-----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, N4tHd1541hU17HHU6+rh6jlH8ncuxqNLA43JQQfZNGsb5nnvGcxWpiDKfV4J4M4J 1N38M9QnbBTgveFeaF8i/g== 0000827052-98-000033.txt : 19980326 0000827052-98-000033.hdr.sgml : 19980326 ACCESSION NUMBER: 0000827052-98-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: AMEX SROS: NYSE SROS: PCX 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: 98573147 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 1997 EDISON INTERNATIONAL 10K PAGE 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, 1997 --------------------------------------- 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 $11,044,875,684.40 on or about March 23, 1998, based upon prices reported on the New York Stock Exchange. As of 1998, there were 368,929,897 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, 1997 . . . . . . . . . . . . . . . .Parts I, II and IV (2) Designated portions of the Joint Proxy Statement relating to registrant's 1998 Annual Meeting of Shareholders. . . . . . . . . .Part III PAGE TABLE OF CONTENTS Item Page - ---- ---- Part I 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Business of Edison International. . . . . . . . . . . . . . . 1 Competitive Environment. . . . .. . . . . . . . . . . . . . 1 Regulation of Edison International . . . . . . . . . . . . 1 Environmental Matters. . . . . . . . . . . . . . . . . . . 3 Business of SCE . . . . . . . . . . . . . . . . . . . . . . . 5 Competitive Environment. . . . . . . . . . . . . . . . . . 6 Regulation of SCE. . . . . . . . . . . . . . . . . . . . . 12 Rate Matters . . . . . . . . . . . . . . . . . . . . . . . 13 Fuel Supply and Purchased Power Costs . . . . . . . . . . . 17 Year 2000 Issue. . . . . . . . . . . . . . . . . . . . . . 18 Business of the Nonutility Companies. . . . . . . . . . . . . 19 2. Properties of SCE . . . . . . . . . . . . . . . . . . . . . . 23 Existing Utility Generating Facilities . . . . . . . . . . 23 SCE Construction Program and Capital Expenditures. . . . . 24 Nuclear Power Matters . . . . . . . . . . . . . . . . . . . 25 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 28 Tradename Litigation . . . . . . . . . . . . . . . . . . . 28 PMNC Litigation . . . . . . . . . . . . . . . . . . . . . . 28 Qualifying Facilities Litigation . . . . . . . . . . . . . 28 Wind Generators' Litigation . . . . . . . . . . . . . . . . 29 Geothermal Generators' Litigation . . . . . . . . . . . . . 30 Electric and Magnetic Fields (EMF) Litigation . . . . . . . 31 San Onofre Personal Injury Litigation . . . . . . . . . . . 32 Oil Pipeline Litigation . . . . . . . . . . . . . . . . . . 34 False Claims Act Litigation . . . . . . . . . . . . . . . . 34 Mohave Generating Station Environmental Litigation . . . . 34 4. Submission of Matters to a Vote of Security Holders . . . . . 35 Executive Officers of the Registrant . . . . . . . . . . . . . 35 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 40 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 40 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . 40 8. Financial Statements and Supplementary Data . . . . . . . . . 40 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 40 Part III 10. Directors and Executive Officers of the Registrant . . . . . . 40 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 40 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . 40 13. Certain Relationships and Related Transactions . . . . . . . . 41 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 41 Report of Independent Public Accountants on Supplemental Schedules . . . . . . . . . . . . . . . . . . . . . . . . . 42 Supplemental Schedules . . . . . . . . . . . . . . . . . . 43 Signatures . . . . . . . . . . . . . . . . . . . . . . . . 48 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 49 PAGE 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 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 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; 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, 1997, 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, electric charging, 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 1997, SCE had 12,642 full-time employees. At year-end 1997, Edison International had 20 full-time employees, Edison Mission Energy had 1,140 full-time employees, Edison Capital had 85 full-time employees, and Edison Enterprises had 218 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. The generation sector has experienced competition from nonutility power producers and regulators are restructuring California's electric utility industry. (See "Business of SCE--Competitive Environment" below for a description of these changes.) 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 page 1 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.) However, the CPUC decision authorizing SCE to reorganize into a holding company structure 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. A CPUC resolution is expected on SCE's Compliance Plan during the second quarter of 1998. For purposes of an electric utility, such as SCE, these new rules apply to all utility transactions with affiliates engaging in the provision of a product that uses electricity or the provision of services that relate to the use of electricity. Edison International is not subject to these new affiliate transaction rules and will continue to be subject to the prior rules. The new affiliate transaction rules are structured to address what the CPUC perceives as market power and cross-subsidization concerns arising out of the new competitive electricity market in California. These new rules are categorized into nondiscrimination standards, disclosure and information standards, and separation standards. In addition, the new rules set forth requirements and restrictions on the utility's offering of certain products and services. Edison International believes that the implementation of these new affiliate transaction rules will not materially affect its results of operation or financial position. page 2 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 districts within California required SCE to reduce emissions of oxides of nitrogen from its generating stations. SCE is selling all of its oil- and gas-fueled generating stations within the SCAQMD, the Mohave Desert Air Quality Management District, Ventura County Air Pollution Control District, and the Santa Barbara County Air Pollution Control District, with an expected sale closure date for 11 of the 12 generating stations being sold by March 31, 1998 (the twelfth plant is expected to be sold in 1998). It is expected that after the generating stations' sale closure dates, under operations and maintenance contracts with the individual owners, SCE will operate those facilities that are kept in operation as active generating stations. SCE operations of the stations it gains contracts for, will be under the direction and expense of the new owners. SCE will be responsible for maintaining the environmental permits of the plants. However, the new owners, not SCE, will be responsible for the purchase and installation of emissions control equipment, and sufficient trading credits required for the plants under the Regional Clean Air Incentives Market within the SCAQMD. The CAA does not require any significant additional 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 late 1998. Also, the EPA and SCE will conclude a cooperative tracer study of sulfur dioxide emissions from the Mohave Generating Station (Mohave) in mid- to late-1998. The study is evaluating potential impact from Mohave emissions on haze within the Grand Canyon National Park. The extent to which these two activities may require sulfur dioxide or particulate emissions reductions at the Mohave is not known. 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 it requires for its projected operations. Until more definite information on tracer study results are available, SCE expects to meet all the present regulations through improved operations at the plant. On February 19, 1998, the Sierra Club and the Grand Canyon Trust filed suit against SCE and the other co-owners of Mohave in the U.S. District Court of Nevada 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. SCE, on behalf of the co-owners, will provide a timely response in defense of the suit. page 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 only if required. The study has not been finalized by the EPA to date. Regulations under the Clean Water Act require permits for the discharge of certain pollutants into waters of the U.S. 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 even more stringent limitations. In order to comply with guidelines and standards applicable to steam electric power plants, SCE incurs additional expenses and capital expenditures. 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. There is an unresolved issue regarding the degree to which coal wastes should be regulated under the RCRA. Increased regulation may result in an increase in expenses related 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 (PCB waste). Current costs for disposal of PCB waste 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). While Edison International has numerous insurance policies that it believes may provide coverage for some of these liabilities, it does not recognize recoveries in its financial statements until they are realized. In connection with the issuance of the San Onofre Nuclear Generating Station Units 2 and 3 operating permits, SCE reached an agreement with the California Coastal Commission in 1991 to restore certain marine mitigation sites. The restorations include two sites: designated wetlands and the construction of an artificial reef for kelp off the California coast. After SCE requested certain modifications to the agreement, the California Coastal Commission issued a final ruling in April 1997 to reduce the scope of remediations. SCE elected to pay for the costs of marine mitigation in lieu of placing the funds into a trust. Recovery of these costs is occurring through the San Onofre incentive pricing plan. Edison International's recorded estimated minimum liability to remediate its 51 identified sites (50 at SCE and one at EME) is $178 million, which includes $75 million for the two sites discussed above. The ultimate costs to clean up Edison International's identified sites may vary from page 4 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 $246 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. The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $91 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 $153 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. This amount includes $60 million of marine mitigation costs remaining to be recovered through the San Onofre incentive pricing plan. 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 1997 were $10 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. Edison International's projected capital expenditures to protect the environment are $820 million for the 1998-2002 period mainly for aesthetics treatment, including undergrounding certain transmission and distribution lines. Business of SCE SCE was incorporated under California law in 1909. 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 some 800 cities and communities and a population of more than 11 million people. SCE had 12,642 full-time employees at year-end 1997. During 1997, 38% of SCE's total operating revenue was derived from residential customers, 38% from commercial customers, 12% from industrial customers, 7% from public authorities, 4% from agricultural and other customers and 1% from resale customers. SCE comprises the major portion of the assets and revenue of Edison International, its parent holding company. page 5 Competitive Environment As previously discussed, SCE's regulatory environment is 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, which is expected to provide competition and customer choice and is scheduled to begin March 31, 1998. Key elements of the CPUC's restructuring decision included: creation of an independent power exchange (PX) and independent system operator (ISO); availability of direct customer access and customer choice; 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). Restructuring Legislation - In September 1996, the State of California enacted legislation to provide a transition to a competitive market structure. The legislation substantially adopted the CPUC December 1995 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 would be recovered through the terms of their contracts while most of the remaining transition costs would be recovered through 2001. The legislation 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 would allow SCE to reduce rates by at least 10% to these customers, beginning January 1, 1998. The financing would occur with securities issued by the California Infrastructure and Economic Development Bank (Bank), or an entity approved by the Bank. The legislation 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 legislation mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Finally, the legislation 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 May 1997, SCE filed an application with the CPUC requesting approval of the issuance of an aggregate amount of up to $3 billion of rate reduction notes in one or more series or classes and a 10% rate reduction for the period from January 1, 1998, through March 31, 2002. At the same time, SCE filed an application with the Bank for approval to issue the notes. Residential and small commercial customers will repay the notes over the expected 10-year term through non-bypassable charges based on electricity consumption. In December 1997, after receiving approval from both the CPUC and the Bank, a limited liability company created by SCE issued approximately $2.5 billion of these notes. Rate-setting - In December 1996, SCE filed a more comprehensive plan (elaborating on its July 1996 filing related to the conceptual aspects of separating costs as requested by CPUC and Federal Energy Regulatory page 6 Commission (FERC) directives) for the functional unbundling of its rates for electric service, beginning January 1, 1998. In response to CPUC and FERC orders, as well as the new restructuring legislation, this filing addressed the implementation-level detail for the functional unbundling of rates into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning. The transmission component of this rate unbundling process was addressed at the FERC through a March 1997 filing. In December 1997, the FERC approved these rates, subject to refund, to be effective on the date the ISO begins operation. (See "Transmission Owners Tariff and Wholesale Distribution Access Tariff" below for further discussion.) CPUC hearings on SCE's rate unbundling (also known as rate-setting) plan were concluded in April 1997. In August 1997, the CPUC issued a decision which adopted the methodology for determining CTC residually (see "CTC" discussion) and adopted SCE's revenue requirement components for public benefit programs and nuclear decommissioning. The decision also adjusted SCE's proposed distribution revenue requirement by reallocating $76 million of it annually to other functions such as generation and transmission. Under the decision, SCE will be able to recover most of the reallocated amount through market revenue, other rate-making mechanisms after petitioning the CPUC to modify its prior decisions, or another review process later in its divestiture proceeding. PX and ISO - In April 1996, SCE, Pacific Gas and Electric Company (PG&E) and San Diego Gas & Electric Company (SDG&E) filed a proposal with the FERC regarding the creation of the PX and the ISO. In November 1996, the FERC conditionally accepted the proposal and directed the three utilities, the ISO, and the PX to file more specific information. The filing was made in March 1997, and included SCE's proposed transmission revenue requirement. On October 29, 1997, the FERC gave conditional, interim authorization for operation of the PX and ISO, which are new independent non-profit California corporations, to begin on January 1, 1998. Prior to the start of the ISO and PX, the chief executive officers of the PX, ISO and the three utilities are required to certify that all the conditions were in place to ensure reliable electric power operations. In addition, the FERC stated it would closely monitor the PX and ISO, require further studies and make modifications, where necessary. A comprehensive review will be performed by the FERC after three years of operation of the PX and ISO. On December 22, 1997, the PX and ISO governing boards announced a delay in the planned start-up of the PX and ISO due to insufficient testing of operational, settlement and billing systems. The PX and ISO are now expected to begin operation by March 31, 1998. In July 1996, the three utilities jointly filed an application with the CPUC requesting approval to establish a restructuring trust which would obtain loans up to $250 million for the development of the ISO and PX through January 1, 1998. The loans are backed by utility guarantees; SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an interim order establishing the restructuring trust and the funding level of $250 million, which has been used to build the hardware and software systems for the ISO and PX. The ISO and PX will repay the trust's loans and recover funds from future ISO and PX customers. In November 1997, the CPUC approved a petition jointly filed by the three utilities which requested an increase in the loan guarantees from $250 million to $300 million; SCE's share of this new total is $135 million. In December 1997, the CPUC approved a remaining issue with respect to the petition which requested that the one-time restructuring implementation charge, to be paid to the PX by the utilities, be deemed a non-bypassable charge to be recovered from all retail customers. The amount of the PX charge is approximately $101 million, plus interest; SCE's share is 45%, or $45.5 million. Direct Customer Access - In May 1997, the CPUC issued a decision describing how all California investor-owned utility customers will be able to choose who will provide them with electric generation service beginning January 1, 1998. On December 30, 1997, the CPUC issued a page 7 decision delaying direct access until March 31, 1998, due to operational delays in the startup of the PX and ISO. When the PX and ISO become operational, customers will be able to choose to remain utility customers with bundled electric service from SCE (which will purchase its power through the PX), or choose direct access, which means the customer can contract directly with either independent power producers or retail electric service providers such as power brokers, marketers and aggregators. Additionally, all investor-owned utility customers must pay the CTC whether or not they choose to buy power through SCE. Electric utilities will continue to provide the core distribution service of delivering energy through their distribution systems regardless of a customer's choice of electricity supplier. The CPUC will continue to regulate the prices and service obligations related to distribution services. If the new competitive market cannot accommodate the volume of direct access transactions, the CPUC could implement a contingency plan. However, the CPUC indicated that it believes it is likely that interest in and migration to direct access will be gradual. Revenue Cycle Services - A decision issued by the CPUC in May 1997, introduces customer choice to metering, billing and related services (revenue cycle services) that are now provided by California's investor- owned utilities. Under this revenue cycle services unbundling decision, beginning in January 1998, direct access customers may choose to have either SCE or their electric generation service provider render consolidated (energy and distribution) bills, or they may choose to have separate billings from each service provider. However, not all electric generation service providers will necessarily offer each billing option. In addition, beginning in January 1998, customers with maximum demand above 20 kW (primarily industrial and large commercial) can choose SCE or any other supplier to provide their metering service. All other customers will have this option beginning in January 1999. Since direct access was delayed, options described in the CPUC decision as becoming available January 1, 1998, will not be available until the PX and ISO become operational. In determining whether any credit should be provided by the utility to firms providing customers with revenue cycle services, and the amount of any such credit, the CPUC has indicated that it is appropriate to net the cost incurred by the utility and the cost avoided by the utility as a result of such services being provided by the other firm rather than by the utility. The unbundling of revenue cycle services will expose SCE to the possible loss of revenue, higher stranded costs and a reduction in revenue security. PBR - In 1993, SCE filed for a PBR mechanism to determine most of its revenue (excluding fuel). The filing was subsequently divided between transmission and distribution (T&D) and power generation. In September 1996, the CPUC adopted a non-generation or T&D PBR mechanism for SCE which began on January 1, 1997. According to the CPUC, beginning in 1998 (coincident with the initiation of the competitive market), the transmission portion is to be separated from non-generation PBR and subject to ratemaking under the rules of the FERC. The distribution-only PBR will extend through December 2001. Key elements of the non-generation PBR include: T&D rates indexed for inflation based on the Consumer Price Index less a productivity factor; elimination of the kilowatt-hour sales adjustment; 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 T&D operations. With the CPUC's 1995 restructuring decision and the passage of restructuring legislation in 1996, the majority of power generation ratemaking (primarily fossil-fueled and nuclear) was assigned to other mechanisms. In April 1997, a CPUC interim order determined that the proposed structure of the fossil-fueled plants' must-run contracts were under the FERC's jurisdiction. On October 31, 1997, SCE filed must-run page 8 tariff schedules with the FERC covering its six ISO-designated must-run plants. In the meantime, SCE is pursuing the divestiture of these plants (see "Divestiture" discussion) and might not ever itself provide service under these FERC tariff schedules. In December 1997, the CPUC adopted a PBR-type rate-making mechanism for SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue requirement in 1998 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 (see "CTC" discussion). The CPUC has announced its intention to unbundle SCE's cost of capital by major utility function and has directed SCE to file an application by May 8, 1998. This proceeding could result in a change in late 1998 or early 1999 to the cost of capital included within the PBR cost of capital trigger mechanism. Divestiture - In November 1996, SCE filed an application with the CPUC to voluntarily divest, by auction, all 12 of its oil- and gas-fueled generating plants. This application built upon SCE's March 1996 plan which outlined how SCE proposed to divest 50% of these assets. SCE would continue to operate and maintain the divested power plants for at least two years following their sale, as mandated by the restructuring legislation enacted in September 1996. In addition, SCE would offer workforce transition programs to those employees who may be impacted by divestiture-related job reductions. In September 1997, the CPUC approved SCE's proposal to auction the 12 plants. On December 1, 1997, SCE filed a compliance filing with the CPUC stating that it agreed to sell ten plants. On December 16, 1997, the CPUC approved the sale of the ten plants. On February 6, 1998, SCE filed a compliance filing with the CPUC for the sale of an eleventh plant. CPUC approval of the sale is expected before March 31, 1998. The total sales price of the eleven plants is $1.1 billion or 2.16 times their combined book value of $531 million. Net proceeds of the sales will be used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. The transfer of ownership of the eleven plants is expected to occur concurrently with the start of the new competitive market, which the PX and ISO expect to occur on March 31, 1998. The process of selling the single remaining plant is still underway. CTC - Recovery of costs to transition to a competitive market is being implemented 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 20, 1995, decision date. In August 1996, in compliance with the CPUC's restructuring decision, SCE filed its application to estimate its 1998 transition costs. In October 1996, SCE amended its transition cost filing to reflect the effects of the legislation enacted in September 1996. Under the rate freeze codified in the legislation, the CTC will be determined residually (i.e., after subtracting other cost components for energy from the PX, T&D, nuclear decommissioning and public benefit programs). Nevertheless, the CPUC directed that the amended application provide estimates of SCE's potential transition costs from 1998 through 2030. SCE provided two estimates between approximately $13.1 billion (1998 net present value) assuming the fossil plants have a market value equal to their net book value, and $13.8 billion (1998 net present value) assuming the fossil plants have no market value. These estimates are 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 composed of: $7.5 billion from SCE's qualifying facility (QF) contracts, which are the direct result of prior legislative and regulatory mandates; and $5.6 page 9 billion to $6.3 billion from costs pertaining to certain generating plants (successful completion of the sale of SCE's gas-fired generating plants would reduce this estimate of transition costs for SCE-owned generation to less than $5 billion) 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 Nuclear Generating Station units, and certain other costs. In February 1997, SCE filed an update to the CTC filing to reflect approval by the CPUC of settlements regarding ratemaking for SCE's share of Palo Verde and the buyout of a power purchase agreement, as well as other minor data updates. No substantive changes in the total CTC estimates were included. This issue has been separated into two phases; Phase 1 addresses the rate-making issues and Phase 2 the quantification issues. A decision on Phase 1 was issued in June 1997, which, among other things, required the establishment of a transition cost balancing account and annual transition cost proceedings, set a market rate forecast for 1998 transition costs, and required that generation-related regulatory assets be amortized ratably over a 48-month period. Hearings on Phase 2 were held in May and June 1997 and a final decision was issued on November 19, 1997. The Phase 2 decision established the calculation methodologies and procedures for SCE to collect its transition costs from 1998 through the end of the rate freeze. The Phase 2 decision also reduced 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. The decision, excluding the effects of other rate actions, had a negative impact on 1997 earnings of approximately 4 cents per share. SCE has filed an application for rehearing on the 1997 rate of return issue. Utility Rate Reduction and Reform Act Initiative - On November 24, 1997, individuals representing The Utility Reform Network (TURN), Public Media Center and the Coalition Against Utility Taxes filed a voter initiative with the California Attorney General. The proposed initiative, which was amended by the proponents on December 9, 1997, seeks among other things to: (i) impose an additional 10 percent rate reduction; (ii) block stranded cost recovery of nuclear investments; (iii) restrict stranded cost recovery of non-nuclear investments unless the CPUC finds that the utility would be deprived of the opportunity to earn a fair rate of return; and (iv) prohibit the collection of any charges pursuant to a financing order for the purpose of making payments on rate reduction notes, or if the financing order is found enforceable by a court, require the utility to offset such charges with an equal credit to customers. On February 11, 1998, the California Secretary of State circulated a copy of the title and summary prepared for the proposed initiative by the California Attorney General's Office, which included a summary of estimate of the fiscal impacts on state and local governments if the initiative were to pass. That estimate concluded that the net impact on state government revenues would be annual revenue reductions of approximately $100 million per fiscal year from 1998-2002. The estimate also referred to potential state liability for debt service on the rate reduction notes. The earliest that the initiative could be placed on a statewide ballot is November 3, 1998. SCE is unable to predict the outcome of this matter but, if the initiative were to qualify for the ballot, be voted into law and upheld by courts, it could have a material effect on its results of operations. Accounting for Generation-Related Assets - If the CPUC's electric industry restructuring plan is implemented as outlined above, SCE would be allowed to recover its CTC 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). page 10 From November 1996 to July 1997, SCE and the other major California electric utilities were engaged in discussions with the Securities and Exchange Commission (SEC) staff regarding the proper application of regulatory accounting standards in light of the electric industry restructuring legislation enacted by the State of California in September 1996 and the CPUC's electric industry restructuring plan. This issue was placed on the agenda of the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) during April 1997 and a final consensus was reached at the July EITF meeting. During the third quarter of 1997, SCE implemented the EITF consensus and discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities. However, implementation of the EITF consensus did not require SCE to write off any of its generation-related assets, including regulatory assets of approximately $600 million at December 31, 1997. SCE has retained these assets on its balance sheet because the legislation and restructuring plan referred to above make probable their recovery through a non-bypassable CTC to distribution customers. These regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments, unamortized losses on reacquired debt, and the recovery of amounts deferred under the Palo Verde rate phase-in plan. The consensus reached by the EITF also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. 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 as a one-time, non-cash charge against earnings. If such a write-off were to be required, SCE believes that it should not affect the recovery of stranded costs provided for in the legislation and restructuring plan. Although depreciation-related differences could result from applying a regulatory prescribed depreciation method (straight-line, remaining-life method) rather than a method that would have been applied absent the regulatory process, SCE believes that the depreciable lives of its generation-related assets would not vary significantly from that of an unregulated enterprise, as the CPUC bases depreciable lives on periodic studies that reflect the physical useful lives of the assets. SCE also believes that any depreciation-related differences would be recovered through the CTC. If events occur during the restructuring process that result in all or a portion of the CTC 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 implementation phases, 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, PG&E and SDG&E jointly filed with the FERC a pro forma Transmission Owners Tariff (T.O. Tariff). The pro forma T.O. Tariff was filed 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. Additionally, on March 31, 1997, SCE filed an individual T.O. Tariff, its proposed revenue requirement for the facilities being turned over to the operational control of the ISO, and a Wholesale Distribution Access Tariff (WDAT). The SCE T.O. Tariff, excluding appendices, is identical to the pro forma T.O. Tariff, and also contains appendices setting forth SCE's proposed page 11 Transmission Access Charges. FERC accepted the SCE T.O. Tariff rates and WDAT for filing, subject to refund, on December 17, 1997. FERC Restructuring Decision - In April 1996, the FERC issued its decision on stranded-cost recovery and open access transmission, effective July 1996. The decision, reaffirmed by the FERC in its March and November 1997 orders, requires all electric utilities subject to the FERC's jurisdiction to file transmission tariffs which provide competitors with increased access to transmission facilities for wholesale transactions and also establishes information requirements for the transmission utility. The decision also provides utilities with the opportunity to recover stranded costs associated with existing wholesale customers, retail-turned- wholesale customers and retail wheeling when the state regulatory body does not have authority to address retail stranded costs. Even though the CPUC is currently addressing stranded-cost recovery through the CTC proceedings, the FERC has also asserted primary jurisdiction over the recovery of stranded costs associated with retial-turned-wholesale customers, such as a new municipal electric system or a municipal annexation. However, FERC did clarify that it does not intend to prevent or interfere with a state's authority and that it has discretion to defer to a state stranded-cost-calculation method. In January 1997, the FERC accepted the open access transmission tariff SCE filed in compliance with the April 1996 decision. The rates included in the tariff are being collected subject to refund. In May 1997, SCE filed a revised open access tariff to reflect the few revisions set forth in the March 1997 order. The open access transmission tariff will be terminated on the date the ISO begins operation. 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 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. page 12 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 in the section on Competitive Environment, 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. These decisions impact cost recovery and rate regulation beginning in January 1998, and implement new ratemaking mechanisms 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 received a 10% reduction from their June 10, 1996, rate levels beginning 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. Distribution Rates Distribution cost recovery is 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- PBR" section for additional discussion.) Transmission Rates Upon the commencement of the ISO and PX, transmission cost recovery will be under FERC authority. Until commencement of the ISO and PX, transmission cost recovery will be combined with distribution cost recovery through a T&D PBR. (See "California Electric Utility Restructuring--Rate-setting" and "FERC Restructuring Decision" above for additional discussion.) Nuclear Decommissioning and Public Purpose Program Rates Recovery of SCE's nuclear decommissioning costs and legislatively mandated public purpose program funding is 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 ISO and PX operations, generation costs will be subject to recovery through the market price and the CTC. page 13 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 total rates. This residual revenue will be first 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 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 by March 31, 2002, or when these costs are fully collected. (See "CTC" above for additional discussion.) 1991 Annual ECAC Application In 1991, SCE issued its QF reasonableness testimony for the period April 1, 1990, through March 31, 1991. The Office of Ratepayer Advocates' (ORA) report on QF reasonableness issues was issued in 1993. In its report, the ORA recommended that the CPUC disallow $1.5 million in power purchase expenses incurred as a result of purchases during the record period under a QF contract with Mojave Cogeneration Company, a nonutility generator. The ORA further alleged that ratepayers may be harmed in the amount of $31.6 million (1993 net present value) over the contract's 20-year life. SCE filed its rebuttal testimony on the contract in 1994. SCE and the ORA subsequently reached a settlement where SCE agreed to a one-time reduction to its ECAC balancing account of $14 million plus interest from January 1, 1996, to resolve the unreasonable action allegations by the ORA for 1991 and all subsequent record periods through the contract's 20-year life. On October 30, 1996, the CPUC issued a decision which would approve the settlement, subject to SCE and the ORA accepting certain conditions concerning the manner in which the $14 million payment would be reflected in rates. After reviewing the decision, SCE declined to accept the condition proposed by the CPUC. Hearings on the ORA's disallowance recommendations regarding the Mojave Cogeneration contract were held in June 1997. During the hearings, the ORA presented testimony to update its assessment of ratepayer harm, which it now assesses to be $45 million (1997 net present value) over the contract's life. On November 26, 1997, the assigned Administrative Law Judge (ALJ) issued a proposed decision (which is not binding on the CPUC) which would adopt ORA's imprudence allegations. On January 13, 1998, the assigned ALJ issued an order setting aside the proposed decision in order to accommodate SCE's request for an oral argument to a quorum of the Commissioners. Oral arguments were heard on February 4, 1998, at which time SCE requested an alternate proposed decision be issued. On March 11, 1998, the Assigned Commissioner issued an alternate proposed decision which recommends a disallowance of $46,000 for the record period and expected disallowances of $16.3 million over the life of the Mojave Cogeneration contract. The matter is currently scheduled for consideration at the CPUC's March 26, 1998 meeting. 1992 Annual ECAC Application SCE filed its QF reasonableness testimony in September 1992. In January 1996, the ORA released its report on QF reasonableness for the 1992 record period as well as for that portion of the 1991 record period concerning capacity truncation and energy deliveries at forecast rates. On February 17, 1998, the ORA submitted surrebuttal testimony. Hearings on the matter began on March 9 and concluded on March 17, 1998, subject to SCE's right to recall certain witnesses in rebuttal to ORA's witnesses. If SCE elects to recall such witnesses, the hearing will resume on April 1, 1998. An adverse decision for SCE on either or both issues could, under certain circumstances, have a material impact on SCE's financial position if the decision were extended to subsequent record periods. The ORA's surrebuttal testimony recommends a disallowance of $17.5 million associated with firm capacity truncation, $17.4 million for forecasted energy payments at forecast rates, and $43,000 for as-available capacity payments at forecast rates. These amounts encompass the 1991 and page 14 1992 periods, and exclude certain projects which have been deferred in this proceeding. 1993 Annual ECAC Application SCE filed its QF reasonableness testimony on September 1, 1993. On March 2, 1998, the ORA filed a combined report covering the QF reasonableness phases of SCE's ECAC applications for 1993-1995. In the report, the ORA recommends a disallowance of $5.6 million related to SCE's administration of a contract with the Arbutus wind project. No other reasonableness issues were identified in the report. SCE's rebuttal testimony is due on June 4, 1998, and hearings are scheduled for early August 1998. 1994 Annual ECAC Application SCE filed its QF reasonableness testimony and non-QF Reasonableness of Operations Report on May 27, 1994. The QF testimony reflects the reasonableness of execution of two new QF contracts and the reasonableness of SCE's administration of 393 QF contracts. The non-QF Report addresses power purchases and exchanges, and the operation of hydroelectric, coal, gas and nuclear resources for the period April 1, 1993, through March 31, 1994. The 1993, 1994 and 1995 QF issues will be joined for hearing. The non-QF issues were bifurcated with the gas procurement issues being separated from the 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. The 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 the ORA's motion to consolidate the 1994 and 1995 record periods for the limited purpose of addressing the gas reasonableness issues. Hearings on these issues began January 21, 1997, and were concluded on February 20, 1997. However, briefing was suspended by the ALJ at the request of the parties to facilitate settlement discussions. On July 11, 1997, the 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. page 15 On December 3, 1997, the CPUC issued a decision approving the Settlement between SCE and the ORA. On March 12, 1998, the CPUC issued a decision ordering SCE to refund $65 million. The Settlement has been fully reflected in SCE's financial statements. A discussion of the ORA's report in the QF reasonableness phase of this ECAC is set forth above in the discussion of the 1993 ECAC Application. 1995 Annual ECAC Application SCE filed its reasonableness of operations testimony on May 26, 1996. The QF reasonableness testimony reflects the reasonableness of settlement agreements with six QFs, the reasonableness of the Biogen Power I termination agreement, and the reasonableness of the SCE's administration of 414 QF contracts for the period April 1, 1994, through March 31, 1995. The 1993, 1994 and 1995 QF issues will be joined for hearing. The non-QF report addresses 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, the 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 that the issue of $5.2 million of nuclear fuel expenses associated with the NUEXCO Trading Corp. bankruptcy be held open for review. In written response to data requests, the ORA indicated it has withdrawn its concerns over the nuclear fuel expenses. Additionally, SCE and the ORA executed a stipulation on December 18, 1997, 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. A motion requesting approval of the SCE/ORA stipulation was filed with the CPUC in December 1997. The CPUC issued its decision approving the stipulation on February 19, 1998. On October 4, 1996, the ORA issued its report on SCE's Canadian gas procurement contracts discussed above. The report recommended a $37.6 million disallowance for the period April 1994 through March 1995. On October 17, 1996, the ALJ consolidated the gas reasonableness issues into the 1994 ECAC proceeding. The reasonableness of the Canadian gas procurement and transportation costs for the record period was resolved by the ORA/SCE settlement discussed above in the 1994 Annual ECAC Application. The Settlement has been fully reflected in SCE's financial statements. A discussion of the ORA's report in the QF reasonableness phase of this ECAC is set forth above in the discussion of the 1993 ECAC Application. 1996 Annual ECAC Application SCE filed its testimony on May 3, 1996, requesting a finding that its fuel and purchased power costs, including purchases from QFs recorded during the period April 1, 1995, through March 31, 1996, were reasonable. The QF reasonableness testimony supports the reasonableness of SCE's administration of 396 QF contracts, including the restructuring or buyout of certain contracts. The non-QF testimony supports the reasonableness of other power purchases and exchanges, and the operation of hydroelectric, coal, gas and nuclear resources. SCE requested and obtained an expedited finding of reasonableness by the CPUC for an agreement it signed with Portland General Electric (PGE), terminating a long-term power purchase contract. On December 9, 1996, the CPUC issued a decision finding the termination of the agreement reasonable. Additionally, as the final part in the approval process, PGE page 16 and SCE filed notices of cancellation of the agreement with the FERC to be effective December 31, 1996. The FERC has accepted the notices of cancellation. Review by the ORA of the non-QF operations has been consolidated with its review in the 1997 Annual ECAC Application. The ORA's report was issued' on August 18, 1997. (See "1997 Annual ECAC Application" below.) No date has been scheduled for the ORA's report on QF reasonableness. 1997 Annual ECAC Application On May 30, 1997, SCE filed its annual reasonableness report requesting that the CPUC find reasonable its fuel and purchased-power costs, including purchases from QFs recorded during the period of April 1, 1996, through March 31, 1997. The QF testimony supports the reasonableness of the SCE's administration of its QF contracts, including two QF settlements. The non-QF testimony supports the reasonableness of other power purchases and exchanges, fuel costs and the operation of hydro, coal, gas and nuclear resources. The ORA's review of the non-QF operations and costs has been consolidated with its review of the non-QF operations and costs in the 1996 ECAC Application. The ORA filed its report on August 18, 1997. In its report, the ORA recommended, among other things, (1) a disallowance of $360,000 associated with an outage at the coal-fired Four Corners Generating Station and (2) a $200,000 adjustment to the costs recorded in SCE's Catastrophic Events Memorandum Account. Hearings took place in January 1998. A CPUC decision is expected by July 1998. No date has been scheduled for the ORA's report on QF reasonableness. Palo Verde In January 1997, the CPUC authorized a further acceleration of the recovery of its 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 accelerated plant recovery, as well as 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 equally with ratepayers the net benefits received from operation of Palo Verde. Proposed New Accounting Standard During 1996, the Financial Accounting Standards Board issued an exposure draft, that would establish accounting standards for the recognition and measurement of closure and removal obligations. The exposure draft would require the estimated present value of an obligation to be recorded as a liability, along with a corresponding increase in the plant or regulatory asset accounts when the obligation is incurred. If the exposure draft is approved in its present form, it would affect SCE's accounting practices for decommissioning of its nuclear power plants, obligations for coal mine reclamation costs, and any other activities related to the closure or removal of long-lived assets. SCE does not expect that the accounting changes proposed in the exposure draft, even after deregulation, would have an adverse effect on its results of operations due to its current and expected future ability to recover these costs through customer rates. Fuel Supply and Purchased Power Costs Fuel and purchased-power costs were approximately $3.7 billion in 1997, an 11.9% increase over 1996. page 17 SCE's sources of energy during 1997 were: purchased power 49%; natural gas 16%; nuclear 17%; coal 12%; and hydro 6%. Average fuel costs, expressed in cents per kilowatt-hour, for the year ended December 31, 1997, were: oil, 8.53 cents; natural gas, 3.39 cents; nuclear, 0.48 cents; and coal, 1.32 cents. Natural Gas Supply As a result of the sale of 11 of its 12 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 the 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: Units 2 & 3 ----- Uranium concentrates(1) . . . . . . . . . . . . . 2003 Conversion . . . . . . . . . . . . . . . . . . . 2003 Enrichment . . . . . . . . . . . . . . . . . . . . 2003 Fabrication . . . . . . . . . . . . . . . . . . . 2005 Spent fuel storage(2). . . . . . . . . . . . . . . 2006/2006 _______________ (1) Assumes the San Onofre participants meet their supply obligations in a timely manner. (2) Assumes full utilization of expanded on-site storage capacity and normal operation of the units, including interpool transfers and maintaining full-core reserve. 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 defaulted on its obligation to begin acceptance of spent nuclear fuel from San Onofre. Dry cask storage either on-site or at another location will be required to permit continued operations beyond the date indicated above. 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 1998 from existing contracts. Contracts cover requirements to provide conversion through 2000, enrichment through 2002, and fabrication through 2016. Palo Verde on-site spent fuel storage capacity will accommodate needs through 2002 for Units 1 and 2, and through 2003 for Unit 3. Year 2000 Issue Many of SCE's existing computer systems identify a year by using only two digits instead of four. If not corrected, these programs could fail or create erroneous results when encountering dates in 2000 or later. This situation has been referred to generally as the Year 2000 Issue. SCE has developed plans and is addressing the programming changes that it has determined are necessary in order for its computer systems to function properly beginning in 2000. Remediation of SCE's key financial systems for the Year 2000 Issue was completed in 1997. SCE's informational and page 18 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. Preliminary estimates of the costs to complete these modifications, including the cost of new hardware and software application modifications, range from $55 million to $80 million, about half of which are expected to be capital costs. Current rate levels for providing electric service should be sufficient to provide funding for these modifications. Remediation of existing critical systems is expected to be 75% complete by the end of 1998. 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. 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. 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, 1997, 1996 and 1995, see Note 12 of Notes to Consolidated Financial Statements contained in Edison International's 1997 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. At December 31, 1997, EME subsidiaries held interests in 27 domestic and 24 international operating power production facilities with an aggregate power production capability of 7,418 MW, of which 5,180 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 1,922 MW, of which EME's anticipated share is approximately 887 MW, are in the construction stage. EME owns interests in oil and gas producing operations and related facilities in various U.S. locations. During the second quarter of 1997, EME completed the sale of its ownership interest in B.C. Star Partners for approximately $71 million. EME recorded an after-tax gain of approximately $14 million on the sale. 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. 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 the first half of 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%. page 19 Construction on the two-unit Paiton project is approximately 85% complete. 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 United States (U.S.) dollars. 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 with 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. A Presidential decree has deemed some power plants, but not including the Paiton project, subject to review, postponement or cancellation. EME continues to monitor the situation closely. 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. Additional projects under development in the Asia Pacific region include projects located in the Philippines and Thailand. 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 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 twenty-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 2 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 page 20 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. At December 31, 1997, EME had total consolidated assets of $5 billion and for the year then ended, had consolidated operating revenue of $975 million and consolidated net income of $115 million. 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 four 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. 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. Edison Capital: Edison Capital, primarily through its subsidiary corporations, is a provider of capital and financial services for energy and infrastructure projects domestically and abroad. Its investments include interests in nuclear power, cogeneration, electric transmission, waste-to-energy, hydroelectric, transportation, telecommunications, and affordable housing facilities. Since its inception in 1987, Edison Capital has invested in approximately 300 projects. In 1997, Edison Capital strengthened its presence in global energy and infrastructure markets by investing $356 million in the Netherlands, South Australia, and Latin America. Edison Capital acquired an interest in the new Eems Power Station, operated by EPON, the largest power generation company in the Netherlands. The investment in this cross-border lease transaction is approximately $188 million. Edison Capital also acquired an interest in the electric power transmission system for South Australia, investing $161 million in a cross-border lease of the system. page 21 Edison Capital's participation in the $1 billion AIG/GE Capital Latin American Infrastructure Fund has been very active since its formation in 1996. The fund has committed to investments in energy, telecommunications and transportation projects in Bolivia, Brazil, Mexico, Trinidad and Argentina. Edison Capital has also co-invested with the Latin Fund in a methanol production facility in Trinidad. Edison Capital also has entered into investment commitments for infrastructure projects in Scotland and Bolivia. In 1997, Edison Capital continued to expand its affordable housing portfolio with the investment of a record of $164 million in 63 projects. Edison Capital placed 41 projects in service, also a record high, and 70% more than in 1996, and has committed $217 million to 83 new projects to be placed in service in 1998 and 1999. The strength of Edison Capital's affordable housing portfolio was proven with the closing of five syndications of housing commitments to four major institutional investors. At year's end, Edison Capital's portfolio included 279 projects, totaling 20,714 units of housing. Edison Capital also acquired the John Stewart Company, a leading diversified management company specializing in affordable housing. By acquiring the John Stewart Company, Edison Capital will be able to expand the services it offers and draw upon the John Stewart Company's expertise to enhance Edison Capital's leadership in the affordable housing market. At December 31, 1997, Edison Capital had total consolidated assets of $1.8 billion and, for the year then ended, consolidated revenue of $138 million and net income of $60.8 million. Edison Capital competes regularly with other equity investors in the highly structured transaction market. These firms include money center banks, major finance and lease companies, affiliates of various public utilities and other Fortune 500 firms. Prior to the permanent extension of the low-income housing tax credits in 1993, competition in the affordable housing market was limited to several major corporations and public tax credit funds. Since the tax credits were permanently extended by Congress, competition for projects with tax credits increased significantly. Edison Capital plans to maintain market share by providing value added services to sponsors, working closely with both sponsors and lenders to facilitate the financing of projects, providing development loans to sponsors, and possibly developing projects on a limited basis. Mission Land Company: Mission Land is engaged, directly and through its subsidiaries, in the business of developing, owning and managing industrial parks and other real property investments. In 1997, Mission Land continued to implement 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. Mission Land is in the final stages of executing its plan to sell off most of its remaining assets. At December 31, 1997, Mission Land had total consolidated assets of $148 million and, for the year then ended, consolidated operating revenue of $106 million and net income of $0.9 million. 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 wholly owned subsidiaries are Edison EV, Edison Select, Edison Source, and Edison Utility Services. Edison EV: Edison EV is engaged in the business of providing services related to electric vehicles, including the distribution and installation of electric vehicle charging equipment. Edison EV has supplemented its existing alliances with General Motors and Saturn Corporation by forming page 22 ties to American Honda Motor Company, Toyota Motor Sales, Ford Motor Company, and to additional electric vehicle charging manufacturers, to serve electric vehicle customers nationwide. 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. By the end of 1997, Edison Select had signed up more than 60,000 customers for these new retail products and services. 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, will offer a diverse range of services to electric utilities in the U.S. and Canada, including billing, outage management, and transmission and distribution outsourcing. Item 2. Properties of SCE Existing Utility Generating Facilities SCE owns and operates 12 oil- and gas-fueled electric generating plants, one diesel-fueled generating plant, 38 hydroelectric plants and an undivided 75.05% interest (1,614 MW net) in Units 2 and 3 at San Onofre. SCE has signed agreements to sell 11 of its 12 oil- and gas-fueled generating plants, and expects those sales to close by March 31, 1998. SCE is also seeking to sell the twelfth plant. Any of the sold plants which remain in operation will continue to be operated by SCE for at least two years following the sale. These plants are located in Central and Southern California. Palo Verde (15.8% SCE-owned, 579 MW net) is located near Phoenix, Arizona. SCE owns a 48% undivided interest (754 MW) in Units 4 and 5 at the Four Corners Generating Station, a coal-fueled steam electric generating plant in New Mexico. Palo Verde and Four Corners are operated by other utilities. SCE operates and owns a 56% undivided interest (885 MW) in Mohave, which consists of two coal-fueled steam electric generating units in Clark County, Nevada. At year-end 1997, the existing SCE-owned generating capacity (summer effective rating) was comprised of approximately 65% gas, 15% nuclear, 11% coal, 8% hydroelectric and 1% 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 United States 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. With certain exceptions, major and certain minor hydroelectric projects with related reservoirs, currently having an effective operating capacity of 1,156 MW and located in whole or in part on lands of the U.S., are owned and operated by SCE under governmental licenses which expire at various times between 1997 and 2026. Such licenses impose numerous restrictions and obligations on SCE, including the right of the United page 23 States to acquire the project 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 referred to above with an aggregate effective operating capacity of 59.1 MW are pending. Annual licenses issued for all SCE projects, whose licenses have expired and are undergoing relicensing, will be renewed until the new licenses are issued. In 1997, SCE's peak demand was 19,118 MW, set on September 4, 1997. Total area system operating capacity of 21,511 MW was available to SCE at the time of the 1997 peak. 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 $2.8 billion principal amount was outstanding at December 31, 1997. 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, affects 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 United States 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. SCE Construction Program and Capital Expenditures Cash required by SCE for its capital expenditures totaled $685 million in 1997, $616 million in 1996 and $773 million in 1995. Construction expenditures for the 1998-2002 period are forecasted at $3.9 billion. In addition to cash required for construction expenditures for the next five years as discussed above, $2.8 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 2002 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. page 24 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. On January 10, 1996, the CPUC's decision for SCE's Test Year 1995 General Rate Case (GRC) rejected a settlement agreement proposed by SCE, SDG&E and the ORA in its original form, but proposed modifications to certain terms related and granted SCE the opportunity to accept the portion of the settlement agreement related to San Onofre Units 2 and 3 with the proposed modifications. The CPUC gave SCE 25 days to prepare a detailed proposal consistent with the policy adopted in SCE's 1995 GRC decision. On February 5, 1996, SCE filed a revised San Onofre Unit 2 and 3 proposal in which it accepted the modifications to certain settlement agreement terms as proposed by the CPUC. The CPUC adopted the revised proposal on April 10, 1996. Under this proposal, SCE would have recovered its remaining investment in San Onofre Units 2 and 3 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. Under Assembly Bill 1890, however, the recovery of the San Onofre remaining investment must 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 would pay a preset price for each kilowatt-hour of energy generated at San Onofre during the eight- year period. Assembly Bill 1890 allowed continuation of the incentive pricing plan through December 31, 2003, the end of the eight-year period. SCE was compensated for the incremental costs required for the continued operation of San Onofre Units 2 and 3 only with revenue earned through the incentive pricing plan. However, 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 is not generating power through future ECAC filings. SCE would also 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 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 the restructuring decision, the CPUC ordered SCE to file an application by March 29, 1996, requesting a new rate mechanism for its share of the Palo Verde units to be effective January 1, 1997. On February 29, 1996, SCE filed its Palo Verde Proposal Application requesting adoption of a new rate mechanism for Palo Verde consistent with the San Onofre Units 2 and 3 rate mechanism. On November 15, 1996, SCE, ORA and TURN, entered into a settlement agreement regarding SCE's Palo Verde Proposal Application. The settlement retained SCE's proposal to recover its remaining investment in the Palo Verde units by December 31, 2001, at a reduced rate of return of 7.35% consistent with AB 1890, but modified SCE's proposed Palo Verde rate mechanism. Instead of receiving a preset price for each kilowatt- hour of energy generated during that period, as proposed, 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 that case, SCE must demonstrate that the aggregate amount of the costs exceeding the forecast in that year are reasonable. In addition, if the page 25 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. The CPUC approved the settlement agreement on December 20, 1996. Beginning in 2002, power from Palo Verde Units 1, 2 and 3 will be sold at the then-current market prices with 50% of the benefits of such operation given to customers. Likewise, beginning in 2004, power from San Onofre Units 2 and 3 will be sold at the then-current market prices with 50% of the benefits of such operation given to customers. San Onofre Nuclear Generating Station In 1992, the CPUC approved a settlement agreement between SCE and the 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. The Units 2 and 3 steam generators have performed relatively well through the first 15 years of operation, with low rates of ongoing tube degradation. However, during the Unit 2 scheduled refueling and inspection outage, which was completed in Spring 1997, an increased rate of 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 rating capacity of the unit must be reduced. As a result of the increased degradation, a mid-cycle outage was conducted in February 1998 for Unit 2. The results of that outage are still being evaluated. 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. As a result, a mid- cycle outage is planned for early 1998. However, during Unit 2's Spring 1997 outage and the February 1998 mid-cycle outage, similar tube supports showed no signs of such erosion. Palo Verde Nuclear Generating Station On March 14, 1993, Arizona Public Service Company (APS), the operating agent for Palo Verde, manually shut down Unit 2 as a result of a steam generator tube leak. Unit 2 remained shut down and began its scheduled refueling outage on March 19, 1993. APS performed an extensive inspection of the Unit 2 steam generators prior to the unit's return to service on September 1, 1993. APS determined that intergranular attack/intergranular stress corrosion cracking was a major contributor to the tube leak. Subsequent inspections have revealed similar, though less severe, corrosion in the Unit 1 and Unit 3 steam generators. APS has taken, and indicates it will continue to take, remedial actions that it believes have slowed the rate of steam generator tube degradation in all three units. 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 it will be economically desirable to replace the Unit 2 steam generators, which have been most affected by tube cracking, in five to ten 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 page 26 could be higher, such that its share of this cost would be between $16 million and $30 million plus replacement power costs. Unanimous 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. 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. Currently, San Onofre Unit 1, which shut down in 1992, is expected to be stored until decommissioning begins at the other San Onofre units. Decommissioning is estimated to cost $2.1 billion in current-year dollars based on site- specific studies performed in 1993 for San Onofre and 1992 for 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 2013 at San Onofre and 2024 at Palo Verde. Decommissioning costs, which are accrued and recovered through non- bypassable customer rates over the terms of each nuclear facility's operating license, are recorded as a component of depreciation expense. Decommissioning expense was $154 million in 1997, $148 million in 1996 and $151 million in 1995. The accumulated provision for decommissioning was $1.1 billion at December 31, 1997, and $949 million at December 31, 1996. The estimated costs to decommission San Onofre Unit 1 ($280 million in 1993 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 $8.9 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 $79 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 $158 million per nuclear incident. However, it 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 $500 million has also been purchased in amounts greater than federal requirements. Additional insurance covers part of replacement power expenses during an page 27 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 $28 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. Such discussions are continuing and the stay of discovery has been extended by agreement of the parties. 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., 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 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 in the Supreme Court of the State of New York, Kings County, asserting general monetary claims in excess of $13 million under the construction turnkey agreement. Edison International believes that the outcome of this litigation will not have a material adverse effect on its financial position or results of operations. Southern California Edison Company Qualifying Facilities Litigation On May 20, 1993, four geothermal QFs filed a lawsuit against SCE in Los Angeles County Superior Court, claiming that SCE underpaid, and continues to underpay, the plaintiffs for energy. SCE denied the allegations in its response to the complaint. The action was brought on behalf of Vulcan/BN Geothermal Power Company, Elmore L.P., Del Ranch L.P. and Leathers L.P., each of which was partially owned by a subsidiary of EME (a subsidiary of Edison International) at the time of filing. In April 1996, EME's 50% share in these projects was sold to CalEnergy. In October 1994, plaintiffs submitted an amended complaint to the court to add causes of action for unfair competition and restraint of trade. In July 1995, after several motions to strike had been heard by the court, the plaintiffs served a fourth amended complaint, which omitted the previous claims based on alleged restraint of trade. The plaintiffs allege in the fourth amended complaint that past underpayments have totaled at least $21 million. In other court filings, plaintiffs contend that additional page 28 contract payments owing from the beginning of the alleged underpayments through the end of the contract term could total approximately $60 million. Plaintiffs also seek unspecified punitive damages and an injunction to enjoin SCE from "future" unfair competition. After SCE's motion to strike portions of the fourth amended complaint was denied, SCE filed an answer to the fourth amended complaint which denies its material allegations. On May 1, 1996, the parties entered into an agreement for a settlement of all claims in dispute. Pursuant to the agreement, the specific terms of which are confidential, a settlement amount has been paid and the parties have entered into mutual general releases, with respect to the period before January 1, 1996. SCE intends to seek recovery of this payment through rates. SCE has also agreed, subject to CPUC approval, to increase payments to plaintiffs for specified levels of energy deliveries for the period after December 31, 1995. Plaintiffs have reserved the right to continue the litigation with respect to the period after December 31, 1995, if CPUC approval is not obtained. On August 8, 1996, SCE filed its application with the CPUC for approval of the settlement as it pertains to the period after 1995. On December 20, 1996, the ORA filed a protest to the application. In its protest, the ORA requests that the CPUC not grant the application or, in the alternative, that the CPUC conduct hearings on the application. On January 17, 1997, SCE filed a reply to the ORA's request. On February 27, 1997, a prehearing conference was held, at which time SCE's application was set for hearing to start on April 23, 1997. This hearing date was subsequently vacated by the assigned administrative law judge due to ongoing discussions to resolve issues raised by the ORA's protest. As a result of those discussions, SCE and the ORA entered into a stipulation and agreement (Stipulation) effective July 11, 1997. In the Stipulation, the ORA agrees to withdraw its protest and support SCE's application in return for SCE's agreement that the cost recovery issues presented in the application may be transferred for a decision in SCE's 1992 ECAC proceeding, where related issues are currently pending. The Stipulation further provides for SCE and the ORA to file a joint motion for approval of the Stipulation. The motion was filed on September 25, 1997. In light of the Stipulation, plaintiffs and SCE have entered into two amendments to the May 1, 1996, settlement agreement. The first amendment provides for the post-1995 portion of the settlement to become effective through 1997 upon CPUC approval consistent with the Stipulation. The second amendment resulted in plaintiffs dismissing the lawsuit without prejudice pending final CPUC resolution of the issues raised by SCE's application. On December 16, 1997, the CPUC issued a decision which approves the application subject to the terms of the Stipulation. In light of this decision, SCE has supplemented its testimony in the 1992 ECAC proceeding to support its request to recover its costs of settlement. Hearings in the 1992 ECAC began on March 9, 1998, and are scheduled to conclude on approximately March 20, 1998. Wind Generators' Litigation Between January 1994 and October 1994, 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 allege SCE incorrectly interpreted contracts with the plaintiffs by limiting fixed energy payments to a single 10-year period rather than beginning a new 10-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 seek declaratory relief regarding the proper interpretation of the contracts. Plaintiffs allege a combined total of approximately $189 million in damages, which includes consequential damages claimed in seven of the eight lawsuits. On March 1, 1995, the court in the lead Los Angeles Superior Court case granted the plaintiffs' motion seeking summary adjudication that the contract language in question is not reasonably susceptible to SCE's position that there is only a single, 10-year period page 29 of fixed payments. Following the March 1 ruling, a ninth lawsuit was filed in the Los Angeles Superior Court raising claims similar to those alleged in the first eight. SCE subsequently responded to the complaint in the new lawsuit by denying its material allegations. On April 5, 1995, SCE filed a petition for Writ of Mandate, Prohibition or Other Appropriate Relief, requesting that the Court of Appeal of the State of California, Second Appellate District issue a writ directing the Los Angeles Superior Court to vacate its March 1 order granting summary adjudication. In a decision filed August 9, 1995, the Court of Appeal issued a writ directing that the order be overturned, and a new order be entered denying the motion. In light of the Court of Appeal decision in the lead Los Angeles case, a summary adjudication motion in the Kern County case was withdrawn. On March 25, 1996, pursuant to a court-approved stipulation, all but one of the cases were consolidated for trial in Los Angeles Superior Court. Shortly thereafter, on April 3, 1996, pursuant to stipulation of the parties, the Kern County case was ordered to be coordinated with the Los Angeles cases so that it too will be tried in Los Angeles. Trial of the consolidated cases, beginning with the lead case, commenced on March 10, 1997. The consolidated cases are to be tried one after another in bifurcated fashion with the liability phase of each and all of the cases to be tried before commencement of the damages phase, if applicable. Testimony and arguments in the liability phase of the lead case concluded on May 20, 1997. On July 7, 1997, the court issued a tentative decision which effectively would resolve all liability issues in the lead case in SCE's favor. A proposed Statement of Decision consistent with the conclusions in the tentative decision was submitted by SCE and argument on the same took place at a hearing on October 31, 1997. The hearing was not concluded at that time and further argument took place on November 17, 1997. On December 22, 1997, the judge ruled on the objections raised at the two hearings and ordered SCE to prepare a proposed Statement of Decision incorporating her ruling. SCE submitted this document to the court on January 13, 1998. At a hearing on February 4, 1998, the court, after considering additional objections to parts of the proposed order, directed SCE to prepare a further, revised order which would not materially change the court's previous, tentative rulings. This final statement of decision was filed on February 6, 1998. In addition, on February 20, 1998, the court entered a judgment against the lead Plaintiff. The court also scheduled another status and trial setting conference for April 2, 1998. Geothermal Generators' Litigation On June 9, 1997, SCE filed a complaint in Los Angeles Superior Court against another independent power producer of geothermal generation and five of its affiliated entities (collectively the "Defendants"). SCE alleges that in order to avoid power production plant shutdowns caused by excessive noncondensable gas in the geothermal field brine, the Defendants 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 Defendants of their obligations under their contracts and applicable law. The complaint seeks termination of the contracts and damages for excess power purchase payments made to the Defendants. The Defendants' motion to transfer venue to Inyo County Superior Court was granted on August 31, 1997. On December 19, 1997, SCE filed a second amended complaint in response to which the Defendants filed a motion to strike, which was argued and taken under submission by the court on March 13, 1998. The Defendants also filed a motion for summary judgment, set for hearing on March 19, 1998, asserting that SCE's claims are time-barred or were released in connection with the settlement of prior litigation among some of the Defendants and two of SCE's affiliates, Mission Power Engineering, and The Mission Group (the Mission Parties). SCE asserts that the earlier settlement does not bar the claims it is prosecuting in this matter and that these claims are page 30 not time-barred. SCE has filed its opposition to the motion for summary judgment and will shortly file a supplemental opposition to address certain additional matters raised by the Defendants. SCE has also filed a cross motion for summary adjudication with respect to the issues raised in Defendants' summary judgment motion. No hearing date has been scheduled for SCE's motion for summary adjudication. In addition, the Defendants have filed a motion to stay SCE's case pending resolution of certain technical issues by the Great Basin Air Quality Management District under the doctrine of primary jurisdiction. The motion was heard for hearing on March 13, 1998, and the matter was taken under submission at that time. The Defendants have also asserted various claims against SCE and the 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 Defendants in Inyo County Superior Court. Following a hearing on November 20, 1997, the court consolidated these actions for all purposes and ordered the Defendants to file a second amended cross-complaint. The second amended cross-complaint asserts nineteen causes of action against SCE, three of which are also asserted against the Mission Parties. Included are claims for declaratory relief; breach of the implied covenant of good faith and fair dealing; inducing breach of employee agreements; breach of contract; disparagement, and slander per se; injunctive relief and restitution for unfair business practices; anticipatory breach of contract; violation of Public Utilities Code Sections 453, 707 and 2106; and negligent and intentional misrepresentation. Several of these claims are premised on the theory that SCE has incorrectly interpreted the cross- complainants' contracts as providing for only a single "fixed price" period in view of the fact that the cross-complainants developed their projects in phases. This theory has also been asserted by other independent power producers in litigation pending in Los Angeles Superior Court. (See, "Wind Generation Litigation" above.) SCE filed a demurrer to, and a motion to strike, in response to the second amended cross- complaint, both of which were argued on March 13, 1998, and taken under submission by the court. Based on the common issues asserted in the Wind Generation Litigation and the Defendants' second amended cross-complaint, SCE filed a petition to coordinate the consolidated actions pending in Inyo County Superior Court with the Wind Generation Litigation pending in Los Angeles Superior Court. In connection with the petition to coordinate, SCE has also applied for a stay of all proceedings in Inyo County. Both the petition to coordinate and the application for stay will be decided by the judge presiding in the Wind Generation Litigation. A hearing has been scheduled with respect to both SCE's petition to coordinate and the application for stay on March 30, 1998. Discovery is at a very preliminary stage, and it is reasonable to anticipate that there will be further amendments to the pleadings. 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 three lawsuits alleging that various plaintiffs developed cancer as a result of exposure to EMF from SCE facilities. SCE denied the material allegations in its responses to each of these lawsuits. The first lawsuit was filed in Orange County Superior Court and served on SCE in June 1994. There are five named plaintiffs and six named defendants, including SCE. Three of the five plaintiffs are presently or were formerly employed by Grubb & Ellis, a real estate brokerage firm with page 31 offices located in a commercial building known as the Koll Center in Newport Beach. Two of the named plaintiffs are spouses of the other plaintiffs. Grubb & Ellis and the owners and developers of the Koll Center are also named as defendants in the lawsuit. This lawsuit alleges, among other things, that the three plaintiffs employed by Grubb & Ellis developed various forms of cancer as a result of exposure to EMF from electrical facilities owned by SCE and/or the other defendants located on Koll Center property. No specific damage amounts are alleged in the complaint, but supplemental documentation prepared by the plaintiffs indicates that plaintiffs allege compensatory damages of approximately $8 million, plus unspecified punitive damages. In December 1995, the court granted SCE's motion for summary judgment and dismissed the case. Plaintiffs have filed a Notice of Appeal. Briefs have been submitted but no date for oral argument has been set. A second lawsuit was filed in Orange County Superior Court and served on SCE in January 1995. This lawsuit arises out of the same fact situation as the June 1994 lawsuit described above and involves the same defendants. There are four named plaintiffs, two of whom were formerly employed by Grubb & Ellis and now allegedly have various forms of cancer. The other two plaintiffs are the spouses of those two individuals. No specific damage amounts are alleged in the complaint, but supplemental documentation prepared by the plaintiffs indicates that plaintiffs will allege compensatory damages of approximately $13.5 million, plus unspecified punitive damages. On April 18, 1995, Grubb & Ellis filed a cross-complaint against the other co-defendants, requesting indemnification and declaratory relief concerning the rights and responsibilities of the parties. Although stayed for a time pending appellate review of sanctions imposed against plaintiffs' attorneys by the trial court, the case has been remanded back to the trial court following the Court of Appeal's decision modifying the sanctions order. To date, no further proceedings have been scheduled. A third case was filed in Orange County Superior Court and served on SCE in March 1995. The plaintiff alleges, among other things, that he developed cancer as a result of EMF emitted from SCE distribution lines which he alleges were not constructed in accordance with CPUC standards. No specific damage amounts are alleged in the complaint but supplemental documentation prepared by the plaintiff indicates that plaintiff will allege compensatory damages of approximately $5.5 million, plus unspecified punitive damages. No trial date has been set in this case. San Onofre Personal Injury Litigation An SCE engineer employed at San Onofre died in 1991 from cancer of the abdomen. On February 6, 1995, his children sued SCE and SDG&E, as well as Combustion Engineering, the manufacturer of the fuel rods for the plant, in the U.S. District Court for the Southern District of California. Plaintiffs alleged that the former employee's illness resulted from, and was aggravated by, exposure to radiation at San Onofre, including contact with radioactive fuel particles released from failed fuel rods. Plaintiffs sought unspecified compensatory and punitive damages. On April 3, 1995, the court granted the defendants' motion to dismiss 14 of the plaintiffs' 15 claims. SCE's April 20, 1995, answer to the complaint denied all material allegations. On October 10, 1995, the court granted plaintiffs' motion to include the Institute of Nuclear Power Operations (an organization dedicated to achieving excellence in nuclear power operations) as a defendant in the suit. On December 7, 1995, the court granted SCE's motion for summary judgment on the sole outstanding claim against it, basing the ruling on the worker's compensation system being the exclusive remedy for the claim. Plaintiffs have appealed this ruling to the Ninth Circuit Court of Appeals. Oral argument on the appeal took place on December 4, 1997, and the matter is now under submission. All trial court proceedings have been stayed pending the ruling of the Court of Appeals. The impact on SCE, if any, from further proceedings in this case against the remaining defendants cannot be determined at this time. page 32 On July 5, 1995, a former SCE reactor operator and his wife sued SCE and SDG&E in the U.S. District Court for the Southern District of California. Plaintiffs also named Combustion Engineering, the manufacturer of the fuel rods for the plant, and the Institute of Nuclear Power Operations as defendants. The former employee died of leukemia shortly after the complaint was filed. Plaintiffs allege that the former operator's illness resulted from, and was aggravated by, exposure to radiation at San Onofre, including contact with radioactive fuel particles released from failed fuel rods. Plaintiffs seek unspecified compensatory and punitive damages. On November 22, 1995, the complaint was amended to allege wrongful death and added the former employee's two children as plaintiffs. On December 22, 1995, SCE filed a motion to dismiss or, in the alternative, for summary judgment based on worker's compensation exclusivity. On March 25, 1996, the court granted SCE's motion for summary judgment. Plaintiffs have appealed this ruling to the Ninth Circuit Court of Appeals. Oral argument on the appeal took place on December 4, 1997, and the matter is now under submission. All trial court proceedings have been stayed pending the ruling of the Court of Appeals in this case and in the case described in the above paragraph. The impact on SCE, if any, from further proceedings in this case against the remaining defendants cannot be determined at this time. 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, the manufacturer of fuel rods for the plant, and the Institute of Nuclear Power Operations as defendants. The security officer worked for a contractor in 1982, worked for SCE as a temporary employee (1982-1984), and later worked as an SCE security supervisor (1984-1994). The officer died of leukemia in 1994. Plaintiffs allege that the former officer's illness resulted from, and was aggravated by, his exposure to radiation at San Onofre, including contact with radioactive fuel particles released from failed fuel rods. Plaintiffs seek unspecified compensatory and punitive damages. SCE's November 13, 1995, answer to the complaint denied all material allegations. All trial court proceedings have been stayed pending the rulings of the Court of Appeals in the cases described in the above two paragraphs. 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 manufacturer of the fuel rods for the San Onofre plant. The employee worked for SCE at San Onofre from 1981 to 1990. Plaintiffs alleged that the employee transported radioactive byproducts on his person, clothing and/or tools to his home where his wife was then exposed to radiation that caused her leukemia. Plaintiffs seek unspecified compensatory and punitive damages. SCE's December 19, 1995, partial answer to the complaint denied all material non-employment related allegations. SCE's motion to dismiss the employee's employment related allegations based on worker's compensation exclusivity was granted on March 19, 1996. The employee's wife died on August 15, 1996. On September 20, 1996, the complaint was amended to allege wrongful death and to add the employee's two children as plaintiffs. SCE's motion for summary judgment was denied on April 9, 1997. The trial in this case took place over approximately 22 days between January and March 1998 and resulted in a jury verdict for both defendants. It is not known whether plaintiffs will move for a new trial and/or appeal. 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, the manufacturer of the fuel rods for the San Onofre plant. Plaintiffs allege that the former contract worker transported radioactive byproducts on her person and clothing to her home where her son was then exposed to radiation that caused his leukemia. Plaintiffs seek unspecified compensatory and punitive damages. SCE's January 2, 1996, answer denied all material allegations. On August 12, 1996, the Court dismissed the page 33 claims of the former worker and her husband with prejudice. This case is expected to go to trial in mid-1998, after completion of the trial court proceedings in the case described in the preceding paragraph. 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 contract worker was an ironworker at San Onofre during a portion of 1995. The suit alleges that SCE allowed dangerous conditions to exist at San Onofre, causing him to sustain unspecified personal injuries. His wife alleges loss of consortium and other general damages. The case has been removed to the U.S. District Court for the Southern District of California. SCE filed a motion on January 6, 1998, asking that the case be converted to a Price-Anderson cause of action. Oil Pipeline Litigation On November 1, 1996, plaintiff, a crude oil pipeline company, filed a lawsuit against SCE and the City of Los Angeles (the City) in the United States District Court for the Central District of California claiming that SCE and the City had interfered with its attempt to construct a proposed 132-mile oil pipeline (Pacific Pipeline) designed to transport oil from the San Joaquin Valley and Santa Barbara to the Los Angeles refineries. Plaintiff alleges, among other things, that SCE and the City wrongfully initiated administrative and other legal proceedings in an attempt to derail and obstruct the construction of the Pacific Pipeline. Plaintiff alleges that these acts constitute unfair competition, tortious interference with economic advantage and violate state and federal antitrust laws. Plaintiff further claims that because of the alleged delays, it could suffer losses in excess of $300 million. Additionally, plaintiff seeks treble and punitive damages. On June 30, 1997, SCE filed an answer to the complaint denying the substantive allegations and raising appropriate defenses. Plaintiff and SCE reached a settlement of this dispute for nonmonetary compensation. An agreement to dismiss the lawsuit was filed with the court on February 8, 1998. False Claims Act Litigation In September 1997, SCE became aware of a complaint filed in the Southern District of the U.S. District Court of California by a San Onofre employee, acting at his own initiative on behalf of the United States under the False Claims Act, against SCE and SDG&E. The complaint alleges that SCE and SDG&E have submitted fraudulent claims to the United States government, the State of California and their customers resulting in $491 million in overpayments ($383 million of which is attributed to SCE). The employee alleges that SCE and SDG&E provided the CPUC with data which inflated projected costs at San Onofre while minimizing projected revenue, resulting in the CPUC setting inflated rates. The amount sought in this complaint is subject to trebling, plus civil penalties of $10,000 per false claim submitted for payment (for an unspecified number of claims). SCE and SDG&E filed separate motions to dismiss this lawsuit on November 6, 1997. The employee responded to both motions on December 20, 1997. SCE and SDG&E replied to the employee's response on January 13, 1998. Oral argument on the motion to dismiss was heard on January 20, 1998, and the court has the matter under submission. Mohave Generating Station Environmental Litigation On February 19, 1998, the Sierra Club and the Grand Canyon Trust filed suit against SCE. Mohave is operated by SCE, and SCE is one of several co-owners. The lawsuit alleges that Mohave has been violating various provisions of the Clean Air Act, the Nevada state implementation plan, 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 Clean Air Act, the maximum civil penalty obtainable is $25,000 per day of violation. page 34 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 December Executive Officer 31, 1997 Company Position Effective Date - ----------------- --------------- ---------------- -------------- John E. Bryson 54 Chairman of the Board, Chief October 1, 1990 Executive Officer and Director Bryant C. Danner 60 Executive Vice President June 1, 1995 and General Counsel Alan J. Fohrer 47 Executive Vice President and September 1, 1996 Chief Financial Officer Theodore F. Craver, Jr. 46 Senior Vice President and February 18, 1998 Treasurer William J. Heller 41 Senior Vice President, January 1, 1996 Strategic Planning and New Business Development Robert G. Foster 50 Senior Vice President, November 21, 1996 Public Affairs Richard K. Bushey 57 Vice President and July 21, 1988 Controller Thomas J. Higgins 52 Vice President, January 1, 1996 Corporate Communications Beverly P. Ryder 47 Corporate Secretary January 1, 1996
__________ (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. 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., 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: page 35
Bryant C. Danner Senior Vice President and July 1992 to May 1995 General Counsel of Edison International and SCE Alan J. Fohrer Executive Vice President, February 1996 to August 1996 Chief Financial Officer and Treasurer of SCE Executive Vice President and May 1995 to January 1996 Chief Financial Officer of SCE Executive Vice President, Chief May 1995 to August 1996 Financial Officer and Treasurer of Edison International Senior Vice President, Chief Financial January 1993 to April 1995 Officer and Treasurer of Edison International Senior Vice President and Chief January 1993 to April 1995 Financial Officer of SCE Vice President, Chief Financial April 1991 to January 1993 Officer and Treasurer of Edison International and SCE Theodore F. Craver, Jr. Vice President and Treasurer of Edison September 1996 to February 1998 International and SCE Executive Vice President and September 1990 to August 1996 Corporate Officer, First Interstate Bancorp(4) William J. Heller Partner, Management Consulting August 1982 to December 1995 firm of McKinsey and Company(1)(4) Robert G. Foster Vice President, Public Affairs of January 1996 to October 1996 Edison International Vice President, Public Affairs of SCE November 1993 to October 1996 Regional Vice President of SCE January 1988 to October 1993 Thomas J. Higgins Vice President, Corporate Communications April 1995 to January 1996 of SCE President, The Laurel January 1994 to December 1994 Company(2)(4) Senior Vice President of Blue October 1990 to December 1993 Cross/Blue Shield of Maryland(4) Beverly P. Ryder Special Assistant to the Chairman May 1995 to December 1995 of Edison International and SCE Director, Strategic Alliances, October 1993 to April 1995 EnvestSCE(3) General Manager, Customer Solutions June 1992 to September 1993
______________ (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 a division of SCE. (4) This entity is not a parent, subsidiary or other affiliate of Edison International. page 36
SCE Age at December Effective Executive Officer(1) 31, 1997 Company Position Date - ----------------- -------- ---------------- --------- John E. Bryson 54 Chairman of the Board, October 1, 1990 Chief Executive Officer and Director Stephen E. Frank 56 President, Chief Operating June 19, 1995 Officer and Director Bryant C. Danner 60 Executive Vice President June 1, 1995 and General Counsel Alan J. Fohrer 47 Executive Vice President and September 1, 1996 Chief Financial Officer Harold B. Ray 57 Executive Vice President, June 1, 1995 Generation Business Unit Theodore F. Craver, Jr. 46 Senior Vice President and Treasurer February 18, 1998 John R. Fielder 52 Senior Vice President, Regulatory February 18, 1998 Policy and Affairs Robert G. Foster 50 Senior Vice President, November 21, 1996 Public Affairs Richard M. Rosenblum 47 Senior Vice President, February 18, 1998 T&D Wires Business Unit Pamela A. Bass 50 Vice President, Customer June 1, 1996 Solutions Business Unit Richard K. Bushey 57 Vice President and Controller January 1, 1984 Bruce C. Foster 45 Vice President, San Francisco January 1, 1995 Regulatory Affairs Thomas J. Higgins 52 Vice President, Corporate April 1, 1995 Communications Beverly P. Ryder 47 Corporate Secretary January 1, 1996
______________ (1) Executive 0fficers, Bryson, Danner, Fohrer, Craver, Robert Foster, Bushey, Higgins, and Ryder hold the same positions with 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., Bruce C. Foster, Thomas J. Higgins, and Beverly P. Ryder. Those officers who have not held their present position for the past five years had the following business experience:
Stephen E. Frank President and Chief Operating Officer, August 1990 to January 1995 Florida Power and Light Company(1) Bryant C. Danner Senior Vice President and July 1992 to May 1995 General Counsel of Edison International and SCE page 37 Alan J. Fohrer Executive Vice President, Chief February 1996 to August 1996 Financial Officer and Treasurer of SCE Executive Vice President and May 1995 to January 1996 Chief Financial Officer of SCE Executive Vice President, Chief May 1995 to August 1996 Financial Officer and Treasurer of Edison International Senior Vice President, Chief January 1993 to April 1995 Financial Officer and Treasurer of Edison International Senior Vice President and Chief January 1993 to April 1995 Financial Officer of SCE Vice President, Chief Financial April 1991 to January 1993 Officer and Treasurer of Edison International and SCE Harold B. Ray Senior Vice President, Power Systems June 1990 to May 1995 Theodore F. Craver, Jr. Vice President and Treasurer, SCE September 1996 to February 1998 Executive Vice President and Corporate September 1990 to August 1996 Treasurer, First Interstate Bancorp(1) John R. Fielder Vice President, Regulatory Policy February 1992 to January 1998 and Public Affairs Robert G. Foster Vice President, Public Affairs November 1993 to January 1996 Regional Vice President, Sacramento January 1988 to October 1993 Office Richard M. Rosenblum Vice President, Distribution January 1996 to January 1998 Business Unit Vice President, Nuclear Engineering June 1993 to December 1995 and Technical Services Manager of Nuclear Regulatory Affairs June 1989 to May 1993 Bruce C. Foster Regional Vice President, San Francisco January 1992 to December 1994 Office Thomas J. Higgins Vice President, Corporate Communications April 1995 to January 1996 President, The Laurel Company(1)(2) January 1994 to December 1994 Senior Vice President of Blue October 1990 to December 1993 Cross/Blue Shield of Maryland(3) Beverly P. Ryder Special Assistant to the Chairman May 1995 to December 1995 of Edison International and SCE Director, Strategic Alliances, October 1993 to April 1995 EnvestSCE(3) General Manager, Customer Solutions June 1992 to September 1993
______________ (1) This entity is not a parent, subsidiary or other affiliate of SCE. (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 a division of SCE.
The Nonutility Companies Age at December Executive Officer 31, 1997 Company Position Effective Date - ----------------- --------------- ---------------- -------------- Alan J. Fohrer 47 Vice Chairman of the Board, May 20, 1993 Edison Mission Energy Edward R. Muller 45 President and Chief Executive August 23, 1993 Officer, Edison Mission Energy Robert M. Edgell 50 Executive Vice President, April 1, 1988 Edison Mission Energy page 38 Thomas R. McDaniel 48 President and Chief Executive March 1, 1992 Officer, Edison Capital President and Chief Executive September 1, 1987 Officer, Mission Land Company Stephen E. Pazian 48 President and Chief Executive June 19, 1997 Officer, Edison Enterprises Chairman and Chief Executive June 19, 1997 Officer, Edison Source and Edison Select Chairman, Edison EV May 1, 1997
______________ 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 Edward R. Muller and Stephen E. Pazian. Those officers who have not held their present position for the past five years had the following business experience:
Alan J. Fohrer Executive Vice President and February 1996 to August 1996 Chief Financial Officer and Treasurer of SCE Executive Vice President and May 1995 to January 1996 Chief Financial Officer of SCE Executive Vice President, Chief May 1996 to August 1996 Financial Officer and Treasurer of Edison International Senior Vice President, Chief January 1993 to May 1995 Financial Officer and Treasurer of Edison International Senior Vice President and Chief January 1993 to May 1995 Financial Officer of SCE Vice President, Chief Financial April 1991 to January 1993 Officer and Treasurer of Edison International and SCE Edward R. Muller Vice President, Chief October 1992 to August 1993 Financial Officer, General Counsel and Secretary, Whittaker Corporation(1)(3) Vice President, Secretary and October 1991 to August 1993 General Counsel of Biowhittaker, Inc.(2)(3) Thomas R. McDaniel President and Chief Executive Officer, August 1987 to March 1992 Edison Capital Stephen E. Pazian President and Chief Executive May 1997 to June 1997 Officer, Edison Source President, Ameritech Security Monitoring(3) January 1996 to April 1997 President and Chief Executive Officer, April 1989 to December 1995 BellSouth MobileComm(3)
______________ (1) During the period Edward R. Muller served as an officer of Whittaker Corporation, the Company was involved in various aerospace, chemical and biotechnology businesses. (2) During the period Edward R. Muller served as an officer of Biowhittaker, Inc., the company was engaged in the development, manufacture, and marketing of cell culture, endotoxin detection and clinical diagnostic testing products. (3) This entity is not a parent, subsidiary or other affiliate of Edison International. page 39 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, 1997, ("Annual Report") under "Quarterly Financial Data" on page 33 and under "Shareholder Information" on page 57, 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, 1998. 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: 1993-1997" on page 56, 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 23 through 33 and is incorporated herein by reference pursuant 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 page 33 under "Quarterly Financial Data," and on pages 35, 36, 37, 38, and 39 through 53 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 16, 1998, under the heading, "Election of Directors of Edison International and SCE" on pages 3 through 6 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 22, and is incorporated herein by reference pursuant to General Instruction G(3). 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 9 through 20, 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 7 through 10 and "Stock Ownership page 40 of Certain Shareholders" on page 31, 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 pages 22 through 25, 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 23 through 53, 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, 1997, 1996 and 1995 Consolidated Balance Sheets -- December 31, 1997, and 1996 Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Retained Earnings -- Years Ended December 31, 1997, 1996 and 1995 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 42 Schedule I--Condensed Financial Information of Parent 43 Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 45 Schedules I through V, inclusive, except those referred to above, are omitted as not required or not applicable. (3) Exhibits See Exhibit Index on page 49 of this report. (b) Reports on Form 8-K December 8, 1997 Item 5: Other Events: Sale of Southern California Edison Company's 10 Gas-fired Generating Plants December 17, 1997 Item 5: Other Events: Rate Reduction Bonds Sold February 13, 1998 Item 5: Other Events: Sale of Southern California Edison Company's Long Beach Gas-fired Generating Plant page 41 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 1997 Annual Report to Shareholders of Edison International incorporated by reference in this Form 10-K, and have issued our report thereon dated January 30, 1998. 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 January 30, 1998 page 42 Edison International SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF PARENT CONDENSED BALANCE SHEETS
December 31, ---------------------------- 1997 1996 ---------- ---------- (In thousands) Assets: Cash and equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 273,603 $ 34,689 Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,969 125,820 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 411,572 160,509 Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 5,128,793 6,552,631 Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 209 ---------- ---------- Total assets $5,540,709 $6,713,349 ========== ========== Liabilities and Shareholders' Equity: Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,536 $ 1,877 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 99,020 313,029 ---------- ---------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 101,556 314,906 Other deferred credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,296 1,211 Common shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 5,436,857 6,397,232 ---------- ---------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . $5,540,709 $6,713,349 ========== ==========
CONDENSED STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 -------- -------- -------- (In thousands, except per-share amounts) Operating revenue and other income. . . . . . . . . . . . . . . $ 38,648 $ 29,539 $ 19,408 Operating expenses and interest expense . . . . . . . . . . . . 65,262 42,908 26,741 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------- -------- -------- Loss before equity in earnings of subsidiaries. . . . . . . . (26,614) (13,369) (7,333) Equity in earnings of subsidiaries. . . . . . . . . . . . . . . 726,470 730,117 746,469 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . $699,856 $716,748 $739,136 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ======== ======== ======== Weighted-average shares of common stock outstanding . . . . . . 400,396 437,335 446,159 Basic earnings per share. . . . . . . . . . . . . . . . . . . . $ 1.75 $ 1.64 $ 1.66 Diluted earnings per share. . . . . . . . . . . . . . . . . . . $ 1.73 $ 1.63 $ 1.65
page 43 Edison International SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF PARENT (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ------- --------- --------- (In thousands) Cash Flows From Operating Activities $(19,894) $ 58,901 $(24,935) -------- -------- -------- Cash Flows From Financing Activities 258,920 (54,150) 299,703 -------- -------- -------- Cash Flows From Investing Activities (112) (102) (333,058) -------- -------- -------- Increase (Decrease) in cash and equivalents 238,914 4,649 ( 58,290) Cash and equivalents at beginning of period 34,689 30,040 88,330 -------- -------- -------- Cash and Equivalents at the End of Period $273,603 $ 34,689 $ 30,040 ======== ======== ======== Cash dividends received from Southern California Edison Company $841,230 $765,199 $521,720 ======== ======== ========
page 44 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: Geothermal projects reserves $ 22,002 $ -- $ -- $ -- $ 22,002 Projects in development stage 60,094 -- -- -- 60,094 Uncollectible accounts Customers 24,466 20,826 -- 20,767 24,525 All other 24,189 24,570 -- 661 48,098 -------- -------- ------- -------- -------- Total $130,751 $ 45,396 $ -- $ 21,428(a) $154,719 ======== ======== ======= ======== ======== 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. page 45 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: Geothermal projects reserves $127,089 $ 8,500 $ 11,000(a) $124,587 $ 22,002 Projects in development stage 52,153 16,956(b) -- 9,015 60,094 Uncollectible accounts Customers 22,712 21,831 - 20,077(c) 24,466 All other 13,013 15,376 - 4,200(c) 24,189 -------- ------- -------- -------- -------- Total $214,967 $62,663 $ 11,000 $157,879 $130,751 ======== ======= ======== ======== ======== Group B: DOE Decontamination and Decommissioning $ 52,742 $ -- $ 1,468(d) $ 5,421(e) $ 48,789 Purchased-power settlement -- -- 107,700(f) 107,700 Pension and benefits 196,662 8,547 21,869(g) 46,151(h) 180,927 Insurance, casualty and other 94,788 59,123 -- 67,402(i) 86,509 -------- -------- -------- -------- -------- Total $344,192 $67,670 $131,037 $118,974 $423,925 ======== ======== ======== ======== ========
________________ (a) Charged to operating revenue. (b) Includes Environmental Reserve of $3.0 million. (c) Accounts written off, net. (d) Represents revision to estimate based on actual billings. (e) Represents amounts paid (f) Represents payments to be made under agreement to terminate a purchased- power contract. (g) Primarily represents transfers from the accrued paid absence allowance account for required additions to the comprehensive disability plan accounts. (h) Includes pension payments to retired employees, amounts paid to active employees during periods of illness and the funding of certain pension benefits. (i) Amounts charged to operations that were not covered by insurance. page 46 Edison International SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Year Ended December 31, 1995
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: Nonrecognition of geothermal earnings $ 40,094 $ -- $34,595(a) $ -- $ 74,689 Geothermal projects 52,400 -- -- -- 52,400 Projects in development stage 24,114 29,305 -- 1,266(b) 52,153 Uncollectible accounts -- Customers 21,609 22,279 -- 21,176(c) 22,712 All other 34,079 801 -- 21,867(c) 13,013 -------- -------- ------- -------- -------- Total $172,296 $ 52,385 $34,595 $ 44,309 $214,967 ======== ======== ======= ======== ======== Group B: DOE Decontamination and Decommissioning $ 56,485 $ -- $ 1,531(d) $ 5,274(e) $ 52,742 Pension and benefits 174,851 42,805 23,676(f) 44,670(g) 196,662 Insurance, casualty and other 79,727 74,751 -- 59,690(h) 94,788 -------- -------- ------- -------- -------- Total $311,063 $117,556 $25,207 $109,634 $344,192 ======== ======== ======= ======== ========
________________ (a) Charged to operating revenue. (b) Accounts written off. (c) Accounts written off, net. (d) Represents new estimate based on actual billings. (e) Represents amounts paid. (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. page 47 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, 1998 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, 1998 Chief Executive Officer and Director Principal Financial Officer: Alan J. Fohrer* Executive Vice President, Chief Financial Officer March 24, 1998 Controller or Principal Accounting Officer: Richard K. Bushey* Vice President and March 24, 1998 Controller Board of Directors: Winston H. Chen* Director March 24, 1998 Warren Christopher* Director March 24, 1998 Stephen E. Frank* Director March 24, 1998 Camilla C. Frost* Director March 24, 1998 Joan C. Hanley* Director March 24, 1998 Carl F. Huntsinger* Director March 24, 1998 Charles D. Miller* Director March 24, 1998 Luis G. Nogales* Director March 24, 1998 Ronald L. Olson* Director March 24, 1998 J. J. Pinola* Director March 24, 1998 James M. Rosser* Director March 24, 1998 E. L. Shannon, Jr.* Director March 24, 1998 Robert H. Smith* Director March 24, 1998 Thomas C. Sutton* Director March 24, 1998 Daniel M. Tellep* Director March 24, 1998 James D. Watkins* Director March 24, 1998 Edward Zapanta* Director March 24, 1998
*By Kenneth S. Stewart - ----------------------------------------- Kenneth S. Stewart Assistant General Counsel page 48 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 3.1 Restated Articles of Incorporation as amended through April 25, 1988 (Registration No. 33-19541)* 3.2 Certificate of Amendment of Restated Articles of Incorporation of SCEcorp (Registration No 33-37381)* 3.3 Bylaws as adopted by the Board of Directors on January 1, 1998 4.1 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 Second Supplemental Indenture, dated as of April 25, 1935 (Registration No. 2-1472)* 4.4 Third Supplemental Indenture, dated as of June 24, 1935 (Registration No. 2-1602)* 4.5 Fourth Supplemental Indenture, dated as of September 1, 1935 (Registration No. 2-4522)* 4.6 Fifth Supplemental Indenture, dated as of August 15, 1939 (Registration No. 2-4522)* 4.7 Sixth Supplemental Indenture, dated as of September 1, 1940 (Registration No. 2-4522)* 4.8 Seventh Supplemental Indenture, dated as of January 15, 1948 (Registration No. 2-7369)* 4.9 Eighth Supplemental Indenture, dated as of August 15, 1948 (Registration No. 2-7610)* 4.10 Ninth Supplemental Indenture, dated as of February 15, 1951 (Registration No. 2-8781)* 4.11 Tenth Supplemental Indenture, dated as of August 15, 1951 (Registration No. 2-7968)* 4.12 Eleventh Supplemental Indenture, dated as of August 15, 1953 (Registration No. 2-10396)* 4.13 Twelfth Supplemental Indenture, dated as of August 15, 1954 (Registration No. 2-11049)* 4.14 Thirteenth Supplemental Indenture, dated as of April 15, 1956 (Registration No. 2-12341)* 4.15 Fourteenth Supplemental Indenture, dated as of February 15, 1957 (Registration No. 2-13030)* 4.16 Fifteenth Supplemental Indenture, dated as of July 1, 1957 (Registration No. 2-13418)* 4.17 Sixteenth Supplemental Indenture, dated as of August 15, 1957 (Registration No. 2-13516)* 4.18 Seventeenth Supplemental Indenture, dated as of August 15, 1958 (Registration No. 2-14285)* 4.19 Eighteenth Supplemental Indenture, dated as of January 15, 1960 (Registration No. 2-15906)* 4.20 Nineteenth Supplemental Indenture, dated as of August 15, 1960 (Registration No. 2-16820)* 4.21 Twentieth Supplemental Indenture, dated as of April 1, 1961 (Registration No. 2-17668)* 4.22 Twenty-First Supplemental Indenture, dated as of May 1, 1962 (Registration No. 2-20221)* 4.23 Twenty-Second Supplemental Indenture, dated as of October 15, 1962 (Registration No. 2-20791)* 4.24 Twenty-Third Supplemental Indenture, dated as of May 15, 1963 (Registration No. 2-21346)* page 49 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 4.25 Twenty-Fourth Supplemental Indenture, dated as of February 15, 1964 (Registration No. 2-22056)* 4.26 Twenty-Fifth Supplemental Indenture, dated as of February 1, 1965 (Registration No. 2-23082)* 4.27 Twenty-Sixth Supplemental Indenture, dated as of May 1, 1966 (Registration No. 2-24835)* 4.28 Twenty-Seventh Supplemental Indenture, dated as of August 15, 1966 (Registration No. 2-25314)* 4.29 Twenty-Eighth Supplemental Indenture, dated as of May 1, 1967 (Registration No. 2-26323)* 4.30 Twenty-Ninth Supplemental Indenture, dated as of February 1, 1968 (Registration No. 2-28000)* 4.31 Thirtieth Supplemental Indenture, dated as of January 15, 1969 (Registration No. 2-31044)* 4.32 Thirty-First Supplemental Indenture, dated as of October 1, 1969 (Registration No. 2-34839)* 4.33 Thirty-Second Supplemental Indenture, dated as of December 1, 1970 (Registration No. 2-38713)* 4.34 Thirty-Third Supplemental Indenture, dated as of September 15, 1971 (Registration No. 2-41527)* 4.35 Thirty-Fourth Supplemental Indenture, dated as of August 15, 1972 (Registration No. 2-45046)* 4.36 Thirty-Fifth Supplemental Indenture, dated as of February 1, 1974 (Registration No. 2-50039)* 4.37 Thirty-Sixth Supplemental Indenture, dated as of July 1, 1974 (Registration No. 2-59199)* 4.38 Thirty-Seventh Supplemental Indenture, dated as of November 1, 1974 (Registration No. 2-52160)* 4.39 Thirty-Eighth Supplemental Indenture, dated as of March 1, 1975 (Registration No. 2-52776)* 4.40 Thirty-Ninth Supplemental Indenture, dated as of March 15, 1976 (Registration No. 2-55463)* 4.41 Fortieth Supplemental Indenture, dated as of July 1, 1977 (Registration No. 2-59199)* 4.42 Forty-First Supplemental Indenture, dated as of November 1, 1978 (Registration No. 2-62609)* 4.43 Forty-Second Supplemental Indenture, dated as of June 15, 1979 (File No.1-2313)* 4.44 Forty-Third Supplemental Indenture, dated as of September 15, 1979 (File No. 1-2313)* 4.45 Forty-Fourth Supplemental Indenture, dated as of October 1, 1979 (Registration No. 2-65493)* 4.46 Forty-Fifth Supplemental Indenture, dated as of April 1, 1980 (Registration No. 2-66896)* 4.47 Forty-Sixth Supplemental Indenture, dated as of November 15, 1980 (Registration No. 2-69609)* 4.48 Forty-Seventh Supplemental Indenture, dated as of May 15, 1981 (Registration No. 2-71948)* 4.49 Forty-Eighth Supplemental Indenture, dated as of August 1, 1981 (File No. 1-2313)* page 50 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 4.50 Forty-Ninth Supplemental Indenture, dated as of December 1, 1981 (Registration No. 2-74339)* 4.51 Fiftieth Supplemental Indenture, dated as of January 16, 1982 (File No. 1-2313)* 4.52 Fifty-First Supplemental Indenture, dated as of April 15, 1982 (Registration No. 2-76626)* 4.53 Fifty-Second Supplemental Indenture, dated as of November 1, 1982 (Registration No. 2-79672)* 4.54 Fifty-Third Supplemental Indenture, dated as of November 1, 1982 (File No. 1-2313)* 4.55 Fifty-Fourth Supplemental Indenture, dated as of January 1, 1983 (File No. 1-2313)* 4.56 Fifty-Fifth Supplemental Indenture, dated as of May 1, 1983 (File No. 1-2313)* 4.57 Fifty-Sixth Supplemental Indenture, dated as of December 1, 1984 (Registration No. 2-94512)* 4.58 Fifty-Seventh Supplemental Indenture, dated as of March 15, 1985 (Registration No. 2-96181)* 4.59 Fifty-Eighth Supplemental Indenture, dated as of October 1, 1985 (File No. 1-2313)* 4.60 Fifty-Ninth Supplemental Indenture, dated as of October 15, 1985 (File No. 1-2313)* 4.61 Sixtieth Supplemental Indenture, dated as of March 1, 1986 (File No. 1-2313)* 4.62 Sixty-First Supplemental Indenture, dated as of March 15, 1986 (File No. 1-2313)* 4.63 Sixty-Second Supplemental Indenture, dated as of April 15, 1986 (File No. 1-2313)* 4.64 Sixty-Third Supplemental Indenture, dated as of April 15, 1986 (File No. 1-2313)* 4.65 Sixty-Fourth Supplemental Indenture, dated as of July 1, 1986 (File No. 1-2313)* 4.66 Sixty-Fifth Supplemental Indenture, dated as of September 1, 1986 (File No. 1-2313)* 4.67 Sixty-Sixth Supplemental Indenture, dated as of September 1, 1986 (File No. 1-2313)* 4.68 Sixty-Seventh Supplemental Indenture, dated as of December 1, 1986 (File No. 1-2313)* 4.69 Sixty-Eighth Supplemental Indenture, dated as of July 1, 1987 (Registration No. 33-19541)* 4.70 Sixty-Ninth Supplemental Indenture, dated as of October 15, 1987 (Registration No. 33-19541)* 4.71 Seventieth Supplemental Indenture, dated as of November 1, 1987 (File No. 1-2313)* 4.72 Seventy-First Supplemental Indenture, dated as of February 15, 1988 (File No. 1-2313)* 4.73 Seventy-Second Supplemental Indenture, dated as of April 15, 1988 (File No. 1-2313)* 4.74 Seventy-Third Supplemental Indenture, dated as of July 1, 1988 (File No. 1-2313)* page 51 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 4.75 Seventy-Fourth Supplemental Indenture, dated as of August 15, 1988 (File No. 1-2313)* 4.76 Seventy-Fifth Supplemental Indenture, dated as of September 15, 1988 (File No. 1-2313)* 4.77 Seventy-Sixth Supplemental Indenture, dated as of January 15, 1989 (File No. 1-2313)* 4.78 Seventy-Seventh Supplemental Indenture, dated as of May 1, 1990 (File No. 1-2313)* 4.79 Seventy-Eighth Supplemental Indenture, dated as of June 15, 1990 (File No. 1-2313)* 4.80 Seventy-Ninth Supplemental Indenture, dated as of August 15, 1990 (File No. 1-2313)* 4.81 Eightieth Supplemental Indenture, dated as of December 1, 1990 (File No. 1-2313)* 4.82 Eighty-First Supplemental Indenture, dated as of April 1, 1991 (File No. 1-2313)* 4.83 Eighty-Second Supplemental Indenture, dated as of May 1, 1991 (File No. 1-2313)* 4.84 Eighty-Third Supplemental Indenture, dated as of June 1, 1991 (File No. 1-2313)* 4.85 Eighty-Fourth Supplemental Indenture, dated as of December 1, 1991 (File No. 1-2313)* 4.86 Eighty-Fifth Supplemental Indenture, dated as of February 1, 1992 (File No. 1-2313)* 4.87 Eighty-Sixth Supplemental Indenture, dated as of April 1, 1992 (File No. 1-2313)* 4.88 Eighty-Seventh Supplemental Indenture, dated as of July 1, 1992 (File No. 1-2313)* 4.89 Eighty-Eight Supplemental Indenture, dated as of July 15, 1992 (File No. 1-2313)* 4.90 Eighty-Ninth Supplemental Indenture, dated as of December 1, 1992 (File No. 1-2313)* 4.91 Ninetieth Supplemental Indenture, dated as of January 15, 1993 (File No. 1-2313)* 4.92 Ninety-First Supplemental Indenture, dated as of March 1, 1993 (File No. 1-2313)* 4.93 Ninety-Second Supplemental Indenture, dated as of June 1, 1993* 4.94 Ninety-Third Supplemental Indenture, dated as of June 15, 1993 (File No. 1-2313)* 4.95 Ninety-Fourth Supplemental Indenture, dated as of July 15, 1993 (File No. 1-2313)* 4.96 Ninety-Fifth Supplemental Indenture, dated as of September 1, 1993 (File No. 1-2313)* 4.97 Ninety-Sixth Supplemental Indenture, dated as of October 1, 1993 (File No. 1-2313)* 4.98 Adoption of Rights Agreement (File No. 1-2313)* page 52 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10.1 1981 Deferred Compensation Agreement (File No. 1-2313)* 10.2 1985 Deferred Compensation Agreement for Executives (File No. 1-2313)* 10.3 1985 Deferred Compensation Agreement for Directors (File No. 1-2313)* 10.4 Director Deferred Compensation Plan (File No. 1-9936)* 10.5 Director Grantor Trust Agreement (File No. 1-9936)* 10.6 Executive Deferred Compensation Plan (File No. 1-9936)* 10.7 Executive Grantor Trust Agreement (File No. 1-9936)* 10.8 Executive Supplemental Benefit Program (File No. 1-2313)* 10.9 Executive Retirement Plan (File No. 1-2313)* 10.10 Employment Agreement with Howard P. Allen (File No. 1-2313)* 10.11 1996 Executive Incentive Compensation Plan (File No. 1-9936)* 10.12 Executive Incentive Compensation Plan 10.13 Executive Disability and Survivor Benefit Program (File No. 1- 9936)* 10.14 Retirement Plan for Directors 10.15 Director Incentive Compensation Plan (File No. 1-9936)* 10.16 Officer Long-Term Incentive Compensation Plan 10.16.1 Form of Agreement for 1989-1995 Awards under the Officer Long- Term Incentive Compensation Plan (File No. 1-9936)* 10.16.2 Form of Agreement for 1996 Awards under the Officer Long-Term Incentive Compensation Plan (File No. 1-9936)* 10.16.3 Form of Agreement for 1997 Awards under the Officer and Management Long-Term Incentive Compensation Plans 10.17 Estate and Financial Planning Program (File No. 1-9936)* 10.18 Consulting Arrangement with Howard P. Allen 10.19 Employment Agreement with Bryant C. Danner (File No. 1-9936)* 10.20 Employment Agreement with Stephen E. Frank (File No. 1-9936)* 10.21 Letter Agreement with Edward R. Muller (File No. 1-2313)* 10.22 Election Terms for Warren Christopher 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. PAGE EXHIBIT 3.3 To Holders of the Company's Bylaws: Effective January 1, 1998, Article III, Section 6, was amended to specify the months in which regular Board meetings will be held. BEVERLY P. RYDER Corporate Secretary BYLAWS OF EDISON INTERNATIONAL AS AMENDED TO AND INCLUDING JANUARY 1, 1998 PAGE 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 3 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 7 Section 12. Inspectors of Election 8 ARTICLE III -- DIRECTORS Section 1. Powers 8 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 PAGE 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 Officer 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 PAGE 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 PAGE BYLAWS Bylaws for the regulation, except as otherwise provided by statute or its Articles of Incorporation of EDISON INTERNATIONAL AS AMENDED TO AND INCLUDING JANUARY 1, 1998 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. PAGE 1 ARTICLE II 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, 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. 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 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 ARTICLE II 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 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. PAGE 3 ARTICLE II 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. 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. PAGE 4 ARTICLE II (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 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: PAGE 5 ARTICLE II (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, 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 PAGE 6 ARTICLE II 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 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, authorized by a written proxy executed by such shareholder and filed with the Secretary. Subject to the following sentence, any proxy duly executed continues in full force and effect until revoked by the person executing 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 executed by the person executing the prior proxy and presented to the meeting, or by attendance at the meeting and voting in person by the person executing the proxy; provided, however, that a proxy is not revoked PAGE 7 ARTICLE III 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 execution 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. 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 PAGE 8 ARTICLE III 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 shareholders in the same manner provided in these Bylaws for the amendment thereof. PAGE 9 ARTICLE III 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. 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. PAGE 10 ARTICLE III 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 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 PAGE 11 ARTICLE III 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 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. PAGE 12 ARTICLE III 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; (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; PAGE 13 ARTICLE IV (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. PAGE 14 ARTICLE IV 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. PAGE 15 ARTICLE IV 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. PAGE 16 ARTICLE IV 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. PAGE 17 ARTICLE IV 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. PAGE 18 ARTICLE IV 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. PAGE 19 ARTICLE V 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. PAGE 20 ARTICLE V 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. PAGE 21 ARTICLE V 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. 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. PAGE 22 ARTICLE V 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. PAGE 23 ARTICLE VI 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 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 PAGE 24 ARTICLE VI 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. PAGE 25 ARTICLE VI 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. PAGE 26 ARTICLE VI 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 ARTICLE VII impossible or impracticable for the corporation to conduct its business without recourse to the provisions of 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. PAGE 28 ARTICLE VII 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 PAGE 29 ARTICLE VIII board of directors, 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 10.12 EDISON INTERNATIONAL EXECUTIVE INCENTIVE COMPENSATION PLAN Effective January 1, 1997 WHEREAS, it has been determined that it is in the best interest of Edison International and its affiliates to offer and maintain competitive executive compensation programs designed to attract and retain qualified executives; WHEREAS, it has been determined that providing financial incentives to executives that reinforce and recognize corporate, organizational and individual performance and accomplishments will enhance the financial and operational performance of Edison International and its affiliates; and WHEREAS, it has been determined that an incentive compensation program would encourage the attainment of short-term corporate goals and objectives; NOW, THEREFORE, the Edison International Executive Incentive Compensation Plan has been established by the Compensation and Executive Personnel Committee of the Board of Directors effective January 1, 1997, and made available to eligible executives of Edison International and its participating affiliates subject to the following terms and conditions: 1. Definitions. When capitalized herein, the following terms are defined as indicated: "Base Salary" is defined to be the annual salary of the Participant on the last day of the year worked by the Participant. "Board" means the Board of Directors of a Company. "CEO" means the chief executive officer of a Company. "Chairman" means the Chairman of the Board and Chief Executive Officer of Edison International. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Edison International or a participating affiliate. "Committee" means the Compensation and Executive Personnel Committee of the Edison International Board of Directors. page 1 "Participant" means the Chairman, president, executive vice presidents, senior vice presidents, elected vice presidents, and senior managers whose participation in this Plan has been approved by the Committee, Chairman or Board. "Plan" means the Edison International Executive Incentive Compensation Plan. 2. Eligibility. To be eligible for the full amount of any incentive award, an individual must have been a Participant for the entire calendar year. Pro-rata awards may be distributed to Participants who are discharged for reasons other than incompetence, misconduct or fraud, or who resigned, retired or became disabled during the calendar year, or who were Participants for less than the full year. In the event of the death of a Participant during the calendar year, a pro-rata award may be made at the discretion of the Committee, the Board, or CEO having the authority to approve the Participant's award had the death not occurred. 3. Company Performance Goals. Each CEO will furnish recommended Company performance goals to the Chairman. In consultation with the Chairman, the Committee will select specific performance goals for the year. The performance goals must represent relatively optimistic, but reasonably attainable goals, the accomplishment of which will contribute significantly to the attainment of Company strategic objectives. 4. Individual Incentive Award Levels. Company, organizational and individual performance relative to the pre-established goals will determine the award a Participant can receive. The Committee will establish target award levels for the year as a percentage of base salary at the time performance goals are set. If the Committee determines individual and Company performance goals have been substantially met, Participants will be eligible for individual incentive awards at the target award levels established by the Committee. Stretch-maximum awards may be established by the Committee and earned on the basis of performance in excess of targets. All awards are discretionary and will be based on the assessment of corporate and individual performance by the Committee or the CEO. 5. Approval and Payment of Individual Awards. During the first quarter of the year following the completion of the calendar year, the Chairman, in consultation with each CEO, will assess the degree to which individual and corporate goals and objectives have been achieved. Incentive award recommendations for eligible officers will be developed. The Committee will receive a report from the Chairman as to overall Company performance, will deliberate on management recommendations, and will approve, or recommend for approval by the applicable Board, the officer awards. Awards to non-officers will be determined and approved by the CEO of each Company, or his/her designee. All decisions of the Committee, the Chairman and the CEOs regarding individual incentive awards will be final and conclusive. Incentive award payments will be made as soon as practical following the appropriate approval. Payment will be made in cash except to the extent an eligible Participant has page 2 previously elected to defer payment of some or all of the award pursuant to the terms of a deferred compensation plan of the Company or to the extent the Committee or Board elects to defer payment of some or all of the award. Awards made will be subject to any income or payroll tax withholding or other deductions as may required by Federal, State or local law. Awards under this Plan will not be considered to be salary or other compensation for the purpose of computing benefits to which the Participant may be entitled under any qualified Company retirement plan, including but not limited to the SCE Retirement Plan, the SCE Stock Savings Plus Plan, or any other plan or arrangement of the Company for the benefit of its employees if such plan or arrangement is a plan qualified under Section 401(a) of the Code and is a trust exempt from Federal income tax under Section 501(a) of the Code. Awards may be considered compensation for nonqualified plan purposes depending on the terms and conditions of the particular nonqualified plan. Awards payable to Participants under this Plan shall constitute an unsecured general obligation of the Company, and no special fund or trust will be created, nor will any notes or securities be issued with respect to any awards. 6. Plan Modifications and Adjustments. In order to ensure the incentive features of the Plan, avoid distortion in its operation and compensate for or reflect extraordinary changes which may have occurred during the calendar year, the Committee may make adjustments to the Company performance goals or other Plan terms and conditions before, during or after the end of the calendar year to the extent it determines appropriate in its sole discretion. Adjustments to the Plan shall be conclusive and binding upon all parties concerned. The Plan may be modified or terminated by the Committee at any time. 7. Plan Administration. This Plan and any officer awards made pursuant to it are to be approved by the Committee, or the Board of the participating affiliate after review by the Committee. Each CEO, or his/her delegate, shall approve any non-officer awards. Administration of the Plan is otherwise delegated to the Edison International Vice President of Human Resources and designees acting under his/her direction. Such vice president is authorized to approve ministerial amendments to the Plan, to interpret Plan provisions, and to approve changes as may be required by law or regulation. No Company, Board, Committee or individual shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan. 8. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and assigns of the Company and Participant. Notwithstanding the foregoing, any right to receive payment hereunder is hereby expressly declared to be personal, nonassignable and nontransferable, except by will, intestacy, or as otherwise required by law, and in the event of any attempted page 3 assignment, alienation or transfer of such rights contrary to the provisions hereof, the Company shall have no further liability for payments hereunder. 9. Beneficiaries. Any award approved following the death of a Participant will be made to the Participant's most recently designated beneficiary or beneficiaries under the Long-Term Incentive Compensation Plan of the Company. If no beneficiary has been designated by the Participant, or if no beneficiary survives the Participant, or if a designated beneficiary should die after surviving the Participant but before the award has been paid, any award approved will be paid in a lump- sum payment to the Participant's estate as soon as practicable. 10. Capacity. If any person entitled to payments under this Plan is incapacitated and unable to use such payments in his or her own best interest, the Company may direct that payments (or any portion) be made to that person's legal guardian or conservator, or that person's spouse, as an alternative to the payment to the person unable to use the payments. Court-appointed guardianship or conservatorship may be required by the Company before payment is made. The Company shall have no obligation to supervise the use of such payments. 11. No Right of Employment. Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the employ of the Company as an officer or manager of the Company or in any other capacity. 12. Severability and Controlling Law. The various provisions of this Plan are severable in their entirety. Any determination of invalidity or unenforceability of any one provision will have no effect on the continuing force and effect of the remaining provisions. This Plan shall be governed by the laws of the State of California. EDISON INTERNATIONAL Lillian R. Gorman -------------------------- Lillian R. Gorman Vice President EXHIBIT 10.14 EDISON INTERNATIONAL SOUTHERN CALIFORNIA EDISON COMPANY RETIREMENT PLAN FOR DIRECTORS As Amended May 15, 1997 I. GENERAL 1.1 Purpose The purpose of this Plan is to provide recognition and retirement compensation to eligible members of the Edison International and Southern California Edison Company Boards of Directors ("Boards") to facilitate the companies' ability to attract, retain, and reward members of the Boards. 1.2 Eligibility Eligibility in this Plan is limited to members of the Boards who have at least five years of total service (which need not be continuous service) as directors, and who retire or resign from the Boards in good standing or die while in service and in good standing. This Plan covers periods of service both as an employee director and as an outside director. For purposes of this Plan, a year of service will be determined on a calendar year basis and a full year of service will be credited for any fractional year served. II. AMOUNT OF ANNUAL BENEFIT 2.1 Benefit The Plan pays an annual retirement benefit equal to the annual retainer in effect at the time of the eligible director's retirement, resignation, or death. The retirement benefit will be paid quarterly in advance in equal installments for the period described in Section 3.1(a). No additional amount will be paid for service on any of the committees of the Boards, nor will interest be paid. 2.2 Benefit of Directors in Service Before 1996 If a director has Board service prior to 1996, the Plan will pay an annual retirement benefit determined by multiplying the director's years of service before and after January 1, 1996 by the applicable compensation base and dividing the sum of the products by the director's total years of service. For service before 1996, the compensation base will be the annual retainer plus eight times the regular monthly meeting fee in effect at the time of the eligible director's retirement, resignation or death. For service after 1995, the page 1 compensation base will be the annual retainer in effect at the time of the eligible director's retirement, resignation or death. III. DURATION OF PAYMENTS 3.1 Benefit Period (a) The Plan benefit will be paid to the retired director or his/her surviving spouse for the number of years equal to the director's total years of service on the Boards. (b) A break in service on the Board of Edison International or Southern California Edison Company which was required to allow the director to render a period of uninterrupted high-level government service, and which was followed by reelection to that Board within 12 months after the completion of such government service, will be recognized under this Plan as a period of service on that Board. (c) A year of simultaneous service on the Boards of Edison International and Southern California Edison Company will be counted as one year for computation of the Plan's benefit period. 3.2 Commencement of Payments The first quarterly installment of Plan Benefits will be paid on the first day of the calendar quarter following the director's retirement as a director, or the 65th anniversary of the director's birth, whichever occurs later. 3.3 Survivor Benefits (a) If the director dies without leaving a surviving spouse, a lump sum of any benefit payments remaining will be calculated and paid to the estate of the director. (b) If the director dies leaving a surviving spouse before retiring from the Boards, benefit payments to that spouse will begin on the first day of the calendar quarter following the date of the director's death, or the 65th anniversary of the director's birth, whichever occurs later. (c) If the director dies leaving a surviving spouse after benefit payments have begun, benefit payments will continue and be paid to that spouse. (d) If the director dies leaving a surviving spouse after retirement from the Boards but before benefit payments have begun, benefit payments to that spouse will begin on the first day of the calendar quarter following the 65th anniversary of the director's birth. page 2 3.4 Termination of Benefit Payments Once begun, benefit payments to a retired director or his/her surviving spouse will continue until the earlier of the o completion of payments for the Benefit Period, or o date of death of the later to die of the director or the surviving spouse. Upon said death, a lump sum of any remaining benefit payments will be calculated and paid to that person's estate. V. ADMINISTRATION (a) This Plan is non-contributory, non-qualified and unfunded, and represents an unsecured general obligation of each Company. No special fund or trust will be created, nor will any notes or securities be issued with respect to any retirement benefits. (b) The Chair of each Company's Compensation and Executive Personnel Committee, or the Vice President of Human Resources of Southern California Edison Company, will have full and final authority to interpret this Plan, and to make determinations advisable for the administration of this Plan, to approve ministerial changes, and to approve changes as may be required by law or regulation. All such decisions and determinations will be final and binding upon all parties. (c) If any person entitled to payments under this Plan is, in the opinion of the Committees or their designee, incapacitated and unable to use such payments in his/her own best interest, the Committees or their designee may direct that payments (or any portion) be made to the person's spouse or legal guardian, as an alternative to the payment to the person unable to use the payments. The Committees or their designee will have no obligation to supervise the use of such payments. (d) This Plan will be governed by the laws of the State of California. EDISON INTERNATIONAL AND SOUTHERN CALIFORNIA EDISON COMPANY Beverly P. Ryder ___________________________________ Beverly P. Ryder, Secretary EXHIBIT 10.16 EDISON INTERNATIONAL OFFICER LONG-TERM INCENTIVE COMPENSATION PLAN Amended and Restated as of January 1, 1997 WHEREAS, the Officer Long-Term Incentive Compensation Plan was approved by the shareholders of SCEcorp on April 16, 1992 and was amended and restated as the Edison International Officer Long-Term Incentive Compensation Plan ("Plan") on February 15, 1996; and WHEREAS, it is deemed appropriate to amend and restate the Plan to reflect certain Security and Exchange Commission rule changes, and Plan amendments addressing administration and change of control; NOW, THEREFORE, the Plan is restated subject to the following terms and conditions: 1. Purpose. The purpose of the Edison International Officer Long-Term Incentive Compensation Plan is to improve the long-term financial and operational performance of Edison International and its affiliates by providing eligible Participants a financial incentive which reinforces and recognizes long-term corporate, organizational and individual performance and accomplishments. The Plan is intended to promote the interests of Edison International and its shareholders by encouraging eligible Participants to acquire stock or increase their proprietary interest in Edison International. 2. Definitions. Whenever the following terms are used in this Plan, they will have the meanings specified below unless the context clearly indicates the contrary: "Board of Directors" or "Board" means the Board of Directors of Edison International. "Cash Equivalent" means a stock-based award payable in cash only granted pursuant to Section 14. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Compensation and Executive Personnel Committee of the Board of Directors excluding those members ineligible to administer this Plan as determined under Section 4. "Common Stock" means the common shares of Edison International. page 1 "Company" means Edison International or the Edison International affiliate employing the Participant. "Dividend Equivalent" means the additional amount of cash or Common Stock as described in Section 12. "Eligible Person" or "Participant" means an officer of the Company whose participation has been approved by the Committee, including without limitation, executive officers under Section 16 of the Securities Exchange Act of 1934, as amended, but excluding those persons participating in the Edison International Management Long-Term Incentive Compensation Plan. "Fair Market Value" means the average of the highest and lowest sale prices for the Common Stock as reported in the western edition of The Wall Street Journal for the New York Stock Exchange Composite Transactions for the date as of which such determination is made. "Holder" means a person holding an Incentive Award. "Incentive Award" means any award which may be made under the Plan by the Committee. "Incentive Stock Option" means an option as defined under Section 422A of the Code granted pursuant to Section 7 of the Plan. "Nonqualified Stock Option" means an option, other than an Incentive Stock Option, granted pursuant to Section 6 of the Plan. "Option" means either a Nonqualified Stock Option or Incentive Stock Option. "Performance Award" means an award granted pursuant to Section 10 which may be based on stock value, book value, or other specific performance criteria. "Plan" means the Officer Long-Term Incentive Compensation Plan as set forth herein, which may be amended from time-to-time. "Restricted Stock" means Common Stock granted or awarded pursuant to Section 8 of the Plan, which is nontransferable and subject to substantial risk of forfeiture until restrictions lapse. "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and effective August 15, 1996. page 2 "Stock Appreciation Equivalent" means an award based on Common Stock appreciation or other specific performance criteria which is granted pursuant to Section 11. "Stock Appreciation Right" or "Right" means a right granted pursuant to Section 9 of the Plan. "Stock Payment" means a payment pursuant to Section 13 in shares of Common Stock to replace all or any portion of the compensation (other than base salary) that would otherwise become payable to a Participant in cash. 3. Aggregate Awards Under Plan. Pursuant to the terms of the Plan, and subject to the provisions of this Section 3 and Section 16 of the Plan, the aggregate number of shares of Common Stock that may be issued or transferred pursuant to Incentive Awards, and the total aggregate value of Incentive Awards other than Dividend Equivalents which are payable in a form other than Common Stock, will not exceed 3 million shares, or the fair market value of such shares as determined on the dates of payment of the Incentive Awards. On an annual basis, as long as any Incentive Awards are outstanding and have not been paid, Dividend Equivalents payable in cash will not exceed the annual dividend payable on 3 million shares of Common Stock. The shares to be delivered under the Plan will be made available, at the discretion of the Board or Committee, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by Edison International including shares purchased on the open market. If any Incentive Award expires, is forfeited, is canceled, or otherwise terminates for any reason other than upon exercise or payment, the shares of Common Stock (provided the Participant receives no benefit of ownership) or equivalent value that could have been delivered will not be charged against the limitations provided above and may again be made subject to Incentive Awards. However, shares subject to Stock Appreciation Rights settled in cash will not be charged against the share limitations provided above, but only against the fair market value limitation. 4. Administration. The Plan will be administered by the Committee, which will consist of those directors on the Compensation and Executive Personnel Committee of the Board who qualify as Non-Employee Directors under Rule 16b-3. The Board shall ensure at least two members are qualified to administer the Plan. The Committee has, and may exercise, such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions as described in the Plan. The Committee has sole authority in its discretion to determine the Officers to whom, and the time or times at which, Incentive Awards may be granted, the nature of the Incentive Award, the number of shares of Common Stock or the amount of cash page 3 that makes up each Incentive Award, the pricing and amount of any Incentive Award, the objectives, goals and performance criteria (which need not be identical) utilized to measure the value of Incentive Awards, the form of payment (cash or Common Stock or a combination thereof) payable upon the event or events giving rise to payment of an Incentive Award, the vesting schedule of any Incentive Award, the term of any Incentive Award, and such other terms and conditions applicable to each individual Incentive Award as the Committee shall determine. The Committee may grant at any time new Incentive Awards to a Participant who has previously received Incentive Awards whether such prior Incentive Awards are still outstanding, have previously been exercised in whole or in part, or are canceled in connection with the issuance of new Incentive Awards. The purchase price or initial value of the Incentive Awards may be established by the Committee without regard to the existing Incentive Awards or such other grants. Further, the Committee may, with the consent of a Participant, amend the terms of any existing Incentive Award previously granted to include or amend any provisions which could be incorporated in such an Incentive Award at the time of such amendment. The Committee has the sole authority to interpret the Plan, to determine the terms and provisions of the Incentive Award agreements, and to make all determinations necessary or advisable for the administration of the Plan. The Committee has authority to prescribe, amend, and rescind rules and regulations relating to the Plan. All interpretations, determinations, and actions by the Committee will be final, conclusive, and binding upon all parties. Any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote or by the unanimous written consent of its members. The Committee may delegate to one or more agents such nondiscretionary administrative duties as it may deem advisable. No member of the Board or the Committee or agent or designee thereof will be liable for any action or determination made in good faith by the Board or the Committee with respect to the Plan or any transaction arising under the Plan. 5. Eligibility and Date of Grant. The Committee has authority, in its sole discretion, to determine and designate from time-to-time those Eligible Persons who are to be granted Incentive Awards, the type of Incentive Awards to be granted, the times at which Incentive Awards will be granted, the prices of Incentive Awards (which may be any lawful consideration determined by the Committee), the amount of any Incentive Award, and the number of shares of Common Stock or the amount of cash subject to each Incentive Award. Each Incentive Award will be evidenced by a written instrument and may include any other terms and conditions consistent with the Plan as the Committee may in its discretion determine. The date of grant of an Incentive Award will be the date of the Agreement between the Company and the Participant. page 4 6. Nonqualified Stock Options. The Committee may approve the grant of Nonqualified Stock Options to Eligible Persons, subject to the following terms and conditions: (a) The purchase price of Common Stock under each Nonqualified Stock Option may not be less than one hundred percent of the Fair Market Value of the Common Stock on the date the Nonqualified Stock Option is granted. (b) No Nonqualified Stock Option may be exercised after ten years and one day from the date of grant. (c) Upon the exercise of a Nonqualified Stock Option, the purchase price will be payable in full in cash and/or its equivalent, such as Common Stock, acceptable to Edison International. Any shares so assigned and delivered to Edison International in payment or partial payment of the purchase price will be valued at their Fair Market Value on the exercise date. (d) No fractional shares will be issued pursuant to the exercise of a Nonqualified Stock Option. Only cash payments will be made in lieu of fractional shares. 7. Incentive Stock Options. The Committee may approve the grant of Incentive Stock Options to Eligible Persons, subject to the following terms and conditions: (a) The purchase price of each share of Common Stock under an Incentive Stock Option will be at least equal to the Fair Market Value of a share of the Common Stock on the date of grant; provided, however, that if a Participant, at the time an Incentive Stock Option is granted, owns stock representing more than ten (10%) percent of the total combined voting power of all classes of stock of Edison International (as defined in Section 425(e) or (d) of the Code), then the exercise price of each share of Common Stock subject to such Incentive Stock Option shall be at least one hundred and ten (110%) percent of the Fair Market Value of such share of Common Stock, as determined in the manner stated in this paragraph. (b) No Incentive Stock Option may be exercised after ten (10) years from the date of the grant. Each Incentive Stock Option granted under this Plan shall also be subject to earlier termination as provided in this Plan. (c) Upon the exercise of an Incentive Stock Option, the purchase price will be payable in full in cash and/or its equivalent, such as Common Stock, acceptable to Edison International. Any shares so assigned and delivered to Edison International in payment or partial payment of the purchase price will be valued at their Fair Market Value on the exercise date. (d) The Fair Market Value (determined at the time the Incentive Stock Option is granted) of the shares of Common Stock for which any Participant may be granted page 5 Incentive Stock Options that are first exercisable during any one calendar year (including Incentive Stock Options under all plans of the Company) will not in the aggregate exceed One Hundred Thousand ($100,000) Dollars. (e) No fractional share will be issued pursuant to the exercise of an Incentive Stock Option. Only cash payments will be made in lieu of fractional shares. 8. Restricted Stock. The Committee may approve the grant or award of Restricted Stock to Eligible Persons subject to the conditions of this Section 8. (a) All shares of Restricted Stock granted or awarded pursuant to the Plan (including any shares of Restricted Stock received by the Holder as a result of stock dividends, stock splits, or any other forms of adjustment) will be subject to the following restrictions: (i) The shares may not be sold, transferred, or otherwise alienated or hypothecated until the restrictions are removed or expire. (ii) The Committee may require the Holder to enter into an escrow agreement providing that the certificates representing Restricted Stock granted or awarded pursuant to the Plan will remain in the physical custody of an escrow holder or Edison International until all restrictions are removed or expire. (iii) Each certificate representing Restricted Stock granted or awarded pursuant to the Plan will bear a legend making appropriate reference to the restrictions imposed on the Restricted Stock. (iv) The Committee may impose restrictions on any shares granted or awarded as it may deem advisable, including, without limitation, restrictions designed to facilitate exemption from or compliance with the Securities Exchange Act of 1934, as amended, with requirements of any stock exchange upon which such shares or shares of the same class are then listed, and with any blue sky or other securities laws applicable to such shares. (b) The restrictions imposed under subparagraph (a) above upon Restricted Stock will lapse in accordance with a schedule or other conditions as determined by the Committee, subject to the provisions of Sections 18 and 19. (c) Upon acceptance of the Restricted Stock offer, the purchase price, if any, established by the Committee will be payable in full in cash and/or its equivalent, such as Common Stock, acceptable to Edison International. (d) Subject to the provisions of subparagraph (a) above and Section 19, the Holder will have all rights of a shareholder with respect to the Restricted Stock granted or page 6 awarded, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. 9. Stock Appreciation Rights. The Committee may approve the grant of Rights related or unrelated to Options to Eligible Persons, subject to the following terms and conditions: (a) A Stock Appreciation Right may be granted: (i) at any time if unrelated to an option; (ii) either at the time of grant, or at any time thereafter during the option term if related to a Nonqualified Stock Option; (iii) only at the time of grant if related to an Incentive Stock Option. (b) A Stock Appreciation Right grant in connection with an Option will entitle the Holder of the related Option, upon exercise of the Stock Appreciation Right, to surrender such Option, or any portion thereof to the extent unexercised, with respect to the number of shares as to which such Stock Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 9(d). Such Option will, to the extent surrendered, then cease to be exercisable. (c) Subject to Section 9(g), a Stock Appreciation Right granted in connection with an Option hereunder will be exercisable at such time or times, and only to the extent that a related Option is exercisable, and will not be transferable except to the extent that such related Option may be transferable. (d) Upon the exercise of a Stock Appreciation Right related to an Option, the Holder will be entitled to receive payment of an amount determined by multiplying: (i) The difference obtained by subtracting the purchase price of a share of Common Stock specified in the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right, by (ii) The number of shares to which such Stock Appreciation Right has been exercised. (e) The Committee may grant Stock Appreciation Rights unrelated to Options to Eligible Persons. Section 9(d) shall be used to determine the amount payable at exercise of such Stock Appreciation Right(s) if Fair Market Value is not used, except that Fair Market Value shall not be used if the Committee specified in the award that book value or another measure as deemed appropriate by the Committee was to be used. In applying the formula in Section 9(d), the initial share value specified in the Stock Appreciation Right award shall be used in lieu of the price "specified in the related Option." page 7 (f) Payment of the amount determined under Section 9(d) or (e) may be made solely in whole shares of Common Stock in a number determined at their Fair Market Value on the date of exercise of the Stock Appreciation Right or alternatively, at the sole discretion of the Committee, solely in cash or in a combination of cash and shares as the Committee deems advisable. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, no fractional share will be issued. Payment for the fractional share will be made in cash only. (g) The Committee may, at the time a Stock Appreciation Right is granted, impose such conditions on the exercise of the Stock Appreciation Right as may be required to satisfy the requirements of Rule 16b-3, as applicable (or any other comparable provisions in effect at the time or times in question). Without limiting the generality of the foregoing, the Committee may determine that a Stock Appreciation Right may be exercised only during the period beginning on the third business day and ending on the twelfth business day following the publication of Edison International's quarterly and annual summarized financial data. 10. Performance Awards. The Committee may approve Performance Awards to Eligible Persons. Such awards may be based on Common Stock performance over a period determined in advance by the Committee or any other measures as determined appropriate by the Committee. Payment will be in cash unless replaced by a Stock Payment in full or in part as determined by the Committee. 11. Stock Appreciation Equivalents. The Committee may approve Stock Appreciation Equivalents to Eligible Persons. Such awards may be based on Common Stock performance over a period determined in advance by the Committee, or any other measures as determined appropriate by the Committee. Payment will be in cash unless replaced by a Stock Payment in full or in part as determined by the Committee. 12. Dividend Equivalents. The Committee may approve Dividend Equivalents based on the dividends declared on the Common Stock on record dates during the period between the date an Incentive Award is granted and the date such Incentive Award is exercised or paid. Dividend Equivalents may be awarded separately or in connection with Incentive Awards payable, whether payable in cash or Common Stock. Subject to Sections 3 and 16, such Dividend Equivalents shall be converted to cash or additional shares by such formula and at such time as may be determined by the Committee. 13. Stock Payments. The Committee may approve Stock Payments of Common Stock to Eligible Persons for all or any portion of the compensation (other than base salary) that would otherwise become payable to a Participant in cash. page 8 Notwithstanding anything to the contrary contained in this Plan, if the written instrument evidencing any Incentive Award states that the Incentive Award(s) will be paid in cash, the Committee may not make a Stock Payment in lieu thereof, and the Incentive Award(s) will be redeemable or exercisable by the Holder only for cash. 14. Cash Equivalents. The Committee may grant any Incentive Award permitted under the Plan which is otherwise payable in stock in the form of a cash equivalent award. 15. Deferral of Payment. The Committee may approve the deferral of any payments which may become due under the Plan. Such deferrals shall be subject to any conditions, restrictions or requirements as the Committee may determine. 16. Adjustment Provisions. Subject to the provisions of this Section 16 below, if the outstanding shares of Common Stock are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock or other securities, through merger, consolidation, sale of all or substantially all of the property of Edison International, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment may be made in (i) the maximum number and kind of shares provided in Section 3 of the Plan, (ii) the number and kind of shares or other securities subject to the then outstanding Incentive Awards, and (iii) the price for each share or other unit of any other securities subject to the then outstanding Incentive Awards without change in the aggregate purchase price or value as to which Incentive Awards remain exercisable or subject to restrictions. Despite the foregoing, upon dissolution or liquidation of Edison International, or upon a reorganization, merger, or consolidation of Edison International with one or more corporations as a result of which Edison International is not the surviving corporation, or upon the sale of all or substantially all the property of Edison International, all Options, Stock Appreciation Rights, and other Incentive Awards then outstanding under the Plan will be fully vested and exercisable and all restrictions on Restricted Stock will immediately cease, unless provisions are made in connection with such transaction for the continuance of the Plan and the assumption of or the substitution for such Incentive Awards of new Options, Stock Appreciation Rights, or other Incentive Awards, or Restricted Stock covering the stock of a successor employer corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices. Any adjustments pursuant to this Section will be made by the Committee, whose determination as to what adjustments will be made and the extent thereof will be final, page 9 binding, and conclusive. No fractional interest will be issued under the Plan on account of any such adjustments. Only cash payments will be made in lieu of fractional shares. Notwithstanding the foregoing, if a reorganization, merger, consolidation, or other corporate transaction is consummated following and related to the occurrence of a Distribution Date, as that term is defined in the Rights Agreement approved by the Edison International Board of Directors on November 20, 1996, as a result of which Edison International is not the surviving corporation, all Options, Stock Appreciation Rights, and other Incentive Awards then outstanding under the Plan will fully vest and all restrictions on Restricted Stock will immediately cease. This Plan may not be terminated, nor may any Incentive Award be cashed out, modified or terminated without the consent of the holder, by Edison International or its successor in interest during the subsequent period necessary to allow Incentive Awards to remain exercisable for at least two years following the close of the transaction, or where applicable, through the first exercise period occurring at least two years after the close of the transaction. During such subsequent period, valuation procedures and exercise periods will occur on a basis consistent with past practice. 17. General Provisions. (a) With respect to any share of Common Stock issued or transferred under any provision of the Plan, such shares may be issued or transferred subject to such conditions, in addition to those specifically provided in the Plan, as the Committee may direct. (b) Nothing in the Plan or in any instrument executed pursuant to the Plan will confer upon any Holder any right to continue in the employ of the Company or affect the right of the Company to terminate the employment of any Holder at any time with or without cause. (c) No shares of Common Stock will be issued or transferred pursuant to an Incentive Award unless and until all then applicable requirements imposed by federal and state securities and other laws, rules, and regulations and by any regulatory agencies having jurisdiction, and by any stock exchanges upon which the Common Stock may be listed, have been fully met. As a condition precedent to the issue of shares pursuant to the grant or exercise of an Incentive Award, Edison International may require the Holder to take any reasonable action to meet such requirements. (d) No Holder (individually or as a member of a group) and no beneficiary or other person claiming under or through such Holder will have any right, title, or interest in or to any shares of Common Stock allocated or reserved under the Plan or subject to any Incentive Award except as to such shares of Common Stock, if any, that have been issued or transferred to such Holder. (e) Edison International may make such provisions as it deems appropriate to withhold any taxes which it determines it is required to withhold in connection with any Incentive Award. Subject to this Section 17(e), however, and without in anyway limiting the page 10 generality of Section 9, the Committee, in its sole discretion and subject to such rules as the Committee may adopt, may permit Participants to elect (i) cash settlement of any Incentive Award, or (ii) to apply a portion of the shares of Common Stock they are otherwise entitled to receive pursuant to an Incentive Award, or shares of Common Stock already owned, to satisfy the tax withholding obligation arising from the receipt, vesting, or exercise of any Incentive Award, as applicable. (f) No Incentive Award and no right under the Plan, contingent or otherwise, will be assignable or subject to any encumbrance, pledge, or charge of any nature, or otherwise transferable (meaning, without limitation, that such Incentive Award or right is exercisable during the Holder's lifetime only by him or her or by his or her guardian or legal representative) except that, under such rules and regulations as Edison International may establish pursuant to the terms of the Plan, a beneficiary may be designated with respect to an Incentive Award in the event of death of a Holder of such Incentive Award, and Incentive Awards may be transferred pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the regulations promulgated thereunder. If such beneficiary is the executor or administrator of the estate of the Holder of such Incentive Award, any rights with respect to such Incentive Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the Holder of such Incentive Award, or, in the case of intestacy, under the laws relating to intestacy. (g) Notwithstanding Section 17(f), the Committee may, to the extent permitted by applicable law and Rule 16b-3, as applicable, permit a Holder to assign the rights to exercise Options or Rights to a trust or to exercise options or rights in favor of a trust, provided that, in the case of Incentive Stock Options, such exercise in favor of a trust shall be permitted only if and to the extent that such exercise is not deemed to be a transfer to or exercise by someone other than the Holder in contravention of Section 422A(b)(5) of the Code. (h) Whenever a Holder is entitled to receive cash in lieu of a fractional share, recognizing that such payment may be deemed a sale of the underlying Common Stock under Section 16 of the Securities Exchange Act of 1934, as amended, the Holder may alternatively elect, at least six months in advance of the payment date, to receive the cash payment or to forfeit his or her rights to such cash payment. This election will be evidenced in the Incentive Award agreement. (i) This Plan shall be governed by the laws of the State of California. 18. Amendment and Termination of the Plan. The Board of Directors or the Committee will have the power, in its discretion, to amend, suspend, or terminate the Plan at any time. No such amendment will, without approval of the shareholders of Edison International to the extent required by law or the rules of any exchange upon which the Common Stock is listed, and except as provided in Section 16 of the Plan: page 11 (a) Materially modify the requirements as to eligibility for participation in the Plan; (b) Materially increase the benefits accruing to Eligible Persons under the Plan; or (c) Materially increase the number of securities which may be issued under the Plan. The Committee may, with the consent of a Holder, make such modifications in the terms and conditions of any Incentive Award as it deems advisable or cancel the Incentive Award (with or without consideration). No amendment, suspension, or termination of the Plan will, without the consent of the Holder, alter, terminate, impair, or adversely affect any right or obligation under any Incentive Award previously granted under the Plan. 19. Termination of Employment. (a) A Stock Appreciation Right or an Option held by a person who was an employee at the time such Right or Option was granted will expire immediately if and when the Holder ceases to be an employee, except as follows: (i) If the employment of a Participant is terminated by the Company other than for cause, then the Stock Appreciation Rights and Options will expire six months thereafter unless the terms of the Incentive Award agreement specify otherwise. For purposes of this provision, termination "for cause" shall include, but shall not be limited to, termination because of dishonesty, criminal offense, or violation of work rule, and shall be determined by, and in the sole discretion of, the Company. During the six- month period, the Stock Appreciation Rights and Options may be exercised in accordance with their terms, but only to the extent exercisable on the date of termination of employment. (ii) If a Participant dies or becomes permanently and totally disabled while employed by the Company, the Stock Appreciation Rights and Options of the Participant will expire three years after the date of death or permanent and total disability unless the terms of the Incentive Award agreement specify otherwise. If the Participant dies or becomes permanently and totally disabled within the six-month period referred to in subparagraph (a) above, the Stock Appreciation Rights and Options will expire six months after the date of death or permanent and total disability, unless the terms of the Incentive Award agreement specify otherwise. (b) In the event a Holder of other Incentive Awards ceases to be an employee, all such Incentive Awards will terminate except in the case of retirement, death, or permanent and total disability. To be eligible for the full amount of any such Incentive Award, an individual must have been a Participant for the entire period to which the Incentive Award applies. Pro-rata awards may be distributed to Participants who are discharged or who terminate their employment for reasons other than incompetence, misconduct or fraud, or who retired or became disabled during the incentive period, or who were page 12 Participants for less than the full incentive period. A pro-rata award may be made to a Participant's designated beneficiary in the event of death of a Participant during an incentive period prior to an award being made. (c) The Committee may in its sole discretion determine, with respect to an Incentive Award, that any Holder who is on a leave of absence for any reason will be considered as still in the employ of the Company, provided that rights to such Incentive Award during an unpaid leave of absence will be limited to the extent to which such right was earned or vested at the commencement of such leave of absence. (d) The Committee may vary the strict requirements of this Section 19 by agreement at the time of grant, or on a case-by-case basis thereafter, as it deems appropriate and in the best interests of Edison International. The Committee may accelerate the vesting of all, or a portion of any Incentive Award, and may extend the above-described exercise periods to as long as the term provided in the original Incentive Award agreement. 20. Effective Date of Plan and Duration of Plan. This Plan as amended and restated will become effective on the date specified by the Board of Directors of Edison International, subject, however, to approval by the stockholders of Edison International at their next annual meeting or at any adjournment thereof, within twelve (12) months following the date of its adoption by the Board of Directors. Unless previously terminated by the Board of Directors, the Plan will terminate April 16, 2002. EDISON INTERNATIONAL Lillian R. Gorman ------------------------------- Lillian R. Gorman Vice President EXHIBIT 10.16.3 EDISON INTERNATIONAL OFFICER AND MANAGEMENT LONG-TERM INCENTIVE COMPENSATION PLANS 1997 AWARD AGREEMENT This award is made by Edison International to "NAME" ("Employee"), as of January 2, 1997, pursuant to the Officer or Management Long-Term Incentive Compensation Plan. Edison International hereby grants to Employee, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option to purchase the following: "EIX" shares of authorized Edison International Common Stock, coupled with dividend equivalents, at an exercise price of $19.75 per share.
"EME" shares of Edison Mission Energy "EC" shares of Edison Capital phantom phantom stock having a base price of stock having a base price of $105.7676 per $120.5499 per share and the following share and the following projected exercise projected exercise prices based on the prices based on the current cost of current cost of capital: capital: - ---------------------------------------------- --------------------------------------------- Period Price $ Period Price $ Period Price $ Period Price $ - ------ ------- ------ ------- ------ ------- ------ -------- 1998 135.0159 2003 237.9441 1998 113.9969 2003 165.5692 1999 151.2178 2004 266.4974 1999 122.8317 2004 178.4008 2000 169.3639 2005 298.4771 2000 132.3511 2005 192.2268 2001 189.6876 2006 334.2944 2001 142.6083 2006 207.1244 2002 212.4501 2007 374.4097 2002 153.6605 2007 223.1766 - ----------------------------------------------- --------------------------------------------- This award is made subject to the conditions contained in the 1997 Statement of Terms and Conditions which is incorporated herein by reference and receipt of which is acknowledged by Employee. Employee hereby consents to the amendment of the terms and conditions of any prior phantom stock award to incorporate the repricing mechanism described in Section 5 of the 1997 Statement of Terms and Conditions. IN WITNESS WHEREOF, Edison International and Employee have caused this instrument to be executed as of the day and year first written above. Edison International Employee By:_______________________________ _______________________________ Edison International Officer and Management Long-Term Incentive Compensation Plans 1997 Statement of Terms and Conditions 1997 awards made under the Edison International Officer and Management Long-Term Incentive Compensation Plans are subject to the following terms and conditions: 1. PRICE (a) The exercise price for the option to purchase Edison International Common Stock (EIX Stock) stated in the Award Certificate is the average of the high and low sales prices of EIX Stock as reported in the Western Edition of The Wall Street Journal for the New York Stock Exchange Composite Transactions for the date of the award. (b) The annual exercise price for each affiliate phantom option (Affiliate Option) will be the base price stated in the Award Certificate escalated by an annual compound appreciation rate linked to the affiliate's cost of capital plus an overhead allowance. Upon any significant subsequent change in the affiliate's cost of capital, the Affiliate Option exercise price for that year may be redetermined and prospectively indexed reflecting the affiliate's revised appreciation rate. 2. VESTING (a) Subject to the provisions of Section 3, options may only be exercised to the extent vested. The initial vesting date will be January 2nd of the year following the date of the award, or six months after the date of the award, whichever date is later. The options will vest as follows: o On the initial vesting date, the options will vest as to 33-1/3% of the covered shares. o On January 2nd of the following year, the options will vest as to an additional 33-1/3% of the covered shares. o On January 2nd of the third year following the date of the award, the options will be fully vested. (b) The vested portions of the options will accumulate to the extent not exercised, and be exercisable by the Employee subject to the provisions of Section 3, in whole or in part, in any subsequent period but not later than the first business day of the 10th year following the date of the award, or, in the case of Affiliate Options, not later than the end of the final 60-day exercise period. (c) If an Employee is removed from a position entitling him/her to benefits under the Plan, retires, dies or is permanently and totally disabled during the three-year vesting period, the options will vest and be exercisable to the extent of 1/36th of the aggregate number of shares stated in the Award Certificate for each full month of service during the vesting period. Notwithstanding the foregoing, the options of an officer who has served as a member of the Southern California Edison Company Management Committee will be fully vested and exercisable upon his/her retirement, death or permanent and total disability. (d) Upon termination of an Employee for any reason other than those specified in Subsection (c), only that portion of the options which has vested as of the prior vesting date may be exercised, and that portion, together with any earned dividend equivalents, will be forfeited unless exercised within 180 days following the date of termination, or in the case of Affiliate Options, the first 60-day exercise period following the date of termination. (e) Notwithstanding the foregoing, the options and earned dividend equivalents may vest in accordance with Section 16 of the Plan as a result of certain events, including liquidation of Edison International or merger, reorganization or consolidation of Edison International as a result of which Edison International is not the surviving corporation. Upon a change of control of Edison International following the occurrence page 1 of a Distribution Date, as that term is defined in the Rights Agreement approved by the Edison International Board of Directors on November 20, 1996, the options will vest and will remain exercisable for at least two years following the Distribution Date, or in the case of Affiliate Options, through the first exercise period occurring at least two years after such date. During that period, (i) the Plan may not be terminated, (ii) individual awards may not be cashed out, terminated, or modified without the Employee's consent, and (iii) valuation procedures and exercise periods will occur on a basis consistent with past practice. 3. OPTION EXERCISE (a) The Employee may exercise an option by providing written notice to Edison International on the form prescribed by Edison International for this purpose specifying the number of shares to be purchased, and accompanied by full payment of the exercise price for the shares. A sample notice is attached as Exhibit 1. Payment must be in cash, or its equivalent, such as EIX Stock, acceptable to Edison International. A "cashless" exercise will be accommodated for all Affiliate Options, and may be accommodated for Edison International Options at the discretion of Edison International. Until payment is accepted, the Employee will have no rights in the optioned stock. If Edison International Options are exercised, the Employee may elect to apply any earned dividend equivalents related to the shares for which the options are being exercised to the exercise price for such shares. (b) Edison International Options may be exercised at any time after they have vested through the first business day of the 10th calendar year following the date of the award. Affiliate Options may be exercised after they have vested, but only during an annually specified 60-day period following the fiscal year end and the completion of an independently reviewed valuation report which indicates a share value for the fiscal year higher than the applicable Affiliate Option exercise price for that period. The final 60-day Affiliate Option exercise period will commence no later than the end of the second quarter of the 10th calendar year following the date of the award. Subject to Section 8, Affiliate Options are payable in cash upon exercise to the extent the actual value of an affiliate share exceeds the applicable exercise price. (c) The Employee agrees that any securities acquired by him/her hereunder are being acquired for his/her own account for investment and not with a view to or for sale in connection with any distribution thereof and that he/she understands that such securities may not be sold, transferred, pledged, hypothecated, alienated, or otherwise assigned or disposed of without either registration under the Securities Act of 1933 or compliance with the exemption provided by Rule 144 or another applicable exemption under such act. (d) In accordance with Section 17(d) of the Plan, the Employee will have no right or claim to any specific funds, property or assets of Edison International as a result of the award. 4. EDISON INTERNATIONAL OPTION DIVIDEND EQUIVALENTS (a) An Edison International Dividend Equivalent Account will be established on behalf of the Employee if Edison International Options have been granted pursuant to the award. This account may be credited with all or a portion of the dividends payable after the date of the award on the number of shares of stock covered by such Edison International Options depending upon Edison International's performance during the first three years of the option period as provided in Subsection (b). No amount will be credited prior to January 2nd of the third year following the date of the award. No dividend equivalent will accrue to any option exercised during that period regardless of Edison International performance. Dividend equivalents credited after that date, if any, will accumulate in this account without interest and will vest and become payable upon the exercise of the option to purchase the corresponding shares of EIX Stock. (b) Dividend equivalents related to Edison International Options are subject to a performance measure based on the percentile ranking of Edison International's total shareholder return ("TSR") compared to the TSR for each stock in the Dow Jones Electric Utilities Group Index. The percentile ranking will be measured at the completion of the first three years of the option term . If Edison International's average ranking is in the 60th percentile or higher for the 3-year period, 100% of the dividend equivalents will be earned from the date of grant through the date the options are exercised. If Edison International's average ranking is in the 25th percentile, 25% of the dividend equivalents will be earned. No dividend equivalents will be earned for performance below the 25th percentile, and a pro rata amount will be earned for performance between the 25th and 60th percentiles. Dividend equivalents related to unexercised Edison International Options that were not earned due to the limitations of this Subsection (b) may be earned back as of the end of each of the last five years of the option period if it is determined at that point that the Edison International cumulative average TSR percentile ranking equals or exceeds the 60th percentile. 5. AFFILIATE OPTION PERFORMANCE UNITS The Affiliate Options are performance units under the Plan based on shares of artificial or "phantom" stock created for this purpose only. The Affiliate Option exercise prices were derived by applying a compound annual appreciation rate, based on the affiliate's cost of capital and an allowance for corporate overhead, to the base price of a share. Following the end of each calendar year during the option term, new affiliate share prices will be computed. If a change in the affiliate's cost of capital has occurred that significantly affects the new share price valuation, the Affiliate Option exercise prices may be redetermined (i) for that year to reflect the same intrinsic value result (gain or loss) that would have existed using the previous cost of capital, and (ii) for subsequent years by applying the revised appreciation rate. If the affiliate share value exceeds the exercise price for that period, any portion of the vested Affiliate Option may be exercised by the Employee in accordance with Section 3 and the difference will be paid in cash to the Employee. 6. TRANSFER AND BENEFICIARY The options will not be transferable by the Employee. During the lifetime of the Employee, the options will be exercisable only by him/her. The Employee may designate a beneficiary who, upon the death of the Employee, will be entitled to exercise the then vested portion of the options during the remaining term subject to the provisions of the Plan and these terms and conditions. 7. TERMINATION OF OPTIONS As set forth in Section 2(d), in the event of termination of the employment of the Employee for any cause, other than retirement, permanent and total disability or death of the Employee, the options will terminate 180 days from the date on which such employment terminated, or in the case of Affiliate Options, at the end of the first 60-day exercise period following the employment termination date. In addition, the options may be terminated if Edison International elects to substitute cash awards as provided under Section 11. 8. TAXES Edison International will have the right to retain and withhold the amount of taxes required by any government to be withheld or otherwise deducted and remitted with respect to the exercise of any Edison International or Affiliate option, the receipt of cash, or the receipt or application of any dividend equivalents to the exercise price. In its discretion, Edison International may require the Employee to reimburse Edison International for any such taxes required to be withheld by Edison International and may withhold any distribution in whole or in part until Edison International is so reimbursed. In lieu thereof, Edison International will have the right to withhold from any other cash amounts due from Edison International to the Employee an amount equal to such taxes required to be withheld by Edison International to reimburse Edison International for any such taxes or to retain and withhold a number of shares of EIX Stock having a market value equal to the taxes and cancel (in whole or in part) the shares in order to reimburse Edison International for the taxes. Each recipient of an Edison International Option must attach a statement to his/her federal and state tax returns for the year in which the Edison International Option was granted containing certain information about the option. A sample statement is attached as Exhibit 2. page 3 9. CONTINUED EMPLOYMENT (a) In consideration of the granting of such options to him/her, the Employee agrees that he/she will remain in the continuous service of Edison International or an Edison International affiliate as an officer or employee during the term of the award. In the event employment is terminated, except as a result of death, disability, or retirement under the Southern California Edison Company Retirement Plan, or a successor plan, whether voluntarily or otherwise, the restrictions of Section 2(d) will apply. (b) Nothing in the Award Certificate or this Statement of Terms and Conditions will be deemed to confer on the Employee any right to continue in the employ of Edison International or an Edison International affiliate or interfere in any way with the right of the employer to terminate his/her employment at any time. 10. NOTICE OF DISPOSITION OF SHARES Employee agrees that if he/she should dispose of any shares of stock acquired on the exercise of the Edison International Options, including a disposition by sale, exchange, gift or transfer of legal title within six months from the date such shares are transferred to the Employee, the Employee will notify Edison International promptly of such disposition. 11. AMENDMENT The options and dividend equivalents are subject to the terms of the Plan as amended. Edison International reserves the right to substitute cash awards substantially equivalent in value to the options and dividend equivalents. The options and dividend equivalents may not otherwise be restricted or limited by any Plan amendment or termination approved after the date of the award without the Employee's written consent. 12. FORCE AND EFFECT The various provisions herein are severable in their entirety. Any determination of invalidity or unenforceability of any one provision will have no effect on the continuing force and effect of the remaining provisions. 13. GOVERNING LAW The terms and conditions of the options and dividend equivalents will be construed under the laws of the State of California. 14. NOTICE. Unless waived by Edison International, any notice required under or relating to the options and dividend equivalents must be in writing, with postage prepaid, addressed to: Edison International, Attn: Corporate Secretary, P.O. Box 800, Rosemead, CA 91770 Lillian R Gorman _________________________ Lillian R. Gorman Vice President, Human Resources page 4 EXHIBIT 1 Date_________________ Corporate Secretary Edison International P.O. Box 800 Rosemead, CA 91770 Dear Sir or Madam: I hereby elect to exercise an option to purchase _____________ shares, no par value, of the Common Stock of Edison International under and pursuant to the _______________ (specify Officer or Management) Long-Term Incentive Compensation Plan Award Certificate dated ___________________. Delivered herewith is my check in the amount of $_______________in full payment of the exercise price. I elect/do not elect to apply any corresponding dividend equivalents to the exercise price. The name(s) to be on the stock certificate or certificates and the address and Social Security Number of such person is as follows: Name: Address: Social Security Number: - AND/OR - I hereby elect to exercise an option to purchase _________ shares of ____ (specify Affiliate name) phantom stock pursuant to the __________ (specify Officer or Management) Long-Term Incentive Compensation Plan Award Certificate dated________________. Very truly yours, cc: Executive Compensation Manager EXHIBIT 2 STATEMENT PURSUANT TO INCOME TAX REGULATION SECTION 1.61-15(c) This statement is attached to my income tax return in compliance with the requirements of Income Tax Regulation Section 1.61-15(c) relative to a nonqualified stock option I received on _____________, 19__. (1) Name and address of the taxpayer: John Q. Doe 1234 Your Street Anywhere, CA 90000 (2) Description of Securities subject to the option: On ____________, 19__, I was granted a nonqualified stock option covering shares of Edison International common stock. (3) Period during which the option is exercisable: The option vests and becomes exercisable as to one-third of the covered shares on _______________, 19__, ______________, 19__ and ______________, 19__, respectively. To the extent vested, the option may be exercised at any time through January 2, 20__. (4) Whether the option had an ascertainable market value: The option did not have a readily ascertainable fair market value on the date of the grant. (5) Whether the option was granted as compensation: The option was granted as compensation and is subject to Reg. Section 1.61-15(a). Respectfully Submitted, EXHIBIT 10.18 RESOLUTION OF THE BOARD OF DIRECTORS OF EDISON INTERNATIONAL Adopted May 15, 1996 RE: DIRECTOR RESIGNATION WHEREAS, Howard P. Allen has tendered his resignation as a director of this corporation after a long and distinguished career as an employee and director; and WHEREAS, the Board of Directors of this corporation desires that Mr. Allen remain available to the corporation for advice and consultation; NOW, THEREFORE, BE IT RESOLVED, that Mr. Allen's resignation is accepted with regret and that the terms and conditions of the consulting arrangement set forth in the attached Schedule A are approved. BE IT FURTHER RESOLVED, that the Chief Executive Officer is authorized to execute any agreement or other document, or take any other action deemed necessary or appropriate in his discretion, to implement the intent of this resolution. SCHEDULE A Terms and Conditions of Howard P. Allen Consulting Arrangement Term: May 15, 1997 - May 14, 2002 Compensation: Amounts equal to those that would otherwise have been payable to Mr. Allen as a director through April 16, 1998 (his normal retirement date from the Board), will be deposited in his account in the Director Deferred Compensation Plan. Affected corporate and Board benefit plan payments will commence in accordance with the terms of the plans as if Mr. Allen retired from the Board on April 16, 1998. APPROVED: John E. Bryson - ------------------------------------------ John E. Bryson Chairman of the Board Bryant C. Danner - ------------------------------------------ Bryant C. Danner Executive Vice President and General Counsel EXHIBIT 10.22 RESOLUTION OF THE BOARD OF DIRECTORS OF EDISON INTERNATIONAL Adopted May 15, 1997 RE: ELECTION AND COMMITTEE APPOINTMENTS OF NEW DIRECTOR WHEREAS, the Nominating Committee of the Board of Directors of this corporation has nominated Warren Christopher to be re-elected as a director of this corporation; WHEREAS, Howard P. Allen has submitted his resignation as a director of this corporation effective immediately following this regular meeting of the Board of Directors, and he serves as Chairman of the Executive Committee and as a member of the Finance Committee of the Board of Directors of this corporation; WHEREAS, pursuant to Article III, Section 2 of the Bylaws of this corporation, the exact number of Directors is fixed at 18, and the addition of Mr. Christopher will increase the number of Directors to 19, until Mr. Allen's resignation is effective; WHEREAS, the charter of the Executive Committee of the Board of Directors of this corporation provides that any vacancy created by any member ceasing to be a director shall be filled by the Board of Directors of this corporation and the Board shall designate one Committee member to be chairman; and WHEREAS, the charter of the Finance Committee of the Board of Directors of this corporation provides that any vacancy created by any member ceasing to be a director shall be filled by the Board of Directors of this corporation or left unfilled at the Board's discretion, and the Board desires to fill such vacancy; NOW, THEREFORE, BE IT RESOLVED, that pursuant to Article III, Section 2 of the Bylaws, the exact number of Directors is fixed at 19 for this regular meeting of this Board of Directors, and the exact number of Directors is fixed at 18 immediately following this regular meeting of this Board of Directors; BE IT FURTHER RESOLVED, that Warren Christopher is elected a director of this corporation, effective immediately, including for this regular meeting of the Board of Directors, subject to the terms and conditions set forth on the attached Schedule A. BE IT FURTHER RESOLVED, that Mr. Christopher is hereby appointed a member and Chairman of the Executive Committee, and a member of the Finance Committee of the Board of Directors of this corporation effective immediately following this regular meeting of the Board of Directors. APPROVED: John E Bryson - ------------------------------------------- John E. Bryson Chairman of the Board Bryant C. Danner - ------------------------------------------ Bryant C. Danner Executive Vice President and General Counsel SCHEDULE A Warren Christopher Election Terms and Conditions o Except as provided below, all regular director compensation and benefits shall apply. o Age restrictions applicable to nominees for director will be waived as to Mr. Christopher until the annual meeting of shareholders in April, 2002. o Retirement benefits and deferred compensation attributable to prior Board service will continue to be paid. Any retirement benefits or deferred compensation attributable to later periods will be payable in accordance with the terms of the plans upon Mr. Christopher's subsequent retirement from the board. o A 500 share grant of Edison International stock will be awarded upon initial election to the Boards of Edison International and Southern California Edison Company. PAGE EXHIBIT 11 Edison International COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (UNAUDITED)
Year Ended December 31, ---------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands, except per-share amounts) Consolidated net income $699,856 $716,748 $739,136 Primary weighted average shares 400,396 437,335 446,159 Fully diluted weighted average shares 404,808 439,299 448,062 Primary earnings per share $ 1.75 $ 1.64 $ 1.66 Fully diluted earnings per share $ 1.73 $ 1.63 $ 1.65
PAGE EXHIBIT 12 EDISON INTERNATIONAL COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Thousands of Dollars)
Year Ended December 31, --------------------------- 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES: Income before interest expense(1) $1,325,569 $1,203,577 $1,282,776 $1,346,636 $1,399,650 $1,450,957 Add: Taxes on income(2) 466,006 353,706 444,635 491,477 505,785 498,729 Rentals(3) 4,460 3,463 3,512 4,018 3,269 2,639 Allocable portion of interest on long-term Contracts for the purchase of power(4) 1,908 1,890 1,870 1,848 1,824 1,797 Spent nuclear fuel interest(7) 1,339 487 68 - - - Interest on partnership indebtedness(5) 38,070 41,091 30,591 34,681 31,356 34,938 Amortization of previously capitalized fixed charges 24,170 6,760 3,414 2,417 2,232 7,025 ---------- ---------- ---------- --------- --------- --------- Total earnings before income taxes and fixed charges (A) $1,861,522 $1,610,974 $1,766,866 $1,881,077 $1,944,116 $1,996,085 ========== ========== ========== ========== ========== ========== FIXED CHARGES: Interest and amortization $ 544,593 $ 523,808 $561,265 $560,641 $ 635,407 $ 708,446 Rentals(3) 4,460 3,463 3,512 4,018 3,269 2,639 Capitalized interest(6) 35,115 73,808 48,996 59,885 57,803 14,937 Allocable portion of interest on long-term contracts for the purchase of power(4) 1,908 1,890 1,870 1,848 1,824 1,797 Spent nuclear fuel interest(7) 1,339 487 68 - - - Interest on partnership indebtedness(5) 38,070 41,091 30,591 34,681 31,356 34,938 Subsidiary preferred and preference stock dividend requirements- pre-tax basis 68,911 63,261 67,480 78,017 81,011 73,052 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges(B) $ 694,396 $ 707,808 $ 713,782 $ 739,090 $ 810,670 $ 835,809 ========== ========== ========== ========== ========== ========== RATION OF EARNINGS TO FIXED CHARGES(A)/(B): 2.68 2.28 2.48 2.55 2.40 2.39 ========== ========== ========== ========== ========== ==========
(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. EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In the following 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 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 devaluation; new or increased environmental liabilities; and other unforeseen events. RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- EARNINGS Edison International's 1997 basic earnings per share were $1.75, compared with $1.64 in 1996 and $1.66 in 1995. Southern California Edison (SCE) earned $1.44 in 1997, compared with $1.42 in 1996 and $1.44 in 1995. Edison Mission Energy (EME), Edison Capital and Mission Land Company had combined earnings of 44 CENTS, up from 27 CENTS in 1996 and 23 CENTS in 1995. Edison International's earnings include special charges of 7 CENTS in 1996 (a 4 CENTS net charge at SCE for workforce management costs and reserves, and a 3 CENTS charge at Mission Land for real estate reserves) and 3 CENTS in 1995 for SCE's workforce management expenses. Edison Enterprises (Edison International's retail arm comprised of Edison Source, Edison EV, Edison Select and Edison Utility Services) and the Edison International parent company had combined expenses of 13 CENTS in 1997, compared with 5 CENTS in 1996 and 1 CENT in 1995. Edison International initiated a share repurchase program in 1995 to increase shareholder value. Its Board of Directors has authorized repurchases of up to $2.3 billion in outstanding shares. In 1997, over 48 million shares were repurchased for $1.2 billion. From the inception of the program through year-end 1997, Edison International has repurchased over 72 million shares for $1.6 billion. 1997 VS. 1996 SCE's 1997 earnings of $1.44 per share were 2 CENTS lower than 1996 (excluding 1996 special charges noted above). The decrease is mainly due to lower earnings from an extended refueling outage at the San Onofre Nuclear Generating Station. 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 44 CENTS in 1997, up 14 CENTS over 1996. EME contributed a record $115 million to earnings in 1997, compared with $92 million in 1996, an increase of 25%. The increase is primarily due to higher earnings from EME's foreign projects, partially due to lower tax rates. Edison Capital contributed a record $61 million to earnings in 1997, up 50% over the prior-year earnings of $41 million. Edison Capital's earnings benefited substantially from two cross-border lease investments and a record high level of affordable housing investments. Edison Capital and EME together contributed 25% of Edison International's total earnings, up from 18% in 1996. Continued start-up costs at Edison Enterprises, combined with interest expense at the Edison International parent company, were 8 CENTS per share more in 1997 than 1996. The reduced number of outstanding shares benefited Edison International's earnings per share by 15 CENTS in 1997, when compared with 1996. 1996 VS. 1995 Excluding special charges, SCE's 1996 earnings per share were $1.46, down 1 CENTS from 1995. The decrease is mainly attributable to a reduction in authorized rates of return and authorized operating expenses, partially offset by improved operating performance. The combined 1996 earnings of EME, Edison Capital and Mission Land, excluding nonrecurring items, were 30 CENTS, 7 CENTS higher than in 1995. The increase is primarily due to higher earnings from EME's First Hydro project in the United Kingdom, which was acquired in December 1995. Continued start-up costs at Edison Enterprises, combined with interest expense at the Edison International parent company, were 4 CENTS per share more in 1996 than 1995. The reduced number of outstanding shares benefited Edison International's earnings per share by 3 CENTS in 1996 versus 1995. OPERATING REVENUE Electric utility revenue increased 5% 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. Operating revenue in 1996 decreased 4% from 1995, as increased sales volume was offset by lower average rates. The lower rates were attributable to the California Public Utilities Commission's (CPUC) decision to lower SCE's 1996 authorized revenue by 4.4%. Additionally, during 1996, SCE's customers received a one-time bill credit totaling $237 million as part of a CPUC-ordered refund of energy cost balancing account overcollections. In 1997, over 98% of SCE's operating revenue was from retail sales. Retail rates are regulated by the CPUC and wholesale rates are regulated by the Federal Energy Regulatory Commission (FERC). Due to warm weather during the summer months, operating revenue during the third quarter of each year is significantly higher than the other quarters. The changes in electric utility revenue resulted from:
IN MILLIONS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Electric utility revenue -- Rate changes (including refunds) $ 173 $(522) $ 168 Sales volume changes 193 206 (129) Other 4 26 35 ----- ----- ----- Total $ 370 $(290) $ 74 ----- ----- ----- ----- ----- -----
Legislation enacted in September 1996 provided for, among other things, at least 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 the June 23 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 10, 1996, level (system average of 10.1 CENTS per kilowatt-hour). See discussion in Competitive Environment. Revenue from diversified operations increased 33% in 1997 primarily due to the start-up of EME's Loy Yang B Unit 2 and Kwinana projects. These facilities began commercial operations during the fourth quarter of 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. Revenue from diversified operations increased substantially during 1996, due to an increase in EME's electric revenue from its First Hydro, Iberian Hy-Power and Loy Yang B Unit 2 projects. OPERATING EXPENSES Fuel expense increased 40% in 1997. The increase is due to a $174 million gas contract termination payment during the third quarter, 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 the year. 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. Fuel expense increased 11% in 1996, compared to 1995, due to higher gas prices and changes in the fuel mix. EME's 1996 fuel expense increased due to Loy Yang B Unit 2, Kwinana and the inclusion of pumping costs related to First Hydro. Purchased-power expense increased slightly in 1997 and 1996, due to increases in spot market purchases and increases in power purchased under federally mandated contracts. SCE is required under federal law to purchase power from certain nonutility generators even though energy prices under these contracts are generally higher than other sources. In 1997, SCE paid about $1.6 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 substantially in 1997, due to undercollections in the energy cost balancing account as actual energy costs (including the gas termination payments 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--Direct Customer Access), research and development activities and San Onofre. 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 (see discussion in Regulatory Matters). The provisions for regulatory adjustment clauses also decreased in 1996 from 1995 due to lower than authorized base-rate revenue, undercollections related to the accelerated recovery of SCE's remaining investment in San Onofre Units 2 and 3 and the $237 million refund to ratepayers during 1996 for prior energy cost balancing account overcollections. Other operating expenses increased 15% in 1997, primarily due to start-up expenses at Edison Enterprises and increased administrative costs at EME, Edison Capital and Mission Land. Other operating expenses increased 10% in 1996 when compared with 1995, as increased operating costs at EME's First Hydro, Iberian Hy-Power and Loy Yang B Unit 2 projects and higher administrative costs offset cost reductions and strong operating performance at SCE. Maintenance expense increased 23% in 1997, due to increased maintenance costs for the scheduled refueling outages at the San Onofre units and SCE's transmission and distribution operating facilities. Depreciation and decommissioning expense increased 16% in 1997. The increase is due to increases in plant assets and the accelerated recovery of the Palo Verde Nuclear Generating Station units effective January 1997. Depreciation and decommissioning expense increased 16% in 1996, compared to 1995, due to higher depreciation rates, the accelerated recovery of San Onofre Units 2 and 3 starting in April 1996, and increases at EME related to its Loy Yang B Unit 2 and Kwinana projects. Property and other taxes decreased 32% in 1997, due to a reclassification of SCE's payroll taxes to operation and maintenance expense. OTHER INCOME AND DEDUCTIONS The provision for rate phase-in plan reflects 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 and January 1998 for Units 1, 2 and 3, respectively. The provision is a non-cash offset to the collection of deferred revenue. Interest and dividend income increased 35% in 1997, 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 1997, due to EME's May 1997 acquisition of the remaining 49% ownership interest in the Loy Yang B project. Minority interest increased 46% during 1996, primarily from higher pre-tax income at EME's Loy Yang B Unit 2. Other nonoperating income decreased substantially in 1997, due to additional accruals for regulatory matters associated with the restructuring of California's electric utility industry. Other nonoperating income also decreased in 1996, compared to 1995, due to regulatory accruals in 1996. INTEREST AND OTHER EXPENSES Interest on long-term debt decreased in 1997, due to the early retirement of $400 million of first and refunding mortgage bonds in July 1997, partially offset by additional interest expense associated with the issuance of approximately $2.5 billion in rate reduction notes in December 1997 (see discussion in Cash Flows from 24 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities). Interest on long-term debt increased 12% in 1996 compared with 1995, reflecting EME's increased ownership in Iberian Hy-Power and First Hydro. Other interest expense increased substantially in 1997, due to higher levels of short-term debt used to retire first and refunding mortgage bonds, discussed above. Other interest expense increased 11% during 1996, due to a $350 million borrowing by Edison International (holding company) for the acquisition of First Hydro and for its ongoing share repurchase program. 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 $2.3 billion of its outstanding shares of common stock. Edison International has repurchased 76.9 million shares ($1.7 billion) between January 1995 and January 30, 1998, funded by dividends from its subsidiaries and its lines of credit. Edison International's cash flow coverage of dividends for 1997 was 5.2 times compared to 5.0 times in 1996 and 4.7 times in 1995. Edison International's dividend payout ratio for 1997 was 57%. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities totaled $2.1 billion in 1997, $2.2 billion in 1996 and $2.1 billion in 1995. Cash from operations exceeded capital requirements for all years presented. CASH FLOWS FROM FINANCING ACTIVITIES At December 31, 1997, Edison International and its subsidiaries had $3.1 billion of borrowing capacity available under lines of credit totaling $3.6 billion. SCE had available lines of credit of $1.8 billion, with $1.3 billion 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 available lines of credit totaling $1.0 billion. The nonutility companies had lines of credit of $800 million available to finance general cash requirements. Edison International's unsecured lines of credit are at negotiated or bank index rates with various expiration dates. The majority have five-year terms. SCE's short-term debt is used to finance fuel inventories, balancing account undercollections and general cash requirements. EME uses available credit lines mainly for construction projects until long-term construction or project loans are secured. 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, 1997, SCE could issue approximately $10.4 billion of additional first and refunding mortgage bonds and $5.3 billion of preferred stock at current interest and dividend rates. EME owns, through a wholly owned subsidiary, 50% of the Brooklyn Navy Yard project. On December 17, 1997, the Brooklyn Navy Yard project partnership completed a $407 million permanent, nonrecourse financing for the project. In February 1997, the contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. (BNY) for damages in the amount of $137 million. In addition to defending this action, BNY has filed an action against the contractor in New York State Court asserting general monetary claims in excess of $13 million arising out of the turnkey agreement. EME agreed to indemnify the partnership and its partner from all claims and costs arising from or in connection with the contractor litigation, which indemnity has been assigned to the lenders. Edison International believes that the outcome of this litigation will not materially affect its results of operations or financial position. In April 1997, EME completed financing and commenced construction of the Doga project, a 180-megawatt, gas-powered power plant near Istanbul, Turkey. A wholly owned subsidiary of EME owns 80% of this project. In connection with the financing, EME has guaranteed $21 million in equity contributions and will continue making equity contributions until commercial operation begins, which is scheduled for 1999. In May 1997, Edison Capital closed its largest infrastructure transaction in recent years by entering into a cross-border lease transaction in the Eems Power Station located in the Netherlands. This transaction was valued at $188 million. The Eems Power Station is a new, five unit (335 MW each) gas-fired, combined-cycle power plant. It is operated by EPON, the largest power generating company in the Netherlands. Edison Capital also acquired an interest in the electric power transmission system in South Australia. This cross-border lease transaction was valued at $161 million. EME has firm commitments of $295 million to make equity and other contributions, primarily for the Paiton project in Indonesia, the ISAB project in Italy, and the Doga project in Turkey. EME also has contingent obligations to make additional contributions of $181 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. 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, 1997, SCE had the capacity to pay $1.4 billion 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 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 25 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 have maturities ranging from one to 10 years, and bear interest at rates ranging from 5.98% 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 SPE 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 The primary uses of cash for investing activities are additions to property and plant, the nonutilities' investments in partnerships and unconsolidated subsidiaries, 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 $12.7 billion between 2013 - 2070 to decommission its nuclear facilities. This estimate is based on SCE's current-dollar decommissioning costs ($2.1 billion), escalated using a 6.65% annual rate. These costs are expected to be funded from independent decommissioning trusts which receive SCE contributions of approximately $100 million per year until decommissioning begins. Cash used for the nonutility subsidiaries' investing activities was $375 million in 1997, $409 million in 1996 and $1.2 billion in 1995. 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. SCE has hedged a portion of its exposure to increases in natural gas prices. Increases in natural gas prices tend to increase the price of electricity purchased from the power exchange(PX). SCE's exposure is also limited by regulatory mechanisms that protect SCE from much of the risk arising from high electricity prices. 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. As a result of interest rate hedging mechanisms, interest expense increased $21 million in 1997, $6 million in 1996 and $7 million in 1995. The maturity dates of several of EME's interest rate swap 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. Projects in the United Kingdom sell their electrical energy and capacity through a centralized electricity pool, which establishes a half-hourly clearing price for electrical 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 purchase 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 based on the difference between the price in the contract and the half-hourly clearing price for the element of power under contract. These contracts can be sold in two structures: one-way contracts, where a specified monthly amount is received in advance and difference payments are made when the pool price is above the price specified in the contract, and two-way contracts, where the counterparty pays First Hydro when the pool price is below the contract price instead of a specified monthly amount. 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. First Hydro's electric revenue increased by $37 million and decreased by $5 million for the year ended December 31, 1997, and 1996, respectively, as a result of electricity rate swap agreements. Loy Yang B sells its electrical 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 of Victoria, 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 can be sold as one-way or two-way contracts which are structured similar to the electricity rate swap agreements described above. These contracts are accounted for as electricity rate swap agreements. The 26 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. Loy Yang B's electric revenue was increased by $59 million for the year ended December 31, 1997, as a result of hedging contract arrangements. 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. Various statistical forecasting techniques are used to help assess foreign exchange risk and the probabilities of various outcomes. There can be no assurance, however, that fluctuations in exchange rates will be fully offset by hedges or that currency movements and the relationship between certain macroeconomic variables will behave in a manner that is consistent with historical or forecasted relationships. Construction on the two-unit Paiton project is approximately 85% complete, and commercial operation is expected in the first half of 1999. 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. 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 with 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. A Presidential decree has deemed some power plants, but not including the Paiton project, subject to review, postponement or cancellation. EME continues to monitor the situation closely. A 10% increase in market interest rates would result in a $29 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 $30 million decline in the fair market value of interest rate hedge agreements. A 10% increase in pool prices would result in a $97 million decrease in the fair value of electricity rate swap agreements. A 10% decrease in pool prices would result in a $97 million increase in the fair value of electricity rate swaps. A 10% increase in natural gas prices would result in a $26 million increase in the fair market value of gas call options. A 10% decrease in natural gas prices would result in a $17 million decline in the fair market value of gas call options. A 10% change in market rates is expected to have an immaterial effect on Edison International's other financial instruments. PROJECTED CAPITAL REQUIREMENTS Edison International's projected construction expenditures for the next five years are: 1998--$1.1 billion; 1999--$807 million; 2000--$763 million; 2001--$721 million; and 2002--$671 million. Long-term debt maturities and sinking fund requirements for the next five years are: 1998--$848 million; 1999--$670 million; 2000--$719 million; 2001--$728 million; and 2002--$635 million. Preferred stock redemption requirements for the next five years are: 1998 through 2001--zero and 2002--$105 million. 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 the June 10, 1996, level (system average of 10.1 CENTS per kilowatt-hour). See further discussion in Competitive Environment -- Restructuring Legislation. In 1998, SCE's revenue will be affected by various mechanisms depending on the utility operation. Revenue related to distribution operations will be determined through a performance-based rate-making mechanism (PBR) (see discussion in Competitive Environment -- PBR) and the distribution assets will have the opportunity to earn a CPUC-authorized 9.49% return. Until the independent system operator (ISO) begins operation, transmission revenue will be determined by the same mechanism as distribution operations. After that time, transmission revenue will be determined through FERC-authorized rates and transmission assets will earn a 9.43% return. These rates are subject to refund. See discussions in the Competitive Environment -- Rate-setting and FERC Restructuring Decision sections. Revenue from generation-related operations will be determined through the competition transition charge (CTC) mechanism, nuclear rate-making agreements and the competitive market in 1998. Revenue related to fossil and hydroelectric generation operations will be recovered from two sources. The portion that is made uneconomic by electric industry restructuring will be determined through the CTC mechanism. The portion that is economic will be recovered through the PX mechanism. In 1998, fossil and hydroelectric generation assets will earn a 7.22% return. A more detailed discussion is in Competitive Environment -- CTC. The CPUC has authorized revised rate-making plans for SCE's nuclear facilities, which call for the accelerated recovery of its 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 4 CENTS 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, 28 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 a minimal impact on 1998 earnings. However, the issuance of the rate reduction notes in December 1997, which enables the repurchase of debt and equity, will have a negative impact on 1998 earnings of approximately $97 million. The impact on earnings per share will be mitigated due to the repurchase of common stock from the rate reduction note proceeds. In 1994, SCE filed its testimony in the non-Qualifying Facilities (QF) phase of the 1994 Energy Cost Adjustment Clause proceeding. In 1995, the CPUC's Office of Ratepayer Advocates (ORA) filed its report on the reasonableness of SCE's gas supply costs for both the 1993 and 1994 record periods. The report recommended a disallowance of $13 million for excessive costs incurred from November 1993 through March 1994 associated with SCE's Canadian gas purchase and supply contracts. The report requested that the CPUC defer finding SCE's Canadian supply and transportation agreements reasonable for the duration of their terms and that the costs under these contracts be reviewed on a yearly basis. In 1996, the ORA issued its report for the 1995 record period recommending a $38 million disallowance for excessive costs incurred from April 1994 through March 1995. Both proposed disallowances were later consolidated into one proceeding. On December 3, 1997, the CPUC approved a settlement agreement between SCE and the ORA on this and any future issues, which will result in a $61 million (including interest) refund to SCE's customers. This refund is fully reflected in the financial statements and will be made in first quarter 1998. In 1991, SCE filed its testimony in the QF phase of the 1991 Energy Cost Adjustment Clause proceeding. In 1993, the ORA filed its report on the reasonableness of SCE's QF contracts and alleged that SCE had imprudently renegotiated a QF contract with the Mojave Cogeneration Company. The report recommended a disallowance of $32 million (1993 net present value) over the contract's 20-year life. Subsequently, SCE and the ORA reached a settlement where SCE agreed to a one-time reduction to its energy cost adjustment clause balancing account of $14 million plus interest. In October 1996, the CPUC approved the settlement agreement, subject to SCE and the ORA accepting certain conditions concerning the way the $14 million payment would be reflected in rates. After reviewing the decision, SCE declined to accept the condition proposed by the CPUC and in November 1996 filed an application for rehearing. In February 1997, the CPUC denied SCE's application. Because SCE and the ORA were unable to finalize their settlement, hearings on the ORA's disallowance recommendations were held in June 1997. During the hearings, the ORA presented testimony to update its assessment of ratepayer harm, which it now estimates to be $45 million (1997 net present value) over the contract's life. In November 1997, a CPUC administrative law judge (ALJ) issued a proposed decision which would adopt the ORA's $45 million disallowance. In January 1998, the CPUC withdrew the ALJ's proposed decision pending oral arguments. Oral arguments were heard on February 4, 1998, at which time SCE requested an alternate proposed decision be issued. SCE expects this matter to be returned to the CPUC's agenda in the near future and a final decision to be issued during second quarter 1998. SCE cannot predict the final outcome of this matter but does not believe it will materially affect its results of operations. 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 RESTRUCTURING - ------------------------------------------------------------------------------- RESTRUCTURING LEGISLATION -- In September 1996, the State of California enacted legislation to provide a transition to a competitive market structure. The legislation substantially adopted the CPUC's December 1995 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 would be recovered through the terms of their contracts while most of the remaining transition costs would be recovered through 2001. The legislation 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 would allow SCE to reduce rates by at least 10% to these customers, beginning January 1, 1998. The financing would occur with securities issued by the California Infrastructure and Economic Development Bank, or an entity approved by the Bank. The legislation 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 legislation mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Finally, the legislation 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 May 1997, SCE filed an application with the CPUC requesting approval of the issuance of an aggregate amount of up to $3 billion of rate reduction notes in one or more series or classes and a 10% rate reduction for the period from January 1, 1998, through March 31, 2002. At the same time, SCE filed an application with the California Infrastructure and Economic Development Bank for approval to issue the notes. Residential and small commercial customers will repay the notes over the expected 10-year term through non-bypassable charges based on electricity consumption. In December 1997, after receiving approval from both the CPUC and the Infrastructure Bank, a limited liability company created by SCE issued approximately $2.5 billion of these notes. For further details, see the discussion in Cash Flows from Financing Activities. 28 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CPUC RESTRUCTURING DECISION -- The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure, which is expected to provide competition and customer choice and is scheduled to begin March 31, 1998. Key elements of the CPUC's restructuring decision included: creation of the PX and ISO; availability of direct customer access and customer choice; PBR for those utility services not subject to competition; voluntary divestiture of at least 50% of utilities' gas-fueled generation, and implementation of the CTC. RATE-SETTING -- In December 1996, SCE filed a more comprehensive plan (elaborating on its July 1996 filing related to the conceptual aspects of separating costs as requested by CPUC and FERC directives) for the functional unbundling of its rates for electric service, beginning January 1, 1998. In response to CPUC and FERC orders, as well as the new restructuring legislation, this filing addressed the implementation-level detail for the functional unbundling of rates into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning. The transmission component of this rate unbundling process was addressed at the FERC through a March 1997 filing. In December 1997, the FERC approved these rates, subject to refund, to be effective on the date the ISO begins operation. CPUC hearings on SCE's rate unbundling (also known as rate-setting) plan were concluded in April 1997. In August 1997, the CPUC issued a decision which adopted the methodology for determining CTC residually (see CTC discussion below) and adopted SCE's revenue requirement components for public benefit programs and nuclear decommissioning. The decision also adjusted SCE's proposed distribution revenue requirement by reallocating $76 million of the amount annually to other functions such as generation and transmission. Under the decision, SCE will be able to recover most of the reallocated amount through market revenue, other rate-making mechanisms after petitioning the CPUC to modify its prior decisions, or another review process later in its divestiture proceeding. PX AND ISO -- In April 1996, SCE, Pacific Gas & Electric Company and San Diego Gas & Electric Company filed a proposal with the FERC regarding the creation of the PX and the ISO. In November 1996, the FERC conditionally accepted the proposal and directed the three utilities, the ISO, and the PX to file more specific information. The filing was made in March 1997, and included SCE's proposed transmission revenue requirement. On October 29, 1997, the FERC gave conditional, interim authorization for operation of the PX and ISO to begin on January 1, 1998. The FERC stated it would closely monitor the PX and ISO, require further studies and make modifications, where necessary. A comprehensive review will be performed by the FERC after three years of operation of the PX and ISO. On December 22, 1997, the PX and ISO governing boards announced a delay in the planned start-up of the PX and ISO due to insufficient testing of operational, settlement and billing systems. The PX and ISO are now expected to begin operation by March 31, 1998. In July 1996, the three utilities jointly filed an application with the CPUC requesting approval to establish a restructuring trust which would obtain loans up to $250 million for the development of the ISO and PX through January 1, 1998. The loans are backed by utility guarantees; SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an interim order establishing the restructuring trust and the funding level of $250 million, which has been used to build the hardware and software systems for the ISO and PX. The ISO and PX will repay the trust's loans and recover funds from future ISO and PX customers. In November 1997, the CPUC approved a petition jointly filed by the three utilities which requested an increase in the loan guarantees from $250 million to $300 million; SCE's share of this new total is $135 million. In December 1997, the CPUC approved a remaining item with respect to the petition which requested that the one-time restructuring implementation charge, to be paid to the PX by the utilities, be deemed a non-bypassable charge to be recovered from all retail customers. The amount of the PX charge is $85 million; SCE's share is 45%, or $38 million. DIRECT CUSTOMER ACCESS -- In May 1997, the CPUC issued a decision describing how all California investor-owned-utility customers will be able to choose who will provide them with electric generation service beginning January 1, 1998. On December 30, 1997, the CPUC issued a decision delaying direct access until March 31, 1998, due to operational delays in the start-up of the PX and ISO. On this date, customers will be able to choose to remain utility customers with bundled electric service from SCE (which will purchase its power through the PX), or choose direct access, which means the customer can contract directly with either independent power producers or retail electric service providers such as power brokers, marketers and aggregators. Additionally, all investor-owned-utility customers must pay the CTC whether or not they choose to buy power through SCE. Electric utilities will continue to provide the core distribution service of delivering energy through its distribution system regardless of a customer's choice of electricity supplier. The CPUC will continue to regulate the prices and service obligations related to distribution services. If the new competitive market cannot accommodate the volume of direct access transactions, the CPUC could implement a contingency plan. However, the CPUC believes it is likely that interest in and migration to direct access will be gradual. REVENUE CYCLE SERVICES -- A decision issued by the CPUC in May 1997, introduces customer choice to metering, billing and related services (referred to as revenue cycle services) that are now provided by California's investor-owned utilities. Under this revenue cycle services unbundling decision, beginning in January 1998, direct access customers may choose to have either SCE or their electric generation service provider render consolidated (energy and distribution) bills, or they may choose to have separate billings from each service provider. However, not all electric generation service providers will necessarily offer each billing option. In addition, beginning in January 1998, customers with maximum demand above 20 kW (primarily industrial and large commercial) can choose SCE or any other supplier to provide their metering service. All other customers will have this option beginning in January 1999. In determining whether any credit should be provided by the utility to firms providing customers with revenue cycle services, and the amount of any such credit, the CPUC has indicated that it is appro- 29 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION priate to net the cost incurred by the utility and the cost avoided by the utility as a result of such services being provided by the other firm rather than by the utility. The unbundling of revenue cycle services will expose SCE to the possible loss of revenue, higher stranded costs and a reduction in revenue security. PBR -- In 1993, SCE filed for a PBR mechanism to determine most of its revenue (excluding fuel). The filing was subsequently divided between transmission and distribution (T&D) and power generation. In September 1996, the CPUC adopted a non-generation or T&D PBR mechanism for SCE which began on January 1, 1997. According to the CPUC, beginning in 1998 (coincident with the initiation of the competitive market), the transmission portion is to be separated from non-generation PBR and subject to ratemaking under the rules of the FERC. The distribution-only PBR will extend through December 2001. Key elements of the non-generation PBR include: T&D rates indexed for inflation based on the Consumer Price Index less a productivity factor; elimination of the kilowatt-hour sales adjustment; 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 T&D operations. With the CPUC's 1995 restructuring decision and the passage of restructuring legislation in 1996, the majority of power generation ratemaking (primarily fossil-fueled and nuclear) was assigned to other mechanisms. In April 1997, a CPUC interim order determined that the proposed structure of the fossil-fueled plants' must-run contracts were under the FERC's jurisdiction. On October 31, 1997, SCE filed must-run tariff schedules with the FERC covering its six ISO-designated must-run plants. In the meantime, SCE is pursuing the divestiture of these plants (see Divestiture discussion below) and might not ever itself provide service under these FERC tariff schedules. In December 1997, the CPUC adopted a PBR-type ratemaking mechanism for SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue requirement in 1998 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 (see CTC discussion below). DIVESTITURE -- In November 1996, SCE filed an application with the CPUC to voluntarily divest, by auction, all 12 of its oil- and gas-fueled generation plants. This application builds on SCE's March 1996 plan which outlined how SCE proposed to divest 50% of these assets. Under the new proposal, SCE would continue to operate and maintain the divested power plants for at least two years following their sale, as mandated by the restructuring legislation enacted in September 1996. In addition, SCE would offer workforce transition programs to those employees who may be impacted by divestiture-related job reductions. SCE's proposal is contingent on the overall electric industry restructuring implementation process continuing on a satisfactory path. In September 1997, the CPUC approved SCE's proposal to auction the 12 plants. On December 1, 1997, SCE filed a compliance filing with the CPUC stating that it had sold 10 plants. On December 16, 1997, the CPUC approved the sale of the 10 plants. On February 6, 1998, SCE filed a compliance filing with the CPUC regarding the sale of an 11th plant. CPUC approval of the sale is expected before March 31, 1998. The total sales price of the 11 plants is $1.1 billion, or 2.16 times their combined book value of $531 million. Net proceeds of the sales will be used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. The transfer of ownership of the 11 plants is expected to occur shortly before the start of the new competitive market, which the PX and ISO currently expect to occur on March 31, 1998. The sale and CPUC approval of the single remaining plant is expected to be completed in early 1998. CTC -- Recovery of costs to transition to a competitive market is being implemented 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 20, 1995, decision date. In August 1996, in compliance with the CPUC's restructuring decision, SCE filed its application to estimate its 1998 transition costs. In October 1996, SCE amended its transition cost filing to reflect the effects of the legislation enacted in September 1996. Under the rate freeze codified in the legislation, the CTC will be determined residually (i.e., after subtracting other cost components for the PX, T&D, nuclear decommissioning and public benefit programs). Nevertheless, the CPUC directed that the amended application provide estimates of SCE's potential transition costs from 1998 through 2030. SCE provided two estimates between approximately $13.1 billion (1998 net present value) assuming the fossil plants have a market value equal to their net book value, and $13.8 billion (1998 net present value) assuming the fossil plants have no market value. These estimates are 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: $7.5 billion from SCE's QF contracts, which are the direct result of prior legislative and regulatory mandates; and $5.6 billion to $6.3 billion from costs pertaining to certain generating plants (successful completion of the sale of SCE's gas-fired generating plants would reduce this estimate of transition costs for SCE-owned generation to less than $5 billion) 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. In February 1997, SCE filed an update to the CTC filing to reflect approval by the CPUC of settlements regarding ratemaking for SCE's share of Palo Verde and the buyout of a power purchase agreement, as well as other minor data updates. No substantive changes in the total CTC estimates were included. This issue has been separated into two phases; Phase 1 addresses the rate-making issues and Phase 2 the quantification issues. 30 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION A decision on Phase 1 was issued in June 1997, which, among other things, required the establishment of a transition cost balancing account and annual transition cost proceedings, set a market rate forecast for 1998 transition costs, and required that generation-related regulatory assets be amortized ratably over a 48-month period. Hearings on Phase 2 were held in May and June 1997 and a final decision was issued on November 19, 1997. The Phase 2 decision established the calculation methodologies and procedures for SCE to collect its transition costs from 1998 through the end of the rate freeze. The Phase 2 decision also reduced 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. The decision, excluding the effects of other rate actions, had a negative impact on 1997 earnings of approximately 4CENTS per share. SCE has filed an application for rehearing on the 1997 rate of return issue. ACCOUNTING FOR GENERATION-RELATED ASSETS -- If the CPUC's electric industry restructuring plan is implemented as outlined above, SCE would be allowed to recover its CTC 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). As previously reported, from November 1996 to July 1997, SCE and the other major California electric utilities were engaged in discussions with the Securities and Exchange Commission staff regarding the proper application of regulatory accounting standards in light of the electric industry restructuring legislation enacted by the State of California in September 1996 and the CPUC's electric industry restructuring plan. This issue was placed on the agenda of the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) during April 1997 and a final consensus was reached at the July EITF meeting. During the third quarter of 1997, SCE implemented the EITF consensus and discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities. However, implementation of the EITF consensus did not require SCE to write off any of its generation-related assets, including regulatory assets of approximately $600 million at December 31, 1997. SCE has retained these assets on its balance sheet because the legislation and restructuring plan referred to above make probable their recovery through a non-bypassable CTC to distribution customers. These regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments, unamortized losses on reacquired debt, and the recovery of amounts deferred under the Palo Verde rate phase-in plan. The consensus reached by the EITF also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. 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 as a one-time, non-cash charge against earnings. If such a write-off were to be required, SCE believes that it should not affect the recovery of stranded costs provided for in the legislation and restructuring plan. Although depreciation-related differences could result from applying a regulatory prescribed depreciation method (straight-line, remaining-life method) rather than a method that would have been applied absent the regulatory process, SCE believes that the depreciable lives of its generation-related assets would not vary significantly from that of an unregulated enterprise, as the CPUC bases depreciable lives on periodic studies that reflect the physical useful lives of the assets. SCE also believes that any depreciation-related differences would be recovered through the CTC. If events occur during the restructuring process that result in all or a portion of the CTC 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 implementation phases, or the effect, after the transition period, that competition will have on its results of operations or financial position. FERC RESTRUCTURING DECISION In April 1996, the FERC issued its decision on stranded-cost recovery and open access transmission, effective July 1996. The decision, reaffirmed by the FERC in its March and November 1997 orders, requires all electric utilities subject to the FERC's jurisdiction to file transmission tariffs which provide competitors with increased access to transmission facilities for wholesale transactions and also establishes information requirements for the transmission utility. The decision also provides utilities with the opportunity to recover stranded costs associated with existing wholesale customers, retail-turned-wholesale customers and retail wheeling when the state regulatory body does not have authority to address retail stranded costs. Even though the CPUC is currently addressing stranded-cost recovery through the CTC proceedings, the FERC has also asserted primary jurisdiction over the recovery of stranded costs associated with retail-turned-wholesale customers, such as a new municipal electric system or a municipal annexation. However, the FERC did clarify that it does not intend to prevent or interfere with a state's authority and that it has discretion to defer to a state stranded-cost-calculation method. In January 1997, the FERC accepted the open access transmission tariff SCE filed in compliance with the April 1996 decision. The rates included in the tariff are being collected subject to refund. In May 1997, SCE filed a revised open access tariff to reflect the few revisions set forth in the March 1997 order. The open access transmission tariff will be terminated on the date the ISO begins operation. 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 31 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION identified site. Unless there is a probable amount, Edison International records the lower end of this range of costs. In connection with the issuance of the San Onofre Units 2 and 3 operating permits, SCE reached agreement with the California Coastal Commission in 1991 to restore certain marine mitigation sites. The restorations include two sites: designated wetlands and the construction of an artificial kelp reef off the California coast. After SCE requested certain modifications to the agreement, the Coastal Commission issued a final ruling in April 1997 to reduce the scope of remediations. SCE elected to pay for the costs of marine mitigation in lieu of placing the funds into a trust. Rate recovery of these costs is occurring through the San Onofre incentive pricing plan. Edison International's recorded estimated minimum liability to remediate its 51 identified sites is $178 million, which includes $75 million for the two sites discussed above. One of SCE's sites, a former pole-treating facility, is considered a federal Superfund site and represents 42% of Edison International's 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 $246 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. The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $91 million of Edison International's 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 $153 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. This amount includes $60 million of marine mitigation costs remaining to be recovered through the San Onofre incentive pricing plan. 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 1997 were $10 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 regulations for Mohave is unknown. Edison International's projected capital expenditures to protect the environment are $820 million for the 1998 - 2002 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, which was completed in Spring 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 rating capacity of the unit must be reduced. As a result of the increased degradation, a mid-cycle inspection outage will be conducted in early 1998 for Unit 2. 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. As a result, a mid-cycle inspection outage is planned for early 1998. However, during Unit 2's Spring 1997 inspection outage, similar tube supports showed no signs of such erosion. PROPOSED NEW ACCOUNTING STANDARD - ------------------------------------------------------------------------------- During 1996, the Financial Accounting Standards Board issued an exposure draft that would establish accounting standards for the 32 EDISON INTERNATIONAL AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION recognition and measurement of closure and removal obligations. The exposure draft would require the estimated present value of an obligation to be recorded as a liability, along with a corresponding increase in the plant or regulatory asset accounts when the obligation is incurred. If the exposure draft is approved in its present form, it would affect SCE's accounting practices for the decommissioning of its nuclear power plants, obligations for coal mine reclamation costs and any other activities related to the closure or removal of long-lived assets. SCE does not expect that the accounting changes proposed in the exposure draft would have an adverse effect on its results of operations even after deregulation due to its current and expected future ability to recover these costs through customer rates. The nonutility subsidiaries are currently reviewing what impact the exposure draft may have on their results of operations and financial position. YEAR 2000 ISSUE - ------------------------------------------------------------------------------- Many of SCE's existing computer systems identify a year by only two digits instead of four. If not corrected, these programs could fail or create erroneous results when the new century begins. This situation has been referred to generally as the Year 2000 Issue. SCE has developed plans and is addressing the programming changes that it has determined are necessary in order for its computer systems to function properly beginning in 2000. 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. Preliminary estimates of the costs to complete these modifications, including the cost of new hardware and software application modifications, range from $55 million to $80 million, about half of which are expected to be capital costs. Current rate levels for providing electric service should be sufficient to provide funding for these modifications. Remediation of existing critical systems is expected to be 75% complete by the end of 1998. 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. 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.
QUARTERLY FINANCIAL DATA - ----------------------------------------------------------------------------------------------- (UNAUDITED) 1997 - ----------------------------------------------------------------------------------------------- IN MILLIONS, EXCEPT PER-SHARE AMOUNTS TOTAL FOURTH THIRD SECOND FIRST - ----------------------------------------------------------------------------------------------- Operating revenue $ 9,235 $ 2,329 $ 2,738 $ 2,167 $ 2,001 Operating income 1,498 342 470 329 357 Net income 700 139 277 139 145 Per share: Basic earnings 1.75 .37 .70 .34 .35 Diluted earnings 1.73 .36 .70 .34 .34 Dividends declared 1.00 .25 .25 .25 .25 Common stock prices: High $ 27 13/16 $ 27 13/16 $ 27 1/8 $ 25 5/8 $ 23 1/8 Low 19 1/2 24 13/16 24 20 1/4 19 1/2 Close 27 3/16 27 3/16 25 1/4 24 7/8 22 1/2 1996 - ----------------------------------------------------------------------------------------------- IN MILLIONS, EXCEPT PER-SHARE AMOUNTS TOTAL FOURTH THIRD SECOND FIRST - ----------------------------------------------------------------------------------------------- Operating revenue $ 8,545 $ 2,195 $ 2,568 $ 1,814 $ 1,968 Operating income 1,478 328 468 332 350 Net income 717 117 277 156 167 Per share: Basic earnings 1.64 .27 .63 .35 .38 Diluted earnings 1.63 .27 .63 .35 .37 Dividends declared 1.00 .25 .25 .25 .25 Common stock prices: High $ 20 3/8 $ 20 3/8 $ 18 1/4 $ 17 5/8 $ 18 5/8 Low 15 1/8 17 3/4 15 1/8 15 3/8 16 5/8 Close 19 7/8 19 7/8 17 7/8 17 5/8 17 1/8
33 EDISON INTERNATIONAL AND SUBSIDIARIES 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. /s/ RICHARD K. BUSHEY /s/ JOHN E. BRYSON - ---------------------------------- ---------------------------------- RICHARD K. BUSHEY JOHN E. BRYSON VICE PRESIDENT AND CONTROLLER CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER January 30, 1998 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, 1997, and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997, and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP - ------------------------------------- ARTHUR ANDERSEN LLP Los Angeles, California January 30, 1998 34 EDISON INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS, EXCEPT PER-SHARE AMOUNTS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Electric utility revenue $ 7,953 $ 7,583 $ 7,873 Diversified operations 1,282 962 532 -------- -------- -------- TOTAL OPERATING REVENUE 9,235 8,545 8,405 -------- -------- -------- Fuel 1,074 768 694 Purchased power 2,854 2,706 2,582 Provisions for regulatory adjustment clauses -- net (411) (226) 230 Other operating expenses 1,781 1,555 1,411 Maintenance 406 331 359 Depreciation and decommissioning 1,362 1,173 1,014 Income taxes 537 563 528 Property and other taxes 134 197 210 -------- -------- -------- TOTAL OPERATING EXPENSES 7,737 7,067 7,028 -------- -------- -------- OPERATING INCOME 1,498 1,478 1,377 -------- -------- -------- Provision for rate phase-in plan (48) (84) (122) Allowance for equity funds used during construction 8 16 19 Interest and dividend income 85 63 65 Minority interest (39) (70) (48) Other nonoperating income (deductions) -- net (62) (13) 41 -------- -------- -------- TOTAL OTHER INCOME (DEDUCTIONS) -- NET (56) (88) (45) -------- -------- -------- INCOME BEFORE INTEREST AND OTHER EXPENSES 1,442 1,390 1,332 -------- -------- -------- Interest on long-term debt 584 604 539 Other interest expense 139 90 81 Allowance for borrowed funds used during construction (9) (10) (14) Capitalized interest (15) (58) (60) Dividends on subsidiary preferred securities 43 47 47 -------- -------- -------- TOTAL INTEREST AND OTHER EXPENSES -- NET 742 673 593 -------- -------- -------- NET INCOME $ 700 $ 717 $ 739 -------- -------- -------- -------- -------- -------- Weighted-average shares of common stock outstanding 400 437 446 BASIC EARNINGS PER SHARE $ 1.75 $ 1.64 $ 1.66 DILUTED EARNINGS PER SHARE $ 1.73 $ 1.63 $ 1.65
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
IN MILLIONS, EXCEPT PER-SHARE AMOUNTS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 3,753 $ 3,700 $ 3,452 Net income 700 717 739 Dividends declared on common stock (395) (435) (446) Stock repurchase and retirement (882) (229) (45) -------- -------- -------- BALANCE AT END OF YEAR $ 3,176 $ 3,753 $ 3,700 -------- -------- -------- -------- -------- -------- Dividends declared per common share $ 1.00 $ 1.00 $ 1.00
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 35 EDISON INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
IN MILLIONS DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Transmission and distribution: Utility plant, at original cost, subject to cost-based rate regulation $ 11,213 $ 10,973 Accumulated provision for depreciation (5,574) (5,129) Construction work in progress 493 462 --------- --------- 6,132 6,306 --------- --------- Generation: Utility plant, at original cost, not subject to cost-based rate regulation 9,522 9,427 Accumulated provision for depreciation and decommissioning (4,970) (4,302) Construction work in progress 100 95 Nuclear fuel, at amortized cost 155 177 --------- --------- 4,807 5,397 --------- --------- TOTAL UTILITY PLANT 10,939 11,703 --------- --------- Nonutility property -- less accumulated provision for depreciation of $238 and $203 at respective dates 3,178 3,570 Nuclear decommissioning trusts 1,831 1,486 Investments in partnerships and unconsolidated subsidiaries 1,408 1,372 Investments in leveraged leases 960 584 Other investments 194 104 --------- --------- TOTAL OTHER PROPERTY AND INVESTMENTS 7,571 7,116 --------- --------- Cash and equivalents 1,907 897 Receivables, including unbilled revenue, less allowances of $27 and $26 for uncollectible accounts at respective dates 1,077 1,095 Fuel inventory 58 72 Materials and supplies, at average cost 133 154 Accumulated deferred income taxes -- net 123 240 Regulatory balancing accounts -- net 193 -- Prepayments and other current assets 106 114 --------- --------- TOTAL CURRENT ASSETS 3,597 2,572 --------- --------- Unamortized debt issuance and reacquisition expense 359 347 Income tax-related deferred charges 1,544 1,741 Other deferred charges 1,091 1,080 --------- --------- TOTAL DEFERRED CHARGES 2,994 3,168 --------- --------- TOTAL ASSETS $ 25,101 $ 24,559 --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 36 EDISON INTERNATIONAL AND SUBSIDIARIES
IN MILLIONS, EXCEPT SHARE AMOUNTS DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES Common shareholders' equity: Common stock (375,764,429 and 424,524,178 shares outstanding at respective dates) $ 2,261 $ 2,547 Cumulative translation adjustments -- net 30 64 Unrealized gain in equity investments -- net 60 33 Retained earnings 3,176 3,753 -------- -------- 5,527 6,397 Preferred securities of subsidiaries: Not subject to mandatory redemption 184 284 Subject to mandatory redemption 425 425 Long-term debt 8,871 7,475 -------- -------- TOTAL CAPITALIZATION 15,007 14,581 -------- -------- OTHER LONG-TERM LIABILITIES 480 424 -------- -------- Current portion of long-term debt 868 592 Short-term debt 330 397 Accounts payable 441 438 Accrued taxes 577 530 Accrued interest 132 131 Dividends payable 95 109 Regulatory balancing accounts -- net -- 182 Deferred unbilled revenue and other current liabilities 1,285 1,059 -------- -------- TOTAL CURRENT LIABILITIES 3,728 3,438 -------- -------- Accumulated deferred income taxes -- net 4,085 4,283 Accumulated deferred investment tax credits 351 372 Customer advances and other deferred credits 1,441 754 -------- -------- TOTAL DEFERRED CREDITS 5,877 5,409 -------- -------- MINORITY INTEREST 9 707 -------- -------- Commitments and contingencies (Notes 2, 8, 9 and 10) TOTAL CAPITALIZATION AND LIABILITIES $ 25,101 $ 24,559 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 37 EDISON INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 700 $ 717 $ 739 Adjustments for non-cash items: Depreciation and decommissioning 1,362 1,173 1,014 Amortization 88 96 73 Rate phase-in plan 47 79 111 Deferred income taxes and investment tax credits 115 91 (166) Equity in income from partnerships and unconsolidated subsidiaries (190) (154) (115) Other long-term liabilities 56 80 33 Other -- net (131) (98) -- Changes in working capital: Receivables (8) 68 (27) Regulatory balancing accounts (375) (156) 282 Fuel inventory, materials and supplies 36 39 (19) Prepayments and other current assets 10 13 (17) Accrued interest and taxes 47 3 19 Accounts payable and other current liabilities 195 70 13 Distributions from partnerships and unconsolidated subsidiaries 182 176 178 ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,134 2,197 2,118 ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt issued 1,646 1,365 1,496 Long-term debt repaid (2,219) (1,315) (960) Rate reduction notes issued 2,449 -- -- Preferred securities issued -- 414 63 Preferred securities redeemed (100) -- (75) Common stock repurchased (1,173) (344) (70) Short-term debt financing -- net (68) (312) (46) Dividends paid (408) (440) (447) Other -- net (14) 45 31 ------ ------ ------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 113 (587) (8) ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and plant (783) (744) (969) Purchase of nonutility power stations -- -- (1,015) Funding of nuclear decommissioning trusts (154) (148) (151) Investments in partnerships and unconsolidated subsidiaries (131) (336) (45) Unrealized gain in equity investments -- net 27 15 8 Other -- net (196) (7) 35 ------ ------ ------ NET CASH USED BY INVESTING ACTIVITIES (1,237) (1,220) (2,137) ------ ------ ------ Net increase (decrease) in cash and equivalents 1,010 390 (27) Cash and equivalents, beginning of year 897 507 534 ------ ------ ------ CASH AND EQUIVALENTS, END OF YEAR $ 1,907 $ 897 $ 507 ------ ------ ------ ------ ------ ------ CASH PAYMENTS FOR INTEREST AND TAXES: Interest -- net of amounts capitalized $ 579 $ 486 $ 463 Taxes 298 447 642 NON-CASH INVESTING AND FINANCING ACTIVITIES: Obligation to fund investments in partnerships and unconsolidated subsidiaries 237 237 466 Additions to property and plant funded by the minority owner of consolidated subsidiaries -- 33 77 Goodwill related to purchase of nonutility power stations -- -- 312
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 38 EDISON INTERNATIONAL AND SUBSIDIARIES 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 (GAAP), 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 recently by the Financial Accounting Standards Board's Emerging Issues Task Force (EITF), during the third quarter of 1997 SCE began accounting for its investment in generation facilities in accordance with GAAP applicable to enterprises in general. Although this change did not result in any adjustment of the carrying value of such investment, the amount is shown separately on Edison International's Balance Sheet under the caption: Generation utility plant, at original cost, not subject to cost-based rate regulation. The competitive market for electric generation in California is scheduled to begin March 31, 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 a recently issued accounting standard. Basic EPS for Edison International equals previously reported primary EPS. EPS amounts were as follows: IN MILLIONS, EXCEPT PER-SHARE AMOUNTS
- ------------------------------------------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT - ------------------------------------------------------------------------------- For the Year Ended December 31, 1997: Income $ 743 Less: dividends on subsidiary preferred securities 43 ------ Basic EPS Net income available to common shareholders 700 400 $ 1.75 ------ ---- ------ Effect of dilutive securities: Employee stock options 4 ---- Diluted EPS $ 700 404 $ 1.73 ------ ---- ------ For the Year Ended December 31, 1996: Income $ 764 Less: dividends on subsidiary preferred securities 47 ------ Basic EPS Net income available to common shareholders 717 437 $ 1.64 ------ ---- ------ Effect of dilutive securities: Employee stock options 2 ---- Diluted EPS $ 717 439 $ 1.63 ------ ---- ------ For the Year Ended December 31, 1995: Income $ 786 Less: dividends on subsidiary preferred securities 47 ------ Basic EPS Net income available to common shareholders 739 446 $ 1.66 ------ ---- ------ Effect of dilutive securities: Employee stock options 2 ---- Diluted EPS $ 739 448 $ 1.65 ------ ---- ------
ESTIMATES Financial statements prepared in compliance with GAAP 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 and Southern California; EME, a market leader in the development, ownership and operation of independent power facilities; 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 and Asia. 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, as further discussed in Note 2 to the Consolidated Financial Statements. EME operates predominantly in one industry segment: independent, electric power generation. EME's domestic projects generally sell power to a limited number of electric utilities under long-term (15 to 30 years) contracts. EME's plants are located in different geographic areas, which mitigates the effects of regional markets, economic down-turns or unusual weather conditions. 39 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NUCLEAR The CPUC authorized rate phase-in plans to defer the collection of $200 million in revenue for each unit at the Palo Verde Nuclear Generating Station during the first four years of operation and recover the deferred revenue (including interest) evenly over the following six years. The phase-in plans 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 1992, SCE discontinued operation of San Onofre Nuclear Generating Station Unit 1, after the CPUC approved a settlement agreement between SCE and the CPUC's Office of Ratepayer Advocates (ORA) to discontinue operation of Unit 1 because operation of the unit was no longer cost-effective. As part of the agreement, SCE recovered its remaining investment over a four-year period ending August 1996, earning an 8.98% rate of return. In 1994, the CPUC authorized accelerated recovery of SCE's nuclear plant investments by $75 million per year, with a corresponding deceleration in recovery of its transmission and distribution assets through revised depreciation estimates over their remaining useful lives. 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. Operating costs, including nuclear fuel and nuclear fuel financing costs, and incremental capital expenditures at San Onofre Units 2 and 3 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. Beginning January 1, 1998, the accelerated plant recovery and the incentive pricing plan became part of the CTC mechanism. Beginning in 2004, SCE will be required to share equally with ratepayers the net benefits received from operation of the units. In January 1997, the CPUC authorized a further acceleration of the recovery of its 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 accelerated 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, 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 equally with ratepayers the net benefits received from operation of Palo Verde. 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. AFUDC 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 5.2% for 1997, 4.2% for 1996 and 3.6% for 1995. 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, 3.2% for 1997, 3.9% for 1996 and 3.8% for 1995. 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 GAAP applicable to enterprises in general. The carrying value of such investment was unaffected by this change. RECLASSIFICATIONS Certain prior-year amounts were reclassified to conform to the December 31, 1997, 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). Beginning January 1, 1998, the difference between generation-related revenue and generation-related costs is being accumulated in a transition cost balancing account. These transition costs are being recovered from utility customers (with interest) through the CTC through 2001. Income tax effects on all balancing account changes are deferred. In January 1997, in compliance with the new 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 credited to the transition cost balancing account beginning 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 are recorded in a balancing account and, at the end of the rate-case cycle, any authorized but unspent RD&D funds are refunded to customers. RD&D expenses were $39 million in 1997, $21 million in 1996 and $28 million in 1995. 40 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REVENUE Electric utility revenue includes amounts for services rendered but unbilled at the end of each year. NOTE 2. REGULATORY MATTERS - ------------------------------------------------------------------------------- CALIFORNIA ELECTRIC UTILITY INDUSTRY RESTRUCTURING - ------------------------------------------------------------------------------- RESTRUCTURING LEGISLATION -- In September 1996, the State of California enacted legislation to provide a transition to a competitive market structure. The legislation substantially adopted the CPUC's December 1995 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 would be recovered through the terms of their contracts while most of the remaining transition costs would be recovered through 2001. The legislation 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 would allow SCE to reduce rates by at least 10% to these customers, beginning January 1, 1998. The financing would occur with securities issued by the California Infrastructure and Economic Development Bank, or an entity approved by the Bank. The legislation 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 legislation mandated the implementation of the CTC that provides utilities the opportunity to recover costs made uneconomic by electric utility restructuring. Finally, the legislation 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 May 1997, SCE filed an application with the CPUC requesting approval of the issuance of an aggregate amount of up to $3 billion of rate reduction notes in one or more series or classes and a 10% rate reduction for the period from January 1, 1998, through March 31, 2002. At the same time, SCE filed an application with the California Infrastructure and Economic Development Bank for approval to issue the notes. Residential and small commercial customers will repay the notes over the expected 10-year term through non-bypassable charges based on electricity consumption. In December 1997, after receiving approval from both the CPUC and the Infrastructure Bank, a limited liability company created by SCE issued approximately $2.5 billion of these notes. For further details, see the discussion under Long-Term Debt in Note 3 to the Consolidated Financial Statements. CPUC RESTRUCTURING DECISION -- The CPUC's December 1995 decision on restructuring California's electric utility industry started the transition to a new market structure, which is expected to provide competition and customer choice and is scheduled to begin March 31, 1998. Key elements of the CPUC's restructuring decision included: creation of an independent power exchange (PX) and independent system operator (ISO); availability of direct customer access and customer choice; 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 CTC. RATE-SETTING -- In December 1996, SCE filed a more comprehensive plan (elaborating on its July 1996 filing related to the conceptual aspects of separating costs as requested by CPUC and FERC directives) for the functional unbundling of its rates for electric service, beginning January 1, 1998. In response to CPUC and FERC orders, as well as the new restructuring legislation, this filing addressed the implementation-level detail for the functional unbundling of rates into separate charges for energy, transmission, distribution, the CTC, public benefit programs and nuclear decommissioning. The transmission component of this rate unbundling process was addressed at the FERC through a March 1997 filing. In December 1997, the FERC approved these rates, subject to refund, to be effective on the date the ISO begins operation. CPUC hearings on SCE's rate unbundling (also known as rate-setting) plan were concluded in April 1997. In August 1997, the CPUC issued a decision which adopted the methodology for determining CTC residually (see CTC discussion below) and adopted SCE's revenue requirement components for public benefit programs and nuclear decommissioning. The decision also adjusted SCE's proposed distribution revenue requirement by reallocating $76 million of the amount annually to other functions such as generation and transmission. Under the decision, SCE will be able to recover most of the reallocated amount through market revenue, other rate-making mechanisms after petitioning the CPUC to modify its prior decisions, or another review process later in its divestiture proceeding. PX AND ISO -- In April 1996, SCE, Pacific Gas & Electric Company and San Diego Gas & Electric Company filed a proposal with the FERC regarding the creation of the PX and the ISO. In November 1996, the FERC conditionally accepted the proposal and directed the three utilities, the ISO, and the PX to file more specific information. The filing was made in March 1997, and included SCE's proposed transmission revenue requirement. On October 29, 1997, the FERC gave conditional, interim authorization for operation of the PX and ISO to begin on January 1, 1998. The FERC stated it would closely monitor the PX and ISO, require further studies and make modifications, where necessary. A comprehensive review will be performed by the FERC after three years of operation of the PX and ISO. On December 22, 1997, the PX and ISO governing boards announced a delay in the planned start-up of the PX and ISO due to insufficient testing of operational, settlement and billing systems. The PX and ISO are now expected to begin operation by March 31, 1998. In July 1996, the three utilities jointly filed an application with the CPUC requesting approval to establish a restructuring trust which would obtain loans up to $250 million for the development of the ISO and PX through January 1, 1998. The loans are backed by utility guarantees; SCE's share was 45%, or $113 million. In August 1996, the CPUC issued an interim order establishing the restructuring trust and the funding level of $250 million, which has 41 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS been used to build the hardware and software systems for the ISO and PX. The ISO and PX will repay the trust's loans and recover funds from future ISO and PX customers. In November 1997, the CPUC approved a petition jointly filed by the three utilities which requested an increase in the loan guarantees from $250 million to $300 million; SCE's share of this new total is $135 million. In December 1997, the CPUC approved a remaining item with respect to the petition which requested that the one-time restructuring implementation charge, to be paid to the PX by the utilities, be deemed a non-bypassable charge to be recovered from all retail customers. The amount of the PX charge is $85 million; SCE's share is 45%, or $38 million. DIRECT CUSTOMER ACCESS -- In May 1997, the CPUC issued a decision describing how all California investor-owned-utility customers will be able to choose who will provide them with electric generation service beginning January 1, 1998. On December 30, 1997, the CPUC issued a decision delaying direct access until March 31, 1998, due to operational delays in the start-up of the PX and ISO. On this date, customers will be able to choose to remain utility customers with bundled electric service from SCE (which will purchase its power through the PX), or choose direct access, which means the customer can contract directly with either independent power producers or retail electric service providers such as power brokers, marketers and aggregators. Additionally, all investor-owned-utility customers must pay the CTC whether or not they choose to buy power through SCE. Electric utilities will continue to provide the core distribution service of delivering energy through its distribution system regardless of a customer's choice of electricity supplier. The CPUC will continue to regulate the prices and service obligations related to distribution services. If the new competitive market cannot accommodate the volume of direct access transactions, the CPUC could implement a contingency plan. However, the CPUC believes it is likely that interest in and migration to direct access will be gradual. REVENUE CYCLE SERVICES -- A decision issued by the CPUC in May 1997, introduces customer choice to metering, billing and related services (referred to as revenue cycle services) that are now provided by California's investor-owned utilities. Under this revenue cycle services unbundling decision, beginning in January 1998, direct access customers may choose to have either SCE or their electric generation service provider render consolidated (energy and distribution) bills, or they may choose to have separate billings from each service provider. However, not all electric generation service providers will necessarily offer each billing option. In addition, beginning in January 1998, customers with maximum demand above 20 kW (primarily industrial and large commercial) can choose SCE or any other supplier to provide their metering service. All other customers will have this option beginning in January 1999. In determining whether any credit should be provided by the utility to firms providing customers with revenue cycle services, and the amount of any such credit, the CPUC has indicated that it is appropriate to net the cost incurred by the utility and the cost avoided by the utility as a result of such services being provided by the other firm rather than by the utility. PBR -- In 1993, SCE filed for a PBR mechanism to determine most of its revenue (excluding fuel). The filing was subsequently divided between transmission and distribution (T&D) and power generation. In September 1996, the CPUC adopted a non-generation or T&D PBR mechanism for SCE which began on January 1, 1997. According to the CPUC, beginning in 1998 (coincident with the initiation of the competitive market), the transmission portion is to be separated from non-generation PBR and subject to ratemaking under the rules of the FERC. The distribution-only PBR will extend through December 2001. Key elements of the non-generation PBR include: T&D rates indexed for inflation based on the Consumer Price Index less a productivity factor; elimination of the kilowatt-hour sales adjustment; 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 T&D operations. With the CPUC's 1995 restructuring decision and the passage of restructuring legislation in 1996, the majority of power generation ratemaking (primarily fossil-fueled and nuclear) was assigned to other mechanisms. In April 1997, a CPUC interim order determined that the proposed structure of the fossil-fueled plants' must-run contracts were under the FERC's jurisdiction. On October 31, 1997, SCE filed must-run tariff schedules with the FERC covering its six ISO-designated must-run plants. In the meantime, SCE is pursuing the divestiture of these plants (see Divestiture discussion below) and might not ever itself provide service under these FERC tariff schedules. In December 1997, the CPUC adopted a PBR-type rate-making mechanism for SCE's hydroelectric plants. The mechanism sets the hydroelectric revenue requirement in 1998 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 (see CTC discussion below). DIVESTITURE -- In November 1996, SCE filed an application with the CPUC to voluntarily divest, by auction, all 12 of its oil- and gas-fueled generation plants. This application builds on SCE's March 1996 plan, which outlined how SCE proposed to divest 50% of these assets. Under the new proposal, SCE would continue to operate and maintain the divested power plants for at least two years following their sale, as mandated by the restructuring legislation enacted in September 1996. In addition, SCE would offer workforce transition programs to those employees who may be impacted by divestiture-related job reductions. SCE's proposal is contingent on the overall electric industry restructuring implementation process continuing on a satisfactory path. In September 1997, the CPUC approved SCE's proposal to auction the 12 plants. On December 1, 1997, SCE filed a compliance filing with the CPUC stating that it had sold 10 plants. On December 16, 1997, the CPUC approved the sale of the 10 plants. On February 6, 1998, SCE filed a compliance filing with the CPUC regarding the sale of 42 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS an 11th plant. CPUC approval of the sale is expected before March 31, 1998. The total sales price of the 11 plants is $1.1 billion, or 2.16 times their combined book value of $531 million. Net proceeds of the sales will be used to reduce stranded costs, which otherwise were expected to be collected through the CTC mechanism. The transfer of ownership of the 11 plants is expected to occur shortly before the start of the new competitive market, which the PX and ISO currently expect to occur on March 31, 1998. The sale and CPUC approval of the single remaining plant is expected to be completed in early 1998. CTC -- The CTC applies to all customers who were using or began using utility services on or after the CPUC's December 20, 1995, decision date. In August 1996, in compliance with the CPUC's restructuring decision, SCE filed its application to estimate its 1998 transition costs. In October 1996, SCE amended its transition cost filing to reflect the effects of the legislation enacted in September 1996. Under the rate freeze codified in the legislation, the CTC will be determined residually (i.e., after subtracting other cost components for the PX, T&D, nuclear decommissioning and public benefit programs). Nevertheless, the CPUC directed that the amended application provide estimates of SCE's potential transition costs from 1998 through 2030. SCE provided two estimates between approximately $13.1 billion (1998 net present value) assuming the fossil plants have a market value equal to their net book value, and $13.8 billion (1998 net present value) assuming the fossil plants have no market value. These estimates are 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: $7.5 billion from SCE's qualifying facilities (QF) contracts, which are the direct result of prior legislative and regulatory mandates; and $5.6 billion to $6.3 billion from costs pertaining to certain generating plants (successful completion of the sale of SCE's gas-fired generating plants would reduce this estimate of transition costs for SCE-owned generation to less than $5 billion) 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 Note 1 to the Consolidated Financial Statements), and certain other costs. In February 1997, SCE filed an update to the CTC filing to reflect approval by the CPUC of settlements regarding ratemaking for SCE's share of Palo Verde and the buyout of a power purchase agreement, as well as other minor data updates. No substantive changes in the total CTC estimates were included. This issue has been separated into two phases; Phase 1 addresses the rate-making issues and Phase 2 the quantification issues. A decision on Phase 1 was issued in June 1997, which, among other things, required the establishment of a transition cost balancing account and annual transition cost proceedings, set a market rate forecast for 1998 transition costs, and required that generation-related regulatory assets be amortized ratably over a 48-month period. Hearings on Phase 2 were held in May and June 1997 and a final decision was issued on November 19, 1997. The Phase 2 decision established the calculation methodologies and procedures for SCE to collect its transition costs from 1998 through the end of the rate freeze. The Phase 2 decision also reduced 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. The decision, excluding the effects of other rate actions, had a negative impact on 1997 earnings of approximately 4 CENTS per share. SCE has filed an application for rehearing on the 1997 rate of return issue. ACCOUNTING FOR GENERATION-RELATED ASSETS -- If the CPUC's electric industry restructuring plan is implemented as outlined above, SCE would be allowed to recover its CTC 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). As previously reported, from November 1996 to July 1997, SCE and the other major California electric utilities were engaged in discussions with the Securities and Exchange Commission staff regarding the proper application of regulatory accounting standards in light of the electric industry restructuring legislation enacted by the State of California in September 1996 and the CPUC's electric industry restructuring plan. This issue was placed on the agenda of the EITF during April 1997 and a final consensus was reached at the July EITF meeting. During the third quarter of 1997, SCE implemented the EITF consensus and discontinued application of accounting principles for rate-regulated enterprises for its investment in generation facilities. However, implementation of the EITF concensus did not require SCE to write off any of its generation-related assets, including regulatory assets of approximately $600 million at December 31, 1997. SCE has retained these assets on its balance sheet because the legislation and restructuring plan referred to above make probable their recovery through a CTC to distribution customers. These regulatory assets relate primarily to the recovery of accelerated income tax benefits previously flowed through to customers, purchased power contract termination payments, unamortized losses on reacquired debt, and the recovery of amounts deferred under the Palo Verde rate phase-in plan. The consensus reached by the EITF also permits the recording of new generation-related regulatory assets during the transition period that are probable of recovery through the CTC mechanism. 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 as a one-time, non-cash charge against earnings. If such a write-off were to be required, SCE believes that it should not affect the recovery of stranded costs provided for in the legislation and restructuring plan. Although depreciation-related differences could result from applying a regulatory prescribed depreciation method (straight-line, remaining-life method) rather than a method that would have been applied absent the regulatory process, SCE believes that the depreciable lives of its generation-related assets would not vary significantly from that of an unregulated enterprise, as the CPUC bases depreciable lives on periodic studies that reflect the physical 43 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS useful lives of the assets. SCE also believes that any depreciation-related differences would be recovered through the CTC. If events occur during the restructuring process that result in all or a portion of the CTC 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 implementation phases, or the effect, after the transition period, that competition will have on its results of operations or financial position. FERC RESTRUCTURING DECISION In April 1996, the FERC issued its decision on stranded-cost recovery and open access transmission, effective July 1996. The decision, reaffirmed by the FERC in its March and November 1997 orders, requires all electric utilities subject to the FERC's jurisdiction to file transmission tariffs which provide competitors with increased access to transmission facilities for wholesale transactions and also establishes information requirements for the transmission utility. The decision also provides utilities with the opportunity to recover stranded costs associated with existing wholesale customers, retail-turned-wholesale customers and retail wheeling when the state regulatory body does not have authority to address retail stranded costs. Even though the CPUC is currently addressing stranded-cost recovery through the CTC proceedings, the FERC has also asserted primary jurisdiction over the recovery of stranded costs associated with retail-turned-wholesale customers, such as a new municipal electric system or a municipal annexation. However, the FERC did clarify that it does not intend to prevent or interfere with a state's authority and that it has discretion to defer to a state stranded-cost-calculation method. In January 1997, the FERC accepted the open access transmission tariff SCE filed in compliance with the April 1996 decision. The rates included in the tariff are being collected subject to refund. In May 1997, SCE filed a revised open access tariff to reflect the few revisions set forth in the March 1997 order. The open access transmission tariff will be terminated on the date the ISO begins operation. CANADIAN GAS CONTRACTS In 1994, SCE filed its testimony in the non-QF phase of the 1994 Energy Cost Adjustment Clause proceeding. In 1995, the ORA filed its report on the reasonableness of SCE's gas supply costs for both the 1993 and 1994 record periods. The report recommended a disallowance of $13 million for excessive costs incurred from November 1993 through March 1994 associated with SCE's Canadian gas purchase and supply contracts. The report requested that the CPUC defer finding SCE's Canadian supply and transportation agreements reasonable for the duration of their terms and that the costs under these contracts be reviewed on a yearly basis. In 1996, the ORA issued its report for the 1995 record period recommending a $38 million disallowance for excessive costs incurred from April 1994 through March 1995. Both proposed disallowances were later consolidated into one proceeding. On December 3, 1997, the CPUC approved a settlement agreement between SCE and the ORA on this and any future issues, which will result in a $61 million (including interest) refund to SCE's customers. This refund is fully reflected in the financial statements and will be made in first quarter 1998. MOJAVE COGENERATION CONTRACT In 1991, SCE filed its testimony in the QF phase of the 1991 Energy Cost Adjustment Clause proceeding. In 1993, the ORA filed its report on the reasonableness of SCE's QF contracts and alleged that SCE had imprudently renegotiated a QF contract with the Mojave Cogeneration Company. The report recommended a disallowance of $32 million (1993 net present value) over the contract's 20-year life. Subsequently, SCE and the ORA reached a settlement where SCE agreed to a one-time reduction to its energy cost adjustment clause balancing account of $14 million plus interest. In October 1996, the CPUC approved the settlement agreement, subject to SCE and the ORA accepting certain conditions concerning the way the $14 million payment would be reflected in rates. After reviewing the decision, SCE declined to accept the condition proposed by the CPUC and in November 1996 filed an application for rehearing. In February 1997, the CPUC denied SCE's application. Because SCE and the ORA were unable to finalize their settlement, hearings on the ORA's disallowance recommendations were held in June 1997. During the hearings, the ORA presented testimony to update its assessment of ratepayer harm, which it now estimates to be $45 million (1997 net present value) over the contract's life. In November 1997, a CPUC administrative law judge (ALJ) issued a proposed decision which would adopt the ORA's $45 million disallowance. In January 1998, the CPUC withdrew the ALJ's proposed decision pending oral arguments. Oral arguments were heard on February 4, 1998, at which time SCE requested an alternate proposed decision be issued. SCE expects this matter to be returned to the CPUC's agenda in the near future and a final decision to be issued during second quarter 1998. SCE cannot predict the final outcome of this matter but does not believe it will materially affect its results of operations. NOTE 3. FINANCIAL INSTRUMENTS - ------------------------------------------------------------------------------- CASH EQUIVALENTS Cash and equivalents include tax-exempt investments ($949 million at December 31, 1997, and $376 million at December 31, 1996), and time deposits and other investments ($958 million at December 31, 1997, and $521 million at December 31, 1996) 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 44 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 recovered through 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 energy and capacity through a centralized electricity pool, which establishes a half-hourly clearing 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 portion of the market risk of the pool by entering into electricity rate swap agreements, related to either the selling or purchase price of power. These contracts can be sold in two structures: one-way contracts, where a specified monthly amount is received in advance and difference payments are made when pool prices rise above the price specified in the contract, and two-way contracts, where First Hydro is paid when pool prices fall below the contract price instead of a specified monthly amount. These contracts attempt to stabilize production revenue or purchasing costs by removing an element of First Hydro's net exposure to pool price volatility. Loy Yang B sells their 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 can be sold as one-way or two-way contracts, which are similar to the electricity rate swap agreements described above. 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, collars and caps 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, 1997, SCE had pledged $19 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 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 EME 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 hedges:
DECEMBER 31, --------------------------------------------------- 1997 1996 ----------------------- ------------------- NOTIONAL CONTRACT NOTIONAL CONTRACT IN MILLIONS AMOUNT EXPIRES AMOUNT EXPIRES - ------------------------------------------------------------------------------- SWAPS: Fixed to variable $441 1999 - 2008 $245 1999 - 2002 Variable to fixed 858 1998 - 2007 440 1997 - 2008 COLLAR: Variable to fixed $ 77 1999 -- -- CAP: Variable to fixed -- -- $ 30 1997
At December 31, 1997, SCE had gas call options valued at $34 million. These options 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. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments were:
DECEMBER 31, ------------------------------------------------- 1997 1996 -------------------- ------------------- COST FAIR COST FAIR INSTRUMENT (IN MILLIONS) BASIS VALUE BASIS VALUE - ------------------------------------------------------------------------------- FINANCIAL ASSETS: Decommissioning trusts $1,371 $1,831 $1,217 $1,486 Electricity rate swaps -- 77 -- 27 Equity investments 9 90 11 68 Gas call options 34 34 -- -- FINANCIAL LIABILITIES: DOE decommissioning and decontamination fees $ 50 $ 43 $ 54 $ 45 Interest rate hedges -- 92 -- 34 Long-term debt 8,871 9,618 7,475 7,712 Preferred securities subject to mandatory redemption 425 451 425 445
45 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 cap; 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. Gross unrealized holding gains on financial assets were:
IN MILLIONS DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Decommissioning trusts: Municipal bonds $131 $ 79 Stocks 190 138 U.S. government issues 91 39 Short-term and other 48 13 ---- ---- 460 269 Equity investments 81 57 ---- ---- Total $541 $326 ---- ---- ---- ----
There were no unrealized holding losses on financial assets for the years presented. 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: 1998--$848 million; 1999--$670 million; 2000--$719 million; 2001--$728 million; and 2002--$635 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 have maturities ranging from one to 10 years, and bear interest at rates ranging from 5.98% 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 SPE 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, 1997 1996 - ----------------------------------------------------------------- First and refunding mortgage bonds: 1998--2026 (5.45% to 8.375%) $1,825 $2,725 Rate reduction notes: 1998--2007 (5.98% to 6.42%) 2,463 -- Pollution-control bonds: 1999--2027 (5.4% to 7.2% and variable) 1,202 1,204 Funds held by trustees (2) (2) Debentures and notes: 1997--2026 (5% to 20% and variable) 4,028 3,891 Subordinated debentures: 2044 (8.375%) 100 100 Commercial paper for nuclear fuel 92 112 Capital lease obligation 68 91 Current portion of capital lease obligation (20) (19) Long-term debt due within one year (848) (573) Unamortized debt discount - net (37) (54) ------ ------ Total $8,871 $7,475 ------ ------ ------ ------
On January 30, 1998, SCE redeemed $125 million of 8.375% first and refunding mortgage bonds, due 2017. Also, on January 30, 1998, a wholly owned financing subsidiary of SCE redeemed $200 million of 7.375% notes, due 2003. 46 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHORT-TERM DEBT Short-term debt consisted of:
IN MILLIONS DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Commercial paper $415 $ 470 Other short-term debt 8 167 Amount reclassified as long-term (92) (237) Unamortized discount (1) (3) ---- ----- Total $330 $ 397 ---- ----- ---- ----- Weighted-average interest rate 6.0% 5.6%
At December 31, 1997, Edison International and its subsidiaries had $3.6 billion of borrowing capacity available. SCE had available lines of credit of $1.8 billion, with $1.3 billion 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 $800 million available to finance general cash requirements. The parent company had available lines of credit totaling $1.0 billion. 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, 1997, SCE had the capacity to pay $1.4 billion 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. Edison International's authorized common stock is 800 million shares with no par value. Edison International purchased on the open market and retired the following amounts of common stock: in 1997--48,992,365 shares ($1.2 billion), in 1996--19,216,627 shares ($344 million) and in 1995--4,212,398 shares ($70 million). Under Edison International's long-term incentive compensation plan, it issued 232,612 shares ($4.9 million) in 1997, 133,131 shares ($2.4 million) in 1996 and 20,900 shares ($0.4 million) in 1995. 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. 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: 1998 through 2001--zero and 2002--$105 million. Edison International subsidiaries' cumulative preferred securities consisted of:
DECEMBER 31, 1997 ------------------------ DECEMBER 31, DOLLARS IN MILLIONS, SHARES REDEMPTION ------------------- EXCEPT PER-SHARE AMOUNTS OUTSTANDING PRICE 1997 1996 - ------------------------------------------------------------------------------------------------------ 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 2,200,000 25.25 55 55 7.36 -- -- 100 ---- ---- Total $184 $284 ---- ---- ---- ---- 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 1,000,000 100.00 100 100 ---- ---- Total $425 $425 ---- ---- ---- ----
In 1997, 4 million shares of Series 7.36% preferred stock were redeemed. In 1995, 750,000 shares of Series 7.58% preferred stock were redeemed and 2.5 million of Series 8.50% preferred securities were issued. There were no preferred stock issuances or redemptions in 1996. 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 owns 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. 47 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the net accumulated deferred income tax liability were:
IN MILLIONS DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Property-related $ 227 $ 247 Unrealized gains or losses 273 201 Investment tax credits 192 206 Regulatory balancing accounts 180 298 Decommissioning-related 114 208 Other 691 366 ------- ------- Total $ 1,677 $ 1,526 ------- ------- DEFERRED TAX LIABILITIES: Property-related $ 4,010 $ 4,345 Leveraged leases 623 534 Capitalized software costs 127 122 Other 879 568 ------- ------- Total $ 5,639 $ 5,569 ------- ------- Accumulated deferred income taxes-net $ 3,962 $ 4,043 ------- ------- ------- ------- CLASSIFICATION OF ACCUMULATED DEFERRED INCOME TAXES: Included in deferred credits $ 4,085 $ 4,283 Included in current assets 123 240
The current and deferred components of income tax expense were:
IN MILLIONS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------- CURRENT: Federal $ 244 $ 325 $ 507 State 55 108 150 Foreign 103 39 7 ------ ----- ----- 402 472 664 ------ ----- ----- DEFERRED: Accrued charges (33) (14) 1 Asset basis adjustment 18 (25) 12 Depreciation (26) 71 72 Investment and energy tax credits-net (22) (37) (26) Leveraged leases 87 26 38 Loss carryforwards 121 (41) (37) Nonutility special charges -- 9 (21) Pension reserves (5) 45 (3) Rate phase-in plan (19) (31) (46) Regulatory balancing accounts 141 34 (118) State tax-privilege year 2 18 (9) Other (167) (21) (35) ------ ----- ----- 97 34 (172) ------ ----- ----- Total income tax expense $ 499 $ 506 $ 492 ------ ----- ----- ------ ----- ----- CLASSIFICATION OF INCOME TAXES: Included in operating income $ 537 $ 563 $ 528 Included in other income (38) (57) (36)
The composite federal and state statutory income tax rate was 40.551% for 1997 and 41.045% for 1996 and 1995. The federal statutory income tax rate is reconciled to the effective tax rate below:
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% Capitalized software (0.8) (0.8) (0.8) Depreciation and other 5.9 7.3 5.1 Housing credits (4.3) (3.6) (2.7) Investment and energy tax credits (1.6) (2.7) (2.3) State tax-net of federal deduction 6.3 6.2 5.6 ---- ---- ---- Effective tax rate 40.5% 41.4% 39.9% ---- ---- ---- ---- ---- ----
NOTE 6. EMPLOYEE COMPENSATION AND BENEFIT PLANS - ------------------------------------------------------------------------------- STOCK OPTION PLANS Under Edison International's Long-Term Incentive Compensation Plan, 8.2 million shares of common stock were 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 4.4 million shares of Edison International common stock are currently outstanding to officers and senior managers of SCE. There were 3.2 million, 4.5 million, 5.4 million and 6.3 million shares reserved for future grant at December 31, 1997, 1996, 1995 and 1994, respectively. 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 subsequent to 1993, dividend equivalents are subject to reduction unless certain shareholder return performance criteria are met. Edison International 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 three-year vesting period, the unvested options will vest and be exercisable to the extent of 1/36 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 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 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. 48 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Edison International measures compensation expense related to stock-based compensation by the intrinsic value method. Compensation expense recorded under the stock-compensation program was $6 million, $9 million and $4 million for 1997, 1996 and 1995, respectively. Stock-based compensation expense under the fair-value method of accounting would have resulted in pro forma earnings of $696 million, $714 million and $737 million for 1997, 1996 and 1995, respectively, and in pro forma basic earnings per share of $1.74, $1.63 and $1.65 for 1997, 1996 and 1995, 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 with the model:
1997 1996 - ------------------------------------------------------------------------------- Expected life 7.0 years 7.0 years Risk-free interest rate 6.3%-6.8% 5.5% Expected volatility 17% 17%
The recognition of dividend equivalents results in no dividends assumed for purposes of fair-value determination. 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. 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, 1994 1,766,091 $ 16.00 - $ 24.44 $ 20.41 6.9 years Granted 910,100 14.56 - 17.44 14.77 $ 6.92 Expired (9,930) 20.19 - 23.28 21.91 Forfeited (9,120) 14.56 - 21.94 19.74 Exercised (20,900) 17.38 - 17.75 17.64 --------- Outstanding, Dec. 31, 1995 2,636,241 $ 14.56 - $ 24.44 $ 18.69 7.0 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 7.0 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 7.0 years
The number of options exercisable and their weighted-average exercise prices at December 31, 1997, 1996 and 1995 were 3,218,189 at $18.48, 1,760,766 at $20.54 and 1,240,425 at $21.08, 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 12% 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. Compensation expense recorded with respect to the phantom stock options was $79 million in 1997, $17 million in 1996 and $1 million in 1995. PENSION PLAN Edison International has a noncontributory, defined-benefit pension plan that covers employees meeting minimum service requirements. Benefits are based on years of accredited service and average base pay. SCE funds the plan on a level-premium actuarial method. These funds are accumulated in an independent trust. Annual contributions meet minimum legal funding requirements and do not exceed the maximum amounts deductible for income taxes. Prior service costs from pension plan amendments are funded over 30 years. Plan assets are primarily common stocks, corporate and government bonds, and short-term investments. In 1996, Edison International recorded pension gains from a special voluntary early retirement program. The plan's funded status was:
IN MILLIONS DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION: Vested benefits $ 1,588 $ 1,679 Nonvested benefits 130 73 -------- -------- Accumulated benefit obligation 1,718 1,752 Value of projected future compensation levels 398 267 -------- -------- Projected benefit obligation $ 2,116 $ 2,019 -------- -------- -------- -------- Fair value of plan assets $ 2,316 $ 2,171 -------- -------- -------- -------- Projected benefit obligation less than plan assets $ (200) $ (152) Unrecognized net gain 305 294 Unrecognized prior service cost (184) (199) Unrecognized net obligation (17-year amortization) (40) (45) -------- -------- Pension liability (asset) $ (119) $ (102) -------- -------- -------- -------- Discount rate 7.0% 7.75% Rate of increase in future compensation 5.0% 5.0% Expected long-term rate of return on assets 8.0% 8.0%
Edison International's utility operations recognize pension expense calculated under the actuarial method used for ratemaking. 49 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of pension expense were:
IN MILLIONS YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost for benefits earned $ 46 $ 51 $ 59 Interest cost on projected benefit obligation 140 180 157 Actual return on plan assets (372) (345) (457) Net amortization and deferral 224 146 270 ----- ----- ---- Pension expense under accounting standards 38 32 29 Special termination benefits -- 1 3 Regulatory adjustment - deferred 17 22 23 ----- ----- ---- Net pension expense recognized 55 55 55 Settlement gain -- (121) -- ----- ----- ---- Total expense (gain) $ 55 $ (66) $ 55 ----- ----- ---- ----- ----- ----
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Employees retiring at or after age 55 (or those eligible for all benefits under the 1996 special voluntary early retirement program) with at least 10 years of service, are eligible for postretirement health care, dental, life insurance and other benefits. Health care benefits are subject to deductibles, copayment provisions and other limitations. SCE funds these benefits (by contributions to independent trusts) up to tax-deductible limits, in accordance with rate-making practices. In 1996, SCE recorded special termination expenses due to a special voluntary early retirement program. Any difference between recognized expense and amounts authorized for rate recovery is not expected to be material (except for the impact of the early retirement program) and will be charged to earnings. Trust assets are primarily common stocks, corporate and government bonds, and short-term investments. The funded status of these benefits is reconciled to the recorded liability below:
IN MILLIONS DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION: Retirees $ 1,004 $ 933 Employees eligible to retire 45 35 Other employees 497 394 ------- ------- Accumulated benefit obligation $ 1,546 $ 1,362 ------- ------- ------- ------- Fair value of plan assets $ 815 $ 617 ------- ------- ------- ------- Plan assets less than accumulated benefit obligation $ 731 $ 745 Unrecognized transition obligation (405) (432) Unrecognized net gain (loss) (245) (236) ------- ------- Recorded liability $ 81 $ 77 ------- ------- ------- ------- Discount rate 7.0% 7.75% Expected long-term rate of return on assets 8.0% 8.5%
The components of postretirement benefits other than pensions expense were:
IN MILLIONS YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost for benefits earned $ 31 $ 33 $ 36 Interest cost on benefit obligation 100 91 78 Actual return on plan assets (50) (43) (28) Amortization of loss 5 6 1 Amortization of transition obligation 27 27 27 ----- ----- ----- Net expense 113 114 114 Special termination expense -- 72 ----- ----- ----- Total expense $ 113 $ 186 $ 114 ----- ----- ----- ----- ----- -----
The assumed rate of future increases in the per-capita cost of health care benefits is 8.5% for 1998, gradually decreasing to 5.25% for 2004 and beyond. Increasing the health care cost trend rate by one percentage point would increase the accumulated obligation as of December 31, 1997, by $255 million and annual aggregate service and interest costs by $28 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 $16 million in 1997, $25 million in 1996 and $20 million in 1995. 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, 1997, was:
PLANT IN ACCUMULATED UNDER OWNERSHIP IN MILLIONS SERVICE DEPRECIATION CONSTRUCTION INTEREST - ------------------------------------------------------------------------------------ TRANSMISSION SYSTEMS: Eldorado $ 28 $ 9 $ 3 60% Pacific Intertie 241 75 1 50 GENERATING STATIONS: Four Corners (coal) Units 4 and 5 459 247 3 48 Mohave (coal) 307 146 5 56 Palo Verde (nuclear) 1,601 665 9 16 San Onofre (nuclear) 4,212 2,210 38 75 ------- ------- ------ Total $ 6,848 $ 3,352 $ 59 ------- ------- ------ ------- ------- ------
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 $3.1 billion and $1.8 billion at December 31, 1997, and 1996, respectively. The equity investment in these facilities is 21% 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. The net investment in leveraged leases consisted of:
IN MILLIONS DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------ Rentals receivable (net of principal and interest on nonrecourse debt) $ 1,634 $ 830 Unearned income (728) (303) ------- ----- Investment in leveraged leases 906 527 Estimated residual value 58 58 Deferred income taxes (623) (534) ------- ----- Net investment in leveraged leases $ 341 $ 51 ------- ----- ------- -----
50 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OPERATING AND CAPITAL LEASES Edison International has operating leases, primarily for vehicles (with varying terms, provisions and expiration dates) and a capital lease ($68 million) for a nonutility power-production facility. Estimated remaining commitments for noncancelable leases at December 31, 1997, were:
OPERATING CAPITAL IN MILLIONS LEASES LEASE - ------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 $ 24 $ 27 1999 19 27 2000 15 27 2001 11 -- 2002 8 -- Thereafter 26 1 ---- ---- Total future commitments $103 82 ---- ---- Amount representing interest (9.65%) (14) ---- Net commitments $ 68 ---- ----
NOTE 9. COMMITMENTS - ------------------------------------------------------------------------------- NUCLEAR DECOMMISSIONING 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 Nuclear Regulatory Commission. Decommissioning is estimated to cost $2.1 billion in current-year dollars, based on site-specific studies performed in 1993 for San Onofre and 1992 for 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. Decommissioning is scheduled to begin in 2013 at San Onofre and 2024 at Palo Verde. San Onofre Unit 1, which shut down in 1992, is expected to be secured until decommissioning begins at the other San Onofre units. 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 $154 million in 1997, $148 million in 1996 and $151 million in 1995. The accumulated provision for decommissioning was $1.1 billion at December 31, 1997, and $949 million at December 31, 1996. The estimated costs to decommission San Onofre Unit 1 ($280 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:
DECEMBER 31, MATURITY ------------------- IN MILLIONS DATES 1997 1996 - ----------------------------------------------------------------------- Municipal bonds 1998-2026 $ 459 $ 400 Stocks -- 392 549 U.S. government issues 1998-2027 357 212 Short-term and other 2002-2003 163 56 ------ ------ Trust fund balance (at cost) $1,371 $1,217 ------ ------ ------ ------
Trust fund earnings (based on specific identification) increase the trust fund balance and the accumulated provision for decommissioning. Net earnings were $54 million in 1997, $49 million in 1996 and $51 million in 1995. Proceeds from sales of securities (which are reinvested) were $595 million in 1997, and $1.0 billion in 1996 and in 1995. Approximately 89% of the trust fund contributions were tax-deductible. The Financial Accounting Standards Board has issued an exposure draft related to accounting practices for removal costs, including decommissioning of nuclear power plants. The exposure draft would require SCE to report its estimated decommissioning costs as a liability, rather than recognizing these costs over the term of each facility's operating license (current industry practice). SCE does not believe that the changes proposed in the exposure draft would have an adverse effect on its results of operations even after deregulation due to its current and expected future ability to recover these costs through customer rates. 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 QFs (cogenerators and small power producers) and other utilities. The QF 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 $193 million through 2017. Certain commitments for the years 1998 through 2002 are estimated below:
IN MILLIONS 1998 1999 2000 2001 2002 - ---------------------------------------------------------------------------------------------- Projected construction expenditures $1,057 $807 $763 $721 $671 Fuel supply contracts 296 215 236 228 237 Purchased-power capacity payments 686 711 714 716 714 Unconditional purchase obligations 9 9 10 9 10
EME has firm commitments to make equity and other contributions to its projects of $295 million, primarily for the Paiton project in Indonesia, the ISAB project in Italy and the Doga project in Turkey. EME also has contingent obligations to make additional contributions of $181 million, primarily for equity support guarantees related to Paiton. 51 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. CONTINGENCIES - ------------------------------------------------------------------------------- In addition to the matters disclosed in these notes, Edison International is involved in 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. BROOKLYN NAVY YARD PROJECT EME owns, through a wholly owned subsidiary, 50% of the Brooklyn Navy Yard project. On December 17, 1997, the Brooklyn Navy Yard project partnership completed a $407 million permanent, nonrecourse financing for the project. In February 1997, the contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. (BNY) for damages in the amount of $137 million. In addition to defending this action, BNY has filed an action against the contractor in New York State Court asserting general monetary claims in excess of $13 million arising out of the turnkey agreement. EME agreed to indemnify the partnership and its partner from all claims and costs arising from or in connection with the contractor litigation, which indemnity has been assigned to the lenders. Edison International believes that the outcome of this litigation will not materially affect 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. 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). While Edison International has numerous insurance policies that it believes may provide coverage for some of these liabilities, it does not recognize recoveries in its financial statements until they are realized. In connection with the issuance of the San Onofre Units 2 and 3 operating permits, SCE reached an agreement with the California Coastal Commission in 1991 to restore certain marine mitigation sites. The restorations include two sites: designated wetlands and the construction of an artificial kelp reef off the California coast. After SCE requested certain modifications to the agreement, the Coastal Commission issued a final ruling in April 1997 to reduce the scope of remediations. SCE elected to pay for the costs of marine mitigation in lieu of placing the funds into a trust. Rate recovery of these costs is occurring through the San Onofre incentive pricing plan discussed in Note 1 to the Consolidated Financial Statements. Edison International's recorded estimated minimum liability to remediate its 51 identified sites (50 at SCE and one at EME) is $178 million, which includes $75 million for the two sites discussed above. 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 $246 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. The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites, representing $91 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 $153 million for its estimated minimum environmental-cleanup costs expected to be recovered through customer rates. This amount includes $60 million of marine mitigation costs remaining to be recovered through the San Onofre incentive pricing plan. 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 1997 were $10 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 $8.9 billion. SCE and other owners of San Onofre and Palo Verde have purchased the maximum private primary insurance available 52 EDISON INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($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 Regulatory Commission exempted San Onofre Unit 1 from this secondary level, effective June 1994. The maximum deferred premium for each nuclear incident is $79 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 $158 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 $28 million per year. Insurance premiums are charged to operating expense. 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, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Revenue $1,946 $1,731 $1,400 Expenses 1,578 1,393 1,121 ------ ------ ------ Net income $ 368 $ 338 $ 279 ------ ------ ------ ------ ------ ------ IN MILLIONS DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------- Current assets $ 637 $ 673 Other assets 5,520 4,747 ------ ------ Total assets $6,157 $5,420 ------ ------ ------ ------ Current liabilities $ 949 $ 691 Other liabilities 3,592 3,110 Equity 1,616 1,619 ------ ------ Total liabilities and equity $6,157 $5,420 ------ ------ ------ ------
NOTE 12. BUSINESS SEGMENTS - ------------------------------------------------------------------------------ Edison International's business segments include electric utility operations (SCE) and three nonutility segments: unregulated power generation (EME); financial investments (Edison Capital); and retail services (Edison Enterprises). Other than EME, the nonutility segments are not individually significant and are combined for reporting purposes. Edison International's business segment information was:
UNREGULATED POWER GENERATION EDISON ELECTRIC ----------------------- INTER- IN MILLIONS UTILITY DOMESTIC FOREIGN OTHER NATIONAL - ------------------------------------------------------------------------------------------- 1997 Operating revenue $ 7,953 $192 $ 783 $ 307 $ 9,235 Operating income 1,642 78 316 (1)(1) 2,035(2) Depreciation and decommissioning 1,240 15 88 19 1,362 Assets 18,059 926 4,059 2,057 25,101 Additions to property and plant 685 4 84 10 783 - ------------------------------------------------------------------------------------------- 1996 Operating revenue $ 7,583 $170 $ 674 $ 118 $ 8,545 Operating income 1,711 75 292 (37)(1) 2,041(2) Depreciation and decommissioning 1,064 15 75 19 1,173 Assets 17,737 949 4,204 1,669 24,559 Additions to property and plant 616 4 116 8 744 - ------------------------------------------------------------------------------------------- 1995 Operating revenue $ 7,873 $177 $ 290 $ 65 $ 8,405 Operating income 1,709 73 131 (8)(1) 1,905(2) Depreciation and decommissioning 954 10 36 14 1,014 Assets 18,155 842 3,532 1,417 23,946 Additions to property and plant 773 4 1,231(3) 3 2,011
Corporate items and eliminations are not material. (1) Excludes reported tax benefits of $61 million in 1997, $80 million in 1996 and $44 million in 1995. (2) Excludes income taxes of $537 million in 1997, $563 million in 1996 and $528 million in 1995. (3) Includes $1,042 million from EME's acquisition of First Hydro. 53 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), (2) 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 CAMILLA C. FROST(3), (4), (6) TRUSTEE, CHANDLER TRUSTS, DIRECTOR AND SECRETARY-TREASURER, CHANDIS SECURITIES COMPANY, LOS ANGELES, CA A director since 1985 JOAN C. HANLEY(4), (5) 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 AND CEO, 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 J. J. PINOLA(3), (4), (6) RETIRED CHAIRMAN OF THE BOARD AND CEO, FIRST INTERSTATE BANCORP, LOS ANGELES, CA A director since 1985 JAMES M. ROSSER(2), (4) PRESIDENT, CALIFORNIA STATE UNIVERSITY, LOS ANGELES, LOS ANGELES, CA A director since 1985 E. L. SHANNON, JR.(1), (2) RETIRED CHAIRMAN OF THE BOARD, SANTA FE INTERNATIONAL CORPORATION, ALHAMBRA, CA A director since 1977 ROBERT H. SMITH(1), (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 COMPANY, BETHESDA, MD A director since 1992 JAMES D. WATKINS(2), (5) 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 16, 1998 54 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 WILLIAM J. HELLER SENIOR VICE PRESIDENT, STRATEGIC PLANNING AND NEW BUSINESS DEVELOPMENT RICHARD K. BUSHEY VICE PRESIDENT AND CONTROLLER LILLIAN R. GORMAN VICE PRESIDENT, HUMAN RESOURCES THOMAS J. HIGGINS VICE PRESIDENT, CORPORATE COMMUNICATIONS 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 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 RICHARD M. ROSENBLUM SENIOR VICE PRESIDENT, T&D WIRES BUSINESS UNIT EMIKO BANFIELD VICE PRESIDENT, SHARED SERVICES PAMELA A. BASS VICE PRESIDENT, CUSTOMER SOLUTIONS BUSINESS UNIT RICHARD K. BUSHEY VICE PRESIDENT AND CONTROLLER BRUCE C. FOSTER VICE PRESIDENT, SAN FRANCISCO REGULATORY AFFAIRS LILLIAN R. GORMAN VICE PRESIDENT, HUMAN RESOURCES 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 DWIGHT E. NUNN VICE PRESIDENT, NUCLEAR ENGINEERING AND TECHNICAL SERVICES FRANK J. QUEVEDO VICE PRESIDENT, EQUAL OPPORTUNITY MAHVASH YAZDI VICE PRESIDENT AND CHIEF INFORMATION OFFICER BEVERLY P. RYDER CORPORATE SECRETARY EDISON MISSION ENERGY - --------------------- EDWARD R. MULLER PRESIDENT AND CEO ROBERT M. EDGELL EXECUTIVE VICE PRESIDENT TERRY V. CHARLTON SENIOR VICE PRESIDENT JAMES V. IACO, JR. SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER GEORGIA R. NELSON SENIOR VICE PRESIDENT S. LINN WILLIAMS SENIOR VICE PRESIDENT AND GENERAL COUNSEL EDISON CAPITAL -- MISSION LAND COMPANY - ---------------------- 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 EDISON TECHNOLOGY SOLUTIONS - --------------------------- VIKRAM S. BUDHRAJA PRESIDENT 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 DIANE O. WITTENBERG PRESIDENT AND CEO, EDISON EV PRESIDENT, EDISON UTILITY ALLIANCES DENNIS A. EASTMAN SENIOR VICE PRESIDENT AND GENERAL MANAGER, EDISON UTILITY SERVICES CLARK W. COLLINS SENIOR VICE PRESIDENT, EDISON ENTERPRISES KENNETH PICKRAHN VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, EDISON ENTERPRISES 55 EDISON INTERNATIONAL AND SUBSIDIARIES SELECTED FINANCIAL AND OPERATING DATA: 1993 - 1997
DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- EDISON INTERNATIONAL AND SUBSIDIARIES Operating revenue $ 9,235 $ 8,545 $ 8,405 $ 8,345 $ 7,839 Operating expenses $ 7,737 $ 7,067 $ 7,028 $ 7,046 $ 6,611 Net income $ 700 $ 717 $ 739 $ 681 $ 639 Weighted-average shares of common stock outstanding (in millions) 400 437 446 448 448 Per-share data: Basic earnings $ 1.75 $ 1.64 $ 1.66 $ 1.52 $ 1.43 Diluted earnings $ 1.73 $ 1.63 $ 1.65 $ 1.52 $ 1.42 Dividends paid $ 1.00 $ 1.00 $ 1.00 $ 1.21 $ 1.41 Dividends declared $ 1.00 $ 1.00 $ 1.00 $ 1.105 $ 1.415 Book value at year-end $ 14.71 $ 15.07 $ 14.41 $ 13.72 $ 13.30 Market value at year-end $27 3/16 $ 19 7/8 $ 17 5/8 $ 14 5/8 $ 20 Dividend payout ratio (paid) 57.1% 61.0% 60.2% 79.6% 98.6% Rate of return on common equity 11.7% 11.1% 11.8% 11.3% 11.7% Price/earnings ratio 15.5 12.1 10.6 9.6 14.0 Ratio of earnings to fixed charges 2.39 2.40 2.55 2.48 2.28 Assets $ 25,101 $ 24,559 $ 23,946 $ 22,390 $ 21,831 Retained earnings $ 3,176 $ 3,753 $ 3,700 $ 3,452 $ 3,266 Common shareholders' equity $ 5,527 $ 6,397 $ 6,393 $ 6,144 $ 5,958 Preferred securities: Not subject to mandatory redemption $ 184 $ 284 $ 284 $ 359 $ 359 Subject to mandatory redemption $ 425 $ 425 $ 425 $ 362 $ 275 Long-term debt $ 8,871 $ 7,475 $ 7,195 $ 6,347 $ 6,459 SOUTHERN CALIFORNIA EDISON COMPANY Operating revenue $ 7,953 $ 7,583 $ 7,873 $ 7,799 $ 7,397 Earnings $ 576 $ 621 $ 643 $ 599 $ 637 Basic earnings per Edison International common share $ 1.44 $ 1.42 $ 1.44 $ 1.34 $ 1.42 Rate of return on common equity 11.6% 12.1% 12.6% 12.0% 12.9% Internal generation of funds 104% 153% 89% 76% 78% Peak demand in megawatts (MW) 19,118 18,207 17,548 18,044 16,475 Generation capacity at peak (MW) 21,511 21,602 21,603 20,615 20,606 Kilowatt-hour sales (in millions) 77,234 75,572 74,296 77,986 73,308 Customers (in millions) 4.25 4.22 4.18 4.15 4.12 Full-time employees* 12,642 12,057 14,886 16,351 16,585 EDISON MISSION ENERGY Revenue $ 975 $ 844 $ 467 $ 381 $ 291 Net income $ 115 $ 92 $ 64 $ 55 $ 2 Assets $ 4,985 $ 5,153 $ 4,374 $ 2,843 $ 2,286 Rate of return on common equity 12.2% 8.8% 9.5% 9.6% 0.3% Ownership in operating projects (MW) 5,180 4,706 4,212 2,048 1,862 Full-time employees 1,140 940 902 690 673 EDISON CAPITAL Revenue $ 138 $ 49 $ 49 $ 47 $ 39 Net income $ 61 $ 41 $ 39 $ 33 $ 29 Assets $ 1,783 $ 1,423 $ 1,063 $ 1,008 $ 972 Rate of return on common equity 23.2% 17.7% 18.5% 16.8% 14.5% Full-time employees 85 70 42 33 20
*1993 AND 1994 ARE BASED ON TWELVE-MONTH AVERAGES. 56 EDISON INTERNATIONAL: Shareholder Information ANNUAL MEETING - ------------------------------------------------------------------------------ The 1998 annual meeting of shareholders will be held on Thursday, April 16, 1998, 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 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, sales, transfers and statements; and - - requests for access to online account information via Edison International's Internet Home Page, www.edisonx.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. PAGE EXHIBIT 21 EDISON INTERNATIONAL SUBSIDIARIES HOLDING COMPANY 00 EDISON INTERNATIONAL (formerly SCEcorp) 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 ENERGY SERVICES, INC. is a California corporation engaged in the business of assisting SCE in optimizing the use of its resources for the benefit of its ratepayers by marketing SCE's capabilities, facilities, products, information, and copyrighted materials to third parties. Energy Services, Inc. does not engage in any activities that would constitute owning or operating facilities used for the generation, transmission, or distribution of electric energy for sale. 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 SOUTHERN STATES REALTY is a California corporation engaged in providing real estate and consulting services to SCE and third parties. NONUTILITY SUBSIDIARIES 01 EDISON INSURANCE SERVICES, INC., is a captive insurance company, incorporated and having its principal executive office in Hawaii, formed for the purpose of issuing domestic and foreign property damage and business interruption insurance to Edison International and its subsidiaries. PAGE 1 01 EDISON VENTURES (formerly Edison Enterprises) 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 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 (formerly Edison Technologies, Inc.) 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 engage in research and development. 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 in a joint venture with Bechtel. 02 EDISON ENTERPRISES is a California corporation having its principal place of business at 13191 Crossroads Parkway North, City of Industry, California 91745, 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 EV is a California corporation having its principal place of business at 515 South Figueroa Street, Suite 950, Los Angeles, California 90071. It is engaged in the business of providing services related to electric vehicles, including the distribution and installation of electric vehicle charging equipment. 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. 03 EDISON SELECT (formerly Edison Spectrum) is a California corporation having its principal place of business 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 business of providing consumer products and services governed by the California Department of Insurance. 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. PAGE 2 02 EDISON CAPITAL (formerly Mission First Financial) 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 FUNDING COMPANY (formerly Mission Funding Company) 04 EDISON CAPITAL HOUSING INVESTMENTS (formerly Edison Housing Investments and Mission Housing Investments) 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 2814 Fifth Street Associates L.P. (Land Park Woods) (P) 99% 05 AE Associates L.P. (Avenida Espana) (P) 99% 05 Agape Housing L.P. (P) 99% 05 Anglo Edison Pinecrest L.L.C. (P) 99% 05 Anglo Edison Ravenwood L.L.C. (P) 99% 05 Argyle Redevelopment Partnership, Ltd. (Colorado partnership) 99% 05 Avalon Courtyard L.P. (Carson Senior Housing) (P) 3% 05 B.A.I. Anglo Edison Pinecrest, LLC (Pinecrest) (P) 99% 05 B.A.I. Anglo Edison Ravenwood, LLC (Ravenwood) (P) 99% 05 Bartlett Hill Associates L.P. (P) 70%; 100% w/ MBHCo. 05 Beacon Manor Associates L.P. (P) 99% 05 Bermuda Gardens Apartments L.P. (C) 99% 05 Borregas Court L.P. (P) 99% 05 Brantwood II Associates L.P. (P) 98.99% 05 Brooks School Associates L.P. (P) 99% 05 Bryn Mawr - Belle Shore L.P. (P) 99% 05 Burlington Arboretum L.P. (P) 94.66% 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/Renton Housing L.P. (C) 99% 05 Cedarshores L.P. (P) 98.99% 05 Centertown Associates L.P. (P) 99% 05 Centro Partners L.P. (El Centro) (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 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) PAGE 3 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 Fairmount 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 Board Street Associates L.P. (Station House) (P) 99% 07 Artloft Associates L.P. (P) 53.43% 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% 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 PAGE 4 05 Edison Capital Contributions VI Partners (P) 91.77% 06 ECH Investors Partner 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% 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 Investors Partner 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 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. (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 PAGE 5 07 Del Norte Place L.P. (P) 18%GP 07 The IBEX Group (P) 10%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 Mountain View Apartments L.P. (P) 0.26%GP 07 Piper Court G.P. (P) 50%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) 3%GP 07 Woodhaven Senior Residences L.P. (P) 1%GP 05 EDISON CAPITAL HOUSING NEW JERSEY 06 El Barrio Academy Urban Renewal Associates, L.P. (P) 98.99% 06 Pellettieri Homes Urban Renewal Associates, L.P. (P) 98.99% 05 EDISON CAPITAL HOUSING NEW YORK 06 Pier A Historic Rehabilitation at Battery Park (P) 99% 05 EDISON CAPITAL HOUSING PENNSYLVANIA 06 Lackawana Housing Associates LLC (Goodwill Neighborhood Residences) (P) 99% 06 McFarland Press Associates (P) 98.9% 06 Villa Maria Housing L.P. (P) 98.9% 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 Investors Partner 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 Investors Partner 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% PAGE 6 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 Investors Partner 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 Investors Partner 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 Edmundson Associates L.P. (Willows) (P) 99% 05 EHI DEVELOPMENT COMPANY (formerly MHI Development Company) 05 EHI DEVELOPMENT FUND (formerly MHI Development Fund) 05 Elizabeth West & East L.P. (P) 99% 05 Elk View Homes (C) 99% 05 Farm (The) Associates L.P. (P) 99% 05 Florence Apartments LLC (P) 99% 05 Garnet Housing Associates (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% PAGE 7 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 Holy Family Associates L.P. (P) 99% 05 Kennedy Lofts Associates L.P. (Massachusetts partnership) 97% 05 Lark Ellen L.P. (P) 99% 05 Las Brisas Apartments L.P. (P) 99% 05 Maplewood School Apartments L.P. (P) 99% 05 Mar Associates L.P. (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 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 95C COMPANY 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 05 MHIFED 96A L.P. (Delaware partnership) 1%GP; 99%LP to NYNEX 06 Good Samaritan Associates L.P. (P) 1% of 99% 06 Reseda Village L.P. (P) 1% of 99% PAGE 8 06 Oxnard Housing Associates L.P. (P) 1% of 99% 06 Metro Senior Associates 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 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% 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 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 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 Monterra Village Associates L.P. (P) 99% of 99% 07 Sky Parkway Housing Associates L.P. (P) 99% of 99% PAGE 9 07 Strobridge Housing Associates L.P. (P) 99% of 99% 07 Westgate Townhomes Associates L.P. (P) 99% of 99% 07 1010 SVN Associates L.P. (P) 99% of 99% 05 MHICAL 96 L.P. (Delaware partnership) 1%GP 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 Monterra Village 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% 06 1010 SVN Associates L.P. (P) 1% of 99% 05 MHICAL 97 COMPANY 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% 05 MHICAL 97 L.P. 1%GP 06 Alma Place Associates L.P. (P) 1% of 99% 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% 06 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 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 (formerly MHIFED 95B Company) 06 Mission Housing Partnership 1996 L.P. 99%LP (formerly MHIFED 95B L.P.) (Delaware partnership) 07 La Terraza Associates L.P. (Carlsbad Villas at Camino Real) (P) 99% of 99% PAGE 10 05 Mission Housing Partnership 1996 L.P. 1%GP (formerly MHIFED 95B L.P.) (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 Cedarshores L.P. (P) 0.01% 07 Eastwood Homes L.P. (P) 0.01% 07 El Barrio Academy Urban Renewal Associates, L.P. (P) 0.01% 07 McFarland Press Associates (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% 07 Villa Maria Housing 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. (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 Montview Park Apartments (C) 99% 05 Morgan Hill Ranch Housing L.P. (P) 99% 05 Neary Lagoon Partners L.P. (P) 99% 05 New Harbor Vista Apartments (C) 99% 05 Northstar Apartments (C) 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 Doors 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 Post Office Plaza L.P. (Ohio partnership) 99% 05 Red Lake Homes (C) 99% 05 Riverwalk Apartments (Colorado) (C) 99% 05 Roebling Village Inn Urban Renewal L.P. (P) 98.99% 05 Rosebloom Associates L.P. (Oakshade) (P) 99% 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.(P) 99% 05 School 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% PAGE 11 05 South Winery Associates L.P. (The Winery Apartments) (P) 99% 05 Stoney Creek Associates L.P. (P) 99% 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 Cornerstone Building (C) 99% 05 The Josephinum Associates L.P. (Washington partnership) 99% 05 The World Schoolhouse Residences L.P. (C) 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 Tuscany Associates L.P. (Tuscany Villa) (P) 99% 05 Venbury Trail L.P. (P) 99% 05 Walnut Avenue Partnership L.P. (P) 99% 05 WGA INVESTORS COMPANY [dead project] 05 Washington Creek Associates L.P. (P) 99% 05 Westfield Condominium Investment L.P. (P) 99% 05 Westport Village Homes Associates L.P. (P) 99% 05 Wheeler Manor Associates L.P. (P) 99% 05 White Mountain Apache Housing (P) 99% 05 Winfield Hill Associates L.P. (P) 99% 05 Woodleaf Village L.P. (P) 98.99% 05 Yanktown Sioux Homes (P) 99% 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 (formerly Mission Integrated Energy Services) 04 MISSION FIRST ASSET INVESTMENT 04 MISSION FUNDING BETA 04 MISSION FUNDING EPSILON 05 EDISON CAPITAL (BERMUDA) INVESTMENTS, LTD. (formerly Mission (Bermuda) Investments Pi, Ltd.) (Bermuda corporation) Address: Clarendon House, 2 Church Street, Hamilton HM CX, Bermuda 06 Edison Capital LAI (Bermuda) Ltd. (Bermuda corporation) 06 Edison Capital Latin American Investments (Bermuda) Ltd. (Bermuda corporation) 50% 05 EDISON CAPITAL LATIN AMERICAN INVESTMENTS HOLDING COMPANY (Delaware corporation) 06 Edison Capital Latin American Investments (Bermuda) Ltd. (Bermuda corporation) 50% 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 PAGE 12 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% 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 04 Calabasas Park Company (P) (inactive) 79%GP 05 Central Valley/Calabasas L.P. (P) [in dissolution] 50%LP 03 CALABASAS PALATINO, INC. 04 Central Valley/Calabasas L.P. (P) [in dissolution] 50%GP 03 Carol Stream Developers G.P. (Illinois partnership) 60%GP 03 Centrelake Partners, L.P. (limited partnership) 98%GP 03 IRWINDALE LAND COMPANY 04 Mission-Koll I (limited partnership) 4%GP 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-Nexus II, L.P. (limited partnership) 50%GP 04 Mission Vacaville L.P. (limited partnership) (formerly Mission- Messenger Vacaville G.P.) 1%GP 03 MISSION INDUSTRIAL CONSTRUCTORS, INC. (inactive) 03 Mission-Koll I (limited partnership) 96%LP 03 Mission-Nexus II, L.P. (limited partnership) 50%LP 03 Mission-Oceangate (P) (formerly Mission Comstock Crosser Hickey) 75%GP 03 MISSION/ONTARIO, INC. 03 MISSION SOUTH BAY COMPANY (inactive) 04 Mission-Oceangate (P) (formerly Mission Comstock, Crosser Hickey G.P.) 25%GP 03 MISSION TEXAS PROPERTY HOLDINGS, INC. 03 Mission Vacaville L.P. (limited partnership) (formerly Mission- Messenger Vacaville G.P.) 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) PAGE 13 02 EDISON MISSION ENERGY (formerly Mission Energy Company) 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 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. DOMESTIC: 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) 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 (formerly Woodland 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 (formerly Hentland Energy Company) (inactive) 03 CORONADO ENERGY COMPANY 04 Oconee Energy, L.P. (Delaware L.P.) 50%; 100% w/Clayville 03 CRESCENT VALLEY ENERGY COMPANY (GP) 04 Beowawe Geothermal Power Company (general partnership) 50% 03 DEL MAR ENERGY COMPANY (GP) 04 Mid-Set Cogeneration Company (P) 50% 03 DELAWARE ENERGY CONSERVERS, INC. (Delaware corporation) (inactive) PAGE 14 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 03 EASTERN SIERRA ENERGY COMPANY (GP & LP) 04 Saguaro Power Company, L.P. (P) 50% 03 EAST MAINE ENERGY COMPANY (inactive) [dissolving] 03 EDISON MISSION ENERGY FUEL [formerly MISSION ENERGY FUEL COMPANY] 04 EDISON MISSION ENERGY OIL AND GAS [formerly MISSION ENERGY OIL AND GAS COMPANY] 05 Four Star Oil & Gas Company (P) 46.85% (owns Lost Hills Cogeneration Facility) 04 EDISON MISSION ENERGY PETROLEUM [formerly MISSION ENERGY PETROLEUM COMPANY] (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. (formerly Edison Mission Energy Canada Ltd. and Mission Energy Canada Corporation) (British Columbia company) 04 The Mission Interface Partnership (Province of Ontario G.P.) 50% 03 EDISON MISSION OPERATION & MAINTENANCE, INC. (formerly Mission Operation and Maintenance, Incorporated) (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 03 EMP, INC. (Oregon corporation) (GP & LP) 04 GEO East Mesa Limited Partnership (P) 50% 05 GEO East Mesa Electric Co. (Nevada corp.) (McCabe Plant) 100% 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 4.03] 50% 03 HOLTSVILLE ENERGY COMPANY (GP & LP) (formerly Brookhaven Energy Company) 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 LAKE GROVE ENERGY COMPANY (former Mid-County subsidiary) (inactive) 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 (formerly Columbia River Cogeneration Company, formerly Cabrillo Energy Company) (held for Weyerhauser) 03 MADERA ENERGY COMPANY (GP) 04 Brookhaven Cogeneration, L.P. (Delaware partnership) 50%; 100% w/Holtsville 03 MADISON ENERGY COMPANY (formerly Sunshine Generators, Inc.) (LP) 04 Gordonsville Energy, L.P. (Delaware partnership) [see 4.04] 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. (formerly Glenwood Springs Property, Inc.) PAGE 15 03 MISSION ENERGY HOLDINGS, INC. 04 Mission Capital, L.P. (Delaware L.P.) 97%; MIPS partnership 03 MISSION ENERGY HOLDINGS INTERNATIONAL, INC. (formerly Patapsco Energy Company) [holds all the issued and outstanding stock of MEC International B.V.--see INTERNATIONAL section] 03 MISSION ENERGY INDONESIA (formerly Chula Energy Company) 03 MISSION ENERGY MEXICO (inactive) formerly the branch office in Mexico (no partnership) 03 MISSION ENERGY NEW YORK, INC. (formerly Allegheny Energy Company) (GP & LP) 04 Brooklyn Navy Yard Cogeneration Partners, L.P. (Delaware partnership) [see 4.05] 50% 03 MISSION ENERGY WALES COMPANY (formerly San Jacinto Energy 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 ENERGY WESTSIDE, INC. (formerly Sun Coast Energy Company) 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) 04 American Bituminous Power Partners, L.P. (Delaware limited partnership) 0.5%; 50% w/Aguila 05 American Kiln Partners, L.P. (Delaware Limited Partnership) 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 4.06] 50% 03 RAPIDAN ENERGY COMPANY (GP) 04 Gordonsville Energy, L.P. (Delaware partnership) [see 4.04] 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) PAGE 16 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% EME INTERNATIONAL: 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 Edison Mission Energy Asia Pte Ltd. (formerly 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 [formerly P.T. Mission Operation and Maintenance Indonesia (Indonesian company) 99% Address: Jl. Gen. A Yani No. 54 Probolinggo, East Java, Indonesia 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 (formerly Mission Energy Holdings Pty. Ltd.) (Australian corporation) 100% Address: Southgate Complex, Level 20, Tower East, 40 City Road, South Melbourne, Victoria 3205 07 Edison Mission Energy Australia Ltd. (formerly 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 4.09] 51% PAGE 17 07 Edison Mission Operation & Maintenance Kwinana Pty Ltd (formerly Mission Operations (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 (formerly Mission Energy Management Australia 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 4.09] 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 4.09] 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 4.09] 51% 05 Edison Mission Energy International B.V. (formerly MEC Mission B.V.) (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 EME Victoria B.V. 100% 05 Hydro Energy B.V. (Netherlands limited liability company) (formerly Continfin Management B.V.) 10% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 06 Iberica de Energias, S.A. (Spain corp) 100% (equity) [see 4.07] Address: Paseo de Gracia 18, Planta 4, 08007, Barcelona, Spain 07 Electrometalurgica del Ebro, S.A. ("EMESA") (Spain corporation) (equity) [see 4.08] 91% 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 PAGE 18 06 Hydro Energy B.V. (Netherlands company) 90% 07 Iberica de Energias, S.A. (Spain corporation) 100% [see 4.07] 08 Electrometalurgica del Ebro, S.A. ("EMESA") (Spain corporation) [see 4.08] 91% 09 Monasterio de Rueda, S.L. (Spain) 100% 06 Saltos del Porma, S.A. 05 Latrobe 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) 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 4.09] 51%; 49% to Gippsland 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 Anomin Sirketi (Turkish corporation) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 06 Doga Isi Satis Hizmetteri Ticaret L.S. (Turkish corporation) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 06 Doga Isletme ve Bakim Ticaret L.S. (Turkish corporation) 80% Address: Merkez Man, Mahallesi Caddesi 11/8, Esenyurt, Istanbul, Turkey 05 MEC IES B.V. (formerly MEC ESA 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) (formerly Mission Energy, formerly Mission Energy Jojobera) (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 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) [see 4.10] 40% Address: Mid Plaza 2, 15th Floor, Jl. Jend. Sudirman Kav. 10-11, 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. (formerly MEC Mission B.V.) (Netherlands company) 1% 06 MEC Esenyurt B.V. (Netherlands company) (Doga Project) 1% 07 Doga Enerji Uretim Sanayi ve Ticaret Anomin Sirketi (Turkish corporation) 07 Doga Isi Satis Hizmetteri Ticaret L.S. (Turkish corporation) 80% 07 Doga Isletme ve Bakim Ticaret L.S. (Turkish corporation) 80% 06 MEC IES B.V. (Netherlands company) (ISAB Project) 1% 07 ISAB Energy Services s.r.l. 06 MEC India B.V. (Netherlands company) 1% PAGE 19 07 Edison Mission Energy Power (Mauritius corporation) (formerly Mission Energy, formerly Mission Energy Jojobera) 06 MEC Indo Coal B.V. (Netherlands company) (Adaro Project) 1% 07 P. T. Adaro Indonesia 10% 06 MEC Indonesia B.V. (Netherlands company) 1% 07 P. T. Paiton Energy Company (Indonesia company) (equity) (Paiton Project) [see 4.10] 40% 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 4.13] 06 MEC Priolo B.V. (Netherlands company) (ISAB Project) 1% 07 ISAB Energy, s.r.l. (Italian J.V. company) (equity) [see 4.11] 1% of 49% (quota, not shares) 06 MEC San Pascual B.V. (Netherlands company) 1% 07 San Pascual Cogeneration Company International B.V. 06 MEC Sidi Krir B.V. [formerly MEC Colombia B.V.] (Netherlands company) 1% 06 MEC Sumatra B.V. (formerly MEC Turkey B.V.) (Netherlands company) 1% 06 MEC Wales B.V. (formerly MEC Global Services 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 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 4.12] 99% 10 First Hydro Finance plc 11 First Hydro Company [see 4.12] 1% 06 Mission Energy Italia s.r.l. 10% (Office in Italy) 06 P.T. Edison Mission Operation and Maintenance Indonesia [formerly P.T. Mission Operation & 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 4.13] 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 4.11] 99% of 49% (quota, not shares) Address: Corso Gelone No. 103, Siracusa, Sicily, Italy PAGE 20 05 MEC San Pascual B.V. (Netherlands company) 99% Address: Croeselaan 18, 3521 GT Utrecht, The Netherlands 06 San Pascual Cogeneration Company International B.V. 50% Address: Croeselaan 18, 3521 GT Utrecht, The Netherlands 05 MEC Sidi Krir B.V. [formerly MEC Colombia B.V.] (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 MEC Sumatra B.V. (formerly MEC Turkey B.V.) (Netherlands company) 99% Address: Croeselaan 18, 3500 GT Utrecht, The Netherlands 05 MEC Wales B.V. (formerly MEC Global Services, 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% 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 4.12] 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 4.12] 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 (formerly 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 Mission Energy 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 PAGE 21 07 First Hydro Holdings Company 1% 08 First Hydro Company [see 4.12] 99% 08 First Hydro Finance plc 100% 09 First Hydro Company [see 4.12] 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 4.12] 99% 10 First Hydro Finance plc 99% 11 First Hydro Company [see 4.12] 1% 06 Mission (No. 2) Limited (UK private limited company) (formerly Mowlem Power Ltd.) 100% Address: Lansdowne House, Berkeley Square, 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 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 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 4.09] 51%; 49% to Gippsland EX-23 2 CONSENT OF IND 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 January 30, 1998, (the Report of Independent Public Accountants) appearing on page 34 of the 1997 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, 1997 of Edison International. It should be noted that we have performed no audit procedures subsequent to January 30, 1998, 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, 1997. We further consent to 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 42 of this Annual Report on Form 10-K, in the Edison International Registration Statements which follow: Registration Form File No. Effective Date ----------------- ------- -------------- Form S-3 333-08115 July 15, 1996 Form S-8 33-303913 May 16, 1996 Form S-8 33-32302 June 2, 1993 Form S-8 33-46713 June 2, 1993 Form S-8 33-46714 June 2, 1993 Form S-3 33-44148 September 17, 1993 ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 24, 1998 EX-24.1 3 POWER OF ATTORNEY PAGE 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, R. K. BUSHEY, THEODORE F. CRAVER, JR., BEVERLY P. RYDER, KENNETH S. STEWART, MARY C. SIMPSON, PAIGE W. R. WHITE, TIMOTHY W. ROGERS, PEGGY A. STERN, JOSEPH G. LLORENS, 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, 1997, Quarterly Reports on Form 10-Q for each of the first three quarters of fiscal year 1998, any Current Reports on Form 8- K from time to time during 1998 and through March 17, 1999, 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 19th day of March, 1998. EDISON INTERNATIONAL By John E. Bryson ------------------------ John E. Bryson Chairman of the Board and Chief Executive Officer [Seal] Attest: Beverly P. Ryder - ---------------- Beverly P. Ryder Secretary 1998 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 - -------------- Executive Vice President Alan J. Fohrer and Chief Financial Officer Controller and Principal Accounting Officer: R. K. Bushey - ------------ Vice President and Controller R. K. Bushey Directors: Winston C. Chen, Director Joseph J. Pinola, Director - ---------------- ---------------- Winston H. Chen Joseph J. Pinola Warren Christopher, Director James M. Rosser, Director - ------------------ --------------- Warren Christopher James M. Rosser Stephen E. Frank, President and E. L. Shannon, Jr. Director - ---------------- Director ------------- Stephen E. Frank E. L. Shannon, Jr. Camilla C. Frost, Director Robert H. Smith, Director - ---------------- --------------- Camilla C. Frost Robert H. Smith Jona 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 2 EX-24.2 4 CERT COPY OF BOARD RESOLUTION PAGE 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 19, 1998. Dated: March 24, 1998 Bonita J. Smith ------------------------------------ Bonita J. Smith Assistant Secretary Edison International PAGE EXHIBIT 24.2 RESOLUTION OF THE BOARD OF DIRECTORS OF EDISON INTERNATIONAL Adopted: March 19, 1998 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, 1997, Quarterly Reports on Form 10-Q for each of the first three quarters of fiscal year 1998, Current Reports on Form 8-K from time to time during 1998 and through March 17, 1999, 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, R. K. Bushey, Theodore F. Craver, Jr., Beverly P. Ryder, Kenneth S. Stewart, Mary C. Simpson, Paige W. R. White, Timothy W. Rogers, Peggy A. Stern, Joseph G. Llorens, 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 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK $10,939,254 7,570,761 3,597,483 2,993,569 0 25,101,067 2,260,974 90,486 3,175,883 5,527,343 425,000 183,755 2,170,374 0 6,651,330 413,726 868,026 0 49,077 20,825 8,791,611 25,101,067 9,235,052 536,848 7,200,529 7,737,377 1,497,675 (55,931) 1,441,744 699,233 742,511 42,655 699,856 394,903 313,710 2,133,917 $1.75 $1.73
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