC, in conjunction with the ISO and PX tariffs, also filed on that date. Together, these tariffs set forth the rate design and terms and conditions for transmission service provided over SCE's facilities over which the ISO will have operational control. The transmission owners tariff also sets forth SCE's proposed transmission access charge. Additionally, on March 31, 1997, SCE filed a wholesale distribution access tariff. The FERC accepted the tariffs for filing, subject to refund, effective April 1, 1998. 8 Regulation of SCE SCE's retail operations are subject to regulation by the CPUC. The CPUC has the authority to regulate, among other things, retail rates, issuances of securities, and accounting practices. SCE's wholesale operations are subject to regulation by the FERC. The FERC has the authority to regulate wholesale rates as well as other matters, including transmission service pricing, accounting practices, and licensing of hydroelectric projects. SCE is subject to the jurisdiction of the Nuclear Regulatory Commission (NRC) with respect to its nuclear power plants. NRC regulations govern the granting of licenses for the construction and operation of nuclear power plants and subject those power plants to continuing review and regulation. The construction, planning, and siting of SCE's power plants within California are subject to the jurisdiction of the California Energy Commission and the CPUC. SCE is subject to the rules and regulations of the California Air Resources Board and local air pollution control districts with respect to the emission of pollutants into the atmosphere; the regulatory requirements of the California State Water Resources Control Board and regional boards with respect to the discharge of pollutants into waters of the state; and the requirements of the California Department of Toxic Substances Control with respect to handling and disposal of hazardous materials and wastes. SCE is also subject to regulation by the EPA, which administers certain federal statutes relating to environmental matters. Other federal, state, and local laws and regulations relating to environmental protection, land use, and water rights also affect SCE. The California Coastal Commission has continuing jurisdiction over the coastal permit for San Onofre Units 2 and 3. Although the units are operating, the permit's mitigation requirements have not yet been fulfilled. California Coastal Commission jurisdiction may continue for several years due to implementation and oversight of permit mitigation conditions, including restoration of wetlands and construction of an artificial reef for kelp. The Department of Energy (DOE) has regulatory authority over certain aspects of SCE's operations and business relating to energy conservation, solar energy development, power plant fuel use and disposal, coal conversion, electric sales for export, public utility regulatory policy, and natural gas pricing. Rate Matters CPUC Retail Ratemaking The CPUC regulates the charges for services provided by SCE to its retail customers. As discussed above in the section on California Electric Utility Restructuring, the nature in which the CPUC regulates SCE is changing. The CPUC has issued final decisions regarding direct access, transition cost recovery, and rate unbundling in the restructuring of the electric industry. In 1998, these decisions affected cost recovery and rate regulation, and authorized new ratemaking mechanisms which were implemented, replacing the Electric Revenue Adjustment Mechanism, Energy Cost Adjustment Clause (ECAC) and base rates mechanism (collectively, the "pre-restructuring ratemaking mechanisms") described in prior annual and quarterly reports filed with the SEC. Total rates for all customers are frozen at June 10, 1996 levels, although residential and small commercial customers have received a 10% reduction from the June 10, 1996 rate levels beginning on January 1, 1998. These rate levels will remain in effect for the remainder of the transition period. Under these frozen rates, individual rate components (distribution, transmission, nuclear decommissioning, and public purpose programs) are determined according to CPUC or FERC authorized mechanisms, with the generation rate determined residually by subtracting these other components from the total rate. Beginning for rates effective in 1999, the consolidation of the individual rate component changes and the calculation of the residual generation rate are set forth for CPUC approval as part of the Revenue 9 Adjustment Proceeding (RAP). On June 1, 1998, SCE filed its first annual RAP Report in compliance with Commission directives to: 1) consolidate authorized rates and revenue requirements associated with various proceedings and mechanisms; 2) verify the residual CTC revenue calculation in the Transition Revenue Account; 3) verify the regulatory account balances which were transferred to the TCBA on January 1, 1998; 4) streamline certain balancing and memorandum accounts; and 5) review the PX charge/credit calculation. SCE anticipates a final 1998 RAP decision in the second quarter of 1999. The CPUC is considering unbundling SCE's cost of capital based on major utility functions. In May 1998, SCE filed an application on this issue and hearings were completed in October 1998. A CPUC decision is expected in early to mid 1999. Distribution Rates Distribution cost recovery is made through a distribution PBR mechanism currently authorized through December 2001. Key elements of the distribution PBR include: distribution rates indexed for inflation based on the Consumer Price Index less a productivity factor; adjustments for cost changes that are not within SCE's control; a cost of capital trigger mechanism based on changes in a bond index; standards for service reliability and safety; and a net revenue-sharing mechanism that determines how customers and shareholders will share gains and losses from distribution operations. (See "California Electric Utility Restructuring-1998 Activities" above for additional discussion.) Transmission Rates With the commencement of the ISO and PX on March 31, 1998, transmission cost recovery is now under FERC authority. Prior to such commencement, transmission cost recovery was combined with distribution cost recovery through a transmission and distribution PBR mechanism. Nuclear Decommissioning and Public Purpose Program Rates Recovery of SCE's nuclear decommissioning costs and legislatively mandated public purpose program funding is made through rates set to recover 100% of these costs. Public purpose programs include cost effective energy efficiency, research, renewable technology development, and low income programs. Generation Rates Effective with the commencement of the ISO and PX operations, generation costs are subject to recovery through the market price and the CTC. Revenue available to recover the uneconomic generation costs subject to recovery through the CTC will be determined residually by subtracting the other rate components from the total rates. This residual revenue will first be allocated to recovery of FERC-authorized ISO charges for transmission support and for purchases from the PX, and then to recovery of transition costs. Transition costs associated with QF (Qualifying Facilities) and interutility contracts and the acceleration of sunk cost recovery will be subject to annual reasonableness review by the CPUC. Transition cost recovery for most utility generation assets will terminate on the earlier of March 31, 2002, or when these costs are fully collected. (See "California Electric Utility Restructuring-1998 Activities" above for additional discussion.) Annual Transition Cost Proceeding (ATCP) In 1997, the CPUC established the ATCP as the proceeding to determine whether SCE's Transition Cost Balancing Account (TCBA) entries are recorded pursuant to applicable CPUC decisions and AB 1890, and that certain expenses are justified. This proceeding includes matters that for periods prior to 10 July 1, 1998, were considered by the CPUC pursuant to ECAC proceedings. (See "Annual Energy Cost Adjustment Clause Proceedings" below for additional discussion.) On September 1, 1998, SCE filed its first ATCP Report with the CPUC and requested that entries made to the TCBA and applicable generation-related memorandum accounts during the record period of January 1, 1998 through June 30, 1998 be found to be justified and in compliance with applicable Commission decisions and AB 1890. In addition, SCE requested the Commission to find for the record period that SCE's: 1) purchased power contract administration is justified; 2) coal contract costs are justified; 3) gas fuel procurement and management activities are justified; 4) recorded employee-related costs are justified; 5) proposal for retaining or eliminating generation-related balancing and memorandum accounts is justified; and 6) jurisdictional allocation of transition costs and other generation-related costs should be based upon recorded kWh. SCE anticipates a final 1998 ATCP decision in December, 1999. Recovery of Restructuring Implementation Costs The legislature, recognizing that costs accommodating the implementation of direct access, the ISO, and the PX would have to be recovered from within the rates that were frozen at June 1996 levels by other provisions of AB 1890, provided a mechanism to insure that such recovery could occur without impairing the utilities' ability to recover their stranded costs from within frozen rates. This mechanism is contained in Section 376 of the Public Utilities Code. In May 1998, Edison filed an application with the CPUC to identify the categories of costs which satisfy the conditions of Section 376, and to establish the reasonableness of those costs incurred in 1997. The CPUC split the application into two phases. Evidentiary hearings on Phase 1, which addressed the eligibility of cost categories for recovery pursuant to Section 376, concluded in November 1998. A proposed decision on Phase 1 was issued by the administrative law judge (ALJ) on March 11, 1999, accompanied by an alternate decision drafted by the assigned commissioner in the proceeding. The alternate decision differs in only minor respects from that of the ALJ. Neither of these decisions is binding on any party until acted upon by the full CPUC, which may adopt one or the other of these proposed decisions, modify them, or issue an entirely new decision. Both of these proposed decisions reject SCE's request for a determination of eligibility under Section 376 for several major categories of costs. These proposed decisions further state that even for the cost categories they approve for Section 376 eligibility, costs incurred in those categories after December 31, 1998 would not be eligible. Instead, these proposed decisions would have SCE recover many of the costs identified in its application from "market revenues," although the decisions fail to identify that market and no specific mechanism or authority to recover such costs from any market has yet been established. SCE disagrees with much of the conclusions reached in these proposed decisions and will file comments to that effect. A final decision from the CPUC is currently scheduled for April 22, 1999, but may be delayed beyond that date. Under both of the proposed decisions, the reasonableness of 1997 and 1998 expenditures for eligible costs under Section 376 would be addressed in a separate application later this year. Annual Energy Cost Adjustment Clause Proceedings Ending in 1998, SCE filed ECAC applications each year with the CPUC regarding its fuel and purchased power expenses, seeking the CPUC's determination that SCE's fuel and purchased power costs, including payments to QFs, were reasonable. These matters are respectively referred to herein as "non-QF matters" and "QF matters." QF MATTERS In a decision issued in September 1998, the CPUC found SCE's administration of QF contracts and payments to QF projects (hereinafter referred to as "SCE's QF activities") for the 1992 ECAC to be reasonable. Review of purchases from three QF projects were deferred because of a pending civil proceeding. The 1992 ECAC was closed, subject to a petition to reopen or modify the decision regarding the deferred QF projects. 11 The 1993 through 1997 ECAC applications were consolidated for purposes of reviewing QF activities for these years. ORA issued its review in two different reports in 1998. ORA contested only the reasonableness of SCE's administration of one QF contract known as the Arbutus project. ORA claimed $3.6 million should be disallowed from recovery. On January 21, 1999 an administrative law judge (ALJ) issued a decision finding SCE's actions with respect to the administration of the Arbutus contract to be reasonable. The ALJ also confirmed a disallowance of $16.3 million related to the Mojave Cogeneration Company project for the years 1992 through 1997. On March 4, 1999, the CPUC issued its decision, upholding the recommendations of the ALJ. Accordingly, SCE will credit its Electric Deferred Refund Account (EDRA) in the amount of $16.3 million, plus applicable interest, within 30 calendar days after the effective date of the decision. Any recovery SCE receives from the Arbutus bankruptcy proceeding will be credited to SCE's Transition Cost Balance Account. This decision closes the 1993, 1994, 1995, 1996, and 1997 Applications, subject to being reopened for the limited purpose of considering issues related to the three projects deferred from the 1992 ECAC proceeding. ORA issued its report on the 1998 ECAC period on February 19, 1999. ORA did not identify any reasonableness issues associated with SCE's QF activities during the 1998 period. NON-QF MATTERS 1994 Annual ECAC Record Period SCE filed its non-QF Reasonableness of Operations Report on May 27, 1994 for the period April 1, 1993 through March 31, 1994. This report addresses power purchases and exchanges, and the operation of hydroelectric, coal, gas, and nuclear resources. The non-QF issues were bifurcated, with the gas procurement issues being separated from other non-QF issues. On August 2, 1996, the CPUC issued a decision finding that SCE's non-QF, non-gas procurement activities were reasonable. ORA recommended a $13.3 million disallowance for costs incurred from November 1993 through March 1994 associated with SCE's Canadian gas supply and transportation contracts. On October 17, 1996, the ALJ granted ORA's motion to consolidate the 1994 and 1995 record periods for the limited purpose of addressing the gas reasonableness issues. On July 11, 1997, ORA and SCE executed a Settlement Agreement. The basic elements of the settlement include: 1) a $39 million disallowance for Canadian gas costs incurred through December 31, 1996; 2) a disallowance of $257,000 per month, per contract, for each of SCE's four supply contracts for Canadian gas costs beginning after January 1, 1997, and continuing until each of the commodity contracts are terminated (one supply agreement was terminated on May 1, 1997, and the remaining three supply agreements were terminated on July 1, 1997); 3) a cost sharing mechanism in lieu of reasonableness review, whereby shareholders would absorb at least 20% of the termination or restructuring costs associated with the Canadian supply and transportation contracts and at least 5% of the termination or restructuring costs associated with the El Paso transportation contract which the CPUC has already found reasonable (a portion of these termination or restructuring costs associated with the cost sharing mechanisms would be flowed through to ratepayers through the Energy Deferred Refund Account); and 4) agreement that all other costs incurred under these contracts, including the termination, buy-down and/or buy-out costs are reasonable and should be determined to be reasonable by the CPUC. On December 3, 1997, the CPUC issued a decision approving the settlement between SCE and ORA. On March 12, 1998, the CPUC approved an advice letter ordering SCE to refund $65 million covering all settlement costs for the 1994, 1995, 1996, and 1997 ECAC record periods. The settlement has been fully reflected in SCE's financial statements. 12 1995 Annual ECAC Record Period SCE filed its reasonableness of operations testimony on May 26, 1996 for the period April 1, 1994 through March 31, 1995 addressing power purchases and exchanges, and the operation of hydroelectric, coal, gas, and nuclear resources for the period April 1, 1994, through March 31, 1995. In May 1996, ORA issued its reasonableness report on several non-QF reasonableness issues. The report recommended a $6.6 million disallowance for replacement fuel expenses associated with 64 outage days due to the Palo Verde Unit 2 steam generator tube rupture in 1993, and for nuclear fuel expenses that were later withdrawn by ORA. SCE and ORA executed a stipulation on December 18, 1997, subsequently approved by the CPUC on February 19, 1998, resolving the Palo Verde issue by agreeing to a disallowance of $318,540 plus interest which is the replacement fuel expense associated with six outage days. 1997 Annual ECAC Record Period On May 30, 1997, SCE filed its annual reasonableness report requesting that the CPUC find reasonable its fuel and purchased-power costs recorded during the period of April 1, 1996, through March 31, 1997. ORA's review of the non-QF operations and costs has been consolidated with its review of the non-QF operations and costs for the 1996 ECAC record period. ORA filed its report on August 18, 1997. In its report, ORA recommended, among other things: 1) a disallowance of $360,000 associated with an outage at the coal-fired Four Corners Generating Station; 2) a $200,000 adjustment to the costs recorded in SCE's Catastrophic Events Memorandum Account, and 3) a recommendation that SCE's execution of its natural gas transportation contract with Southwest Gas Corporation be found unreasonable for purposes of CTC eligibility. The January 1998 hearings resulted in a CPUC decision issued on October 22, 1998, adopting the proposed disallowances. The decision found the execution of the Southwest Gas contract reasonable and therefore, any uneconomic costs associated with the contract will be subject to CTC recovery. The remainder of SCE's non-QF costs and expenses were also found reasonable. On December 21, 1998, SCE filed a petition for modification of the above decision alleging that it erroneously stated that SCE may seek recovery of its Nuclear Unit Incentive Procedure (NUIP) rewards in the Revenue Allocation Proceeding. The CPUC found that SCE's calculation of the NUIP reward was reasonable and it was an error for the Commission to order another reasonableness review of these rewards which totaled $15,238,778 plus interest. The February 18, 1999, CPUC decision granted SCE's petition to modify the 1998 decision and authorized the booking of the NUIP rewards into the TCBA. 1998 Annual ECAC Record Period On February 19, 1999, ORA issued its Reasonableness Report and made the following recommendations. ORA found that SCE's costs ($239.1 million) recorded in the ISO/PX Implementation Delay Memorandum Account (IPDMA) properly reflected the ISO/PX expenses that accrued during the three month delay in the commencement of ISO/PX operations. ORA also required SCE to include a showing that it undertook all practicable steps to minimize the delay with its request for the recovery of IPDMA costs. ORA found no evidence to show that SCE caused a delay in the ISO/PX implementation. ORA found that SCE had correctly calculated its NUIP rewards for Palo Verde Units 2 and 3. The NUIP rewards calculated for Unit 2 and 3 were $2.5 million and $1.6 million, respectively. ORA recommended two coal generation related disallowances seeking replacement fuel costs based on December 1997 outages of Mojave Units 1 and 2 in the amount of $2.4 million, and a $1.6 million disallowance related to an outage at Four Corners Unit 5. ORA also recommended disallowances totaling $5.6 million plus interest, to correct for audit errors. SCE is investigating the facts behind these recommended disallowances recommendations and expects to file rebuttal testimony on April 26, 1999. Hearings are scheduled in May 1999. 13 Palo Verde In January 1997, the CPUC authorized a further acceleration of the recovery of SCE's remaining investment of $1.2 billion in Palo Verde Units 1, 2, and 3. The accelerated recovery will continue through December 2001, earning a 7.35% fixed rate of return. The future operating costs, including nuclear fuel and nuclear fuel financing costs, and incremental capital expenditures, are subject to balancing account treatment through 2001. Beginning January 1, 1998, the balancing account became part of the CTC mechanism. The existing nuclear unit incentive procedure will continue only for purposes of calculating a reward for performance of any unit above an 80% capacity factor for a fuel cycle. Beginning in 2002, SCE will be required to share the net benefits received from the operation of Palo Verde equally with ratepayers. San Onofre Nuclear Generating Station Units 2 and 3 In April 1996, the CPUC authorized a further acceleration of the recovery of SCE's remaining investment of $2.6 billion in San Onofre Units 2 and 3. The accelerated recovery will continue through December 2001, earning a 7.35% fixed rate of return. San Onofre's operating costs, including nuclear fuel, nuclear fuel financing costs, and incremental capital expenditures, are recovered through an incentive pricing plan which allows SCE to receive about 4.0(cent) per kWh through December 31, 2003. Beginning January 1, 1998, the accelerated plant recovery and incremental cost incentive pricing became part of the CTC mechanism. Beginning in 2004, SCE will be required to share the net benefits received from operation of San Onofre Units 2 and 3 equally with ratepayers. New Accounting Rules A recently issued accounting rule requires that costs related to start-up activities be expensed as incurred, effective January 1, 1999. Edison International does not expect this new accounting rule to materially affect its results of operations or its financial position. In June 1998, a new accounting standard for derivative instruments and hedging activities was issued. The new standard, which will be effective January 1, 2000, requires all derivatives to be recognized on the balance sheet at fair value. Gains or losses from changes in fair value would be recognized in earnings in the period of change unless the derivative is designated as a hedging instrument. Gains or losses from hedges of a forecasted transaction or foreign currency exposure would be reflected in other comprehensive income. Gains or losses from hedges of a recognized asset or liability, or a firm commitment would be reflected in earnings for the ineffective portion of the hedge. SCE anticipates that most of its derivatives under the new standard would qualify for hedge accounting. SCE expects to recover in rates any market price changes from its derivatives that could potentially affect earnings. Accordingly, implementation of this new standard is not expected to affect earnings. Fuel Supply and Purchased Power Costs Since April 1, 1998, SCE has been required to purchase all power for distribution to retail customers from the PX. In 1998, fuel and purchased-power costs, excluding that purchased from the PX, were approximately $3.1 billion, which was a 20% decrease from the costs in 1997. SCE's sources of energy during 1998 were as follows: 54% purchased power; 4% natural gas; 22% nuclear; 13% coal; and 7% hydro. Average fuel costs, expressed in (cent) per kWh, for the year ended December 31, 1998, were: oil, 6.03(cent); natural gas, 3.06(cent); nuclear, 0.48(cent); and coal, 1.23(cent). 14 Natural Gas Supply As a result of the sale of all of its gas-fired generating stations, SCE has terminated four long-term natural gas supply and three long-term gas transportation contracts which had been used to import gas from Canada. In addition, SCE has exercised an option under its 15-year gas transportation commitment with El Paso Natural Gas Company to reduce its capacity obligation from 200 million to 130 million cubic feet per day. Nuclear Fuel Supply SCE has contractual arrangements covering 100% of the projected nuclear fuel requirements for San Onofre through the years indicated below: Uranium concentrates(*).......................................... 2003 Conversion.................................................. 2003 Enrichment.................................................. 2003 Fabrication................................................. 2005 - --------------- (*) Assumes the San Onofre participants meet their supply obligations in a timely manner. Assuming normal operation and full utilization of existing on-site storage capacity, San Onofre Units 2 and 3 will maintain full-core offload reserve through 2005. The Nuclear Waste Policy Act of 1982 requires that the DOE provide for the disposal of utility spent nuclear fuel beginning January 31, 1998. The DOE has defaulted on its obligation to begin acceptance of spent nuclear fuel from the commercial nuclear industry by that date. Additional spent fuel storage either on-site or at another location will be required to permit continued operations beyond 2005. Participants at Palo Verde have contractual agreements for uranium concentrates to meet projected requirements through 2000. Independent of arrangements made by other participants, SCE will furnish its share of uranium concentrates requirement through at least 1999 from existing contracts. Contracts covering 100% requirements are in place for conversion through 1998, enrichment through 2002, and fabrication through 2016. Assuming normal operation and regulatory approval for more condensed on-site spent fuel storage, Palo Verde Units 1, 2, and 3 will maintain full-core offload reserve until the spring of 2002, fall of 2002, and spring of 2003, respectively. Arizona Public Service, operating agent for Palo Verde, has commenced construction of an interim fuel storage facility that it projects will be completed in 2002. Year 2000 Issue Many of SCE's existing computer systems identify a date by using only six digits instead of eight. If not appropriately addressed, these programs could fail or create erroneous results when attempting to process information containing dates after December 31, 1999. This situation has been referred to generally as the Year 2000 Issue. SCE has a comprehensive program in place to address potential Year 2000 impacts. SCE divides Year 2000 activities into five phases: inventory, impact assessment, remediation, testing, and implementation. Edison International provides overall coordination of this effort, working with SCE, the Nonutility Companies, and their business units. Remediation of SCE's key financial systems for the Year 2000 Issue was completed in 1997. SCE's informational and operational systems have been assessed, and detailed plans have been developed to address modifications required to be completed, tested, and operational by December 31, 1999. Year 2000 readiness preparations for SCE's mainframe financial systems were completed in the fourth quarter 15 of 1997, and preparations for SCE's material management system were completed in the second quarter of 1998. SCE's customer information and billing system is in the process of being replaced with a system designed to be Year 2000-ready and final conversion activities are expected to be completed by the first quarter of 1999. SCE's distributed computing assets include operations and business information systems. SCE's critical operations information systems include outage management, power management, and plant monitoring and access retrieval systems. SCE's business information systems include a data acquisition system for billing, the computer call center support system, credit support, and maintenance management. SCE's current estimate of the costs to complete these modifications, including the cost of new hardware and software application modification, is $72 million, about 40% of which is expected to be capital costs. SCE's Year 2000 costs expended through December 31, 1998, were $35 million. SCE expects current rate levels for providing electric service to be sufficient to provide funding for utility-related modifications. SCE expects its Year 2000 date conversion project to be completed on a timely basis, with no material adverse impact to its results of operations or financial position. Another aspect of SCE's program involves developing contingency plans. Final drafts of such plans are expected to be completed by March 1999, with management approval thereof scheduled for May 1, 1999. These plans will continue to be revised and enhanced as the year 2000 approaches. SCE's objectives for the Year 2000 readiness of critical systems was to be 75% complete by year-end 1998, and to be 100% complete by July 1999. SCE was 80% complete at year-end 1998 and is on track to meet its July 1999 goal. SCE's Year 2000 date conversion project includes an assessment of critical interfaces with the computer systems of others, and it does not expect a material adverse effect on its operating and business functions from the Year 2000 Issue. (See item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition -- "Year 2000 Issue" below for additional discussion.) Business of The Nonutility Companies The activities of the Nonutility Companies are described below. For Edison International's business segment information for each of the years ended December 31, 1998, 1997, and 1996, see Note 12 of Notes to Consolidated Financial Statements contained in Edison International's 1998 Annual Report to Shareholders incorporated by reference in this report. Edison Mission Energy: EME, primarily through its subsidiary corporations, is engaged in the business of developing, acquiring, owning, and operating electric power generation facilities worldwide. As of December 31, 1998, EME subsidiaries held interests in 24 domestic and 24 international operating power production facilities with an aggregate power production capability of 7,363 MW, of which 5,153 MW are attributable to EME's interests. These operating facilities are located in California, Florida, Nevada, New Jersey, New York, Virginia, Washington, West Virginia, Australia, Spain, and the United Kingdom. In addition, facilities aggregating more than 3,162 MW, of which EME's anticipated share is approximately 1,884 MW, are in the construction stage. EME also has a pending acquisition of a 100% interest in a 1,884 MW facility. EME owns interests in oil and gas producing operations and related facilities in various U.S. locations. EME's activity in the Asia Pacific region commenced in December 1992 with the acquisition of a 51% interest of the 1,000-MW Loy Yang B Power Station (Loy Yang B) from the State Government of Victoria (State), Australia's first electric privatization effort. In May 1997, a subsidiary of EME acquired the State's 49% interest in Loy Yang B. The first of two 500 MW units at Loy Yang B began commercial operations in October 1993. Unit 2 commenced commercial operations in October 1996. An EME affiliate provides operations and maintenance services for both units. 16 In April 1995, EME and its partners, Mitsui & Co. Ltd., General Electric Corporation and P.T. Batu Hitam Perkasa, an Indonesian limited liability company, commenced construction of the $2.5 billion Paiton project, a 1,230 MW coal-fired power plant in East Java, Indonesia. The project will consist of two units, each of which is expected to have a capacity of 615 MW, with commercial operation expected in 1999. In January 1996, EME purchased an additional 7.5% interest in the Paiton project from General Electric Corporation, thereby increasing its ownership interest to 40%. Construction on the two-unit Paiton project is nearing completion with commercial operation expected in 1999. The tariff is higher in the early years and steps down over time. The tariff for the Paiton project includes infrastructure to be used in common by other units at the Paiton complex. The plant's output is fully contracted with the state-owned electricity company, PT Perusahaan Listrik Negara (PLN). Payments are in Indonesian Rupiah, with the portion of such payments intended to cover non-Rupiah project costs (including returns to investors) indexed to the Indonesian Rupiah/U.S. dollar exchange rate established at the time of the Power Purchase Agreement in February 1994. PLN's payment obligations are supported by the Government of Indonesia. The projected rate of growth of the Indonesian economy and the exchange rate of Indonesian Rupiah into U.S. dollars have deteriorated significantly since the Paiton project was contracted, approved and financed. The project received substantial finance and insurance support from the Export-Import Bank of the United States, The Export-Import Bank of Japan, the U.S. Overseas Private Investment Corporation and the Ministry of International Trade and Industry of Japan. The Paiton project's senior debt ratings have been reduced from investment grade to speculative grade based on the rating agencies' perceived increased risk that PLN might not be able to honor the electricity sales contract with Paiton. The Government of Indonesia has arranged to reschedule sovereign debt owed to foreign governments and has entered into discussions about rescheduling sovereign debt owed to private lenders. PLN has recently announced its intentions to commence discussions with independent power producers to renegotiate the power supply contracts, however it is not yet known what form the negotiation may take. Any material modifications of the contract could also require a renegotiation of the Paiton project's debt agreement. The impact of any such renegotiations with PLN, Government of Indonesia or the project's creditors on EME's expected return on its investment in Paiton is uncertain at this time, however, management believes that it will ultimately recover its investment in the project. Kwinana is a $108 million, 116 MW gas-fired cogeneration project located at the British Petroleum Kwinana refinery near Perth, Australia. The project, which is 100% owned by EME, began commercial operations in December 1996. The project supplies electricity to Western Power (formerly the State Electricity Commission of Western Australia) and both electricity and steam to the British Petroleum Kwinana refinery. In July 1998, EME, through its indirect, wholly-owned subsidiary, purchased a 25% interest in Tri-Energy, a 700 MW gas-fired power plant under construction in the Ratchaburi Province, Thailand. Commercial operation is expected in mid 2000. EME's operating projects in the European region are the First Hydro project located in North Wales, the Roosecote project in northwest England, the Derwent project located in Derby, England and the Iberian Hy-Power projects (which consist of 18 small, hydroelectric facilities) in Spain. Iberian Hy-Power I was acquired in December 1992, and Iberian Hy-Power II was acquired in August 1993. In January 1996, EME purchased the remaining equity stake in Iberian Hy-Power Amsterdam, B.V., increasing its ownership percentage to approximately 100% (minority interests are owned in three of the projects by third parties). In December 1995, EME purchased all of the outstanding shares of First Hydro Company (First Hydro) for approximately $1 billion (653 million pounds sterling). First Hydro's principal assets are two pumped-storage electric power stations located in North Wales at Dinorwig and Ffestiniog, which have a combined capacity of 2,088 MW. The Dinorwig station, which was commissioned in 1983, comprises six units 17 totaling 1,728 MW. The Ffestiniog station was commissioned in 1963 and comprises four units totaling 360 MW. First Hydro is an independent generating company with three main sources of revenue: (i) selling power into the electricity trading market or "pool" in England and Wales, (ii) providing system support services to The National Grid Company Plc, and (iii) selling its installed capacity forward by entering into "contracts for differences" with large electricity suppliers. In June 1995, EME (49% ownership) and its partner, ISAB S.P.a. (51% ownership), signed a 20-year power purchase contract with ENEL S.P.a., Italy's state electricity corporation, pursuant to which ENEL S.P.a. will purchase 507 MW of output from the 512-MW ISAB power project, which is located near Siracusa in Sicily, Italy. The project will employ gasification technology to convert heavy oil residues from the ISAB refinery in Priolo Gargallo into clean-burning syngas that will be used to generate electricity in a combustion turbine. The approximately two trillion Italian lira (U.S. $1.3 billion) project financial closing was completed in April 1996, with construction commencing in July 1996. Commercial operation is expected in late 1999. In February 1995, EME (80% ownership) signed a shareholders agreement to develop the $180 million Doga Enerji A.S. project in Esenyurt, near Istanbul, Turkey. The 180 MW combined-cycle, gas-fired cogeneration facility is expected to commence commercial operations in 1999. In April 1997, EME completed financing and commenced construction of the Doga project. Commercial operation is expected in April 1999. On August 2, 1998, EME entered into agreements to acquire the 1,884-MW Homer City Generating Station, one of the largest coal-fired generating plants in the mid-Atlantic region of the United States, for approximately $1.8 billion. Homer City is jointly owned by subsidiaries of GPU, Inc. and New York State Electric & Gas Corporation. The coal-fired facility has the rights to direct, high voltage interconnections to both the New York Power Pool and the Pennsylvania-New Jersey-Maryland Power Pool. The plant is located approximately 45 miles northeast of Pittsburgh, Pennsylvania. EME will operate the plant, which is one of the lowest-cost generation facilities in the region. The closing of the Homer City transaction is subject to receipt of regulatory approvals and is expected to be completed by the end of the first quarter of 1999. Most of the necessary state and federal regulatory approvals have been obtained. EME plans to finance the acquisition with a combination of debt secured by the project, EME's corporate debt, and cash. On December 31, 1998, EME had total consolidated assets of over $5 billion, consolidated operating revenue of $894 million, and consolidated net income of $132 million. In December 1998, EME del Caribe, an indirect, wholly-owned subsidiary of EME, acquired 50% of the 540-MW EcoElectrica liquefied natural gas (LNG) cogeneration facility under construction in Penuelas, Puerto Rico for approximately $243 million. The project also includes a desalination plant and LNG storage and vaporization facilities and is expected to begin commercial operation by late 1999. Currently, most of EME's domestic operating power production facilities have QF status under the Public Utility Regulatory Policies Act (PURPA) and the regulations promulgated thereunder. QF status exempts the projects from the application of the Holding Company Act, many provisions of the Federal Power Act, and state laws and regulations respecting rates and financial or organizational regulation of electric utilities. EME, through wholly owned subsidiaries, also has ownership interests in five operating power projects that have received exempt wholesale generator status as defined in the Holding Company Act. In addition, some EME subsidiaries have made fuel-related investments and a limited number of non-energy related investments. While QF status entitles projects to the benefits of PURPA, each project must still comply with other federal, state, and local laws, including those regarding siting, construction, operation, licensing, and pollution abatement. 18 EME competes with many other companies, including multinational development groups, equipment suppliers, and other independent power producers (including affiliates of utilities), in selling electric power and steam, and with electric utilities in obtaining the right to install new generating capacity. Over the past decade, obtaining a power sales contract with a utility has generally become a progressively more difficult, expensive, and competitive process. Many power sales contracts are now awarded by competitive bidding, which both increases the costs of obtaining such contracts and decreases the chances of obtaining such contracts. As a result of competition, it may be difficult to obtain a power sales agreement for a proposed project, and the prices offered in new power sales agreements for both electric capacity and energy may be less than the prices in prior agreements. EME evaluates each potential project in an effort to determine when the probability of success is high enough to justify expenditures in developing a proposal or bid for the project. Amendments to the Holding Company Act made by the Energy Policy Act have increased the number of competitors in the domestic independent power industry by reducing certain restrictions applicable to projects that are not QFs under PURPA. The offering of unbundled retail distribution service in certain states, through legislation or regulatory order, could also lead to increased competition in the independent power market. Year 2000 Issue -- EME, like SCE and the other Nonutility Companies, has a comprehensive program in place, provided overall coordination by Edison International, to address potential Year 2000 Impacts. (See "Business of SCE -- Year 2000 Issue" above for a description of this program.) EME has essentially completed all phases of the project (inventory, impact assessment, remediation, testing, and implementation) and is going through the final review and approval process. Edison Capital: Edison Capital is a provider of capital and financial services in energy and infrastructure projects, including power generation, electric transmission and distribution, transportation, telecommunications, and affordable housing. Since its formation in 1987, Edison Capital has participated in approximately $18 billion in transactions. On December 31, 1998, Edison Capital had total consolidated assets of $2.3 billion and, for the year then ended, consolidated revenue of $235 million and net income of $105.3 million. Edison Capital has an A-credit rating from Standard & Poor's and, in 1998, Edison Capital received credit-rating upgrades to A- from Duff & Phelps and to A3 from Moody's. During 1998, Edison Capital closed investments in the aggregate amount of $616 million, an 18% increase over 1997 and over seven times the average annual level of investment for 1987 through 1996. In energy/infrastructure projects, Edison Capital has invested an aggregate amount of $1.7 billion, which comprises 74% of its assets. In 1998, Edison Capital increased its energy/infrastructure investments in the amount of $515 million and the company has forward commitments to invest another $212 million in projects located around the world. Latin America -- In 1997, Edison Capital made a commitment to invest $80 million through the $1 billion AID/GE Capital Latin American Infrastructure Fund. Edison Capital actively participates on the investment committee of the fund which reviews each potential investment. In 1998, Edison Capital closed investments in a variety of regional infrastructure projects in 1998. To date Edison Capital has funded $23 million in 13 projects through the fund and directly invested an additional $9 million in two of those projects. The company also committed $40 million to the Lyonnaise Latin American Water corporation (LYLAW), a $155 million joint venture company formed to invest in Latin American water production, treatment, and distribution projects. LYLAW is a joint venture of Suez-Lyonnaise des Eaux, Edison Capital, and other investors. Edison Capital is an active participant on LYLAW's investment committee. Europe -- In the first quarter of 1998, Edison Capital completed a $92 million investment in the 1,675-MW Eems Power Station, which is operated by EPON, the largest power generation company in 19 the Netherlands. This transaction was a follow-on to Edison Capital's $188 million investment in Eems in 1997. Edison Capital now holds an interest in three of the plant's five 335-MW units. In the United Kingdom, Edison Capital committed to invest $10 million upon completion of the new 640-bed Law Hospital in Scotland. The Law Hospital project is part of the UK's Private Finance Initiative, which was adopted in the early 1990s to authorize private-sector participation in the design, construction, finance and operation of infrastructure projects for public use. The Law Hospital is expected to be completed around May 2000. In addition, during the fourth quarter of 1998, Edison Capital committed to invest in a second project financed under the Private Finance Initiative consisting of $7 million investment in the St. George's Hospital project near Wimbledon, England. Asia -- Edison Capital committed $100 million to the AIG Asian Infrastructure Fund II in 1998, in which the company is also an active member of the investment committee. The $1.7 billion fund will focus on power, water, natural resources, transportation, and telecommunications projects throughout Asia. Africa -- The company invested $372 million in a transaction involving three coal-fired units of the six-unit, 4,110-MW Majuba Power Station near Johannesburg, South Africa. The power plant is operated by ESKOM, the integrated electric utility which serves South Africa. United States -- Edison Capital invested $15 million in three wind-powered electric generating projects along the Buffalo Ridge in southwest Minnesota. The projects will sell power to Northern States Power Company under 30-year power-purchase agreements. Edison Capital has invested an aggregate amount of $511 million in affordable housing projects, which comprises 22% of its assets. In 1998, Edison Capital's affordable housing business unit placed 63 new affordable housing projects in service. As of December 31, 1998, the company had 26 projects under construction and $64 million committed to an additional 25 projects scheduled to close in 1999. Edison Capital Housing Investments now has projects in 34 states and its continuing to expense its portfolio. The John Stewart Company, formed in 1978, is the housing management company that was acquired by Edison Capital in 1997. It had over 12,000 units under management as of the end of 1998. It was selected in 1998 to rehabilitate, manage and market 1,119 housing units at the Presidio and up to 760 housing units on Treasure Island - both former military bases which are located in San Francisco, California which are being converted to private residential and commercial use. Edison Capital has entered into investments that rely in part on specific federal and state tax benefits and incentives available under existing laws and regulations. There is no assurance against changes in those laws, or unfavorable interpretation and application of the laws by tax authorities, which could adversely affect Edison Capital's business prospects or, if applied retrospectively, its return on existing investments. Edison Capital competes regularly with other equity investors in the energy/infrastructure finance market. These firms include money center banks, major finance and lease companies, affiliates of various public utilities, and other Fortune 500 firms. In addition, competition exists for long-term equity and convertible debt investments in global energy/infrastructure projects. This competition comes from multinational investors in addition to those firms mentioned above. Since low-income housing tax credits were permanently extended by Congress in 1993, competition for affordable housing project with tax credits has increased significantly. Edison Capital maintains market share in the affordable housing market by providing property management and other value added services to sponsors, working closely with sponsors and lenders to facilitate the financing of projects, providing development loans to sponsors, and developing projects on a limited basis. Year 2000 Issue -- Edison Capital like SCE and the other Nonutility Companies, has a comprehensive program in place, provided overall coordination by Edison International, to address potential Year 2000 20 Impacts. (See "Business of SCE -- Year 2000 Issue" above for a description of this program.) Edison Capital has completed the inventory and impact assessment process on the Year 2000 project and remediation, testing, and implementation activities are in progress for each of the three categories (mainframe computing, distributed computing, and physical assets) with completion scheduled by July 1, 1999. Mission Land Company: Mission Land was formed to develop, own and manage industrial parks and other real property investments. In 1998, Mission Land neared completion of its plan to exit the real estate business in an orderly manner and to recover a substantial amount of the outstanding investment. Real estate assets have been reduced substantially from peak levels in 1992. At December 31, 1998, Mission Land had total consolidated assets of $109 million and, for the year then ended, consolidated operating revenue of $52 million and net income of $0.6 million. Edison Technology Solutions (ETS): ETS was organized in 1998 to research, develop and commercialize new electricity and energy related technologies, including power grid reliability, distributed generation, renewable energy technologies, metering, customer end-use technologies, and electric vehicle re-charging stations. ETS also has licenses to certain patents and intellectual property rights which it seeks to commercialize. Edison Enterprises: Edison Enterprises was organized to own the stock and coordinate the activities of Edison International's retail products and services business. Consolidation of the retail business under Edison Enterprises will enable them to take advantage of shared staff resources and realize economies of scale as they expand into new markets. The current Edison Enterprises businesses include Edison Select, Edison Source, and Edison Utility Services. Edison Select: Edison Select is engaged in the business of providing home services to consumers, and currently markets electrical, appliance, and computer repair services under the Edison OnCall name, as well as providing security services through Edison Security Services. In 1998, Edison Enterprises acquired Westec Residential Security, Inc. and Valley Burglar and Fire Alarm Company, Inc which significantly expanded Edison Enterprises' existing residential security business. Edison Source: Edison Source is engaged in the business of integrated energy outsourcing and retail energy sales. Integrated energy outsourcing services include the energy efficient retrofit, operation, and maintenance of refrigeration, heating, ventilating, air conditioning, lighting, and other electrical systems equipment. Retail energy services include EarthSource, one of the first renewable energy products available to residential and small business customers in California's new electricity marketplace. Edison Utility Services: Edison Utility Services, formed in December of 1997, offers a diverse range of services to electric utilities in the U.S. and Canada, including billing, outage management, and transmission and distribution outsourcing. Year 2000 Issue -- Edison Enterprises, like SCE and the other Nonutility Companies, has a comprehensive program in place, provided overall coordination by Edison International, to address potential Year 2000 Impacts. (See "Business of SCE -- Year 2000 Issue" above for a description of this program.) All project phases (inventory, impact assessment, remediation, testing, and implementation are underway at Edison Enterprises and are scheduled for completion by July 1, 1999. Item 2. Properties of SCE Existing Utility Generating Facilities SCE owns and operates one diesel-fueled generating plant located on Santa Catalina island, 36 hydroelectric plants, and an undivided 75.05% interest (1,614 MW net) in Units 2 and 3 at San Onofre. 21 These plants are located in Central and Southern California. By the end of 1998, SCE had sold all 12 of its gas-fueled generating plants. SCE also owns a 15.8% share of the Palo Verde (579 MW net) Nuclear Generating Station which is located near Phoenix, Arizona. SCE owns a 48% undivided interest (754 MW) in Units 4 and 5 at the Four Corners Generating Station, which is a coal-fueled steam electric generating plant located in New Mexico. Palo Verde and Four Corners are operated by other utilities. SCE operates and owns a 56% undivided interest (885 MW) in the Mohave Generating Station, which consists of two coal-fueled steam electric generating units in Clark County, Nevada. At year-end 1998, the existing SCE-owned generating capacity (summer effective rating) was divided approximately as follows: 43.9% nuclear, 32.8% coal, 23.1% hydroelectric, and 0.2% oil. San Onofre, Four Corners, certain of SCE's substations and portions of its transmission, distribution and communication systems are located on lands of the U.S. or others under (with minor exceptions) licenses, permits, easements or leases, or on public streets or highways pursuant to franchises. Certain of such documents obligate SCE, under specified circumstances and at its expense, to relocate transmission, distribution, and communication facilities located on lands owned or controlled by federal, state, or local governments. The 36 hydroelectric plants, some with related reservoirs, currently having an effective operating capacity of 1,156 MW, and are, with five exceptions, located in whole or in part on lands of the U.S. pursuant to 30 to 50 year governmental licenses that expire at various times between 1998 and 2026. Such licenses impose numerous restrictions and obligations on SCE, including the right of the United States to acquire projects upon payment of specified compensation. When existing licenses expire, FERC has the authority to issue new licenses to third parties, but only if their license application is superior to SCE's and then only upon payment of specified compensation to SCE. Any new licenses issued to SCE are expected to be issued under terms and conditions less favorable than those of the expired licenses. SCE's applications for the relicensing of certain hydroelectric projects with an aggregate effective operating capacity of 1214.89 MW are pending. The SCE hydroelectric projects that are undergoing relicensing and whose long-term licenses have expired, have been issued annual licenses, which will be renewed until the new licenses are issued. In 1998, SCE's peak demand was 19,935 MW, set on August 31, 1998. Substantially all of SCE's properties are subject to the lien of a trust indenture securing First and Refunding Mortgage Bonds (Trust Indenture), of which approximately $2.5 billion in principal amount was outstanding on December 31, 1998. Such lien and SCE's title to its properties are subject to the terms of franchises, licenses, easements, leases, permits, contracts, and other instruments under which properties are held or operated, certain statutes and governmental regulations, liens for taxes and assessments, and liens of the trustees under the Trust Indenture. In addition, such lien and SCE's title to its properties are subject to certain other liens, prior rights and other encumbrances, none of which, with minor or unsubstantial exceptions, affect SCE's right to use such properties in its business, unless the matters with respect to SCE's interest in Four Corners and the related easement and lease referred to below may be so considered. SCE's rights in the Four Corners Project, which is located on land of The Navajo Nation of Indians under an easement from the U.S. and a lease from The Navajo Nation, may be subject to possible defects. These defects include possible conflicting grants or encumbrances not ascertainable because of the absence of, or inadequacies in, the applicable recording law and the record systems of the Bureau of Indian Affairs and The Navajo Nation, the possible inability of SCE to resort to legal process to enforce its rights against The Navajo Nation without Congressional consent, possible impairment or termination under certain circumstances of the easement and lease by The Navajo Nation, Congress, or the Secretary of the Interior, and the possible invalidity of the Trust Indenture lien against SCE's interest in the easement, lease, and improvements on the Four Corners Project. 22 SCE Construction Program and Capital Expenditures Cash required by SCE for its capital expenditures totaled $861 million in 1998, and $685 million in 1997 and $616 million in 1996. Construction expenditures for the 1999-2003 period are forecasted at $3.9 billion. In addition to cash required for construction expenditures for the next five years as discussed above, $2.4 billion is needed to meet requirements for long-term debt maturities and sinking fund redemption requirements. SCE's estimates of cash available for operations for the five years through 2003 assume, among other things, the receipt of adequate and timely rate relief and the realization of its assumptions regarding cost increases, including the cost of capital. SCE's estimates and underlying assumptions are subject to continuous review and periodic revision. The timing, type, and amount of all additional long-term financing are also influenced by market conditions, rate relief, and other factors, including limitations imposed by SCE's Articles of Incorporation and Trust Indenture. Nuclear Power Matters SCE's nuclear facilities have been reliable sources of inexpensive, non-polluting power for SCE's customers for more than a decade. Throughout the operating life of these facilities, SCE's customers have supported the revenue requirements of SCE's capital investment in these facilities and for their incremental costs through traditional cost-of-service ratemaking. In 1996, the CPUC adopted SCE's San Onofre Unit 2 and 3 proposal under which SCE would have recovered its remaining investment in these San Onofre Units at a reduced rate of return of 7.35%, but on an accelerated basis during the eight-year period from the effective date in 1996 through December 31, 2003. AB 1890, however, requires the recovery of the San Onofre investment to be completed by December 31, 2001. In addition, the traditional cost-of-service ratemaking for San Onofre Units 2 and 3 was superseded by an incentive pricing plan in which SCE's customers pay a preset price for each kWh of energy generated at San Onofre during the eight-year period. AB 1890 allows for the continuation of the incentive pricing plan through December 31, 2003. SCE was compensated for the incremental costs required for the continued operation of San Onofre Units 2 and 3 with revenue earned through the incentive pricing plan. SCE also retained the ability to request recovery of the cost of fuel consumed for generation of replacement energy for periods in which San Onofre will not generate power through ECAC filings and, beginning in 1998, as part of ATCP. AB 1890 also allows SCE to continue to collect funds for decommissioning expenses through traditional ratemaking treatment. On July 16, 1997, the CPUC approved SCE's request to transfer the recorded net investment in San Onofre Units 2 and 3 step-up transformers to San Onofre Units 2 and 3 sunk costs for recovery by December 31, 2001, at a reduced rate of return of 7.35%. On August 21, 1997, the CPUC approved San Diego Gas & Electric's (SDG&E) and SCE's Joint Petition to Modify, requesting continued recovery of certain corporate administrative and general costs allocable to San Onofre Units 2 and 3, at rates of 0.28(cent) and 0.21(cent) per kWh, respectively, for the period January 1, 1998, through December 31, 2003. In 1996, SCE filed its Palo Verde Proposal Application requesting adoption of a new rate mechanism for Palo Verde consistent with that of San Onofre Units 2 and 3. On November 15, 1996, SCE, ORA, and TURN entered into a settlement agreement, which was approved by the CPUC on December 20, 1996, regarding SCE's Palo Verde Proposal Application which now allows SCE to recover its remaining investment in the Palo Verde units by December 31, 2001, at a reduced rate of return of 7.35% 23 consistent with AB 1890. The settling parties agreed that SCE would recover its share of Palo Verde incremental operating costs, except if those costs exceed 95% of the levels forecast by SCE in its application by more than 30% in any given year in which case, SCE must demonstrate that the aggregate amount of the costs exceeding the forecast in that year are reasonable. If the annual Palo Verde site Gross Capacity Factor (GCF) is less than 55% in a calendar year, SCE will bear the burden of proof to demonstrate that the site's operations causing the GCF to fall below 55% were reasonable in that year. If operations are determined to be unreasonable by the CPUC, SCE's replacement power purchases associated with that period of Palo Verde operations below 55% GCF may be disallowed. Beginning in 2002, the benefits of future operation of Palo Verde Units 1, 2, and 3 will be shared equally between shareholders and customers. Likewise, beginning in 2004, the benefits of future operation of San Onofre Units 2 and 3 will be shared equally between shareholders and customers. San Onofre Nuclear Generating Station In 1992, the CPUC approved a settlement agreement between SCE and ORA to discontinue operation of Unit 1 at the end of its then-current fuel cycle. In November 1992, SCE discontinued operation of Unit 1. As part of the agreement, SCE recovered its remaining investment over a four-year period ending August 1996. On December 21, 1998, SCE filed an application with the CPUC requesting authorization to access its Nuclear Decommissioning Trust Funds for Unit 1 for the purpose of commencing decommissioning of Unit 1 in 2000. The Units 2 and 3 steam generators have performed relatively well through the first 15 years of operation, with low rates of ongoing steam generator tube degradation. During the Unit 2 scheduled refueling and inspection outage, which was completed in 1997, an increased rate of degradation was identified, which resulted in the removal of more tubes from service than had been expected. The present design analysis, which is being reviewed for a potential increase, allows for the removal of up to 10% of the steam generator tubes before the unit's capacity must be re-evaluated. As a result of the increased degradation, a mid-cycle outage was conducted in early 1998 for Unit 2. Continued degradation was found during this inspection. A favorable (decreasing) trend in degradation was observed during inspection in the scheduled refueling outage in January 1999. The results of the January 1999 inspection are being analyzed to determine if there is a need for a mid-cycle inspection outage in early 2000. With the results from the January 1999 outage, 7.5% of the tubes have now been removed from service. In September 1998, San Onofre Unit 2 experienced a small amount of leakage from a steam generator tube plug, which required an 11-day outage to repair. During Unit 3's refueling outage, which was completed in July 1997, inspections of structural supports for steam generator tubes identified several areas where the thickness of the supports had been reduced, apparently by erosion during normal plant operation. A follow-up mid-cycle inspection indicated that the erosion had been stabilized. Additional monitoring inspections are planned during the next scheduled refueling outage in 1999. To date, 5% of Unit 3's tubes have been removed from service. During Unit 2's February 1998 mid-cycle outage, similar tube supports showed no significant levels of such erosion. Palo Verde Nuclear Generating Station Based on latest available data, APS estimates that the Unit 1 and Unit 3 steam generators should operate for the 40 year licensed operating life of those units, although APS continues to monitor the situation. APS has disclosed that it believes that it will be economically desirable to replace the Unit 2 steam generators, which have been most affected by tube cracking, in four to nine years. APS has indicated to the participants that it believes that replacement of the Unit 2 steam generators would cost between $100 million and $150 million. SCE estimates that this cost could be higher, such that its share of this cost would be between $16 million and $30 million plus replacement power costs. Unanimous 24 approval of the Palo Verde participants is required for capital improvements, including steam generator replacement. In December 1997, the Palo Verde participants unanimously agreed to purchase two spare steam generators at a cost of approximately $82 million; however, SCE has not yet decided whether it supports replacement of the Unit 2 steam generators. During 1998, Palo Verde Nuclear Generating Station generated 30 billion kWh of electricity. It was the first time an American power plant of any kind crossed the 30-billion-kWh threshold in a single year. Palo Verde broke its own record of 29.5 billion kWh that it set in 1997 and was the nation's top power producer for the fourth consecutive year. The year-end station capacity factor was 92.5%. Units 1 and 3 were each refueled in 36-day outages - a site record. Unit 2 operated on-line the entire year and at year's end had operated continuously for 430 days. Nuclear Facility Decommissioning With the exception of San Onofre Unit 1, SCE plans to decommission its nuclear generating facilities at the end of each facility's operating license by a prompt removal method authorized by the NRC. On December 21, 1998, SCE filed an application with the CPUC requesting the authority to access its decommissioning trust funds for San Onofre Unit 1 for the purpose of decommissioning commencing in 2000. Decommissioning is estimated to cost $1.9 billion in current-year dollars based on site-specific studies performed in 1998 for San Onofre and Palo Verde. This estimate considers the total cost of decommissioning and dismantling the plant, including labor, material, burial, and other costs. The site specific studies are updated approximately every three years. Changes in the estimated costs, timing of decommissioning, or the assumptions underlying these estimates could cause material revisions to the estimated total cost to decommission in the near term. Decommissioning is scheduled to begin in 2000 at San Onofre Unit 1. SCE expects decommissioning San Onofre Units 2 and 3 and Palo Verde to occur after its generating licenses expire in 2013 and 2024 respectively. Decommissioning expense was $164 million in 1998 and $154 million in 1997. The accumulated provision for decommissioning was $1.2 billion at December 31, 1998, and $1.1 billion at December 31, 1997. The estimated costs to decommission San Onofre Unit 1 ($368 million in 1998 dollars) are recorded as a liability. Decommissioning funds collected in rates are placed in independent trusts which, together with accumulated earnings, will be utilized solely for decommissioning. Nuclear Insurance Federal law limits public liability claims from a nuclear incident to $9.8 billion. SCE and other owners of San Onofre and Palo Verde have purchased the maximum private primary insurance available ($200 million). The balance is covered by the industry's retrospective rating plan that uses deferred premium charges to every reactor licensee if a nuclear incident at any licensed reactor in the U.S. results in claims and/or costs which exceed the primary insurance at that plant site. Federal regulations require this secondary level of financial protection. The NRC exempted San Onofre Unit 1 from this secondary level, effective June 1994. The maximum deferred premium for each nuclear incident is $88 million per reactor, but not more than $10 million per reactor may be charged in any one year for each incident. Based on its ownership interests, SCE could be required to pay a maximum of $175 million per nuclear incident. SCE, however, would have to pay no more than $20 million per incident in any one year. Such premium amounts include a 5% surcharge if additional funds are needed to satisfy public liability claims and are subject to periodic adjustment for inflation. If the public liability limit above is insufficient, federal regulations may impose further revenue-raising measures to pay claims, including a possible additional assessment on all licensed reactor operators. Property damage insurance covers losses up to $500 million, including decontamination costs, at San Onofre and Palo Verde. Decontamination liability and property damage coverage exceeding the primary 25 $500 million has also been purchased in amounts greater than federal requirements. Additional insurance covers part of replacement power expenses during an accident-related nuclear unit outage. These policies are issued primarily by mutual insurance companies owned by utilities with nuclear facilities. If losses at any nuclear facility covered by these arrangements were to exceed the accumulated funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to $22 million per year. Insurance premiums are charged to operating expense. Item 3. Legal Proceedings Edison International Tradename Litigation On September 30, 1997, an action was filed against Edison International in the United States District Court for the Southern District of New York alleging trademark infringement under the Lanham Act and related state causes of action for unfair competition. The complaint requested injunctive relief restraining Edison International from using various tradenames and trademarks utilizing the "Edison" name and sought to recover unspecified damages in profits from Edison International allegedly arising from infringing activities. On November 19, 1997, Edison International filed and served its answer to the complaint denying all of the substantive allegations and asserting affirmative defenses. After an initial status conference, the court stayed discovery in this matter to allow the parties to discuss a resolution of the matter. As a result of such discussions, the parties negotiated and executed a nonmonetary settlement agreement and filed a stipulation for dismissal, calling for dismissal of the action without prejudice. The dismissal was approved by the court on November 11, 1998. Geothermal Generators' Litigation Edison International, The Mission Group, and Mission Power Engineering Company, have been named as defendants in a lawsuit more fully described under "Southern California Edison Company - Geothermal Generators' Litigation." Edison Mission Energy PMNC Litigation In February 1997, a civil action was commenced in the Superior Court of the State of California, Orange County, entitled The Parsons Corporation and PMNC v. Brooklyn Navy Yard Cogeneration Partners, L.P. (Brooklyn Navy Yard), Mission Energy New York, Inc. and B-41 Associates, L.P., in which plaintiffs assert general monetary claims under the construction turnkey agreement in the amount of $136.8 million. In addition to defending this action, Brooklyn Navy Yard has also filed an action in the Supreme Court of the State of New York, Kings County entitled Brooklyn Navy Yard Cogeneration Partners, L.P. v. PMNC, Parsons Main of New York, Inc., Nab Construction Corporation, L.K. Comstock & Co., Inc. and The Parsons Corporation, asserting general monetary claims in excess of $13 million under the construction turnkey agreement. On March 26, 1998, the Superior Court in the California action granted PMNC's motion for attachment against Brooklyn Navy Yard in the amount of $43 million. PMNC subsequently attached three checking accounts in the approximate amount of $500,000. Brooklyn Navy Yard is appealing the attachment order. On the same day, the court stayed all proceedings in the California action pending an order by the New York Appellate Court of the appeal by PMNC of a denial of its motion to dismiss the New York action. That appeal was denied following a hearing on September 29, 1998. 26 Southern California Edison Company Wind Generators' Litigation SCE was named as a defendant in a series of eight lawsuits brought by independent power producers of wind generation. Seven of the lawsuits were filed in Los Angeles County Superior Court and one was filed in Kern County Superior Court. The lawsuits alleged that SCE incorrectly interpreted contracts with the plaintiffs by limiting fixed energy payments to a single ten-year period rather than beginning a new ten-year period of fixed energy payments for each stage of development. In its responses to the complaints, SCE denied the plaintiffs' allegations. In each of the lawsuits, the plaintiffs sought declaratory relief regarding the proper interpretation of the contracts. Plaintiffs alleged a combined total of approximately $189 million in damages, which included consequential damages claimed in seven of the eight lawsuits. A ninth lawsuit was subsequently filed in Los Angeles County raising claims similar to those alleged in the first eight. SCE responded to the complaint in the new lawsuit by denying its material allegations. After receiving a favorable decision in the liability phase of the lead case, SCE agreed to settle with the plaintiffs in seven of the lawsuits on terms whereby SCE waived its rights to recover costs against such plaintiffs in exchange for their agreement that there is only one fixed price period under each of their power purchase contracts with SCE and a mutual dismissal with prejudice of claims. SCE also entered into a settlement agreement with the plaintiff in another of the lawsuits which resolved the issue of multiple fixed price periods on the same terms and which also resolved a related issue unique to that plaintiff in exchange for a nominal payment by SCE. This settlement was approved by the bankruptcy court in proceedings involving the plaintiff. On January 28, 1999, SCE finalized a settlement with the remaining plaintiffs on terms effectively the same as those in the initial group of settlements except that the settlement agreement also resolved, on terms favorable to SCE, certain claims which SCE had asserted in the lead case by way of cross-complaint. Geothermal Generators' Litigation On June 9, 1997, SCE filed a complaint in Los Angeles County Superior Court against an independent power producer of geothermal generation and six of its affiliated entities (Coso parties). SCE alleges that in order to avoid power production plant shutdowns caused by excessive noncondensable gas in the geothermal field brine, the Coso parties routinely vented highly toxic hydrogen sulfide gas from unmonitored release points beginning in 1990 and continuing through at least 1994, in violation of applicable federal, state, and local environmental law. According to SCE, these violations constituted material breaches by the Coso parties of their obligations under their contracts with SCE and applicable law. The complaint sought termination of the contracts and damages for excess power purchase payments made to the Coso parties. The Coso parties' motion to transfer venue to Inyo County Superior court was granted on August 31, 1997. On June 1, 1998, the court struck SCE's request for termination of the contracts, leaving SCE with its claim for damages and other relief. On February 16, 1999, the court denied the Coso Parties' motion for judgment on the pleadings directed to SCE's first amended complaint. The Coso parties have also asserted various claims against SCE, The Mission Group, and Mission Power Engineering Company (Mission parties) in a cross complaint filed in the action commenced by SCE as well as in a separate action filed against SCE by three of the Coso parties in Inyo County Superior Court. In November 1997, the court struck all but two causes of action asserted in the separate action on the grounds that they should have been raised as part of the Coso parties' cross-complaint, and ordered the remaining two causes of action consolidated for all purposes with the action filed by SCE. The Coso parties subsequently filed second and third amended cross-complaints. The third amended cross-complaint names SCE, the Mission parties, and Edison International. As against SCE, the third amended cross-complaint purports causes of action for declaratory relief, breach of the covenant of good 27 faith and fair dealing; inducing breach of agreements between the Coso parties and their former employees; breach of an earlier settlement agreement between the Mission parties and the Coso parties; slander and disparagement, injunctive relief and restitution for unfair business practices; anticipatory breach of the contracts; and violations of Public Utilities Code ss.ss. 453, 702 and 2106. As against the Mission parties, the third amended cross-complaint seeks damages for breach of warranty of authority with respect to the settlement agreement, and for equitable indemnity. The Coso parties voluntarily dismissed Edison International from the third amended cross-complaint on December 4, 1998. As against SCE, the third amended cross-complaint seeks restitution, compensatory damages in excess of $115 million, punitive damages in an amount not less than $400 million, interest, attorney's fees, declaratory relief, and injunctive relief. On September 21, 1998, SCE filed an answer to the third amended cross-complaint generally denying the allegations contained therein and asserting affirmative defenses. In addition, SCE filed a cross-complaint for reformation of the contracts alleging that if they are not susceptible to SCE's interpretation, they should be reformed to reflect the parties' true intention. The Coso defendants demurred to SCE's cross-complaint and, in January 1999, their demurrer was sustained with leave to amend. In light of this new ruling, SCE recently filed an amended cross-complaint for reformation. Following various pre-trial motions filed by the Mission parties and Edison International, the Coso Parties, on December 23, 1998, purported to file a fourth amended cross-complaint against the Mission Parties only. The Mission Parties' demurrer to and motion to strike directed to the fourth amended cross-complaint was heard and taken under submission on March 10, 1999. On December 15, 1998, the Court granted the Coso parties leave to file a second amended complaint in the separately filed (now consolidated) action. The second amended complaint which names SCE and Edison International, alleges that SCE engaged in anti-competitive conduct, false advertising, and conduct proscribed by Public Utilities Code ss. 2106, and seeks injunctive relief, restitution, and punitive damages. On January 20, 1999, SCE filed three motions to strike several portions of the second amended complaint on the grounds, among others, that the CPUC or FERC have either exclusive or primary jurisdiction over the matters asserted therein, and that SCE's alleged conduct was in furtherance of constitutionally protected rights of free speech and petition and therefore not actionable. These matters were heard on February 22, 1999, and taken under submission at that time. Discovery and motion practice related to discovery is active. The Court has set a trial date of March 1, 2000. The materiality of net final judgments against SCE in these actions would be largely dependent on the extent to which any damages or additional payments which might result therefrom are recoverable through rates. Electric and Magnetic Fields (EMF) Litigation SCE is involved in lawsuits alleging that various plaintiffs developed cancer as a result of exposure to EMF from SCE facilities. In December 1995, the court granted SCE's motion for summary judgment in the first lawsuit and dismissed the case. Plaintiffs filed a notice of appeal. Following a settlement conference ordered by the Court of Appeal, the case was dismissed in January 1999. Following dismissal of the second lawsuit by the plaintiffs, a wrongful death action was filed by the husband and children of one of the original plaintiffs who had subsequently died. This wrongful death action was dismissed by the court without leave to amend on September 16, 1998. Plaintiffs' appeal in the wrongful death action was dismissed following a settlement conference in the Court of Appeal in January 1999. 28 San Onofre Personal Injury Litigation SCE is actively involved in three lawsuits claiming personal injuries allegedly resulting from exposure to radiation at San Onofre. On August 31, 1995, the wife and daughter of a former San Onofre security supervisor sued SCE and SDG&E in the U.S. District Court for the Southern District of California. Plaintiffs also named Combustion Engineering and the Institute of Nuclear Power Operations as defendants. All trial court proceedings have been stayed pending ruling of the Ninth Circuit Court of Appeal, on an appeal of a lower court's judgment in favor of SCE in two earlier cases raising similar allegations. On May 28, 1998, the Court of Appeal affirmed these judgments. A trial date has not yet been set. On November 17, 1995, an SCE employee and his wife sued SCE in the U.S. District Court for the Southern District of California. Plaintiffs also named Combustion Engineering. The trial in this case resulted in a jury verdict for both defendants. The plaintiffs' motion for a new trial was denied. Plaintiffs filed an appeal of the trial court's judgment to the Ninth Circuit Court of Appeal. Briefing on the appeal was completed in January 1999 and the parties are awaiting a date for oral argument to be set by the court. A decision is not expected until early 2000. On November 28, 1995, a former contract worker at San Onofre, her husband, and her son, sued SCE in the U.S. District Court for the Southern District of California. Plaintiffs also named Combustion Engineering. On August 12, 1996, the Court dismissed the claims of the former worker and her husband with prejudice. This case, with only the son as plaintiff, is expected to go to trial in late 1999. On November 20, 1997, a former contract worker at San Onofre and his wife sued SCE in the Superior Court of California, County of San Diego. The case was removed to the U.S. District Court for the Southern District of California. On May 11, 1998, the plaintiffs filed a first amended complaint. On May 22, 1998, SCE filed an answer denying the material allegations of the first amended complaint. Pursuant to a stipulation of the parties, the court, on January 4, 1999, dismissed the plaintiffs' complaint in this matter with prejudice. In March of 1999, SCE reached an agreement with the plaintiffs in both of the U.S. District Court cases to stay trial pending the results of the case currently before the Ninth Circuit Court of Appeal. The parties agreed that if the plaintiffs/petitioners do not receive a favorable determination on appeal then the two District Court cases will be dismissed. If, however, the plaintiffs/petitioners receive a favorable determination on appeal, then the two District Court cases will be set for trial. SCE was previously involved, along with other defendants, in two earlier cases raising allegations similar to those described above. Although, as indicated above, SCE was successful in removing itself from those actions, the impact on SCE, if any, from further proceedings in these cases against the remaining defendants can not be determined at this time. Mohave Generating Station Environmental Litigation On February 19, 1997, the Sierra Club and the Grand Canyon Trust filed suit in the U.S. District Court of Nevada against SCE and the other three co-owners of Mohave Generating Station. The lawsuit alleges that Mohave has been violating various provisions of the CAA, the Nevada state implementation plan, certain EPA orders, and applicable pollution permits relating to opacity and sulfur dioxide emission limits over the last five years. The plaintiffs seek declaratory and injunctive relief as well as civil penalties. Under the CAA, the maximum civil penalty obtainable is $25,000 per day per violation. SCE and the co-owners obtained an extension to respond to the complaint pending the court's ruling on a motion to dismiss filed by the defendants. On June 4, 1998, the plaintiffs served SCE and its co-owners with a 60-day supplemental notice of intent to sue. This supplemental notice identified additional causes of action as well as an additional plaintiff 29 (National Parks and Conservation Association) to be added to the proceedings. On November 12, 1998, the court bifurcated the liability and damage phases of the case. Item 4. Submission of Matters to a Vote of Security Holders Inapplicable Pursuant to Form 10-K's General Instruction (General Instruction) G(3), the following information is included as an additional item in Part I: Executive Officers (1) of the Registrant Edison International
Age at Executive Officer December 31, 1998 Company Position - ------------------------- --------------------------- ------------------------------------------------------- John E. Bryson 55 Chairman of the Board, Chief Executive Officer and Director, Edison International; Chairman of the Board, Chief Executive Officer and Director, SCE Bryant C. Danner 61 Executive Vice President and General Counsel, Edison International; Executive Vice President and General Counsel, SCE Alan J. Fohrer 48 Executive Vice President and Chief Financial Officer, Edison International; Executive Vice President and Chief Financial Officer, SCE Theodore F. Craver, Jr. 47 Senior Vice President and Treasurer, Edison International; Senior Vice President and Treasurer, SCE Robert G. Foster 51 Senior Vice President, Public Affairs, Edison International; Senior Vice President, Public Affairs, SCE Lillian R. Gorman 45 Senior Vice President, Human Resources, Edison International; Senior Vice President, Human Resources, SCE William J. Heller 42 Senior Vice President, Strategic Planning and New Business Development, Edison International Thomas J. Higgins 53 Vice President, Corporate Communications, Edison International; Vice President, Corporate Communications, SCE Thomas M. Noonan(2) 47 Vice President and Controller, Edison International; Vice President and Controller, SCE Anthony L. Smith 50 Vice President, Tax, Edison International; Vice President, Tax, SCE
30 - ---------- (1) Executive Officers are defined by Rule 3b-7 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. Pursuant to this rule, the Executive Officers of Edison International include certain elected officers of Edison International and its subsidiaries SCE, Edison Mission Energy, Edison Capital, and Edison Enterprises, all of whom may be deemed significant policy makers of Edison International. (2) Richard K. Bushey resigned as Vice President and Controller of Edison International and SCE effective March 1, 1999. None of Edison International's elected executive officers are related to each other by blood or marriage. As set forth in Article IV of Edison International's Bylaws, the elected officers of Edison International are chosen annually by and serve at the pleasure of Edison International's Board of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. Each of the elected executive officers of Edison International holds an identical position at SCE except William J. Heller, who is not an officer of SCE. Each of the elected executive officers of Edison International has been actively engaged in the business of Edison International for more than five years except Theodore F. Craver, Jr., Lillian R. Gorman, William J. Heller, and Thomas J. Higgins. Those officers who have not held their present position with Edison International and/or SCE for the past five years had the following business experience during that period:
Edison International Executive Officer Company Position Effective Dates - ----------------- -------------------- --------------- Bryant C. Danner Executive Vice President and General Counsel, June 1995 to present Edison International and SCE Senior Vice President and General Counsel, June 1992 to May 1995 Edison International and SCE Alan J. Fohrer Executive Vice President and Chief Financial September 1996 to present Officer, Edison International and SCE Executive Vice President, Chief Financial February 1996 to August 1996 Officer and Treasurer, SCE Executive Vice President and Chief Financial May 1995 to January 1996 Officer, SCE Executive Vice President, Chief Financial May 1995 to August 1996 Officer and Treasurer, Edison International Senior Vice President, Chief Financial Officer January 1993 to April 1995 and Treasurer, Edison International Senior Vice President and Chief Financial January 1993 to April 1995 Officer, SCE Theodore F. Craver, Jr. Senior Vice President and Treasurer, Edison February 1998 to present International and SCE Vice President and Treasurer, Edison September 1996 to February 1998 International and SCE Executive Vice President and Corporate Officer, September 1990 to August 1996 First Interstate Bancorp(3) 31 Robert G. Foster Senior Vice President, Public Affairs, Edison November 1996 to present International and SCE Vice President, Public Affairs of Edison January 1996 to October 1996 International Lillian R. Gorman Senior Vice President, Human Resources, Edison March 1999 to present International and SCE Vice President, Human Resources, Edison July 1996 to February 1999 International and SCE Executive Vice President and Human Resources October 1990 to May 1996 Director, First Interstate Bancorp(3) William J. Heller Senior Vice President, Strategic Planning and January 1996 to present New Business Development, Partner, Management Consulting firm of McKinsey August 1982 to December 1995 and Company(1)(3) Thomas J. Higgins Vice President, Corporate Communications, January 1996 to present Edison International and SCE Vice President, Corporate Communications, SCE April 1995 to January 1996 President, The Laurel Company(2)(3) January 1994 to December 1994 Thomas M. Noonan Vice President and Controller, Edison March 1999 to present International and SCE Assistant Controller, Edison International and September 1993 to February 1999 SCE Anthony L. Smith Vice President, Tax, Edison International and March 1999 to present SCE Assistant Controller, Edison International and July 1988 to February 1999 SCE
- -------------- (1) Prior to leaving McKinsey and Company, William J. Heller served as associate/engagement manager in Houston, Texas, senior engagement manager/principal in London, England and principal/head of McKinsey's Los Angeles energy practice beginning in 1991. (2) As President of The Laurel Company, Thomas J. Higgins provided advice on planning and financing for mergers and acquisitions for clients in the managed health care business. (3) This entity is not a parent, subsidiary or other affiliate of Edison International.
Southern California Edison Company Age at Executive Officer(1) December 31, 1998 Company Position - -------------------------------------- --------------------------- --------------------------------------------------- Stephen E. Frank 57 President, Chief Operating Officer and Director Harold B. Ray 58 Executive Vice President, Generation Business Unit 32 Pamela A. Bass 51 Senior Vice President, Customer Service Business Unit John R. Fielder 53 Senior Vice President, Regulatory Policy and Affairs Richard M. Rosenblum 48 Senior Vice President, Transmission & Distribution (T&D) Business Unit Bruce C. Foster 46 Vice President, San Francisco Regulatory Affairs
- -------------- (1) Edison International Executive Officers, Bryson, Danner, Fohrer, Craver, Robert Foster, Gorman, Higgins, Noonan and Smith as referenced above, hold the same Company Positions in Edison International and SCE. Information concerning their ages, Company Position and (for those who have not held their present position with Edison International and/or SCE for the past five years) business experience is set forth above under Edison International. Edison International is the parent holding company of SCE. None of SCE's executive officers are related to each other by blood or marriage. As set forth in Article IV of SCE's Bylaws, the officers of SCE are chosen annually by and serve at the pleasure of SCE's Board of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. All of the executive officers have been actively engaged in the business of SCE for more than five years except for Stephen E. Frank, Theodore F. Craver, Jr., Lillian R. Gorman, and Thomas J. Higgins. Those officers who have not held their present position for the past five years had the following business experience: Southern California Edison Company
Executive Officer Company Position Effective Dates - -------------------------------- ---------------------------------------------- -------------------------------------- Stephen E. Frank President, Chief Operating Officer and June 1995 to present Director President and Chief Operating Officer, August 1990 to January 1995 Florida Power and Light Company(1) Harold B. Ray Executive Vice President, Generation June 1995 to present Business Unit Senior Vice President, Power Systems June 1990 to May 1995 John R. Fielder Senior Vice President, Regulatory Policy and February 1998 to present Affairs Vice President, Regulatory Policy and Affairs February 1992 to January 1998 Richard M. Rosenblum Senior Vice President, T&D Business Unit February 1998 to present Vice President, Distribution Business Unit January 1996 to January 1998 Vice President, Nuclear Engineering and June 1993 to December 1995 Technical Services 33 Bruce C. Foster Vice President, San Francisco January 1995 to present Regulatory Affairs Regional Vice President, San Francisco Office January 1992 to December 1994 Pamela A. Bass Senior Vice President, Customer Service March 1999 to present Business Unit Vice President, Customer Solutions Business June 1996 to February 1999 Unit Vice President, Shared Services January 1996 to May 1996 Division Vice President, ENvest August 1993 to December 1995
- ------------------ (1) This entity is not a parent, subsidiary or other affiliate of SCE. The Nonutility Companies
Age at Executive Officer December 31, 1998 Company Position - ------------------------------------ ---------------------------- ---------------------------------------------------- Edward R. Muller 46 President and Chief Executive Officer, Edison Mission Energy Robert M. Edgell 51 Executive Vice President, Edison Mission Energy Thomas R. McDaniel 49 President and Chief Executive Officer, Edison Capital President and Chief Executive Officer, Mission Land Company Stephen E. Pazian 49 President and Chief Executive Officer, Edison Enterprises Chairman and Chief Executive Officer, Edison Source and Edison Select Chairman, President, and Chief Executive Officer, Edison Utility Services
None of the Nonutility Companies' executive officers are related to each other by blood or marriage. As set forth in Article IV of their respective Bylaws, the officers of the Nonutility Companies are chosen annually by and serve at the pleasure of the respective Boards of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. All of the executive officers have been actively engaged in the business of the respective Nonutility Companies and/or Edison International or SCE for more than five years except for Stephen E. Pazian. Those officers who have not held their present position for the past five years had the following business experience: 34 The Nonutility Companies
Executive Officer Company Position Effective Dates - ------------------------------------ ---------------------------------------------- ----------------------------------- Stephen E. Pazian President and Chief Executive Officer, June 1997 to present Edison Enterprises Chairman and Chief Executive Officer, May 1997 to present Edison Source and Edison Select Chairman, President, and Chief Executive December 1997 to present Officer, Edison Utility Services President, Ameritech Security Monitoring(1) January 1996 to April 1997 President and Chief Executive Officer, BellSouth MobileComm(1) April 1989 to December 1995
- -------------- (1) This entity is not a parent, subsidiary or other affiliate of Edison International. 35 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information responding to Item 5 is included in Edison International's Annual Report to Shareholders for the year ended December 31, 1998, (Annual Report) under "Quarterly Financial Data" on page 56 and under "Shareholder Information" on page 61, and is incorporated by reference pursuant to General Instruction G(2). The number of Common Stock shareholders of record was 104,567 on March 23, 1999. Additional information concerning the market for Edison International's Common Stock is set forth on the cover page hereof. Item 6. Selected Financial Data Information responding to Item 6 is included in the Annual Report under "Selected Financial and Operating Data: 1994-1998" on page 60, and is incorporated herein by reference pursuant to General Instruction G(2). Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Information responding to Item 7 is included in the Annual Report under "Management's Discussion and Analysis" on pages 25 through 34 and is incorporated herein by reference pursuant to General Instruction G(2). Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information responding to Item 7A is included in the Annual Report under "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 28 through 29 and is incorporated herein by reference to General Instruction G (2). Item 8. Financial Statements and Supplementary Data Certain information responding to Item 8 is set forth after Item 14 in Part IV. Other information responding to Item 8 is included in the Annual Report on pages 37 through 55 and is incorporated herein by reference pursuant to General Instruction G(2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning executive officers of Edison International is set forth in Part I in accordance with General Instruction G(3), pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information responding to Item 10 is included in the Joint Proxy Statement (Proxy Statement) filed with the Commission in connection with Edison International's Annual Meeting to be held on April 15, 1999, under the heading, "Election of Directors of Edison International and SCE" on pages 4 through 7 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 23, and is incorporated herein by reference pursuant to General Instruction G(3). 36 Item 11. Executive Compensation Information responding to Item 11 is included in the Proxy Statement beginning with the section under the heading "Executive Compensation Table - Edison International and SCE" on pages 10 through 22, and is incorporated herein by reference pursuant to General Instruction G(3). Item 12. Security Ownership of Certain Beneficial Owners and Management Information responding to Item 12 is included in the Proxy Statement under the headings "Stock Ownership of Directors and Executive Officers of Edison International and SCE" on pages 8 through 9 and "Stock Ownership of Certain Shareholders" on page 26, and is incorporated herein by reference pursuant to General Instruction G(3). Item 13. Certain Relationships and Related Transactions Information responding to Item 13 is included in the Proxy Statement under the heading "Certain Relationships and Transactions of Nominees and Executive Officers" on page 23, and is incorporated herein by reference pursuant to General Instruction G(3). PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The following items contained in the Annual Report are found on pages 25 through 55, and are incorporated by reference in this report. Management's Discussion and Analysis of Results of Operations and Financial Condition Responsibility for Financial Reporting Report of Independent Public Accountants Consolidated Statements of Income -- Years Ended December 31, 1998, 1997, and 1996 Consolidated Balance Sheets -- December 31, 1998, and 1997 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Comprehensive Income -- Years Ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements (2) Report of Independent Public Accountants and Schedules Supplementing Financial Statements The following documents may be found in this report at the indicated page numbers. Page ---- Report of Independent Public Accountants on Supplemental Schedules 41 Schedule I--Condensed Financial Information of Parent 42 Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 45 Schedules I through V, inclusive, except those referred to above, are omitted as not required or not applicable. 37 (3) Exhibits See Exhibit Index on page 47 of this report. (b) Reports on Form 8-K November 13, 1998 Item 5: Other Events - Proposition 9 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES To Edison International: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the 1998 Annual Report to Shareholders of Edison International incorporated by reference in this Form 10-K, and have issued our report thereon dated February 4, 1999. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The supplemental schedules listed in Part IV of this Form 10-K, which are the responsibility of Edison International's management, are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations, and are not part of the basic consolidated financial statements. These supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California February 4, 1999 39 Edison International SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF PARENT CONDENSED BALANCE SHEETS
December 31, - ------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------ (In thousands) Assets: Cash and equivalents $ 7,101 $ 273,603 Other current assets 248,317 137,969 - ------------------------------------------------------------------------------------------------ Total current assets 255,418 411,572 Investments in subsidiaries 4,946,607 5,128,793 Other deferred debits 295 344 - ------------------------------------------------------------------------------------------------ Total assets $5,202,320 $5,540,709 - ------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity: Accounts payable $ 195 $ 2,536 Other current liabilities 185,577 99,020 - ------------------------------------------------------------------------------------------------ Total current liabilities 185,772 101,556 Other deferred credits 837 2,296 Common shareholders' equity 5,015,711 5,436,857 - ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $5,202,320 $5,540,709 - ------------------------------------------------------------------------------------------------
40 CONDENSED STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- (In thousands, except per-share amounts) Operating revenue and other income. $ 46,193 $ 38,648 $ 29,539 Operating expenses and interest expense 61,316 65,262 42,908 - ----------------------------------------------------------------------------------------------------------- Loss before equity in earnings of subsidiaries (15,123) (26,614) (13,369) Equity in earnings of subsidiaries 683,285 726,470 730,117 - ----------------------------------------------------------------------------------------------------------- Net income $ 668,162 $ 699,856 $ 716,748 - ----------------------------------------------------------------------------------------------------------- Weighted-average shares of common stock outstanding 359,205 400,396 437,335 Basic earnings per share $ 1.86 $ 1.75 $ 1.64 Diluted earnings per share $ 1.84 $ 1.73 $ 1.63
41 Edison International SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF PARENT (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- (In thousands) Cash Flows From Operating Activities $ (131,187) $ (19,894) $ 58,901 - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities (125,298) 258,920 (54,150) - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities (10,017) (112) (102) - ------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in cash and equivalents (266,502) 238,914 4,649 Cash and equivalents at beginning of period 273,603 34,689 30,040 - ------------------------------------------------------------------------------------------------------------------- Cash and Equivalents at the End of Period $ 7,101 $ 273,603 $ 34,689 - ------------------------------------------------------------------------------------------------------------------- Cash dividends received from Southern California Edison Company $1,103,574 $1,841,230 $ 765,199
42 Edison International SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Year Ended December 31, 1998
Additions --------- Balance at Charged to Charged to Balance Beginning of Costs and Other at End Description Period Expenses Accounts Deductions of period - --------------------------------------------------------------------------------------------------------------------- (In thousands) Group A: Uncollectible accounts Customers 24,525 21,570 -- 24,457 21,638 All other 48,098 2,273 -- 47,737 2,634 - --------------------------------------------------------------------------------------------------------------------- Total $ 72,623 $ 23,843 $ -- $ 72,194(a) $ 24,272 - --------------------------------------------------------------------------------------------------------------------- Group B: DOE Decontamination and Decommissioning $ 44,336 $ -- $ (89)(b) $ 4,828(c) $ 39,419 Purchased-power settlements 145,640 -- -- 15,943(d) 129,697 Pension and benefits 211,200 170,743 18,988 (e) 161,263(f) 239,668 Insurance, casualty and other 84,253 70,727 -- 74,487(g) 80,493 - --------------------------------------------------------------------------------------------------------------------- Total $485,429 $241,470 $18,899 $256,521 $489,277 - ---------------------------------------------------------------------------------------------------------------------
(a) Accounts written off, net. (b) Represents revision to estimate based on actual billings. (c) Represents amounts paid (d) Represents the amortization of the liability established for purchased-power contract settlement agreements. (e) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (f) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (g) Amounts charged to operations that were not covered by insurance. 43 Edison International SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Year Ended December 31, 1997
Additions --------- Balance at Charged to Charged to Balance Beginning of Costs and Other at End Description Period Expenses Accounts Deductions of period - --------------------------------------------------------------------------------------------------------------------- (In thousands) Group A: Uncollectible accounts Customers 24,466 20,826 -- 20,767 24,525 All other 24,189 24,570 -- 661 48,098 - --------------------------------------------------------------------------------------------------------------------- Total $ 48,655 $ 45,396 $ -- $ 21,428(a) $172,623 - --------------------------------------------------------------------------------------------------------------------- Group B: DOE Decontamination and Decommissioning $ 48,789 $ -- $ 1,089(b) $ 5,542(c) $ 44,336 Purchased-power settlements 107,700 -- 67,320(d) 29,380(e) 145,640 Pension and benefits 180,927 102,193 17,624(f) 89,544(g) 211,200 Insurance, casualty and other 86,509 63,541 -- 65,797(h) 84,253 - --------------------------------------------------------------------------------------------------------------------- Total $423,925 $165,734 $ 86,033 $190,263 $485,429 - ---------------------------------------------------------------------------------------------------------------------
- ---------------- (a) Accounts written off, net. (b) Represents revision to estimate based on actual billings. (c) Represents amounts paid (d) Represents payments to be made under agreement to terminate a purchased-power contract. (e) Represents the amortization of the liability established for purchased-power contract settlement agreements. (f) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (g) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (h) Amounts charged to operations that were not covered by insurance. 44 Edison International SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Year Ended December 31, 1996
Additions --------- Balance at Charged to Charged to Balance Beginning of Costs and Other at End Description Period Expenses Accounts Deductions of period - --------------------------------------------------------------------------------------------------------------------- (In thousands) Group A: Uncollectible accounts Customers 22,712 21,831 -- 20,077(c) 24,466 All other 13,013 15,376 -- 4,200(c) 24,189 - --------------------------------------------------------------------------------------------------------------------- Total $ 35,725 $ 37,663 $ 24,277 $ 48,655 - --------------------------------------------------------------------------------------------------------------------- Group B: DOE Decontamination and Decommissioning $ 52,742 $ -- $ 1,468(b) $ 5,421(c) $ 48,789 Purchased-power settlement -- -- 107,700(d) 107,700 Pension and benefits 196,662 8,547 21,869(e) 46,151(f) 180,927 Insurance, casualty and other 94,788 59,123 -- 67,402(g) 86,509 - --------------------------------------------------------------------------------------------------------------------- Total $344,192 $67,670 $131,037 $118,974 $423,925 - ---------------------------------------------------------------------------------------------------------------------
- ---------------- (a) Accounts written off, net. (b) Represents revision to estimate based on actual billings. (c) Represents amounts paid. (d) Represents payments to be made under agreement to terminate a purchased-power contract. (e) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (f) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (g) Amounts charged to operations that were not covered by insurance. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Edison International By Kenneth S. Stewart ------------------------------ Kenneth S. Stewart Assistant General Counsel Date: March 24, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------------------------------------------------------------------------------------------------------------- Principal Executive Officer: John E. Bryson* Chairman of the Board, March 24, 1999 Chief Executive Officer and Director Principal Financial Officer: Alan J. Fohrer* Executive Vice President, Chief Financial Officer March 24, 1999 Controller or Principal Accounting Officer: Richard K. Bushey* Vice President and March 24, 1999 Controller Board of Directors: Winston H. Chen* Director March 24, 1999 Warren Christopher* Director March 24, 1999 Stephen E. Frank* Director March 24, 1999 Joan C. Hanley* Director March 24, 1999 Carl F. Huntsinger* Director March 24, 1999 Charles D. Miller* Director March 24, 1999 Luis G. Nogales* Director March 24, 1999 Ronald L. Olson* Director March 24, 1999 James M. Rosser* Director March 24, 1999 E. L. Shannon, Jr.* Director March 24, 1999 Robert H. Smith* Director March 24, 1999 Thomas C. Sutton* Director March 24, 1999 Daniel M. Tellep* Director March 24, 1999 James D. Watkins* Director March 24, 1999 Edward Zapanta* Director March 24, 1999
*By Kenneth S. Stewart ----------------------------------------- Kenneth S. Stewart Assistant General Counsel 46 EXHIBIT INDEX Exhibit Number Description 3.1 Restated Articles of Incorporation of Edison International dated May 7, 1996. 3.2 Certificate of Determination of Series A Junior Participating Cumulative Preferred Stock of Edison International dated November 21, 1998, (Form 8-A dated November 21, 1996)* 3.3 Bylaws of Edison International as amended by the Board of Dirctors on February 18, 1999. 4.1 SCE First Mortgage Bond Trust Indenture, dated as of October 1, 1923 (Registration No. 2-1369)* 4.2 Supplemental Indenture, dated as of March 1,1927 (Registration No. 2-1369)* 4.3 Third Supplemental Indenture, dated as of June 24, 1935 (Registration No. 2-1602)* 4.4 Fourth Supplemental Indenture, dated as of September 1, 1935 (Registration No. 2-4522)* 4.5 Fifth Supplemental Indenture, dated as of August 15, 1939 (Registration No. 2-4522)* 4.6 Sixth Supplemental Indenture, dated as of September 1, 1940 (Registration No. 2-4522)* 4.7 Eighth Supplemental Indenture, dated as of August 15, 1948 (Registration No. 2-7610)* 4.8 Twenty-Fourth Supplemental Indenture, dated as of February 15, 1964 (Registration No. 2-22056)* 4.9 Eighty-Eightth Supplemental Indenture, dated as of July 15, 1992 (File No. 1-2313 Form 8-K dated July 22, 1992)* 10.1 1981 Deferred Compensation Agreement (File No. 1-2313, Form 10-K for the year ended December 31, 1981)* 10.2 1985 Deferred Compensation Agreement for Executives (File No. 1-2313, Form 10-K for the year ended December 31, 1986)* 10.3 1985 Deferred Compensation Agreement for Directors (File No. 1-2313, Form10-K for the year ended December 31, 1986)* 10.4 Director Deferred Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended June 30, 1998)* 10.5 Director Grantor Trust Agreement (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 10.6 Executive Deferred Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended March 31, 1998)* 10.7 Executive Grantor Trust Agreement (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 10.8 Executive Supplemental Benefit Program (File No. 1-2313, Form 10-K for the year ended December 31, 1980)* 10.9 Executive Retirement Plan (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 10.10 Executive Incentive Compensation Plan (File No. 1-9936, Form 10-K for the year ended December 31, 1997)* 10.11 Executive Disability and Survivor Benefit Program (File No. 1-9936, Form 10-K for the year ended December 31, 1994)* 10.12 Retirement Plan for Directors (File No. 1-9936, Form 10-Q for the quarter ended June 30, 1998)* 10.13 Officer Long-Term Incentive Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended March 31, 1998)* 10.13.1 Form of Agreement for 1989-1995 Awards under the Officer Long-Term Incentive Compensation Plan (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 47 EXHIBIT INDEX Exhibit Number Description 10.13.2 Form of Agreement for 1996 Awards under the Officer Long-Term Incentive Compensation Plan (File No. 1-9936, Form 10-K for the year ended December 31, 1996)* 10.13.3 Form of Agreement for 1997 Awards under the Officer and Management Long-Term Incentive Compensation Plans (File No. 1-9936, Form 10-K for the year ended December 31, 1997)* 10.14 Equity Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended June 30, 1998)* 10.14.1 Form of Agreement for 1998 Employee Awards under the Equity Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended June 30, 1998)* 10.14.2 Form of Agreement for 1998 Director Awards under the Equity Compensation Plan (File No. 1-9936, Form 10-Q for the quarter ended June 30, 1998)* 10.15 Estate and Financial Planning Program (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 10.16 Option Gain Deferral Plan (File No. 1-9936, Form 10-Q for the quarter ended March 31, 1998)* 10.17 Employment Letter Agreement with Bryant C. Danner (File No. 1-9936, Form 10-K for the year ended December 31, 1992)* 10.18 Employment Letter Agreement with Stephen E. Frank (File No. 1-9936, Form 10-K for the year ended December 31, 1995)* 10.19 Employment Letter Agreement with Edward R. Muller (File No. 1-9936, Form 10-K for the year ended December 31, 1994)* 10.20 Election Terms for Warren Christopher (File No. 1-9936, Form 10-K for the year ended December 31, 1997)* 10.21 Dispute resolution amendment of 1981 Executive Deferred Compensation Plan, 1985 Executive and Director Deferred Compensation Plans and Executive Supplemental Benefit Program 10.22 Employment Letter Agreement with Stephen E. Pazian 10.23 Retirement Agreement with Richard K. Bushey 11. Computation of Primary and Fully Diluted Earnings Per Share 12. Computation of Ratios of Earnings to Fixed Charges 13. Selected portions of the Annual Report to Shareholders for year ended December 31, 1997 21. Subsidiaries of the Registrant 23. Consent of Independent Public Accountants - Arthur Andersen LLP 24.1 Power of Attorney 24.2 Certified copy of Resolution of Board of Directors Authorizing Signature 27. Financial Data Schedule - ------------ * Incorporated by reference pursuant to Rule 12b-32. EXHIBIT 3.1 CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF EDISON INTERNATIONAL The undersigned, ALAN J. FOHRER and BEVERLY P. RYDER, hereby certify that they are the duly elected and acting Executive Vice President, Treasurer and Chief Financial Officer, and Secretary, respectively, of EDISON INTERNATIONAL, a California corporation, and that the Articles of Incorporation of said corporation shall be restated to read as set forth in full as follows: "RESTATED ARTICLES OF INCORPORATION OF EDISON INTERNATIONAL First: Edison International is the name of the corporation. Second: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Third: This corporation is authorized to issue only two classes of shares, which shall be designated respectively "Preferred Stock" and "Common Stock." The total number of shares of Preferred Stock authorized to be issued is fifty million (50,000,000) shares. The total number of shares of Common Stock authorized to be issued is eight hundred million (800,000,000) shares. Fourth: The Preferred Stock may be issued from time to time in one or more series. To the extent not prohibited by law, the Board of Directors is authorized: (i) to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series, (ii) to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, including but not limited to rights, preferences, privileges, and restrictions regarding dividends, liquidation, conversion, redemption and voting (including provisions specifying more than one vote per share) and, (iii) within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Fifth: BUSINESS COMBINATIONS: 1. In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in paragraph 2 of this Article Fifth, none of the following transactions shall be consummated unless and until such transaction shall have been approved by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding shares of stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class: (a) any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or 1 (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of more than ten percent (10%) of the total book value of the assets of the corporation and its consolidated subsidiaries as shown on the most recently available quarterly consolidated balance sheet of the corporation; or (c) the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder having an aggregate Fair Market Value of more than ten percent (10%) of the total book value of the assets of the corporation and its consolidated subsidiaries as shown on the most recently available quarterly consolidated balance sheet of the corporation; or (d) the adoption of any plan or proposal for the spinoff, split-off or split-up of the corporation or any material Subsidiary proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (e) any reclassification of any securities of the corporation (including any reverse stock split), any recapitalization of the capital stock of the corporation, any merger or consolidation of the corporation with or into any of its Subsidiaries, or any other transaction (whether or not with or involving any Interested Shareholder), which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of stock or series thereof of the corporation or of any Subsidiary directly or indirectly Beneficially Owned (as hereinafter defined) by any Interested Shareholder or as a result of which the shareholders of the corporation would cease to be shareholders of a corporation incorporated under the laws of the State of California having, as parts of its articles of incorporation, provisions to the same effect as this Article Fifth; or (f) any agreement, contract or other arrangement providing for any of the transactions described in the foregoing paragraphs (a) through (e). The term "Business Combination" as used in this Article Fifth shall mean any transaction or proposed transaction which is referred to in any one or more of the foregoing subparagraphs (a) through (f) of this paragraph 1. 2. The provisions of paragraph 1 of this Article Fifth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote of shareholders, if any, as is required by law and any other provision of any Article hereof, if such Business Combination has been approved by at least a majority of the Disinterested Directors (as hereinafter defined) at the time or if all the conditions specified in the following subparagraphs (a), (b), (c), (d), (e) and (f) are satisfied: (a) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of any consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (1) (if applicable) the Highest Per Share Price (as hereinafter defined) paid in order to acquire any shares of Common Stock beneficially owned by the Interested Shareholder which were acquired beneficially by such 2 Interested Shareholder (x) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (y) in the transaction in which it became an Interested Shareholder, whichever is higher; and (2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such later date is referred to in this Article Fifth as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock other than the Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class or series of outstanding Voting Stock, whether or not the Interested Shareholder beneficially owns any shares of a particular class or series of Voting Stock): (1) (if applicable) the Highest Per Share Price paid in order to acquire any shares of such class or series of Voting Stock beneficially owned by the Interested Shareholder which were acquired beneficially by such Interested Shareholder (x) within the two-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher; and (2) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (3) the Fair Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class or series of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid in order to acquire beneficially shares of such class or series of Voting Stock that are beneficially owned by the Interested Shareholder and, if the Interested Shareholder beneficially owns shares of any class or series of Voting Stock that were acquired with varying forms of consideration, the form of consideration to be received by holders of such class or series of Voting Stock shall be either cash or the form used to acquire beneficially the largest number of shares of such class or series of Voting Stock beneficially acquired by it prior to the Announcement Date. The price determined in accordance with paragraphs 2(a) and 2(b) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combinations of shares or similar event. (d) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) except as approved by at least a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular dates therefor the full amount of any dividends (whether or not cumulative) payable on any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation; (ii) there shall have been (x) 3 no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by at least a majority of the Disinterested Directors, and (y) an increase in such annual rate of dividends (as necessary to prevent any such reduction) in the event of any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to increase such annual rate was approved by at least a majority of the Disinterested Directors; and (iii) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder or as a result of a pro rata stock dividend or stock split. (e) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionally as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 3. For the purposes of this Article Fifth: (a) A "person" shall mean any individual, firm, corporation or other entity. (b) "Interested Shareholder" shall mean any person or group (other than this corporation or any Subsidiary or any compensation plan or any benefit plan of this corporation or any Subsidiary or any trustee of, or fiduciary with respect to, any such plan when acting in such capacity, or any corporation formed pursuant to a resolution of the Board of Directors of this corporation which was approved by at least a majority of the Disinterested Directors as defined hereinafter) who or which: (1) is the Beneficial Owner, directly or indirectly, of more than ten percent (10%) of the voting power of the outstanding Voting Stock; or (2) is an Affiliate of the corporation and at any time within the two-year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of ten percent (10%) or more of the voting power of the then outstanding Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock representing more than one percent (1%) of the voting power of the outstanding Voting Stock, which shares were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 4 (c) A person shall be a "Beneficial Owner" of any Voting Stock: (1) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (2) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote or direct the vote pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting or disposing of any shares of Voting Stock. (d) For the purposes of determining whether a person is an Interested Shareholder pursuant to subparagraph (b) of paragraph 3 of this Article Fifth, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (c) of paragraph 3 of this Article Fifth but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options, or otherwise. (e) The term "Affiliate," used to indicate a relationship to a specified person, means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. (f) The term "Associate," used to indicate a relationship with a specified person, means (A) any corporation, partnership or other organization of which such specified person is an officer or partner, (B) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (C) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any of its parents or Subsidiaries and (D) any person who is a director, officer or partner of such specified person or of any corporation (other than the corporation or any wholly-owned Subsidiary of the corporation), partnership or other entity which is an Affiliate of such specified person. (g) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the corporation or by a Subsidiary of the corporation or by the corporation and one or more Subsidiaries; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph (b) of paragraph 3 of this Article Fifth the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the corporation. (h) "Disinterested Director" means any member of the Board of Directors of the corporation who was a member of the Board of Directors of the corporation on April 21, 1988, or who became a member of the Board of Directors of the corporation subsequent to that time and who is unaffiliated with, and not a nominee or representative of, an Interested Shareholder and who is recommended to succeed a Disinterested 5 Director by at least a majority of Disinterested Directors then on the Board of Directors. Any reference to "Disinterested Directors" shall refer to a single Disinterested Director if there be but one. Any reference under this Article Fifth to an approval, designation or determination by "a majority of the Disinterested Directors" of the Board of Directors shall mean such approval, designation or determination by not less than a majority of the Disinterested Directors then serving on the Board of Directors. (i) "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape, for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sales price or bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations Systems or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by at least a majority of the Disinterested Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (ii) in the case of stock of any class or series which is not traded on any United States registered securities exchange nor in the over-the-counter market or in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by at least a majority of the Disinterested Directors in good faith; and such determination by the Disinterested Directors shall be conclusive and binding for all purposes of this Article Fifth. (j) References to "Highest Per Share Price" with respect to any class of stock, means the highest amount of consideration paid for a share of such stock (including, without limitation, any brokerage commissions, transfer taxes and soliciting dealers' fees) and shall reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. (k) In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs (a) and (b) of paragraph 2 of this Article Fifth shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 4. At least a majority of the Disinterested Directors of the corporation shall have the power and duty to make a good faith determination, on the basis of information known to them, of all facts necessary to determine compliance with this Article Fifth, including without limitation: (a) whether a person is an Interested Shareholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person is an Affiliate or Associate of another; 6 (d) whether the assets which are the subject of any Business Combination, or the securities issued or transferred by the corporation or any Subsidiary in any Business Combination, have an aggregate Fair Market Value of more than ten percent (10%) of the total book value of the assets of the corporation and its consolidated subsidiaries as shown on the most recently available quarterly consolidated balance sheet of the corporation; and (e) whether the requirements of paragraph 2 of this Article Fifth have been met. Such determination by a majority of the Disinterested Directors shall be conclusive and binding for all purposes of this Article Fifth. 5. Nothing contained in this Article Fifth shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. 6. The fact that a Business Combination complies with the provisions of Section 2 of this Article Fifth shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the shareholders of the corporation. 7. In addition to any affirmative vote required by law or these Articles of Incorporation, a proposal that the provisions of this Article Fifth be altered, amended or repealed in any respect, or any provision inconsistent therewith be adopted, shall require either (i) the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as a single class or (ii) approval by at least a majority of the Disinterested Directors and the affirmative vote of the holders of at least fifty percent (50%) of the voting power of the then outstanding Voting Stock voting together as a single class. Sixth: LIMITATION ON LIABILITY OF DIRECTORS AND AUTHORITY TO INDEMNIFY AGENTS 1. The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. 2. The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code." This Certificate of Restated Articles of Incorporation does not itself alter or amend the Articles of Incorporation of the corporation in any respect and has been approved by the Board of Directors. 7 IN WITNESS WHEREOF, the undersigned have executed this certificate on this 7th day of May, 1996. ALAN J. FOHRER ALAN J. FOHRER Executive Vice President, Treasurer and Chief Financial Officer of Edison International BEVERLY P. RYDER BEVERLY P. RYDER Secretary of Edison International DECLARATION The undersigned ALAN J. FOHRER and BEVERLY P. RYDER, the Executive Vice President, Treasurer and Chief Financial Officer, and Secretary, respectively, of Edison International, each declares under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing certificate are true and correct of his or her own knowledge. Executed at Rosemead, California on this 7th day of May, 1996. ALAN J. FOHRER ALAN J. FOHRER Executive Vice President, Treasurer and Chief Financial Officer of Edison International BEVERLY P. RYDER BEVERLY P. RYDER Secretary of Edison International EXHIBIT 3.3 To Holders of the Company's Bylaws: Effective February 18, 1999, Article II, Section 11, was amended to be consistent with California law which provides that proxies include electronic and oral telephonic authorizations by shareholders. BEVERLY P. RYDER Corporate Secretary BYLAWS OF EDISON INTERNATIONAL AS AMENDED TO AND INCLUDING FEBRUARY 18, 1999 INDEX Page ARTICLE I -- PRINCIPAL OFFICE Section 1. Principal Office.............................................1 ARTICLE II -- SHAREHOLDERS Section 1. Meeting Locations...........................................1 Section 2. Annual Meetings.............................................1 Section 3. Special Meetings............................................2 Section 4. Notice of Annual or Special Meeting.........................2 Section 5. Quorum......................................................4 Section 6. Adjourned Meeting and Notice Thereof........................4 Section 7. Voting......................................................4 Section 8. Record Date.................................................6 Section 9. Consent of Absentees........................................7 Section 10. Action Without Meeting......................................7 Section 11. Proxies.....................................................8 Section 12. Inspectors of Election......................................8 ARTICLE III -- DIRECTORS Section 1. Powers......................................................9 Section 2. Number of Directors.........................................9 Section 3. Election and Term of Office................................10 Section 4. Vacancies..................................................10 Section 5. Place of Meeting...........................................11 Section 6. Regular Meetings...........................................11 Section 7. Special Meetings...........................................11 Section 8. Quorum.....................................................12 Section 9. Participation in Meetings by Conference Telephone..........12 Section 10. Waiver of Notice...........................................12 Section 11. Adjournment................................................12 Section 12. Fees and Compensation......................................13 Section 13. Action Without Meeting.....................................13 Section 14. Rights of Inspection.......................................13 Section 15. Committees.................................................13 ARTICLE IV -- OFFICERS Section 1. Officers...................................................14 Section 2. Election...................................................14 Section 3. Eligibility of Chairman or President.......................15 Section 4. Removal and Resignation....................................15 Section 5. Appointment of Other Officers..............................15 Section 6. Vacancies..................................................15 Section 7. Salaries...................................................15 Section 8. Furnish Security for Faithfulness..........................16 Section 9. Chairman's Duties; Succession to Such Duties in Chairman's Absence or Disability............16 Section 10. President's Duties.........................................16 Section 11. Chief Financial Officer....................................16 Section 12. Vice President's Duties....................................17 Section 13. General Counsel's Duties...................................17 Section 14. Associate General Counsel's and Assistant General Counsel's Duties...........................................17 Section 15. Controller's Duties........................................17 Section 16. Assistant Controllers' Duties..............................17 Section 17. Treasurer's Duties.........................................17 Section 18. Assistant Treasurers' Duties...............................18 Section 19. Secretary's Duties.........................................18 Section 20. Assistant Secretaries' Duties..............................19 Section 21. Secretary Pro Tempore......................................19 Section 22. Election of Acting Treasurer or Acting Secretary...........19 Section 23. Performance of Duties......................................19 ARTICLE V -- OTHER PROVISIONS Section 1. Inspection of Corporate Records............................20 Section 2. Inspection of Bylaws.......................................21 Section 3. Contracts and Other Instruments, Loans, Notes and Deposits of Funds..............................21 Section 4. Certificates of Stock......................................22 Section 5. Transfer Agent, Transfer Clerk and Registrar...............22 Section 6. Representation of Shares of Other Corporations.............22 ARTICLE V -- OTHER PROVISIONS (Cont.) Section 7. Stock Purchase Plans.......................................23 Section 8. Fiscal Year and Subdivisions...............................23 Section 9. Construction and Definitions...............................23 ARTICLE VI -- INDEMNIFICATION Section 1. Indemnification of Directors and Officers..................24 Section 2. Indemnification of Employees and Agents....................25 Section 3. Right of Directors and Officers to Bring Suit..............26 Section 4. Successful Defense.........................................26 Section 5. Non-Exclusivity of Rights..................................26 Section 6. Insurance..................................................26 Section 7. Expenses as a Witness......................................27 Section 8. Indemnity Agreements.......................................27 Section 9. Separability...............................................27 Section 10. Effect of Repeal or Modification...........................27 ARTICLE VII -- EMERGENCY PROVISIONS Section 1. General....................................................27 Section 2. Unavailable Directors......................................28 Section 3. Authorized Number of Directors.............................28 Section 4. Quorum.....................................................28 Section 5. Creation of Emergency Committee............................28 Section 6. Constitution of Emergency Committee........................29 Section 7. Powers of Emergency Committee..............................29 Section 8. Directors Becoming Available...............................29 Section 9. Election of Board of Directors.............................29 Section 10. Termination of Emergency Committee.........................30 ARTICLE VIII -- AMENDMENTS Section 1. Amendments.................................................30 BYLAWS Bylaws for the regulation, except as otherwise provided by statute or its Articles of Incorporation of EDISON INTERNATIONAL AS AMENDED TO AND INCLUDING FEBRUARY 18, 1999 ARTICLE I -- PRINCIPAL OFFICE Section 1. Principal Office. The principal office of the Corporation is hereby fixed and located at 2244 Walnut Grove Avenue, in the City of Rosemead, County of Los Angeles, State of California. The Board of Directors is hereby granted full power and authority to change said principal office from one location to another. ARTICLE II -- SHAREHOLDERS Section 1. Meeting Locations. All meetings of shareholders shall be held at the principal office of the corporation or at such other place or places within or without the State of California as may be designated by the Board of Directors (the "Board"). In the event such places shall prove inadequate in capacity for any meeting of shareholders, an adjournment may be taken to and the meeting held at such other place of adequate capacity as may be designated by the officer of the corporation presiding at such meeting. Section 2. Annual Meetings. The annual meeting of shareholders shall be held on the third Thursday of the month of April of each year at 10:00 a.m. on said day to elect directors to hold office for the year next ensuing and until their successors shall be elected, and to consider and act upon such other matters as may lawfully be presented to such meeting; provided, however, that should said day fall upon a legal holiday, then any such annual meeting of shareholders shall be held at the same time and place on the next day thereafter ensuing which is not a legal holiday. 1 Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President, or upon written request of any three members of the Board, or by the holders of shares entitled to cast not less than ten percent of the votes at such meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. If the notice is not given within twenty days after receipt of the request, the persons entitled to call the meeting may give the notice. Section 4. Notice of Annual or Special Meeting. Written notice of each annual or special meeting of shareholders shall be given not less than ten (or if sent by third-class mail, thirty) nor more than sixty days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of an annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law and these Bylaws, any proper matter may be presented at an annual meeting for such action. The notice of any special or annual meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. For any matter to be presented by a shareholder at an annual meeting held after December 31, 1993, but on or before December 31, 1999, including the nomination of any person (other than a person nominated by or at the direction of the Board) for election to the Board, written notice must be received by the Secretary of the corporation from the shareholder not less than sixty nor more than one hundred twenty days prior to the date of the annual meeting specified in these Bylaws and to which the shareholder's notice relates; provided however, that in the event the annual meeting to which the shareholder's written notice relates is to be held on a date which is more than thirty days earlier than the date of the annual meeting specified in these Bylaws, the notice from a shareholder must be received by the Secretary not later than the close of business on the tenth day following the date on which public disclosure of the date of the annual meeting was made or given to the shareholders. For any matter to be presented by a shareholder at an annual meeting held after December 31, 1999, including the nomination of any person (other than a person nominated by or at the direction of the Board) for election to the Board, written 2 notice must be received by the Secretary of the corporation from the shareholder not more than one hundred eighty days nor less than one hundred twenty days prior to the date on which the proxy materials for the prior year's annual meeting were first released to shareholders by the corporation; provided however, that in the event the annual meeting to which the shareholder's written notice relates is to be held on a date which is more than thirty days earlier or later than the date of the annual meeting specified in these Bylaws, the notice from a shareholder must be received by the Secretary not earlier than two hundred twenty days prior to the date of the annual meeting to which the shareholder's notice relates nor later than one hundred sixty days prior to the date of such annual meeting, unless less than one hundred seventy days' prior public disclosure of the date of the meeting is made by the earliest possible quarterly report on Form 10-Q, or, if impracticable, any means reasonably calculated to inform shareholders including without limitation a report on Form 8-K, a press release or publication once in a newspaper of general circulation in the county in which the principal office is located, in which event notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the date of such public disclosure. The shareholder's notice to the Secretary shall set forth (a) a brief description of each matter to be presented at the annual meeting by the shareholder; (b) the name and address, as they appear on the corporation's books, of the shareholder; (c) the class and number of shares of the corporation which are beneficially owned by the shareholder; and (d) any material interest of the shareholder in the matters to be presented. Any shareholder who intends to nominate a candidate for election as a director shall also set forth in such a notice (i) the name, age, business address and residence address of each nominee that he or she intends to nominate at the meeting, (ii) the principal occupation or employment of each nominee, (iii) the class and number of shares of capital stock of the corporation beneficially owned by each nominee, and (iv) any other information concerning the nominee that would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of the nominee. The notice shall also include a consent, signed by the shareholder's nominees, to serve as a director of the corporation if elected. Notwithstanding anything in these Bylaws to the contrary, and subject to the provisions of any applicable law, no business shall be conducted at a special or annual meeting except in accordance with the procedures set forth in this Section 4. Notice of a shareholders' meeting shall be given either personally or by first-class mail (or, if the outstanding shares of the corporation are held of record by 500 or more persons on the record date for the meeting, by third-class mail) or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or, if no such address appears or is given, at the place where the principal office of the corporation is located or by publication at least once in a newspaper of general 3 circulation in the county in which the principal office is located. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Section 5. Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or the Articles; provided, however, that the shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to have less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 6. Adjourned Meeting and Notice Thereof. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. However, when any shareholders' meeting is adjourned for more than forty-five days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 7. Voting. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 8 of this Article. 4 Voting shall in all cases be subject to the provisions of Chapter 7 of the California General Corporation Law, and to the following provisions: (a) Subject to clause (g), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (b) Shares standing in the name of a receiver may be voted by such receiver; and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. (c) Subject to the provisions of Section 705 of the California General Corporation Law and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the corporation has notice, actual or constructive, of the non-age unless a guardian of the minor's property has been appointed and written notice of such appointment given to the corporation. (e) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation, or by any other person authorized to do so by the chairman of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this subdivision, unless the contrary is shown. (f) Shares of the corporation owned by any of its subsidiaries shall not be entitled to vote on any matter. (g) Shares of the corporation held by the corporation in a fiduciary capacity, and shares of the corporation held in a fiduciary capacity by any of its subsidiaries, shall not be entitled to vote on any matter, except to the extent that 5 the settlor or beneficial owner possesses and exercises a right to vote or to give the corporation binding instructions as to how to vote such shares. (h) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a shareholder voting agreement or otherwise, or if two or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) If only one votes, such act binds all; (ii) If more than one vote, the act of the majority so voting binds all; (iii If more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. No shareholder of any class of stock of this corporation shall be entitled to cumulate votes at any election of directors of this corporation. Elections for directors need not be by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at the meeting and before the voting begins. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. Section 8. Record Date. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty days nor less than ten days prior to the date of the meeting nor more than sixty days prior to any other action. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, 6 distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date, except as otherwise provided by law or these Bylaws. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty-five days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than as set forth in this Section 8 or Section 10 of this Article shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 9. Consent of Absentees. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601 (f) of the California General Corporation Law. Section 10. Action Without Meeting. Subject to Section 603 of the California General Corporation Law, any action which, under any provision of the California General Corporation Law, may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless a record date for voting purposes be fixed as provided in Section 8 of this Article, the record date for determining shareholders entitled to give consent pursuant to this Section 10, when no prior action by the 7 Board has been taken, shall be the day on which the first written consent is given. Section 11. Proxies. Every person entitled to vote shares has the right to do so either in person or by one or more persons, not to exceed three, designated by a proxy authorized by such shareholder or the shareholder's attorney in fact and filed with the corporation, in accordance with Cal. Corp. Code ss.178. Subject to the following sentence, any proxy duly authorized continues in full force and effect until revoked by the person authorizing it prior to the vote pursuant thereto by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy authorized by the person authorizing the prior proxy and presented to the meeting, or by attendance at the meeting and voting in person by the person authorizing the proxy; provided, however, that a proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by this corporation. No proxy shall be valid after the expiration of eleven months from the date of its authorization unless otherwise provided in the proxy. Section 12. Inspectors of Election. In advance of any meeting of shareholders, the Board may appoint any persons other than nominees as inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointments at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. The duties of such inspectors shall be as prescribed by Section 707 (b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. 8 ARTICLE III -- DIRECTORS Section 1. Powers. Subject to limitations of the Articles, of these Bylaws and of the California General Corporation Law relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may delegate the management of the day-to-day operation of the business of the corporation provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents and employees of the corporation, prescribe the powers and duties for them as may not be inconsistent with law, with the Articles or these Bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefor not inconsistent with law, or with the Articles or these Bylaws, as they may deem best. (c) To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Section 2. Number of Directors. The authorized number of directors shall be not less than fifteen nor more than twenty until changed by amendment of the Articles or by a Bylaw duly adopted by the shareholders. The exact number of directors shall be fixed, within the limits specified, by the Board by adoption of a resolution or by the 9 shareholders in the same manner provided in these Bylaws for the amendment thereof. Section 3. Election and Term of Office. The directors shall be elected at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 4. Vacancies. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. Vacancies existing as a result of a removal of a director may be filled by the shareholders as provided by law. A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. 10 No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. Section 5. Place of Meeting. Regular or special meetings of the Board shall be held at any place within or without the State of California which has been designated from time to time by the Board or as provided in these Bylaws. In the absence of such designation, regular meetings shall be held at the principal office of the corporation. Section 6. Regular Meetings. Promptly following each annual meeting of shareholders the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Regular meetings of the Board shall be held at the principal office of the corporation without notice on the third Thursday of the months of February, April, May, July and September, and on the second Thursday in December, at the hour of 9:00 a.m. or as soon thereafter as the regular meeting of the Board of Directors of Southern California Edison Company is adjourned, and on the third Thursday in March, at the hour of 8:00 a.m. or as soon thereafter as the regular meeting of the Board of Directors of Southern California Edison Company is adjourned. Call and notice of all regular meetings of the Board are not required. Section 7. Special Meetings. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or by any two directors. Special meetings of the Board shall be held upon four days' written notice or forty-eight hours' notice given personally or by telephone, telegraph, telex, facsimile, electronic mail or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the corporation or as may have been given to the corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. The notice need not specify the purpose of such special meeting. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mail, postage prepaid. Any other written 11 notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone, radio or other similar means to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 8. Quorum. One-third of the number of authorized directors constitutes a quorum of the Board for the transaction of business, except to adjourn as provided in Section ll of this Article. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number is required by law or by the Articles; provided, however, that a meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. Participation in Meetings by Conference Telephone. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. Section 10. Waiver of Notice. The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 11. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place is fixed at the meeting adjourned. If the meeting is adjourned for more than twenty-four hours, notice of any adjournment to another 12 time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 12. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. Section 13. Action Without Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall have the same force and effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board. Section 14. Rights of Inspection. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts. Section 15. Committees. The Board may appoint one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may delegate to such committees any or all of the authority of the Board except with respect to: (a) The approval of any action for which the California General Corporation Law also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the Board or in any committee; (c) The fixing of compensation of the directors for serving on the Board or on any committee; (d) The amendment or repeal of Bylaws or the adoption of new Bylaws; 13 (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation except at a rate or in a periodic amount or within a price range determined by the Board; or (g) The appointment of other committees of the Board or the members thereof. Any such committee, or any member or alternate member thereof, must be appointed by resolution adopted by a majority of the exact number of authorized directors as specified in Section 2 of this Article. The Board shall have the power to prescribe the manner and timing of giving of notice of regular or special meetings of any committee and the manner in which proceedings of any committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee. ARTICLE IV -- OFFICERS Section 1. Officers. The officers of the corporation shall be a Chairman of the Board, a President, a Chief Financial Officer, one or more Vice Presidents, a General Counsel and a Secretary. The corporation may also have, at the discretion of the Board, one or more Associate General Counsel, one or more Assistant General Counsel, a Controller, one or more Assistant Controllers, a Treasurer, one or more Assistant Treasurers and one or more Assistant Secretaries, and such other officers as may be elected or appointed in accordance with Section 5 of this Article. The Board, the Chairman of the Board or the President may confer a special title upon any Vice President not specified herein. Section 2. Election. The officers of the corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 5 or Section 6 of this Article, shall be chosen annually by, and shall serve at the pleasure of the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected. 14 Section 3. Eligibility of Chairman or President. No person shall be eligible for the office of Chairman of the Board or President unless such person is a member of the Board of the corporation; any other officer may or may not be a director. Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board at any time or by any officer upon whom such power or removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment of the officer. Any officer may resign at any time by giving written notice to the corporation, but without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Appointment of Other Officers. The Board may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in the Bylaws or as the Board may from time to time determine. Section 6. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled at any time deemed appropriate by the Board in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 7. Salaries. The salaries of the Chairman of the Board, President, Chief Financial Officer, Vice Presidents, General Counsel, Controller, Treasurer and Secretary of the corporation shall be fixed by the Board. Salaries of all other officers shall be as approved from time to time by the chief executive officer. 15 Section 8. Furnish Security for Faithfulness. Any officer or employee shall, if required by the Board, furnish to the corporation security for faithfulness to the extent and of the character that may be required. Section 9. Chairman's Duties; Succession to Such Duties in Chairman's Absence or Disability. The Chairman of the Board shall be the chief executive officer of the corporation and shall preside at all meetings of the shareholders and of the Board. Subject to the Board, the Chairman of the Board shall have charge of the business of the corporation. The Chairman of the Board shall keep the Board fully informed, and shall freely consult them concerning the business of the corporation. In the absence or disability of the Chairman of the Board, the President shall act as the chief executive officer of the corporation; in the absence or disability of the Chairman of the Board and the President, the next in order of election by the Board of the Vice Presidents shall act as chief executive officer of the corporation. In the absence or disability of the Chairman of the Board, the President shall act as Chairman of the Board at meetings of the Board; in the absence or disability of the Chairman of the Board and the President, the next, in order of election by the Board, of the Vice Presidents who is a member of the Board shall act as Chairman of the Board at any such meeting of the Board; in the absence or disability of the Chairman of the Board, the President, and such Vice Presidents who are members of the Board, the Board shall designate a temporary Chairman to preside at any such meeting of the Board. Section 10. President's Duties. The President shall perform such other duties as the Chairman of the Board shall delegate or assign to such officer. Section 11. Chief Financial Officer. The Chief Financial Officer of the corporation shall be the chief consulting officer in all matters of financial import and shall have control over all financial matters concerning the corporation. If the corporation does not have a currently elected and acting Controller, the Chief Financial Officer shall also be the Chief Accounting Officer of the corporation. 16 Section 12. Vice Presidents' Duties. The Vice Presidents shall perform such other duties as the chief executive officer shall designate. Section 13. General Counsel's Duties. The General Counsel shall be the chief consulting officer of the corporation in all legal matters and, subject to the chief executive officer, shall have control over all matters of legal import concerning the corporation. Section 14. Associate General Counsel's and Assistant General Counsel's Duties. The Associate General Counsel shall perform such of the duties of the General Counsel as the General Counsel shall designate, and in the absence or disability of the General Counsel, the Associate General Counsel, in order of election to that office by the Board at its latest organizational meeting, shall perform the duties of the General Counsel. The Assistant General Counsel shall perform such duties as the General Counsel shall designate. Section 15. Controller's Duties. The Controller shall be the chief accounting officer of the Corporation and, subject to the Chief Financial Officer, shall have control over all accounting matters concerning the Corporation and shall perform such other duties as the Chief Executive Officer shall designate. Section 16. Assistant Controllers' Duties. The Assistant Controllers shall perform such of the duties of the Controller as the Controller shall designate, and in the absence or disability of the Controller, the Assistant Controllers, in order of election to that office by the Board at its latest organizational meeting, shall perform the duties of the Controller. Section 17. Treasurer's Duties. It shall be the duty of the Treasurer to keep in custody or control all money, stocks, bonds, evidences of debt, securities and other items of value that may belong to, or be in the possession or control of, the corporation, and to dispose of the same in such manner as the Board or the chief executive officer may direct, and to perform all acts incident to the position of Treasurer. 17 Section 18. Assistant Treasurers' Duties. The Assistant Treasurers shall perform such of the duties of the Treasurer as the Treasurer shall designate, and in the absence or disability of the Treasurer, the Assistant Treasurers, in order of election to that office by the Board at its latest organizational meeting, shall perform the duties of the Treasurer, unless action is taken by the Board as contemplated in Article IV, Section 22. Section 19. Secretary's Duties. The Secretary shall keep or cause to be kept full and complete records of the proceedings of shareholders, the Board and its committees at all meetings, and shall affix the corporate seal and attest by signing copies of any part thereof when required. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the corporation at the principal office in accordance with Section 213 of the California General Corporation Law. The Secretary shall be the custodian of the corporate seal and shall affix it to such instruments as may be required. The Secretary shall keep on hand a supply of blank stock certificates of such forms as the Board may adopt. The Secretary shall serve or cause to be served by publication or otherwise, as may be required, all notices of meetings and of other corporate acts that may by law or otherwise be required to be served, and shall make or cause to be made and filed in the principal office of the corporation, the necessary certificate or proofs thereof. An affidavit of mailing of any notice of a shareholders' meeting or of any report, in accordance with the provisions of Section 60l (b) of the California General Corporation Law, executed by the Secretary shall be prima facie evidence of the fact that such notice or report had been duly given. The Secretary may, with the Chairman of the Board, the President, or a Vice President, sign certificates of ownership of stock in the corporation, and shall cause all certificates so signed to be delivered to those entitled thereto. The Secretary shall keep all records required by the California General Corporation Law. 18 The Secretary shall generally perform the duties usual to the office of secretary of corporations, and such other duties as the chief executive officer shall designate. Section 20. Assistant Secretaries' Duties. Assistant Secretaries shall perform such of the duties of the Secretary as the Secretary shall designate, and in the absence or disability of the Secretary, the Assistant Secretaries, in the order of election to that office by the Board at its latest organizational meeting, shall perform the duties of the Secretary, unless action is taken by the Board as contemplated in Article IV, Sections 21 and 22 of these Bylaws. Section 21. Secretary Pro Tempore. At any meeting of the Board or of the shareholders from which the Secretary is absent, a Secretary pro tempore may be appointed and act. Section 22. Election of Acting Treasurer or Acting Secretary. The Board may elect an Acting Treasurer, who shall perform all the duties of the Treasurer during the absence or disability of the Treasurer, and who shall hold office only for such a term as shall be determined by the Board. The Board may elect an Acting Secretary, who shall perform all the duties of the Secretary during the absence or disability of the Secretary, and who shall hold office only for such a term as shall be determined by the Board. Whenever the Board shall elect either an Acting Treasurer or Acting Secretary, or both, the officers of the corporation as set forth in Article IV, Section 1 of these Bylaws, shall include as if therein specifically set out, an Acting Treasurer or an Acting Secretary, or both. Section 23. Performance of Duties. Officers shall perform the duties of their respective offices as stated in these Bylaws, and such additional duties as the Board shall designate. 19 ARTICLE V -- OTHER PROVISIONS Section 1. Inspection of Corporate Records. (a) A shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation; or (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (b) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (c) The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (d) Any such inspection and copying under this Article may be made in person or by agent or attorney. 20 Section 2. Inspection of Bylaws. The corporation shall keep in its principle office the original or a copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times during office hours. Section 3. Contracts and Other Instruments, Loans, Notes and Deposits of Funds. The Chairman of the Board, the President, or a Vice President, either alone or with the Secretary or an Assistant Secretary, or the Secretary alone, shall execute in the name of the corporation such written instruments as may be authorized by the Board and, without special direction of the Board, such instruments as transactions of the ordinary business of the corporation may require and, such officers without the special direction of the Board may authenticate, attest or countersign any such instruments when deemed appropriate. The Board may authorize any person, persons, entity, entities, attorney, attorneys, attorney-in-fact, attorneys-in-fact, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. No loans shall be contracted on behalf of the corporation and no evidences of such indebtedness shall be issued in its name unless authorized by the Board as it may direct. Such authority may be general or confined to specific instances. All checks, drafts, or other similar orders for the payment of money, notes, or other such evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as the Board or chief executive officer may direct. Unless authorized by the Board or these Bylaws, no officer, agent, employee or any other person or persons shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board may direct. 21 Section 4. Certificates of Stock. Every holder of shares of the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board, the President, or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Certificates for shares may be used prior to full payment under such restrictions and for such purposes as the Board may provide; provided, however, that on any certificate issued to represent any partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Except as provided in this Section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and canceled at the same time. The Board may, however, if any certificate for shares is alleged to have been lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. Transfer Agent, Transfer Clerk and Registrar. The Board may, from time to time, appoint transfer agents, transfer clerks, and stock registrars to transfer and register the certificates of the capital stock of the corporation, and may provide that no certificate of capital stock shall be valid without the signature of the stock transfer agent or transfer clerk, and stock registrar. Section 6. Representation of Shares of Other Corporations. The chief executive officer or any other officer or officers authorized by the Board or the chief executive officer are each authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. 22 The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. Section 7. Stock Purchase Plans. The corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired, to one or more of the employees or directors of the corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. Any such stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment and option or obligation on the part of the corporation to repurchase the shares upon termination of employment, restrictions upon transfer of the shares, the time limits of and termination of the plan, and any other matters, not in violation of applicable law, as may be included in the plan as approved or authorized by the Board or any committee of the Board. Section 8. Fiscal Year and Subdivisions. The calendar year shall be the corporate fiscal year of the corporation. For the purpose of paying dividends, for making reports and for the convenient transaction of the business of the corporation, the Board may divide the fiscal year into appropriate subdivisions. Section 9. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these Bylaws. 23 ARTICLE VI -- INDEMNIFICATION Section 1. Indemnification of Directors and Officers. Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, formal or informal, whether brought in the name of the corporation or otherwise and whether of a civil, criminal, administrative or investigative nature (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is an alleged action or inaction in an official capacity or in any other capacity while serving as a director or officer, shall, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permissible under California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that (A) the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of the corporation; (B) the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) other than a proceeding by or in the name of the corporation to procure a judgment in its favor only if any settlement of such a proceeding is approved in writing by the corporation; (C) that no such person shall be indemnified (i) except to the extent that the aggregate of losses to be indemnified exceeds the amount of such losses for which the director or officer is paid pursuant to any directors' and officers' liability insurance policy maintained by the corporation; (ii) on account of any suit in which judgment is rendered against such person for an accounting of profits made from the purchase or sale by such person of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iii) if a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful; and (iv) as to circumstances in which indemnity is expressly prohibited by Section 317 of the General Corporation Law of California (the "Law"); and (D) that no such person 24 shall be indemnified with regard to any action brought by or in the right of the corporation for breach of duty to the corporation and its shareholders (a) for acts or omissions involving intentional misconduct or knowing and culpable violation of law; (b) for acts or omissions that the director or officer believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director or officer; (c) for any transaction from which the director or officer derived an improper personal benefit; (d) for acts or omissions that show a reckless disregard for the director's or officer's duty to the corporation or its shareholders in circumstances in which the director or officer was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the corporation or its shareholders; (e) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's or officer's duties to the corporation or its shareholders; and (f) for costs, charges, expenses, liabilities and losses arising under Section 310 or 316 of the Law. The right to indemnification conferred in this Article shall include the right to be paid by the corporation expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that if the Law permits the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, such advances shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts to the corporation if it shall be ultimately determined that such person is not entitled to be indemnified. Section 2. Indemnification of Employees and Agents. A person who was or is a party or is threatened to be made a party to or is involved in any proceeding by reason of the fact that he or she is or was an employee or agent of the corporation or is or was serving at the request of the corporation as an employee or agent of another enterprise, including service with respect to employee benefit plans, whether the basis of such action is an alleged action or inaction in an official capacity or in any other capacity while serving as an employee or agent, may, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permitted by California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses, (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. 25 Section 3. Right of Directors and Officers to Bring Suit. If a claim under Section 1 of this Article is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. Neither the failure of the corporation (including its Board, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its Board, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the claimant has not met the applicable standard of conduct. Section 4. Successful Defense. Notwithstanding any other provision of this Article, to the extent that a director or officer has been successful on the merits or otherwise (including the dismissal of an action without prejudice or the settlement of a proceeding or action without admission of liability) in defense of any proceeding referred to in Section 1 or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. Section 5. Non-Exclusivity of Rights. The right to indemnification provided by this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Section 6. Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Law. 26 Section 7. Expenses as a Witness. To the extent that any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs and expenses actually and reasonably incurred by him or her on his or her behalf in connection therewith. Section 8. Indemnity Agreements. The corporation may enter into agreements with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permissible under the Law and the corporation's Articles of Incorporation. Section 9. Separability. Each and every paragraph, sentence, term and provision of this Article is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Article may be modified by a court of competent jurisdiction to preserve its validity and to provide the claimant with, subject to the limitations set forth in this Article and any agreement between the corporation and claimant, the broadest possible indemnification permitted under applicable law. Section 10. Effect of Repeal or Modification. Any repeal or modification of this Article shall not adversely affect any right of indemnification of a director or officer existing at the time of such repeal or modification with respect to any action or omission occurring prior to such repeal or modification. ARTICLE VII -- EMERGENCY PROVISIONS Section 1. General. The provisions of this Article shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic or other attack on the United States or a disaster making it impossible or impracticable for the corporation to conduct its business without recourse to the provisions of 27 this Article. Said provisions in such event shall override all other Bylaws of the corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article. Section 2. Unavailable Directors. All directors of the corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. Section 3. Authorized Number of Directors. The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2, or the minimum number required by law, whichever number is greater. Section 4. Quorum. The number of directors necessary to constitute a quorum shall be one-third of the authorized number of directors as specified in the foregoing Section, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the Bylaws of a corporation to specify. Section 5. Creation of Emergency Committee. In the event the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. 28 Section 6. Constitution of Emergency Committee. The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 2, provided that such remaining directors are not less than three in number. In the event such remaining directors are less than three in number the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining directors and no officers or employees of the corporation available, the emergency committee shall consist of three persons designated in writing by the shareholder owning the largest number of shares of record as of the date of the last record date. Section 7. Powers of Emergency Committee. The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. Section 8. Directors Becoming Available. Any person who has ceased to be a director pursuant to the provisions of Section 2 and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 9. Election of Board of Directors. The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a board of directors, 29 and upon such election all the powers and authorities of the emergency committee shall cease. Section 10. Termination of Emergency Committee. In the event, after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 2 become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. ARTICLE VIII -- AMENDMENTS Section 1. Amendments. These Bylaws may be amended or repealed either by approval of the outstanding shares or by the approval of the Board; provided, however, that a Bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable Board or vice versa may only be adopted by approval of the outstanding shares. The exact number of directors within the maximum and minimum number specified in these Bylaws may be amended by the Board alone. EXHIBIT 10.21 RESOLUTION OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF SOUTHERN CALIFORNIA EDISON COMPANY Adopted November 30, 1989 RE: AMENDMENT OF DISPUTE RESOLUTION PROCEDURES IN NON-QUALIFIED BENEFIT PLANS WHEREAS, the Board of Directors ("Board") has previously adopted certain non-qualified benefit plans (the "Plans") for eligible executives and directors of the corporation, including the (a) 1981, 1987, 1988, and 1989 Deferred Compensation Plans for executives, (b) the Executive Supplemental Benefit Program, (c) the Executive Retirement Plan, (d) the 1985 Deferred Compensation Plan for executives, (e) the Retirement Plan for Directors, and (f) the 1985, 1987, 1988 and 1989 Deferred Compensation Plans for directors; and WHEREAS, these Plans have been adopted, among other things, to attract and retain the corporation's team of executives and directors, provide financial incentives to reinforce and recognize performance and accomplishments, and make the corporation's compensation programs for executives and directors more competitive within the electric utility industry and general industry; and WHEREAS, it is now deemed desirable to amend these Plans to provide dispute resolution procedures which will guarantee speedy and fair review of any claims that may arise under the Plans; NOW, THEREFORE, BE IT RESOLVED, that the Plans, be and they hereby are, amended as set forth in the attached "Exhibit A". EXHIBIT A RE: AMENDMENT OF DISPUTE RESOLUTION PROCEDURES 1. 1981, 1987, 1988. and 1989 Deferred Compensation Plans. ------------------------------------------------------ Section 11 of each of these plans is amended to read as follows: "The Board (either directly or through its designees) will have power and authority to interpret, construe, and administer this Agreement; provided that, the Board's authority to interpret this Agreement shall not cause the Board's decisions in this regard to be entitled to a deferential standard of review in the event that a Participant or beneficiary seeks review of the Board's decision as described below. In addition, the Board shall have the power to prospectively modify or terminate this Agreement, provided that any such modification or termination does not result in the elimination of any rights that the Participant or beneficiary may have under this Agreement. Absent the consent of the Participant, however, the Board shall in no event have any authority to modify this section. "No member of the Board, nor its designee, shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement. "In the event of Plan amendment or termination, the benefit payable from the account balance of a retired or deceased Participant shall not be impaired, and the benefit from the account balances of other Participants shall not be less than the benefit to which each such Participant would have been entitled from his or her account balance immediately prior to such amendment or termination. "Because it is agreed that time will be of the essence in determining whether any payments are due to Participant or his or her beneficiary under this Agreement, a Participant or beneficiary may, if he or she desires, submit any claim for payment under this Agreement to arbitration. This right to select arbitration shall be solely that of the Participant or beneficiary and the Participant or beneficiary may decide whether or not to arbitrate in his or ber discretion. The "right to select arbitrationn is not mandatory on the Participant or beneficiary, and the Participant or beneficiary may choose in lieu thereof to bring an action in an appropriate civil court. Once an arbitration is commenced, however, it may not be discontinued without the mutual consent of both parties to the arbitration. During the lifetime of the Participant only he or she can use the arbitration procedure set forth in this section. "Any claim for arbitration may be submitted as follows: if Participant or beneficiary has submitted a request to be paid under this Agreement and the claim is finally denied by the Company in whole or in part, such claim may be filed in writing with an arbitrator of Participant's or beneficiary's choice who is selected by the method described in the next three sentences. The first step of the selection shall consist of the Participant or beneficiary submitting a list of five potential arbitrators to the Company. Each of the five arbitrators must be either (1) a member of the National Academy of Arbitrators located in the State of California or (2) a retired California Superior Court or Appellate Court judge. Within one week after receipt of the list, the Company shall select one of the five arbitrators as the arbitrator for the dispute in question. If the Company fails to select an arbitrator within one week after receipt of the list, the Participant or beneficiary shall then designate one of the five arbitrators for the dispute in question. "The arbitration hearing shall be held within seven days (or as soon thereafter as possible) after the picking of the arbitrator. No continuance of said hearing shall be allowed without the mutual consent of Participant or beneficiary and the Company. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion, and the arbitrator may close the hearing in his or her sole discretion when he or she decides he or she has heard sufficient evidence to satisfy issuance of an award. "The arbitrator's award shall be rendered as expeditiously as possible and in no event later than one week after the close of the hearing. "In the event the arbitrator finds that the Company has breached this Agreement, he or she shall order the Company to pay to Participant or beneficiary within two business days after the decision is rendered the amount then due the Participant or beneficiary, plus, notwithstanding anything to the contrary in this Agreement, an additional amount equal to 20% of the amount actually in dispute. This additional amount shall constitute an additional benefit under this Agreement. The award of the arbitrator shall be final and binding upon the parties. "The award may be enforced in any appropriate court as soon as possible after its rendition. The Company will be considered the prevailing party in a dispute if the arbitrator determines (1) that the Company has not breached this Agreement and (2) the claim by Participant or his or her beneficiary was not made in good faith. Otherwise, the Participant or his or her beneficiary will be considered the prevailing party. In the event that the Company is the prevailing party, the fee of the arbitrator and all necessary expenses of the hearing (excluding any attorneys' fees incurred by the Company) including stenographic reporter, if employed, shall be paid by the losing party. In the event that the Participant or his or her beneficiary is the prevailing party, the fee of the arbitrator and all necessary expenses of the hearing (including all attorneys, fees incurred by Participant or his or her beneficiary in pursuing his or her claim), including the fees of a stenographic reporter if employed, shall be paid by the Company." 2. Executive Supplemental Benefit Program. -------------------------------------- Section 7 of Part E of the Program is amended by inserting the words "Subject to Section 8 of Part E," at the beginning. Section 8 of Part E is amended to read identically to the amendment set forth in Section 1 of this Exhibit A, except that (1) instead of the word "Agreement" the word "Program" shall be used and (2), in lieu of paragraph three of said amendment, the following paragraph shall be substituted: "In the event of an amendment or termination of any Part of this Program, the benefits payable on account of a retired or deceased Participant shall not be impaired, and the benefits of other Participants shall not be less than the benefits to which each such Participant would have been entitled immediately prior to such amendment or termination of any Part (or Parts) of the Program." 3. Executive Retirement Plan. ------------------------- Section 12 of the plan is amended to read identically to the amendment set forth in Section 1 of this Exhibit A, except that (1) instead of the word "Agreement" the word "Plan" shall be used, the words "Eligible Employee" shall be used in lieu of the word "Participant," and (3), in lieu of paragraph three of said amendment, the following paragraph shall be substituted: "In the event of Plan amendment or termination which has the effect of eliminating or reducing a benefit under the Plan, the benefit payable on account of a retired Eligible Employee or survivor or other beneficiary shall not be impaired, and the benefits of other Eligible Employees shall not be less than the benefit to which each such Eligible Employee would have been entitled if he or she had retired immediately prior to such amendment or termination." 4. 1985 Deferred Compensation Plan for Executives. ---------------------------------------------- Section 10 of the plan is amended to read identically to the amendment set forth in Section 1 of this Exhibit A. 5. Retirement Plan for Directors. ----------------------------- Article V of the plan is,amended to delete the third and fourth sections thereof. New Article VI entitled "Plan Interpretation" is added to read identically to the amendment set forth in Section 1 of this Exhibit A, except that (1) instead of the word "Agreement" the word "Plan" shall be used, the words "Eligible Director" shall be used in lieu of the word "Participant," and (3), in lieu of paragraph three of said amendment, the following paragraph shall be substituted: "In the event of Plan amendment or termination which has the effect of eliminating or reducing a benefit under the Plan, the benefit payable on account of a retired Eligible Director or survivor or other beneficiary shall not be impaired, and the benefits of other Eligible Directors shall not be less than the benefit to which each such Eligible Director would have been entitled if he or she had retired immediately prior to such amendment or termination." 6. 1995, 1987, 1988 and 1989 Deferred Compensation Plans for Directors ------------------------------------------------------------------- Section 9 of each of these plans is amended to read identically to the amendment set forth in Section 1 of this Exhibit A. EXHIBIT 10.22 EDISON INTERNATIONAL LOGO March 10, 1997 Mr. Stephen Pazian 228 Phillippa Street Hinsdale, IL 60521-2435 VIA Fax: (630) 325-2737 Dear Steve: I am pleased to offer you the position of President and Chief Executive Officer of our retail businesses, including Edison source, Select and EV. We are confident you will make a significant contribution t our company in this essential role. We are equally confident that the company will provide you with substantial challenges and opportunity. As we have shared with you through the business plans and conversations with various executives, the growth of our retail businesses represents an extremely important part of Edison International's overall strategic plan. We're strongly committed to making the investments in skills and physical assets that are necessary to attain a lead position for these businesses. Specifically, the offer of employment includes: 1. You will have the title of President and Chief Executive Officer of retail businesses (including Edison Source, Select and EV), and you will be a member of the Chairman's Strategic Advisory Council, the small group of senior executives charged with strategy formulation for Edison International. You will report directly to me in this role. 2. Your base salary will be $380,000 per year for the first year of employment, starting at a mutually agreed upon date. 3. You will be eligible for a maximum annual incentive award of 120% of your annual salary (target opportunity of 60%) paid in the February following each plan year. Although 1997 will not be a full year of employment, you will receive a guaranteed bonus of $228,000 which represents a full annual target award. 1 4. In the future, your annual salary, annual incentive awards, and long-term incentives will be reviewed on a regular basis at the same time and in the same manner as all other officers. 5. You will receive an initial long-term incentive award comprised of Edison International non-qualified stock options with performance-related dividend equivalents covering 100,000 shares. A portion of this grant is intended to offset a portion of the amount that was deposited in your deferred compensation account when you were hired at Ameritech. The economic value of this grant is $570,000, based on a Black-Scholes calculation of $5.70 effective last November. An updated Black-Sholes calculation today would more realistically value these options at $700,000. For annual grant beginning in early 1998, the target total option value would be 70% of base salary. We will work with you to design a long-term incentive plan (a phantom equity plan) to take effect for the 1998 performance year, and your option grants will reflect a mix of Edison International non-qualified stock options and phantom stock options tied to the growth of these businesses. 6. To offset the current economic value of your unvested Ameritech stock options and also a portion of the amount that was deposited by Ameritech into your deferred compensation account when you were hired, we will deposit $450,000 into your Deferred Compensation account at Edison. This money will vest at the end of five years of employment with our company. 7. You will be able to defer up to 75% of your base salary and 100% of your bonus in our Deferred Compensation Plan. All deferrals receive a 3% company match and the current interest is 9.2%. 8. You will be credited with one additional year of service in the Executive Retirement Plan for each year of actual service up to ten years. 9. We will provide a term life insurance policy with a $2 million death benefit. 10. To assist you in establishing residence within reasonable commuting distance, you will receive a full relocation and moving expense package including: (1) home marketing/home sale assistance and reimbursements, (2) home search assistance services and necessary house-hunting trips, (3) transportation of household goods and up to 90 days of temporary storage, (4) final move expenses including transportation, lodging and meals, (5) temporary living expenses not to exceed 90 days, (6) reasonable closing costs, plus discount points not to exceed 1% of the new loan amount, (7) a five-year mortgage subsidy on up to a million dollar mortgage of 2 5%-4%-3%-2% interest rate reductions to substantially reduce your monthly payments (while taxable, this subsidy will be offset by the full interest rate deduction you will be entitled to, resulting in an essentially 'tax-free' benefit, (8) miscellaneous relocation allowance of $15,000, and (9) tax gross up on house hunting and temporary living expenses and reasonable home purchase closing costs. 11. You will be provided annual with an additional ten days of paid time off until such time as your annual earned vacation reaches 20 days. This paid time off is available after vacation is exhausted and must be utilized in the calendar year provided. 12. A club membership will be included as an executive benefit. 13. You will receive a monthly car allowance of $500. 14. To assist you with the transition of your financial planning, tax and estate planning affairs, you will receive a one-time lump sum payment of $15,000. Beginning in 1998, you will be eligible for our normal executive financial planning benefit of $5,000 annually. 15. You will participate in all benefit programs offered to Edison employees, subject to the eligibility rules of each program. In addition, you will receive all executive benefits, including the Executive Retirement Plan, Benefit Adjustment Account, Executive Supplemental Survivor Income Continuation Plan, Executive Supplemental Short-Term Disability Plan, Estate and Financial Planning Program, and other executive perquisites as described. 16. If you are involuntarily terminated within the first three years of your employment, except for cause, you will receive an amount equal to the remaining salary that would have otherwise been payable to you for the balance of the three year period, with a minimum payout of one year's base salary. Thereafter, you will be entitled to a severance payment equal to one year of base salary if you are involuntarily terminated (except for cause) at some future date. In addition, if service is terminated involuntarily (except for cause): (a) both the initial stock options that have been granted to you as described above (in paragraph 5) and the one-time deposit into your Deferred Compensation account as described above (in paragraph 6) will vest immediately upon termination; and (b) the additional "service credit years" that have been earned to date will count under the Executive Retirement Plan in determining whether you have necessary five years of service to be eligible to receive retirement benefits. 3 This offer is contingent upon completion of a physical/drug screen examination by a qualified medical facility and completion of a background verification. This offer is subject to final approval by the Edison International Board of Directors. I am personally delighted to have the opportunity to work closely with you, Steve, and I look forward to our future together. Please feel free to call me at the office (818-302-2265) or my home (818-577-5495) to discuss this futher. I will expect your call on the weekend to hear your reaction to this offer. Sincerely, John E. Bryson -------------------------------- John E. Bryson Acknowledgment and Acceptance of the Terms of this Offer: Accepted: ----------------------- Stephen Pazian Date: _______________________ EXHIBIT 10.23 RETIREMENT AGREEMENT This Retirement Agreement ("Agreement"), is entered into by and between Richard K. Bushey ("RKB") an individual, and Edison International ("EI"), a corporation. In consideration of the covenants undertaken and the releases contained in this Agreement and of RKB's more than 35 years of valued service, RKB on the one hand, and EI on the other hand, agree as follows: 1. RKB will irrevocably resign as an officer of EI and Southern California Edison ("SCE") effective December 31, 1998, by executing a letter substantially in the form attached hereto as Exhibit A and incorporated herein by reference. RKB will irrevocably retire from employment with EI and SCE effective on the later of (a) April 1, 1999, or (b) the date when an amendment providing for a lump sum payment option from the SCE Qualified Retirement Plan (the "Qualified Plan") becomes effective. The date of RKB's retirement as an employee of EI and SCE shall be referred to in this Agreement as the "Effective Date". RKB will continue as an employee of EI and SCE at no less than his current salary until the Effective Date and agrees to provide services to EI and SCE, or to others on behalf of EI or SCE, as mutually agreed upon by RKB and EI's Chief Financial Officer from January 1, 1999, to the Effective Date. 2. RKB will be entitled to severance benefits equal to RKB's final annual salary which will be credited to RKB's account under the Edison International Executive Deferred Compensation Plan (the "Executive DCP") as of the Effective Date. 3. Notwithstanding his resignation as an officer, RKB shall be considered an SCE vice president-level executive for all executive benefit plan purposes during the remainder of his employment, and upon his retirement, he shall be entitled to benefits under such plans on the same basis as any SCE vice president retiring 1 in 1999. RKB and his dependents will be entitled to health care benefits on the same basis as other active SCE executives retiring in 1999. 4. RKB will be eligible for bonus award consideration under the Executive Incentive Plan for 1998 and for the portion of 1999 that he works in accordance with the terms of the plan. 5. RKB has Edison International nonqualified stock options outstanding under the Equity Compensation Plan or predecessor plans. Notwithstanding any terms in the option agreements to the contrary, and subject to approval of the EI Compensation and Executive Personnel Committee ("CEP Committee"), all of RKB's outstanding unvested options will vest on the Effective Date and be exercisable for the full original terms of the agreements granting such options. 6. RKB will receive retirement benefits under the Qualified Plan and the SCE Executive Retirement Plan ("ERP"). With respect to RKB's benefits under the Qualified Plan and the ERP, the parties understand and agree as follows: a. RKB will receive, at his option, either a joint and survivor life annuity or a lump sum payment under the Qualified Plan. The monthly pension benefit payment available to RKB under the Qualified Plan determined in accordance with plan practice assuming an April 1, 1999 Effective Date, is estimated to be approximately $6,609; the actuarially determined lump sum payment equivalent to the joint and survivor annuity is estimated to be approximately $885,000 based on current interest rates. The lump sum amount that will be available to RKB on the Effective Date will be based on the interest rate, determined in accordance with plan practice, used for discounting purposes that is in effect on the Effective Date. b. RKB has elected the 120-month benefit payment option under the ERP. The monthly benefit payments to RKB under the ERP will commence one month after the Effective Date and will be payable for 120 months. The initial monthly payment will be approximately $6,975 assuming an April 1, 1999 Effective Date. In accordance with plan practice, interest will be credited 2 annually at the end of each calendar year and the monthly payment for the following year will be recomputed to reflect the credited interest. c. Benefits under the Qualified Plan will continue for RKB's lifetime, and upon his death, his eligible surviving spouse will commence receiving a 50% survivor annuity payable under the terms of the Qualified Plan for the balance of her life, unless RKB elects a lump sum payment option for the Qualified Plan benefit, in which event RKB shall be ineligible for the lifetime annuity and his surviving spouse will not be eligible for a survivor annuity. d. Based upon RKB's projected accrued sick leave, the total unused sick leave allowance payable under the Qualified Plan and/or the ERP is estimated to be $93,000. This amount is subject to change depending upon sick leave usage prior to the Effective Date. e. The maximum benefits payable under the Qualified Plan are subject to IRS limitations. Because of these limitations, the portions of the retirement benefits payable from the Qualified Plan and the ERP may vary from the amounts shown in this Paragraph 6; however, the total of the retirement benefits payable under the Qualified Plan and the ERP will remain approximately as estimated. 7. Subject to approval of the CEP Committee of RKB's request to defer commencement of payments from the EI Executive Deferred Compensation Plan, the 1981A Deferred Compensation Plan and the 1985 Deferred Compensation Plan, payments will commence on May 1, 2000. Interest will be credited to RKB's Plan accounts at the rate of 8.16% per annum from the Effective Date to April 30, 2000. Thereafter, interest will be credited at the rates and subject to the terms and conditions of the respective plans. 8. EI will credit to RKB's Executive DCP account the sum of $100,000 on the Effective Date, and will pay to RKB an additional $100,000 one year later, and an additional $100,000 two years later, as retainer fees for RKB to remain available as a consultant for a period of 36 months commencing on the Effective Date to provide upon request by the EI Chief Financial Officer, or his delegate, 3 information and assistance to EI or its affiliates with respect to any matters handled by RKB or with which he became familiar while he was employed by EI and SCE. RKB will receive no additional hourly or other compensation for performing these consulting services, but EI will reimburse RKB for any expenses incurred in connection with the providing of such information and assistance as a consultant. EI agrees that it will give RKB reasonable prior notice of its need for his assistance or provision of information, which shall be no more than 39 hours per month, set all meetings at reasonable times convenient to RKB's schedule. RKB and EI agrees that it shallshall submit written statements accounting for his expenses on a monthly basis, and EI will reimburse RKB for these expenses within two weeks after each submittal. 9. On the Effective Date RKB will become the owner at no cost to RKB of the personal computer and related equipment, the facsimile machine and selected furniture and office decorations that EI provided for his use as identified on the schedule attached hereto as Exhibit B and selected by RKB. The values of such items are taxable income to RKB and subject to applicable withholding of taxes pursuant to Paragraph 13 of this Agreement. 10. For the 36-month period immediately following the Effective Date, RKB will not engage in any activity which is directly competitive with EI or any of its affiliates, or serve on the Board of Directors of any corporation engaged in any such business, or render services to any organization or individual in connection with any matter in which the position of such organization or individual is known to RKB to be adverse to the position of EI, or any affiliate of EI, except with the written consent of the Chief Executive Officer or General Counsel of EI. 11. RKB acknowledges that he is in possession of confidential trade secret and business information not publicly available concerning EI and its affiliates. RKB specifically agrees that he will not at any time, in any fashion, form, or manner use or divulge, disclose or communicate to any person, firm, or corporation, in any manner whatsoever, any confidential information concerning any matters affecting or relating to the business of EI and any of its affiliates. 4 12. RKB and EI expressly agree that, except to the extent this Agreement imposes obligations upon the parties, this Agreement will never, at any time, for any purpose whatsoever, be considered as an admission of liability or responsibility of the parties or any of them. Moreover, neither this Agreement nor anything in this Agreement will be construed to be nor will be admissible in any proceeding as evidence of or an admission by EI or any of its affiliates of any violation of its or their policies or procedures, or of state or federal laws or regulations. This Agreement may be introduced, however, in any proceeding to enforce the terms of this Agreement. Such introduction must be pursuant to an order protecting the confidentiality of this Agreement. 13. EI may withhold from any compensation or benefits payable under this Agreement all federal, state and other taxes as may be required pursuant to any law or governmental regulation or ruling. RKB agrees that he will be exclusively liable for the payment of all federal and state taxes that may be due from him as the result of the consideration received from EI herein. 14. If RKB has a right as a former employee and retiree to receive other plan benefits not specifically addressed herein (by way of example and not by way of limitation, benefits under the Stock Savings Plus Plan and other executive retirement and post-retirement survivor benefits), RKB and his beneficiaries will continue to have the right to such other benefits in accordance with the terms of the respective plans. 15. This Agreement will be administered by EI, which will have the general responsibility of reasonably interpreting this Agreement. Any controversy or claim arising out of or relating to this Agreement or breach or alleged breach of this Agreement, or to enforce or interpret this Agreement, which cannot be resolved by the parties will be settled by arbitration to be held in the County of Los Angeles in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties will equally divide the arbitrators' fees. The prevailing party will be entitled to recover against the 5 other party reasonable attorney's fees, expenses and costs incurred in connection with such proceedings including his or its one-half share of the arbitrators' fees. 16. This Agreement will be binding upon any successor in interest of EI. Neither this Agreement nor any right or interest hereunder will be assignable by RKB without EI's prior written consent. Nothing herein will restrict RKB's right to designate beneficiaries under any of the plans in which he is a participant, provided such designations are not prohibited by the applicable plan documents and are otherwise lawful, or to transfer rights to income to any trust or other entity which he may establish for estate planning purposes. Except as required by law, no right to receive payments under this Agreement will be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt to effect such action will be null, void and of no effect. 17. No provision of this Agreement may be amended, modified, or waived except by written agreement signed by the parties hereto. 18. RKB acknowledges and understands that the confidentiality of this Agreement is of the utmost concern to EI and that this Agreement would not have been entered into by EI without his promise to keep such matter confidential. Accordingly, RKB agrees that, except to the extent disclosure is required by law or formal government demand, he will keep the terms and conditions of this Agreement and the Agreement document itself confidential and he will not disclose them to any other person, other than his wife, immediate family members, legal advisors and/or other professional advisors, who will also be advised of its confidentiality and who will agree to be bound by this confidentiality agreement. 19. RKB acknowledges and understands that EI would not enter into this Agreement without it serving as the means to compromise, resolve, settle, and terminate any dispute or claim that may exist between them with respect to RKB's 6 employment with EI and SCE and his retirement therefrom. RKB and EI therefore agree that all of the payments, benefits and rights accruing to RKB from EI pursuant to the terms of this Agreement are hereby made expressly contingent upon RKB's delivery to EI of a fully executed and valid release in the form attached as Exhibit C (the "Release") no earlier than 30 days, nor later than 7 days, prior to the Effective Date. 20. This Agreement will be deemed to have been entered into in the State of California and all questions concerning its validity, interpretation or performance of any of its terms or provisions, or of any rights or obligations of the parties hereto, will be governed and resolved in accordance with the laws of the State of California. Furthermore, no provision of this Agreement is to be interpreted for or against either party because that party, or his legal representative, drafted such provision. 21. RKB represents and agrees that he has carefully read and understands this Agreement, and agrees that neither EI nor any officer, agent, or employee of EI or any of its affiliates has made any representations other than those contained herein. EI agrees that neither RKB nor any of his representatives has made any representations other than those contained herein. Further, RKB and EI expressly agree that they have entered into this Agreement freely and voluntarily and without pressure or coercion from the other or from their respective officers, agents, employees, or anyone else acting on their behalf. RKB further expressly agrees that prior to the execution of this Agreement, he was advised to seek independent legal advice concerning the terms, conditions and effect of this Agreement. 22. RKB and EI represent and agree that this Agreement and the Release contain the entire agreement and understanding between the parties hereto concerning RKB's employment with and retirement from EI and SCE, and other subject matters addressed herein. RKB and EI further represent and agree that the Agreement and Release supersede and replace all prior negotiations and agreements, proposed or otherwise, whether written or oral, concerning the 7 subject matter hereof and that the Agreement and Release constitute an integrated agreement, the terms of which are contractual in nature and not a mere recital. 23. If any provision of this Agreement or the application thereof is held invalid, the invalidity will not affect the other provisions or applications, and to this extent, the provisions of this Agreement are declared to be severable. 24. This Agreement may be executed in counterparts, and each counterpart, when executed, will have the efficacy of a signed original. Photographic copies of such signed counterparts may be used in lieu of the original for any purpose. IN WITNESS WHEREOF, RKB and EI have executed this Agreement on the dates opposite their signatures. I declare under penalty of perjury under the laws of the State of California that I have carefully read the foregoing Agreement and know and fully understand the terms and content thereof and I accept and agree to the provisions it contains and hereby execute it voluntarily and as my own free act with full understanding of its consequences. Dated: September 15, 1998, at Richard K. Bushey ----------------------------- Arcadia, California Richard K. Bushey I warrant and represent that I have the authority to execute this Agreement on behalf of EI. EDISON INTERNATIONAL Dated: October 5, 1998 at Alan J. Fohrer ---------------------------- Rosemead, California Alan J. Fohrer Its: Executive Vice President & Chief Financial Officer 8 SPOUSE'S STATEMENT I have carefully read the foregoing Agreement and I know and fully understand the terms and content thereof. I understand that California is a community property state, and to the extent I now or in the future may have any right, title or interest in anything released, bargained for, received, or agreed to in the Agreement, I hereby expressly agree to be completely bound by all provisions of the Agreement. I have signed this statement as my own free act. Dated: September 15, 1998 Janeil D. Bushey ------------------------------- Arcadia, California Janeil D. Bushey WITNESSED BY: Dated: September 15, 1998 Karen M. Whitehill --------------------------------- Karen M. Whitehill 9 EXHIBIT A RICHARD K. BUSHEY 1030 Don Alvarado Drive Arcadia, California 91006 February 18, 1999 Edison International 2244 Walnut Grove Avenue Rosemead, California 91770 ATTENTION: Corporate Secretary Ladies and Gentlemen: This is to advise you that effective March 1, 1999, I hereby irrevocably and voluntartily elect to resign as controller of Edison International ("EI"), and Southern California Edison Company ("SCE") and that effective April 1, 1999, I hereby irrevocably and voluntarily elect to resign as vice president of EI and SCE and from other officer and/or director positions held with other affiliates of EI and SCE. I am also electing to retire as an employee of EI and SCE effective April 2, 1999. Subsequent to my retirement as an employee of EI and SCE, I will not seek reemployment with EI, SCE or any of its other affiliates. With your agreement and acceptance below, this letter will serve to supersede and (1) amend the effective dates of my retirement and resignation as set forth in the Retirement Agreement ("Agreement") which I executed on September 15, 1998, and Alan J. Fohrer executed on behalf of EI on October 5, 1998, and (2) further amend such effective dates as set forth in a letter dated December 19, 1998, which amended the Agreement. Please return one signed copy of this letter to me for my files. Sincerely, Richard K. Bushey ----------------- Richard K. Bushey SSN ###-##-#### AGREED TO AND ACCEPTED: EDISON INTERNATIONAL By: Beverly P. Ryder Date: March 1, 1999 ---------------- Beverly P. Ryder Its: Corporate Secretary 10 EXHIBIT B Description of Computer Equipment, Facsimile and Office Furnishings Available to RKB at No Cost 1. Computer Equipment: Dell Notebook Dell Docking Station Monitor, Speakers and Headphones Keyboard Mouse HP Printer Printer Table 2. Facsimile: Brothers Model 6550MC 3. Office Furnishings: Desk Unit Sofa, Wing Chair, Coffee Table, End Table, Chow Table Desk Chair Side Chairs (4) Pictures (3) Desk Pad, Pen Set, Memo Pad Holders, Water Carafe, Clock Lamps (2) 11 RELEASE Richard K. Bushey ("RKB") and Edison International ("EI"), have entered into a retirement agreement ("Retirement Agreement") whereby RKB has agreed to irrevocably retire from employment with EI and Southern California Edison ("SCE") effective on the later of (a) April 1, 1999, or (b) the date when an amendment providing for a lump sum payment option from the SCE Qualified Retirement Plan becomes effective. As part of RKB's consideration under the Retirement Agreement, and as a condition precedent to the additional payments and benefits he will be entitled to receive pursuant to the Retirement Agreement, RKB promised to deliver this executed Release to EI no sooner than 30 days nor later than 7 days prior to the effective date of the Retirement Agreement. Now, therefore, RKB agrees as follows: 1. Except for obligations granted by or arising out of the Retirement Agreement, and any applicable retirement, deferred compensation, stock option, or welfare benefit plan, RKB, on his own behalf, and on the behalf of his descendants, dependents, heirs, executors, administrators, assigns and successors, as such, does hereby covenant not to sue and acknowledges complete satisfaction of and hereby releases, absolves and discharges EI, and its successors, assigns, subsidiaries, divisions and affiliated corporations, past and present (including without limitation SCE and its affiliates), and their trustees, directors, officers, shareholders, agents, attorneys, insurers, and employees, past and present, and each of them, as such (hereinafter in this Release collectively referred to as "EI Releasees") with respect to and from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, wages, obligations, debts, expenses, attorney's fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, without any exception whatsoever, and any and all claims, demands, agreements, obligations, and causes of action, known or unknown, suspected or 12 unsuspected, by RKB arising out of or in any way concerning the events and/or circumstances surrounding his employment with EI and SCE or separation and retirement therefrom. 2. RKB understands and expressly agrees that the release given by him in Paragraph 1, above, without any exception whatsoever, extends to all claims, injuries, damages or losses to his person and property, whether known, unknown, foreseen, patent or latent, which he may have against the EI Releasees or any of them. RKB specifically and expressly waives all his rights under SECTION 1542 of the CALIFORNIA CIVIL CODE which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 3. RKB expressly acknowledges and agrees that by entering into this Release, he is waiving any and all rights or claims that he may have arising from the Age Discrimination in Employment Act of 1967, as amended, which have arisen on or before the date of execution of this Release. RKB further acknowledges and agrees that: o In return for executing this Release, he will receive compensation beyond that which he was already entitled to receive before entering into this Release; o He is hereby advised in writing to consult with an attorney before signing this Release; o He was given a copy of this Release on February 5, 1999, and informed that he has 21 days within which to consider the release and voluntarily executed this Release before expiration of that 21-day period; and 13 o He was informed that he has seven days following the date of execution of this Release in which to revoke it. IN WITNESS WHEREOF, RKB has executed this Release on the date opposite his signature. I declare under penalty of perjury under the laws of the State of California that I have carefully read the foregoing Release and know and fully understand the terms and content thereof and I accept and agree to the provisions it contains and hereby execute it voluntarily and as my own free act with full understanding of its consequences. Dated: February 23, 1999, at Richard K. Bushey Rosemead, California ------------------------------ Richard K. Bushey 14 EXHIBIT 11 Edison International Computation of Primary and Fully Diluted Earnings per Share (Unaudited) Year Ended December 31, -------------------------------------------- 1998 1997 1996 -------------------------------------------- (in thousands, except per share amounts) Consolidated net income $ 668,163 $ 699,856 $ 716,748 Primary weighted average shares 359,205 400,396 437,335 Fully diluted weighted average shares 363,685 404,808 439,299 Primary earnings per share 1.86 1.75 1.64 Fully diluted earnings per share 1.84 1.73 1.63 EXHIBIT 12 EDISON INTERNATIONAL COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Thousands of Dollars)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 ----------- ----------- ----------- ------------ ------------ ------------- EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES: Income before interest expense (1) $1,203,577 $1,282,776 $1,346,636 $ 1,399,650 $ 1,450,957 $ 1,416,332 Add: Taxes on income (2) 353,706 444,635 491,477 505,785 498,729 461,711 Rentals (3) 3,463 3,512 4,018 3,269 2,639 2,208 Allocable portion of interest on long-term contracts for the purchase of power (4) 1,890 1,870 1,848 1,824 1,797 1,767 Spent nuclear fuel interest (7) 487 68 - - - - Interest on partnership indebtedness (5) 41,091 30,591 34,681 31,356 34,938 36,019 Amortization of previously capitalized fixed charges 6,760 3,414 2,417 2,232 7,025 7,246 ----------- ----------- ----------- ------------ ------------ ------------- Total earnings before income taxes and fixed charges (A) $1,610,974 $1,766,866 $1,881,077 $1,944,116 $1,996,085 $1,925,283 ========== ========== ========== ========== ========== ========== FIXED CHARGES: Interest and amortization $ 523,808 $ 561,265 $ 560,641 $ 635,407 $ 708,446 $ 710,388 Rentals (3) 3,463 3,512 4,018 3,269 2,639 2,208 Capitalized interest (6) 73,808 48,996 59,885 57,803 14,937 19,219 Allocable portion of interest on long-term contracts for the purchase of power (4) 1,890 1,870 1,848 1,824 1,797 1,767 Spent nuclear fuel interest (7) 487 68 - - - - Interest on partnership indebtedness (5) 41,091 30,591 34,681 31,356 34,938 36,019 Subsidiary preferred and preference stock dividend requirements - pre-tax basis 63,261 67,480 78,017 81,011 73,052 63,888 ----------- ----------- ----------- ------------ ------------ ------------- Total fixed charges (B) $ 707,808 $ 713,782 $ 739,090 $ 810,670 $ 835,809 $ 833,489 =========== =========== =========== ============ ============ ============= RATIO OF EARNINGS TO FIXED CHARGES (A) / (B): 2.28 2.48 2.55 2.40 2.39 2.31 =========== =========== =========== ============ ============ =============
(1) Includes allowance for funds used during construction and accrual of unbilled revenue. (2) Includes allocation of federal income and state franchise taxes to other income. (3) Rentals include the interest factor relating to certain significant rentals plus one-third of all remaining annual rentals. (4) Allocable portion of interest included in annual minimum debt service requirement of supplier. (5) Includes the allocable portion of interest on project indebtedness of fifty-percent partnership investments by other wholly-owned subsidiaries of Edison International. (6) Includes the fixed charges associated with Nuclear Fuel and capitalized interest of fifty-percent owned partnerships. (7) Represents interest on spent nuclear fuel disposal obligation. EXHIBIT 13 Edison International and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Earnings Edison International's 1998 basic earnings per share were $1.86, compared with $1.75 in 1997 and $1.64 in 1996. Southern California Edison (SCE) earned $1.37 in 1998, compared with $1.44 in 1997 and $1.42 in 1996. Edison Mission Energy (EME), Edison Capital and Mission Land Company had combined earnings of 66cents in 1998, up from 44cents in 1997 and 27cents in 1996. Edison International's earnings included special charges of 7cents in 1996 (a 4cents net charge at SCE for workforce management costs and reserves, and a 3cents charge at Mission Land for real estate reserves). Edison Enterprises (Edison Source, Edison Select and Edison Utility Services) and the Edison International parent company had combined net expenses of 17cents in 1998, compared with 13cents in 1997 and 5cents in 1996. Edison International initiated a share repurchase program in 1995 to increase shareholder value. Its board of directors has authorized repurchases of up to $2.8 billion in outstanding shares. In 1998, over 25 million shares were repurchased for approximately $724 million. From the inception of the program through year-end 1998, Edison International has repurchased over 97 million shares for approximately $2.3 billion. 1998 vs. 1997 SCE's 1998 earnings of $1.37 per share were 7cents lower than 1997. The decrease was mainly due to reduced authorized returns on generating assets and a lower earning asset base, partially offset by superior operating performance at the San Onofre Nuclear Generating Station. The lower earning asset base was mainly the result of the accelerated recovery of investments and divestiture of gas- and oil-fueled generation assets. EME and Edison Capital had combined earnings of 66cents in 1998, up 22cents over 1997. EME contributed $132 million to earnings in 1998, compared with $115 million in 1997, an increase of 15%. The increase was primarily due to the improved performance of energy projects, lower net interest costs and the one-time effect of a write-off of deferred financing costs at Loy Yang B in 1997, partially offset by an effective tax rate change in 1997. Edison Capital contributed a record $105 million to earnings in 1998, up 73% over the prior-year earnings of $61 million. Edison Capital's earnings benefited substantially from increased investments in cross-border lease transactions in the Netherlands, South Australia and South Africa, affordable housing, and infrastructure projects. Edison Capital and EME together contributed 35% of Edison International's total earnings, up from 25% in 1997. Start-up and acquisition-related costs at Edison Enterprises continued to negatively impact earnings in 1998. The reduced number of outstanding shares benefited Edison International's earnings per share by 19cents in 1998, when compared with 1997. 1997 vs. 1996 SCE's 1997 earnings of $1.44 per share were 2cents lower than 1996 (excluding 1996 special charges noted above). The decrease was mainly due to lower earnings from an extended refueling outage at San Onofre. The decline was almost completely offset by higher sales, lower non-nuclear operating expenses and the effect of Edison International's share repurchase program. EME and Edison Capital had combined earnings of 44cents in 1997, up 14cents over 1996. The increase was primarily due to higher earnings from EME's foreign projects, partially due to lower tax rates, as well as an increase from Edison Capital's earnings from two cross-border lease transactions and a record high level of affordable housing investments in service. Continued start-up expenses at Edison Enterprises, combined with interest expense at the Edison International parent company, were 8cents per share more in 1997 than 1996. The reduced number of outstanding shares benefited Edison International's earnings per share by 15cents in 1997, when compared with 1996. Operating Revenue Since April 1, 1998, SCE has been required to sell all of its generated power to the power exchange (PX). For more details, see Competitive Environment. Excluding the sales to the PX, electric utility revenue decreased 6% from 1997. The decrease reflects lower average residential rates (mandated by legislation enacted in September 1996), partially offset by an increase in other electric revenue resulting from maintenance work SCE is providing for the new owners of the divested gas- and oil-fueled plants, as required by the restructuring legislation. Electric utility revenue increased 5% in 1997 over 1996, due to an increase in sales volume and customer refunds in 1996. There were no comparable refunds in 1997. The increase in volume is mainly attributable to the overall increase in retail sales among residential and commercial customers due to unusually warm weather during the third quarter of 1997. In 1998, over 99% of electric utility revenue (excluding sales to the PX) was from retail sales. Retail rates are regulated by the California Public Utilities Commission (CPUC) and wholesale rates are regulated by the Federal Energy Regulatory Commission (FERC). Due to warmer weather during the summer months, electric utility revenue (excluding sales to the PX) during the third quarter of each year is significantly higher than the other quarters. The changes in electric utility revenue (excluding sales to the PX) resulted from: In millions Year ended December 31 1998 1997 1996 ----------- ---------------------- ---- ---- ---- Electric utility revenue Rate changes (including refunds) $(527) $ 173 $ (522) Sales volume changes (44) 193 206 Other 117 4 26 ----- ------ ------ Total $(454) $ 370 $ (290) ===== ====== ====== Legislation enacted in September 1996 provided for, among other things, a 10% rate reduction (financed through the issuance of rate reduction notes) for residential and small commercial customers in 1998 and other rates to remain frozen at June 1996 levels (system average of 10.1cents per kilowatt-hour). See discussion in Competitive Environment. 25 Revenue from diversified operations increased 6% in 1998, primarily due to increased revenue at Edison Capital, related to its cross-border lease transactions and increased revenue at Edison Source. Revenue from diversified operations increased 33% in 1997, mostly due to the start-up of EME's Loy Yang B Unit 2 and Kwinana projects. These facilities began commercial operations during late 1996. In addition, revenue from diversified operations increased, due to higher energy sales from EME's First Hydro project combined with substantial increases at Edison Capital from its cross-border lease investments and Mission Land from the sale of $63 million in real estate during the second quarter of 1997. Operating Expenses Fuel expense decreased 53% in 1998, primarily due to the sale of SCE's gas- and oil-fueled generation plants, as well as significantly lower gas prices at SCE in the first quarter of 1998. EME also had decreased fuel expense in 1998 mainly due to the new fuel supply agreement entered into by Loy Yang B in May 1997. Fuel expense increased 40% in 1997 over 1996. The increase was due to a $174 million gas contract termination payment at SCE during the third quarter of 1997, combined with higher gas prices and the extended refueling outages at San Onofre. San Onofre Unit 2 was shut down during the entire first quarter of 1997, Unit 3 was shut down 80 days of the second quarter and both units had a combined outage time of 30 days during the third quarter, which resulted in an overall increase in gas-powered generation for 1997. There were no comparable outages in 1996. EME's fuel expense also increased in 1997 due to the start-up of the Kwinana project in the fourth quarter of 1996 and higher pumping costs at the First Hydro project (a pumped-storage facility which pumps water at night for storage in reservoirs and then allows it to flow back to generate electricity when it is needed during the day) due to increased generation and higher prices. Since April 1, 1998, SCE has been required to purchase all of its power from the PX for distribution to its retail customers. SCE is continuing to purchase power from certain nonutility generators (known as qualifying facilities) and under existing inter-utility contracts. This purchased power is sold to the PX. Excluding the power purchased from the PX, purchased-power expense decreased slightly in 1998, while increasing slightly in 1997. SCE is required under federal law to purchase power from certain qualifying facilities even though energy prices under these contracts are generally higher than other sources. In 1998, SCE paid about $1.5 billion (including energy and capacity payments) more for these power purchases than the cost of power available from other sources. The CPUC has mandated the prices for these contracts. Provisions for regulatory adjustment clauses decreased in 1998, mainly due to the rate-making treatment of the rate reduction notes. This rate-making treatment has allowed for the deferral of the collection of a portion of the transition-related revenue, from a four-year period to a 10-year period. This decrease was almost completely offset by overcollections resulting from the gain on sales of the gas- and oil-fueled generation plants during 1998 and other transition costs, as well as overcollections related to the administration of public-purpose funds. The provisions for regulatory adjustment clauses decreased substantially in 1997, due to undercollections in the energy cost balancing account as actual energy costs (including the gas termination payment discussed above) exceeded CPUC-authorized fuel and purchased-power cost estimates. In addition, there were undercollections associated with SCE's direct access activities (see discussion in Competitive Environment), research and development activities, and San Onfore. These undercollections were offset by overcollections related to actual base-rate revenue from kilowatt-hour sales exceeding CPUC-authorized estimates and the final settlement of SCE' s Canadian supply and transportation contracts. Other operating expenses increased 19% in 1998, primarily due to must-run reliability services, direct access activities, and PX and independent system operator (ISO) costs incurred by SCE, as well as higher expenses at Edison Source. Also, storm damage expense resulting from the harsh winter in 1998 contributed to the increase at SCE. Other operating expenses increased 15% in 1997 when compared with 1996, primarily due to start-up expenses at Edison Enterprises and increased administrative costs at EME, Edison Capital and Mission Land. Maintenance expense increased 23% in 1997, due to higher maintenance costs at SCE's transmission and distribution operating facilities, and the scheduled refueling outages at the San Onofre units. Depreciation, decommissioning and amortization expense increased 22% in 1998, primarily due to the further acceleration of recovery of San Onofre Units 2 and 3 and the Palo Verde Nuclear Generating Station units, accelerated recovery of the gas- and oil-fueled generation plants, and the amortization of the loss on plant sales. The amortization of the loss on plant sales, as well as the accelerated recoveries implemented in 1998 are part of the competition transition charge (CTC) mechanism. Depreciation, decommissioning and amortization expense increased 16% in 1997, mainly due to increases in plant assets and the accelerated recovery of the Palo Verde units, effective January 1997. Income taxes decreased 15% in 1998, primarily due to lower pre-tax income at SCE, as well as additional amortization at SCE related to the CTC mechanism, partially offset by higher pre-tax income at Edison Capital related to its increased investments in cross-border lease transactions, affordable housing, and infrastructure projects. Property and other taxes decreased 32% in 1997, due to a reclassification of SCE's payroll taxes to operation and maintenance expense. Gain on sale of utility plant represents the net result from the sale of SCE's 12 gas- and oil-fueled generation plants in 1998. Gains on sales of the gas- and oil-fueled plants were used to reduce stranded costs. Losses on sales will be recovered from customers over the transition period. Other Income and Deductions The provision for rate phase-in plan reflected a CPUC-authorized, 10-year rate phase-in plan, which deferred the collection of revenue during the first four years of operation for the Palo Verde units. The deferred revenue (including interest) was collected evenly over the final six years of each unit's plan. The plan ended in February 1996, September 1996 26 and January 1998 for Units 1, 2 and 3, respectively. The provision was a non-cash offset to the collection of deferred revenue. Interest and dividend income increased 27% in 1998, reflecting higher investment balances due to the sale of SCE's gas- and oil-fueled generation plants, as well as increases in interest earned on higher balancing account undercollections. In 1997, interest and dividend income increased 35% due to increases in interest earned on SCE's balancing accounts and increases in dividend income from SCE's equity investments. Minority interest decreased in 1998 and in 1997, due to EME' s May 1997 acquisition of the remaining 49% ownership interest in the Loy Yang B project. Other nonoperating income increased 39% in 1998, when compared to 1997. The increase reflects the additional accruals in 1997 at SCE for regulatory matters. These accruals caused a substantial decrease in other nonoperating income in 1997, when compared to 1996. Interest and Other Expenses Interest on long-term debt increased 12% in 1998, mainly due to an increase at SCE related to the issuance of the rate reduction notes in December 1997. In 1997, interest on long-term debt decreased due to the early retirement of $400 million of first and refunding mortgage bonds in July 1997, partially offset by the additional interest expense associated with the rate reduction notes issued in December 1997. Interest on the rate reduction notes was $148 million in 1998 and $9 million in 1997. Other interest expense decreased substantially in 1998, mostly due to lower overall short-term debt balances, particularly short-term debt at SCE used to finance fuel inventories and at the Edison International parent company level. SCE's fuel inventories are no longer needed because of the divestiture of the gas- and oil-fueled plants. Other interest expense increased substantially in 1997, due to higher levels of short-term debt used to retire first and refunding mortgage bonds. Financial Condition Edison International's liquidity is primarily affected by debt maturities, dividend payments, capital expenditures, and investments in partnerships and unconsolidated subsidiaries. Capital resources include cash from operations and external financings. Edison International's board of directors has authorized the repurchase of up to $2.8 billion (increased from $2.3 billion in July 1998) of its outstanding shares of common stock. Edison International repurchased 100.4 million shares ($2.4 billion) between January 1995 and February 4, 1999, funded by dividends from its subsidiaries and the issuance of rate reduction notes. Edison International's cash flow coverage of dividends for 1998 was 3.9 times compared to 5.2 times in 1997 and 5.0 times in 1996. The decrease in 1998 is primarily due to the rate-making treatment of the gains on sales of SCE's 12 gas- and oil-fueled generation plants. Edison International's dividend payout ratio for 1998 was 55%. Cash Flows from Operating Activities Net cash provided by operating activities totaled $1.5 billion in 1998, $2.1 billion in 1997 and $2.2 billion in 1996. Cash from operations exceeded capital requirements for all years presented. Cash Flows from Financing Activities At December 31, 1998, Edison International and its subsidiaries had $2.4 billion of borrowing capacity available under lines of credit totaling $2.6 billion. SCE had available lines of credit of $1.3 billion, with $800 million for general purpose short-term debt and $500 million for the long-term refinancing of its variable-rate pollution-control bonds. The parent company had total lines of credit of $500 million, with $400 million available. The nonutility companies had total lines of credit of $800 million, with $700 million available to finance general cash requirements. These unsecured lines of credit are at negotiated or bank index rates with various expiration dates. SCE's short-term debt is used to finance fuel inventories and general cash requirements. Long-term debt is used mainly to finance capital expenditures. SCE's external financings are influenced by market conditions and other factors, including limitations imposed by its articles of incorporation and trust indenture. As of December 31, 1998, SC E could issue approximately $13.9 billion of additional first and refunding mortgage bonds and $4.4 billion of preferred stock at current interest and dividend rates. EME has firm commitments of $1.8 billion to acquire the Homer City project (see discussion in Generating Station Acquisition). EME plans to finance the acquisition with a combination of debt secured by the project, EME corporate debt and cash. EME has firm commitments of $266 million to make equity and other contributions, primarily for the ISAB project in Italy, the Paiton project in Indonesia, the EcoElectrica project in Puerto Rico, the Tri Energy project in Thailand, and the Doga project in Turkey. EME also has contingent obligations to make additional contributions of $204 million, primarily for equity support guarantees related to Paiton. EME may incur additional obligations to make equity and other contributions to projects in the future. EME believes it will have sufficient liquidity to meet these equity requirements from cash provided by operating activities, proceeds from the repayment of loans to energy projects and funds available from EME's revolving line of credit. Edison Capital has firm commitments of $276 million to fund affordable housing, and energy and infrastructure investments. California law prohibits SCE from incurring or guaranteeing debt for its nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure, limiting the dividends it may pay Edison International. At December 31, 1998, SCE had the capacity to pay $794 million in additional dividends and continue to maintain its authorized capital structure. These restrictions are not expected to affect Edison International's ability to meet its cash obligations. In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE is the sole member, issued approximately $2.5 billion of rate reduction notes to Bankers Trust Company of California, as certificate trustee for the California Infrastructure and Economic 27 Development Bank Special Purpose Trust SCE-1 (Trust), which is a special purpose entity established by the State of California. The terms of the rate reduction notes generally mirror the terms of the pass-through certificates issued by the Trust, which are known as rate reduction certificates. The proceeds of the rate reduction notes were used by the SP E to purchase from SCE an enforceable right known as transition property. Transition property is a current property right created pursuant to the restructuring legislation and a financing order of the CPUC and consists generally of the right to be paid a specified amount from a non-bypassable tariff levied on residential and small commercial customers. Notwithstanding the legal sale of the transition property by SC E to the SPE, the amounts reflected as assets on SCE's balance sheet have not been reduced by the amount of the transition property sold to the SPE, and the liabilities of the SPE for the rate reduction notes are for accounting purposes reflected as long-term liabilities on the consolidated balance sheets of SCE. SCE used the proceeds from the sale of the transition property to retire debt and equity securities. The rate reduction notes have maturities ranging from one to nine years, and bear interest at rates ranging from 6.14% to 6.42%. The rate reduction notes are secured solely by the transition property and certain other assets of the SPE, and there is no recourse to SCE or Edison International. Although the SPE is consolidated with SCE in the financial statements, as required by generally accepted accounting principles, the S PE is legally separate from SCE, the assets of the SPE are not available to creditors of SCE or Edison International, and the transition property is legally not an asset of SCE or Edison International. Cash Flows from Investing Activities Cash flows from investing activities are affected by additions to property and plant, the nonutility companies' investments in partnerships and unconsolidated subsidiaries, proceeds from the sale of assets (see discussion in Competitive Environment), and funding of nuclear decommissioning trusts. Decommissioning costs are accrued and recovered in rates over the term of each nuclear generating facility's operating license through charges to depreciation expense. SCE estimates that it will spend approximately $8.6 billion between 2000-2070 to decommission its nuclear facilities. This estimate is based on SCE's current-dollar decommissioning costs ($1.9 billion), escalated at rates averaging 5.6% annually. These costs are expected to be funded from independent decommissioning trusts, which currently receive SCE contributions of approximately $100 million per year. However, SCE has requested the CPUC to authorize a reduction in the annual contributions to the decommissioning trusts beginning January 1, 2000. The plan to decommission San Onofre Unit 1 beginning in 2000, which is pending CPUCapp roval, is not expected to affect SCE's annual contributions to the decommissioning trusts. Cash used for the nonutility subsidiaries' investing activities was $1.2 billion in 1998, $383 million in 1997 and $409 million in 1996. Market Risk Exposures Edison International's primary market risk exposures arise from fluctuations in energy prices, interest rates and foreign exchange rates. Edison International's risk management policy allows the use of derivative financial instruments to manage its financial exposures, but prohibits the use of these instruments for speculative or trading purposes. As a result of the rate freeze established in the restructuring legislation, SCE's transition costs are recovered as the residual component of rates once the costs for distribution, transmission, public purpose programs, nuclear decommissioning and the cost of supplying power to its customers through the PX and ISO have already been recovered. Accordingly, more revenue will be available to cover transition costs when market prices in the PX and ISO are low than when PX and ISO prices are high. The PX and ISO market prices to date have generally been reasonable, although some irregular price spikes have occurred. The ISO has responded to price spikes in the market for reliability services (referred to as ancillary services) by imposing a price cap of $250/MW on the market for such services until certain actions have been completed to improve the functioning of those markets. Similarly, the ISO currently maintains a cap of $250/MWh on its market for imbalance energy while a software problem affecting the efficient operation of that market persists. The caps in these markets mitigate the risk of costly price spikes that would reduce the revenue available to SCE to pay transition costs. During the upcoming year, the ISO will be considering removing these price caps, which could increase the risk of high market prices. SCE has entered into hedges against high natural gas prices, since increases in natural gas prices tend to raise the price of electricity purchased from the PX. A 10% increase in market interest rates would result in a $27 million increase in the fair value of Edison International's interest rate hedge agreements. A 10% decrease in market interest rates would result in a $27 million decline in the fair value of interest rate hedge agreements. A 10% increase in pool prices would result in a $112 million decrease in the fair market value of electricity rate swap agreements. A 10% decrease in pool prices would result in a $113 million increase in the fair market value of electricity rate swap agreements. A 10% increase in natural gas prices would result in a $21 million increase in the fair market value of gas call options. A 10% decrease in natural gas prices would result in a $14 million decline in the fair market value of gas call options. A 10% change in market interest rates is expected to have an immaterial effect on Edison International's other financial instruments. Changes in interest rates, electricity pool pricing and fluctuations in foreign currency exchange rates can have a significant impact on EME's results of operations. EME has mitigated the risk of interest rate fluctuations by arranging for fixed rate or variable rate financing with interest rate swaps or other hedging mechanisms for the majority of its project financings. Interest expense includes $23 million in 1998, $21 million in 1997 and $6 million in 1996, as a result of interest rate hedging mechanisms. The maturity dates of several of EME's interest rate swap and collar agreements do not correspond to the term of the underlying debt. EME does not believe that interest rate fluctuations will have a material adverse effect on its results of operations or financial position. 28 Projects in the United Kingdom sell their electric energy and capacity through a centralized electricity pool, which establishes a half-hourly clearing price, or pool price, for electric energy. The pool price is extremely volatile, and can vary by a factor of ten or more over the course of a few hours due to large differentials in demand according to the time of day. First Hydro mitigates a portion of the market risk of the pool by entering into contracts for differences (electricity rate swap agreements), related to either the selling or purchasing price of power, where a contract specifies a price at which the electricity will be traded, and the parties to the agreements make payments, calculated on the difference between the price in the contract and the pool price for the element of power under contract. These contracts are sold in various structures. These contracts act as a means of stabilizing production revenue or purchasing costs by removing an element of First Hydro's net ex posure to pool price volatility. A proposal to replace the current structure of the forward-contracts market and the pool has been made by the Director General of Electricity Supply, at the request of the Minister of Science, Energy and Industry in the United Kingdom. The Minister has recom mended that the proposal be implemented by April 2000. Further definition of the proposal will be required before the effects of the changes can be evaluated. Implementation of the proposal may also require legislation. Loy Yang B sells its electric energy through a centralized electricity pool, which provides for a system of generator bidding, central dispatch and a settlements system based on a clearing market for each half-hour of every day. The Victorian Power Exchange, operator and administrator of the pool, determines a system marginal price each half-hour. To mitigate the exposure to price volatility of the electricity traded in the pool, Loy Yang B has entered into a number of financial hedges. From May 8, 1997, to December 31, 2000, approximately 53% to 64% of the plant output sold is hedged under vesting contracts, with the remainder of the plant capacity hedged under the state hedge described below. Vesting contracts were put into place by the State Government of Victoria (State), between each generator and each distributor, prior to the privatization of electric power distributors in order to provide more predictable pricing for those electricity customers that were unable to choose their electricity retailer. Vesting contracts set base strike prices at which the electricity will be traded, and the parties to the agreement make payments, calculated based on the difference between the price in the contract and the half-hourly pool clearing price for the element of power under contract. These contracts are sold in various structures. These contracts are accounted for as electricity rate swap agreements. The state hedge is a long-term contractual arrangement based upon a fixed price commencing May 8, 1997, and terminating October 31, 2016. The State guarantees the State Electricity Commission of Victoria's obligations under the state hedge. EME's electric revenue increased by $108 million and $96 million for the years ended December 31, 1998, and 1997, respectively, and decreased $5 million for the year ended December 31, 1996, as a result of electricity rate swap agreements. As EME continues to expand into foreign markets, fluctuations in foreign currency exchange rates can affect the amount of its equity contributions to, distributions from and results of operations of its foreign projects. At times, EME has hedged a portion of its current exposure to fluctuations in foreign exchange rates where it deems appropriate through financial derivatives, offsetting obligations denominated in foreign currencies, and indexing underlying project agreements to U.S. dollars or other indices reasonably expected to correlate with foreign exchange movements. Statistical forecasting techniques are used to help assess foreign exchange risk and the probabilities of various outcomes. There can be no assurance, however, tha t fluctuations in exchange rates will be fully offset by hedges or that currency movements and the relationship between macroeconomic variables will behave in a manner that is consistent with historical or forecasted relationships. Construction on the two-unit Paiton project is nearing completion. The tariff is higher in the early years and steps down over time, and the tariff for the Paiton project includes infrastructure to be used in common by other units at the Paiton complex. The plant's output is fully contracted with the state-owned electricity company for payment in U.S. dollars and supported by the Indonesian government. The projected rate of growth of the Indonesian economy and the exchange rate of Indonesian Rupiah into U.S. dollars have deteriorated significantly since the Paiton project was contracted, approved and financed. The project received substantial finance and insurance support from the Export-Import Bank of the United States, The Export-Import Bank of Japan, the U.S. Overseas Private Investment Corporation and the Ministry of International Trade and Industry of Japan. The Paiton project's senior debt ratings have been reduced from investment grade to speculative grade based on the rating agencies' perceived increased risk that the state-owned electricity company might not be able to honor the electricity sales contract with Paiton. The Indonesian government has arranged to reschedule sovereign debt owed to foreign governments and has entered into discussions about rescheduling sovereign debt owed to private lenders. A presidential decree has deemed some independent power projects, but not including the Paiton project, subject to review, postponement or cancellation. The Indonesian government announced that it would propose a policy related to independent power projects by the end of 1998, but did not do so. The state-owned electricity company has said that it would be prepared to enter into discussions with Paiton beginning in February 1999. The Paiton project continues to discuss the situation in Indonesia with the state-owned electricity company, the Indonesian government and its official and commercial lenders. EME continues to monitor the situation closely. Projected Capital Requirements Edison International's projected construction expenditures for the next five years are: 1999 - $953 million; 2000 - $831 million; 2001 - $726 million; 2002 - $699 million; and 2003 - $689 million. Long-term debt maturities and sinking fund requirements for the next five years are: 1999 - $898 million; 2000 - $824 million; 2001 - $734 million; 2002 - $643 million; and 2003 - $507 million. Preferred stock redemption requirements for the next five years are: 1999 through 2001 - zero; 2002 - $105 million; and 2003 - $9 million. 29 Generating Station Acquisition In August 1998, EME entered into agreements to acquire the 1,884-MW Homer City Generating Station for approximately $1.8 billion. Homer City is jointly owned by subsidiaries of GPU, Inc. and New York State Electric & Gas Corporation. The coal-fired facility has the rights to direct, high-voltage interconnections to both the New York Power Pool and the Pennsylvania-New Jersey-Maryland Power Pool. The plant is located near Pittsburgh, Pennsylvania. EME will operate the plant, which is one of the lowest-cost generation facilities in the region. Most of the necessary state and federal regulatory approvals have been obtained. The closing of the transaction is expected to be completed by the end of the first quarter of 1999. EME plans to finance this acquisition with a combination of debt secured by the project, EME corporate debt and cash. The acquisition is expected to have no effect on 1999 earnings and a positive effect on earnings in 2000 and beyond. Regulatory Matters Legislation enacted in September 1996 provided for, among other things, a 10% rate reduction for residential and small commercial customers in 1998 and other rates to remain frozen at June 1996 levels (system average of 10.1cents per kilowatt-hour). In 1999, revenue will be determined by various mechanisms depending on the utility operation. Revenue related to distribution operations will be determined through a performance-based rate-making mechanism (PBR) and the distribution assets will have the opportunity to earn a CPUC-authorized 9.49% return. The distribution-only PBR will extend through December 2001. Transmission revenue will be determined through FERC-authorized rates and transmission assets will earn a 9.43% return. These rates are subject to refund. Key elements of PBR include: tr ansmission and distribution (T&D) rates indexed for inflation based on the Consumer Price Index less a productivity factor; adjustments for cost changes that are not within SCE's control; a cost-of-capital trigger mechanism based on changes in a bond index; standards for service reliabil ity and safety; and a net revenue-sharing mechanism that determines how customers and shareholders will share gains and losses from T&D operations. Revenue from generation-related operations will be determined through the competitive market and the CTC mechanism, which now includes the nuclear rate-making agreements. Revenue related to fossil and hydroelectric generation operations is recovered from two sources. The portion that is made uneconomic by electric industry restructuring is recovered through the CTC mechanism. The portion that is economic is recovered through the market. In 1999, fossil and hydroelectric generation assets will earn a 7.22% return. In 1996 and 1997, the CPUC authorized revised rate-making plans for SCE's nuclear facilities, which call for the accelerated recovery of the nuclear investments in exchange for a lower authorized rate of return. SCE's nuclear assets are earning an annual rate of return of 7.35%. In addition, the San Onofre plan authorizes a fixed rate of approximately 4cents per kilowatt-hour generated for operating costs including incremental capital costs, and nuclear fuel and nuclear fuel financing costs. The San Onofre plan commenced in April 1996, and ends in December 2001 for the accelerated recovery portion and in December 2003 for the incentive pricing portion. Palo Verde's operating costs, including incremental capital costs, and nuclear fuel and nuclear fuel financing costs, are subject to balancing account treatment. The Palo Verde plan commenced in January 1997 and ends in December 2001. Beginning January 1, 1998, both the San Onofre and Palo Verde rate-making plans became part of the CTC mechanism. The changes in revenue from the regulatory mechanisms discussed above, excluding the effects of other rate actions, are expected to have an approximately $20 million negative impact on 1999 earnings. The impact on earnings per share will be mitigated due to the anticipated repurchase of common stock in 1999. The CPUC is considering unbundling SCE's cost of capital based on major utility function. In May 1998, SCE filed an application on this issue and hearings were completed in October 1998. A CPUC decision is expected in early to mid-1999. Competitive Environment SCE currently operates in a highly regulated environment in which it has an obligation to deliver electric service to customers in return for an exclusive franchise within its service territory. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and regulators are restructuring California's electric utility industry. California Electric Utility Industry Restructuring Restructuring Decision and Statute - The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure involving competition and customer choice. The State of California enacted legislation in 1996 to provide a transition to a competitive market structure. The Statute substantially adopted the CPUC's restructuring decision by addressing stranded-cost recovery for utilities and providing a certain cost-recovery time period for the transition costs associated with utility-owned generation-related assets. Transition costs related to power-purchase contracts are being recovered through the terms of their contracts while most of the remaining transition costs will be recovered through 2001. The Statute also included provisions to finance a portion of the stranded costs that residential and small commercial customers would have paid between 1998 and 2001, which allowed SCE to reduce rates by at least 10% to these customers, effective January 1, 1998. The Statute included a rate 30 freeze for all other customers, including large commercial and industrial customers, as well as provisions for continued funding for energy conservation, low-income programs and renewable resources. Despite the rate freeze, SCE expects to be able to recover its revenue requirement during the 1998-2001 transition period. In addition, the Statute mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Finally, the Statute contained provisions for the recovery (through 2006) of reasonable employee-related transition costs, incurred and projected, for retraining, severance, early retirement, outplacement and related expenses. The new market structure and customer choice began on April 1, 1998. 1998 Activities - During 1998, SCE implemented changes to comply with restructuring elements required by the CPUC and the Statute. Beginning January 1, 1998: * SCE's rates were unbundled into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning. The transmission component is being collected through FERC-approved rates, subject to refund. * SCE's costs associated with its hydroelectric plants are being recovered through a performance-based mechanism. The mechanism sets the hydroelectric revenue requirement and establishes a formula for extending it through the duration of the electric industry restructuring transition period, or until market valuation of the hydroelectric facilities, whichever occurs first. The mechanism provides that power sales revenue from hydroelectric facilities in excess of the hydroelectric revenue requirement be credited against the costs to transition to a competitive market. * SCE's transition costs are being recovered through a non-bypassable CTC. This charge applies to all customers who were using or began using utility services on or after the CPUC's December 1995 restructuring decision date. SCE has estimated its transition costs to be approximately $10.6 billion (1998 net present value) from 1998 through 2030. This estimate was based on incurred costs, forecasts of future costs and assumed market prices. However, changes in the assumed market p rices could materially affect these estimates. The potential transition costs are comprised of $6.4 billion from SCE's qualifying facilities contracts, which are the direct result of prior legislative and regulatory mandates, and $4.2 billion (which reflects the sale of SCE's gas- and oil-fueled generation plants) from costs pertaining to certain generating assets and regulatory commitments consisting of costs incurred (whose recovery has been deferred by the CPUC) to provide service to customers. Such commitments include the recovery of income tax benefits previously flowed through to customers, postretirement benefit transition costs, accelerated recovery of San Onofre Units 2 and 3 and the Palo Verde units (as discussed in Regulatory Matters), and certain other costs. * Residential and small commercial customers who began receiving a 10% rate reduction are repaying the rate reduction notes issued in December 1997 (see further discussion in Cash Flows from Financing Activities) through non-bypassable charges based on electricity consumption. Effective April 1, 1998: * The ISO assumed operational control of the transmission system after the ISO and PX had begun accepting bids and schedules for electricity purchases on March 31, 1998. The restructuring implementation costs related to the start-up and development of the PX, which are paid by the utilities, will be recovered from all retail customers over the four-year transition period. SCE's share of the charge is $45 million, plus interest and fees. SCE's share of the ISO's start-up and development costs (approximately $16 million per year) will be paid over a 10-year period. * Customers can choose to remain utility customers with either bundled electric service or an hourly PX pricing option from SCE (which is purchasing its power through the PX), or choose direct access, which means the customer can contract directly with either independent power producers or energy service providers (ESPs) such as power brokers, marketers and aggregators. Electric utilities are continuing to provide the core distribution service of delivering energy through their distribution system regardless of a customer's choice of electricity supplier. The CPUC is continuing to regulate the prices and service obligations related to distribution services. As of December 31, 1998, approximately 47,000 of SCE's 4.3 million customers have requested the direct access option. * Customers have options regarding metering, billing and related services (referred to as revenue cycle services) that have been provided by California's investor-owned utilities. ESPs can provide their customers with one consolidated bill for their services and the utility's services, request the utility to provide such a consolidated bill to the customer or elect to have both the ESP and the utility bill the customer for their respective charges. Customers with maximum demand above 20kW (primarily industrial and medium and large commercial) can choose SCE or any other supplier to provide their metering service. Beginning in January 1999, all customers can make these choices. In September 1998, the CPUC issued a decision regarding the credits that would be provided to customers if they elect to obtain revenue cycle services from someone other than SCE. Although the decision adopted SCE's recommendation of using the net avoided cost, it also adopted a methodology which results in higher credits to customers but requires ESPs to pay service fees to SCE for the costs that SCE incurs as a result of dealing with the ESP. SCE may experience a reduction in revenue security as a result of this unbundling. During 1998, SCE sold all of its gas- and oil-fueled generation plants. The total sales price of the 12 plants was $1.2 billion, over $500 million more than the combined book value. Net proceeds of the sales were used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. Accounting for Generation-Related Assets - If the CPUC's electric industry restructuring plan continues as described above, SCE would be allowed to recover its transition costs through non-bypassable charges to its distribution customers (although its investment in certain generation assets would be subject to a lower authorized rate of return). In 1997, SCE 31 discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities based on new accounting guidance. The financial reporting effect of this discontinuance was to segregate these assets on the balance sheet; the new guidance did not require SCE to write off any of its generation-related assets, including related regulatory assets. However, the new guidance did not specifically address the application of asset impairment standards to these assets. SCE has retained these assets on its balance sheet because the Statute and restructuring plan referred to above make probable their recovery through a non-bypassable CTC to distribution customers. The regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments and unamortized losses on reacquired debt. The new accounting guidance also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. During the second quarter of 1998, additional guidance was developed related to the application of asset impairment standards to these assets. Using this guidance resulted in SCE reducing its remaining nuclear plant investment by $2.6 billion (as of June 30, 1998) and recording a regulatory asset on its balance sheet for the same amount. For this impairment assessment, the fair value of the investment was calculated by discounting future net cash flows. This reclassification had no effect on SCE's results of operations. If during the transition period events were to occur that made the recovery of these generation-related regulatory assets no longer probable, SCE would be required to write off the remaining balance of such assets (approximately $2.4 billion, after tax, at December 31, 1998) as a one-time, non-cash charge against earnings. If events occur during the restructuring process that result in all or a portion of the transition costs being improbable of recovery, SCE could have additional write-offs associated with these costs if they are not recovered through another regulatory mechanism. At this time, SCE cannot predict what other revisions will ultimately be made during the restructuring process in subsequent proceedings or the effect, after the transition period, that competition will have on its results of operations or financial position. Environmental Protection Edison International is subject to numerous environmental laws and regulations, which require it to incur substantial costs to operate existing facilities, construct and operate new facilities, and mitigate or remove the effect of past operations on the environment. As further discussed in Note 10 to the Consolidated Financial Statements, Edison International records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. Edison International reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site. Unless there is a probable amount, Edison International records the lower end of this likely range of costs. Edison International's recorded estimated minimum liability to remediate its 49 identified sites is $171 million. One of SCE's sites, a former pole-treating facility, is considered a federal Superfund site and represents 41% of its recorded liability. The ultimate costs to clean up Edison International's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process. Edison International believes that, due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $247 million. The upper limit of this range of costs was estimated using assumptions least favorable to Edison International among a range of reasonably possible outcomes. SCE has sold all of its gas- and oil-fueled power plants and has retained some liability associated with the divested properties. The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $88 million of its recorded liability, through an incentive mechanism. Under this mechanism, SCE will recover 90% of cleanup costs through customer rates; shareholders fund the remaining 10%, with the opportunity to recover these costs from insurance carriers and other third parties. SCE has successfully settled insurance claims with all responsible carriers. Costs incurred at SCE's remaining sites are expected to be recovered through customer rates. SCE has recorded a regulatory asset of $141 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. Edison International's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that Edison International may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can be made for these sites. Edison International expects to clean up its identified sites over a period of up to 30 years. Remediation costs in each of the next several years are expected to range from $4 million to $10 million. Recorded costs for 1998 were $7 million. Based on currently available information, Edison International believes it is unlikely that it will incur amounts in excess of the upper limit of the estimated range and, based upon the CPUC's regulatory treatment of environmental-cleanup costs, Edison International believes that costs ultimately recorded will not materially affect its results of operations or financial position. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates. The 1990 federal Clean Air Act requires power producers to have emissions allowances to emit sulfur dioxide. Power companies receive emissions allowances from the federal government and may bank or sell excess allowances. SCE expects to have excess allowances under Phase II of the Clean Air Act (2000 and later). The act also calls for a study to determine if additional regulations are needed to reduce regional haze in the southwestern U.S. In addition, another study is in progress to determine the specific impact of air contaminant emissions from the Mohave Coal Generating Station on visibility in Grand Canyon National Park. The potential effect of these studies on sulfur dioxide emissions 32 regulations for Mohave is unknown. Edison International's projected environmental capital expenditures are $900 million for the 1999-2003 period, mainly for aesthetics treatment, including undergrounding certain transmission and distribution lines. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of scientific research. After many years of research, scientists have not found that exposure to EMF causes disease in humans. Research on this topic is continuing. However, the CPUC has issued a decision which provides for a rate-recoverable research and public education program conducted by California electric utilities, and authorizes these utilities to take no-cost or low-cost steps to reduce EMF in new electric facilities. SCE is unable to predict when or if the scientific community will be able to reach a consensus on any health effects of EMF, or the effect that such a consensus, if reached, could have on future electric operations. San Onofre Steam Generator Tubes The San Onofre Units 2 and 3 steam generators have performed relatively well through the first 15 years of operation, with low rates of ongoing steam generator tube degradation. However, during the Unit 2 scheduled refueling and inspection outage in 1997, an increased rate of tube degradation was identified, which resulted in the removal of more tubes from service than had been expected. The steam generator design allows for the removal of up to 10% of the tubes before the rated capacity of the unit must be reduced. As a result of the increased degradation, a mid-cycle inspection outage was conducted in early 1998 for Unit 2. Continued degradation was found during this inspection. A favorable or decreasing trend in degradation was observed during inspectio n in the scheduled refueling outage in January 1999. The results of the January 1999 inspection are being analyzed to determine if there is a need for a mid-cycle inspection outage in early 2000. With the results from the January 1999 outage, 7.5% of the tubes have now been removed from service. In September 1998, San Onofre Unit 2 experienced a small amount of leakage from a steam generator tube plug which required an 11-day outage to repair. During Unit 3's refueling outage, which was completed in July 1997, inspections of structural supports for steam generator tubes identified several areas where the thickness of the supports had been reduced, apparently by erosion during normal plant operation. A follow-up mid-cycle inspection indicated that the erosion had been stabilized. Additional monitoring inspections are planned during the next scheduled refueling outage in 1999. To date, 5% of Unit 3's tubes have been removed from service. During Unit 2's February 1998 mid-cycle outage, similar tube supports showed no significant levels of such erosion. New Accounting Rules A recently issued accounting rule requires that costs related to start-up activities be expensed as incurred, effective January 1, 1999. This new accounting rule will not materially affect Edison International's results of operations or financial position. In June 1998, a new accounting standard for derivative instruments and hedging activities was issued. The new standard, which will be effective January 1, 2000, requires all derivatives to be recognized on the balance sheet at fair value. Gains or losses from changes in fair value would be recognized in earnings in the period of change unless the derivative is designated as a hedging instrument. Gains or losses from hedges of a forecasted transaction or foreign currency exposure would be reflected in other comprehensive income. Gains or losses from hedges of a recognized asset or liability or a firm commitment would be reflected in earnings for the ineffective portion of the hedge. SCE anticipates that most of its derivatives under the new standard would qualify for hedge accounting. SCE expects to recover in rates any market price changes from its derivatives that could potentially affect earnings. Edison International is studying the impact of the new standard on its nonutility subsidiaries, and is unable to predict at this time the impact on its financial statements. Year 2000 Issue Many of the existing computer systems at Edison International were originally programmed to represent any date by using six digits (e.g., 12/31/99) rather than eight digits (e.g., 12/31/1999). Accordingly, such programs, if not appropriately addressed, could fail or create erroneous results when attempting to process information containing dates after December 31, 1999. This situation has been referred to generally as the Year 2000 Issue. Edison International has a comprehensive program in place to address potential Year 2000 impacts. Edison International provides overall coordination of this effort, working with its affiliates and their business units. Edison International divides Year 2000 activities into five phases: inventory, impact assessment, remediation, testing and implementation. Edison International's objective for the Year 2000 readiness of critical systems is to be 100% complete by July 1999. A critical system is defined as those applications and systems, including embedded processor technology, which if not appropriately remediated, may have a significant impact on customers, the health and safety of the public and/or personnel, the revenue stream, or regulatory compliance. Edison International met its first goal to be 75% complete by year-end 1998 and is on track to meets its July 1999 goal. A system, application or physical asset is deemed to be Year 2000-ready if it is determined by Edison International to be suitable for continued use through the year 2028 (or through the last year of the anticipated life of the asset, whichever occurs first), even though it is not fully Year 2000-compliant. A system, application, or physical asset is Year 2000-compliant if it accurately processes date/time data. Edison International has structured the scope of the program to focus on three principal categories: mainframe computing, distributed computing and physical assets (also known as embedded processors). The mainframe and distributed computing assets consist of computer application systems (software). Physical assets include information 33 technology infrastructure (hardware, operating system software) and embedded processor technology in generation, transmission, distribution, and facilities components. Year 2000-readiness preparations for SCE's mainframe financial systems were completed in the fourth quarter of 1997, and preparations for SCE's material management system were completed in the second quarter of 1998. SCE's customer information and billing system is in the process of being replaced with a system designed to be Year 2000-ready and final conversion activities are expected to be completed during the first quarter of 1999. SCE's distributed computing assets include operations and business information systems. SCE's critical operations information systems include outage management, power management, and plant monitoring and access retrieval systems. SCE's business information systems include a data acquisition system for billing, the computer call center support system, credit support and maintenance management. EME has essentially completed all phases of the project and is going through the final review and approval process. Edison Capital has completed the inventory and impact assessment phases; remediation, testing and implementation activities are in progress for each of the three categories with completion scheduled by July 1, 1999. Edison Enterprises' project schedule has been altered and compressed. All project phases are underway and scheduled for completion by July 1, 1999. Ongoing efforts in 1999 will continue to focus on guarding against reintroduction of components that are not Year 2000-ready into Year 2000-ready systems. The other essential component of the Edison International Year 2000-readiness program is to identify and assess vendor products and business partners for Year 2000 readiness, as these external parties may have the potential to impact Edison International's Year 2000 readiness. Edison International has implemented a process to identify and contact vendors and business partners to determine their Year 2000 status, and is evaluating the responses. As of January 31, 1999, Edison International has contacted over 4,300 critical vendors and business partners (the largest percentage of which are SCE's vendors and business partners). Edison International's general policy requires that all newly purchased products and services be Year 2000-ready or otherwise designed to allow Edison International to determine whether such products and services present Year 2000 issues. SCE is also working to address Year 2000 issues related to all ISO and PX interfaces, as well as joint ownership facilities. SCE and other Edison International affiliates exchange Year 2000-readiness information (including, but not limited to, test results and related data) with one another and certain external parties as part of their Year 2000-readiness efforts. Edison International's current estimate of the costs to complete these modifications, including the cost of new hardware and software application modification, is $75 million, about 40% of which is expected to be capital costs. Edison International's Year 2000 costs expended through December 31, 1998, were $36 million. SCE expects current rate levels for providing electric service to be sufficient to provide funding for utility-related modifications. Although Edison International expects that its critical systems will be fully Year 2000-ready prior to year-end 1999, there can be no assurance that the systems of other companies on which the systems and operations of the Edison International companies rely will be converted on a timely basis. Edison International believes that prudent business practices call for the development of contingency plans. Such contingency plans include developing strategies for dealing with the most reasonably likely worst case scenario concerning Year 2000-related processing failures or malfunctions caused by Edison International's internal systems or from external parties. As noted above, Edison International has, in many cases, completed its Year 2000-readiness work and is currently in the remediation and testing phases for certain other internal systems as well as assessing risks posed by external parties. SCE is working with industry groups in an effort to help define a reasonably likely worst case scenario and in the development of contingency plans. SCE's contingency plans, which will include scheduling of key personnel, are expected to be completed by March 1999. As of January 31, 1999, draft component and system contingency plans were completed and being evaluated, draft plans were in progress for generating units, and a draft of the grid operations plan had been submitted to the Western Systems Coordinating Council. However, contingency plans will continue to be revised and enhanced as 2000 approaches. Edison International also plans to test these contingency plans by conducting or participating in exercises during 1999. Also, SCE is scheduled to participate in industry-wide drills during 1999. Edison International does not expect the Year 2000 Issue to have a material adverse effect on its results of operation or financial position; however, if not effectively remediated, negative effects from Year 2000 issues, including those related to internal systems, vendors, business partners, the ISO, the PX or customers, could cause results to differ. Forward-looking Information In the preceding Management's Discussion and Analysis of Results of Operations and Financial Condition and elsewhere in this annual report, the words estimates, expects, anticipates, believes, and other similar expressions are intended to identify forward-looking information that involves risks and uncertainties. Actual results or outcomes could differ materially as a result of such important factors as further actions by state and federal regulatory bodies setting rates and implementing the restructuring of the electric utility industry; the effects of new laws and regulations relating to restructuring and other matters; the effects of increased competition in the electric utility business, including direct customer access to retail energy suppliers and the unbundling of revenue cycle services such as metering and billing; changes in prices of electricity and fuel costs; changes in market interest or currency exchange rates; foreign currency devaluation; new or increased environmental liabilities; the effects of the Year 2000 Issue; and other unforeseen events. 34 Responsibility for Financial Reporting The management of Edison International is responsible for the integrity and objectivity of the accompanying financial statements. The statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and are based, in part, on management estimates and judgment. Edison International and its subsidiaries maintain systems of internal control to provide reasonable, but not absolute, assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of the financial statements. There are limits inherent in all systems of internal control, the design of which involves management's judgment and the recognition that the costs of such systems should not exceed the benefits to be derived. Edison International believes its systems of internal control achieve this appropriate balance. These systems are augmented by internal audit programs through which the adequacy and effectiveness of internal controls and policies and procedures are monitored, evaluated and reported to management. Actions are taken to correct deficiencies as they are identified. Edison International's independent public accountants, Arthur Andersen LLP, are engaged to audit the financial statements in accordance with generally accepted auditing standards and to express an informed opinion on the fairness, in all material respects, of Edison International's reported results of operations, cash flows and financial position. As a further measure to assure the ongoing objectivity of financial information, the audit committee of the board of directors, which is composed of outside directors, meets periodically, both jointly and separately, with management, the independent public accountants and internal auditors, who have unrestricted access to the committee. The committee recommends annually to the board of directors the appointment of a firm of independent public accountants to conduct audits of its financial statements; considers the independence of such firm and the overall adequacy of the audit scope and Edison International's systems of internal control; reviews financial reporting issues and is advised of management's actions regarding financial reporting and internal control matters. Edison International and its subsidiaries maintain high standards in selecting, training and developing personnel to assure that their operations are conducted in conformity with applicable laws and are committed to maintaining the highest standards of personal and corporate conduct. Management maintains programs to encourage and assess compliance with these standards. Richard K. Bushey John E. Bryson Richard K. Bushey John E. Bryson Vice President and Controller Chairman of the Board and Chief Executive Officer 35 Report of Independent Public Accountants To the Shareholders and the Board of Directors, Edison International: We have audited the accompanying consolidated balance sheets of Edison International (a California corporation) and its subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Edison International'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 Edison International and its subsidiaries as of December 31, 1998, and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California February 4, 1999 36
Consolidated Statements of Income In millions, except per share amounts Year ended December 31, 1998 1997 1996 - ------------------------------------- ---------------------- ---- ---- ---- Sales to ultimate consumers $7,105 $7,639 $7,273 Sales to power exchange 1,348 - - Other 394 314 310 ------ ------ ------ Total electric utility revenue 8,847 7,953 7,583 Diversified operations 1,361 1,282 962 ------ ------ ----- Total operating revenue 10,208 9,235 8,545 ------ ------ ----- Fuel 501 1,074 768 Purchased power - contracts 2,626 2,854 2,706 Purchased power - power exchange 1,984 - - Provisions for regulatory adjustment clause-net (473) (411) (226) Other operating expenses 2,122 1,785 1,558 Maintenance 411 406 331 Depreciation, decommissioning and amortization 1,662 1,362 1,173 Income taxes 455 537 563 Property and other taxes 133 134 197 Net gains on sale of utility plant (542) (4) (3) ------ ------ ----- Total operating expenses 8,879 7,737 7,067 ------ ------ ----- Operating income 1,329 1,498 1,478 ------ ------ ----- Provision for rate phase-in plan - (48) (84) Allowance for equity funds used during construction 12 8 16 Interest and dividend income 108 85 63 Minority interest (3) (39) (70) Other nonoperating income (deductions) - net (38) (62) (13) ------ ------ ----- Total other income (deductions)- net 79 (56) (88) ------ ------ ----- Income before interest and other expenses 1,408 1,442 1,390 ------ ------ ----- Interest on long-term debt 652 584 604 Other interest expense 77 139 90 Allowance for borrowed funds used during construction (8) (9) (10) Capitalized interest (19) (15) (58) Dividends on subsidiary preferred securities 38 43 47 ------ ------ ----- Total interest and other expenses-net 740 742 673 ------ ------ ----- Net income $ 668 $ 700 $ 717 ====== ====== ===== Weighted-average shares of common stock outstanding 359 400 437 Basic earnings per share $1.86 $1.75 $1.64 Weighted-average shares, including effect of dilutive securities 364 405 439 Diluted earnings per share $1.84 $1.73 $1.63 Dividends declared per common share $1.04 $1.00 $1.00 Consolidated Statements of Comprehensive Income In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Net income $ 668 $ 700 $ 717 Cumulative translation adjustments-net - (34) 49 Unrealized gain on securities-net 12 27 15 Reclassification adjustment for gains included in net income (18) - - ----- ----- ----- Comprehensive income $ 662 $ 693 $ 781 ===== ===== =====
The accompanying notes are an integral part of these financial statements. 37 CONSOLIDATED BALANCE SHEETS
In millions December 31, 1998 1997 - ----------- ----------- ---- ---- ASSETS Transmission and distribution: Utility plant, at original cost, subject to cost-based rate regulation $11,772 $11,213 Accumulated provision for depreciation (6,063) (5,574) Construction work in progress 455 493 ------- ------- 6,164 6,132 ------- ------- Generation: Utility plant, at original cost, not subject to cost-based rate regulation 1,690 9,522 Accumulated provision for depreciation, decommissioning and amortization (834) (4,970) Construction work in progress 62 100 Nuclear fuel, at amortized cost 172 155 ------ ----- 1,090 4,807 ------ ----- Total utility plant 7,254 10,939 ------ ------ Nonutility property-less accumulated provision for depreciation of $297 and $238 at respective dates 3,072 3,178 Nuclear decommissioning trusts 2,240 1,831 Investments in partnerships and unconsolidated subsidiaries 1,980 1,408 Investments in leveraged leases 1,621 960 Other investments 208 194 ------ ----- Total other property and investments 9,121 7,571 ------ ----- Cash and equivalents 584 1,907 Receivables, including unbilled revenue, less allowances of $24 and $27 for uncollectible accounts at respective dates 1,316 1,077 Fuel inventory 51 58 Materials and supplies, at average cost 116 133 Accumulated deferred income taxes-net 275 123 Regulatory balancing accounts-net 649 193 Prepayments and other current assets 138 106 ------ ------ Total current assets 3,129 3,597 ------ ------ Regulatory asset-unamortized nuclear investment-net 2,162 - Regulatory asset-income tax-related deferred charges 1,463 1,544 Unamortized debt issuance and reacquisition expense 349 359 Other deferred charges 1,220 1,091 ------ ------ Total deferred charges 5,194 2,994 ------- ------- Total assets $24,698 $25,101 ======= =======
The accompanying notes are an integral part of these financial statements. 38 CONSOLIDATED BALANCE SHEETS
In millions, except share amounts December 31, 1998 1997 - --------------------------------- ------------ ---- ---- CAPITALIZATION AND LIABILITIES: Common shareholders' equity: Common stock (350,553,197 and 375,764,429 shares outstanding at respective dates) $2,109 $2,261 Accumulated other comprehensive income: Cumulative translation adjustments-net 30 30 Unrealized investments-net 54 60 Retained earnings 2,906 3,176 ------ ------ 5,099 5,527 Preferred securities of subsidiaries: Not subject to mandatory redemption 129 184 Subject to mandatory redemption 406 425 Long-term debt 8,008 8,871 ------ ------ Total capitalization 13,642 15,007 ------ ------ Other long-term liabilities 467 480 ------ ------ Current portion of long-term debt 920 868 Short-term debt 565 330 Accounts payable 490 441 Accrued taxes 630 577 Accrued interest 147 132 Dividends payable 92 95 Deferred unbilled revenue and other current liabilities 1,442 1,285 ------ ------ Total current liabilities 4,286 3,728 ------ ------ Accumulated deferred income taxes-net 4,591 4,085 Accumulated deferred investment tax credits 271 351 Customer advances and other deferred credits 1,425 1,441 ------ ------ Total deferred credits 6,287 5,877 ------ ------ Minority interest 16 9 ------ ------ Commitments and contingencies (Notes 2, 8, 9 and 10) Total capitalization and liabilities $24,698 $25,101 ======= =======
The accompanying notes are an integral part of these financial statements. 39 CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions Year ended December 31, 1998 1997 1996 - ----------- ----------------------- ---- ---- Cash flows from operating activities: Net income $ 668 $ 700 $ 717 Adjustments for non-cash items: Depreciation, decommissioning and amortization 1,662 1,362 1,173 Other amortization 169 88 96 Deferred income taxes and investment tax credits 348 115 91 Equity in income from partnerships and unconsolidated subsidiaries (190) (190) (154) Income from leveraged leases (213) (86) (14) Regulatory asset related to the sale of oil and gas plant (220) - - Net gains on sale of oil and gas plant (565) - - Other-net (48) 58 75 Changes in working capital: Receivables (235) (8) 68 Regulatory balancing accounts (455) (375) (156) Fuel inventory, materials and supplies 24 36 39 Prepayments and other current assets (19) 10 13 Accrued interest and taxes 68 47 3 Accounts payable and other current liabilities 283 195 70 Distributions from partnerships and unconsolidated subsidiaries 185 182 176 ------ ------ ------ Net cash provided by operating activities 1,462 2,134 2,197 ------ ------ ------ Cash flows from financing activities: Long-term debt issued 981 1,646 1,365 Long-term debt repaid (1,544) (2,219) (1,315) Rate reduction notes issued - 2,449 - Rate reduction notes repaid (252) - - Preferred securities issued - - 414 Preferred securities redeemed (74) (100) - Common stock repurchased (714) (1,173) (344) Short-term debt financing-net 236 (68) (312) Dividends paid (374) (408) (440) Other-net 17 (14) 45 ------ ------ ----- Net cash provided (used) by financing activities (1,724) 113 (587) ------ ------ ----- Cash flows from investing activities: Additions to property and plant (963) (783) (744) Proceeds from sale of assets 1,215 211 139 Funding of nuclear decommissioning trusts (163) (154) (148) Investments in partnerships and unconsolidated subsidiaries (659) (131) (336) Investments in leveraged leases (458) (327) 3 Unrealized gain in equity investments-net (6) 27 15 Other-net (27) (80) (149) ------ ----- ----- Net cash used by investing activities (1,061) (1,237) (1,220) ------ ----- ----- Net increase (decrease) in cash and equivalents (1,323) 1,010 390 Cash and equivalents, beginning of year 1,907 897 507 ------ ------ ------ Cash and equivalents, end of year $ 584 $1,907 $ 897 ====== ====== ======
The accompanying notes are an integral part of these financial statements. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies Accounting Principles Southern California Edison Company's (SCE) accounting policies conform with generally accepted accounting principles, including the accounting principles for rate-regulated enterprises which reflect the rate-making policies of the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). As a result of industry restructuring legislation enacted by the State of California and a related change in the application of accounting principles for rate-regulated enterprises adopted by the Financial Accounting Standards Board's Emerging Issues Task Force, during the third quarter of 1997, SCE began accounting for its investment in generation facilities in accordance with accounting principles applicable to enterprises in general and Edison International's balance sheets display a separate caption for its investment in generation. Application of such accounting principles to SCE's generation assets did not result in any adjustment of their carrying value; however, SCE's nuclear investments were reclassified as a regulatory asset in second quarter 1998. Competition Transition Charge (CTC) Beginning January 1, 1998, a non-bypassable charge is being billed to all SCE customers, which provides SCE the opportunity to recover its costs to transition to a competitive market. Consolidation Policy The consolidated financial statements include Edison International and its wholly owned subsidiaries. Edison International's subsidiaries use the equity method to account for significant investments in partnerships and subsidiaries in which they own 50% or less. Intercompany transactions have been eliminated, except Edison Mission Energy's (EME) profits from energy sales to SCE, which are allowed in utility rates. Earnings Per Share (EPS) Basic and diluted EPS are computed in accordance with an accounting standard issued in 1997. Basic EPS for Edison International equals previously reported primary EPS. Dividends on subsidiary preferred securities are subtracted from income for the EPS calculation (numerator); dilutive securities (employee stock options) are added to the weighted-average shares for the diluted EPS calculation (denominator). Estimates Financial statements prepared in compliance with generally accepted accounting principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosure of contingencies. Actual results could differ from those estimates. Certain significant estimates related to electric utility restructuring, decommissioning and contingencies are further discussed in Notes 2, 9 and 10 to the Consolidated Financial Statements, respectively. Fuel Inventory Fuel inventory is valued under the last-in, first-out method for fuel oil and natural gas, and under the first-in, first-out method for coal. Nature Of Operations Edison International's wholly owned subsidiaries include: SCE, a rate-regulated electric utility which produces and supplies electric energy for its 4.3 million customers in central, coastal and Southern California; EME, a leading global producer of electricity engaged in the development, ownership and operation of electric power generation facilities worldwide; Edison Capital, a leading provider of capital and financial services; and Edison Enterprises, the retail business arm of Edison International. EME and Edison Capital have domestic and foreign projects, primarily in Europe, Asia and Africa. SCE operates in a highly regulated environment in which it has an obligation to deliver electric service to customers in return for an exclusive franchise within its service territory. This regulatory environment is changing, as further discussed in Note 2 to the Consolidated Financial Statements. As a result of these changes, effective April 1, 1998, SCE sells all electric energy produced to the power exchange (PX), as mandated by state legislation and purchases electric energy from the PX to supply to its customers. EME's plants are located in different geographic areas, which mitigates the effects of regional markets, economic down-turns or unusual weather conditions. EME's domestic projects generally sell power to a limited number of electric utilities under long-term (15 to 30 years) contracts. Projects in both the United Kingdom and Australia sell their energy and capacity through a centralized electricity pool. Other electric power generated overseas is sold primarily through long-term contracts to electric utilities in the country where the power is generated. Nuclear CPUC-authorized rate phase-in plans, which deferred collection of revenue for each unit at the Palo Verde Nuclear Generating Station during the first four years of operation, ended in February 1996, September 1996 and January 1998 for Units 1, 2 and 3, respectively. Under federal law, SCE is liable for its share of the estimated costs to decommission three federal nuclear enrichment facilities (based on purchases). These costs, which will be paid over 15 years, are recorded as a fuel cost and recovered through non-bypassable customer rates. In 1996 and 1997, the CPUC authorized acceleration of the recovery of SCE's remaining investment of $2.6 billion in San Onofre Nuclear Generating Station Units 2 and 3 and $1.2 billion in Palo Verde Units 1, 2 and 3, respectively. The accelerated recovery will continue through December 2001, earning a 7.35% fixed rate of return. San Onofre's operating costs, including nuclear fuel and nuclear fuel financing costs, and incremental capital expenditures are recovered through an incentive pricing plan which allows SCE to receive about 4cents per kilowatt-hour through 2003. Any differences between these costs and the incentive price will flow through to the shareholders. Palo Verde's accelerated 41 plant recovery, as well as operating costs, including nuclear fuel and nuclear fuel financing costs, and incremental capital expenditures, are subject to balancing account treatment through 2001. Beginning January 1, 1998, San Onofre's incentive pricing plan and accelerated plant recovery and the Palo Verde balancing account became part of the CTC mechanism. SCE will be required to share equally with ratepayers the net benefits received from operation of Palo Verde, beginning in 2002, and from the operation of the San Onofre units in 2004. Palo Verde's existing nuclear unit incentive procedure will continue only for purposes of calculating a reward for performance of any unit above an 80% capacity factor for a fuel cycle. Property and Plant Plant additions, including replacements and betterments, are capitalized. Such costs for utility property include direct material and labor, construction overhead and an allowance for funds used during construction (AFUDC). AFUDC represents the estimated cost of debt and equity funds that finance utility-plant construction. AFUDC is capitalized during plant construction and reported in current earnings. AF UDC is recovered in rates through depreciation expense over the useful life of the related asset. Depreciation of utility plant is computed on a straight-line, remaining-life basis. Replaced or retired property and removal costs less salvage are charged to the accumulated provision for depreciation. Depreciation expense stated as a percent of average original cost of depreciable utility plant was 4.2% for 1998, 5.2% for 1997 and 4.2% for 1996. Nonutility property is capitalized at cost, including interest incurred on borrowed funds that finance construction. Depreciation of nonutility properties is primarily computed on a straight-line basis over their estimated useful lives. Depreciation expense stated as a percent of average original cost of depreciable nonutility property was, on a composite basis, 3.6% for 1998, 3.2% for 1997 and 3.9% for 1996. During the third quarter of 1997, SCE discontinued accounting for its investment in generation facilities using accounting principles applicable to rate-regulated enterprises and began accounting for such investment using accounting principles applicable to enterprises in general. The carrying value of such investment was unaffected by this change. However, the nuclear investments were reclassified as a regulatory asset in second quarter 1998. Reclassifications Certain prior-year amounts were reclassified to conform to the December 31, 1998, financial statement presentation. Regulatory Balancing Accounts Prior to January 1, 1998, the differences between CPUC-authorized and actual base-rate revenue from kilowatt-hour sales and CPUC-authorized and actual energy costs were accumulated in balancing accounts until they were refunded to, or recovered from, utility customers through authorized rate adjustments (with interest). On January 1, 1998, the balances in these balancing accounts were transferred to a transition cost balancing account. Also, beginning January 1, 1998, the difference between generation-related revenue and generation-related costs is being accumulated in a transition cost balancing account, effectively eliminating all other balancing accounts except those used to assist in the administration of public purpose funds. Additionally, gains resulting from the divestiture of the gas- and oil-fueled generation plants were credited to the transition cost balancing account; the losses are being amortized over the remaining transition period and accumulated in the transition cost balancing account. These transition costs are being recovered from utility customers (with interest) through the CTC. For further details, see discussion under California Electric Utility Industry Restructuring in Note 2 to the Consolidated Financial Statements. Income tax effects on all balancing account changes are deferred. In January 1997, in compliance with the restructuring legislation, overcollections in the kilowatt-hour sales and energy cost balancing accounts at December 31, 1996, were transferred to an interim balancing account and were subsequently credited to the transition cost balancing account in January 1998. Research, Development and Demonstration (RD&D) SCE capitalizes RD&D costs that are expected to result in plant construction. If construction does not occur, these costs are charged to expense. RD&D expenses were $2 million in 1998, $39 million in 1997, and $21 million in 1996. Revenue Electric utility revenue includes amounts for services rendered but unbilled at the end of each year. Beginning April 1, 1998, electric utility revenue also includes amounts for sales to the PX. Supplemental Cash Flows Information Edison International's supplemental cash flows information was: In millions Year ended December 31, 1998 1997 1996 - ------------ ---------------------- ---- ---- ---- Payments for interest and taxes: Interest-net of amounts capitalized $ 474 $ 579 $ 486 Taxes 87 298 447 Non-cash investing and financing activities: Obligation to fund investments in partnerships and unconsolidated subsidiaries 7 159 237 Additions to property and plant funded by minority owner of consolidated subsidiaries - - 33 Note 2 Regulatory Matters California Electric Utility Industry Restructuring Restructuring Decision and Statute - The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure involving competition and customer choice. The State of California enacted legislation in 1996 to provide a 42 transition to a competitive market structure. The Statute substantially adopted the CPUC's restructuring decision by addressing stranded-cost recovery for utilities and providing a certain cost-recovery time period for the transition costs associated with utility-owned generation-related assets. Transition costs related to power-purchase contracts are being recovered through the terms of their contracts while most of the remaining transition costs will be recovered through 2001. The Statute also included provisions to finance a portion of the stranded costs that residential and small commercial customers would have paid between 1998 and 2001, which allowed SCE to reduce rates by at least 10% to these customers, effective January 1, 1998. The Statute included a rate freeze for all other customers, including large commercial and industrial customers, as well as provisions for continued funding for energy conservation, low-income programs and renewable resources. Despite the rate freeze, SCE expects to be able to recover its revenue requirement during the 1998-2001 transition period. In addition, the Statute mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Finally, the Statute contained provisions for the recovery (through 2006) of reasonable employee-related transition costs, incurred and projected, for retraining, severance, early retirement, outplacement and related expenses. The new market structure and customer choice began on April 1, 1998. 1998 Activities - During 1998, SCE implemented changes to comply with restructuring elements required by the CPUC and the Statute. Beginning January 1, 1998: * SCE's rates were unbundled into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning. The transmission component is being collected through FERC-approved rates, subject to refund. * SCE's costs associated with its hydroelectric plants are being recovered through a performance-based mechanism. The mechanism sets the hydroelectric revenue requirement and establishes a formula for extending it through the duration of the electric industry restructuring transition period, or until market valuation of the hydroelectric facilities, whichever occurs first. The mechanism provides that power sales revenue from hydroelectric facilities in excess of the hydroelectric revenue requirement be credited against the costs to transition to a competitive market. * SCE's transition costs are being recovered through a non-bypassable CTC. This charge applies to all customers who were using or began using utility services on or after the CPUC's December 1995 restructuring decision date. SCE has estimated its transition costs to be approximately $10.6 billion (1998 net present value) from 1998 through 2030. This estimate was based on incurred costs, forecasts of future costs and assumed market prices. However, changes in the assumed market prices could materially affect these estimates. The potential transition costs are comprised of $6.4 billion from SCE's qualifying facilities contracts, which are the direct result of prior legislative and regulatory mandates, and $4.2 billion (which reflects the sale of SCE's gas- and oil-fueled generation plants) from costs pertaining to certain generating assets and regulatory commitments consisting of costs incurred (whose recovery has been deferred by the CPUC) to provide service to customers. Such commitments include the recovery of income tax benefits previously flowed through to customers, postretirement benefit transition costs, accelerated recovery of San Onofre Units 2 and 3 and the Palo Verde units, and certain other costs. * Residential and small commercial customers who began receiving a 10% rate reduction are repaying the rate reduction notes issued in December 1997 (see further discussion in Note 3 to the Consolidated Financial Statements) through non-bypassable charges based on electricity consumption. Effective April 1, 1998: * The ISO assumed operational control of the transmission system after the ISO and PX had begun accepting bids and schedules for electricity purchases on March 31, 1998. The restructuring implementation costs related to the start-up and development of the PX, which are paid by the utilities, will be recovered from all retail customers over the four-year transition period. SCE's share of the charge is $45 million, plus interest and fees. SCE's share of the ISO's start-up and development costs (approximately $16 million per year) will be paid over a 10-year period. * Customers can choose to remain utility customers with either bundled electric service or an hourly PX pricing option from SCE (which is purchasing its power through the PX), or choose direct access, which means the customer can contract directly with either independent power producers or energy service providers (ESPs) such as power brokers, marketers and aggregators. Electric utilities are continuing to provide the core distribution service of delivering energy through their distribution system regardless of a customer's choice of electricity supplier. The CPUC is continuing to regulate the prices and service obligations related to distribution services. * Customers have options regarding metering, billing and related services (referred to as revenue cycle services) that have been provided by California's investor-owned utilities. ESPs can provide their customers with one consolidated bill for their services and the utility's services, request the utility to provide such a consolidated bill to the customer or elect to have both the ESP and the utility bill the customer for their respective charges. Customers with maximum demand above 20kW (primarily industrial and medium and large commercial) can choose SCE or any other supplier to provide their metering service. Beginning in January 1999, all customers can make these choices. In September 1998, the CPUC issued a decision regarding the credits that would be provided to customers if they elect to obtain revenue cycle services from someone other than SCE. Although the decision adopted SCE's recommendation of using the net avoided cost, it also adopted a methodology which results in higher credits to customers but requires ESPs to pay service fees to SCE for the costs that SCE incurs as a result of dealing with the ESP. 43 During 1998, SCE sold all of its gas- and oil-fueled generation plants. The total sales price of the 12 plants was $1.2 billion, over $500 million more than the combined book value. Net proceeds of the sales were used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. Accounting for Generation-Related Assets - If the CPUC's electric industry restructuring plan continues as described above, SCE would be allowed to recover its transition costs through non-bypassable charges to its distribution customers (although its investment in certain generation assets would be subject to a lower authorized rate of return). In 1997, SC E discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities based on new accounting guidance. The financial reporting effect of this discontinuance was to segregate these assets on the balance sheet; the new guidance did not require SCE to write off any of its generation-related assets, including related regulatory assets. However, the new guidance did not specifically address the application of asset impairment standards to these assets. SCE has retained these assets on its balance sheet because the Statute and restructuring plan referred to above make probable their recovery through a non-bypassable CTC to distribution customers. The regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments and unamortized losses on reacquired debt. The new accounting guidance also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. During the second quarter of 1998, additional guidance was developed related to the application of asset impairment standards to these assets. Using this guidance resulted in SCE reducing its remaining nuclear plant investment by $2.6 billion (as of June 30, 1998) and recording a regulatory asset on its balance sheet for the same amount. For this impairment assessment, the fair value of the investment was calculated by discounting future net cash flows. This reclassification had no effect on SCE's results of operations. If during the transition period events were to occur that made the recovery of these generation-related regulatory assets no longer probable, SCE would be required to write off the remaining balance of such assets (approximately $2.4 billion, after tax, at December 31, 1998) as a one-time, non-cash charge against earnings. If events occur during the restructuring process that result in all or a portion of the transition costs being improbable of recovery, SCE could have additional write-offs associated with these costs if they are not recovered through another regulatory mechanism. At this time, SCE cannot predict what other revisions will ultimately be made during the restructuring process in subsequent proceedings or the effect, after the transition period, that competition will have on its results of operations or financial position. Note 3 Financial Instruments Cash Equivalents Cash and equivalents include tax-exempt investments ($78 million at December 31, 1998, and $949 million at December 31, 1997), and time deposits and other investments ($506 million at December 31, 1998, and $958 million at December 31, 1997) with maturities of three months or less. Derivative Financial Instruments Edison International's risk management policy allows the use of derivative financial instruments to manage financial exposure on its investments and fluctuations in interest rates, but prohibits the use of these instruments for speculative or trading purposes. Edison International uses the hedge accounting method to record its derivative financial instruments, except for gas call options. Hedge accounting requires an assessment that the transaction reduces risk, that the derivative be designated as a hedge at the inception of the derivative contract, and that the changes in the market value of a hedge move in an inverse direction to the item being hedged. Under hedge accounting, the derivative itself is not recorded on Edison International's balance sheet. Mark-to-market accounting would be used if the hedge accounting criteria were not met. Interest rate differentials and amortization of premiums for interest rate caps are recorded as adjustments to interest expense. If the derivatives were terminated before the maturity of the corresponding debt issuance, the realized gain or loss on the transaction would be amortized over the remaining term of the debt. SCE has gas call options that mitigate SCE's exposure to increases in natural gas prices. Increases in natural gas prices tend to increase the price of electricity purchased from the PX. The options cover various periods from 1998 through 2001. SCE uses the mark-to-market accounting method for its gas call options. Gains and losses from monthly changes in market prices are recorded as income or expense. However, the costs of the options and the market price changes are included in the transition cost balancing account. As a result, the mark-to-market gains or losses have no effect on earnings. Projects in the United Kingdom sell their electrical energy and capacity through a centralized electricity pool, which establishes a half-hourly clearing price, or pool price, for electrical energy. The pool price is extremely volatile, and can vary by a factor of 10 or more over the course of a few hours due to large differentials in demand according to the time of day. First Hydro mitigates a significant portion of the market risk of the pool by entering into electricity rate swap agreements, related to either the selling or purchasing price of power. These contracts are sold in various structures. These contracts act as a means of stabilizing production revenue or purchasing costs by removing an element of First Hydro's net exposure to pool price volatility. 44 Loy Yang B sells its electrical energy through a centralized electricity pool, which provides for a system of generator bidding, central dispatch and a settlement system based on a clearing market for each half-hour of every day. To mitigate the exposure to price volatility of the electricity traded in the pool, Loy Yang B has entered into a number of financial hedges. Between May 1997 and December 2000, approximately 53% to 64% of the plant output sold is hedged under vesting contracts, with the remainder of the plant capacity hedged under the state hedge described below. Vesting contracts set base strike prices at which the electricity will be traded, and the parties to the agreement make payments, calculated based on the difference between the price in the contract and the half-hourly pool clearing price for the element of power under the contract. These contracts are sold in various structures. These contracts are accounted for as electricity rate swap agreements. The state hedge is a long-term contractual agreement based upon a fixed price commencing in May 1997 and terminating in October 2016. Interest rate swaps and collars are used to reduce the potential impact of interest rate fluctuations on floating-rate long-term debt. SCE's interest rate swap agreement requires the parties to pledge collateral according to bond rating and market interest rate changes. At December 31, 1998, SCE had pledged $25 million as collateral due to a decline in market interest rates. SCE is exposed to credit loss in the event of nonperformance by the counterparty to the agreement, but does not expect the counterparty to fail to meet its obligation. Edison Capital has entered into a foreign currency contract to reduce the potential impact of changes in foreign exchange rates and future foreign currency denominated cash flows. Edison International is subject to concentrations of credit risk as the result of elements involved in EME's financial instruments and power-sales contracts. Credit risk relates to the risk of loss that EM E would incur as a result of nonperformance by counterparties (major financial institutions and domestic and foreign utilities) under their contractual obligations. EME attempts to mitigate this risk by contracting with counterparties that have a strong capacity to meet their contractual obligations and by monitoring their credit quality. In addition, EME seeks to secure long-term power-sales contracts for its projects that are expected to result in adequate cash flow under a wide range of economic and operating circumstances. To accomplish this, EME attempts to structure its long-term contracts so that fluctuations in fuel costs will produce similar fluctuations in electric and/or steam revenue by entering into long-term fuel supply and transportation agreements. Accordingly, EME does not anticipate a material effect on its results of operations or financial condition as a result of counterparty nonperformance. Edison International had the following interest rate and foreign currency hedges: December 31, 1998 1997 --------------------- ---------------------- Notional Contract Notional Contract In millions Amount Expires Amount Expires --------------------- ---------------------- Swaps: Fixed to variable $ 245 1999 - 2002 $ 441 1999 - 2008 Variable to fixed 1,163 1999 - 2008 858 1998 - 2007 Collar 82 1999 $ 77 1999 Foreign currency contract 9 2001 - - Fair Value of Financial Instruments Fair values of financial instruments were: December 31, 1998 1997 -------------------- ------------------- Cost Fair Cost Fair Instrument (in millions) Basis Value Basis Value -------------------- ------------------- Financial assets: Decommissioning trusts $1,534 $2,240 $1,371 $1,831 Electricity rate swaps - 19 - 77 Equity investments 7 72 9 90 Gas call options 39 31 34 34 Financial liabilities: DOE decommissioning and decontamination fees $ 45 $ 40 $ 50 $ 43 Interest rate hedges - 111 - 92 Long-term debt 8,008 8,187 8,871 9,618 Preferred securities subject to mandatory redemption 406 432 425 451 Financial assets are carried at their fair value based on quoted market prices for decommissioning trusts and equity investments and on financial models for gas call options and electricity rate swaps. Financial liabilities are recorded at cost. Financial liabilities' fair values are based on: termination costs for the interest rate swaps; brokers' quotes for long-term debt, preferred stock and the interest rate collar; and discounted future cash flows for U.S. Department of Energy (DOE) decommissioning and decontamination fees. Due to their short maturities, amounts reported for cash equivalents and short-term debt approximate fair value. 45 Gross unrealized holding gains (losses) on financial assets were: In Millions December 31, 1998 1997 ----------- ----------- ---- ---- Decommissioning trusts: Municipal bonds $196 $131 Stocks 365 190 U.S. government issues 115 91 Short-term and other 30 48 ---- ---- 706 460 Equity investments 65 81 Gas call options (8) - ---- ---- Total $763 $541 ==== ==== There were no unrealized holding losses on financial assets for the years presented, other than the unrealized holding loss on the gas call options in 1998. In June 1998, a new accounting standard for derivative instruments and hedging activities was issued. The new standard, which will be effective January 1, 2000, requires all derivatives to be recognized on the balance sheet at fair value. Gains or losses from changes in fair value would be recognized in earnings in the period of change unless the derivative is designated as a hedging instrument. Gains or losses from hedges of a forecasted transaction or foreign currency exposure would be reflected in other comprehensive income. Gains or losses from hedges of a recognized asset or liability or a firm commitment would be reflected in earnings for the ineffective portion of the hedge. SCE anticipates that most of its derivatives under the new standard would qualify for hedge accounting. SCE expects to recover in rates any market price changes from its derivatives that could potentially affect earnings. Edison International is studying the impact of the new standard on its nonutility subsidiaries, and is unable to predict at this time the impact on its financial statements. Investments Net unrealized gains (losses) in equity investments are recorded as a separate component of shareholders' equity under the caption: Unrealized gain in equity investments-net. Unrealized gains and losses on decommissioning trust funds are recorded in the accumulated provision for decommissioning. All investments are classified as available-for-sale. Long-Term Debt California law prohibits SCE from incurring or guaranteeing debt for its nonutility affiliates. Almost all SCE properties are subject to a trust indenture lien. SCE has pledged first and refunding mortgage bonds as security for borrowed funds obtained from pollution-control bonds issued by government agencies. SCE uses these proceeds to finance construction of pollution-control facilities. Bondholders have limited discretion in redeeming certain pollution-control bonds, and SCE has arranged with securities dealers to remarket or purchase them if necessary. Debt premium, discount and issuance expenses are amortized over the life of each issue. Under CPUC rate-making procedures, debt reacquisition expenses are amortized over the remaining life of the reacquired debt or, if refinanced, the life of the new debt. Commercial paper intended to be refinanced for a period exceeding one year and used to finance nuclear fuel scheduled to be used more than one year after the balance sheet date is classified as long-term debt. Long-term debt maturities and sinking-fund requirements for the next five years are: 1999-$898 million; 2000-$824 million; 2001-$734 million; 2002-$643 million; and 2003-$507 million. In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE is the sole member, issued approximately $2.5 billion of rate reduction notes to Bankers Trust Company of California, as certificate trustee for the California Infrastructure and Economic Development Bank Special Purpose Trust SCE-1 (Trust), which is a special purpose entity established by the State of California. The terms of the rate reduction notes generally mirror the terms of the pass-through certificates issued by the Trust, which are known as rate reduction certificates. The proceeds of the rate reduction notes were used by the SPE to purchase from SCE an enforceable right known as transition property. Transition property is a current property right created pursuant to the restructuring legislation and a financing order of the CPUC and consists generally of the right to be paid a specified amount from a non-bypassable tariff levied on residential and small commercial customers. Notwithstanding the legal sale of the transition property by SCE to the SPE, the amounts reflected as assets on SCE's balance sheet have not been reduced by the amount of the transition property sold to the SPE, and the liabilities of the SPE for the rate reduction notes are for accounting purposes reflected as long-term liabilities on the consolidated balance sheet of SCE. SCE used the proceeds from the sale of the transition property to retire debt and equity securities. The rate reduction notes are secured solely by the transition property and certain other assets of the SPE, and there is no recourse to SCE or Edison International. Although the SPE is consolidated with SCE in the financial statements, as required by generally accepted accounting principles, the S PE is legally separate from SCE, the assets of the SPE are not available to creditors of SCE or Edison International, and the transition property is legally not an asset of SCE or Edison International. Long-term debt consisted of: In millions December 31, 1998 1997 - ----------- ----------- ---- ---- First and refunding mortgage bonds: 1999-2026 (5.625% to 7.5%) $1,550 $1,825 Rate reduction notes: 1999-2007 (6.14% to 6.42%) 2,217 2,463 Pollution-control bonds: 1999-2027 (5.4% to 7.2% and variable) 1,201 1,202 Funds held by trustees (2) (2) Debentures and notes: 1999-2026 (5% to 20% and variable) 3,732 4,028 Subordinated debentures 2044 (8.375%) 100 100 Commercial paper for nuclear fuel 108 92 Capital lease obligation 48 68 Current portion of capital lease obligation (22) (20) Long-term debt due within one year (898) (848) Unamortized debt discount - net (26) (37) ------ ------ Total $8,008 $8,871 ====== ====== 46 Short-Term Debt Short-term debt consisted of: In millions December 31, 1998 1997 - ----------- ----------- ---- ---- Commercial paper $670 $415 Other short-term debt 6 8 Amount reclassified as long-term (108) (92) Unamortized discount (3) (1) ---- ---- Total $565 $330 ==== ==== Weighted-average interest rate 5.3% 6.0% At December 31, 1998, Edison International and its subsidiaries had $2.4 billion of borrowing capacity available. SCE had available lines of credit of $1.3 billion, with $800 million for short-term debt and $500 million for the long-term refinancing of its variable-rate pollution-control bonds. The nonutility subsidiaries had lines of credit of $700 million available to finance general cash requirements. The parent company had available lines of credit totaling $400 million. Edison International's unsecured revolving lines of credit are at negotiated or bank index rates with various expiration dates; the majority have five-year terms. Note 4 Equity The CPUC regulates SCE's capital structure, limiting the dividends it may pay Edison International. At December 31, 1998, SCE had the capacity to pay $794 million in additional dividends and continue to maintain its authorized capital structure. These restrictions are not expected to affect Edison International's ability to meet its cash obligations. In 1998, Edison International implemented a recently issued accounting standard that requires companies to report comprehensive income. Implementation of the new standard had no effect on Edison International's results of operations or financial position. Changes in Edison International's common shareholders' equity were as follows:
Accumulated Total Other Common Common Comprehensive Retained Shareholders' In millions, except share amounts Stock Income Earnings Equity - --------------------------------- --------------------------------------------------------- Balance December 31, 1995 $2,660 $ 33 $3,700 $6,393 Net income 717 717 Stock repurchase and retirement (19,216,627 shares) (115) (229) (344) Long-term incentive compensation plan (133,131 shares) 2 2 Dividends declared on common stock (435) (435) Unrealized gain on securities 25 25 Tax effect (10) (10) Cumulative translation adjustment 47 47 Tax effect 2 2 ------ ------- ------ ------ Balance December 31, 1996 2,547 97 3,753 6,397 ------ ------- ------ ------ Net income 700 700 Stock repurchase and retirement (48,992,365 shares) (294) (879) (1,173) Long-term incentive compensation plan (232,616 shares) 5 5 Dividends declared on common stock (395) (395) Unrealized gain on securities 45 45 Tax effect (18) (18) Cumulative translation adjustment (38) (38) Tax effect 4 4 Capital stock expense 3 3 Stock option appreciation (3) (3) ------ ------ ------ ------ Balance December 31, 1997 2,261 90 3,176 5,527 ------ ------ ------ ------ Net income 668 668 Stock repurchase and retirement (25,211,232 shares) (152) (562) (714) Dividends declared on common stock (371) (371) Unrealized gain on securities 18 18 Tax effect (6) (6) Reclassified adjustment for gain included in net income (30) (30) Tax effect 12 12 Stock option appreciation (5) (5) ------ ------ ------ ------ Balance December 31, 1998 $2,109 $ 84 $2,906 $5,099 ====== ====== ====== ======
Edison International authorized common stock is 800 million shares with no par value. From January 1, 1999, through February 4, 1999, Edison International repurchased 2.9 million shares of common stock ($83 million). SCE's authorized shares of preferred and preference stock are: $25 cumulative preferred-24 million; $100 cumulative preferred-12 million; and preference-50 million. All cumulative preferred stocks are redeemable. Mandatorily redeemable preferred stocks are subject to sinking-fund provisions. When preferred shares are redeemed, the premiums paid are charged to common equity. 47 EME is a general partner and also owns, indirectly, the limited partner's share of Mission Capital L.P., which was formed solely for the purpose of holding parent company debentures. Mission Capital L.P. has 6 million authorized shares of cumulative preferred securities with a liquidation preference that obligates EME. Preferred stock redemption requirements for the next five years are: 1999 through 2001-zero; 2002-$105 million; and 2003-$9 million. Edison International subsidiaries' cumulative preferred securities consisted of: December 31, 1998 ----------------- Dollars in millions, Shares Redemption December 31, except per share amounts Outstanding Price 1998 1997 - ------------------------ ------------------------ ------------ Not subject to mandatory redemption: $25 par value preferred stock: 4.08% Series 1,000,000 $25.50 $ 25 $ 25 4.24 1,200,000 25.80 30 30 4.32 1,653,429 28.75 41 41 4.78 1,296,769 25.80 33 33 5.80 - - - 55 ---- ---- Total $129 $184 ==== ==== Subject to mandatory redemption: $25 par value preferred securities: 8.50% Series 2,500,000 $25.00 $ 63 $ 63 9.875 3,500,000 25.00 87 87 $100 par value preferred stock: 6.05% Series 750,000 100.00 75 75 6.45 1,000,000 100.00 100 100 7.23 807,000 100.00 81 100 ---- ---- Total $406 $425 ==== ==== In 1998, 193,000 shares of Series 7.23% and 2.2 million shares of Series 5.8% preferred stock were redeemed. In 1997, 4 million shares of Series 7.36% preferred stock were redeemed. There were no preferred stock issuances for the years presented. Note 5 Income Taxes Edison International's subsidiaries will be included in its consolidated federal income tax and combined state franchise tax returns. Under income tax allocation agreements, each subsidiary calculates its own tax liability. Income tax expense includes the current tax liability from operations and the change in deferred income taxes during the year. Investment tax credits are amortized over the lives of the related properties. The components of the net accumulated deferred income tax liability were: In millions December 31, 1998 1997 - ----------- ----------- ---- ---- Deferred tax assets: Property-related $ 197 $ 227 Unrealized gains or losses 8 273 Investment tax credits 152 192 Regulatory balancing accounts 96 180 Decommissioning-related 126 114 Executive benefit plans 11 5 Deferred income 188 - Operating reserves 136 112 Loss carryforwards 42 9 Dividend in excess of equity earnings 22 23 Fixed costs 188 109 Other 681 433 ------ ------ Total $1,847 $1,677 ------ ------ Deferred tax liabilities: Property-related $3,982 $4,010 Leveraged leases 964 623 Capitalized software costs 196 127 Decommissioning 17 17 Special allocation 69 51 Investment tax credit 23 24 Regulatory balancing accounts 162 202 Other 766 585 ------ ------ Total $6,179 $5,639 ------ ------ Accumulated deferred income taxes-net $4,332 $3,962 ====== ====== Classification of accumulated deferred income taxes: Included in deferred credits $4,607 $4,085 Included in current assets 275 123 The current and deferred components of income tax expense were: In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Current: Federal $121 $244 $325 State 18 55 108 Foreign 15 103 39 ---- ---- ---- 154 402 472 ---- ---- ---- Deferred: Accrued charges (43) (33) (14) Property-related (14) (8) 46 Investment and energy tax credits-net (80) (22) (37) Leveraged leases 346 87 26 Loss carryforwards (33) 121 (41) Nonutility special charges - - 9 Pension reserves (3) (5) 45 Rate phase-in plan - (19) (31) Regulatory balancing accounts 177 141 34 State tax-privilege year (1) 2 18 Other (42) (167) (21) ---- ---- ---- 307 97 34 ---- ---- ---- Total income tax expense $461 $499 $506 ==== ==== ==== Classification of Income Taxes: Included in operating income $455 $537 $563 Included in other income 6 (38) (57) 48 The composite federal and state statutory income tax rate was 40.551% for 1998 and 1997, and 41.045% for 1996. The federal statutory income tax rate is reconciled to the effective tax rate below: Year ended December 31, 1998 1997 1996 - ---------------------- ---- ---- ---- Federal statutory rate 35.0% 35.0% 35.0% Capitalized software (0.6) (0.8) (0.8) Property-related and other 10.0 5.9 7.3 Housing credits (5.7) (4.3) (3.6) Investment and energy tax credits (5.7) (1.6) (2.7) State tax-net of federal deduction 7.5 6.3 6.2 ----- ----- ----- Effective tax rate 40.5% 40.5% 41.4% ===== ===== ===== Note 6 Employee Compensation and Benefit Plans Stock Option Plans In April 1998, Edison International shareholders approved the Edison International Equity Compensation Plan. The plan replaces the Long-Term Incentive Compensation Program, consisting of officer, director, and management plans, which was adopted by Edison International shareholders in 1992. No new awards will be made under the prior program; however, it will remain in effect as long as any awards remain outstanding under the prior program. The prior program participated in the use of 8.2 million shares of common stock reserved for potential issuance under various stock compensation programs to directors, officers and senior managers of Edison International and its affiliates. Under these programs, options on 3.9 million shares of Edison International common stock are currently outstanding to officers and senior managers. The new plan authorizes the annual issuance of shares equal to one percent of the issued and outstanding shares of Edison International common stock as of December 31 of the prior year. This authorization is cumulative so that to the extent shares are not needed to meet new plan requirements in any year, the excess authorized shares will carry over to subsequent years until plan termination. One percent of the issued and outstanding Edison International common stock on December 31, 1997, was 3.8 million shares. Under the new plan, options on 1.4 million shares of Edison International common stock are currently outstanding to officers and senior managers. Each option may be exercised to purchase one share of Edison International common stock, and is exercisable at a price equivalent to the fair market value of the underlying stock at the date of grant. Edison International stock options include a dividend equivalent feature. Generally, for options issued before 1994, amounts equal to dividends accrue on the options at the same time and at the same rate as would be payable on the number of shares of Edison International common stock covered by the options. The amounts accumulate without interest. For Edison International stock options issued after 1993, dividend equivalents are subject to reduction unless certain shareholder return performance criteria are met. The new plan's stock options have a 10-year term with one-fourth of the total award vesting after each of the first four years of the award term. The prior program's stock options have a 10-year term with one-third of the total award vesting after each of the first three years of the award term. If an optionee retires, dies or is permanently and totally disabled during the vesting period, the unvested options will vest and be exercisable to the extent of 1/36 (prior program) or 1/48 (the new plan) of the grant for each full month of service during the vesting period. Unvested options of any person who has served in the past on the Edison International or SCE Management Committee (which was dissolved in 1993) will vest and be exercisable upon the member's retirement, death or permanent and total disability. Upon retirement, death or permanent and total disability, the vested options may continue to be exercised within their original terms by the recipient or beneficiary. If an optionee is terminated other than by retirement, death or permanent and total disability, options which had vested as of the prior anniversary date of the grant are forfeited unless exercised within 180 days of the date of termination. All unvested options are forfeited on the date of termination. Edison International measures compensation expense related to stock-based compensation by the intrinsic value method. Compensation expense recorded under the stock-compensation program was $9 million, $6 million and $9 million for 1998, 1997 and 1996, respectively. Stock-based compensation expense under the fair-value method of accounting would have resulted in pro forma earnings of $668 million, $696 million and $714 million for 1998, 1997 and 1996, respectively, and in pro forma basic earnings per share of $1.86, $1.74 and $1.63 for 1998, 1997 and 1996, respectively. The fair value for each option granted, reflecting the basis for the above pro forma disclosures, was determined on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used in determining fair value through the model: 1998 1997 ---- ---- Expected life 7.0 years 7.0 years Risk-free interest rate 4.7%-5.6% 6.3%-6.8% Expected volatility 17% 17% The application of fair-value accounting to calculate the pro forma disclosures above is not an indication of future income statement effects. The pro forma disclosures do not reflect the effect of fair-value accounting on stock-based compensation awards granted prior to 1995. 49 A summary of the status of Edison International's stock options is as follows:
Weighted-Average ---------------------------------------- Share Exercise Exercise Fair Value Remaining Options Price Price at Grant Life ------- -------- -------- --------- --------- Outstanding, Dec. 31, 1995 2,636,241 $14.56 - $24.44 $18.69 7 years Granted 1,091,850 15.81 - 18.31 17.57 $ 6.27 Expired (18,394) 14.56 - 23.28 20.08 Forfeited (21,810) 14.56 - 20.19 16.24 Exercised (133,131) 14.56 - 23.28 18.19 --------- Outstanding, Dec. 31, 1996 3,554,756 $14.56 - $24.44 $18.68 7 years Granted 1,350,809 19.75 - 25.19 20.19 $ 7.62 Expired - - - Forfeited (33,599) 14.56 - 19.75 17.76 Exercised (460,300) 14.56 - 23.28 19.06 --------- Outstanding, Dec. 31, 1997 4,411,666 $14.56 - $25.19 $18.76 7 years Granted 1,639,300 $26.73 - $29.34 $27.25 $ 6.42 Expired - - - Forfeited (46,171) $17.63 - $28.94 $26.07 Exercised (573,527) $14.56 - $25.75 $17.33 --------- Outstanding, Dec. 31, 1998 5,431,268 $14.56 - $29.34 $21.52 7 years
The number of options exercisable and their weighted-average exercise prices at December 31, 1998, 1997 and 1996 were 3,805,755 at $19.72, 3,218,189 at $18.48, and 1,760,766 at $20.54, respectively. Phantom Stock Options Phantom stock option performance awards have been developed for two affiliate companies, EME and Edison Capital, as part of the Edison International long-term incentive compensation program for senior management. Each phantom stock option may be exercised to realize any appreciation in the deemed value of one hypothetical share of EME or Edison Capital stock over exercise prices. Exercise prices for EME and Edison Capital phantom stock are escalated on an annually compounded basis over the grant price by 9% and 7.75%, respectively. The deemed values of the phantom stock are recalculated annually as determined by a formula linked to the value of its portfolio of investments, less general and administrative costs. The options have a 10-year term with one-third of the total award vesting in each of the first three years of the award term. For options awarded in 1998, one-fourth of the total award vests in each of the first four years of the award term. Compensation expense recorded with respect to the phantom stock options was $53 million in 1998, $79 million in 1997 and $17 million in 1996. Pension Plan Edison International has a noncontributory, defined-benefit pension plan that covers employees meeting minimum service requirements. Edison International's utility operations recognize pension expense as calculated by the actuarial method used for ratemaking. In 1996, Edison International recorded pension gains from a special voluntary early retirement program. In 1998, Edison International adopted a new accounting standard that revises the disclosure requirements for pension plans. Prior periods have been restated. Information on plan assets and benefit obligations is shown below: In millions Year ended December 31, 1998 1997 - ----------- ---------------------- ---- ---- Change in benefit obligation Benefit obligation at beginning of year $2,116 $2,019 Service cost 63 46 Interest cost 143 140 Actuarial loss 92 193 Benefits paid (133) (282) ------ ------ Benefit obligation at end of year $2,281 $2,116 ====== ====== Change in plan assets Fair value of plan assets at beginning of year $2,316 $2,171 Actual return on plan assets 338 372 Employer contributions 55 55 Benefits paid (133) (282) ------ ------ Fair value of plan assets at end of year $2,576 $2,316 ====== ====== Funded status $ 295 $ 200 Unrecognized net gain (372) (305) Unrecognized net obligation (17-year amortization) 34 40 Unrecognized prior service cost 169 184 ------ ------ Pension asset (liability) $ 126 $ 119 ====== ====== Discount rate 6.75% 7.0% Rate of compensation increase 5.0% 5.0% Expected return on plan assets 7.5% 8.0% The components of pension expense were: In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Service cost $ 63 $ 46 $ 51 Interest cost 143 140 180 Expected return on plan assets (172) (161) (203) Net amortization and deferral 14 13 5 ---- ---- ---- Pension expense under accounting standards 48 38 33 Regulatory adjustment-deferred 11 17 22 ---- ---- ---- Net pension expense recognized 59 55 55 Settlement gain - - (121) ---- ---- ---- Total expense (gain) $ 59 $ 55 $(66) ==== ==== ==== 50 Postretirement Benefits Other Than Pensions Employees retiring at or after age 55 with at least 10 years of service (or those eligible under a 1996 special voluntary early retirement program), are eligible for postretirement health and dental care, life insurance and other benefits. In 1996, SCE recorded special termination expenses from a special voluntary early retirement program. In 1998, SCE adopted a new accounting standard that revises the disclosure requirements for postretirement benefit plans. Prior periods have been restated. Information on plan assets and benefit obligations is shown below: In millions Year ended December 31, 1998 1997 - ----------- ---------------------- ---- ---- Change in benefit obligation Benefit obligation at beginning of year $1,546 $1,362 Service cost 43 31 Interest cost 100 100 Actuarial loss (gain) (72) 112 Benefits paid (54) (59) ------ ------ Benefit obligation at end of year $1,563 $1,546 ====== ====== Change in plan assets Fair value of plan assets at beginning of year $ 815 $ 617 Actual return on plan assets 147 147 Employer contributions 121 110 Benefits paid (54) (59) ------ ------ Fair value of plan assets at end of year $1,029 $ 815 ====== ====== Funded status $ (534) $ (731) Unrecognized net loss 87 245 Unrecognized transition obligation (20-year amortization) 378 405 ------ ------ Recorded asset (liability) $ (69) $ (81) ====== ====== Discount rate 6.75% 7.0% Expected return on plan assets 7.5% 8.0% The components of postretirement benefits other than pensions expense were: In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Service cost $ 43 $ 31 $ 33 Interest cost 100 100 91 Expected return on plan assets (62) (50) (43) Amortization of loss 1 5 6 Amortization of transition obligation 27 27 27 ---- ---- ---- Net expense 109 113 114 Special termination expense - - 72 ---- ---- ---- Total expense $109 $113 $186 ==== ==== ==== The assumed rate of future increases in the per-capita cost of health care benefits is 8.25% for 1999, gradually decreasing to 5.0% for 2009 and beyond. Increasing the health care cost trend rate by one percentage point would increase the accumulated obligation as of December 31, 1998, by $269 million and annual aggregate service and interest costs by $32 million. Decreasing the health care cost trend rate by one percentage point would decrease the accumulated obligation as of December 31, 1998, by $214 million and annual aggregate service and interest costs by $25 million. Employee Savings Plan Edison International has a 401(k) defined contribution savings plan designed to supplement employees' retirement income. The plan received employer contributions of $18 million in 1998, $16 million in 1997 and $25 million in 1996. Note 7 Jointly Owned Utility Projects SCE owns interests in several generating stations and transmission systems for which each participant provides its own financing. SCE's share of expenses for each project is included in the consolidated statements of income. The investment in each project, as included in the consolidated balance sheet as of December 31, 1998, was: Accumulated Original Depreciation Cost of and Under Ownership In millions Facility Amortization Construction Interest - ----------- ------- ------------ ------------ -------- Transmission systems: Eldorado $ 31 $ 6 $ 2 60% Pacific Intertie 239 78 5 50 Generating stations: Four Corners (coal) Units 4 and 5 459 288 2 48 Mohave (coal) 315 183 6 56 Palo Verde (nuclear)(1) 1,605 908 12 16 San Onofre (nuclear)(1) 4,217 2,762 63 75 ------ ------ ----- Total $6,866 $4,225 $ 90 ====== ====== ===== (1) Reported as "Regulatory asset-unamortized nuclear investment-net." Note 8 Leases Leveraged Leases Edison Capital is the lessor in several leveraged-lease agreements with terms of 13 to 38 years. All operating, maintenance, insurance and decommissioning costs are the responsibility of the lessees. The total cost of these facilities was $4.8 billion and $3.1 billion at December 31, 1998, and 1997, respectively. The equity investment in these facilities is 23% of the purchase price. The remainder is nonrecourse debt secured by first liens on the leased property. The lenders have accepted their security interests as their only remedy if the lessee defaults. 51 The net investment in leveraged leases consisted of: In millions December 31, 1998 1997 - ----------- ----------- ---- ---- Rentals receivable (net of principal and interest on nonrecourse debt) $2,635 $1,634 Unearned income (1,062) (728) Investment in leveraged leases 1,573 906 Estimated residual value 58 58 Deferred income taxes (964) (623) ------ ------ Net investment in leveraged leases $ 667 $ 341 ====== ====== Operating and Capital Leases Edison International has operating leases, primarily for vehicles (with varying terms, provisions and expiration dates) and a capital lease ($48 million) for a nonutility power-production facility. Estimated remaining commitments for noncancelable leases at December 31, 1998, were: Operating Capital In millions Leases Leases - ----------- --------- ------- Year ended December 31, 1999 $ 29 $ 27 2000 23 27 2001 18 - 2002 14 - 2003 10 - Thereafter 31 1 ---- ---- Total future commitments $125 55 ==== Amount representing interest (9.65%) (7) ---- Net commitments $ 48 ==== Note 9 Commitments Nuclear Decommissioning Decommissioning is estimated to cost $1.9 billion in current-year dollars, based on site-specific studies performed in 1998 for San Onofre and Palo Verde. Changes in the estimated costs, timing of decommissioning, or the assumptions underlying these estimates could cause material revisions to the estimated total cost to decommission in the near term. SCE plans to decommission its nuclear generating facilities by a prompt removal method authorized by the Nuclear Regulatory Commission. Decommissioning is scheduled to begin in 2013 for San Onofre Units 2 and 3, and 2025 at Palo Verde. In December 1998, SCE requested the CPUC's approval to access its nuclear decommissioning trust funds to commence decommissioning of San Onofre Unit 1 in 2000. Decommissioning costs, which are accrued and recovered through non-bypassable customer rates over the term of each nuclear facility's operating license, are recorded as a component of depreciation expense. Decommissioning expense was $164 million in 1998, $154 million in 1997 and $148 million in 1996. The accumulated provision for decommissioning, excluding San Onofre Unit 1, was $1.2 billion at December 31, 1998, and $1.1 billion at December 31, 1997. The estimated costs to decommission San Onofre Unit 1 ($368 million) are recorded as a liability. Decommissioning funds collected in rates are placed in independent trusts, which, together with accumulated earnings, will be utilized solely for decommissioning. Trust investments include: Maturity December 31, In millions Dates 1998 1997 - ----------- -------- ---- ---- Municipal bonds 2000-2029 $ 547 $ 459 Stocks - 550 392 U.S. government issues 1999-2029 355 357 Short-term and other 1999-2028 82 163 ------ ------ Trust fund balance (at cost) $1,534 $1,371 ====== ====== Trust fund earnings (based on specific identification) increase the trust fund balance and the accumulated provision for decommissioning. Net earnings were $63 million in 1998, $54 million in 1997 and $49 million in 1996. Proceeds from sales of securities (which are reinvested) were $1.2 billion in 1998, $595 million in 1997 and $1.0 billion in 1996. Approximately 89% of the trust fund contributions were tax-deductible. Other Commitments SCE and EME have fuel supply contracts which require payment only if the fuel is made available for purchase. SCE has power-purchase contracts with certain qualifying facilities (cogenerators and small power producers) and other utilities. These contracts provide for capacity payments if a facility meets certain performance obligations and energy payments based on actual power supplied to SCE. There are no requirements to make debt-service payments. SCE has unconditional purchase obligations for part of a power plant's generating output, as well as firm transmission service from another utility. Minimum payments are based, in part, on the debt-service requirements of the provider, whether or not the plant or transmission line is operable. The purchased-power contract is not expected to provide more than 5% of current or estimated future operating capacity. SCE's minimum commitment under both contracts is approximately $172 million through 2017. Certain commitments for the years 1999 through 2003 are estimated below: In millions 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Projected construction expenditures $953 $831 $726 $699 $689 Fuel supply contracts 229 199 190 207 185 Purchased-power capacity payments 744 786 797 704 689 Unconditional purchase obligations 9 10 10 9 10 52 EME has firm commitments to make equity and other contributions to its projects of $266 million, primarily for the ISAB project in Italy, the Paiton project in Indonesia, the EcoElectrica project in Puerto Rico, the Tri Energy project in Thailand and the Doga project in Turkey. EME also has contingent obligations to make additional contributions of $204 million, primarily for equity support guarantees related to Paiton. In August 1998, EME entered into agreements to acquire Homer City Generating Station (located near Pittsburgh, Pennsylvania) for approximately $1.8 billion. The sale, pending final approval, is expected to be completed by the end of the first quarter 1999. EME plans to finance this acquisition with a combination of debt secured by the project, EME corporate debt and cash. Edison Capital has commitments of $276 million to fund affordable housing, and energy and infrastructure investments. Note 10 Contingencies In addition to the matters disclosed in these notes, Edison International is involved in other legal, tax and regulatory proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of business. Edison International believes the outcome of these proceedings will not materially affect its results of operations or liquidity. Environmental Protection Edison International is subject to numerous environmental laws and regulations, which require it to incur substantial costs to operate existing facilities, construct and operate new facilities, and mitigate or remove the effect of past operations on the environment. Edison International records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. Edison International reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operations and maintenance, monitoring and site closure. Unless there is a probable amount, Edison International records the lower end of this reasonably likely range of costs (classified as other long-term liabilities at undiscounted amounts). Edison International's recorded estimated minimum liability to remediate its 49 identified sites is $171 million. The ultimate costs to clean up Edison International's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process, such as: the extent and nature of contamination; the scarcity of reliable data for identified sites; the varying costs of alternative cleanup methods; developments resulting from investigatory studies; the possibility of identifying additional sites; and the time periods over which site remediation is expected to occur. Edison International believes that, due to these uncertainties, it is reasonably possible that cleanup costs could exceed its recorded liability by up to $247 million. The upper limit of this range of costs was estimated using assumptions least favorable to Edison International among a range of reasonably possible outcomes. SCE has sold all of its gas- and oil-fueled generation plants and has retained some liability associated with the divested properties. The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $88 million of its recorded liability, through an incentive mechanism (SCE may request to include additional sites). Under this mechanism, SCE will recover 90% of cleanup costs through customer rates; shareholders fund the remaining 10%, with the opportunity to recover these costs from insurance carriers and other third parties. SCE has successfully settled insurance claims with all responsible carriers. Costs incurred at SCE's remaining sites are expected to be recovered through customer rates. SCE has recorded a regulatory asset of $141 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. Edison International's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that Edison International may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can now be made for these sites. Edison International expects to clean up its identified sites over a period of up to 30 years. Remediation costs in each of the next several years are expected to range from $4 million to $10 million. Recorded costs for 1998 were $7 million. Based on currently available information, Edison International believes it is unlikely that it will incur amounts in excess of the upper limit of the estimated range and, based upon the CPUC' s regulatory treatment of environmental-cleanup costs, Edison International believes that costs ultimately recorded will not materially affect its results of operations or financial position. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates. Nuclear Insurance Federal law limits public liability claims from a nuclear incident to $9.6 billion. SCE and other owners of San Onofre and Palo Verde have purchased the maximum private primary insurance available ($200 million). The balance is covered by the industry's retrospective rating plan that uses deferred premium charges to every reactor licensee if a nuclear incident at any licensed reactor in the U.S. results in claims and/or costs which exceed the primary insurance at that plant site. Federal regulations require this secondary level of financial protection. The Nuclear 53 Regulatory Commission exempted San Onofre Unit 1 from this secondary level, effective June 1994. The maximum deferred premium for each nuclear incident is $88 million per reactor, but not more than $10 million per reactor may be charged in any one year for each incident. Based on its ownership interests, SCE could be required to pay a maximum of $175 million per nuclear incident. However, it would have to pay no more than $20 million per incident in any one year. Such amounts include a 5% surcharge if additional funds are needed to satisfy public liability claims and are subject to adjustment for inflation. If the public liability limit above is insufficient, federal regulations may impose further revenue-raising measures to pay claims, including a possible additional assessment on all licensed reactor operators. Property damage insurance covers losses up to $500 million, including decontamination costs, at San Onofre and Palo Verde. Decontamination liability and property damage coverage exceeding the primary $500 million also has been purchased in amounts greater than federal requirements. Additional insurance covers part of replacement power expenses during an accident-related nuclear unit outage. These policies are issued primarily by mutual insurance companies owned by utilities with nuclear facilities. If losses at any nuclear facility covered by the arrangement were to exceed the accumulated funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to $22 million per year. Insurance premiums are charged to operating expense. Spent Nuclear Fuel Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. The Act requires that the DOE provide for the disposal of spent nuclear fuel and high-level radioactive waste from nuclear generation stations beginning January 31, 1998. However, the DOE did not meet its obligation. It is not certain when the DOE will begin accepting spent nuclear fuel from San Onofre or from other nuclear power plants. SCE has paid the DOE the required one time fee applicable to nuclear generation at San Onofre through April 6, 1983, (approximately $24 million, plus interest). SCE is also paying the required quarterly fee equal to one mill per kilowatt-hour of nuclear-generated electricity sold after April 6, 1983. SCE has primary responsiblity for the interim storage of its spent nuclear fuel at San Onofre. Current capability to store spent fuel is estimated to be adequate through 2005. Meeting spent fuel storage requirements beyond that period could require new and separate interim storage facilities, the costs for which have not been determined. Extended delays by the DOE can lead to consideration of costly alternatives involving siting and environmental issues. Palo Verde on-site spent fuel storage capacity will accommodate needs until 2002 for Units 1 and 2, and until 2003 for Unit 3. Arizona Public Service, operating agent for Palo Verde, has commenced construction of an interim fuel storage facility and projects completion in 2002. SCE and other owners of nuclear power plants may be able to recover interim storage costs arising from DOEdelays in the acceptance of utility spent nuclear fuel by pursuing relief under the terms of the contracts, as directed by the courts, or through other court actions. Note 11 Investments in Partnerships and Unconsolidated Subsidiaries Edison International's nonutility subsidiaries have equity interests in energy generation projects and real estate investment partnerships. Summarized financial information of these investments was: In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Revenue $1,848 $1,946 $1,731 Expenses 1,525 1,578 1,393 ------ ------ ------ Net income $ 323 $ 368 $ 338 ====== ====== ====== In millions December 31, 1998 1997 - ----------- ----------- ---- ---- Current assets $ 655 $ 637 Other assets 6,811 5,520 ------ ------ Total assets $7,466 $6,157 ====== ====== Current liabilities $1,190 $ 949 Other liabilities 4,493 3,592 Equity 1,783 1,616 ------ ------ Total liabilities and equity $7,466 $6,157 ====== ====== Note 12 Business Segments Edison International implemented a new accounting standard in 1998 that requires the reporting of certain information about operating segments. Edison International's reportable business segments include its electric utility operation segment (SCE), an unregulated power generation segment (EME) and a capital and financial services provider segment (Edison Capital). Its segments are based on Edison International's internal organization. They are separate business units and are managed separately. Edison International evaluates performance based on net income. SCE is a rate-regulated electric utility which produces and supplies electric energy in central, coastal and Southern California. SCE's regulatory environment is changing, as discussed in Note 2 to the Consolidated Financial Statements. EME is a leading global producer of electricity engaged in the development, ownership and operation of electric power generation facilities worldwide. Edison Capital is a leading provider of capital and financial services with investments worldwide. 54 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Edison International's business segment information was:
Unregulated Capital & Consolidated Electric Power Financial Edison In millions Utility Generation Services Other (1) International --------- ------------ --------- -------- ------------- 1998 Operating revenue $8,847 $ 704 $ 235 $ 233 $ 10,019 Equity in income from investments - 189 - - 189 Depreciation, decommissioning and amortization 1,546 87 20 9 1,662 Interest and dividend income 67 50 4 (13) 108 Interest expense-net 477 183 50 (8) 702 Income tax expense 442 70 (15) (36) 461 Net income 515 132 105 (84) 668 Total assets 16,947 5,158 2,276 317 24,698 Additions to property and plant 861 73 - 29 963 - -------------------------------------------------------------------------------------------------------- 1997 Operating revenue $7,953 $ 786 $ 138 $ 169 9,046 Equity in income from investments - 189 - - 189 Depreciation, decommissioning and amortization 1,240 103 17 2 1,362 Interest and dividend income 45 27 10 3 85 Interest expense-net 435 210 29 25 699 Income tax expense 520 57 (44) (34) 499 Net income 606 115 61 (82) 700 Total assets 18,059 4,985 1,783 274 25,101 Additions to property and plant 685 88 - 10 783 - -------------------------------------------------------------------------------------------------------- 1996 Operating revenue $7,583 $ 690 $ 49 $ 69 $ 8,391 Equity in income from investments - 154 - - 154 Depreciation, decommissioning and amortization 1,064 90 14 5 1,173 Interest and dividend income 38 21 8 (4) 63 Interest expense-net 443 151 14 18 626 Income tax expense 511 82 (62) (25) 506 Net income 655 92 41 (71) 717 Total assets 17,737 5,153 1,423 246 24,559 Additions to property and plant 616 120 - 8 744
(1) Includes amounts from nonutility subsidiaries not significant as a reportable segment. Geographic Information Electric power and steam generated domestically by EME is sold primarily under long-term contracts to electric utilities and industrial steam users located in the U.S. Projects located in the United Kingdom and a project in Australia sell their energy through a centralized power pool. Other electric power generated overseas is sold primarily under long-term contracts to electric utilities located in the country where the power is generated. All electric power generated by SCE is sold to the PX. Edison International's foreign and domestic revenue and assets information was: In millions Year ended December 31, 1998 1997 1996 - ----------- ---------------------- ---- ---- ---- Revenue United States $ 9,502 $8,452 $7,871 Foreign countries 706 783 674 ------ ------ ------ $10,208 $9,235 $8,545 ======= ====== ====== In millions December 31, 1998 1997 - ----------- ----------- ---- ---- Assets United States $20,739 $21,048 Foreign countries: United Kingdom 1,787 1,759 Australia 1,326 1,461 Other 846 833 ------- ------- $24,698 $25,101 ======= ======= 55 QUARTERLY FINANCIAL DATA (UNAUDITED)
In millions, 1998 1997 ---- ---- except per share amounts Total Fourth Third Second First Total Fourth Third Second First - ------------------------ ----- ------ ----- ------ ----- ----- ------ ----- ------ ----- Operating revenue(1) $10,208 $ 2,615 $ 3,441 $ 2,243 $ 1,909 $ 9,235 $ 2,329 $ 2,738 $ 2,167 $ 2,001 Operating income 1,329 345 360 298 326 1,498 342 470 329 357 Net income 668 163 216 145 144 700 139 277 139 145 Per share: Basic earnings 1.86 .46 .61 .40 .39 1.75 .37 .70 .34 .35 Diluted earnings 1.84 .46 .60 .40 .38 1.73 .36 .70 .34 .34 Dividends declared 1.04 .26 .26 .26 .26 1.00 .25 .25 .25 .25 Common stock prices: High $ 31 $28 9/16 $29 11/16 $ 31 $30 1/16 $27 13/16 $27 13/16 $27 1/8 $25 5/8 $23 1/8 Low 25 1/8 25 1/8 25 3/8 27 15/16 25 3/16 19 1/2 24 13/16 24 20 1/4 19 1/2 Close 27 7/8 27 7/8 25 11/16 29 9/16 29 3/8 27 3/16 27 3/16 25 1/4 24 7/8 22 1/2
(1)Effective second quarter 1998, operating revenue includes sales to the PX. 56 BOARD OF DIRECTORS John E. Bryson (1) Chairman of the Board and CEO, Edison International and Southern California Edison A director since 1990 Winston H. Chen (2), (5) Chairman of the Paramitas Foundation and Chairman of Paramitas Investment Corporation, Santa Clara, CA A director since 1995 Warren Christopher (1), (4) Senior Partner, O'Melveny & Myers, Los Angeles, CA A director since 1971* Stephen E. Frank President and Chief Operating Officer, Southern California Edison A director since 1995 Joan C. Hanley (2), (4) Former General Partner, Miramonte Vineyards, Rancho Palos Verdes, CA A director since 1980 Carl F. Huntsinger (1), (5) General Partner, DAE Limited Partnership Ltd., Ojai, CA A director since 1983 Charles D. Miller (3), (5) Chairman of the Board, Avery Dennison Corporation, Pasadena, CA A director since 1987 Luis G. Nogales (2), (3) President, Nogales Partners, Los Angeles, CA A director since 1993 Ronald L. Olson (2), (4) Senior Partner, Munger, Tolles and Olson, Los Angeles, CA A director since 1995 James M. Rosser (3), (4) President, California State University, Los Angeles, Los Angeles, CA A director since 1985 E. L. Shannon, Jr.(1), (2), (6) Retired Chairman of the Board, Santa Fe International Corporation, Alhambra, CA A director since 1977 Robert H. Smith (2), (3), (4) Managing Director, Smith and Crowley Incorporated, Pasadena, CA A director since 1987 Thomas C. Sutton (3), (5) Chairman of the Board and CEO, Pacific Life Insurance Company, Newport Beach, CA A director since 1995 Daniel M. Tellep (3), (5) Retired Chairman of the Board, Lockheed Martin Corporation, Bethesda, MD A director since 1992 James D. Watkins (1), (6) Admiral USN, Retired, President, Joint Oceanographic Institutions, Inc., and President, Consortium for Oceanographic Research and Education, Washington, D.C. A director since 1993 Edward Zapanta, M.D. (1), (5) Physician and Neurosurgeon, Torrance, CA A director since 1984 * 8/19/71 to 1/20/77 6/18/81 to 1/19/93 5/15/97 to present (1) Member of the Executive Committee (2) Member of the Finance Committee (3) Member of the Compensation and Executive Personnel Committee (4) Member of the Nominating Committee (5) Member of the Audit Committee (6) Retiring on April 15, 1999 57 MANAGEMENT TEAM EDISON INTERNATIONAL John E. Bryson Chairman of the Board and CEO Bryant C. Danner Executive Vice President and General Counsel Alan J. Fohrer Executive Vice President and Chief Financial Officer Theodore F. Craver, Jr. Senior Vice President and Treasurer Robert G. Foster Senior Vice President, Public Affairs Lillian R. Gorman Senior Vice President, Human Resources William J. Heller Senior Vice President, Strategic Planning and New Business Development Richard K. Bushey (1) Vice President and Controller Thomas J. Higgins Vice President, Corporate Communications Thomas M. Noonan (2) Vice President and Controller Anthony L. Smith Vice President, Tax Mahvash Yazdi Vice President and Chief Information Officer Beverly P. Ryder Corporate Secretary SOUTHERN CALIFORNIA EDISON John E. Bryson Chairman of the Board and CEO Stephen E. Frank President and Chief Operating Officer Bryant C. Danner Executive Vice President and General Counsel Alan J. Fohrer Executive Vice President and Chief Financial Officer Harold B. Ray Executive Vice President, Generation Business Unit Pamela A. Bass Senior Vice President, Customer Service Business Unit Theodore F. Craver, Jr. Senior Vice President and Treasurer John R. Fielder Senior Vice President, Regulatory Policy and Affairs Robert G. Foster Senior Vice President, Public Affairs Lillian R. Gorman Senior Vice President, Human Resources Richard M. Rosenblum Senior Vice President, T&D Business Unit Emiko Banfield Vice President, Shared Services Richard K. Bushey (1) Vice President and Controller Bruce C. Foster Vice President, San Francisco Regulatory Affairs Lawrence D. Hamlin Vice President, Power Production Thomas J. Higgins Vice President, Corporate Communications R. W. Krieger Vice President, Nuclear Generation J. Michael Mendez Vice President, Labor Relations Thomas M. Noonan (2) Vice President and Controller Dwight E. Nunn Vice President, Nuclear Engineering and Technical Services Frank J. Quevedo Vice President, Equal Opportunity Anthony L. Smith Vice President, Tax Mahvash Yazdi Vice President and Chief Information Officer Beverly P. Ryder Corporate Secretary (1) Resigned March 1, 1999 (2) Effective March 1, 1999 58 MANAGEMENT TEAM EDISON MISSION ENERGY Edward R. Muller President and CEO Robert M. Edgell Executive Vice President James V. Iaco, Jr. Senior Vice President and Chief Financial Officer Georgia R. Nelson Senior Vice President Raymond W. Vickers Senior Vice President and General Counsel S. Linn Williams Senior Vice President EDISON CAPITAL Thomas R. McDaniel President and CEO, Edison Capital and Mission Land Company Ashraf T. Dajani Senior Vice President, Edison Capital Richard E. Lucey Senior Vice President and Chief Financial Officer, Edison Capital Larry C. Mount Vice President and General Counsel, Edison Capital Charles W. Johnson Executive Vice President, Mission Land Company Vikram S. Budhraja President, Edison Technology Solutions EDISON ENTERPRISES Stephen E. Pazian President and CEO, Edison Enterprises A. Robert Handell President and Chief Operating Officer, Edison Source Michael L. Merlo President and Chief Operating Officer, Edison Select Dennis A. Eastman Senior Vice President and General Manager, Edison Utility Services Tim S. Glassett Senior Vice President and General Counsel, Edison Enterprises William P. Kuehn Senior Vice President and Chief Financial Officer, Edison Enterprises 59 SELECTED FINANCIAL AND OPERATING DATA: 1994 - 1998
Dollars in millions, except per share amounts 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Edison International and Subsidiaries Operating revenue(1) $ 10,208 $ 9,235 $ 8,545 $ 8,405 $ 8,345 Operating expenses(1) $ 8,879 $ 7,737 $ 7,067 $ 7,028 $ 7,046 Net income $ 668 $ 700 $ 717 $ 739 $ 681 Weighted-average shares of common stock outstanding (in millions) 359 400 437 446 448 Per share data: Basic earnings $ 1.86 $ 1.75 $ 1.64 $ 1.66 $ 1.52 Diluted earnings $ 1.84 $ 1.73 $ 1.63 $ 1.65 $ 1.52 Dividends paid $ 1.03 $ 1.00 $ 1.00 $ 1.00 $ 1.21 Dividends declared $ 1.04 $ 1.00 $ 1.00 $ 1.00 $ 1.105 Book value at year-end $ 14.55 $ 14.71 $ 15.07 $ 14.41 $ 13.72 Market value at year-end $ 27 7/8 $27 3/16 $19 7/8 $17 5/8 $ 14 5/8 Dividend payout ratio (paid) 55.4% 57.1% 61.0% 60.2% 79.6% Rate of return on common equity 12.8% 11.7% 11.1% 11.8% 11.3% Price/earnings ratio 15.0 15.5 12.1 10.6 9.6 Ratio of earnings to fixed charges 2.31 2.39 2.40 2.55 2.48 Assets $ 24,698 $ 25,101 $24,559 $23,946 $ 22,390 Retained earnings $ 2,906 $ 3,176 $ 3,753 $ 3,700 $ 3,452 Common shareholders' equity $ 5,099 $ 5,527 $ 6,397 $ 6,393 $ 6,144 Preferred securities: Not subject to mandatory redemption $ 129 $ 184 $ 284 $ 284 $ 359 Subject to mandatory redemption $ 406 $ 425 $ 425 $ 425 $ 362 Long-term debt $ 8,008 $ 8,871 $ 7,475 $ 7,195 $ 6,347 Southern California Edison Company Operating revenue(1) $ 8,847 $ 7,953 $ 7,583 $ 7,873 $ 7,799 Earnings $ 490 $ 576 $ 621 $ 643 $ 599 Basic earnings per Edison International common share $ 1.37 $ 1.44 $ 1.42 $ 1.44 $ 1.34 Rate of return on common equity 13.3% 11.6% 12.1% 12.6% 12.0% Peak demand in megawatts (MW) 19,935 19,118 18,207 17,548 18,044 Generation capacity at peak (MW) 10,546 21,511 21,602 21,603 20,615 Kilowatt-hour sales (in millions) 76,595 77,234 75,572 74,296 77,986 Customers (in millions) 4.27 4.25 4.22 4.18 4.15 Full-time employees 13,177 12,642 12,057 14,886 16,351 Edison Mission Energy Revenue $ 894 $ 975 $ 844 $ 467 $ 381 Net income $ 132 $ 115 $ 92 $ 64 $ 55 Assets $ 5,158 $ 4,985 $ 5,153 $ 4,374 $ 2,843 Rate of return on common equity 14.8% 12.2% 8.8% 9.7% 9.6% Ownership in operating projects (MW) 5,153 5,180 4,706 4,212 2,048 Full-time employees 1,180 1,140 940 902 690 Edison Capital Revenue $ 235 $ 138 $ 49 $ 49 $ 47 Net income $ 105 $ 61 $ 41 $ 39 $ 33 Assets $ 2,276 $ 1,783 $ 1,423 $ 1,063 $ 1,008 Rate of return on common equity 30.2% 23.2% 17.7% 18.5% 16.8% Full-time employees 85 85 70 42 33
(1)1998 operating revenue includes $1.3 billion from sales to the Power Exchange; 1998 operating expenses include $2.0 billion of power purchased from the Power Exchange. 60 SHAREHOLDER INFORMATION Annual Meeting The 1998 annual meeting of shareholders will be held on Thursday, April 15, 1999, at 10:00 a.m. at the Industry Hills Sheraton Resort and Conference Center, One Industry Hills Parkway, City of Industry, California. Stock Listing and Trading Information Edison International Common Stock The New York and Pacific stock exchanges use the ticker symbol EIX. Daily papers list as EdisonInt. Preferred Stock Southern California Edison's preferred stocks are listed on the American and Pacific stock exchanges under the ticker symbol SCE. Previous day's closing prices, when traded, are listed in the daily newspapers in the American Stock Exchange composite table under the symbol SoCalEd. The 6.05%, 6.45% and 7.23% series are not listed. The preferred securities of Mission Capital, an affiliate of Edison Mission Energy, are listed on the New York Stock Exchange under the ticker symbol MEPrA for the 9.875% series and MEPrB for the 8.50% series. Transfer Agent and Registrar Southern California Edison maintains shareholder records and is transfer agent And registrar for Edison International common stock and Southern California Edison preferred stocks. Shareholders may call Shareholder Services, 800.347.8625, between 8:00 a.m. and 4:00 p.m. (Pacific Time) every business day regarding: * stock transfer and name-change requirements; * address changes, including dividend addresses; * electronic deposit of dividends; * taxpayer identification number submission or changes; * duplicate 1099 and W-9 forms; * notices of and replacement of lost or destroyed stock certificates and dividend checks; * requests to eliminate multiple annual report mailings; * Edison International's Dividend Reinvestment Plan, including enrollments, withdrawals, terminations, transfers, sales, duplicate statements; and * requests for access to online account information via www.edisoninvestor.com. The address of Shareholder Services is: P.O. Box 400, Rosemead, California 91770-0400. FAX: 626.302.4815 Dividend Reinvestment and Electronic Funds Transfer Shareholders can purchase additional common shares by reinvesting their quarterly dividends. A prospectus on Edison International's Dividend Reinvestment Plan is available from Shareholder Services. Dividend checks can be electronically deposited directly to your financial institution. Enrollment forms are available upon request. EXHIBIT 21 EDISON INTERNATIONAL TIER LIST [Numbers on left are Dun & Bradstreet hierarchy (tier level) indicators] HOLDING COMPANY 00 EDISON INTERNATIONAL is a corporation organized under the laws of the State of California and having its principal place of business at 2244 Walnut Grove Avenue (P.O. Box 999), Rosemead, California 91770. It was organized principally to acquire and hold securities of other corporations for investment purposes. Edison International has the following subsidiaries: UTILITY SUBSIDIARIES 01 SOUTHERN CALIFORNIA EDISON COMPANY ("SCE") is a California corporation having its principal place of business at 2244 Walnut Grove Avenue (P.O. Box 800), Rosemead, California 91770. SCE is a public utility primarily engaged in the business of supplying electric energy to portions of central and southern California, excluding the City of Los Angeles and certain other cities. Its subsidiaries have the same principal place of business as Southern California Edison Company: 02 CALIFORNIA ELECTRIC POWER COMPANY is an inactive California corporation that remains from a 1964 merger with SCE. 02 CONSERVATION FINANCING CORPORATION is a California corporation engaged in the remediation and mitigation of environmental liabilities. 02 EDISON ESI is a California corporation engaged in the business of marketing services, products, information, and copyrighted materials to third parties on behalf of SCE. 02 MONO POWER COMPANY is an inactive California corporation that has been engaged in the business of exploring for and developing fuel resources. 03 The Bear Creek Uranium Company is an inactive California partnership between Mono Power Company (50%) and Union Pacific Resources (50%) that has been engaged in reclamation of an integrated uranium mining and milling complex in Wyoming. 02 SCE CAPITAL COMPANY is an inactive Delaware corporation that acted as a financing vehicle for SCE. 02 SCE FUNDING LLC is a Delaware limited liability company that acts as a financing vehicle for rate reduction bonds. 02 SCE UK SERVICES LTD is a United Kingdom private limited company that provides auditing services for affiliated companies. 02 SOUTHERN STATES REALTY is a California corporation engaged in holding real estate assets for SCE. NONUTILITY SUBSIDIARIES 01 EDISON DRIVES ELECTRIC is a California corporation having its principal place of business at 2244 Walnut Grove Avenue, Rosemead, California 91770, which is engaged in administering a vehicle lease program for Edison International employees. 1 01 EDISON INSURANCE SERVICES, INC., is a Hawaii corporation having its principal executive office at 1099 Alakea Street, 22nd Floor, Honolulu, Hawaii 96813, formed for the purpose of issuing domestic and foreign property damage and business interruption insurance to Edison International and its subsidiaries. 01 EDISON VENTURES is a California corporation having its principal place of business at 2244 Walnut Grove Avenue, Rosemead, California 91770, which was organized to own the stock and coordinate the activities of nonutility companies. The subsidiaries of Edison Ventures are as follows: 02 EDISON TRANSENERGY is a California corporation having its principal place of business at 2244 Walnut Grove Avenue, Rosemead, California 91770, which is engaged in pipeline development activities to transport crude oil. 01 EDISON ENERGY (inactive) 01 THE MISSION GROUP is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 1700, Irvine, California 92612-1046, which was organized to own the stock and coordinate the activities of nonutility companies. The subsidiaries of The Mission Group are as follows: 02 EDISON TECHNOLOGY SOLUTIONS ("ETS") is a California corporation having its principal place of business at 6040 North Irwindale Avenue, Irwindale, California 91706, which was organized to engage in technology development and commercialization. The subsidiaries of Edison Technology Solutions are as follows: 03 EDISON EV is a California corporation having its principal place of business at 6040 North Irwindale Avenue, Irwindale, California 91706, which is engaged in the business of providing electric vehicle charging infrastructure. 03 FACILICHEM, INC., is a California corporation having its principal place of business at 333 Ravenswood Avenue, Menlo Park, California 94025, which was organized to engage in the research, development and commecialization of liquid membrane technologies for application in specific industrial and chemical processes. ETS has a 10% ownership interest with an option to increase that interest to 16.66% 02 EDISON ENVIRONMENTAL SERVICES is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 1700, Irvine, California 92612-1046, which was organized to provide nuclear decommissioning services. 02 EDISON ENTERPRISES is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746, which was organized to own the stock and coordinate the activities of various retail companies. The subsidiaries of Edison Enterprises are as follows: 03 EDISON SOURCE is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of integrated energy services and wholesale power marketing. 04 G.H.V. REFRIGERATION, INC. is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of providing refrigeration/HVAC operations, maintenance and 2 installations throughout Southern California and Arizona. 03 EDISON SELECT is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of providing consumer products and services. 04 EDISON HOME PROTECTION COMPANY (inactive) 04 SELECT HOME WARRANTY COMPANY is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the home protection company business. 04 VALLEY BURGLAR & FIRE ALARM CO., INC. is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of providing home security services. 04 WESTEC RESIDENTIAL SECURITY, INC. is a Delaware corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of providing home security services. 03 EDISON UTILITY SERVICES is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91746. It is engaged in the business of providing services including billing and transmission and distribution outsourcing. 02 EDISON CAPITAL is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 800, Irvine, California 92612-1046. It is engaged in the business of leveraged- leasing transactions and other project financings, either directly or through subsidiaries. Edison Capital owns a group of subsidiaries and has interests in various partnerships through its subsidiaries. The subsidiaries and partnerships of Edison Capital are listed below. Unless otherwise indicated, all entities are corporations, are organized under the laws of the State of California, and have the same principal place of business as Edison Capital. (P)=partnership; (C)=commitment. 03 BURLINGTON APARTMENTS, INC. 04 Burlington Arboretum L.P. (P) 1% 03 EDISON CAPITAL EUROPE LIMITED (UK corporation) 03 EDISON CAPITAL VENTURES 03 EDISON FUNDING COMPANY 04 EDISON CAPITAL HOUSING INVESTMENTS 05 1st Time Homebuyer Opportunities L.P. (Chester County Homes)(P)99% 05 1010 SVN Associates L.P. (P) 99% 05 1475 167th Avenue Associates L.P. (Bermuda Gardens) (P) 99.9% 05 16th & Church Street Associates L.P. (P) 99% 05 1732 Champa L.P. (Buerger Brothers Lofts) (P) 99% 05 18303 Kittridge Associates - 39 L.P. (P) 99% 05 1856 Wells Court Partners, L.P. (Wells Court) (P) 99% 05 210 Washington Avenue Associates (Renaissance Plaza) (Connecticut partnership) 99% 05 2400 Locust Associates L.P. (Locust on the Park) (P) 99% 05 Abajo Del Sol L.P. (P) 99.9% 05 AE Associates L.P. (Avenida Espana) (P) 99% 05 Agape Housing L.P. (P) 99% 05 Alhambra Apartments L.P. (P) 99.9% 05 Anglo Edison LLC No. 1 (Las Brisas) (P) 99% 05 Anglo Edison Pinecrest L.L.C. (P) 99% 05 Anglo Edison Ravenwood L.L.C. (P) 99% 05 Apollo Development Associates LP (Apollo Hotel) (P) 99% 3 05 Argyle Redevelopment Partnership, Ltd. (Colorado partnership) 99% 05 Auburn Manor Apartments L.P. (P) 99% 05 B.A.I. Anglo Edison Pinecrest, LLC (Pinecrest) (P) 99% 05 Barnsdall Court L.P. (Villa Mariposa) (P) 99% 05 Bartlett Hill Associates L.P. (P) 70%; 100% w/ MBHCo. 05 Beacon Manor Associates L.P. (P) 99% 05 Borregas Court L.P. (P) 99% 05 Boulder Creek Apartments L.P. (P) 99% 05 Bouquet Canyon Seniors L.P. (P) 99% 05 Brantwood II Associates L.P. (P) 98.99% 05 Brooks School Associates L.P. (P) 98.99% 05 Bryn Mawr - Belle Shore L.P. (P) 99% 05 Burlington Arboretum L.P. (P) 94.66% 05 Burlington Senior Housing LLC (P) 98.9% 05 Bush Hotel L.P. (P) 99% 05 Carson Housing L.P. (P) 99% 05 CCS/Bellingham L.P. (Washington Grocery Building)(P) 99% 05 CCS/Mount Vernon Housing L.P. (La Venture) (P) 99% 05 CCS/Renton Housing L.P. (Renton) (P) 99% 05 Cedarshores Limited Dividend Housing Association L.P. (P) 98.99% 05 Centertown Associates L.P. (Ravenwood) (P) 99% 05 Centro Partners L.P. (El Centro) (P) 99% 05 Cincinatti Ravenwood Apartments L.P. (P) 99% 05 Cochrane Village Apartments L.P. (P) 99% 05 Conejo Valley Community Housing Associates (Community House Apartments) (P) 99% 05 Coolidge Station Apartments L.L.C. (P) 99% 05 Coyote Springs Apartments Associates L.P. (P) 99% 05 Cypress Cove Associates (P) 99% 05 Davis MHA Twin Pines Community Associates L.P. (Northstar Apartments) (P) 99% 05 Delta Plaza Apartments L.P. (P) 99% 05 EAH Larkspur Creekside Associates L.P. (P) 99% 05 EAST COAST CAPITAL, INC. (Massachusetts corporation) 05 East Cotati Avenue Partners L.P. (P) 99% 05 Eastwood Homes L.P. (P) 98.99% 05 EC ASSET SERVICES, INC. (Massachusetts corporation) 05 EC PROPERTIES, INC. (Massachusetts corporation) 06 Corporations for Affordable Housing L.P. (P) 1% 07 Arbor Lane Associates Phase II L.P. (Timberwood) (P) 99% 07 Arroyo Vista Associates L.P. (P) 99% 07 Artloft Associates L.P. (P) 35.6% 07 Caleb Affordable Housing Associates L.P. (Ledges/Pinebrook) (P) 99% 07 The Carlin L.P. (P) 99% 07 Diamond Phase III Venture L.P. (P) 99% 07 Fairmont Hotel Urban Renewal Associates L.P. (P) 99% 07 Mackenzie Park Associates L.P. (P) 99% 07 Parkside Associates L.P. (Parkside Garden) (P) 99% 07 Pines Housing L.P. (P) 99% 07 Pines Housing II, L.P. (P) 99% 07 Smyrna Gardens Associates L.P. (P) 99% 07 Tioga Gardens L.P. (P) 99% 07 Walden Pond, L.P. (Hamlet) (P) 99% 06 Corporations for Affordable Housing L.P. II (P) 1% 07 2601 North Broad Street Associates L.P.(Station House)(P)99% 07 Artloft Associates L.P. (P) 53.39% 07 Brookline Housing Associates LLC (Bridgewater) (P) 99% 07 EDA L.P. (Eagle's Nest) (P) 99% 07 Edgewood Manor Associates II L.P. (P) 99% 07 Gateway Housing L.P. (Gateway Townhomes) (P) 99% 07 Homestead Village Associates L.P. (P) 99% 07 Junction City Apartments L.P. (Green Park) (P) 99% 07 Liberty House Associates L.P. (P) 99% 07 Maple Ridge Development Associates L.P. (P) 99% 07 Parsonage Cottage Senior Residence L.P. (P) 99% 4 07 Rittenhouse School L.P. (P) 99% 07 Silver City Housing L.P. (P) 99% 07 South 55th Street, L.P. (P) 99% 07 W. M. Housing Associates L.P. (Williamsport Manor) (P) 99% 07 Winnsboro Apartments L.P. (Deer Wood) (P) 99% 05 EC PROPERTIES III, INC. (Massachusetts corporation) 06 Corporations for Affordable Housing L.P. III (P) 1% 07 Piedmont Housing Associates (P) 99% 07 Pines Housing III (P) 99% 07 Salem-Lafayette Urban Renewal Associates, L.P. (P) 99% 07 Spring Valley Commons (P) 99% 07 Stevenson Housing Associates (Park Vista) (P) 99% 05 EC-SLP, INC. (Massachusetts corporation) 05 ECHI Wyvernwood, Inc. [dead project] 05 ECH/HFC GP Partnership No. 1 (P) 34.9% 06 Edison Capital Housing Partners VII L.P. (P) 19.4% 07 C-Court L.P. (Cawelti Court) (P) 99% 07 Cottonwood Affordable Housing L.P. (P) 99% 07 Fifth & Wilshire (P) 99% 07 Flagstaff Affordable Housing II, L.P. (Forest View Apts.) (P) 99% 07 Huff Avenue Associates L.P. (P) 99% 07 Mountain View Townhomes Associates L.P. (P) 99% 07 Oak Forest Associates L.P. (P) 99% 07 Paradise Road Partners L.P. (Gateway Village) (P) 99% 07 Woodland Arms Apartments, Ltd. (P) 99% 05 ECH/HFC GP Partnership No. 2 (P) 56.7% 06 Edison Capital Housing Partners VIII L.P. (P) 18.54% 07 Catalonia Associates L.P. (P) 99% 07 Ohlone Housing Associates L.P. (P) 99% 05 EDISON CAPITAL AFFORDABLE HOUSING 97 V 05 EDISON CAPITAL AFFORDABLE HOUSING 97 VI 05 EDISON CAPITAL AFFORDABLE HOUSING 97 VII 05 EDISON CAPITAL AFFORDABLE HOUSING 97 VIII 05 Edison Capital Contributions VI Partners (P) 91.77% 06 ECH Investor Partners VI-A L.P. (P) 15.39% 07 Edison Capital Housing Partners VI L.P. (P) 61.82% 08 Admiralty Heights Associates II 1995 L.P. (Kent Manor(P) 99% 08 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 08 Altamont Hotel Associates L.P. (P) 99% 08 Bradley Manor Senior Apartments L.P. (P) 99% 08 Double X Associates 1995 L.P. (Terrace Manor) (P) 99% 08 Hamilton Place Apartments L.P. (Larkin Place) (P) 99% 08 Hamilton Place Senior Living L.P. (P) 99% 5 08 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 08 KDF Malabar L.P. (P) 99% 08 LINC-Bristol Associates I, L.P. (City Gardens) (P) 99% 08 MAS-WT, L.P. (Washington Terrace) (P) 99% 08 Northwood Manor Associates L.P. (P) 99% 08 Silver Lake Properties L.P. (P) 99% 08 University Park Properties L.P. (P)99% 08 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 08 Vista Verde Townhomes II LLC (P) 99% 08 Vista Properties LLC (Vista View) (P) 99% 06 ECH Investor Partners VI-B L.P. (P) 15.39% 07 Edison Capital Housing Partners VI L.P. (P) 37.18% 08 Admiralty Heights Associates II 1995 L.P. (Kent Manor) (P) 99% 08 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 08 Altamont Hotel Associates L.P. (P) 99% 08 Bradley Manor Senior Apartments L.P. (P) 99% 08 Double X Associates 1995 L.P. (Terrace Manor) (P) 99% 08 Hamilton Place Apartments L.P. (Larkin Place)(P) 99% 08 Hamilton Place Senior Living L.P. (P) 99% 08 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 08 KDF Malabar L.P. (P) 99% 08 LINC-Bristol Associates I, L.P.(City Gardens) (P) 99% 08 MAS-WT, L.P. (Washington Terrace) (P) 99% 08 Northwood Manor Associates L.P. (P) 99% 08 Silver Lake Properties L.P. (P) 99% 08 University Park Properties L.P. (P)99% 08 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 08 Vista Verde Townhomes II LLC (P) 99% 08 Vista Properties LLC (Vista View) (P) 99% 05 EDISON CAPITAL HOUSING DELAWARE, INC. 06 B.A.I. Edison Ravenwood L.P. (Ravenwood) (P) 90% 07 Cincinatti Ravenwood Apartments L.P. (P) 0.95% 05 Edison Capital Housing Partners V L.P. (P) 16.38% 06 AMCAL Santa Barbara Fund XXXVI L.P. (Positano) (P) 99% 06 Bodega Hills Investors L.P. (P) 99% 06 Mercy Housing California IV L.P. (Vista Grande) (P) 99% 06 Park Place Terrace L.P. (P) 99% 06 River Walk Apartments Homes L.P. (P) 99% 06 San Diego Golden Villa Partners L.P. (Golden Villa) (P) 99% 06 Santa Alicia Gardens Townhomes L.P. (The Gardens) (P) 99% 06 St. Hedwigs Gardens (P) 99% 06 Sunshine Terrace L.P. (P) 99% 06 Union Meadows Apartments (P) 99% 05 EDISON CAPITAL HOUSING FLORIDA 05 EDISON CAPITAL HOUSING MANAGEMENT 06 JOHN STEWART COMPANY Address: 2310 Mason Street, San Francisco, CA 94133 07 2814 Fifth Street Associates L.P. (P) 0.5%GP 07 381 Turk Street L.P. (P) 1%GP 07 Community Investment L.P. (Oak Village Apartments) (P) 1%GP 07 Crescent Manor Associates L.P. (P) 2.85%GP 07 The IBEX Group (P) 10%GP 08 Del Norte Place L.P. (P) 18%GP 08 Woodhaven Senior Residences L.P. (P) 1%GP 07 Jackie Robinson Apartments L.P. (P) 1.67%GP 07 Larkspur Isle L.P. (P) 0.5%GP 07 Las Casitas L.P. (P) 0.5%GP 07 Mason Street Enterprises L.P. (P) 1%GP 07 Piper Court G.P. (P) 99.9%GP 07 Shiloh Arms L.P. (P) 1%GP/9.8%LP 07 St. John's L.P. (P) 1%GP/19.6%LP 07 Village East Apartments L.P. (P) 2.48%GP 05 EDISON CAPITAL HOUSING NEW JERSEY 06 El Barrio Academy Urban Renewal Associates, L.P. (Academy Street)(P) 98.99% 06 Pellettieri Homes Urban Renewal Associates, L.P. (P) 98.99% 05 EDISON CAPITAL HOUSING NEW YORK 06 WPA/Edison LLC (Pier A) (P) 99% 05 EDISON CAPITAL HOUSING PENNSYLVANIA 06 Lackawana Housing Associates LLC (Goodwill Neighborhood Residences) (P) 98.99% 06 McFarland Press Associates (P) 98.99% 06 Villa Maria Housing L.P. (P) 98.99% 05 EDISON HOUSING GEORGIA 06 HMB-Atlanta I L.P. (Spring Branch) (P) 99% 05 EDISON HOUSING NORTH CAROLINA 06 Edison Capital Contributions VI Partners (P) 4.03% 07 ECH Investor Partners VI-A L.P. (P) 15.39% 08 Edison Capital Housing Partners VI L.P. (P) 61.82% 09 Admiralty Heights Associates II 1995 L.P.(Kent Manor) (P) 99% 09 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 09 Altamont Hotel Associates L.P. (P) 99% 09 Bradley Manor Senior Apartments L.P. (P) 99% 6 09 Double X Associates 1995 L.P. (Terrace Manor) (P) 99% 09 Hamilton Place Apartments L.P. (Larkin Place) (P) 99% 09 Hamilton Place Senior Living L.P. (P) 99% 09 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 09 KDF Malabar L.P. (P) 99% 09 LINC-Bristol Associates I, L.P.(City Gardens)(P) 99% 09 MAS-WT, L.P. (Washington Terrace) (P) 99% 09 Northwood Manor Associates L.P. (P) 99% 09 Silver Lake Properties L.P. (P) 99% 09 University Park Properties L.P. (P)99% 09 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 09 Vista Verde Townhomes II LLC (P) 99% 09 Vista Properties LLC (Vista View) (P) 99% 07 ECH Investor Partners VI-B L.P. (P) 15.39% 08 Edison Capital Housing Partners VI L.P. (P) 37.18% 09 Admiralty Heights Associates II 1995 L.P.(Kent Manor) (P) 99% 09 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 09 Altamont Hotel Associates L.P. (P) 99% 09 Bradley Manor Senior Apartments L.P. (P) 99% 09 Double X Associates 1995 L.P.(Terrace Manor)(P) 99% 09 Hamilton Place Apartments L.P. (Larkin Place)(P) 99% 09 Hamilton Place Senior Living L.P. (P) 99% 09 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 09 KDF Malabar L.P. (P) 99% 09 LINC-Bristol Associates I, L.P.(City Gardens) (P) 99% 09 MAS-WT, L.P. (Washington Terrace) (P) 99% 09 Northwood Manor Associates L.P. (P) 99% 09 Silver Lake Properties L.P. (P) 99% 09 University Park Properties L.P. (P)99% 09 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 09 Vista Verde Townhomes II LLC (P) 99% 09 Vista Properties LLC (Vista View) (P) 99% 05 EDISON HOUSING OREGON, INC. 05 EDISON HOUSING SOUTH CAROLINA 06 Edison Capital Contributions VI Partners (P) 4.20% 07 ECH Investor Partners VI-A L.P. (P) 15.39% 08 Edison Capital Housing Partners VI L.P. (P) 61.82% 09 Admiralty Heights Associates II 1995 L.P. (Kent Manor) (P) 99% 09 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 09 Altamont Hotel Associates L.P. (P) 99% 09 Bradley Manor Senior Apartments L.P. (P) 99% 09 Double X Associates 1995 L.P. (Terrace Manor) (P) 99% 09 Hamilton Place Apartments L.P. (Larkin Place) (P) 99% 09 Hamilton Place Senior Living L.P. (P) 99% 09 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 09 KDF Malabar L.P. (P) 99% 09 LINC-Bristol Associates I, L.P. (City Gardens)(P) 99% 09 MAS-WT, L.P. (Washington Terrace) (P) 99% 09 Northwood Manor Associates L.P. (P) 99% 09 Silver Lake Properties L.P. (P) 99% 09 University Park Properties L.P. (P)99% 09 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 09 Vista Verde Townhomes II LLC (P) 99% 09 Vista Properties LLC (Vista View) (P) 99% 07 ECH Investor Partners VI-B L.P. (P) 15.39% 08 Edison Capital Housing Partners VI L.P. (P) 37.18% 09 Admiralty Heights Associates II 1995 L.P.(Kent Manor) (P) 99% 09 Affordable/Citrus Glenn Phase II, Ltd. (Citrus Glenn Apts. Phase II) (P) 99% 09 Altamont Hotel Associates L.P. (P) 99% 09 Bradley Manor Senior Apartments L.P. (P) 99% 09 Double X Associates 1995 L.P.(Terrace Manor)(P)99% 7 09 Hamilton Place Apartments L.P. (Larkin Place)(P)99% 09 Hamilton Place Senior Living L.P. (P) 99% 09 Hearthstone Group 3 L.P. (Evergreen Court) (P) 99% 09 KDF Malabar L.P. (P) 99% 09 LINC-Bristol Associates I, L.P. (City Gardens) (P) 99% 09 MAS-WT, L.P. (Washington Terrace) (P) 99% 09 Northwood Manor Associates L.P. (P) 99% 09 Silver Lake Properties L.P. (P) 99% 09 University Park Properties L.P. (P)99% 09 Upland Senior Housing L.P. (Coy D. Estes) (P) 99% 09 Vista Verde Townhomes II LLC (P) 99% 09 Vista Properties LLC (Vista View) (P) 99% 05 Edmundson Associates L.P. (Willows) (P) 99% 05 EHI DEVELOPMENT COMPANY 05 EHI DEVELOPMENT FUND 05 Electra Arms Senior Associates L.P. (P) 99% 05 Elizabeth West & East L.P. (P) 99% 05 Farm (The) Associates L.P. (P) 99% 05 Florence Apartments LLC (P) 99% 05 Gilroy Redwood Associates L.P. (Redwoods) (P) 99% 05 Ginzton Associates L.P. (P) 99% 05 Grace Housing L.P. (P) 99% 05 Grandy Lake 1996 L.P. (Grandy Lake Residences) (P) 99% 05 Grossman Apartments Investors L.P. (P) 99% 05 Harry Clark Jr. Residential Center LLC (P) 99% 05 Heartland-Wisconsin Rapids Timber Trails LLC (Timber Trails)(P)99% 05 Heather Glen Associates L.P. (P) 99% 05 Heritage Partners L.P. (P) 99% 05 Holy Family Associates L.P. (P) 99% 05 Hotel Elkhart L.L.C. (The Cornerstone) (P) 99% 05 KDF Park Glenn L.P. (Park Glenn) (P) 99% 05 KDF Santa Paula L.P. (Santa Paula) (P) 99% 05 Kennedy Lofts Associates L.P. (Massachusetts partnership) 05 Lark Ellen L.P. (P) 99% 05 LL Housing L.P. (Maryland partnership) (P) 99% 05 LL Housing L.L.C. (P) 99% 05 Madison/Mollison L.P. (Park Mollison) (P) 99% 05 Maplewood School Apartments L.P. (P) 99% 05 Mar Associates L.P. (Frank Mar) (P) 99% 05 Marlton Residences Associates L.P. (P) 99% 05 Mercy Housing California IX L.P. (Sycamore) (P) 99% 05 Merrill Road Associates L.P. (P) 99% 05 MH I L.P. (P) 1% 06 California Park Apartments L.P. (P) 1% of 99% 05 MH II L.P. (P) 1% 06 5363 Dent Avenue Associates L.P. (P) 1% of 99% 05 MH III L.P. (P) 1% 06 DeRose Housing Associates L.P. (P) 1% of 99% 05 MH IV L.P. (P) 1% 06 MPT Apartments L.P. (MacArthur Park) (P) 1% of 99% 05 MH V L.P. (P) 1% 06 Centennial Place L.P. (P) 1% of 99% 05 MHICAL 94 COMPANY 06 MHICAL 94 L.P. (Delaware partnership) 99%LP 07 Mayacamas Village Associates L.P. (P) 99% of 99% 07 Rincon De Los Esteros Associates L.P. (P) 99% of 99% 07 West Capital Courtyard L.P. (P) 99% of 99% 07 Winfield Hill Associates L.P. (P) 99% of 99% 05 MHICAL 94 L.P. (Delaware partnership) 1%GP 06 Mayacamas Village Associates L.P. (P) 1% of 99% 06 Rincon De Los Esteros Associates L.P. (P) 1% of 99% 06 West Capital Courtyard L.P. (P) 1% of 99% 06 Winfield Hill Associates L.P. (P) 1% of 99% 05 MHICAL 95 COMPANY 06 MHICAL 95 L.P. (Delaware partnership) 99%LP 07 Abby Associates L.P. (Windmere) (P) 99% of 99% 07 Antelope Associates L.P. (P) 99% of 99% 8 07 Baker Park Associates L.P. (P) 99% of 99% 07 Bracher Associates L.P. (P) 99% of 99% 07 Colina Vista L.P. (P) 99% of 99% 07 ECH/HFC GP Partnership No. 2 (P) 43.3% 08 Edison Capital Housing Partners VIII L.P. (P) 18.54% 09 Catalonia Associates L.P. (P) 99% 09 Ohlone Housing Associates L.P. (P) 99% 07 Florin Woods Associates L.P. (P) 99% of 99% 07 Mercy Housing California VI L.P. (205 Jones) (P) 99% of 99% 07 Pinmore Associates L.P. (P) 99% of 99% 07 Sunset Creek Partners L.P. (P) 99% of 99% 05 MHICAL 95 L.P. (Delaware partnership) 1%GP 06 Abby Associates L.P. (Windmere) (P) 1% of 99% 06 Antelope Associates L.P. (P) 1% of 99% 06 Baker Park Associates L.P. (P) 1% of 99% 06 Bracher Associates L.P. (P) 1% of 99% 06 Colina Vista L.P. (P) 1% of 99% 06 ECH/HFC GP Partnership No. 2 (P) 43.3% 07 Edison Capital Housing Partners VIII L.P. (P) 18.54% 08 Catalonia Associates L.P. (P) 99% 08 Ohlone Housing Associates L.P. (P) 99% 06 Florin Woods Associates L.P. (P) 1% of 99% 06 Mercy Housing California VI L.P. (205 Jones) (P) 1% of 99% 06 Pinmore Associates L.P. (P) 1% of 99% 06 Sunset Creek Partners L.P. (P) 1% of 99% 05 MHICAL 96 COMPANY 06 MHICAL 96 L.P. (Delaware partnership) 99%LP 07 2814 Fifth Street Associates L.P. (Land Park Woods) (P) 99% 07 ECH/HFC GP Partnership No. 1 (P) 50.4% 08 Edison Capital Housing Partners VII L.P. (P) 19.4% 09 C-Court L.P. (Cawelti Court) (P) 99% 09 Cottonwood Affordable Housing L.P. (P) 99% 09 Fifth & Wilshire (P) 99% 09 Flagstaff Affordable Housing II, L.P. (Forest View Apts.) (P) 99% 09 Huff Avenue Associates L.P. (P) 99% 09 Mountain View Townhomes Associates L.P. (P) 99% 09 Oak Forest Associates L.P. (P) 99% 09 Paradise Road Partners L.P. (Gateway Village) (P) 99% 09 Woodland Arms Apartments, Ltd. (P) 99% 07 Greenway Village Associates L.P. (P) 99% of 99% 07 Kennedy Court Partners L.P. (P) 99% of 99% 07 Klamath Associates L.P. (P) 99% of 99% 07 Sky Parkway Housing Associates L.P. (P) 99% of 99% 07 Strobridge Housing Associates L.P. (P) 99% of 99% 07 Westgate Townhomes Associates L.P. (P) 99% of 99% 05 MHICAL 96 L.P. (Delaware partnership) 1%GP 06 2814 Fifth Street Associates L.P. (Land Park Woods) (P) 99% 06 ECH/HFC GP Partnership No. 1 (P) 50.4% 07 Edison Capital Housing Partners VII L.P. (P) 19.4% 08 C-Court L.P. (Cawelti Court) (P) 99% 08 Cottonwood Affordable Housing L.P. (P) 99% 08 Fifth & Wilshire (P) 99% 08 Flagstaff Affordable Housing II, L.P. (Forest View Apts.) (P) 99% 08 Huff Avenue Associates L.P. (P) 99% 08 Mountain View Townhomes Associates L.P. (P) 99% 08 Oak Forest Associates L.P. (P) 99% 08 Paradise Road Partners L.P. (Gateway Village) (P) 99% 08 Woodland Arms Apartments, Ltd. (P) 99% 06 Greenway Village Associates L.P. (P) 1% of 99% 06 Kennedy Court Partners L.P. (P) 1% of 99% 06 Klamath Associates L.P. (P) 1% of 99% 06 Sky Parkway Housing Associates L.P. (P) 1% of 99% 06 Strobridge Housing Associates L.P. (P) 1% of 99% 06 Westgate Townhomes Associates L.P. (P) 1% of 99% 05 MHICAL 97 COMPANY 9 06 MHICAL 97 L.P. 99% LP 07 Alma Place Associates L.P. (P) 99% of 99% 07 ECH/HFC GP Partnership No. 1 (P) 14.7% 08 Edison Capital Housing Partners VII L.P. (P) 19.4% 09 C-Court L.P. (Cawelti Court) (P) 99% 09 Cottonwood Affordable Housing L.P. (P) 99% 09 Fifth & Wilshire (P) 99% 09 Flagstaff Affordable Housing II, L.P. (Forest View Apts.) (P) 99% 09 Huff Avenue Associates L.P. (P) 99% 09 Mountain View Townhomes Associates L.P. (P) 99% 09 Oak Forest Associates L.P. (P) 99% 09 Paradise Road Partners L.P. (Gateway Village) (P) 99% 09 Woodland Arms Apartments, Ltd. (P) 99% 07 Garnet Housing Associates (P) 99% of 99% 07 Monterra Village Associates L.P. (P) 99% of 99% 07 Walnut Avenue Partnership L.P. (P) 99% of 99% 05 MHICAL 97 L.P. 1%GP 06 Alma Place Associates L.P. (P) 1% of 99% 06 ECH/HFC GP Partnership No. 1 (P) 14.7% 07 Edison Capital Housing Partners VII L.P. (P) 19.4% 08 C-Court L.P. (Cawelti Court) (P) 99% 08 Cottonwood Affordable Housing L.P. (P) 99% 08 Fifth & Wilshire (P) 99% 08 Flagstaff Affordable Housing II, L.P. (Forest View Apts.) (P) 99% 08 Huff Avenue Associates L.P. (P) 99% 08 Mountain View Townhomes Associates L.P. (P) 99% 08 Oak Forest Associates L.P. (P) 99% 08 Paradise Road Partners L.P. (Gateway Village) (P) 99% 08 Woodland Arms Apartments, Ltd. (P) 99% 06 Garnet Housing Associates (P) 1% of 99% 06 Monterra Village Associates L.P. (P) 1% of 99% 06 Walnut Avenue Partnership L.P. (P) 1% of 99% 05 MHIFED 94 COMPANY 05 MHIFED 94 L.P. (Delaware partnership) 1%GP; 99% LP to NYNEX 06 Berry Avenue Associates L.P. (P) 1% of 99% 06 Carlton Way Apartments L.P. (P) 1% of 99% 06 CDR Senior Housing Associates (Casa del Rio) (P) 1% of 99% 06 Corona Ely/Ranch Associates L.P. (P) 1% of 99% 06 Fairview Village Associates L.P. (P) 1% of 99% 06 Fell Street Housing Associates L.P. (P) 1% of 99% 06 Hope West Apartments L.P. (P) 1% of 99% 06 Morrone Gardens Associates L.P. (P) 1% of 99% 06 Pajaro Court Associates L.P. (P) 1% of 99% 06 Tierra Linda Associates L.P. (P) 1% of 99% 06 Tlaquepaque Housing Associates L.P. (P) 1% of 99% 05 MHIFED 95 COMPANY 05 MHIFED 95 L.P. (Delaware partnership) 1%GP; 99%LP to NYNEX 06 Avalon Courtyard L.P. (Carson Senior Housing) (P) 1% of 99% 06 Hollywood El Centro L.P. (P) 1% of 99% 06 La Brea/Franklin L.P. (P) 1% of 99% 06 Larkin Pine L.P. (P) 1% of 99% 06 Mercy Housing California III L.P.(3rd & Reed) (P) 1% of 99% 06 Pinole Grove Associates L.P. (P) 1% of 99% 06 Second Street Center L.P. (Santa Monica) (P) 1% of 99% 06 Solinas Village Partners L.P. (P) 1% of 99% 06 Three Oaks Housing L.P. (P) 1% of 99% 06 1101 Howard Street Associates L.P. (P) 1% of 99% 05 MHIFED 96 COMPANY 05 MHIFED 96 L.P. (Delaware partnership) 5%GP; 95%LP to Cargill 06 Lavell Village Associates L.P. (P) 5% of 99% 06 North Town Housing Partners L.P. (Villa del Norte Village) (P) 5% of 99% 06 Poco Way Associates L.P. (P) 5% of 99% 06 Seasons Affordable Senior Housing L.P. (P) 5% of 99% 05 MHIFED 96A COMPANY 10 05 MHIFED 96A L.P. (Delaware partnership) 1%GP; 99%LP to NYNEX 06 Good Samaritan Associates L.P. (P) 1% of 99% 06 Metro Senior Associates L.P. (P) 1% of 99% 06 Oxnard Housing Associates L.P. (P) 1% of 99% 06 Reseda Village L.P. (P) 1% of 99% 06 Round Walk Village Apartments L.P. (P) 1% of 99% 06 Santa Alicia Family Housing Associates (P) 1% of 99% 06 Vine Street Court L.P. (P) 1% of 99% 06 Vine Street Court L.P. II (P) 1% of 99% 05 MHIFED 97 COMPANY 06 MHIFED 97 L.P. 1%GP 05 MHIFED 97 L.P. 99%LP 05 Mid-Peninsula Century Village Associates L.P. (Century Village)(P) 99% 05 Mid-Peninsula Sharmon Palms Associates L.P.(Sharmon Palms)(P)99% 05 Mission Capp L.P. (P) 99% 05 MISSION HOUSING ALPHA 06 Lee Park Investors L.P. (Pennsylvania partnership) 99% 05 MISSION HOUSING BETA 06 Richmond City Center Associates L.P. (P) 99% 05 MISSION HOUSING DELTA 06 MH I L.P. (P) 99% 07 California Park Apartments L.P. (P) 99% of 99% 06 MH II L.P. (P) 99% 07 5363 Dent Avenue Associates L.P. (P) 99% of 99% 07 MH III L.P. (P) 99% 07 DeRose Housing Associates L.P. (P) 99% of 99% 06 MH IV L.P. (P) 99% 07 MPT Apartments L.P. (MacArthur Park) (P) 99% of 99% 06 MH V L.P. (P) 99% 07 Centennial Place L.P. (P) 99% of 99% 05 MISSION HOUSING DENVER 06 Mercantile Square L.P. (P) 99% 06 North Park Village LLC (P) 99% 05 MISSION HOUSING EPSILON 06 Knolls Community Associates L.P. (P) 99% 06 Riverside/Liebrandt Partners L.P. (La Playa) (P) 99% 05 MISSION HOUSING GAMMA 06 Del Carlo Court Associates L.P.(P) 99% 05 MISSION HOUSING HOLDINGS 06 Mission Housing Partnership 1996 L.P. 99%LP (Delaware partnership) 07 La Terraza Associates L.P. (Carlsbad Villas at Camino Real) (P) 99% of 99% 05 Mission Housing Partnership 1996 L.P. 1%GP (Delaware partnership) 06 La Terraza Associates L.P. (Carlsbad Villas at Camino Real) (P) 1% of 99% 05 MISSION HOUSING THETA 06 MISSION FUNDING THETA 07 Brantwood II Associates L.P. (P) 0.01% 07 Brooks School Associates L.P. (P) 0.01% 07 Burlington Senior Housing LLC (P) 0.01% 07 Cedarshores Limited Dividend Housing Association L.P. (P) 0.01% 07 Eastwood Homes L.P. (P) 0.01% 07 El Barrio Academy Urban Renewal Associates, L.P. (Academy Street) (P) 0.01% 07 Lackawana Housing Associates LLC (Goodwill Neighborhood Residences) (P) 0.01% 07 McFarland Press Associates (P) 0.01% 07 Oakdale Terrace Leased Housing Associates L.P. (P) 0.01% 07 Pellettieri Homes Urban Renewal Associates, L.P. (P) 0.01% 07 Persimmon Associates L.P. (P) 0.01% 07 Roebling Village Inn Urban Renewal L.P. (P) 0.01% 07 Sherman Glen, L.L.C. (P) 0.01% 07 Timber Sound, Ltd. (P) 0.01% 07 Timber Sound II, Ltd. (P) 0.01% 11 07 Villa Maria Housing L.P. (P) 0.01% 07 Westfield Condominium Investment L.P. (P) 0.01% 07 Woodleaf Village L.P. (P) 0.01% 06 Mission Housing Investors Partnership 5%GP; 95%LP to GECC 07 Forest Winds Associates L.P. (P) 5% of 99% 07 Glen Eden Associates L.P. (A Street) (P) 5% of 99% 07 Gray's Meadows Investors L.P. (P) 5% of 99% 07 Prince Bozzuto L.P. (Fairground Commons) (Maryland partnership) 5% of 99% 07 Rancho Park Associates L.P. (P) 5% of 99% 07 Rustic Gardens Associates L.P. (P) 5% of 99% 07 Sea Ranch Apartments L.P. (P) 5% of 99% 07 Springdale Kresson Associates L.P. (Jewish Federation) (New Jersey partnership) 5% of 99% 07 1028 Howard Street Associates L.P. (P) 5% of 99% 05 MISSION HOUSING ZETA 06 Fremont Building L.P. (Crescent Arms) (P) 99% 05 MISSION SA COMPANY 05 Morgan Hill Ranch Housing L.P. (P) 99% 05 National Boston Lofts Associates LLLP (Boston Lofts) (P) 99% 05 Neary Lagoon Partners L.P. (P) 99% 05 New Harbor Vista Apartments (C) 99% 05 Oakdale Terrace Leased Housing Associates L.P. (P) 98.99% 05 Oceanside Gardens L.P. (P) 99% 05 Olive Court Apartments L.P. (P) 98.9% 05 Omaha Amber Ridge L.P. (Amber Ridge) (P) 99% 05 Ontario Senior Housing L.P. (Ontario Plaza) (P) 98.9% 05 Open Door Associates L.P. (West Valley) (P) 99% 05 Pacific Terrace Associates L.P. (C) 99% 05 Pacifica Community Associates L.P. (Villa Pacifica) (P) 99% 05 Palmer House L.P. (P) 99% 05 Pecan Court Associates L.P. (C) 99% 05 Persimmon Associates L.P. (P) 98.99% 05 Pilot Grove L.P. (Massachusetts partnership) 99% 05 Pinewood on Wisconsin Apartments (P) 99% 05 Post Office Plaza L.P. (Ohio partnership) 99% 05 President John Adams Manor Apartments L.P. (P) 99% 05 Providence-Brown Street Housing L.P. (Brown Street) (P) 99.9% 05 PVA L.P. (Park Victoria) (P) 99% 05 Red Lake Homes (P) 99% 05 Riverwalk Apartments, Ltd. (Colorado) (P) 99% 05 Roebling Village Inn Urban Renewal L.P. (P) 98.99% 05 Rosebloom Associates L.P. (Oakshade) (P) 99% 05 Rosecreek Senior Living L.P. (P) 99.9% 05 San Juan Commons 1996 L.P. (P) 99% 05 San Pablo Senior Housing Associates L.P. (P) 99% 05 San Pedro Gardens Associates L.P. (P) 99% 05 Santa Paulan Senior Apartments Associates L.P.(The Paulan) (P) 99% 05 Schoolhouse Court Housing Associates L.P. (C) 99% 05 Sherman Glen, L.L.C. (P) 98.99% 05 South Beach Housing Associates L.P. (Steamboat) (P) 99% 05 South Winery Associates L.P. (The Winery Apartments) (P) 99% 05 Stoney Creek Associates L.P. (P) 99% 05 Stony Point Apartment Investors L.P. (Panas Place) (P) 99.9% 05 Studebaker Building L.P. (P) 99% 05 Sultana Acres Associates L.P. (P) 99% 05 Tabor Grand L.P. (Colorado partnership) 99% 05 Terra Cotta Housing Associates L.P. (C) 99% 05 The Josephinum Associates L.P. (Washington partnership) 99% 05 Thomson Rental Housing, L.P. (Washington Place) (P) 99% 05 Timber Sound, Ltd. (P) 98.99% 05 Timber Sound II, Ltd. (P) 98.99% 05 Trinity Park Apartments L.P. (P) 99% 05 Trolley Terrace Townhomes L.P. (P) 99% 05 Tuscany Associates L.P. (Tuscany Villa) (P) 99% 05 Twin Ponds Apartments L.P. (P) 99% 05 Venbury Trail L.P. (P) 99% 12 05 Wall Street Palmer House L.P. (P) 99% 05 WGA INVESTORS COMPANY [dead project] 05 Washington Creek Associates L.P. (P) 99% 05 West Valley Hart L.P. (Hart & Alabama) (P) 99.9% 05 Westfield Condominium Investment L.P. (P) 98.99% 05 Westport Village Homes Associates L.P. (P) 99% 05 Wheeler Manor Associates L.P. (P) 99% 05 White Mountain Apache L.P. (P) 99% 05 Woodleaf Village L.P. (P) 98.99% 05 Women's Westlake L.P. (Dorothy Day) (P) 99% 05 Yale Street L.P. (P) 99.9% 05 YWCA Villa Nueva Partners L.P. (P) 99% 04 EDISON FUNDING OMICRON GP 05 Olive Court Housing Associates L.P. (P) 0.1% 05 Ontario Senior Housing L.P. (Ontario Plaza) (P) 0.1% 04 EDISON INTEGRATED ENERGY SERVICES 04 MISSION FIRST ASSET INVESTMENT 04 MISSION FUNDING BETA 04 MISSION FUNDING EPSILON 05 EDISON CAPITAL(BERMUDA) INVESTMENTS, LTD. (Bermuda corporation) Address: Clarendon House, 2 Church Street, Hamilton HM CX, Bermuda 06 Edison Capital LAI (Bermuda) Ltd. (Bermuda corporation) 07 Trinidad and Tobago Methanol Company Limited 1.0% 06 Edison Capital Latin American Investments (Bermuda) Ltd. (Bermuda corporation) 33.3% 07 AIG-GE Capital Latin American Infrastructure Fund LP 8% 07 AIG Asian Infrastructure Fund II LP 5.8% 05 EDISON CAPITAL INTERNATIONAL (BERMUDA) LTD. 06 Edison Capital Latin American Investments (Bermuda) Ltd. (Bermuda corporation) 33.3% 07 AIG-GE Capital Latin American Infrastructure Fund LP 8% 07 AIG Asian Infrastructure Fund II LP 5.8% 06 Electricidad de La Paz S.A. (Electropaz) 10% 06 Lyonnaise Latin America Water Corporation Ltd. 25.8% 06 Olmeca Cable Investments Ltd. (Mandeville Mexico, S.A.) 21.7% 05 Edison Capital Latin American Investments Holding Company (Delaware corporation) 06 Edison Capital Latin American Investments (Bermuda) Ltd. (Bermuda corporation) 33.3% 07 AIG-GE Capital Latin American Infrastructure Fund LP 8% 07 AIG Asian Infrastructure Fund II LP 5.8% 05 EDISON CAPITAL (NETHERLANDS) HOLDINGS B.V. 06 EDISON CAPITAL (NETHERLANDS) INVESTMENTS B.V. 07 Law Hospital 20% 05 GEM Energy Company (New York partnership) 50% 05 MISSION FUNDING ALPHA 06 MISSION FUNDING MU 07 EPZ Mission Funding Mu Trust (equity interest in foreign utility company) [see 4.01] 05 MISSION FUNDING DELTA 06 MISSION FUNDING NU 07 EPZ Mission Funding Nu Trust (equity interest in foreign utility company) [see 4.02] 05 MISSION INVESTMENTS, INC. (U.S. Virgin Islands corporation) Address: ABN Trustcompany, Guardian Building, Havensight, 2nd Floor, St. Thomas, U.S. Virgin Islands 05 MISSION (BERMUDA) INVESTMENTS, LTD. (Bermuda corporation) Address: Clarendon House, 2 Church Street, Hamilton HM CX, Bermuda 04 MISSION FUNDING GAMMA 04 MISSION FUNDING KAPPA 05 ABB Funding Partners, L.P. (P) 14.27% 04 MISSION FUNDING ZETA 05 Huntington L.P. (New York partnership) 50% 05 Lakota Ridge LLC 75% 13 05 Shaokatan Hills LLC 75% 05 Woodstock Hills LLC 75% 03 EDISON MORTGAGE COMPANY 03 MISSION BARTLETT HILL COMPANY 04 Bartlett Hill Associates L.P. (P) 30% [29%LP, 1%GP]; 100% w/ ECHI 03 MISSION INTERNATIONAL CAPITAL, INC. 03 RENEWABLE ENERGY CAPITAL COMPANY 02 MISSION LAND COMPANY is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 800, Irvine, California 92612-1046. It is engaged, directly and through its subsidiaries, in the business of owning, managing and selling industrial parks and other real property investments. The subsidiaries and partnerships of Mission Land Company are listed below. Unless otherwise indicated, all entities are corporations, are organized under the laws of the State of California, and have the same principal place of business as Mission Land Company. 03 ASSOCIATED SOUTHERN INVESTMENT COMPANY 03 CALABASAS PALATINO, INC. (inactive) 03 Carol Stream Developers G.P. (Illinois partnership) 60%GP 03 Centrelake Partners, L.P. (limited partnership) 98%GP 03 IRWINDALE LAND COMPANY (inactive) 03 MISSION AIRPORT PARK DEVELOPMENT CO. 04 Carol Stream Developers G.P. (Illinois partnership) 40%GP 04 Centrelake Partners, L.P. (limited partnership) 2%LP 04 Mission Vacaville L.P. (limited partnership) 1%GP 03 MISSION INDUSTRIAL CONSTRUCTORS, INC. (inactive) 03 Mission-Oceangate (P) 75%GP 03 MISSION/ONTARIO, INC. (inactive) 03 MISSION SOUTH BAY COMPANY (inactive) 04 Mission-Oceangate (P) 25%GP 03 MISSION TEXAS PROPERTY HOLDINGS, INC. (inactive) 03 Mission Vacaville L.P. (limited partnership) 99%LP 02 MISSION POWER ENGINEERING COMPANY is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 1700, Irvine, California 92612-1046. It is currently an inactive company. The subsidiaries of Mission Power Engineering Company are listed below. Unless otherwise indicated, all entities are corporations, are organized under the laws of the State of California, and have the same principal place of business as Mission Power Engineering Company. 03 ASSOCIATED SOUTHERN ENGINEERING COMPANY (inactive) 02 EDISON MISSION ENERGY is a California corporation having its principal place of business at 18101 Von Karman Avenue, Suite 1700, Irvine, California 92612- 1046. Edison Mission Energy owns the stock of a group of corporations which, primarily through partnerships with non-affiliated entities, are engaged in the business of developing, owning and/or operating cogeneration, geothermal and other energy or energy-related projects pursuant to the Public Utility Regulatory Policies Act of 1978. Edison Mission Energy, through wholly owned subsidiaries, also has ownership interests in a number of independent power projects in operation or under development that either have been reviewed by the Commission's staff for compliance with the Act or are or will be exempt wholesale generators or foreign utility companies under the Energy Policy Act of 1992. In addition, some Edison Mission Energy subsidiaries have made fuel-related investments and a limited number of non-energy related investments. The subsidiaries and partnerships of Edison Mission Energy are listed below. Unless otherwise indicated, all entities are corporations, are organized under the laws of the State of California and have the same principal place of business as Edison Mission Energy. 14 EDISON MISSION ENERGY DOMESTIC COMPANIES: 03 AGUILA ENERGY COMPANY (LP) 04 American Bituminous Power Partners, L.P. (Delaware limited partnership) 49.5%; 50% with Pleasant Valley 05 American Kiln Partners, L.P. (Delaware limited partnership) 49.5% of 53% 03 ANACAPA ENERGY COMPANY (GP) 04 Salinas River Cogeneration Company (P) 50% 03 ARROWHEAD ENERGY COMPANY (inactive) 03 BALBOA ENERGY COMPANY (GP) 04 Smithtown Cogeneration, L.P. (Delaware partnership) 50%; 100% w/Kingspark 03 BERGEN POINT ENERGY COMPANY (GP) 04 TEVCO/Mission Bayonne Partnership (Delaware G.P.) 50% 03 BLUE RIDGE ENERGY COMPANY (GP) 04 Bretton Woods Cogeneration, L.P. (Delaware limited partnership) 50%; 100% w/Bretton Woods 03 BRETTON WOODS ENERGY COMPANY (GP & LP) 04 Bretton Woods Cogeneration, L.P. (Delaware L.P.) 50%; 100% w/Blue Ridge 03 CAMINO ENERGY COMPANY (GP) 04 Watson Cogeneration Company (general partnership) 49% 03 CAPISTRANO COGENERATION COMPANY (GP) 04 James River Cogeneration Company (North Carolina partnership) 50% 03 CENTERPORT ENERGY COMPANY (GP & LP) 04 Riverhead Cogeneration I, L.P. (Delaware partnership) 50%; 100% w/Ridgecrest 03 CHESAPEAKE BAY ENERGY COMPANY (GP) 04 Delaware Clean Energy Project (Delaware general partnership) 50% 03 CHESTER ENERGY COMPANY (no partners; option Chesapeake,VA) 03 CLAYVILLE ENERGY COMPANY 04 Oconee Energy, L.P. (Delaware L.P.) 50%; 100% w/Coronado 03 COLONIAL ENERGY COMPANY (inactive) 03 CORONADO ENERGY COMPANY 04 Oconee Energy, L.P. (Delaware L.P.) 50%; 100% w/Clayville 03 DEL MAR ENERGY COMPANY (GP) 04 Mid-Set Cogeneration Company (P) 50% 03 DELAWARE ENERGY CONSERVERS, INC. (Delaware corporation)(inactive) 03 DESERT SUNRISE ENERGY COMPANY (Nevada corporation) (inactive) 03 DEVEREAUX ENERGY COMPANY (LP) 04 Auburndale Power Partners, L.P.(Delaware L.P.) 49%; 50% w/El Dorado [see 4.03] 03 EASTERN SIERRA ENERGY COMPANY (GP & LP) 04 Saguaro Power Company, L.P. (P) 50% 03 EAST MAINE ENERGY COMPANY (inactive) [dissolving] 03 EDISON ALABAMA GENERATING COMPANY 03 EDISON MISSION ENERGY FUEL 04 EDISON MISSION ENERGY OIL AND GAS 05 Four Star Oil & Gas Company (P) 50.1% (owns Lost Hills Cogeneration Facility) 04 EDISON MISSION ENERGY PETROLEUM (Gas contracts w/ Tex. Gas Mktg) 04 POCONO FUELS COMPANY (inactive) 04 SOUTHERN SIERRA GAS COMPANY 05 TM Star Fuel Company (general partnership) 50% 03 EDISON MISSION ENERGY FUNDING CORP. (Delaware corporation) 1% 03 Edison Mission Energy Interface Ltd. (British Columbia company) 04 The Mission Interface Partnership (Province of Ontario G.P.) 50% 03 EDISON MISSION HOLDINGS CO. 04 CHESTNUT RIDGE ENERGY COMPANY 05 EME Homer City Generation L.P. (Pennsylvania) 99% 04 EDISON MISSION FINANCE CO. 100% 04 MISSION ENERGY WESTSIDE, INC. 05 EME Homer City Generation L.P. (Pennsylvania) 1% 15 03 EDISON MISSION MARKETING & TRADING, INC. 03 EDISON MISSION OPERATION & MAINTENANCE, INC. (no partnership) 04 Mission Operations de Mexico, S.A. de C.V. 95% 03 EL DORADO ENERGY COMPANY (GP) 04 Auburndale Power Partners, L.P. (Delaware L.P.) 1%; 50% w/ Devereaux [see 4.03] 03 EMP, INC. (Oregon corporation) (GP & LP) (inactive) 03 FOUR COUNTIES GAS COMPANY (inactive) 03 HANOVER ENERGY COMPANY 04 Chickahominy River Energy Corp. (Virginia corporation) (GP & LP) 05 Commonwealth Atlantic L.P.(Delaware partnership) [see 4.05] 50% 03 HOLTSVILLE ENERGY COMPANY (GP & LP) 04 Brookhaven Cogeneration, L.P.(Delaware partnership) 50%; 100% w/Madera 03 INDIAN BAY ENERGY COMPANY (GP & LP) 04 Riverhead Cogeneration III, L.P. (Delaware partnership) 50%; 100% w/Santa Ana 03 JEFFERSON ENERGY COMPANY (GP & LP) (inactive) 03 KINGS CANYON ENERGY COMPANY (inactive) 03 KINGSPARK ENERGY COMPANY (GP & LP) 04 Smithtown Cogeneration, L.P. (Delaware partnership) 50%; 100% w/Balboa 03 LAGUNA ENERGY COMPANY (inactive) (former interest in Ambit) 03 LA JOLLA ENERGY COMPANY (inactive) (used for Belridge) 03 LAKEVIEW ENERGY COMPANY 04 Georgia Peaker, L.P. (Delaware L.P.) 50%; 100% w/Silver Springs 03 LEHIGH RIVER ENERGY COMPANY (inactive) 03 LONGVIEW COGENERATION COMPANY (held for Weyerhauser) 03 MADERA ENERGY COMPANY (GP) 04 Brookhaven Cogeneration, L.P. (Delaware partnership) 50%; 100% w/Holtsville 03 MADISON ENERGY COMPANY (LP) 04 Gordonsville Energy, L.P. (Delaware partnership) [see 4.06] 49%; 50% w/Rapidan 03 Mission Capital, L.P. (Delaware L.P.) 3%; MIPS partnership 03 MISSION/EAGLE ENERGY COMPANY (inactive) 03 MISSION ENERGY CONSTRUCTION SERVICES, INC. (Provides construction services for Paiton Project) 03 MISSION ENERGY HOLDINGS, INC. 04 Mission Capital, L.P. (Delaware L.P.) 97%; MIPS partnership 03 MISSION ENERGY HOLDINGS INTERNATIONAL, INC. [holds all the issued and outstanding stock of MEC International B.V.--see INTERNATIONAL section] 03 MISSION ENERGY INDONESIA (inactive) 03 MISSION ENERGY MEXICO (inactive) formerly the branch office in Mexico (no partnership) 03 MISSION ENERGY NEW YORK, INC. (GP & LP) 04 Brooklyn Navy Yard Cogeneration Partners, L.P. (Delaware partnership) 50% [see 4.04] 03 MISSION ENERGY WALES COMPANY 04 Mission Hydro Limited Partnership (UK limited partnership) 05 EME Generation Holdings Limited (UK limited partnership) 30% [See International section for structure of EME Generation Holdings Ltd.] 03 Mission Operations de Mexico, S.A. de C.V. 5% 03 MISSION TRIPLE CYCLE SYSTEMS COMPANY (GP) 04 Triple Cycle Partnership (Texas G.P.) 50% 03 NORTH JACKSON ENERGY COMPANY (inactive) [held for Akso Salt Proj] 03 NORTHERN SIERRA ENERGY COMPANY (GP) 04 Sobel Cogeneration Company (general partnership) 50% 03 ORTEGA ENERGY COMPANY (Mid-County Cogen gas contracts) 03 PANTHER TIMBER COMPANY (GP) 04 American Kiln Partners, L.P. (Delaware limited partnership) 2% 03 PARADISE ENERGY COMPANY (inactive) 03 PLEASANT VALLEY ENERGY COMPANY (GP) 16 04 American Bituminous Power Partners, L.P. (Delaware limited partnership) 0.5%; 50% w/Aguila 05 American Kiln Partners, L.P. (Delaware Limited Partnership) 0.5% of 53% 03 PRINCE GEORGE ENERGY COMPANY (LP) 04 Hopewell Cogeneration Limited Partnership (Delaware limited partnership) 24.75% 04 Hopewell Cogeneration Inc. (Delaware corporation) 25% 05 Hopewell Cogeneration Limited Partnership (Delaware limited partnership) 1% 03 QUARTZ PEAK ENERGY COMPANY (LP) 04 Nevada Sun-Peak L.P. (Nevada partnership) [see 4.07] 50% 03 RAPIDAN ENERGY COMPANY (GP) 04 Gordonsville Energy, L.P.(Delaware partnership)[see 4.06] 1%; 50% w/Madison 03 REEVES BAY ENERGY COMPANY (GP & LP) 04 North Shore Energy L.P. (Delaware partnership) 50%; 100% w/Santa Clara 05 Northville Energy Corporation (New York corporation) 100% 03 RIDGECREST ENERGY COMPANY (GP) 04 Riverhead Cogeneration I, L.P.(Delaware partnership) 50%; 100% w/Centerport 03 RIO ESCONDIDO ENERGY COMPANY 03 RIVERPORT ENERGY COMPANY (GP & LP) 04 Riverhead Cogeneration II, L.P. (Delaware partnership) 50%; 100% w/San Pedro 03 SAN GABRIEL ENERGY COMPANY (inactive) (McKenzie gas contracts) 03 SAN JOAQUIN ENERGY COMPANY (GP) 04 Midway-Sunset Cogeneration Company, L.P. (P) 50% 03 SAN JUAN ENERGY COMPANY (GP) 04 March Point Cogeneration Company (P) 50% 03 SAN PEDRO ENERGY COMPANY (GP) 04 Riverhead Cogeneration II, L.P. (Delaware partnership) 50%; 100% w/Riverport 03 SANTA ANA ENERGY COMPANY (GP) 04 Riverhead Cogeneration III, L.P. (Delaware partnership) 50%; 100% w/Indian Bay 03 SANTA CLARA ENERGY COMPANY (GP) 04 North Shore Energy, L.P. (Delaware partnership) 50%; 100% w/Reeves Bay 05 Northville Energy Corporation (New York corporation) 100% 03 SILVERADO ENERGY COMPANY (GP) 04 Coalinga Cogeneration Company (P) 50% 03 SILVER SPRINGS ENERGY COMPANY 04 Georgia Peaker, L.P. (Delaware limited partnership) 50%; 100% w/Lakeview 03 SONOMA GEOTHERMAL COMPANY (GP & LP) 04 Geothermal Energy Partners Ltd. (P) (Aidlin) 5%LP 03 SOUTH COAST ENERGY COMPANY (GP) 04 Harbor Cogeneration Company (P) 30% 03 SOUTHERN SIERRA ENERGY COMPANY (GP) 04 Kern River Cogeneration Company (general partnership) 50% 03 THOROFARE ENERGY COMPANY (inactive) 03 VIEJO ENERGY COMPANY (GP) 04 Sargent Canyon Cogeneration Company (P) 50% 03 VISTA ENERGY COMPANY (New Jersey corporation) (inactive) 03 WESTERN SIERRA ENERGY COMPANY (GP) 04 Sycamore Cogeneration Company (general partnership) 50% EDISON MISSION ENERGY INTERNATIONAL COMPANIES: 04 MEC International B.V. (Netherlands corporation) (Holding Company 100% owned by MEC Holdings International, Inc. (California corp.)) Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 Beheer-en Beleggingsmaatschappij Botara B.V. (BHP Project) 100% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 17 05 Edison Mission Energy Asia Pte Ltd. (Singapore private company limited by shares) 100% (EME's Regional Asia Pacific Headquarters) Address: 391-B Orchard Road, Ngee Ann City, Tower B, 14th Floor, #14-08/10, Singapore 238874 06 Edison Mission Energy Asia Pacific Pte Ltd. (Singapore corporation) 100% Address: 391-B Orchard Road, Ngee Ann City, Tower B, 14th Floor, #14-08/10, Singapore 238874 06 Edison Mission Energy Fuel Company Pte Ltd. (Singapore corporation) 100% Address: 391-B Orchard Road, Ngee Ann City, Tower B, 14th Floor, #14-08/10, Singapore 238874 06 Edison Mission Operation & Maintenance Services Pte Ltd 100% Address: 391-B Orchard Road, Ngee Ann City, Tower B, 14th Floor, #14-08/10, Singapore 238874 06 P.T. Edison Mission Operation and Maintenance Indonesia (Indonesian company) 99% Address: Jl. Gen. A Yani No. 54 Probolinggo, East Java, Indonesia 05 Edison Mission Energy International B.V. (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 Edison Mission Energy Services B.V. (Netherlands company) 100% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 Edison Mission Operation & Maintenance Services B.V. (Netherlands company) 100% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 EME Tri Gen B.V. 100% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Tri Energy Company Limited (Tri Energy Project) (equity) 25% [see 4.17] Address: 16th Floor, Grant Amarin Tower, New Petchburi Road, Ratchathewi, Bangkok 10320 Thailand 05 EME Victoria B.V. 100% (inactive) Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 Global Generation B.V. 100% Address: Croeselaan 18, 3521 CB Utrecht, The Netherlands 05 Hydro Energy B.V. (Netherlands limited liability company) 10% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Iberica de Energias, S.A. (Spain corp) 96.65% [see 4.08] Address: Paseo de Gracia 18, Planta 4, 08007, Barcelona, Spain 07 Electrometalurgica del Ebro, S.A. ("EMESA") (Spain corporation) 91.32% [see 4.09] Address: Paseo de Gracia 18, Planta 4, 08007, Barcelona, Spain 08 Monasterio de Rueda, S.L. (Spain) 100% Address: Paseo de Gracia 18, Planta 4, 08007, Barcelona, Spain 05 Iberian Hy-Power Amsterdam B.V. (Netherlands limited liability company) 100% Address: Strawinskylaan 1725, Amsterdam, NOORD-HOLL 1077 XX 06 Aprohiso S.A. (Spain corporation) (inactive) 100% Address: Paseo de Gracia 18, Planta 4, 08007, Barcelona, Spain 06 Hydro Energy B.V. (Netherlands company) 90% 07 Iberica de Energias, S.A.(Spain corporation)96.65%[see4.08] 08 Electrometalurgica del Ebro, S.A. ("EMESA") (Spain corporation) 91.32% [see 4.09] 09 Monasterio de Rueda, S.L. (Spain) 100% 06 Iberica de Energias, S.A. (Spain corporation) 3.35% [see 4.08] 07 Electrometalurgica del Ebro, S.A. ("EMESA") (Spain corporation) 91.32% [see 4.09] 08 Monasterio de Rueda, S.L. (Spain) 100% 06 Saltos del Porma, S.A. 05 Latrobe Power Pty. Ltd. (Australian corporation) 99% 18 Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 06 Mission Victoria Partnership (Australian partnership) 52.31% (100% w/ Traralgon PPL 46.69% and MEVALP 1%) 07 Latrobe Power Partnership (Australian partnership) 99% 08 Loy Yang B Joint Venture (Australian joint venture) [see 4.10] 51%; 49% to Gippsland 05 Loy Yang Holdings Pty Ltd (Australia corporation) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 06 Edison Mission Energy Holdings Pty Ltd (Australian corp.) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Edison Mission Energy Australia Ltd. (Australian public company) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 08 Latrobe Power Partnership (Australian partnership) 1% 09 Loy Yang B Joint Venture (Australian J.V.) [see 4.10] 51% 07 Edison Mission Energy Australia Pilbara Power Pty Ltd. (Australia company) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Edison Mission Energy Taupo Ltd. (Australia company) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Edison Mission Operation & Maintenance Kwinana Pty Ltd (Australia) 100% (Operator of Kwinana Project) Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Edison Mission Operation & Maintenance Loy Yang Pty Ltd (Australian corporation) 100% Address: P.O. Box 1792, Traralgon, Victoria 3844,Australia 07 Mission Energy Holdings Superannuation Fund Pty Ltd. (retirement fund required by Australia law) 100% 07 Mission Energy (Kwinana) Pty Ltd (Australia) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 08 Kwinana Power Partnership (Australian G.P.) 1% Address: Level 23, St. Martins Tower 44 St George's Terrace, Perth WA 6000 06 Latrobe Power Pty. Ltd. (Australian corporation) 1% 07 Mission Victoria Partnership (Australian partnership) 52.31% 08 Latrobe Power Partnership (Australian partnership) 99% 09 Loy Yang B Joint Venture (Australian J.V.) [see 4.10] 51% 06 Mission Energy Ventures Australia Pty. Ltd. (Australian company) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Mission Victoria Partnership (Australian partnership) 1% 08 Latrobe Power Partnership (Australian partnership) 99% 09 Loy Yang B Joint Venture (Australian J.V.) [see 4.10] 51% 06 Traralgon Power Pty. Ltd. (Australian corporation) 1% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Mission Victoria Partnership (Australian partnership) 46.69% 08 Latrobe Power Partnership (Australian partnership) 99% 09 Loy Yang B Joint Venture (Australian J.V.) [see 4.10] 51% 05 MEC Esenyurt B.V. (Netherlands company) (Doga Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Doga Enerji Uretim Sanayi ve Ticaret L.S. (Turkish corporation) (Project company) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 19 06 Doga Isi Satis Hizmetleri ve Ticaret L.S. (Turkish corporation) (Heat company) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 06 Doga Isletme ve Bakim Ticaret L.S. (Turkish corporation) (O&M company) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 05 MEC IES B.V. (Netherlands company) (ISAB Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 ISAB Energy Services s.r.l. 49% (services co ISAB Project) 05 MEC India B.V. (Netherlands company) (Jojobera Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Edison Mission Energy Power (Mauritius corporation) (Branch office in India) Address: Louis Leconte Street, Curepipe, Mauritius 05 MEC Indo Coal B.V. (Netherlands company) (Adaro Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 P. T. Adaro Indonesia (equity) 10% Address: Suite 704, World Trade Centre, Jl. Jend. Sudirman Kav. 31, Jakarta 12920 Indonesia 05 MEC Indonesia B.V. (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 P. T. Paiton Energy Company (Indonesia company) (equity) (Paiton Project) 40% [see 4.11] Address: Menara Batavia, 8th Floor, Jl. K. H. Mas Mansyur Kav. 126, Jakarta 10220 Indonesia 05 MEC International Holdings B.V. (Netherlands corp) 100% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Edison Mission Energy International B.V.(Netherlands company)1% 06 MEC Esenyurt B.V. (Netherlands company) (Doga Project) 1% 07 Doga Enerji Uretim Sanayi ve Ticaret L.S. (Turkish corporation) (Project company) 80% 07 Doga Isi Satis Hizmetleri ve Ticaret L.S. (Turkish corporation) (Heat company) 80% 07 Doga Isletme Bakim Ticaret L.S. (Turkish corporation) (O&M company) 80% 06 MEC IES B.V. (Netherlands company) (ISAB Project) 1% 07 ISAB Energy Services s.r.l. 49% 06 MEC India B.V. (Netherlands company) 1% 07 Edison Mission Energy Power (Mauritius corporation) 06 MEC Indo Coal B.V. (Netherlands company) (Adaro Project) 1% 07 P. T. Adaro Indonesia (equity) 10% 06 MEC Indonesia B.V. (Netherlands company) 1% 07 P. T. Paiton Energy Company (Indonesia company) (equity) (Paiton Project) 40% [see 4.11] 06 MEC Laguna Power B.V. (Netherlands company) (Thailand Project) 1% 07 Gulf Power Generation Co. Ltd. (Bangkok corporation) 40% 06 MEC Perth B.V. (Netherlands company) (Kwinana Project) 1% 07 Kwinana Power Partnership (Australian G.P.) [see 4.16] 06 MEC Priolo B.V. (Netherlands company) (ISAB Project) 1% 07 ISAB Energy, s.r.l. (Italian J.V. company) (equity) [see 4.12] 1% of 49% (quota, not shares) 06 MEC San Pascual B.V. (Netherlands company) 1% 07 San Pascual Cogeneration Company International B.V. 50% 08 San Pascual Cogeneration Company (Philippines) Ltd. (San Pascual Project) (equity) 1% 07 Morningstar Holdings B.V. (formerly Vestra B.V.) 50% 08 San Pascual Cogeneration Company (Philippines) Ltd. (San Pascual Project) (equity) 49% 06 MEC Sidi Krir B.V. (Netherlands company) 1% 06 MEC Sumatra B.V. (Netherlands company) 1% 20 06 MEC Wales B.V. (Netherlands Company) 1% 07 Mission Hydro Limited Partnership (UK limited partnership) 08 EME Generation Holdings Limited (UK company) 100% 09 Loyvic Pty Ltd. (Australia company) 100% 10 Energy Capital Partnership (Australia partnership) 1% 11 Enerloy Pty Ltd. (Australia company) 100% 09 EME Victoria Generation Limited (UK company) 100% 10 Energy Capital Partnership (Australia partnership 98% 11 Enerloy Pty Ltd. (Australia company) 100% 10 Mission Energy Development Australia Pty Ltd 11 Gippsland Power Pty Ltd 100% 12 Loy Yang B Joint Venture 49% 09 Energy apital Partnership (Australia partnership) 1%LP 10 Enerloy Pty Ltd. (Australia company) 100% 09 First Hydro Holdings Company (Australia partnership)99% 10 First Hydro Company [see 4.13] 99% 10 First Hydro Finance plc 11 First Hydro Company [see 4.13] 1% 06 Mission Energy Italia s.r.l. 10% (Office in Italy) 06 P.T. Edison Mission Operation and Maintenance Indonesia (Indonesian company) 1% 05 MEC Laguna Power B.V. (Netherlands co) (Malaya Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Gulf Power Generation Co. Ltd. (Bangkok corporation) 40% Address: 888/101 Mahatun Plaza Tower, 10th Floor, Ploenchit, Lumphini, Patumwan, Bangkok 10330 05 MEC Perth B.V. (Netherlands company) (Kwinana Project) 99% 06 Kwinana Power Partnership (Australian G.P.) 99% [See 4.16] Address: Level 23, St. Martins Tower 44 St George's Terrace, Perth WA 6000 05 MEC Priolo B.V. (Netherlands company) (ISAB Project) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 ISAB Energy, s.r.l. (Italian J.V. company) (equity) [see 4.12] 99% of 49% (quota, not shares) Address: Corso Gelone No. 103, Siracusa, Sicily, Italy 05 MEC San Pascual B.V. (Netherlands company) 99% Address: Croeselaan 18, 3521 CB Utrecht, The Netherlands 06 San Pascual Cogeneration Company International B.V. 50% Address: Croeselaan 18, 3521 CB Utrecht, The Netherlands 07 San Pascual Cogeneration Company (Philippines) Ltd (San Pascual Project) (equity) 1% Address: Unit 1610/1611, Tower One, Ayala Triangle, Ayala Avenue, 1200 Makati City, Metro Manila, Republic of the Philippines 06 Morningstar Holdings B.V. (formerly Vestra B.V.) 50% Address: Croeselaan 18, 3521 CB Utrecht, The Netherlands 07 San Pascual Cogeneration Company (Philippines) Ltd (San Pascual Project) (equity) 49% Address: Unit 1610/1611, Tower One, Ayala Triangle, Ayala Avenue, 1200 Makati City, Metro Manila, Republic of the Philippines 05 MEC Sidi Krir B.V. (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 MEC Sumatra B.V. (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 MEC Wales B.V. (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Mission Hydro Limited Partnership 69% Address: Lansdowne House, Berkeley Square, London W1X5DH England 07 EME Generation Holdings Limited (UK company) 100% 08 Loyvic Pty Ltd. (Australia company) 100% 09 Energy Capital Partnership (Australia partnership) 1% 10 Enerloy Pty Ltd. (Australia company) 100% 21 08 EME Victoria Generation Limited (UK company) 100% 09 Energy Capital Partnership (Australia partnership 98% 10 Enerloy Pty Ltd. (Australia company) 100% 09 Mission Energy Development Australia Pty Ltd 10 Gippsland Power Pty Ltd 100% 11 Loy Yang B Joint Venture 49% 08 Energy Capital Partnership (Australia partnership) 1%LP 09 Enerloy Pty Ltd. (Australia company) 100% 08 First Hydro Holdings Company (Australia partnership) 99% Address: Lansdowne House, Berkeley Square, London W1X5DH England 09 First Hydro Company [see 4.13] 99% Address: Bala House, St. David's Park Ewloe, Dlwyd, Wales CH5 3XJ 09 First Hydro Finance plc 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 10 First Hydro Company [see 4.13] 1% Address: Bala House, St. David's Park Ewloe, Dlwyd, Wales CH5 3XJ 05 Mission Energy Company (UK) Limited (United Kingdom private limited company) 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Derwent Cogeneration Limited (United Kingdom private limited liability company) (equity) [see 4.14] 33% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Edison Mission Energy Limited (UK private limited company) 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Edison Mission Operation & Maintenance Limited (a United Kingdom corporation) 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Edison Mission Services Limited (UK private limited company)100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Mission Hydro (UK) Limited 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 07 First Hydro Holdings Company 1% 08 First Hydro Company [see 4.13] 99% 08 First Hydro Finance plc 100% 09 First Hydro Company [see 4.13] 1% 07 Mission Hydro Limited Partnership 1%GP 08 EME Generation Holdings Limited (UK company) 100% 09 Loyvic Pty Ltd. (Australia company) 100% 10 Energy Capital Partnership (Australia partnership) 1% 11 Enerloy Pty Ltd. (Australia company) 100% 09 EME Victoria Generation Limited (UK company) 100% 10 Energy Capital Partnership (Australia partnership 98% 11 Enerloy Pty Ltd. (Australia company) 100% 10 Mission Energy Development Australia Pty Ltd 11 Gippsland Power Pty Ltd 100% 12 Loy Yang B Joint Venture 49% 09 Energy Capital Partnership (Australia partnership) 1%LP 10 Enerloy Pty Ltd. (Australia company) 100% 09 First Hydro Holdings Company (Australia partnership) 99% 10 First Hydro Company [see 4.13] 99% 10 First Hydro Finance plc 99% 11 First Hydro Company [see 4.13] 1% 06 Mission (No. 2) Limited (UK private limited company) 100% Address: Lansdowne House, Berkeley Square, 22 London W1X5DH England 06 Pride Hold Limited (United Kingdom corporation) 99% Address: Lansdowne House, Berkeley Square, London W1X5DH England 07 Lakeland Power Ltd. (United Kingdom private limited liability company) [see 4.15] 80% Address: Roosecote Power Station, Barrow-In-Furness, Cumbria, England LA13 OPX 07 Lakeland Power Development Company (UK corporation) 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Rapid Energy Limited 05 Mission Energy Italia s.r.l. 90% Representative Office in Italy Address: Villa Brasini, Via Flaminia 497, 00191 Rome Italy 05 Pride Hold Limited (United Kingdom corporation) 1% Address: Lansdowne House, Berkeley Square, London W1X5DH England 06 Lakeland Power Ltd. (United Kingdom private limited liability company) [see 4.15] 80% Address: Roosecote Power Station, Barrow-In-Furness, Cumbria, England LA13 OPX 06 Lakeland Power Development Company (UK corporation) 100% Address: Lansdowne House, Berkeley Square, London W1X5DH England 05 Rillington Holdings Limited (Gibraltar) Address: 57/63 Line Wall Road, Gibraltar 06 EME del Caribe Holding GmbH (Austria) Address: 4020 Linz, Landstrasse 12, Austria 07 EME del Caribe (Cayman Islands) Address: First Floor, Caledonian House, Mary Street, George Town, Grand Cayman, Cayman Islands 08 EcoElectrica Holdings, Ltd. (Cayman Islands) 50% Address: 1350 GT, The Huntlaw Building, Fort Street, Grand Cayman, Cayman Islands 09 EcoElectrica Ltd. (Cayman Islands) 100% Address: 1350 GT, The Huntlaw Building, Fort Street, Grand Cayman, Cayman Islands 10 EcoElectrica L.P. (Bermuda partnership) (equity) 1% Address: Plaza Scotiabank, 273 Ponce de Leon Avenue, Suite 902, Hato Rey, Puerto Rico 00918 09 EcoElectrica L.P. (Bermuda partnership) (equity) 99% Address: Plaza Scotiabank, 273 Ponce de Leon Avenue, Suite 902, Hato Rey, Puerto Rico 00918 05 Southwestern Generation B.V. 100% Address: Croeselaan 18, 3521 CB Utrecht, The Netherlands 05 Traralgon Power Pty. Ltd. (Australian corporation) 99% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 06 Mission Victoria Partnership (Australian partnership) 46.69% (100% w/ Latrobe PPL 52.31% and MEVALP 1%) 07 Latrobe Power Partnership (Australian partnership) 08 Loy Yang B Joint Venture (Australian J.V.) [see 4.10] 51%; 49% to Gippsland EX-23 2 CONSENT OF PUBLIC INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants we hereby consent to the incorporation by reference of our report dated February 4, 1999, (the Report of Independent Public Accounts) appearing on page 36 of the 1998 Annual Report to Shareholders of Edison International (Exhibit 13 included herein) in this Annual Report on Form 10-K for the year ended December 31, 1998 of Edison International. It should be noted that we have performed no audit procedures subsequent to February 4, 1999, the date of our report. Furthermore, we have not audited any financial statements of Edison International as of any date or period subsequent to December 31, 1998. We further consent t the incorporation by reference of the above-mentioned Report of Independent Public Accountants, incorporated by reference in this Annual Report on Form 10-K, and to the incorporation by reference of our report (the Report of Independent Public Accountants on supplemental schedules), appearing on page 40 of this Annual Report on Form 10-K, in the Edison International Registration Statements which follow: Registration Form File No. Effective Date ----------------- -------- -------------- Form S-8 33-32302 June 2, 1993 Form S-8 33-46714 June 2, 1993 Form S-3 33-44148 December 10, 1993 Form S-3 333-08115 July 15, 1996 Form S-8 33-303913 May 16, 1996 Form S-8 333-50443 April 17, 1998 ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 24, 1999 EX-24 3 EIX POWER OF ATTORNEY EXHIBIT 24.1 Edison International POWER OF ATTORNEY The undersigned, EDISON INTERNATIONAL, a California corporation, and certain of its officers and/or directors do each hereby constitute and appoint, BRYANT C. DANNER, ALAN J. FOHRER, THEODORE F. CRAVER, JR., THOMAS M. NOONAN, BEVERLY P. RYDER, KENNETH S. STEWART, MARY C. SIMPSON, PAIGE W.R. WHITE, TIMOTHY W. ROGERS, PEGGY A. STERN, RAYNA M. MORRISON, BONITA J. SMITH, POLLY L. GAULT, BEVERLY K. MARSHALL, DOUGLAS G. GREEN and J. A. BOUKNIGHT, JR., or any of them, to act as attorney-in-fact, for and in their respective names, places, and steads, to execute, sign, and file or cause to be filed an Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Quarterly Reports on Form 10-Q for each of the first three quarters of fiscal year 1999, any Current Reports on Form 8-K from time to time during 1999 and through March 16, 2000, and any and all supplements and amendments thereto, to be filed by Edison International with the Securities and Exchange Commission, under the Securities Exchange Act of 1934 as amended, (the "Act"), for the purpose of complying with Sections 13 or 15(d) of the Act, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform all and every act and thing whatsoever requisite, necessary and appropriate to be done in and about the premises as fully and to all intents and purposes as the undersigned or any of them might or could do if personally present, hereby ratifying and approving the acts of each of said attorneys-in-fact. Executed at Rosemead, California, as of this 18th day of March, 1999. EDISON INTERNATIONAL By: JOHN E. BRYSON ------------------------------------ JOHN E. BRYSON Chairman of the Board and Chief Executive Officer Attest: - --------------------------- BEVERLY P. RYDER Secretary 1999 Edison International 10-K, 10-Q, and 8-K Power of Attorney Principal Executive Officer: John E. Bryson - --------------------------- Chairman of the Board, Chief John E. Bryson Executive Officer and Director Principal Financial Officer: Alan J. Fohrer - ---------------------------- Alan J. Fohrer Executive Vice President, and Chief Financial Officer Controller and Principal Accounting Officer: Thomas M. Noonan - ---------------------------- Thomas M. Noonan Vice President and Controller Additional Directors: Winston H. Chen Director James M. Rosser Director - ------------------------ -------------------------- Winston H. Chen James M. Rosser Warren Christopher Director E. L. Shannon, Jr. Director - ------------------------ -------------------------- Warren Christopher E. L. Shannon, Jr. Stephen E. Frank Director Robert H. Smith Director - ------------------------ -------------------------- Stephen E. Frank Robert H. Smith Joan C. Hanley Director Thomas C. Sutton Director - ------------------------ -------------------------- Joan C. Hanley Thomas C. Sutton Carl F. Huntsinger Director Daniel M. Tellep Director - ------------------------ -------------------------- Carl F. Huntsinger Daniel M. Tellep Charles D. Miller Director James D. Watkins Director - ------------------------ -------------------------- Charles D. Miller James D. Watkins Luis G. Nogales Director Edward Zapanta Director - ------------------------ -------------------------- Luis G. Nogales Edward Zapanta Ronald L. Olson Director - ------------------------ Ronald L. Olson EX-24.2 4 CERTIFIED COPY - BOARD RESOLUTION EXHIBIT 24.2 I, Bonita J. Smith, Assistant Secretary of Edison International, certify that the attached is an accurate and complete copy of a resolution of the Board of Directors of the corporation, duly adopted at a meeting of its Board of Directors held on March 18, 1999. Dated: March 19, 1999. Bonita J. Smith - ------------------------------- Bonita J. Smith Assistant Secretary Southern California Edison RESOLUTION OF THE BOARD OF DIRECTORS OF EDISON INTERNATIONAL Adopted: March 18, 1999 RE: FORMS 10-K, 10-Q, AND 8-K WHEREAS, the Securities Exchange Act of 1934, as amended, and regulations thereunder, require that Annual, Quarterly, and Current Reports be filed with the Securities and Exchange Commission ("Commission"), and it is desirable to effect such filings over the signatures of attorneys-in-fact; NOW, THEREFORE, BE IT RESOLVED, that each of the officers of this corporation is hereby authorized to file or cause to be filed with the Commission the Annual Report on Form 10-K of this corporation for the fiscal year ended December 31, 1998, Quarterly Reports on Form 10-Q for each of the first three quarters of fiscal year 1999, Current Reports on Form 8-K from time to time during 1999 and through March 16, 2000, and any required or appropriate supplements or amendments to such reports, all in such forms as the officer acting or counsel for this corporation considers appropriate. BE IT FURTHER RESOLVED, that each of the officers of this corporation is hereby authorized to execute and deliver on behalf of this corporation and in its name a power of attorney appointing Bryant C. Danner, Alan J. Fohrer, Theodore F. Craver, Jr., Thomas M. Noonan, Beverly P. Ryder, Kenneth S. Stewart, Mary C. Simpson, Paige W. R. White, Timothy W. Rogers, Peggy A. Stern, Rayna M. Morrison, Bonita J. Smith, Polly L. Gault, Beverly K. Marshall, Douglas G. Green and J. A. Bouknight, Jr., and each of them, to act severally as attorney-in-fact for this corporation for the purpose of executing and filing with the Commission the above-described reports and any amendments and supplements thereto. APPROVED: John E. Bryson - ------------------------------------- John E. Bryson Chairman of the Board Bryant C. Danner - ------------------------------------- Bryant C. Danner Executive Vice President and General Counsel EX-27 5 EIX FINANCIAL DATA SCHEDULE
UT Edison International Financial Data Schedule -- Exhibit 27 1,000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 7,253,582 9,121,378 3,128,496 5,194,423 0 24,697,879 2,109,279 83,558 2,906,432 5,099,269 405,700 128,755 2,568,297 0 5,414,221 667,506 920,333 0 25,636 22,746 9,445,416 24,697,879 10,207,888 455,277 8,423,281 8,878,558 1,329,330 78,956 1,408,286 702,342 705,944 37,781 668,163 370,411 389,951 1,461,664 1.86 1.84
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