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 S No £
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 S No £
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 S
Accelerated filer £
Non-accelerated filer £
(Do not check if a smaller reporting company)
Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
The following terms and abbreviations appearing in the text of this report 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
CDWR
California Department of Water Resources
CEC
California Energy Commission
coal plants
Midwest Generation coal plants and Homer City plant
Commonwealth Edison
Commonwealth Edison Company
CPS
Combined Pollutant Standard
CPUC
California Public Utilities Commission
CSAPR
Cross-State Air Pollution Rule
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.
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
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, a Delaware limited liability company that owns and/or leases, and that operates, the Midwest Generation plants
Midwest Generation plants
Midwest Generation'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
Pension and postretirement benefits other than pensions:
Net gain arising during the period, net of income tax expense of $2 for the nine months ended September 30, 2010
—
1
—
13
Amortization of net (gain) loss included in net income, net of income tax expense (benefit) of $1 and $1 for the three months and $4 and $(3) for the nine months ended September 30, 2011 and 2010, respectively
3
1
7
(5
)
Prior service credit arising during the period, net of income tax expense of $1 for the nine months ended September 30, 2010
—
—
—
2
Amortization of prior service credit, net of income tax benefit of $1 for the nine months ended September 30, 2010
—
—
—
(2
)
Unrealized gain (loss) on derivatives qualified as cash flow hedges:
Unrealized holding gain (loss) arising during the period, net of income tax expense (benefit) of $(19) and $29 for the three months and $(24) and $41 for the nine months ended September 30, 2011 and 2010, respectively
(30
)
43
(38
)
61
Reclassification adjustments included in net loss, net of income tax benefit of none and $5 for the three months and $12 and $54 for the nine months ended September 30, 2011 and 2010, respectively
—
(7
)
(17
)
(80
)
Other comprehensive income (loss)
(27
)
38
(48
)
(11
)
Comprehensive income
414
561
797
1,118
Less: Comprehensive income attributable to noncontrolling interests
15
13
43
39
Comprehensive income attributable to Edison International
$
399
$
548
$
754
$
1,079
The accompanying notes are an integral part of these consolidated financial statements.
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 ("GAAP") for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three- and nine-month periods ended September 30, 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 GAAP.
Cash Equivalents
Cash equivalents included investments in money market funds totaling $1.1 billion at both September 30, 2011 and December 31, 2010. Generally, the carrying value of cash equivalents equals the fair value, as these 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 $215 million and $197 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at September 30, 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)
September 30, 2011
December 31, 2010
Coal, gas, fuel oil and other raw materials
$
191
$
184
Spare parts, materials and supplies
401
384
Total inventory
$
592
$
568
Earnings Per Share
Edison International computes earnings per share ("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 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:
Income from continuing operations attributable to common shareholders, net of tax
$
426
$
514
$
805
$
1,086
Participating securities dividends
—
(3
)
—
(5
)
Income from continuing operations available to common shareholders
$
426
$
511
$
805
$
1,081
Weighted average common shares outstanding
326
326
326
326
Basic earnings per share – continuing operations
$
1.31
$
1.57
$
2.47
$
3.32
Diluted earnings per share – continuing operations:
Income from continuing operations available to common shareholders
$
426
$
511
$
805
$
1,081
Income impact of assumed conversions
1
2
3
3
Income from continuing operations available to common shareholders and assumed conversions
$
427
$
513
$
808
$
1,084
Weighted average common shares outstanding
326
326
326
326
Incremental shares from assumed conversions
3
2
3
2
Adjusted weighted average shares – diluted
329
328
329
328
Diluted earnings per share – continuing operations
$
1.30
$
1.57
$
2.46
$
3.30
Stock-based compensation awards to purchase 5,943,378 and 9,700,218 shares of common stock for the three months ended September 30, 2011 and 2010, respectively, and 8,970,290 and 6,154,826 shares of common stock for the nine months ended September 30, 2011 and 2010 respectively, were outstanding, 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 during the respective periods 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.
Accounting Guidance Not Yet Adopted
Fair Value Measurement
In May 2011, the FASB issued an accounting standards update modifying the fair value measurement and disclosure guidance. This guidance prohibits grouping of financial instruments for purposes of fair value measurement and requires the value be based on the individual security. This amendment also results in new disclosures primarily related to Level 3 measurements including quantitative disclosure about unobservable inputs and assumptions, a description of the valuation processes and a narrative description of the sensitivity of the fair value to changes in unobservable inputs. Edison International will adopt this
guidance effective January 1, 2012 and does not expect the adoption of this standard will have a material impact on Edison International's consolidated statements of income, financial position or cash flows.
Presentation of Comprehensive Income
In June 2011, the FASB issued an accounting standards update on the presentation of comprehensive income. An entity can elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. Edison International will adopt this guidance effective January 1, 2012. Edison International currently presents the statement of comprehensive income immediately following the statement of income and expects to continue to do so. The adoption of this accounting standards update does not change the items that constitute net income and other comprehensive income.
Note 2. Consolidated Statements of Changes in Equity
The following table provides the changes in equity for the nine months ended September 30, 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)
—
—
802
802
(1
)
44
845
Other comprehensive loss
—
(48
)
—
(48
)
—
—
(48
)
Common stock dividends declared ($0.96 per share)
—
—
(313
)
(313
)
—
—
(313
)
Dividends, distributions to noncontrolling interests and other
—
—
—
—
(1
)
(44
)
(45
)
Stock-based compensation and other
7
—
(21
)
(14
)
—
—
(14
)
Noncash stock-based compensation and other
22
—
(3
)
19
—
(1
)
18
Purchase of noncontrolling interests1
(14
)
—
—
(14
)
—
—
(14
)
Issuance of preference stock
—
—
—
—
—
123
123
Balance at September 30, 2011
$
2,346
$
(124
)
$
8,793
$
11,015
$
2
$
1,029
$
12,046
1
During the nine months ended September 30, 2011, EMG purchased the remaining interests in Pinnacle Wind Force, LLC, and Broken Bow I, LLC and all assets of the Crofton Bluffs project. All three projects are now 100% owned by EMG. The purchases of the noncontrolling interests were accounted for as equity transactions between controlling and noncontrolling interest holders.
The following table provides the changes in equity for the nine months ended September 30, 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
—
—
1,090
1,090
—
39
1,129
Other comprehensive loss
—
(11
)
—
(11
)
—
—
(11
)
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 ($0.945 per share)
—
—
(308
)
(308
)
—
—
(308
)
Dividends, distributions to noncontrolling interests and other
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. 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 September 30, 2011 and December 31, 2010, EMG consolidated 13 and 14 projects, respectively, with a total generating capacity of 570 MW and 580 MW, respectively, that have interests held by others. In April 2011, EMG sold its 75% ownership interest in a Minnesota wind project.
The following table presents summarized financial information of the projects that were consolidated by EMG:
(in millions)
September 30, 2011
December 31, 2010
Current assets
$
40
$
26
Net property, plant and equipment
702
739
Other long-term assets
6
6
Total assets
$
748
$
771
Current liabilities
$
28
$
25
Long-term debt net of current portion
67
71
Deferred revenues
69
71
Other long-term liabilities
21
21
Total liabilities
$
185
$
188
Noncontrolling interests
$
2
$
4
At September 30, 2011 and December 31, 2010, assets serving as collateral for the debt obligations had a carrying value of $160 million and $163 million, 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 have variable interests in VIEs, including 6 tolling agreements through which SCE provides the natural gas to fuel the plants and 10 contracts with qualifying facilities ("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. 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. As a result, 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 September 30, 2011 and the amounts that SCE paid to these projects were $178 million and $205 million for the three months ended September 30, 2011 and 2010, respectively, and $347 million and
$447 million for the nine months ended September 30, 2011 and 2010, respectively. These amounts are recovered in customer rates.
Equity Interests
EMG accounts for domestic gas and wind energy projects in which it has less than a 100% ownership interest, and cannot exercise unilateral control, under the equity method. At September 30, 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 the Sunrise project and EMG's partner provides the fuel management services for the Big 4 projects. 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 accounts for its variable interests under the equity method.
EMG accounts for its interest in three renewable wind generating facilities under the equity method. At December 31, 2010, EMG had interests in 2 renewable wind generating facilities, the Elkhorn Ridge and San Juan Mesa projects. In addition to these 2 projects, at September 30, 2011, EMG had interests in Community Wind North, which achieved commercial operation on May 28, 2011. The commercial and operating activities of these entities are jointly directed by representatives of each partner. Thus, EMG is not the primary beneficiary of these projects.
The following table presents the carrying amount of EMG's investments in unconsolidated VIEs and the maximum exposure to loss for each investment:
September 30, 2011
(in millions)
Investment
Maximum
Exposure
Natural gas-fired projects
$
340
$
340
Renewable energy projects
228
228
EMG's maximum exposure to loss in its VIEs accounted for under the equity method is generally limited to its investment in these entities. One of EMG's domestic energy projects has long-term debt that is secured by a pledge of project entity assets, but does not provide for recourse to EMG. Accordingly, a default under the project financing 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 September 30, 2011, entities which EMG has accounted for under the equity method had indebtedness of $64 million, of which $16 million is proportionate to EMG's ownership interest in this project.
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 determine 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).
