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Edison International 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32
  7. Ex-32

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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q



(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2011

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                         to                          

Commission File Number 1-9936



EDISON INTERNATIONAL
(Exact name of registrant as specified in its charter)



California   95-4137452
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

2244 Walnut Grove Avenue
(P. O. Box 976)
Rosemead, California

 



91770
(Address of principal executive offices)   (Zip Code)

(626) 302-2222
(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 (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 ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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 April 28, 2011
Common Stock, no par value   325,811,206


Table of Contents


TABLE OF CONTENTS

GLOSSARY

  v

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 
1
 

Consolidated Statements of Income

 
1
 

Consolidated Statements of Comprehensive Income

 
2
 

Consolidated Balance Sheets

 
3
 

Consolidated Statements of Cash Flows

 
5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
7
 

Note 1. Summary of Significant Accounting Policies

 
7
 

Note 2. Consolidated Statements of Changes in Equity

 
9
 

Note 3. Variable Interest Entities

 
9
 

Note 4. Fair Value Measurements

 
11
 

Note 5. Debt and Credit Agreements

 
16
 

Note 6. Derivative Instruments and Hedging Activities

 
16
 

Note 7. Income Taxes

 
23
 

Note 8. Compensation and Benefit Plans

 
24
 

Note 9. Commitments and Contingencies

 
26
 

Note 10. Regulatory and Environmental Developments

 
32
 

Note 11. Accumulated Other Comprehensive Income (Loss)

 
33
 

Note 12. Supplemental Cash Flows Information

 
34
 

Note 13. Preferred and Preference Stock of Utility

 
34
 

Note 14. Regulatory Assets and Liabilities

 
34
 

Note 15. Other Investments

 
35
 

Note 16. Other Income and Expenses

 
36
 

Note 17. Business Segments

 
36

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
38

FORWARD-LOOKING STATEMENTS

 
38

EDISON INTERNATIONAL MANAGEMENT OVERVIEW

 

Highlights of Operating Results

 
39
 

Management Overview of SCE

 
40
   

Capital Program

 
40
   

2012 CPUC General Rate Case

 
40
   

Nuclear Industry and Regulatory Response to Events in Japan

 
40
 

Management Overview of EMG

 
41
   

Midwest Generation Environmental Compliance Plans and Costs

  41
   

Homer City Outage

  41

i


Table of Contents

 

Environmental Regulation Developments

  42

SOUTHERN CALIFORNIA EDISON COMPANY

RESULTS OF OPERATIONS

 
43
 

Electric Utility Results of Operations

 
43
   

Utility Earning Activities

 
44
     

2011 vs. 2010

  44
   

Utility Cost-Recovery Activities

 
44
     

2011 vs. 2010

  44
   

Supplemental Operating Revenue Information

 
44
   

Income Taxes

 
45

LIQUIDITY AND CAPITAL RESOURCES

 
45
 

Available Liquidity

 
45
   

Debt Covenant

 
46
 

Dividend Restrictions

 
46
 

Margin and Collateral Deposits

 
46
   

Derivative Instruments and Power Procurement Contracts

 
46
   

Workers Compensation Self-Insurance Fund

 
46
 

Historical Consolidated Cash Flows

 
46
   

Condensed Consolidated Statement of Cash Flows

 
47
     

Net Cash Provided by Operating Activities

  47
     

Net Cash Provided by Financing Activities

  47
     

Net Cash Used by Investing Activities

  47
 

Contractual Obligations and Contingencies

 
48
   

Contractual Obligations

 
48
   

Contingencies

 
48
     

Environmental Remediation

  48

MARKET RISK EXPOSURES

 
48
 

Commodity Price Risk

 
48
 

Credit Risk

 
48

EDISON MISSION GROUP

RESULTS OF OPERATIONS

 
50
 

Results of Continuing Operations

 
50
   

Adjusted Operating Income ("AOI") —Overview

 
51
   

Adjusted Operating Income from Consolidated Operations

 
52
     

Midwest Generation Plants

  52
     

Homer City

  53
     

Seasonality—Coal Plants

  53
     

Renewable Energy Projects

  54
     

Energy Trading

  54
   

Adjusted Operating Income from Unconsolidated Affiliates

 
55
   

Interest Expense

 
55

ii


Table of Contents

   

Income Taxes

  55
 

Results of Discontinued Operations

 
55

LIQUIDITY AND CAPITAL RESOURCES

 
56
 

Available Liquidity

 
56
 

Capital Investment Plan

 
57
   

Environmental Capital Expenditures

 
57
   

Non-Environmental Capital Expenditures

 
57
   

Future Projects

 
58
 

Historical Segment Cash Flows

 
58
   

Condensed Statement of Cash Flows

 
58
     

Net Cash Provided by Operating Activities

  58
     

Net Cash Provided by Financing Activities

  59
     

Net Cash Provided by Investing Activities

  59
 

Credit Ratings

 
59
   

Overview

 
59
   

Credit Rating of EMMT

 
59
 

Margin, Collateral Deposits and Other Credit Support for Energy Contracts

 
59
 

Debt Covenants and Dividend Restrictions

 
60
   

Credit Facility Financial Ratios

 
60
   

Key Ratios of EMG's Principal Subsidiaries Affecting Dividends

 
60
   

EMG's Senior Notes and Guaranty of Powerton-Joliet Leases

 
60
 

Contractual Obligations and Contingencies

 
61
   

Fuel Supply Contracts

 
61
   

Midwest Generation New Source Review Lawsuit

 
61
   

Homer City New Source Review Lawsuit

 
61
 

Off-Balance Sheet Transactions

 
61

MARKET RISK EXPOSURES

 
61
 

Derivative Instruments

 
61
   

Unrealized Gains and Losses

 
61
   

Fair Value Disclosures

 
61
 

Commodity Price Risk

 
62
   

Energy Price Risk Affecting Sales from the Coal Plants

 
62
   

Capacity Price Risk

 
63
   

Basis Risk

 
64
   

Coal and Transportation Price Risk

 
64
   

Emission Allowances Price Risk

 
64
 

Credit Risk

 
65
 

Interest Rate Risk

 
66

iii


Table of Contents

EDISON INTERNATIONAL PARENT AND OTHER

RESULTS OF OPERATIONS

 
67

LIQUIDITY AND CAPITAL RESOURCES

 
67
 

Historical Cash Flows

 
67
   

Condensed Statement of Cash Flows

 
67
     

Net Cash Used by Operating Activities

  67
     

Net Cash Provided (Used) by Financing Activities

  68

EDISON INTERNATIONAL (CONSOLIDATED)

LIQUIDITY AND CAPITAL RESOURCES

 
69
 

Contractual Obligations

 
69

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 
69

NEW ACCOUNTING GUIDANCE

 
69

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 
69

ITEM 4. CONTROLS AND PROCEDURES

 
69
 

Disclosure Controls and Procedures

 
69

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 
69
 

California Coastal Commission Potential Environmental Proceeding

 
69
 

Midwest Generation New Source Review Lawsuit

 
70

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 
70
 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 
70

ITEM 6. EXHIBITS

 
70

SIGNATURE

 
71

iv


Table of Contents


GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

2010 Form 10-K   Edison International's Annual Report on Form 10-K for the year-ended December 31, 2010
2010 Tax Relief Act   Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act
of 2010
AFUDC   allowance for funds used during construction
Ambit project   American Bituminous Power Partners, L.P.
AOI   Adjusted Operating Income (Loss)
APS   Arizona Public Service Company
ARO(s)   asset retirement obligation(s)
BACT   best available control technology
BART   best available retrofit technology
Bcf   billion cubic feet
Big 4   Kern River, Midway-Sunset, Sycamore and Watson natural gas power projects
Btu   British thermal units
CAA   Clean Air Act
CAIR   Clean Air Interstate Rule
CAISO   California Independent System Operator
CAMR   Clean Air Mercury Rule
CARB   California Air Resources Board
Commonwealth Edison   Commonwealth Edison Company
CDWR   California Department of Water Resources
CEC   California Energy Commission
coal plants   Midwest Generation coal plants and Homer City plant
CPS   Combined Pollutant Standard
CPUC   California Public Utilities Commission
CRRs   congestion revenue rights
DOE   U.S. Department of Energy
EME   Edison Mission Energy
EMG   Edison Mission Group Inc.
EMMT   Edison Mission Marketing & Trading, Inc.
EPS   earnings per share
ERRA   energy resource recovery account
EWG   Exempt Wholesale Generator
Exelon Generation   Exelon Generation Company LLC
FASB   Financial Accounting Standards Board
FERC   Federal Energy Regulatory Commission
FGIC   Financial Guarantee Insurance Company
FIP(s)   federal implementation plan(s)
Four Corners   coal fueled electric generating facility located in Farmington, New Mexico in
which SCE holds a 48% ownership interest
GAAP   generally accepted accounting principles
GHG   greenhouse gas
Global Settlement   A settlement between Edison International and the IRS that resolved federal tax disputes related to Edison Capital's cross-border, leveraged leases through 2009, and all other outstanding federal tax disputes and affirmative claims for tax years 1986 through 2002 and related matters with state tax authorities.
GRC   general rate case
GWh   gigawatt-hours
HAPs   Hazardous Air Pollutants
Homer City   EME Homer City Generation L.P., a Pennsylvania limited partnership that leases and operates three coal-fired electric generating units and related facilities located in Indiana County, Pennsylvania

v


Table of Contents

Illinois EPA   Illinois Environmental Protection Agency
IRS   Internal Revenue Service
ISO   Independent System Operator
kWh(s)   kilowatt-hour(s)
LIBOR   London Interbank Offered Rate
MD&A   Management's Discussion and Analysis of Financial Condition and Results
of Operations in this report
Midwest Generation   Midwest Generation, LLC
Midwest Generation plants   EME's power plants (fossil fuel) located in Illinois
MMBtu   million British thermal units
Mohave   two coal fueled electric generating facilities that no longer operate located
in Clark County, Nevada in which SCE holds a 56% ownership interest
Moody's   Moody's Investors Service
MRTU   Market Redesign and Technology Upgrade
MW   megawatts
MWh   megawatt-hours
NAAQS   national ambient air quality standards
NAPP   Northern Appalachian
NERC   North American Electric Reliability Corporation
Ninth Circuit   U.S. Court of Appeals for the Ninth Circuit
NOV   notice of violation
NOx   nitrogen oxide
NRC   Nuclear Regulatory Commission
NSR   New Source Review
NYISO   New York Independent System Operator
PADEP   Pennsylvania Department of Environmental Protection
Palo Verde   large pressurized water nuclear electric generating facility located near
Phoenix, Arizona in which SCE holds a 15.8% ownership interest
PBOP(s)   postretirement benefits other than pension(s)
PBR   performance-based ratemaking
PG&E   Pacific Gas & Electric Company
PJM   PJM Interconnection, LLC
PRB   Powder River Basin
PSD   Prevention of Significant Deterioration
QF(s)   qualifying facility(ies)
ROE   return on equity
RPM   Reliability Pricing Model
RTO(s)   Regional Transmission Organization(s)
S&P   Standard & Poor's Ratings Services
San Onofre   large pressurized water nuclear electric generating facility located in south
San Clemente, California in which SCE holds a 78.21% ownership interest
SCE   Southern California Edison Company
SNCR   selective non-catalytic reduction
SDG&E   San Diego Gas & Electric
SEC   U.S. Securities and Exchange Commission
SIP(s)   state implementation plan(s)
SO2   sulfur dioxide
US EPA   U.S. Environmental Protection Agency
VIE(s)   variable interest entity(ies)
year-ended 2010 MD&A   Management's Discussion and Analysis of Financial Condition and Results
of Operations appearing in the 2010 Form 10-K
 

vi


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

   
Consolidated Statements of Income
  Edison International
 
 
 

Three months ended
March 31,
 
(in millions, except per-share amounts, unaudited)
  2011
  2010
 
   

Electric utility

  $ 2,230   $ 2,159  

Competitive power generation

    552     652  

Other

        (1 )
       

Total operating revenue

    2,782     2,810  
       

Fuel

    258     295  

Purchased power

    508     608  

Operations and maintenance

    1,149     1,037  

Depreciation, decommissioning and amortization

    417     369  

Lease terminations and other

        3  
       

Total operating expenses

    2,332     2,312  
       

Operating income

    450     498  

Interest and dividend income

    4     19  

Equity in income (loss) from unconsolidated affiliates – net

    (5 )   18  

Other income

    41     34  

Interest expense – net of amounts capitalized

    (196 )   (168 )

Other expenses

    (13 )   (8 )
       

Income from continuing operations before income taxes

    281     393  

Income tax expense

    65     150  
       

Income from continuing operations

    216     243  

Income (loss) from discontinued operations – net of tax

    (2 )   6  
       

Net income

    214     249  

Dividends on preferred and preference stock of utility

    14     13  
       

Net income attributable to Edison International common shareholders

  $ 200   $ 236  
       

Amounts attributable to Edison International common shareholders:

             

Income from continuing operations, net of tax

  $ 202   $ 230  

Income (loss) from discontinued operations, net of tax

    (2 )   6  
       

Net income attributable to Edison International common shareholders

  $ 200   $ 236  
       

Basic earnings per common share attributable to Edison International common shareholders:

             

Weighted-average shares of common stock outstanding

    326     326  

Continuing operations

  $ 0.62   $ 0.70  

Discontinued operations

    (0.01 )   0.02  
       

Total

  $ 0.61   $ 0.72  
       

Diluted earnings per common share attributable to Edison International common shareholders:

             

Weighted-average shares of common stock outstanding, including effect of dilutive securities

    328     328  

Continuing operations

  $ 0.62   $ 0.70  

Discontinued operations

    (0.01 )   0.02  
       

Total

  $ 0.61   $ 0.72  

Dividends declared per common share

  $ 0.320   $ 0.315  
   

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

1


Table of Contents

   
Consolidated Statements of Comprehensive Income
  Edison International
 
 
 

Three months ended
March 31,
 
(in millions, unaudited)
  2011
  2010
 
   

Net income

  $ 214   $ 249  

Other comprehensive income (loss), net of tax:

             
 

Pension and postretirement benefits other than pensions:

             
   

Net gain arising during the period

        12  
   

Amortization of net (gain) loss included in net income

    3     (8 )
   

Prior service credit arising during the period

        2  
   

Amortization of prior service credit

        (2 )
 

Unrealized gain (loss) on derivatives qualified as cash flow hedges:

             
   

Unrealized holding gain arising during the period, net of income tax expense of $4 and $62 for 2011 and 2010, respectively

    6     95  
   

Reclassification adjustments included in net income, net of income tax benefit of $6 and $14 for 2011 and 2010, respectively

    (10 )   (20 )
       

Other comprehensive income (loss)

    (1 )   79  
       

Comprehensive income

    213     328  

Less: Comprehensive income attributable to noncontrolling interests

    14     13  
       

Comprehensive income attributable to Edison International

  $ 199   $ 315  
   

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

2


Table of Contents

   
Consolidated Balance Sheets
  Edison International
 



(in millions, unaudited)

  March 31,
2011

  December 31,
2010

 
   

ASSETS

             

Cash and cash equivalents

  $ 1,298   $ 1,389  

Receivables, less allowances of $87 and $85 for uncollectible accounts at respective dates

    782     931  

Accrued unbilled revenue

    410     442  

Inventory

    586     568  

Prepaid taxes

    533     390  

Derivative assets

    115     133  

Restricted cash

    10     2  

Margin and collateral deposits

    50     65  

Regulatory assets

    407     378  

Other current assets

    145     124  
       

Total current assets

    4,336     4,422  
       

Nuclear decommissioning trusts

    3,619     3,480  

Investments in unconsolidated affiliates

    544     559  

Other investments

    232     223  
       

Total investments

    4,395     4,262  
       

Utility property, plant and equipment, less accumulated depreciation of $6,488 and $6,319 at respective dates

    25,276     24,778  

Competitive power generation and other property, plant and equipment, less accumulated depreciation of $1,940 and $1,865 at respective dates

    5,437     5,406  
       

Total property, plant and equipment

    30,713     30,184  
       

Derivative assets

    355     437  

Restricted deposits

    40     47  

Rent payments in excess of levelized rent expense under plant operating leases

    1,219     1,187  

Regulatory assets

    4,450     4,347  

Other long-term assets

    653     644  
       

Total long-term assets

    6,717     6,662  
       

             

             

             

Total assets

 
$

46,161
 
$

45,530
 
   

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

3


Table of Contents

   
Edison International
 
Consolidated Balance Sheets
   
   
 



(in millions, except share amounts, unaudited)

  March 31,
2011

  December 31,
2010

 
   

LIABILITIES AND EQUITY

             

Short-term debt

  $ 334   $ 115  

Current portion of long-term debt

    53     48  

Accounts payable

    1,059     1,362  

Accrued taxes

    54     52  

Accrued interest

    221     205  

Customer deposits

    211     217  

Derivative liabilities

    222     217  

Regulatory liabilities

    778     738  

Other current liabilities

    761     998  
       

Total current liabilities

    3,693     3,952  
       

Long-term debt

    12,522     12,371  
       

Deferred income taxes

    5,908     5,625  

Deferred investment tax credits

    120     122  

Customer advances

    112     112  

Derivative liabilities

    476     468  

Pensions and benefits

    2,282     2,260  

Asset retirement obligations

    2,576     2,561  

Regulatory liabilities

    4,733     4,524  

Other deferred credits and other long-term liabilities

    2,030     2,041  
       

Total deferred credits and other liabilities

    18,237     17,713  
       

Total liabilities

    34,452     34,036  
       

Commitments and contingencies (Note 9)

             

Common stock, no par value (800,000,000 shares authorized; 325,811,206 shares issued and outstanding at each date)

    2,340     2,331  

Accumulated other comprehensive loss

    (77 )   (76 )

Retained earnings

    8,413     8,328  
       

Total Edison International's common shareholders' equity

    10,676     10,583  
       

Preferred and preference stock of utility

    1,030     907  

Other noncontrolling interests

    3     4  
       

Total noncontrolling interests

    1,033     911  

Total equity

    11,709     11,494  
       

Total liabilities and equity

  $ 46,161   $ 45,530  
   

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

4


Table of Contents

   
Consolidated Statements of Cash Flows
  Edison International
 
 
 

Three months ended
March 31,
 
(in millions, unaudited)
  2011
  2010
 
   

Cash flows from operating activities:

             

Net income

  $ 214   $ 249  

Less: Income (loss) from discontinued operations

    (2 )   6  
       

Income from continuing operations

    216     243  

Adjustments to reconcile to net cash provided by operating activities:

             

Depreciation, decommissioning and amortization

    417     369  

Regulatory impacts of net nuclear decommissioning trust earnings (reflected in accumulated depreciation)

    41     38  

Other amortization

    37     24  

Lease terminations and other

        3  

Stock-based compensation

    7     7  

Equity in income (loss) from unconsolidated affiliates – net

    5     (18 )

Distributions and dividends from unconsolidated entities

    5     22  

Deferred income taxes and investment tax credits

    226     218  

Income from leveraged leases

    (1 )   (1 )

Changes in operating assets and liabilities:

             
 

Receivables

    128     150  
 

Inventory

    (18 )   (2 )
 

Margin and collateral deposits – net of collateral received

    15     (6 )
 

Prepaid taxes

    (143 )   (104 )
 

Other current assets

    (6 )   (47 )
 

Rent payments in excess of levelized rent expense

    (32 )   (45 )
 

Accounts payable

    (49 )   (138 )
 

Accrued taxes

    1     (6 )
 

Other current liabilities

    (207 )   (182 )
 

Derivative assets and liabilities – net

    106     695  
 

Regulatory assets and liabilities – net

    (42 )   (636 )
 

Other assets

    (7 )   (11 )
 

Other liabilities

    21     20  

Operating cash flows from discontinued operations

    (2 )   6  
       

Net cash provided by operating activities

    718     599  
       

Cash flows from financing activities:

             

Long-term debt issued

    82     541  

Long-term debt issuance costs

    (1 )   (14 )

Long-term debt repaid

    (9 )   (343 )

Preference stock issued

    123      

Short-term debt financing – net

    294     192  

Settlements of stock-based compensation – net

    (7 )   (1 )

Dividends and distributions to noncontrolling interests

    (13 )   (13 )

Dividends paid

    (104 )   (103 )
       

Net cash provided by financing activities

  $ 365   $ 259  
   

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

5


Table of Contents

   
Edison International
 
Consolidated Statements of Cash Flows
   
   
 
 
 

Three months ended
March 31,
 
(in millions, unaudited)
  2011
  2010
 
   

Cash flows from investing activities:

             

Capital expenditures

  $ (1,133 ) $ (951 )

Proceeds from sale of nuclear decommissioning trust investments

    622     286  

Purchases of nuclear decommissioning trust investments and other

    (669 )   (335 )

Proceeds from partnerships and unconsolidated subsidiaries, net of investment

    5     32  

Investments in other assets

    1     (54 )

Effect of consolidation and deconsolidation of variable interest entities

        (91 )
       

Net cash used by investing activities

    (1,174 )   (1,113 )
       

Net decrease in cash and cash equivalents

    (91 )   (255 )

Cash and cash equivalents, beginning of period

    1,389     1,673  
       

Cash and cash equivalents, end of period

  $ 1,298   $ 1,418  
   

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Edison International has two business segments for financial reporting purposes: an electric utility operation segment (SCE) and a competitive power generation segment (EMG). SCE is an investor-owned public utility primarily engaged in the business of supplying electricity to an approximately 50,000-square-mile area of southern California. EMG is the holding company for its principal wholly owned subsidiary, EME. EME is a holding company with subsidiaries and affiliates engaged in the business of developing, acquiring, owning or leasing, operating and selling energy and capacity from independent power production facilities. EME also engages in hedging and energy trading activities in competitive power markets through its Edison Mission Marketing & Trading, Inc. ("EMMT") subsidiary.

Basis of Presentation

Edison International's significant accounting policies were described in Note 1 of "Edison International Notes to Consolidated Financial Statements" included in the 2010 Form 10-K. Edison International follows the same accounting policies for interim reporting purposes, with the exception of accounting principles adopted as of January 1, 2011, discussed below in "—New Accounting Guidance." This quarterly report should be read in conjunction with the financial statements and notes included in the 2010 Form 10-K.

In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to fairly state the consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the operating results for the full year.

The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Cash Equivalents

Cash equivalents included investments in money market funds totaling $1.0 billion and $1.1 billion at March 31, 2011 and December 31, 2010, respectively. Generally, the carrying value of cash equivalents equals the fair value, as all investments have maturities of three months or less.

Edison International temporarily invests the ending daily cash balance in its primary disbursement accounts until required for check clearing. Edison International reclassified $207 million and $197 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at March 31, 2011 and December 31, 2010, respectively.

Inventory

Inventory is stated at the lower of cost or market, cost being determined by the weighted-average cost method for fuel, and the average cost method for materials and supplies. Inventory consisted of the following:

(in millions)
  March 31,
2011

  December 31,
2010

 
   

Coal, gas, fuel oil and other raw materials

  $ 204   $ 184  

Spare parts, materials and supplies

    382     384  
       

Total inventory

  $ 586   $ 568  
   

Earnings Per Share

Edison International computes EPS using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security. Edison International's

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participating securities are stock-based compensation awards payable in common shares, including stock options, performance shares and restricted stock units, which earn dividend equivalents on an equal basis with common shares. Stock options awarded during the period 2003 through 2006 received dividend equivalents. EPS attributable to Edison International common shareholders was computed as follows:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Basic earnings per share – continuing operations:

             

Income from continuing operations attributable to common shareholders, net of tax

  $ 202   $ 230  

Participating securities dividends

        (1 )
       

Income from continuing operations available to common shareholders

  $ 202   $ 229  

Weighted average common shares outstanding

    326     326  
       

Basic earnings per share – continuing operations

  $ 0.62   $ 0.70  
       

Diluted earnings per share – continuing operations:

             

Income from continuing operations available to common shareholders

  $ 202   $ 229  

Income impact of assumed conversions

    1     1  
       

Income from continuing operations available to common shareholders and assumed conversions

  $ 203   $ 230  

Weighted average common shares outstanding

    326     326  

Incremental shares from assumed conversions

    2     2  
       

Adjusted weighted average shares – diluted

    328     328  

Diluted earnings per share – continuing operations

  $ 0.62   $ 0.70  
   

Stock-based compensation awards to purchase 8,980,322 and 5,998,238 shares of common stock were outstanding for the three months ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the awards was greater than the average market price of the common shares and, therefore, the effect would have been antidilutive.

New Accounting Guidance

Accounting Guidance Adopted in 2011

Revenue—Multiple-Deliverables

In October 2009, the Financial Accounting Standards Board (FASB) issued amended guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenues based on those separate deliverables. This update also requires additional disclosure related to the significant assumptions used to determine the revenue recognition of the separate deliverables. This guidance is required to be applied prospectively to new or significantly modified revenue arrangements. Edison International adopted this guidance effective January 1, 2011. The adoption of this accounting standards update did not have a material impact on Edison International's consolidated results of operations, financial position or cash flows.

Fair Value Measurements and Disclosures

The FASB issued an accounting standards update modifying the disclosure requirements related to fair value measurements. Under these requirements, purchases and settlements for Level 3 fair value measurements are presented on a gross basis, rather than net. Edison International adopted this guidance effective January 1, 2011.

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Note 2. Consolidated Statements of Changes in Equity

The following table provides the changes in equity for the three months ended March 31, 2011.

 
  Equity Attributable to Edison International   Noncontrolling Interests    
 
(in millions)
  Common
Stock

  Accumulated
Other
Comprehensive
Loss

  Retained
Earnings

  Subtotal
  Other
  Preferred
and
Preference
Stock

  Total
Equity

 
   

Balance at December 31, 2010

  $ 2,331   $ (76 ) $ 8,328   $ 10,583   $ 4   $ 907   $ 11,494  
       

Net income (loss)

            200     200         14     214  

Other comprehensive loss

        (1 )       (1 )           (1 )

Common stock dividends declared ($0.32 per share)

            (104 )   (104 )           (104 )

Dividends, distributions to noncontrolling interests and other

                    (1 )   (14 )   (15 )

Stock-based compensation and other

    2         (9 )   (7 )           (7 )

Noncash stock-based compensation
and other

    7         (2 )   5             5  

Issuance of preference stock

                        123     123  
       

Balance at March 31, 2011

  $ 2,340   $ (77 ) $ 8,413   $ 10,676   $ 3   $ 1,030   $ 11,709  
   

The following table provides the changes in equity for the three months ended March 31, 2010:

 
  Equity Attributable to Edison International   Noncontrolling Interests    
 
(in millions)
  Common
Stock

  Accumulated
Other
Comprehensive
Income

  Retained
Earnings

  Subtotal
  Other
  Preferred
and
Preference
Stock

  Total
Equity

 
   

Balance at December 31, 2009

  $ 2,304   $ 37   $ 7,500   $ 9,841   $ 258   $ 907   $ 11,006  
       

Net income

            236     236         13     249  

Other comprehensive income

        79         79             79  

Deconsolidation of variable interest entities

                    (249 )       (249 )

Cumulative effect of a change in accounting principle, net of tax

            15     15             15  

Common stock dividends declared ($0.315 per share)

            (103 )   (103 )           (103 )

Dividends, distributions to noncontrolling interests and other

                    (2 )   (13 )   (15 )

Stock-based compensation and other

    2         (2 )                

Noncash stock-based compensation
and other

    5         (4 )   1             1  
       

Balance at March 31, 2010

  $ 2,311   $ 116   $ 7,642   $ 10,069   $ 7   $ 907   $ 10,983  
   


Note 3. Variable Interest Entities

A variable interest entity ("VIE") is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE.

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Commercial and operating activities are generally the factors that most significantly impact the economic performance of VIEs in which Edison International has a variable interest. Commercial and operating activities include construction, operation and maintenance, fuel procurement, dispatch and compliance with regulatory and contractual requirements.

Categories of Variable Interest Entities

Projects or Entities that are Consolidated

At March 31, 2011 and December 31, 2010, EMG consolidated 13 wind projects with a total generating capacity of 500 MW that have minority interests held by others. EMG also had a 50% partnership interest in the American Bituminous Power Partners, L.P. project, commonly referred to as the Ambit project.

The following table presents summarized financial information of the projects that were consolidated by EMG:

(in millions)
  March 31,
2011

  December 31,
2010

 
   

Current assets

  $ 36   $ 26  

Net property, plant and equipment

    726     739  

Other long-term assets

    5     6  
       
 

Total assets

  $ 767   $ 771  
       

Current liabilities

 
$

23
 
$

25
 

Long-term debt net of current maturities

    70     71  

Deferred revenues

    72     71  

Other long-term liabilities

    21     21  
       
 

Total liabilities

  $ 186   $ 188  
       

Noncontrolling interests

 
$

4
 
$

4
 
   

Assets serving as collateral for the debt obligations had a carrying value of $167 million and $163 million at March 31, 2011 and December 31, 2010, respectively, and primarily consist of property, plant and equipment.

Variable Interest in VIEs that are not Consolidated

Power Purchase Contracts

SCE has 16 power purchase agreements ("PPAs") that are considered variable interests in VIEs, including 6 tolling agreements through which SCE provides the natural gas to operate the plants and 10 contracts with QFs that contain variable pricing provisions based on the price of natural gas. SCE has concluded that it is not the primary beneficiary of these VIEs since it does not control the commercial and operating activities of these entities. In general, because payments for capacity are the primary source of income, the most significant economic activity for SCE's VIEs is the operation and maintenance of the power plants.

As of the balance sheet date, the carrying amount of assets and liabilities in SCE's consolidated balance sheet that relate to its involvement with VIEs result from amounts due under the PPAs or the fair value of those derivative contracts. These are accounted for at fair value. Under these contracts, SCE recovers the costs incurred under its approved long-term power procurement plans. SCE has no residual interest in the entities and has not provided or guaranteed any debt or equity support, liquidity arrangements, performance guarantees or other commitments associated with these contracts other than the purchase commitments described in Note 9, so there is no significant potential exposure to loss as a result of SCE's involvement with these VIEs. The aggregate capacity dedicated to SCE for these VIE projects was 3,820 MW at March 31, 2011 and the amounts that SCE paid to these projects were $86 million and $125 million for the three months ended March 31, 2011 and 2010, respectively. These amounts are recovered in customer rates.

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Equity Interests

EMG accounts for domestic energy projects in which it has a 50% or less ownership interest, and cannot exercise unilateral control, under the equity method. At March 31, 2011 and December 31, 2010, EMG had five significant variable interests in natural gas projects that are not consolidated, consisting of the Big 4 projects (Kern River, Midway-Sunset, Sycamore and Watson) and the Sunrise project. A subsidiary of EMG operates three of the four Big 4 projects and EMG's partner provides the fuel management services. In addition, the executive director of these projects is provided by EMG's partner. Commercial and operating activities are jointly controlled by a management committee of each VIE. Accordingly, EMG continues to account for its variable interests under the equity method.

At March 31, 2011 and December 31, 2010, EMG accounts for its interests in two renewable wind generating facilities, the Elkhorn Ridge and San Juan Mesa projects, under the equity method. The commercial and operating activities of these entities are directed by a management committee composed of representatives of each partner. Thus, EMG is not the primary beneficiary of these projects. In addition, EMG accounts for its interests in a wind project under construction, Community Wind North, under the equity method.

The following table presents the carrying amount of EMG's investments in unconsolidated VIEs and the maximum exposure to loss for each investment:

 
  March 31, 2011  
(in millions)
  Investment
  Maximum
Exposure

 
   

Natural gas-fired projects

  $ 315   $ 315  

Renewable energy projects

    227     227  
   

EMG's maximum exposure to loss in its VIEs accounted for under the equity method is generally limited to its investment in these entities. Two of EMG's domestic energy projects have long-term debt that is secured by a pledge of assets of the project entity, but does not provide for recourse to EMG. Accordingly, a default under such project financings could result in foreclosure on the assets of the project entity resulting in a loss of some or all of EMG's investment, but would not require EMG to contribute additional capital. At March 31, 2011, entities which EMG has accounted for under the equity method had indebtedness of $115 million, of which $41 million is proportionate to EMG's ownership interest in these two projects.


Note 4. Fair Value Measurements

Recurring Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or liability should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk.

Edison International categorizes financial assets and liabilities into a fair value hierarchy based on valuation inputs used to derive fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

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The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:

 
  As of March 31, 2011  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting
and
Collateral1

  Total
 
   

Assets at Fair Value

                               

Money market funds2

  $ 1,044   $   $   $   $ 1,044  
       

Derivative contracts:

                               
 

Electricity

        68     260     (54 )   274  
 

Natural gas

        66     8         74  
 

Fuel oil

    7             (7 )    
 

Tolling

            122         122  
       

Subtotal of commodity contracts

    7     134     390     (61 )   470  
       

Long-term disability plan

    9                 9  
       

Nuclear decommissioning trusts:

                               
 

Stocks3

    2,068                 2,068  
 

Municipal bonds

        772             772  
 

Corporate bonds4

        320             320  
 

U.S. government and agency securities

    251     103             354  
 

Short-term investments, primarily cash equivalents5

        80             80  
       

Subtotal of nuclear decommissioning trusts

    2,319     1,275             3,594  
       

Total assets6

    3,379     1,409     390     (61 )   5,117  
       

Liabilities at Fair Value

                               

Derivative contracts:

                               
 

Electricity

        13     53     (14 )   52  
 

Natural gas

        255     7     (4 )   258  
 

Tolling

            374         374  
       

Subtotal of commodity contracts

        268     434     (18 )   684  

Interest rate contracts

        14             14  
       

Total liabilities

        282     434     (18 )   698  
   

Net assets (liabilities)

  $ 3,379   $ 1,127   $ (44 ) $ (43 ) $ 4,419  
   

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  As of December 31, 2010  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting
and
Collateral1

  Total
 
   

Assets at Fair Value

                               

Money market funds2

  $ 1,100   $   $   $   $ 1,100  
       

Derivative contracts:

                               
 

Electricity

        70     363     (61 )   372  
 

Natural gas

    1     69     11     (1 )   80  
 

Fuel oil

    8             (8 )    
 

Tolling

            118         118  
       

Subtotal of commodity contracts

    9     139     492     (70 )   570  
       

Long-term disability plan

    9                 9  
       

Nuclear decommissioning trusts:

                               
 

Stocks3

    2,029                 2,029  
 

Municipal bonds

        790             790  
 

Corporate bonds4

        346             346  
 

U.S. government and agency securities

    215     73             288  
 

Short-term investments, primarily cash equivalents5

    1     31             32  
       

Subtotal of nuclear decommissioning trusts

    2,245     1,240             3,485  
       

Total assets6

    3,363     1,379     492     (70 )   5,164  
       

Liabilities at Fair Value

                               

Derivative contracts:

                               
 

Electricity

        13     40     (21 )   32  
 

Natural gas

        286     11     (4 )   293  
 

Tolling

            344         344  
 

Coal

        1         (1 )    
       

Subtotal of commodity contracts

        300     395     (26 )   669  

Interest rate contracts

        16             16  
       

Total liabilities

        316     395     (26 )   685  
       

Net assets (liabilities)

  $ 3,363   $ 1,063   $ 97   $ (44 ) $ 4,479  
   
1
Represents the netting of assets and liabilities under master netting agreements and cash collateral across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

2
Money market funds are included in cash and cash equivalents and restricted cash on Edison International's consolidated balance sheets.

3
Approximately 68% and 67% of the equity investments were located in the United States at March 31, 2011 and December 31, 2010, respectively.

4
Corporate bonds are diversified, and included $25 million and $27 million at March 31, 2011 and December 31, 2010, respectively, for collateralized mortgage obligations and other asset backed securities.

5
Excludes net receivables of $25 million and net liabilities of $5 million at March 31, 2011 and December 31, 2010, respectively, of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases.

6
Excludes $31 million at both March 31, 2011 and December 31, 2010, respectively, of cash surrender value of life insurance investments for deferred compensation.

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The following table sets forth a summary of changes in the fair value of Level 3 assets and liabilities:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Fair value, net asset at beginning of period

  $ 97   $ 62  

Total realized/unrealized gains (losses):

             
 

Included in earnings1

        45  
 

Included in regulatory assets and liabilities2

    (134 )   (487 )
 

Included in accumulated other comprehensive income

    1     6  

Purchases

    5     6  

Settlements

    (11 )   (28 )

Transfers in or out of Level 3

    (2 )   (1 )
       

Fair value, net liability at end of period

  $ (44 ) $ (397 )
   

Change during the period in unrealized losses related to assets and liabilities held at the end of the period3

  $ (139 ) $ (422 )
   
1
Reported in "Competitive power generation" revenue on Edison International's consolidated statements of income.

2
Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.

3
Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income were $(6) million and $46 million for the three months ended March 31, 2011 and 2010, respectively. The remainder of the unrealized losses relate to SCE. See 2 above.

Edison International determines the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no significant transfers between levels during 2011 and 2010.

Valuation Techniques Used to Determine Fair Value

Level 1

Includes assets and liabilities where fair value is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. Financial assets and liabilities classified as Level 1 include exchange-traded equity securities, exchange traded derivatives, U.S. treasury securities and money market funds.

Level 2

Pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the derivative instrument. Financial assets and liabilities utilizing Level 2 inputs include fixed-income securities and over-the-counter derivatives.

Derivative contracts that are over-the-counter traded are valued using pricing models to determine the net present value of estimated future cash flows and are generally classified as Level 2. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary source that best represents traded activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes or prices from exchanges are used to validate and corroborate the primary source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity. Broker quotes are incorporated when corroborated with other information which may include a combination of prices from exchanges, other brokers and comparison to executed trades.

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Level 3

Includes financial assets and liabilities where fair value is determined using techniques that require significant unobservable inputs. Over-the-counter options, bilateral contracts, capacity contracts, QF contracts, derivative contracts that trade infrequently (such as congestion revenue rights ("CRRs") in the California market and over-the-counter derivatives at illiquid locations), long-term power agreements, and derivative contracts with counterparties that have significant nonperformance risks are generally valued using pricing models that incorporate unobservable inputs and are classified as Level 3. Assumptions are made in order to value derivative contracts in which observable inputs are not available. In circumstances where Edison International cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, Edison International continues to assess valuation methodologies used to determine fair value.

For derivative contracts that trade infrequently (illiquid financial transmission rights and CRRs), changes in fair value are based on models forecasting the value of those contracts. The models' inputs are reviewed and the fair value is adjusted when it is concluded that a change in inputs would result in a new valuation that better reflects the fair value of those derivative contracts. For illiquid long-term power agreements, fair value is based upon the discounting of future electricity and natural gas prices derived from a proprietary model using the risk free discount rate for a similar duration contract, adjusted for credit risk and market liquidity. Changes in fair value are based on changes to forward market prices, including forecasted prices for illiquid forward periods. The fair value of the majority of SCE's derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models which may require SCE to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.

Nonperformance Risk

The fair value of the derivative assets and liabilities are adjusted for nonperformance risk. To assess nonperformance risks, SCE considers the probability of and the estimated loss incurred if a party to the transaction were to default. SCE also considers collateral, netting agreements, guarantees and other forms of credit support when assessing nonperformance. EMG reviews credit ratings of counterparties (and related default rates based on such credit ratings) and prices of credit default swaps. The market price (or premium) for credit default swaps represents the price that a counterparty would pay to transfer the risk of default, typically bankruptcy, to another party. A credit default swap is not directly comparable to the credit risks of derivative contracts, but provides market information of the related risk of nonperformance. The nonperformance risk adjustment represented an insignificant amount at both March 31, 2011 and December 31, 2010.

Nuclear Decommissioning Trusts

SCE's nuclear decommissioning trust investments include equity securities, U.S. treasury securities and other fixed-income securities. Equity and treasury securities are classified as Level 1 as fair value is determined by observable market prices in active or highly liquid and transparent markets. The remaining fixed-income securities are classified as Level 2. The fair value of these financial instruments is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.

Fair Value of Long-Term Debt Recorded at Carrying Value

The carrying amounts and fair values of long-term debt are:

 
  March 31, 2011   December 31, 2010  
(in millions)
  Carrying
Amount

  Fair
Value

  Carrying
Amount

  Fair
Value

 
   

Long-term debt, including current portion

  $ 12,575   $ 12,314   $ 12,419   $ 12,360  
   

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Fair values of long-term debt are based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The carrying value of trade receivables, payables and short-term debt approximates fair value.


Note 5. Debt and Credit Agreements

Project Financings

In February 2011, EME completed, through its subsidiary, Viento Funding II, Inc., an amendment of its 2009 non-recourse financing of its interests in the Wildorado, San Juan Mesa and Elkhorn Ridge wind projects. The amendment increased the financing amount to $255 million, which included a $227 million ten-year term loan (expiring in December 2020), a $23 million seven-year letter of credit facility and a $5 million seven-year working capital facility. At March 31, 2011, $227 million was outstanding under this loan. The amount of outstanding letters of credit was $13 million. Interest under the term loan accrues at London Interbank Offered Rate (LIBOR) plus 2.75% initially with the rate increasing 0.25% on every fourth anniversary.

Credit Agreements

At March 31, 2011, SCE's outstanding short-term debt was $200 million at a weighted-average interest rate of 0.35%. This short-term debt was supported by a $2.4 billion credit facility. At December 31, 2010, there was no outstanding short-term debt. At March 31, 2011, letters of credit issued under SCE's credit facilities aggregated $73 million and are scheduled to expire in twelve months or less.

As of March 31, 2011, a subsidiary of EMG had a $10 million letter of credit facility with $2 million outstanding letters of credit.

At March 31, 2011, Edison International (Parent)'s outstanding short-term debt was $81 million at a weighted-average interest rate of 0.61%. At December 31, 2010, the outstanding short-term debt was $19 million at a weighted-average interest rate of 0.63%.

Letters of Credit

At March 31, 2011, standby letters of credit under EME's credit facility aggregated $80 million and were scheduled to expire as follows: $53 million in 2011 and $27 million in 2012. In addition, letters of credit under EME's subsidiaries' credit facilities aggregated $41 million, $3 million of which was under the Midwest Generation, LLC (Midwest Generation) credit facility, and were scheduled to expire as follows: $7 million in 2011, $16 million in 2012, $10 million in 2017, and $8 million in 2018. Certain letters of credit are subject to automatic annual renewal provisions.


Note 6. Derivative Instruments and Hedging Activities

Electric Utility

Commodity Price Risk

SCE is exposed to commodity price risk which represents the potential impact that can be caused by a change in the market value of a particular commodity. SCE's hedging program reduces ratepayer exposure to variability in market prices related to SCE's power and gas activities. As part of this program, SCE enters into energy options, swaps, forward arrangements, tolling arrangements and CRRs. These transactions are pre-approved by the CPUC or executed in compliance with CPUC-approved procurement plans. SCE recovers its related hedging costs through the ERRA balancing account, and as a result, exposure to commodity price risk is not expected to impact earnings, but may impact cash flows.

SCE's electricity price exposure arises from electricity purchased from the California wholesale market as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities, power purchase agreements and CDWR contracts allocated to SCE.

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SCE's natural gas price exposure arises from natural gas purchased for generation at the Mountainview power plant and peaker plants, QF contracts where pricing is based on a monthly natural gas index and power purchase agreements in which SCE has agreed to provide the natural gas needed for generation, referred to as tolling arrangements.

Notional Volumes of Derivative Instruments

The following table summarizes the notional volumes of derivatives used for hedging activities:

 
   
  Economic Hedges  
Commodity
  Unit of Measure
  March 31,
2011

  December 31,
2010

 
   

Electricity options, swaps and forwards

  GWh     32,795     32,138  

Natural gas options, swaps and forwards

  Bcf     208     250  

Congestion revenue rights

  GWh     167,668     181,291  

Tolling arrangements

  GWh     113,541     114,599  
   

Fair Value of Derivative Instruments

The following table summarizes the gross and net fair values of commodity derivative instruments at March 31, 2011:

 
  Derivative Assets   Derivative Liabilities    
 
(in millions)
  Short-
Term

  Long-
Term

  Subtotal
  Short-
Term

  Long-
Term

  Subtotal
  Net
Liability

 
   

Non-trading activities

                                           

Economic hedges

  $ 85   $ 302   $ 387   $ 225   $ 475   $ 700   $ 313  

Netting and collateral

    (8 )   (13 )   (21 )   (10 )   (14 )   (24 )   (3 )
       

Total

  $ 77   $ 289   $ 366   $ 215   $ 461   $ 676   $ 310  
   

The following table summarizes the gross and net fair values of commodity derivative instruments at December 31, 2010:

 
  Derivative Assets   Derivative Liabilities    
 
(in millions)
  Short-
Term

  Long-
Term

  Subtotal
  Short-
Term

  Long-
Term

  Subtotal
  Net
Liability

 
   

Non-trading activities

                                           

Economic hedges

  $ 87   $ 367   $ 454   $ 216   $ 449   $ 665   $ 211  

Netting and collateral

                (4 )       (4 )   (4 )
       

Total

  $ 87   $ 367   $ 454   $ 212   $ 449   $ 661   $ 207  
   

Income Statement Impact of Derivative Instruments

SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and expects to recover these costs from ratepayers. As a result, realized gains and losses are not reflected in earnings, but may temporarily affect cash flows. Due to expected future recovery from ratepayers, unrealized gains and losses are recorded as regulatory assets and liabilities and therefore are also not reflected in earnings. The results of derivative activities and related regulatory offsets are recorded in cash flows from operating activities in the consolidated statements of cash flows.

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The following table summarizes the components of economic hedging activity:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Realized losses

  $ (39 ) $ (24 )

Unrealized losses

    (96 )   (581 )
   

Contingent Features/Credit Related Exposure

Certain derivative instruments and power procurement contracts under SCE's power and natural gas hedging activities contain collateral requirements. SCE has historically provided collateral in the form of cash and/or letters of credit for the benefit of counterparties. These requirements can vary depending upon the level of unsecured credit extended by counterparties, changes in market prices relative to contractual commitments and other factors.

Certain of these power contracts contain a provision that requires SCE to maintain an investment grade credit rating from each of the major credit rating agencies, referred to as a "credit-risk-related contingent feature." If SCE's credit rating were to fall below investment grade, SCE may be required to pay the derivative liability or post additional collateral. The aggregate fair value of all derivative liabilities with these credit-risk-related contingent features was $82 million and $67 million as of March 31, 2011 and December 31, 2010, respectively, for which SCE has posted no collateral and $4 million of collateral to its counterparties for the respective periods. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2011, SCE would be required to post $2 million of collateral.

Counterparty Default Risk Exposure

As part of SCE's procurement activities, SCE contracts with a number of utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. If a counterparty were to default on its contractual obligations, SCE could be exposed to potentially volatile spot markets for buying replacement power or selling excess power. In addition, SCE would be exposed to the risk of non-payment of accounts receivable, primarily related to sales of excess energy and realized gains on derivative instruments. However, all of the contracts that SCE has entered into with counterparties are either entered into under SCE's short-term or long-term procurement plan which has been approved by the CPUC, or the contracts are approved by the CPUC before becoming effective. As a result of regulatory recovery mechanisms, losses from non-performance are not expected to affect earnings, but may temporarily affect cash flows.

To manage credit risk, SCE looks at the risk of a potential default by counterparties. Credit risk is measured by the loss that would be incurred if counterparties failed to perform pursuant to the terms of their contractual obligations. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary.

Competitive Power Generation

EMG uses derivative instruments to reduce EMG's exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, EMG's financial results can be affected by fluctuations in interest rates. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that EMG does not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.

Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on Edison International's consolidated balance sheets with offsetting changes recorded on the consolidated statements of income. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, to the extent effective, on Edison International's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive income until the related forecasted

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transaction occurs. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.

Derivative instruments that are utilized for trading purposes are measured at fair value and included on the consolidated balance sheets as derivative assets or liabilities. Changes in fair value are recognized in operating revenues on the consolidated statements of income.

Where EMG's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, EMG presents its derivative assets and liabilities on a net basis on the consolidated balance sheets.

Notional Volumes of Derivative Instruments

The following table summarizes the notional volumes of derivatives used for hedging and trading activities:

March 31, 2011  
 
   
   
   
  Hedging Activities    
 
Commodity
  Instrument
  Classification
  Unit of
Measure

  Cash Flow
Hedges

  Economic
Hedges

  Trading
Activities

 
   
Electricity   Forwards/Futures   Sales   GWh     16,899  1   20,400  3   33,336  
Electricity   Forwards/Futures   Purchases   GWh     306  1   21,079  3   35,455  
Electricity   Capacity   Sales   MW-Day
(in thousands)
    186  2       123  2
Electricity   Capacity   Purchases   MW-Day
(in thousands)
    21  2       379  2
Electricity   Congestion   Sales   GWh         136  4   9,244  4
Electricity   Congestion   Purchases   GWh         863  4   146,786  4
Natural gas   Forwards/Futures   Sales   bcf             27.4  
Natural gas   Forwards/Futures   Purchases   bcf             28.6  
Fuel oil   Forwards/Futures   Sales   barrels             35,000  
Fuel oil   Forwards/Futures   Purchases   barrels         240,000     35,000  
Coal   Forwards/Futures   Sales   tons             2,731,000  
Coal   Forwards/Futures   Purchases   tons             2,638,000  
   

 

(in millions)
Instrument
  Purpose
  Type of Hedge
  Notional
Amount

  Expiration Date
 
Amortizing interest rate swap   Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt   Cash flow   $ 92   June 2016

Amortizing interest rate swap

 

Convert floating rate (6-month LIBOR) debt to fixed rate (3.415%) debt

 

Cash flow

 

 

113

 

December 2020

Amortizing interest rate swap

 

Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt

 

Cash flow

 

 

122

 

December 2025

Amortizing forward starting interest rate swap

 

Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt

 

Cash flow

 

 

68

 

March 2026
 

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Table of Contents

December 31, 2010  
 
   
   
   
  Hedging Activities    
 
Commodity
  Instrument
  Classification
  Unit of
Measure

  Cash Flow
Hedges

  Economic
Hedges

  Trading
Activities

 
   
Electricity   Forwards/Futures   Sales   GWh     16,799  1   22,456  3   34,630  
Electricity   Forwards/Futures   Purchases   GWh     408  1   22,931  3   37,669  
Electricity   Capacity   Sales   MW-Day
(in thousands)
    190  2       136  2
Electricity   Capacity   Purchases   MW-Day
(in thousands)
    8  2       419  2
Electricity   Congestion   Sales   GWh         136  4   12,020  4
Electricity   Congestion   Purchases   GWh         1,143  4   187,689  4
Natural gas   Forwards/Futures   Sales   bcf             30.6  
Natural gas   Forwards/Futures   Purchases   bcf             34.3  
Fuel oil   Forwards/Futures   Sales   barrels         250,000     10,000  
Fuel oil   Forwards/Futures   Purchases   barrels         490,000     10,000  
Coal   Forwards/Futures   Sales   tons             2,630,500  
Coal   Forwards/Futures   Purchases   tons             2,645,500  
   

 

(in millions)
Instrument
  Purpose
  Type of Hedge
  Notional
Amount

  Expiration Date
 
Amortizing interest rate swap   Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt   Cash flow   $ 138   June 2016

Amortizing forward starting interest rate swap

 

Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt

 

Cash flow

 

 

122

 

December 2025

Amortizing forward starting interest rate swap

 

Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt

 

Cash flow

 

 

68

 

March 2026
 
1
EMG's hedge products include forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the coal plants which meet the normal purchases and sales exception and are accounted for on the accrual method.

2
EMG's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Reliability Pricing Model (RPM) auction is not accounted for as a derivative.

3
EMG also entered into transactions that adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. These positions largely offset each other. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.

4
Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.

Fair Value of Derivative Instruments

The following table summarizes the fair value of derivative instruments reflected on EMG's consolidated balance sheets:

March 31, 2011  
 
  Derivative Assets   Derivative Liabilities    
 
 
  Net Assets
 
(in millions)
  Short-term
  Long-term
  Subtotal
  Short-term
  Long-term
  Subtotal
 
   

Non-trading activities

                                           

Cash flow hedges

  $ 44   $ 6   $ 50   $ 9   $ 23   $ 32   $ 18  

Economic hedges

    59     6     65     56     1     57     8  

Trading activities

    139     96     235     106     26     132     103  
       

    242     108     350     171     50     221     129  

Netting and collateral received1

    (204 )   (42 )   (246 )   (164 )   (35 )   (199 )   (47 )
       

Total

  $ 38   $ 66   $ 104   $ 7   $ 15   $ 22   $ 82  
   

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Table of Contents

December 31, 2010  
 
  Derivative Assets   Derivative Liabilities    
 
 
  Net Assets
 
(in millions)
  Short-term
  Long-term
  Subtotal
  Short-term
  Long-term
  Subtotal
 
   

Non-trading activities

                                           

Cash flow hedges

  $ 54   $ 2   $ 56   $ 10   $ 25   $ 35   $ 21  

Economic hedges

    77     2     79     71         71     8  

Trading activities

    184     103     287     148     29     177     110  
       

    315     107     422     229     54     283     139  

Netting and collateral received1

    (269 )   (37 )   (306 )   (223 )   (35 )   (258 )   (48 )
       

Total

  $ 46   $ 70   $ 116   $ 6   $ 19   $ 25   $ 91  
   
1
Netting of derivative receivables and derivative payables and the related cash collateral received and paid is permitted when a legally enforceable master netting agreement exists with a derivative counterparty.

Income Statement Impact of Derivative Instruments

The following table provides the activity of accumulated other comprehensive income, containing information about the changes in the fair value of cash flow hedges, to the extent effective, and reclassification from accumulated other comprehensive income into results of operations:

 
  Cash Flow Hedge Activity1
Three Months Ended
March 31,
   
 
  Income Statement
Location

(in millions)
  2011
  2010
 

Accumulated other comprehensive income derivative gain at January 1

  $ 27   $ 175    

Effective portion of changes in fair value

    10     157    

Reclassification from accumulated other comprehensive income to net income

    (16 )   (34 ) Competitive power generation
         

Accumulated other comprehensive income derivative gain at March 31

  $ 21   $ 298    
 
1
Unrealized derivative gains are before income taxes. The after-tax amounts recorded in accumulated other comprehensive income at March 31, 2011 and 2010 were $12 million and $180 million, respectively.

For additional information related to accumulated other comprehensive income, see Note 11.

The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EMG recorded net gains of $2 million and $9 million during the first quarters of 2011 and 2010, respectively, in competitive power generation revenues on the consolidated statements of income representing the amount of cash flow hedge ineffectiveness.

The effect of realized and unrealized gains (losses) from derivative instruments used for economic hedging and trading purposes on the consolidated statements of income is presented below:

 
   
  Three Months Ended
March 31,
 
(in millions)
  Income Statement Location
  2011
  2010
 
   

Economic hedges

  Competitive power generation   $ 6   $ (4 )

  Fuel     6     1  

Trading activities

 

Competitive power generation

   
16
   
47
 
   

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Contingent Features

Certain derivative instruments contain margin and collateral deposit requirements. Since EMG's credit ratings are below investment grade, EMG has provided collateral in the form of cash and letters of credit for the benefit of derivative counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features was in an asset position at March 31, 2011 and, accordingly, the contingent features described below do not currently have liquidity exposure. Certain derivative contracts do not require margin, but contain provisions that require EMG or Midwest Generation to comply with the terms and conditions of their respective credit facilities. The credit facilities each contain financial covenants. Some hedge contracts include provisions related to a change in control or material adverse effect resulting from amendments or modifications to the related credit facility. Failure by EMG or Midwest Generation to comply with these provisions may result in a termination event under the hedge contracts, enabling the counterparties to terminate and liquidate all outstanding transactions and demand immediate payment of amounts owed to them. EMMT has hedge contracts that do not require margin, but provide that each party can request additional credit support in the form of adequate assurance of performance in the case of an adverse development affecting the other party. Future increases in power prices could expose EMG, Midwest Generation or EMMT to termination payments or additional collateral postings under the contingent features described above.

Margin and Collateral Deposits

Margin and collateral deposits include cash deposited with counterparties and brokers, and cash received from counterparties and brokers as credit support under energy contracts. The amount of margin and collateral deposits generally varies based on changes in the fair value of the related positions. Edison International nets counterparty receivables and payables where balances exist under master netting agreements. Edison International presents the portion of its margin and collateral deposits netted with its derivative positions on its consolidated balance sheets. The following table summarizes margin and collateral deposits provided to and received from counterparties:

(in millions)
  March 31,
2011

  December 31,
2010

 
   

Collateral provided to counterparties:

             
 

Offset against derivative liabilities

  $ 5   $ 8  
 

Reflected in margin and collateral deposits

    50     65  

Collateral received from counterparties:

             
 

Offset against derivative assets

    48     52  
   

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Note 7. Income Taxes

Effective Tax Rate

The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision from continuing operations.

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Income from continuing operations before income taxes

  $ 281   $ 393  
       

Provision for income tax at federal statutory rate of 35%

    98     138  

Increase (decrease) in income tax from:

             
 

State tax – net of federal benefit

    9     14  
 

Health care legislation1

        39  
 

Production and housing credits

    (18 )   (15 )
 

Property-related and other

    (24 )   (26 )
       

Total income tax expense from continuing operations

  $ 65   $ 150  
       

Effective tax rate

    23 %   38 %
   
1
During the first quarter of 2010, Edison International recorded a $39 million non-cash charge to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in March 2010. The health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies.

The CPUC requires flow-through ratemaking treatment for the current tax benefit arising from certain property-related and other temporary differences which reverse over time. The accounting treatment for these temporary differences results in recording regulatory assets and liabilities for amounts that would otherwise be recorded to deferred income tax expense.

Accounting for Uncertainty in Income Taxes

Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained on audit. The guidance requires the disclosure of all unrecognized tax benefits, which includes both the reserves recorded for tax positions on filed tax returns and the unrecognized portion of affirmative claims.

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits:

(in millions)
  2011
  2010
 
   

Balance at January 1,

  $ 565   $ 664  

Tax positions taken during the current year:

             
 

Increases

    20     16  

Tax positions taken during a prior year:

             
 

Increases

        123  
 

Decreases

    (5 )   (20 )
       

Balance at March 31,

  $ 580   $ 783  
   

As of March 31, 2011 and December 31, 2010, respectively, if recognized, $460 million and $455 million of the unrecognized tax benefits would impact the effective tax rate.

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Edison International's federal income tax returns and its California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 are currently under review by the Franchise Tax Board. The IRS examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included proposed adjustments for the following two items:

A proposed adjustment increasing the taxable gain on the 2004 sale of EMG's international assets, which if sustained, would result in a federal tax payment of approximately $187 million, including interest and penalties (the IRS has asserted a 40% penalty for understatement of tax liability related to this matter).

A proposed adjustment to disallow a component of SCE's repair allowance deduction, which if sustained, would result in a federal tax payment of approximately $90 million, including interest.

Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011.

Accrued Interest and Penalties

The total amount of accrued interest and penalties related to Edison International's income tax liabilities was $217 million and $213 million as of March 31, 2011 and December 31, 2010, respectively.

The net after-tax interest and penalties recognized in income tax expense was $3 million and $15 million for the three months ended March 31, 2011 and 2010, respectively.


Note 8. Compensation and Benefit Plans

Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

During the three months ended March 31, 2011, Edison International made 2010 plan year contributions of $2 million, 2011 plan year contributions of $28 million and expects to make $4 million of additional 2010 plan year contributions and $96 million of additional 2011 plan year contributions during the remainder of 2011. Annual contributions made to most of SCE's pension plans are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the annual expense.

Expense components are:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Service cost

  $ 43   $ 34  

Interest cost

    52     54  

Expected return on plan assets

    (60 )   (52 )

Amortization of prior service cost

    2     2  

Amortization of net loss

    6     7  
       

Expense under accounting standards

    43     45  

Regulatory adjustment – deferred

    (6 )   (14 )
       

Total expense recognized

  $ 37   $ 31  
   

Postretirement Benefits Other Than Pensions

During the three months ended March 31, 2011, Edison International made 2011 plan year contributions of $6 million and expects to make $50 million of additional contributions during the remainder of 2011. Annual contributions made to SCE plans are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the annual expense.

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Expense components are:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Service cost

  $ 11   $ 8  

Interest cost

    33     31  

Expected return on plan assets

    (28 )   (25 )

Amortization of prior service cost (credit)

    (9 )   (9 )

Amortization of net loss

    9     8  
       

Total expense

  $ 16   $ 13  
   

Stock-Based Compensation

During the first quarter of 2011, Edison International granted its 2011 stock-based compensation awards, which included stock options, performance shares and restricted stock units.

Stock Options

The following is a summary of the status of Edison International stock options:

 
   
  Weighted-Average    
 
 
  Stock options
  Exercise
Price

  Remaining
Contractual
Term (Years)

  Aggregate
Intrinsic Value
(in millions)

 
   

Outstanding at December 31, 2010

    19,142,209   $ 33.28              

Granted

    3,228,721     37.92              

Expired

    (51,629 )   48.45              

Forfeited

    (117,177 )   31.18              

Exercised

    (508,164 )   25.09              
                   

Outstanding at March 31, 2011

    21,693,960     34.14     6.51        
             

Vested and expected to vest at March 31, 2011

    21,205,360     34.15     6.46   $ 115  
       

Exercisable at March 31, 2011

    13,075,275     34.35     5.02     83  
   

At March 31, 2011, there was $32 million of total unrecognized compensation cost related to stock options, net of expected forfeitures. That cost is expected to be recognized over a weighted-average period of approximately three years.

Performance Shares

The following is a summary of the status of Edison International nonvested performance shares:

 
  Equity Awards    
   
 
 
  Liability Awards  
 
   
  Weighted-Average
Grant Date
Fair Value

 
 
  Shares
  Shares
  Weighted-Average
Fair Value

 
   

Nonvested at December 31, 2010

    415,028   $ 30.99     415,028   $ 34.74  

Granted

    144,624     31.65     144,624        

Forfeited

    (108,648 )   44.09     (108,648 )      
                       

Nonvested at March 31, 2011

    451,004     28.05     451,004     26.02  
   

The current portion of nonvested performance shares classified as liability awards is reflected in "Other current liabilities" and the long-term portion is reflected in "Pensions and benefits" on the consolidated balance sheets.

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At March 31, 2011, there was $7 million (based on the March 31, 2011 fair value of performance shares classified as equity awards) of total unrecognized compensation cost related to performance shares. That cost is expected to be recognized over a weighted-average period of approximately two years.

Restricted Stock Units

The following is a summary of the status of Edison International nonvested restricted stock units granted to SCE employees:

 
  Restricted
Stock Units

  Weighted-Average
Grant Date
Fair Value

 
   

Nonvested at December 31, 2010

    644,796   $ 32.18  

Granted

    241,417     37.93  

Forfeited

    (7,448 )   30.95  

Paid Out

    (93,831 )   54.85  
       

Nonvested at March 31, 2011

    784,934   $ 31.89  
   

At March 31, 2011, there was $14 million of total unrecognized compensation cost related to restricted stock units, net of expected forfeitures, which is expected to be recognized as follows: $6 million in 2011, $6 million in 2012 and $2 million in 2013.

Supplemental Data on Stock Based Compensation

 
  Three months ended
March 31,
 
(in millions, except per award amounts)
  2011
  2010
 
   

Stock based compensation expense1

  $ 6   $ 8  

Income tax benefits related to stock compensation expense

    2     3  

Excess tax benefits2

    2     1  

Stock options

             
 

Cash used to purchase shares to settle options

    19     7  
 

Cash from participants to exercise stock options

    13     5  
 

Value of options exercised

    6     2  

Restricted stock units

             
 

Value of shares settled

    5      
 

Tax benefits realized from settlement of awards

    2      
   
1
Reflected in "Operations and maintenance" on the consolidated statements of income.

2
Reflected in "Settlements of stock based compensation—net" in the financing section of the consolidated statements of cash flows.

No performance shares were settled as of March 31, 2011 and 2010, respectively.


Note 9. Commitments and Contingencies

Third-Party Power Purchase Agreements

During the first quarter of 2011, SCE entered into a renewable energy power purchase contract which is classified as an operating lease. SCE's additional commitments under this contract are estimated to be: $29 million each year in 2012 – 2015 and $468 million for the period remaining thereafter.

Other Commitments

Fuel Supply Contracts

At March 31, 2011, Midwest Generation and EMG Homer City Generation L.P. ("Homer City") had commitments to purchase coal from third-party suppliers at fixed prices, subject to adjustment clauses.

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These commitments are estimated to aggregate $677 million, summarized as follows: $373 million for the remainder of 2011, $255 million in 2012 and $49 million in 2013.

Turbine Commitments

At March 31, 2011, EMG had commitments to purchase wind turbines of $90 million due in 2011. EMG's failure to schedule turbine delivery by June 2011 would result in a termination obligation equal to its turbine deposit, which would result in a $21 million charge against earnings. EMG has identified a project in which to place these turbines. However, there is no assurance that development will be completed and the turbines will be used for this project.

On October 8, 2010, an agreement was reached to settle disputes included in the complaint filed by EMG against Mitsubishi Power Systems Americas, Inc. and Mitsubishi Heavy Industries, Ltd. with respect to a wind turbine generator supply agreement. As a result of this agreement, EMG may elect to deploy up to 60 additional wind turbines (aggregating 144 MW) that were part of the original contract, or may be obligated to make a payment of up to $30 million following the end of the three-year period if it has not elected to deploy the additional turbines and if certain other criteria apply. In April 2011, the 55 MW Pinnacle wind project in West Virginia, which will deploy the 23 wind turbines purchased from Mitsubishi, commenced construction.

Capital Expenditures

At March 31, 2011, EMG's subsidiaries had firm commitments to spend approximately $153 million during the remainder of 2011 on capital and construction expenditures. These expenditures primarily relate to selective non-catalytic reduction ("SNCR") equipment at the Midwest Generation plants, the construction of wind projects and non-environmental improvements at the coal plants. EMG intends to fund these expenditures through project level and turbine vendor financing, U.S. Treasury grants, cash on hand and cash generated from operations.

Guarantees and Indemnities

Edison International's subsidiaries have various financial and performance guarantees and indemnifications which are issued in the normal course of business. As discussed below, these contracts included performance guarantees and indemnifications.

Environmental Indemnities Related to the Midwest Generation Plants

In connection with the acquisition of the Midwest Generation plants, EME agreed to indemnify Commonwealth Edison Company ("Commonwealth Edison") with respect to specified environmental liabilities before and after December 15, 1999, the date of sale. The indemnification claims are reduced by any insurance proceeds and tax benefits related to such claims and are subject to a requirement that Commonwealth Edison takes all reasonable steps to mitigate losses related to any such indemnification claim. This indemnification for environmental liabilities is not limited in term and would be triggered by a valid claim from Commonwealth Edison. Also, in connection with the sale-leaseback transaction related to the Powerton and Joliet Stations in Illinois, EME agreed to indemnify the lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnities, a maximum potential liability cannot be determined. Commonwealth Edison has advised EME that Commonwealth Edison believes it is entitled to indemnification for all liabilities, costs, and expenses that it may be required to bear as a result of the litigation discussed below under "—Contingencies—Midwest Generation New Source Review Lawsuit." Except as discussed below, EME has not recorded a liability related to these environmental indemnities.

Midwest Generation entered into a supplemental agreement with Commonwealth Edison and Exelon Generation Company LLC on February 20, 2003 to resolve a dispute regarding interpretation of its reimbursement obligation for asbestos claims under the environmental indemnities set forth in the Asset Sale Agreement. Under this supplemental agreement, Midwest Generation agreed to reimburse Commonwealth Edison and Exelon Generation for 50% of specific asbestos claims pending as of February 2003 and related expenses less recovery of insurance costs, and agreed to a sharing arrangement for liabilities and expenses associated with future asbestos-related claims as specified in the agreement. As a general matter, Commonwealth Edison and Midwest Generation apportion responsibility for future

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asbestos-related claims based upon the number of exposure sites that are Commonwealth Edison locations or Midwest Generation locations. The obligations under this agreement are not subject to a maximum liability. The supplemental agreement had an initial five-year term with an automatic renewal provision for subsequent one-year terms (subject to the right of either party to terminate); pursuant to the automatic renewal provision, it has been extended until February 2012. There were approximately 228 cases for which Midwest Generation was potentially liable and that had not been settled and dismissed at March 31, 2011. Midwest Generation had recorded a liability of $56 million at March 31, 2011 related to this contract indemnity.

The amounts recorded by Midwest Generation for the asbestos-related liability are based upon a number of assumptions. Future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be higher or lower than projected.

Environmental Indemnity Related to the Homer City Plant

In connection with the acquisition of the Homer City plant, Homer City agreed to indemnify the sellers with respect to specified environmental liabilities before and after the date of sale. Payments would be triggered under this indemnity by a valid claim from the sellers. EME guaranteed this obligation of Homer City. Also, in connection with the sale-leaseback transaction related to the Homer City plant, Homer City agreed to indemnify the lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnity provisions, they are not subject to a maximum potential liability and do not have expiration dates. For discussion of the New Source Review lawsuit filed against Homer City, see "—Contingencies—Homer City New Source Review Lawsuit." EME has not recorded a liability related to this indemnity.

Indemnities Provided under Asset Sale and Sale-Leaseback Agreements

The asset sale agreements for the sale of EME's international assets contain indemnities from EME to the purchasers, including indemnification for taxes imposed with respect to operations of the assets prior to the sale and for pre-closing environmental liabilities. Not all indemnities under the asset sale agreements have specific expiration dates. Payments would be triggered under these indemnities by valid claims from the sellers or purchasers, as the case may be. At March 31, 2011, EME had recorded a liability of $44 million related to these matters.

In connection with the sale of various domestic assets, EME has from time to time provided indemnities to the purchasers for taxes imposed with respect to operations of the assets prior to the sale. EME has also provided indemnities to purchasers for items specified in each agreement (for example, specific pre-existing litigation matters and/or environmental conditions). Due to the nature of the obligations under these indemnity agreements, a maximum potential liability cannot be determined.

Not all indemnities under the asset sale agreements have specific expiration dates. Payments would be triggered under these indemnities by valid claims from the sellers or purchasers, as the case may be. No significant amounts are recorded as a liability for these matters.

In connection with the sale-leaseback transactions related to the Homer City plant in Pennsylvania, the Powerton and Joliet Stations in Illinois and, previously, the Collins Station in Illinois, EME and several of its subsidiaries entered into tax indemnity agreements. Although the Collins Station lease terminated in April 2004, Midwest Generation's tax indemnity agreement with the former lease equity investor is still in effect. Under these tax indemnity agreements, these entities agreed to indemnify the lessors in the sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax indemnity agreement, including specified defaults under the respective leases. The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these potential obligations, EME cannot determine a maximum potential liability which would be triggered by a valid claim from the lessors. No significant amounts are recorded as a liability for these matters.

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Indemnity Provided as Part of the Acquisition of Mountainview

In connection with the acquisition of the Mountainview power plant, SCE agreed to indemnify the seller with respect to specific environmental claims related to SCE's previously owned San Bernardino Generating Station, divested by SCE in 1998 and reacquired as part of the Mountainview acquisition. SCE retained certain responsibilities with respect to environmental claims as part of the original divestiture of the station. The aggregate liability for either party to the purchase agreement for damages and other amounts is a maximum of $60 million. This indemnification for environmental liabilities expires on or before March 12, 2033. SCE has not recorded a liability related to this indemnity.

Mountainview Filter Cake Indemnity

The Mountainview power plant utilizes water from on-site groundwater wells and City of Redlands ("City") recycled water for cooling purposes. Unrelated to the operation of the plant, the groundwater contains perchlorate. The pumping of the water removes perchlorate from the aquifer beneath the plant and concentrates it in the plant's wastewater treatment "filter cake." Use of this impacted groundwater for cooling purposes was mandated by Mountainview's California Energy Commission permit. SCE has indemnified the City for cleanup or associated actions related to groundwater contaminated by perchlorate due to the disposal of filter cake at the City's solid waste landfill. The obligations under this agreement are not limited to a specific time period or subject to a maximum liability. SCE has not recorded a liability related to this indemnity.

Other Edison International Indemnities

Edison International provides other indemnifications through contracts entered into in the normal course of business. These are primarily indemnifications against adverse litigation outcomes in connection with underwriting agreements, and specified environmental indemnities and income taxes with respect to assets sold. Edison International's obligations under these agreements may be limited in terms of time and/or amount, and in some instances Edison International may have recourse against third parties for certain indemnities. The obligated amounts of these indemnifications often are not explicitly stated, and the overall maximum amount of the obligation under these indemnifications cannot be reasonably estimated. Edison International has not recorded a liability related to these indemnities.

Contingencies

In addition to the matters disclosed in these Notes, Edison International is involved in other legal, tax and regulatory proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of business. Edison International believes the outcome of these other proceedings will not materially affect its results of operations or liquidity.

Midwest Generation New Source Review Lawsuit

In August 2009, the United States Environmental Protection Agency ("US EPA") and the State of Illinois filed a complaint in the Northern District of Illinois against Midwest Generation, but not Commonwealth Edison, alleging that Midwest Generation or Commonwealth Edison performed repair or replacement projects at six Illinois coal-fired electric generating stations in violation of the Prevention of Significant Deterioration ("PSD") requirements and of the New Source Performance Standards of the Clean Air Act ("CAA"), including alleged requirements to obtain a construction permit and to install controls sufficient to meet best available control technology ("BACT") emissions rates. The US EPA also alleged that Midwest Generation and Commonwealth Edison violated certain operating permit requirements under Title V of the CAA. Finally, the US EPA alleged violations of certain opacity and particulate matter standards at the Midwest Generation plants. In addition to seeking penalties ranging from $25,000 to $37,500 per violation, per day, the complaint calls for an injunction ordering Midwest Generation to install controls sufficient to meet BACT emissions rates at all units subject to the complaint; to obtain new PSD or New Source Review permits for those units; to amend its applications under Title V of the CAA; to conduct audits of its operations to determine whether any additional modifications have occurred; and to offset and mitigate the harm to public health and the environment caused by the alleged CAA violations. The remedies sought by the plaintiffs in the lawsuit could go well beyond the requirements of the Combined Pollutant Standard ("CPS"). Several Chicago-based environmental action groups have intervened in the case.

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In March 2010, nine of the ten counts related to PSD requirements in the complaint were dismissed, and the tenth count was also dismissed to the extent it sought civil penalties under the CAA, as barred by the applicable statute of limitations. Following those dismissals, the government plaintiffs filed an amended complaint, with claims that attempted to add Commonwealth Edison and EME as defendants and introduce new legal theories to impose liability on Midwest Generation and EME. In March 2011, the court again dismissed the nine PSD claims previously dismissed in 2010, along with claims related to alleged violations of Title V of the CAA to the extent based on the dismissed PSD claims. The court also dismissed all claims asserted against Commonwealth Edison and EME. The court denied a motion to dismiss a claim by the Chicago-based environmental action groups for civil penalties in the remaining PSD claim, but noted that the plaintiffs will be required to convince the court that the statute of limitations should be equitably tolled. The court did not address other counts in the complaint that allege violations of opacity and particulate matter limitations under the Illinois State Implementation Plan and Title V of the CAA. Trial of the liability portion of the case is scheduled to commence June 3, 2013.

An adverse decision could involve penalties and remedial actions that could have a material adverse impact on the financial condition and results of operations of Midwest Generation and EME. EME cannot predict the outcome of these matters or estimate the impact on the Midwest Generation plants, or its and Midwest Generation's results of operations, financial position or cash flows.

Homer City New Source Review Lawsuit

In January 2011, the US EPA filed a complaint in the Western District of Pennsylvania against Homer City, the sale-leaseback owner participants of the Homer City plant, and two prior owners of the Homer City plant. The complaint alleges violations of the PSD and Title V provisions of the CAA and its implementing regulations, including requirements contained in the Pennsylvania State Implementation Plan, as a result of projects in the 1990s performed by prior owners without PSD permits and the subsequent failure to incorporate emissions limitations that meet BACT into the station's Title V operating permit. In addition to seeking penalties ranging from $32,500 to $37,500 per violation, per day, the complaint calls for an injunction ordering Homer City to install controls sufficient to meet BACT emissions rates at all units subject to the complaint; to obtain new PSD or New Source Review permits for those units; to amend its applications under Title V of the CAA; to conduct audits of its operations to determine whether any additional modifications have occurred; and to offset and mitigate the harm to public health and the environment caused by the alleged CAA violations. Pennsylvania Department of Environmental Protection, the State of New York and the State of New Jersey have intervened in the lawsuit.

Also in January 2011, two residents filed a complaint in the Western District of Pennsylvania, on behalf of themselves and all others similarly situated, against Homer City, the sale-leaseback owner participants of the Homer City plant, two prior owners of the Homer City plant, EME, and Edison International, claiming that emissions from the Homer City plant had adversely affected their health and property values. The plaintiffs seek to have their suit certified as a class action and request injunctive relief, the funding of a health assessment study and medical monitoring, compensatory and punitive damages.

In April 2011, Homer City filed motions to dismiss both complaints. An adverse decision could involve penalties, remedial actions and damages that could have a material adverse impact on the financial condition and results of operations of Homer City and EME. EME cannot predict the outcome of these matters or estimate the impact on the Homer City plant, or its and Homer City's results of operations, financial position or cash flows.

Navajo Nation Litigation

The Navajo Nation filed a complaint in June 1999 against SCE, among other defendants, arising out of the coal supply agreement for Mohave. Subsequently, the Hopi Tribe was added as an additional plaintiff. As amended in April 2010, the Navajo Nation's complaint asserts claims for, among other things, interference with fiduciary duties and contractual relations, fraudulent misrepresentations by nondisclosure, and various contract-related claims. The complaint claims that the defendants' actions prevented the Navajo Nation from obtaining the full value in royalty rates for the coal supplied to Mohave. The complaint seeks damages of not less than $600 million, plus interest thereon, and punitive damages of not less than $1 billion. No trial date has been set for this litigation. In April 2009, in a related case filed in December 1993 against the U.S. Government, the U.S. Supreme Court found that the Navajo Nation did not have a claim for compensation. In October 2010, the Hopi Tribe settled all of its claims and the remaining parties

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agreed to engage in mediation. SCE cannot predict the outcome of the Navajo Nation's complaint against SCE.

Environmental Remediation

Edison International records its environmental remediation 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 (reflected in "Other long-term liabilities") at undiscounted amounts as timing of cash flows is uncertain.

As of March 31, 2011, Edison International's recorded estimated minimum liability to remediate its 29 identified material sites (sites in which the upper end of the range of costs is at least $1 million) at SCE (24 sites) and EMG (5 sites primarily related to Midwest Generation) was $59 million, of which $52 million was related to SCE, including $20 million related to San Onofre. In addition to its identified material sites, SCE also has 33 immaterial sites for which the total minimum recorded liability was $3 million. Edison International's other subsidiaries have no identified remediation sites. 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 at these identified material sites and immaterial sites could exceed its recorded liability by up to $190 million and $7 million, respectively, all of which is related to SCE. 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 90% of its environmental remediation costs at certain sites, representing $28 million of its recorded liability, through an incentive mechanism (SCE may request to include additional sites). Under this mechanism, SCE recovers 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. SCE expects to recover costs incurred at its remaining sites through customer rates. SCE has recorded a regulatory asset of $52 million at March 31, 2011 for its estimated minimum environmental cleanup costs expected to be recovered through customer rates.

Edison International's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that Edison International may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can be made for these sites.

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 $3 million to $18 million. Recorded costs were $4 million and less than $1 million for the three months ended March 31, 2011 and 2010, respectively.

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 for its identified sites and, based upon the CPUC's regulatory treatment of environmental remediation costs incurred at SCE, Edison International believes that costs ultimately recorded will not materially affect its results of operations, financial position or cash flows. 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.

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Nuclear Insurance

Federal law limits public liability claims from a nuclear incident to the amount of available financial protection, which is currently approximately $12.6 billion. SCE and other owners of San Onofre and Palo Verde have purchased the maximum private primary insurance available ($375 million). The balance is covered by a loss sharing program among nuclear reactor licensees. If a nuclear incident at any licensed reactor in the United States results in claims and/or costs which exceed the primary insurance at that plant site, all nuclear reactor licensees could be required to contribute their share of the liability in the form of a deferred premium.

Based on its ownership interests, SCE could be required to pay a maximum of approximately $235 million per nuclear incident. However, it would have to pay no more than approximately $35 million per incident in any one year. If the public liability limit above is insufficient, federal law contemplates that additional funds may be appropriated by Congress. This could include an additional assessment on all licensed reactor operators as a measure for raising further federal revenue.

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 entities 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 approximately $48 million per year. Insurance premiums are charged to operating expense.

Spent Nuclear Fuel

Under federal law, the Department of Energy ("DOE") is responsible for the selection and construction of a facility for the permanent disposal of spent nuclear fuel and high-level radioactive waste. The DOE did not meet its contractual obligation to begin acceptance of spent nuclear fuel by January 31, 1998. Extended delays by the DOE have led to the construction of costly alternatives and associated siting and environmental issues. Currently, both San Onofre and Palo Verde have interim storage for spent nuclear fuel on site sufficient for the current license period.

In January 2004, SCE, as operating agent of San Onofre, filed a complaint against the DOE in the United States Court of Federal Claims seeking damages for the DOE's failure to meet its obligation to begin accepting spent nuclear fuel from San Onofre. In June 2010, the United States Court of Federal Claims issued a decision granting SCE damages of approximately $142 million to recover costs incurred through December 31, 2005, which has been appealed by the DOE. Additional legal action would be necessary to recover damages incurred after that date. Any damages recovered would be returned to SCE ratepayers or used to offset past or future fuel decommissioning or storage costs for the benefit of ratepayers.


Note 10. Regulatory and Environmental Developments

Environmental Developments

Greenhouse Gas Regulation

In March 2011, a California court issued an order suspending CARB's regulations implementing a California cap-and-trade program. The order would also potentially apply to other measures included in the regulations. The CARB has the right to appeal the ruling.

In April 2011, California enacted a law requiring that California utilities purchase 33% of their electricity requirements from renewable resources. The law requires the CPUC to adopt implementing regulations. The impact of the new 33% law will depend on the content of yet to be adopted implementing regulations, which remains uncertain.

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Hazardous Air Pollutant Regulations

In March 2011, the US EPA issued draft "National Emission Standards for Hazardous Air Pollutants," limiting emissions of hazardous air pollutants ("HAPs") from coal- and oil-fired electrical generating units. The regulations are expected to be finalized by November 2011. Based on its continuing review, EMG does not expect these standards, if adopted, would require Midwest Generation to make material changes to the approach to compliance with state and federal environmental regulations that it contemplates for CPS compliance. Midwest Generation expects to continue to develop and implement a compliance program that includes the use of activated carbon injection, upgrades to particulate removal systems and dry sorbent injection, combined with its use of low sulfur Powder River Basin ("PRB") coal, to meet emission limits for criteria pollutants, such as nitrogen oxide ("NOx") and sulfur dioxide ("SO2") as well as for HAPs, such as mercury, acid gas and non-mercury metals. With respect to the Homer City plant, the proposed standards, like the pending Clean Air Transport Rule, will require additional reductions in and controls for SO2 emissions.

Water Quality

Once-Through Cooling Issues

In March 2011, the US EPA proposed draft standards under the federal Clean Water Act which would affect cooling water intake structures at generating facilities. The standards are intended to protect aquatic organisms by reducing capture in screens attached to cooling water intake structures (impingement) and in the water volume brought into the facilities (entrainment). The regulations are expected to be finalized by July 2012. Edison International is still evaluating the proposed standards but believes, from a preliminary review, that compliance with the proposed standards regarding impingement will be achievable without incurring material additional capital expenditures or operating costs for both the Midwest Generation plants and the Homer City plant. The required measures to comply with the proposed standards regarding entrainment are subject to the discretion of the permitting authority, and Edison International is unable at this time to assess potential costs of compliance, which could be significant for the Midwest Generation plants and San Onofre, but are not expected to be material for the Homer City plant, which already has cooling towers.

In addition to the proposed draft US EPA standards, the existing California once-through cooling policy may result in significant capital expenditures at San Onofre and may affect its operations. The California policy may also significantly impact SCE's ability to procure generating capacity from fossil-fueled plants that use ocean water in once-through cooling systems, system reliability and the cost of electricity if other coastal power plants in California are forced to shut down or limit operations.


Note 11. Accumulated Other Comprehensive Loss

Edison International's accumulated other comprehensive loss consists of:

(in millions)
  Unrealized
Gain (Loss)
on Cash
Flow Hedges

  Pension and
PBOP – Net
Gain
(Loss)

  Pension and
PBOP – Prior
Service Cost

  Accumulated
Other
Comprehensive
Loss

 
   

Balance at December 31, 2010

  $ 16   $ (87 ) $ (5 ) $ (76 )

Current period change

    (4 )   3         (1 )
       

Balance at March 31, 2011

  $ 12   $ (84 ) $ (5 ) $ (77 )
   

Included in accumulated other comprehensive loss at March 31, 2011 was $21 million, net of tax, of unrealized gains on commodity-based cash flow hedges; and $9 million, net of tax, of unrealized losses related to interest rate hedges. The maximum period over which a commodity cash flow hedge is designated is May 31, 2014.

Unrealized gains on commodity hedges consist of futures and forward electricity contracts that qualify for hedge accounting. These gains arise because current forecasts of future electricity prices in these markets are lower than the contract prices. Approximately $21 million of unrealized gains on cash flow hedges, net of tax, are expected to be reclassified into earnings during the next 12 months. Management expects that

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reclassification of net unrealized gains will increase energy revenues recognized at market prices. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result of changes in market conditions.


Note 12. Supplemental Cash Flows Information

Edison International's supplemental cash flows information is:

 
  Three months ended
March 31,
 
(in millions)
  2011
  2010
 
   

Cash payments (receipts) for interest and taxes:

             
 

Interest – net of amounts capitalized

  $ 155   $ 137  
 

Tax payments (refunds) – net

    (45 )   10  
   

Noncash investing and financing activities:

             
 

Accrued capital expenditures

  $ 461   $ 309  
 

Consolidation of variable interest entities:

             
   

Assets other than cash

  $   $ (94 )
   

Liabilities and noncontrolling interests

        99  
 

Deconsolidation of variable interest entities: