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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
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OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-2313
SOUTHERN CALIFORNIA EDISON COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1240335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P. O. Box 800)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
(626) 302-1212
(Registrant's telephone number, including area code)
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 (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 ___
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date:
Class Outstanding at May 7, 2002
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Common Stock, no par value 434,888,104
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SOUTHERN CALIFORNIA EDISON COMPANY
INDEX
Page
No.
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Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income (Loss) - Three Months
Ended March 31, 2002, and 2001 1
Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended March 31, 2002, and 2001 1
Consolidated Balance Sheets - March 31, 2002,
and December 31, 2001 2
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002, and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II. Other Information:
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 21
SOUTHERN CALIFORNIA EDISON COMPANY
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
3 Months Ended
March 31,
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In millions 2002 2001
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(Unaudited)
Operating revenue $1,932 $ 1,512
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Fuel 52 47
Purchased power 255 1,724
Provisions for regulatory adjustment clauses - net 697 (29)
Other operation and maintenance 413 426
Depreciation, decommissioning and amortization 182 152
Property and other taxes 29 29
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Total operating expenses 1,628 2,349
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Operating income (loss) 304 (837)
Interest and dividend income 109 25
Other nonoperating income 10 8
Interest expense - net of amounts capitalized (183) (207)
Other nonoperating deductions (4) 8
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Net income (loss) before taxes 236 (1,003)
Income tax (benefit) 84 (411)
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Net income (loss) 152 (592)
Dividends on preferred stock 6 6
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Net income (loss) available for common stock $ 146 $ (598)
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
3 Months Ended
March 31,
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In millions 2002 2001
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(Unaudited)
Net income (loss) $ 152 $ (592)
Other comprehensive income, net of tax:
Cumulative effect of change in accounting for derivatives -- 397
Unrealized gain (loss) on cash flow hedges 1 (422)
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Comprehensive income (loss) $ 153 $ (617)
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The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
In millions 2002 2001
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(Unaudited)
ASSETS
Cash and equivalents $ 1,303 $ 3,414
Receivables, less allowances of $33 and $32
for uncollectible accounts at respective dates 755 1,093
Accrued unbilled revenue 411 451
Fuel inventory 9 14
Materials and supplies, at average cost 153 146
Accumulated deferred income taxes - net 347 433
Regulatory assets - net -- 83
Prepayments and other current assets 119 145
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Total current assets 3,097 5,779
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Nonutility property - less accumulated provision
for depreciation of $20 and $17 at respective dates 161 159
Nuclear decommissioning trusts 2,358 2,275
Other investments 237 224
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Total investments and other assets 2,756 2,658
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Utility plant, at original cost:
Transmission and distribution 13,673 13,568
Generation 1,740 1,729
Accumulated provision for depreciation and decommissioning (8,167) (7,969)
Construction work in progress 584 556
Nuclear fuel, at amortized cost 139 129
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Total utility plant 7,969 8,013
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Regulatory assets - net 5,025 5,528
Other deferred charges 507 475
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Total deferred charges 5,532 6,003
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Total assets $ 19,354 $ 22,453
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The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
In millions, except share amounts 2002 2001
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(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term debt $ -- $ 2,127
Long-term debt due within one year 1,346 1,146
Preferred stock to be redeemed within one year 105 105
Accounts payable 884 3,261
Accrued taxes 904 823
Other current liabilities 1,633 1,645
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Total current liabilities 4,872 9,107
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Long-term debt 5,812 4,739
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Accumulated deferred income taxes - net 3,175 3,365
Accumulated deferred investment tax credits 153 153
Customer advances and other deferred credits 827 739
Power-purchase contracts 337 356
Accumulated provision for pensions and benefits 452 420
Other long-term liabilities 151 148
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Total deferred credits and other liabilities 5,095 5,181
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Commitments and contingencies
(Notes 1 and 3)
Preferred stock:
Not subject to mandatory redemption 129 129
Subject to mandatory redemption 151 151
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Total preferred stock 280 280
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Common stock (434,888,104 shares outstanding at each date) 2,168 2,168
Additional paid-in capital 338 336
Accumulated other comprehensive income (loss) (22) (22)
Retained earnings 811 664
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Total common shareholder's equity 3,295 3,146
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Total liabilities and shareholder's equity $ 19,354 $ 22,453
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The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 Months Ended
March 31,
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In millions 2002 2001
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(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 152 $ (592)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation, decommissioning and amortization 182 152
Other amortization 25 18
Deferred income taxes and investment tax credits (162) (303)
Regulatory assets - long-term - net 537 (141)
Gas call options (23) --
Other assets 17 (73)
Other liabilities 81 66
Changes in working capital:
Receivables and accrued unbilled revenue 377 16
Regulatory liabilities - short-term - net 83 56
Fuel inventory, materials and supplies (2) (7)
Prepayments and other current assets 25 28
Accrued interest and taxes 56 (28)
Accounts payable and other current liabilities (2,343) 1,987
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Net cash provided (used) by operating activities (995) 1,179
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Cash flows from financing activities:
Long-term debt issued 1,600 --
Long-term debt repaid (400) --
Bonds repurchased and funds held in trust 192 (156)
Rate reduction notes repaid (62) (63)
Nuclear fuel financing - net (59) (9)
Short-term debt financing - net (2,127) 669
Dividends paid (27) (1)
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Net cash provided (used) by financing activities (883) 440
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Cash flows from investing activities:
Additions to property and plant (229) (178)
Funding of nuclear decommissioning trusts (6) --
Investments in other assets 2 3
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Net cash used by investing activities (233) (175)
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Net increase (decrease) in cash and equivalents (2,111) 1,444
Cash and equivalents, beginning of period 3,414 583
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Cash and equivalents, end of period $ 1,303 $ 2,027
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The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Statement
In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to
present a fair statement of the financial position and results of operations for the periods covered by this
report. The results of operations for the period ended March 31, 2002, are not necessarily indicative of the
operating results for the full year.
Southern California Edison's (SCE) significant accounting policies were described in Note 1 of "Notes to
Consolidated Financial Statements" included in its 2001 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. SCE follows the same accounting policies for interim reporting purposes.
Certain prior-period amounts were reclassified to conform to the March 31, 2002, financial statement presentation.
The quarterly report should be read in conjunction with SCE's 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Note 1. Regulatory Matters
California Public Utilities Commission Litigation Settlement Agreement
SCE and the California Public Utilities Commission (CPUC) entered into a settlement of SCE's lawsuit against the
CPUC which sought a ruling that SCE is entitled to full recovery of its past electricity procurement costs. A
consumer advocacy group and other parties are pursuing an appeal to the federal court of appeals seeking to
overturn the stipulated judgment of the district court that approved the settlement agreement. On March 4, 2002,
the court of appeals heard argument on the appeal and the matter is now under submission. A decision could be
issued at any time. SCE cannot predict the outcome of the appeal or the impact that any outcome would have upon
the stipulated judgment. Possible outcomes could include affirmance, a return to the district court, a referral
of a controlling state law question to the California Supreme Court, or reversal of the stipulated judgment. SCE
cannot predict whether or how a ruling on the stipulated judgment could also affect the settlement agreement.
Under the settlement agreement, SCE cannot pay dividends or other distributions on its common stock (all of which
is held by its parent, Edison International) prior to the earlier of the date on which SCE has recovered all of
its procurement-related obligations or January 1, 2005. However, if SCE has not recovered all of its
procurement-related obligations by December 31, 2003, SCE may apply to the CPUC for consent to resume common
stock dividends, and the CPUC will not unreasonably withhold its consent.
Holding Company Issue
In January 2001, independent auditors hired by the CPUC issued a report on the financial condition and solvency
of SCE and its affiliates. The report confirmed what SCE had previously disclosed to the CPUC in public filings
about SCE's financial condition. In April 2001, the CPUC issued an order instituting investigation that reopens
the past CPUC decision authorizing the utilities to form holding companies and initiates an investigation into,
among other things: whether the holding companies violated CPUC requirements to give first priority to the
capital needs of their respective utility subsidiaries; any additional suspected violations of laws or CPUC rules
and decisions; and whether additional rules, conditions, or other changes to the holding company decisions are
necessary. On January 9, 2002, the CPUC issued an interim decision on the first priority condition. The
decision stated that, at least under certain circumstances, the condition includes the requirement that holding
companies infuse all types of capital into their respective utility subsidiaries when necessary to fulfill the
utility's obligation to serve. The decision did not determine if any of the utility holding companies had
violated this condition, reserving such a determination for a later phase of the proceedings. On February 11,
2002, SCE filed an application for rehearing of the decision, stating that the decision is an unlawful and
erroneous attempt to rewrite the first priority condition rather than interpret it and that the decision could
result in higher rates for
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE's customers. A decision on rehearing is expected in May 2002. SCE cannot predict what effects this
investigation or any subsequent actions by the CPUC may have on SCE.
Utility-Retained Generation Proceeding
On April 4, 2002, the CPUC issued a decision to return utility-retained generation (URG) assets to
cost-of-service ratemaking through the end of 2002. After that time, SCE's URG-related revenue requirement will
be determined through the 2003 general rate case proceeding. Key elements of the URG decision are: retention of
the San Onofre incentive pricing mechanism through 2003; recovery of incurred costs for all URG components other
than San Onofre; establishment of a depreciation schedule for SCE's nuclear plants based on their remaining
useful lives; and establishment of balancing accounts for utility generation, purchased power, and Independent
System Operator (ISO) ancillary services.
Based on this decision, during second quarter 2002, SCE will resume applying accounting principles for
rate-regulated enterprises for its generation assets (such accounting was discontinued in 1997). As a result,
SCE expects to reestablish for financial reporting purposes its unamortized nuclear plant and regulatory assets
related to purchased-power settlements and flow-through taxes, adjust the procurement-related obligations account
(PROACT) balance, and record a corresponding credit to earnings of approximately $500 million after tax.
Implementation of the URG decision, together with the PROACT mechanism, will allow SCE to reestablish
substantially all of the regulatory assets previously written off to earnings.
Wholesale Electricity Markets
On April 25, 2001, after months of extremely high power prices, the Federal Energy Regulatory Commission (FERC)
issued an order providing for energy price controls during ISO Stage 1 or greater power emergencies (7% or less
in reserve power). The order establishes an hourly clearing price based on the costs of the least efficient
generating unit during the period. Effective June 20, 2001, the FERC expanded the April 25, 2001, order to
include non-emergency periods and price mitigation in the 11-state western region. The latest order is in effect
until September 30, 2002.
After unsuccessful settlement negotiations among utilities, power sellers and state representatives, on July 25,
2001, the FERC issued an order that limits potential refunds from alleged overcharges by energy suppliers to the
ISO and California Power Exchange (PX) spot markets during the period from October 2, 2000, through June 20,
2001, and adopted a refund methodology based on daily spot market gas prices. An administrative law judge
conducted evidentiary hearings on this matter in March 2002 and further hearings are scheduled in August 2002.
SCE cannot predict the amount of any potential refunds. Under the settlement of litigation with the CPUC,
refunds will be applied to the balance in the PROACT.
Note 2. Purchased Power
SCE purchased power through the PX from April 1998 through mid-January 2001. SCE has bilateral forward contracts
with other entities and power-purchase contracts with other utilities and independent power producers classified
as qualifying facilities (QFs). Purchased power detail is provided below:
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 Months Ended
March 31,
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In millions 2002 2001
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(Unaudited)
PX/ISO:
Purchases $ (19) $ 1,081
Generation sales -- (705)
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Purchased power - PX/ISO - net (19) 376
Purchased power - bilateral contracts 15 52
Purchased power - interutility/QF contracts 259 1,296
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Total $ 255 $ 1,724
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PX/ISO amounts for the three months ended March 31, 2002, reflect billing adjustments. Since January 17, 2001,
all other power is purchased by a state agency for delivery to SCE's customers and is not considered a cost to
SCE.
Note 3. Contingencies
In addition to the matters disclosed in these notes, SCE is involved in other legal, tax and regulatory
proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of
business. SCE believes the outcome of these other proceedings will not materially affect its results of
operations or liquidity.
Energy Crisis Issue
In October 2000, a federal class action securities lawsuit was filed against SCE and Edison International. As
amended in December 2000 and March 2001, the lawsuit involves securities fraud claims arising from alleged
improper accounting for energy-cost undercollections. The second amended complaint is supposedly filed on behalf
of a class of persons who purchased Edison International common stock between July 21, 2000, and April 17, 2001.
This lawsuit has been consolidated with another similar lawsuit filed on March 15, 2001. On September 17, 2001,
SCE and Edison International filed a motion to dismiss for failure to state a claim. On March 8, 2002, the
district court issued an order dismissing the complaint with prejudice. The plaintiffs have stipulated to
dismiss their appeal.
Environmental Protection
SCE 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.
SCE records its environmental liabilities when site assessments and/or remedial actions are probable and a range
of reasonably likely cleanup costs can be estimated. SCE 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, SCE records the lower end of this reasonably likely range of costs
(classified as other long-term liabilities) at undiscounted amounts.
SCE's recorded estimated minimum liability to remediate its 40 identified sites is $110 million. The ultimate
costs to clean up SCE'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. SCE believes that, due to these uncertainties, it is reasonably
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
possible that cleanup costs could exceed its recorded liability by up to $287 million. The upper limit of this
range of costs was estimated using assumptions least favorable to SCE among a range of reasonably possible
outcomes. SCE has sold all of its gas-fueled generation plants and has retained some liability associated with
the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at certain sites, representing $49 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 $75 million for its
estimated minimum environmental-cleanup costs expected to be recovered through customer rates.
SCE'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 SCE may be held responsible for
contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs
can be made for these sites.
SCE 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 $10 million to $25 million. Recorded costs for the twelve months
ended March 31, 2002, were $17 million.
Based on currently available information, SCE 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, SCE believes that costs ultimately recorded will not materially affect its results of operations or
financial position. There can be no assurance, however, that future developments, including additional
information about existing sites or the identification of new sites, will not require material revisions to such
estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $9.5 billion. SCE and other owners of the
San Onofre and Palo Verde nuclear generating stations have purchased the maximum private primary insurance
available ($200 million). The balance is covered by the industry's retrospective rating plan that uses deferred
premium charges to every reactor licensee if a nuclear incident at any licensed reactor in the U.S. results in
claims and/or costs which exceed the primary insurance at that plant site. Federal regulations require this
secondary level of financial protection. The Nuclear Regulatory Commission exempted San Onofre Unit 1 from this
secondary level, effective June 1994. The maximum deferred premium for each nuclear incident is $88 million per
reactor, but not more than $10 million per reactor may be charged in any one year for each incident. Based on
its ownership interests, SCE could be required to pay a maximum of $175 million per nuclear incident. However,
it would have to pay no more than $20 million per incident in any one year. Such amounts include a 5% surcharge
if additional funds are needed to satisfy public liability claims and are subject to adjustment for inflation.
If the public liability limit above is insufficient, federal regulations may impose further revenue-raising
measures to pay claims, including a possible additional assessment on all licensed reactor operators.
Property damage insurance covers losses up to $500 million, including decontamination costs, at San Onofre and
Palo Verde. Decontamination liability and property damage coverage exceeding the primary $500 million also has
been purchased in amounts greater than federal requirements. Additional insurance covers part of replacement
power expenses during an accident-related nuclear unit outage. A mutual insurance company owned by utilities
with nuclear facilities issues these policies. 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 $35 million per year. Insurance premiums are charged to operating expense.
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Spent Nuclear Fuel
Under federal law, the U.S. Department of Energy (DOE) is responsible for the selection and development of a
facility for disposal of spent nuclear fuel and high-level radioactive waste. Such a facility was to be in
operation by January 1998. However, the DOE did not meet its obligation. It is not certain when the DOE will
begin accepting spent nuclear fuel from San Onofre or from other nuclear power plants. Extended delays by the
DOE could lead to consideration of costly alternatives involving siting and environmental issues. SCE has paid
the DOE the required one-time fee applicable to nuclear generation at San Onofre through April 6, 1983
(approximately $24 million, plus interest). SCE is also paying the required quarterly fee equal to one mill per
kilowatt-hour of nuclear-generated electricity sold after April 6, 1983.
SCE, as operating agent, has primary responsibility for the interim storage of its spent nuclear fuel at San
Onofre. Current capability to store spent fuel is estimated to be adequate through 2005. Palo Verde on-site
spent fuel storage capacity will accommodate needs until 2003 for Unit 2, and until 2004 for Units 1 and 3.
Arizona Public Service Company, operating agent for Palo Verde, expects to complete in 2002 an interim fuel
storage facility that is currently under construction.
Page 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) for the first
quarter of 2002 discusses material changes in the results of operations, financial condition and other
developments of Southern California Edison Company (SCE) since December 31, 2001, and as compared to the first
quarter of 2001. This discussion presumes that the reader has read or has access to SCE's MD&A for the calendar
year 2001 (the year-end 2001 MD&A), which was included in Southern California Edison's 2001 annual report to
shareholders and incorporated by reference into Southern California Edison's Annual Report on Form 10-K for the
year ended December 31, 2001.
This MD&A contains forward-looking statements. These statements are based on SCE's knowledge of present facts,
current expectations about future events and assumptions about future developments. Forward-looking statements
are not guarantees of performance; they are subject to risks, uncertainties and assumptions that could cause
actual future activities and results of operations to be materially different from those set forth in this
discussion. Important factors that could cause actual results to differ include risks discussed below in the
Forward-Looking Information section. The following discussion provides updated information about material
developments since the issuance of the year-end 2001 MD&A and should be read in conjunction with the financial
statements contained in this quarterly report and Southern California Edison's Annual Report on Form 10-K for the
year ended December 31, 2001.
This MD&A includes information about SCE, a regulated public utility company providing electricity to retail
customers in central, coastal, and southern California.
RESULTS OF OPERATIONS
First Quarter 2002 vs. First Quarter 2001
Earnings
SCE earned $146 million for the three months ended March 31, 2002, compared with a loss of $598 million for the
same period in 2001. SCE's first quarter 2001 loss reflects a $661 million procurement-related adjustment for
undercollected power procurement costs. Excluding this adjustment, SCE's first quarter 2001 earnings were $63
million. The $83 million increase was primarily due to the accrual of interest income on the balance in the
newly established procurement-related obligations account (PROACT) and lower interest expense. The increase in
2002 also reflects lower earnings in 2001 resulting from a February 2001 fire and resulting outage at San Onofre
Nuclear Generating Station. Relevant regulatory proceedings are discussed below in PROACT Regulatory Asset.
In first quarter 2001, SCE's $661 million of undercollected power procurement costs were expensed as incurred,
rather than accumulated in a balancing account. Accounting principles generally accepted in the United States
require SCE at each financial statement date to assess the probability of recovering its regulatory assets
through the rate-making process. As of December 31, 2000, SCE was unable to conclude that, under applicable
accounting principles, its $4.2 billion generation and procurement-related regulatory assets were probable of
recovery through the rate-making process, and wrote them off as a charge to earnings in 2000.
Based on the California Public Utilities Commission's (CPUC) January 23, 2002, PROACT resolution, SCE was able to
conclude that $3.6 billion in regulatory assets previously written off were probable of recovery through the
rate-making process as of December 31, 2001. As a result, SCE's year-ended December 31, 2001, consolidated
income statement included a $2.1 billion credit to earnings. In first quarter 2002, any difference between
energy procurement costs and related revenue is accumulated in the PROACT balancing account.
Page 10
Operating Revenue
Operating revenue increased in 2002, primarily due to a 4(cent)-per-kWh (1(cent)in January and 3(cent)in June) surcharge
effective in 2001. The increase was partially offset by: a decrease in retail sales volume primarily
attributable to conservation efforts; a decrease in revenue arising from the credits given to direct access
customers in 2002; a decrease in revenue related to penalties customers incurred for not complying with their
interruptible contracts; and a decrease in revenue related to electric power provided to SCE's customers by the
California Department of Water Resources (CDWR). Amounts SCE bills to and collects from its customers for
electric power purchased and sold by the CDWR to SCE's customers (beginning January 17, 2001) are being remitted
to the CDWR and are not recognized as revenue by SCE. These amounts were $341 million and $257 million,
respectively, for the first quarter 2002 and first quarter 2001.
With respect to the decrease in revenue in 2002 arising from the credits given to direct access customers, from
1998 through mid-September 2001, SCE's customers were able to choose to purchase power directly from an energy
service provider other than SCE (thus becoming direct access customers) or continue to have SCE purchase power on
their behalf. Most direct access customers continued to be billed by SCE, but were given a credit for the
generation costs SCE saved by not serving them. Operating revenue is reported net of this credit. Following
previous CPUC action that restricted direct access, on March 21, 2002, the CPUC issued a final decision affirming
that new direct access arrangements entered into by SCE's customers after September 20, 2001, are invalid.
More than 94% of 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).
Operating Expenses
Fuel expense increased in 2002 compared to 2001, primarily due to the 2001 outage at San Onofre Unit 3 that
resulted from a February 2001 fire. The unit returned to service in June 2001.
Purchased-power expense decreased significantly in 2002. The decrease resulted primarily from lower expenses
related to qualifying facilities (QFs), bilateral contracts and interutility contracts, as well as the absence of
California Power Exchange (PX)/Independent System Operator (ISO) purchased-power expense after mid-January 2001.
See Purchased Power table in Note 2 to the Consolidated Financial Statements in this quarterly report.
Prior to April 1998, federal law and CPUC orders required SCE to enter into contracts to purchase power from QFs
at CPUC-mandated prices. These contracts expire on various dates through 2025. In 2002, purchased-power
expenses declined significantly, primarily due to lower payments to QFs. Generally, contract energy payments for
QFs have been tied to spot natural gas prices. During the first quarter of 2002, spot natural gas prices were
dramatically lower than the same period in 2001. The decrease in purchased-power expense related to bilateral
contracts and interutility contracts was also due to the decrease in natural gas prices.
SCE has contracts with certain QFs in which Edison Mission Energy, a nonutility affiliate, has 49% - 50%
ownership interests. The terms and pricing of these contracts are approved by the CPUC. SCE's power purchases
from these facilities were $82 million for the three months ended March 31, 2002, and $160 million for the same
period in 2001.
PX/ISO purchased-power expense increased significantly between May 2000 and mid-January 2001, due to a number of
factors, including increased demand for electricity in California, dramatic price increases for natural gas (a
key input of electricity production), and problems in the structure and conduct of the PX and ISO markets. In
December 2000, the FERC eliminated the requirement that SCE buy and sell all power through the PX and ISO. Due
to SCE's noncompliance with the PX's tariff requirement for posting collateral for all transactions as a result
of the downgrades in its credit rating, the PX suspended SCE's market trading privileges effective mid-January
2001.
Page 11
Provisions for regulatory adjustment clauses increased in 2002 compared to 2001. The 2002 increase was mainly
due to overcollections related to the difference between SCE's revenue from retail electric rates (including
surcharges) and the costs that SCE is authorized by the CPUC to recover in retail electric rates. These
overcollections were used to reduce the balance in the PROACT balancing account. The 2002 increase also reflects
an overcollection resulting from the CDWR revenue requirement decision in first quarter 2002 and an
overcollection resulting from an increase in the market valuation of SCE's gas call options.
Depreciation, decommissioning and amortization expense increased in 2002, mainly due to an increase in
depreciation expense associated with distribution assets, as well as an increase related to decommissioning
expense. A 1994 CPUC decision allowed SCE to accelerate the recovery of its nuclear-related assets while
deferring the recovery of its distribution-related assets for the same amount. Beginning in January 2002, SCE
reactivated the deferred distribution asset recovery according to this same CPUC decision. Decommissioning
expense was higher in 2002 primarily as a result of higher earnings on trust funds. Under CPUC ratemaking,
decommissioning trust fund earnings are offset by decommissioning expense.
Other Income and Deductions
Interest and dividend income increased in 2002. The increase was mainly due to the interest earned on the PROACT
balance, as well as a higher average cash balance during first quarter 2002.
Interest expense - net of amounts capitalized decreased in 2002, mainly due to higher short-term debt balances in
first quarter 2001, as well as higher balancing account overcollections in first quarter 2001.
Other nonoperating deductions increased in 2002, primarily due to lower accruals for regulatory matters in first
quarter 2001.
Income Taxes
Income tax expense increased in 2002, primarily due to the income tax benefit SCE recorded in first quarter 2001
related to its power procurement cost undercollection.
FINANCIAL CONDITION
The liquidity of SCE is affected primarily by regulation affecting its ability to recover power purchase and
other costs in retail rates, debt maturities, access to capital markets, credit ratings, dividend payments and
capital expenditures. Capital resources primarily consist of cash from operations and external financings.
In March 2002, SCE closed a $1.6 billion financing which included a $300 million secured credit line, as well as
$1.3 billion in secured term loans.
At March 31, 2002, SCE had drawn on its entire $300 million credit line. This secured line of credit has a
two-year expiration date and, when available, can be drawn down at bank index rates.
Short-term debt is used to finance balancing account undercollections, fuel inventories and general cash
requirements, including purchased-power payments. Long-term debt is used mainly to finance capital
expenditures. External financings are influenced by market conditions and other factors.
California law prohibits SCE from incurring or guaranteeing debt for its nonutility affiliates. Additionally,
the CPUC regulates SCE's capital structure, which limits the dividends it may pay Edison International by
precluding any dividends that would reduce SCE's equity component of its capital structure below authorized
levels. SCE's settlement agreement with the CPUC also places restrictions on SCE's ability to declare or pay
dividends on its common stock until the earlier of the date SCE's PROACT balance is fully recovered or January 1,
2005. During 2004, SCE may seek CPUC consent, which may not be unreasonably withheld, to resume dividend
payments if the PROACT balance has not been fully recovered by year-end 2003. See additional discussion below in
CPUC Litigation Settlement Agreement.
Page 12
A summary of current liquidity issues is included below. A detailed discussion of liquidity issues is included
in the Financial Condition (pages 6 and 7) disclosure in the year-end 2001 MD&A.
Liquidity Issues
Sustained high wholesale energy prices from May 2000 through June 2001 and a freeze on retail rates resulted in
significant undercollections of wholesale power costs. These undercollections, coupled with SCE's anticipated
near-term capital requirements and the adverse reaction of the credit markets to continued regulatory uncertainty
regarding SCE's ability to recover its current and future power procurement costs, materially and adversely
affected SCE's liquidity throughout 2001. As a result of its liquidity concerns, beginning in January 2001, SCE
took steps to conserve cash. SCE suspended payments for purchased power, deferred payments on outstanding debt,
and did not declare or pay dividends on any of its cumulative preferred stock or common stock.
In January 2002, the CPUC adopted a resolution implementing a settlement agreement with SCE. Based on the rights
to power procurement cost recovery and revenue established by the agreement and the PROACT resolution, SCE repaid
its undisputed past-due obligations and near-term debt maturities in March 2002, using cash on hand resulting
from rate increases approved by the CPUC in 2001, and the proceeds of $1.6 billion in senior secured credit
facilities and the remarketing of $196 million in pollution-control bonds.
SCE expects to meet its continuing obligations in 2002 from remaining cash on hand and future operating cash
flows. Material factors affecting the timing of recovery of the PROACT balance are discussed below in PROACT
Regulatory Asset. SCE's liquidity after 2002 may be affected by the outcome of the Generation Procurement
Proceeding (discussed below).
Cash Flows from Operating Activities
Net cash used by operating activities was $995 million in the first quarter of 2002, compared to net cash
provided by operating activities of $1.2 billion in the first quarter of 2001. Cash used by operating activities
in first quarter 2002 was primarily due to SCE's March 2002 repayment of past-due obligations, partially offset
by the reduction in the PROACT balancing account during the first three months of 2002. Cash provided by
operating activities in first quarter 2001 was primarily affected by SCE suspending payments for purchased power
and other obligations beginning in January 2001. Cash provided (used) by operating activities also reflects the
CPUC-approved surcharges (1(cent)per kWh in January and 3(cent)per kWh in June) that were billed in 2001.
Cash Flows from Financing Activities
Net cash used by financing activities was $883 million in the first quarter of 2002, compared to net cash
provided by financing activities of $440 million in the first quarter of 2001. Cash used by financing activities
in first quarter 2002 was primarily due to SCE's March 2002 repayment of $1.65 billion of credit facilities and
$531 million of matured commercial paper. Cash provided by financing activities in first quarter 2001 was
primarily due to SCE borrowing additional amounts to finance general cash requirements, partially offset by the
January 2001 repurchase of $420 million of pollution-control bonds.
Cash Flows from Investing Activities
Cash flows from investing activities are affected by additions to property and plant and funding of nuclear
decommissioning trusts.
COMMITMENTS
SCE's long-term debt maturities and sinking fund requirements for the five twelve month periods following
March 31, 2002, are: 2003 - $1.3 billion; 2004 - $1.4 billion; 2005 - $371 million; 2006 - $446 million;
Page 13
and 2007 - $246 million. These amounts have been updated to reflect the $1.6 billion in debt SCE issued on March
1, 2002.
There have been no other material changes to the Projected Commitments (page 8) disclosure in the year-end 2001
MD&A.
REGULATORY MATTERS
Generation and Power Procurement
CPUC Litigation Settlement Agreement
------------------------------------
In October 2001, SCE and the CPUC entered into a settlement of SCE's lawsuit against the CPUC which sought a
ruling that SCE is entitled to full recovery of its past electricity procurement costs. A consumer advocacy
group and other parties are pursuing an appeal to the federal court of appeals seeking to overturn the stipulated
judgment of the district court that approved the settlement agreement. On March 4, 2002, the court of appeals
heard argument on the appeal and the matter is now under submission. A decision could be issued at any time.
SCE cannot predict the outcome of the appeal or the impact that any outcome would have upon the stipulated
judgment. Possible outcomes could include affirmance, a return to the district court, a referral of a
controlling state law question to the California Supreme Court, or reversal of the stipulated judgment. SCE
cannot predict whether or how a ruling on the stipulated judgment could also affect the settlement agreement.
Under the settlement agreement, SCE cannot pay dividends or other distributions on its common stock (all of which
is held by its parent) prior to the earlier of the date on which SCE has recovered all of its procurement-related
obligations or January 1, 2005. However, if SCE has not recovered all of its procurement-related obligations by
December 31, 2003, SCE may apply to the CPUC for consent to resume common stock dividends, and the CPUC will not
unreasonably withhold its consent. Other provisions of the settlement agreement are described in the CPUC
Litigation Settlement Agreement (pages 10 through 12) disclosure in the year-end 2001 MD&A.
PROACT Regulatory Asset
-----------------------
In accordance with the settlement agreement and an implementing resolution adopted by the CPUC, SCE established a
regulatory balancing account called the PROACT with an initial balance of $3.6 billion reflecting the net amount
of past procurement-related liabilities to be recovered by SCE. Each month, SCE applies to the PROACT the
difference between SCE's revenue from retail electric rates (including surcharges) and the costs that SCE is
authorized by the CPUC to recover in retail electric rates. The balance in the PROACT was $2.6 billion at
December 31, 2001, and $2.1 billion at March 31, 2002. After giving effect to the URG decision described below,
SCE estimates that the remaining PROACT balance as of April 30, 2002, was approximately $2.0 billion. SCE
currently projects that it will recover the remaining balance of the procurement-related obligations in the
PROACT by late 2003. Material factors that would change SCE's estimate of the timing of PROACT recovery are:
o level of output of SCE's generating plants and amount of contract power deliveries;
o authorized revenue changes for distribution, transmission, generation and power procurement-related
costs;
o level of retail sales;
o level of direct access;
o direct access customers' contribution to recovery of SCE's PROACT-related costs and to the CDWR's costs;
and
o potential energy supplier refunds.
Page 14
The following is an update on various regulatory proceedings impacting the timing of PROACT recovery:
Direct Access - Historical Procurement Charge. From 1998 through mid-September 2001, SCE's customers were able
to choose to purchase power directly from an energy service provider other than SCE (thus becoming direct access
customers) or continue to purchase power from SCE. Direct access customers receive a credit for the generation
costs SCE saves by not serving them. Operating revenue is reported net of this credit. Because of this credit,
direct access power purchases resulted in additional undercollected power procurement costs to SCE during 2000
and 2001. Following previous CPUC action that restricted direct access, on March 21, 2002, the CPUC issued a
final decision affirming that new direct access arrangements entered into by SCE's customers after September 20,
2001, are invalid. On January 8, 2002, SCE filed a proposal with the CPUC to establish a historical procurement
charge to direct access customers to pay a fair share of the past power procurement costs. Hearings were held in
late January 2002, and SCE is awaiting a CPUC decision on the proposal. If the CPUC does not impose the
historical procurement charge or a similar charge on direct access customers, it would reduce SCE's total revenue
by approximately $275 million per year and could extend the currently projected time required for SCE to recover
the PROACT balance.
Direct Access - Exit Fees. The CPUC allocated the costs of power purchases by the CDWR among customers of SCE
and the other California utilities on behalf of whose customers the CDWR is purchasing power. The CPUC deferred
a decision on the responsibility of direct access customers to pay a portion of the CDWR's costs. On May 20,
2002, parties will submit proposals to the CPUC regarding the appropriate charges to these customers and methods
of assessing the charges. If assessed, these charges could increase SCE's total revenue by as much as $235
million in 2003 (based on analysis done by the CDWR) and could shorten the currently projected time required to
recover the PROACT balance. SCE anticipates a decision from the CPUC on this matter during the fourth quarter of
2002.
CDWR Power Purchases
--------------------
As reported in the year-end 2001 MD&A, the CPUC issued a decision on February 21, 2002, implementing a revenue
requirement to enable the CDWR to recover its costs of purchasing power on behalf of utility customers for the
period January 17, 2001, through December 31, 2002. This CPUC decision is incorporated into SCE's current
projection of the timing of PROACT recovery. On February 28, 2002, SCE and the CDWR executed an agreement that
provided for SCE to pay the CDWR for previously delivered imbalance energy (plus interest) in three installments
($100 million on April 1, 2002; $150 million on June 3, 2002; and the balance on July 1, 2002). In a decision
dated March 21, 2002, the CPUC accepted the February 28 agreement between SCE and the CDWR as fully resolving the
charges in dispute.
On June 1, 2002, the CDWR is expected to file with the CPUC an updated revenue requirement for calendar year
2003. SCE is unable to predict what effect, if any, the update will have on PROACT recovery.
Utility-Retained Generation (URG) Decision
------------------------------------------
On April 4, 2002, the CPUC issued a decision to return generation assets retained by SCE (utility-retained
generation) to cost-of-service ratemaking through the end of 2002. Ratemaking for SCE's utility-retained
generation after 2002 will be determined through the 2003 general rate case (GRC) proceeding described below.
The URG decision:
o Allows recovery of incurred costs for all URG components other than San Onofre Units 2 and 3, subject to
reasonableness review by the CPUC;
o Retains the incremental cost incentive pricing mechanism (ICIP) for San Onofre Units 2 and 3 through
2003;
Page 15
o Establishes a depreciation schedule for SCE's nuclear plants that reflects their remaining useful lives
(which SCE projects to be 2012 for San Onofre Units 2 and 3 and 2025 for Palo Verde Nuclear Generating
Station), using unamortized balances as of January 1, 2001, as a starting point;
o Establishes balancing accounts for the costs of utility generation, purchased power, and ancillary
services from the ISO; and
o Continues the use of SCE's last CPUC-authorized return on common equity of 11.6% for SCE's URG rate base
other than San Onofre Units 2 and 3, and keeps in place the 7.37% return on rate base for San Onofre
Units 2 and 3 under the ICIP.
Based on this decision, during the second quarter of 2002, SCE will resume applying accounting principles for
rate-regulated enterprises for its generation assets. As a result, SCE expects to reestablish for financial
reporting purposes its unamortized nuclear plant and regulatory assets related to purchased-power settlements and
flow-through taxes, adjust the PROACT regulatory asset balance, and record a corresponding credit to earnings of
approximately $500 million after tax. Implementation of the URG decision, together with the PROACT mechanism,
will allow SCE to reestablish substantially all of the regulatory assets previously written off to earnings.
Generation Procurement Proceeding
---------------------------------
In October 2001, the CPUC issued an order instituting rulemaking to establish policies and cost recovery
mechanisms for procurement of power. The order directed SCE and the other major California electric utilities to
provide recommendations for establishing these policies and mechanisms to enable the utilities to resume power
procurement by January 1, 2003. In comments filed with the CPUC on November 26, 2001, SCE proposed that a final
decision be issued in October 2002 adopting utility-specific procurement plans. An assigned commissioner's
ruling on April 2, 2002, stated that the proceeding initially will focus on developing an interim rather than
permanent cost recovery mechanism, suggested that SCE might be directed to resume procuring all needed power
itself in advance of January 1, 2003, and did not provide for SCE to regain an investment-grade credit rating
before resuming power procurement. As directed by the ruling, SCE filed a legal brief on April 12, 2002,
describing actions that must be undertaken by the CPUC for SCE to resume procuring all power needed to serve its
customers. On May 1, 2002, SCE filed testimony with the CPUC that included comprehensive procurement plans for
2003. SCE stated that, to ensure the success of a procurement framework, the CPUC must: (a) determine that SCE
may procure power for more than one year, (b) allow SCE to return to an investment-grade credit rating before it
begins procurement, and do nothing to impair that credit rating, (c) decide that no procurement plan will begin
until SCE is fully ready and an appropriate framework is in place, (d) resolve the issue of direct access,
including return to and departure from the utility and exit fees, so that SCE can reliably predict its net short
amount of additional power needed, and (e) take additional actions to adopt appropriate methodologies and
procedures for power procurement. If SCE were required to resume power procurement before it has an
investment-grade credit rating, the cash requirements could impair SCE's liquidity. SCE is unable to predict
what effect, if any, this rulemaking will have on the currently projected timing of PROACT recovery.
Transmission and Distribution
Performance-Based Ratemaking (PBR)
----------------------------------
SCE's revenue related to distribution operations is determined through a PBR mechanism. The distribution PBR
mechanism was to have ended in December 2001, but in June 2001 the CPUC extended the mechanism until SCE's next
GRC, which is expected to be effective in 2003. On April 22, 2002, the CPUC issued a decision that modifies the
PBR mechanism in the following significant respects:
o SCE's current PBR distribution rate mechanism is converted to a revenue requirement mechanism to prevent
material revenue under or overcollections resulting from changes in retail rates. A balancing account
will be established to record any under or overcollections. This is retroactively effective as of
June 14, 2001.
Page 16
o A methodology is adopted for setting SCE's distribution revenue requirement for June 14 to December 31,
2001, calendar year 2002, and calendar year 2003 until replaced by the GRC. The methodology
(a) establishes 2000 as the base year, (b) annually adjusts SCE's distribution revenue requirement by the
change in the Consumer Price Index minus a productivity factor of 1.6%, and (c) annually increases SCE's
distribution requirement to account for additional costs of expanding the distribution network to
connect new customers (an allowance of about $650 per customer).
o The performance benchmarks for worker safety, customer satisfaction, and outage frequency are updated
beginning in 2002 to reflect improvements in SCE's performance. These changes will reduce rewards SCE
would earn compared to the previous standards.
As a result of this decision, SCE expects its earnings for 2002 to increase by approximately $100 million.
During the second quarter of 2002, SCE expects to record credits to earnings of approximately $26 million for
revenue undercollections during the period June 14, 2001, through December 31, 2001, and $23 million for revenue
undercollections during the first quarter of 2002. SCE projects additional credits to earnings for revenue
undercollections of approximately $51 million during the remaining nine months of 2002. All of these amounts are
on an after-tax basis. This decision is incorporated into SCE's current projection of the timing of PROACT
recovery.
CPUC GRC Proceeding
-------------------
In December 2001, SCE submitted a notice of intent to file its 2003 GRC with the CPUC, requesting an increase of
approximately $500 million in revenue (compared to 2000 recorded revenue) for its distribution and generation
operations. On May 3, 2002, SCE filed its formal application for the 2003 GRC. After taking into account the
effects of the CPUC's April 22 PBR decision, SCE reduced the revenue increase requested in the application to
$286 million. Hearings are expected to begin in July 2002, with a final decision expected in second quarter 2003.
Wholesale Electricity Markets
On July 25, 2001, the FERC issued an order that limits potential refunds from alleged overcharges by energy
suppliers to the ISO and PX spot markets during the period from October 2, 2000, through June 20, 2001, and
adopted a refund methodology based on daily spot market gas prices. An administrative law judge conducted
evidentiary hearings on this matter in March 2002 and further hearings are scheduled in August 2002. SCE cannot
predict the amount of any potential refunds. Under the litigation settlement agreement with the CPUC, any
refunds will be applied to reduce the balance in the PROACT. SCE has not incorporated any potential refunds into
its current projection of the timing of PROACT recovery.
OTHER MATTERS
Environmental Protection
SCE's projected environmental capital expenditures are $2.0 billion for the 2002-2006 period, mainly for
undergrounding certain transmission and distribution lines. This amount has been increased from the amount
projected at December 31, 2001, to reflect the results from SCE's annual environmental cost study for 2001
completed in April 2002.
There have been no other material changes in the Environmental Protection (pages 17 and 18) disclosure in the
year-end 2001 MD&A.
NEW ACCOUNTING STANDARDS
SCE is studying the impact of the new Asset Retirement Obligations standard to be implemented in 2003, and is
unable to predict at this time the impact on its financial statements.
Page 17
SCE implemented the new Goodwill and Other Intangibles standard on January 1, 2002. Adoption of this standard
did not materially impact its results of operations or financial position.
For a more detailed description of these new standards, see the New Accounting Standards (pages 19 and 20)
disclosure in the year-end 2001 MD&A.
FORWARD-LOOKING INFORMATION
In the preceding MD&A and elsewhere in this quarterly 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 important factors that may
be outside SCE's control, including among other things:
o the outcome of the pending appeals of the stipulated judgment approving SCE's settlement agreement with
the CPUC, and the effects of other legal actions or ballot initiatives, if any, attempting to undermine
the provisions of the settlement agreement or otherwise adversely affecting SCE;
o changes in prices of wholesale electricity and natural gas or in operating costs, which could cause
SCE's cost recovery to be less than anticipated;
o the actions of securities rating agencies, including the determination of whether or when to make
changes in SCE's credit ratings, the ability of SCE to regain investment-grade ratings, and the impact
of current or lowered ratings and other financial market conditions on the ability of SCE to obtain
needed financing on reasonable terms;
o further actions by state and federal regulatory bodies setting rates, adopting or modifying cost
recovery, accounting or rate-setting mechanisms and implementing the restructuring of the electric
utility industry, as well as legislative or judicial actions affecting the same matters;
o the effects of increased competition in energy-related businesses, including the market entrants and the
effects of new technologies that may be developed in the future;
o new or increased environmental liabilities; and
o weather conditions, natural disasters, and other unforeseen events.
Page 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings
San Onofre Personal Injury Litigation
As previously reported in Part 1, Item 3 of SCE's 2001 Form 10-K, SCE is actively involved in four lawsuits
claiming personal injuries allegedly resulting from exposure to radiation at San Onofre.
On or about March 25, 2002, plaintiffs filed a petition for a writ of certiorari in the United States Supreme
Court in the matter brought against SCE on November 17, 1995, in which they seek review of the Ninth Circuit's
September 27, 2001, ruling affirming the District Court's judgment in favor of SCE and the other defendants in
the action. SCE has elected not to file an opposition to the petition, unless invited to do so by the Court.
Shareholder Litigation
As previously reported in Part 1, Item 3 of SCE's 2001 Form 10-K, two purported class actions (referred to as the
Stubblefield Action and King Action) were filed in October 2000 and March 2001, and involved securities fraud
claims arising from alleged improper accounting by Edison International and SCE for undercollections in SCE's
Transition Revenue Account.
On March 8, 2002, the federal district court in Los Angeles, California issued an order dismissing the complaint
with prejudice as to all defendants. The plaintiffs initially filed a notice of appeal to the Ninth Circuit
Court of Appeals, but, on April 19, 2002, jointly filed with defendants a stipulation requesting the dismissal of
the appeal with prejudice. On April 26, 2002, the Ninth Circuit approved the parties' stipulation and ordered
the appeal dismissed with prejudice.
Qualifying Facilities Litigation
As previously reported in Part I, Item 3 of SCE's 2001 Form 10-K, SCE has been involved in a number of legal
actions brought by various QFs, alleging SCE's failure to timely pay for power deliveries made from November 1,
2000, through March 26, 2001 (the "Payment Suspension Period"). The QF plaintiffs have included gas-fired
cogenerators and owners of solar, wind, geothermal and biomass projects, with the lawsuits, in aggregate, seeking
payments of more than $833,000,000 for energy and capacity supplied to SCE under QF contracts, and in some cases
additional damages. Many of these QF lawsuits also have sought an order allowing the suppliers to stop providing
power to SCE so that they may sell to other purchasers. Plaintiffs in most of these cases have entered into
settlement agreements providing for stays of litigation, payments to the QFs upon the occurrence of specified
conditions, modifications in some cases to the contract prices going forward, releases and dismissals of the
litigation upon payment by SCE. On March 1, 2002, and with several exceptions related to unique disputes or
other unique circumstances, including the status of regulatory approval, SCE paid the amounts due under the
settlement agreements with these QFs, which triggered the releases and other provisions effectuating the
settlements.
As a result of SCE's above-mentioned payments, and with certain exceptions described below, the lawsuits have
either been dismissed or are in the process of being dismissed.
o Inland Paperboard and Packaging, Inc.: Inland Paperboard and Packaging, Inc. ("Inland"), which filed
-------------------------------------
suit in federal district court in Los Angeles in April 2001, has not entered into a settlement agreement
with SCE. In March 2002, notwithstanding that no settlement agreement had been executed, SCE paid
Inland amounts (including interest) allegedly owed for Payment Suspension Period electricity deliveries
by Inland to SCE. Inland, however, has continued to maintain its lawsuit and seeks relief from the
court permitting it to terminate its power purchase contract with SCE based upon SCE's late payment,
plus damages allegedly arising from SCE's alleged interference with Inland's alleged efforts to sell
power to third parties during the period when
Page 19
payment was suspended. SCE disputes Inland's claims. The parties have agreed to a voluntary
mediation. Trial is set for August 6, 2002.
o Cabazon Power Partners: Plaintiffs in the Cabazon Power Partners lawsuit are owned in part by an
----------------------
affiliate of Enron Corporation. SCE has entered into settlement agreements with these projects, but has
withheld payment of the settlement amounts due to its view that certain regulatory compliance issues
applicable to Enron wind projects provides SCE a defense to making payment. The Cabazon lawsuit has
been stayed due to the parties' entry into the settlement agreements referenced above. However, in view
of SCE's withholding of the settlement amounts provided for under those agreements, plaintiffs in
Cabazon have threatened to resume legal proceedings.
o Watson Cogeneration Co., Midway-Sunset Cogeneration Company, U.S. Borax, Inc., NP Cogen, Inc., and Black
---------------------------------------------------------------------------------------------------------
Hills Ontario, LLC: Each of these QFs has been paid all, or substantially all, of the amounts owing
------------------
under settlement agreements with SCE. However, an application filed by SCE seeking CPUC approval of
various aspects of the Watson Cogeneration Co., Midway-Sunset Cogeneration Company, U. S. Borax, Inc.,
and Black Hills Ontario, LLC settlements remains pending. Upon CPUC approval, SCE expects that these
cases will all be dismissed as provided for in the settlement agreements. The CPUC has approved NP
Cogen, Inc.'s settlement with SCE. The time for filing an application for rehearing of the CPUC's
decision expired on May 4, 2002. SCE has received no application for rehearing, but it has not yet been
able to obtain firm confirmation from the CPUC that no timely rehearing application was filed. Assuming
that no rehearing application was filed, dismissal of the NP Cogen, Inc. lawsuit is expected.
o Salton Sea Power Generation, LP, IMC Chemicals, Inc. and Luz Solar Partners, Ltd. III: These QFs have
--------------------------------------------------------------------------------------
been paid amounts owing under their settlement agreements with SCE. Nevertheless, the QFs have to date
failed to dismiss their lawsuits. In the Salton Sea and Luz matters, the QFs allege that SCE has
wrongfully refused to dismiss cross-complaints or other claims by SCE against the QFs. SCE contends
that it is not required to dismiss these claims in their entireties and that the QFs are obligated to
dismiss their claims against SCE in full.
Power Exchange (PX) Performance Bond Litigation
As previously reported in Part I, Item 3 of SCE's 2001 Form 10-K, on January 19, 2001, American Home Assurance
Company ("American Home") notified SCE that due to SCE's failure to comply with its payment obligations to the
PX, the PX issued a demand to American Home on a $20,000,000 pool performance bond. American Home demanded
payment from SCE by January 29, 2001, of $20,000,000 under an indemnity agreement between SCE and American Home.
As required by the indemnity agreement, in February 2001, SCE deposited $20,200,000 in an account in trust to be
available to satisfy any judgment, should there be one, against American Home as a result of SCE's alleged
default. On March 19, 2002, American Home initiated suit against SCE for breach of contract and declaratory
relief, principally alleging that SCE's failure to obtain an exoneration of the bond from the PX in connection
with SCE's payment of its indebtedness was a material breach of a collateral agreement executed by SCE and
American Home.
On April 30, 2002, SCE filed its answer to American Home's lawsuit denying the material allegations of the
complaint, and filed a cross-complaint against American Home, alleging causes of action for breach of contract,
bad faith, reformation of contract, breach of fiduciary duty, and declaratory relief. SCE seeks the return of
its previously deposited $20,200,000.
Page 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment and Restated Articles of Incorporation of SCE effective June 1, 1993
(File No. 1-2313, Form 10-K for the year ended December 31, 1993)*
3.2 Certificate of Correction of Restated Articles of Incorporation of SCE dated effective
August 21, 1997 (File No. 1-2313, Form 10-Q for the quarter ended September 30, 1997)*
3.3 Amended Bylaws of Southern California Edison Company as adopted by the Board of Directors on
January 1, 2002 (File No. 1-2313, Form 10-K for year ended December 31, 2001)*
10.1 Terms of 2002 stock option and performance share awards under the Equity Compensation Plan or
the 2000 Equity Plan (File No. 1-9936, files as Exhibit 10.1 to the Edison International Form
10-Q for the quarter ended March 31, 2002)*
(b) Reports on Form 8-K:
Date of Report Date Filed Item(s) Reported
-------------- ---------- ----------------
March 1, 2002 March 1, 2002 5
------------------
* Incorporated by reference pursuant to Rule 12b-32.
Page 21
SIGNATURES
Pursuant to the requirements 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.
SOUTHERN CALIFORNIA EDISON COMPANY
(Registrant)
By THOMAS M. NOONAN
--------------------------------
THOMAS M. NOONAN
Vice President and Controller
By KENNETH S. STEWART
--------------------------------
KENNETH S. STEWART
Assistant General Counsel and
Assistant Secretary
May 10, 2002
Page 22
