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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 September 30, 2010

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.

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 October 26, 2010
Common Stock, no par value   325,811,206


Table of Contents


TABLE OF CONTENTS

GLOSSARY

  i

PART I. FINANCIAL INFORMATION

 
1

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. Derivative Instruments and Hedging Activities

 
10
 

Note 3. Liabilities and Lines of Credit

 
17
 

Note 4. Income Taxes

 
18
 

Note 5. Compensation and Benefit Plans

 
20
 

Note 6. Commitments and Contingencies

 
23
 

Note 7. Consolidated Statements of Changes in Equity

 
35
 

Note 8. Accumulated Other Comprehensive Income

 
36
 

Note 9. Supplemental Cash Flows Information

 
37
 

Note 10. Fair Value Measurements

 
37
 

Note 11. Regulatory Assets and Liabilities

 
43
 

Note 12. Other Income and Expenses

 
44
 

Note 13. Variable Interest Entities

 
44
 

Note 14. Business Segments

 
48

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

 
50
 

FORWARD-LOOKING STATEMENTS

 
50

EDISON INTERNATIONAL OVERVIEW

 

Introduction

 
52
 

Highlights of Operating Results

 
52
 

SCE Capital Program

 
54
 

SCE 2012 General Rate Case

 
55
 

Environmental Developments

 
55
   

Midwest Generation Environmental Compliance Plans and Costs

  55
   

Environmental Regulation Developments

  56
 

EMG Renewables Program

 
56
   

Mitsubishi Lawsuit

  56
 

Parent Company Liquidity

 
57

Table of Contents

SOUTHERN CALIFORNIA EDISON COMPANY

 

RESULTS OF OPERATIONS

 
58
 

Electric Utility Results of Operations

 
58
   

Three Months Ended September 30, 2010 versus September 30, 2009

  59
     

Utility Earning Activities

  60
     

Utility Cost-Recovery Activities

  60
   

Nine Months Ended September 30, 2010 versus September 30, 2009

  61
     

Utility Earning Activities

  61
     

Utility Cost-Recovery Activities

  63
   

Supplemental Operating Revenue Information

  63
   

Income Taxes

  64
 

LIQUIDITY AND CAPITAL RESOURCES

 
64
 

Available Liquidity

 
64
   

Debt Covenant

  65
 

Regulatory Proceedings

 
65
   

Energy Efficiency Risk/Reward Incentive Mechanism

  65
   

2010 FERC Rate Case

  65
 

Dividend Restrictions

 
65
 

Income Tax Matters

 
65
 

Margin and Collateral Deposits

 
65
 

Historical Consolidated Cash Flows

 
66
   

Condensed Consolidated Statement of Cash Flows

  66
     

Cash Flows Provided by Operating Activities

  66
     

Cash Flows Provided (Used) by Financing Activities

  66
     

Cash Flows Used by Investing Activities

  67
 

Contractual Obligations and Contingencies

 
67
   

Contractual Obligations

  67
   

Contingencies

  67
     

Environmental Remediation

  67
 

MARKET RISK EXPOSURES

 
68
 

Interest Rate Risk

 
68
 

Commodity Price Risk

 
68
   

Natural Gas and Electricity Price Risk

  68
 

Credit Risk

 
69


EDISON MISSION GROUP

 

RESULTS OF OPERATIONS

 
70
 

Results of Continuing Operations

 
70
   

Adjusted Operating Income (Loss) ("AOI") – Overview

  71
   

Adjusted Operating Income from Consolidated Operations

  73
     

Midwest Generation Plants

  73
     

Homer City Facilities

  74
     

Non-GAAP Disclosures—Fossil-Fueled Facilities

  75
       

Adjusted Operating Income

  75
     

Seasonal Disclosure—Fossil-Fueled Facilities

  75
     

Renewable Energy Projects

  76

Table of Contents

     

Energy Trading

  77
   

Adjusted Operating Income from Leveraged Lease Activities

  77
   

Adjusted Operating Income from Lease Terminations and Other

  77
   

Adjusted Operating Income from Unconsolidated Affiliates

  77
     

Doga

  77
     

March Point

  77
     

Seasonal Disclosure

  77
   

Interest Related Income (Expense)

  78
   

Income Taxes

  78
 

Results of Discontinued Operations

 
78
 

Derivative Instruments

 
78
   

Unrealized Gains and Losses

  78
   

Fair Value Disclosures

  79
 

LIQUIDITY AND CAPITAL RESOURCES

 
79
 

Available Liquidity

 
79
   

Small Business Jobs Act of 2010

  80
 

Capital Investment Plan

 
81
 

Historical Consolidated Cash Flows

 
82
   

Condensed Consolidated Statement of Cash Flows

  82
     

Consolidated Cash Flows Provided (Used) by Operating Activities

  82
     

Consolidated Cash Flows Provided (Used) by Financing Activities

  82
     

Consolidated Cash Flows Provided (Used) by Investing Activities

  82
 

Credit Ratings

 
83
   

Overview

  83
   

Credit Rating of EMMT

  83
   

Margin, Collateral Deposits and Other Credit Support for Energy Contracts

  83
 

Debt Covenants and Dividend Restrictions

 
84
   

Credit Facility and Financial Ratios

  84
   

Dividend Restrictions in Major Financings

  84
   

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

  85
 

Contractual Obligations and Contingencies

 
85
   

Fuel Supply and Transportation Contracts

  85
   

Midwest Generation New Source Review Lawsuit

  85
   

Homer City New Source Review Notice of Violation

  85
 

Off-Balance Sheet Transactions

 
85
 

Environmental Matters and Regulations

 
85
 

MARKET RISK EXPOSURES

 
86
 

Commodity Price Risk

 
86
   

Energy Price Risk Affecting Sales from the Fossil-Fueled Facilities

  86
   

Capacity Price Risk

  88
   

Basis Risk

  88
   

Coal and Transportation Price Risk

  89
   

Emission Allowances Price Risk

  89
 

Credit Risk

 
90
 

Interest Rate Risk

 
91

Table of Contents

EDISON INTERNATIONAL PARENT AND OTHER

 

RESULTS OF OPERATIONS

 
92
 

LIQUIDITY AND CAPITAL RESOURCES

 
92
 

Historical Cash Flow

 
92
   

Condensed Statement of Cash Flows

  92
   

Cash Flows Used by Operating Activities

  92
   

Cash Flows Provided (Used) by Financing Activities

  92

EDISON INTERNATIONAL (CONSOLIDATED)

 

CONTRACTUAL OBLIGATIONS

 
94
 

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 
94
 

NEW ACCOUNTING GUIDANCE

 
94

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 
94

ITEM 4. CONTROLS AND PROCEDURES

 
94
 

Disclosure Controls and Procedures

 
94
 

Changes in Internal Control Over Financial Reporting

 
94

PART II. OTHER INFORMATION

 
95

ITEM 1. LEGAL PROCEEDINGS

 
95
 

Homer City New Source Review Notice of Violation

 
95
 

Midwest Generation New Source Review Lawsuit

 
95
 

Mitsubishi Lawsuit

 
95
 

Navajo Nation Litigation

 
95
 

California Coastal Commission Potential Environmental Proceeding

 
95

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

 
96
 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 
96

ITEM 6. EXHIBITS

 
96

SIGNATURE

 
97

Table of Contents


GLOSSARY

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

2009 Form 10-K   Edison International's Annual Report on Form 10-K for the year ended December 31, 2009
AB   Assembly Bill
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
CONE   cost of new entry
CPS   Combined Pollutant Standard
CPUC   California Public Utilities Commission
CRRs   congestion revenue rights
DCR   Devers-Colorado River
DOE   U.S. Department of Energy
DOJ   U.S. Department of Justice
DRA   Division of Ratepayer Advocates
DWP   Los Angeles Department of Water & Power
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
FGD   flue gas desulfurization
FGIC   Financial Guarantee Insurance Company
FTRs   firm transmission rights
Four Corners   coal fueled electric generating facility located in Farmington, New Mexico in which Edison International holds a 48% ownership interest
GAAP   generally accepted accounting principles

i


Table of Contents

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
Homer City   EME Homer City Generation L.P.
Illinois EPA   Illinois Environmental Protection Agency
Illinois PCB   Illinois Pollution Control Board
Investor-Owned Utilities   SCE, SDG&E and PG&E
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
MEHC   Mission Energy Holding Company
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
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
POD   Presiding Officer's Decision
PRB   Powder River Basin
PSD   Prevention of Significant Deterioration
PUHCA 2005   Public Utility Holding Company Act of 2005
PX   California Power Exchange
QF(s)   qualifying facility(ies)
RGGI   Regional Greenhouse Gas Initiative
RICO   Racketeer Influenced and Corrupt Organization

ii


Table of Contents

ROE   return on equity
RPM   reliability pricing model
RTO   Regional Transmission Organization
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
SB   Senate Bill
SCAQMD   South Coast Air Quality Management District
SCE   Southern California Edison Company
SCR   selective catalytic reduction
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
SRP   Salt River Project Agricultural Improvement and Power District
TURN   The Utility Reform Network
US EPA   U.S. Environmental Protection Agency
VIE(s)   variable interest entity(ies)
 

iii


Table of Contents


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

   
Consolidated Statements of Income
  Edison International
 
 
 
Three Months Ended
September 30,

 
Nine Months Ended
September 30,

 
 
     
(in millions, except per-share amounts)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Electric utility

  $ 3,097   $ 3,068   $ 7,502   $ 7,529  

Competitive power generation

    691     596     1,838     1,781  
       

Total operating revenue

    3,788     3,664     9,340     9,310  
       

Fuel

    328     406     877     1,120  

Purchased power

    1,118     1,032     2,337     2,155  

Operation and maintenance

    1,102     1,093     3,285     3,136  

Depreciation, decommissioning and amortization

    378     365     1,127     1,053  

Lease terminations and other

            2     888  
       

Total operating expenses

    2,926     2,896     7,628     8,352  
       

Operating income

    862     768     1,712     958  

Interest and dividend income

    4     2     27     29  

Equity in income from partnerships and unconsolidated subsidiaries – net

    62     35     101     34  

Other income

    33     74     103     131  

Interest expense – net of amounts capitalized

    (175 )   (187 )   (518 )   (556 )

Other expenses

    (12 )   (16 )   (39 )   (41 )
       

Income from continuing operations before income taxes

    774     676     1,386     555  

Income tax expense (benefit)

    247     232     261     (169 )
       

Income from continuing operations

    527     444     1,125     724  

Income (loss) from discontinued operations – net of tax

    (4 )   (1 )   4     (5 )
       

Net income

    523     443     1,129     719  

Less: Net income attributable to noncontrolling interests

    13     40     39     82  
       

Net income attributable to Edison International common shareholders

  $ 510   $ 403   $ 1,090   $ 637  
       

Amounts attributable to Edison International common shareholders:

                         

Income from continuing operations, net of tax

  $ 514   $ 404   $ 1,086   $ 642  

Income (loss) from discontinued operations, net of tax

    (4 )   (1 )   4     (5 )
       

Net income attributable to Edison International common shareholders

  $ 510   $ 403   $ 1,090   $ 637  
       

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

                         

Weighted-average shares of common stock outstanding

    326     326     326     326  

Continuing operations

  $ 1.57   $ 1.23   $ 3.32   $ 1.95  

Discontinued operations

    (0.01 )       0.01     (0.01 )
       

Total

  $ 1.56   $ 1.23   $ 3.33   $ 1.94  
       

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

                         

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

    328     329     328     328  

Continuing operations

  $ 1.57   $ 1.22   $ 3.30   $ 1.95  

Discontinued operations

    (0.01 )       0.01     (0.01 )
       

Total

  $ 1.56   $ 1.22   $ 3.31   $ 1.94  
       

Dividends declared per common share

  $ 0.315   $ 0.310   $ 0.945   $ 0.930  
   

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
September 30,

 
Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Net Income

  $ 523   $ 443   $ 1,129   $ 719  

Other comprehensive income (loss), net of tax:

                         
 

Foreign currency translation adjustments – net

                4  
 

Pension and postretirement benefits other than pensions:

                         
   

Net gain arising during the period

    1         13     1  
   

Amortization of net (gain) loss included in net income

    1     1     (5 )   4  
   

Prior service adjustment arising during the period

            2      
   

Amortization of prior service adjustment

            (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 $29 and $(4) for the three months and $41 and $44 for the nine months ended September 30, 2010 and 2009, respectively

    43     (5 )   61     56  
   

Reclassification adjustments included in net income, net of income tax benefit of $5 and $52 for the three months and $54 and $75 for the nine months ended September 30, 2010 and 2009, respectively

    (7 )   (72 )   (80 )   (104 )
       

Other comprehensive income (loss)

    38     (76 )   (11 )   (39 )
       

Comprehensive income

    561     367     1,118     680  

Less: Comprehensive income attributable to noncontrolling interests

    13     40     39     82  
       

Comprehensive income attributable to Edison International

  $ 548   $ 327   $ 1,079   $ 598  
   

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

2


Table of Contents

   
Consolidated Balance Sheets
  Edison International
 
(in millions)
 
September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

ASSETS

             

Cash and equivalents

  $ 2,009   $ 1,673  

Short-term investments

    4     10  

Receivables, less allowances of $59 and $53 for uncollectible accounts at respective dates

    1,075     1,017  

Accrued unbilled revenue

    612     347  

Inventory

    547     533  

Derivative assets

    174     357  

Restricted cash

    15     69  

Margin and collateral deposits

    91     125  

Regulatory assets

    404     120  

Other current assets

    110     179  
       

Total current assets

    5,041     4,430  
       

Competitive power generation and other property – less accumulated depreciation of $1,794 and $2,231 at respective dates

    5,265     5,147  

Nuclear decommissioning trusts

    3,347     3,140  

Investments in partnerships and unconsolidated subsidiaries

    581     216  

Other investments

    251     251  
       

Total investments and other assets

    9,444     8,754  
       

Utility plant, at original cost:

             
 

Transmission and distribution

    23,747     22,214  
 

Generation

    2,731     2,667  

Accumulated depreciation

    (6,097 )   (5,921 )

Construction work in progress

    3,020     2,701  

Nuclear fuel, at amortized cost

    340     305  
       

Total utility plant

    23,741     21,966  
       

Derivative assets

    266     268  

Restricted deposits

    44     43  

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

    1,186     1,038  

Regulatory assets

    5,227     4,139  

Other long-term assets

    617     806  
       

Total long-term assets

    7,340     6,294  
       

Total assets

 
$

45,566
 
$

41,444
 
   

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

3


Table of Contents

   
Consolidated Balance Sheets
  Edison International
 
(in millions, except share amounts)
    
September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

LIABILITIES AND EQUITY

             

Short-term debt

  $ 98   $ 85  

Current portion of long-term debt

    43     377  

Accounts payable

    1,228     1,347  

Accrued taxes

    163     186  

Accrued interest

    200     196  

Customer deposits

    224     238  

Derivative liabilities

    231     107  

Regulatory liabilities

    804     367  

Other current liabilities

    896     884  
       

Total current liabilities

    3,887     3,787  
       

Long-term debt

    12,117     10,437  
       

Deferred income taxes

    4,896     4,334  

Deferred investment tax credits

    103     102  

Customer advances

    114     119  

Derivative liabilities

    1,330     529  

Pensions and benefits

    2,143     2,061  

Asset retirement obligations

    3,372     3,241  

Regulatory liabilities

    3,663     3,328  

Other deferred credits and other long-term liabilities

    2,395     2,500  
       

Total deferred credits and other liabilities

    18,016     16,214  
       

Total liabilities

    34,020     30,438  
       

Commitments and contingencies (Note 6)

             

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

    2,325     2,304  

Accumulated other comprehensive income

    26     37  

Retained earnings

    8,283     7,500  
       

Total Edison International's common shareholders' equity

    10,634     9,841  

Noncontrolling interests

    5     258  

Preferred and preference stock of utility not subject to mandatory redemption

    907     907  
       

Total equity

    11,546     11,006  
       

Total liabilities and equity

 
$

45,566
 
$

41,444
 
   

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

4


Table of Contents

   
Consolidated Statements of Cash Flows
  Edison International
 
 
 
Nine Months Ended September 30,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash flows from operating activities:

             

Net income

  $ 1,129   $ 719  

Less: Income (loss) from discontinued operations

    4     (5 )
       

Income from continuing operations

    1,125     724  

Adjustments to reconcile to net cash provided by operating activities:

             
 

Depreciation, decommissioning and amortization

    1,127     1,053  
 

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

    106     133  
 

Other amortization

    90     95  
 

Lease terminations and other

    2     888  
 

Stock-based compensation

    20     17  
 

Equity in income from partnerships and unconsolidated subsidiaries – net

    (101 )   (34 )
 

Distributions and dividends from unconsolidated entities

    76     5  
 

Deferred income taxes and investment tax credits

    414     (1,322 )
 

Income from leveraged leases

    (3 )   (13 )

Changes in operating assets and liabilities:

             
 

Receivables

    (184 )   (154 )
 

Inventory

    (27 )   4  
 

Restricted cash

    53     (148 )
 

Margin and collateral deposits – net of collateral received

    32     (99 )
 

Other current assets

    (244 )   (65 )
 

Rent payments in excess of levelized rent expense

    (148 )   (161 )
 

Accounts payable

    28     267  
 

Accrued taxes

    (23 )   (318 )
 

Other current liabilities

    (129 )   9  
 

Derivative assets and liabilities – net

    1,079     (414 )
 

Regulatory assets and liabilities – net

    (530 )   951  
 

Proceeds from U.S. Treasury grants

    92      
 

Other assets

    (42 )   (136 )
 

Other liabilities

    (67 )   835  

Operating cash flows from discontinued operations

    4     (5 )
       

Net cash provided by operating activities

    2,750     2,112  
       

Cash flows from financing activities:

             

Long-term debt issued

    1,652     939  

Long-term debt issuance costs

    (35 )   (25 )

Long-term debt repaid

    (371 )   (566 )

Bonds repurchased

        (219 )

Short-term debt financing – net

    13     (2,058 )

Settlements of stock-based compensation – net

    (7 )   4  

Cash contributions from noncontrolling interests

        2  

Dividends and distributions to noncontrolling interests

    (39 )   (88 )

Dividends paid

    (308 )   (303 )
       

Net cash provided (used) by financing activities

  $ 905   $ (2,314 )
   

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

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Consolidated Statements of Cash Flows
  Edison International
 
 
 
Nine Months Ended
September 30,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash flows from investing activities:

             

Capital expenditures

  $ (3,129 ) $ (2,287 )

Purchase of interest in acquired companies

    (4 )   (7 )

Proceeds from termination of leases

        1,420  

Proceeds from sale of nuclear decommissioning trust investments

    903     1,814  

Purchases of nuclear decommissioning trust investments and other

    (1,036 )   (1,977 )

Proceeds from partnerships and unconsolidated subsidiaries, net of investment

    35     10  

Maturities and sale of short-term investments

    7     3  

Purchases of short-term investments

    (1 )   (1 )

Investments in other assets

    (3 )   (278 )

Effect of consolidation and deconsolidation of variable interest entities

    (91 )    
       

Net cash used by investing activities

    (3,319 )   (1,303 )
       

Net increase (decrease) in cash and equivalents

    336     (1,505 )

Cash and equivalents, beginning of period

    1,673     3,916  
       

Cash and equivalents, end of period

  $ 2,009   $ 2,411  
   

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    


Note 1. Summary of Significant Accounting Policies

Edison International's principal wholly owned subsidiaries are SCE, a rate-regulated electric utility that supplies electric energy to a 50,000 square-mile area of central, coastal and southern California; and EMG, a wholly owned competitive power generation subsidiary. EMG is a holding company whose subsidiaries and affiliates are engaged in the business of developing, acquiring, owning or leasing, operating and selling energy and capacity from independent power production facilities. EMG's subsidiaries also conduct hedging and energy trading activities in competitive power markets.


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 2009 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, 2010 as discussed below in "—New Accounting Guidance." This quarterly report should be read in conjunction with such financial statements.

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- and nine-month periods ended September 30, 2010 are not necessarily indicative of the operating results for the full year.

The December 31, 2009 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. Except as indicated, amounts presented in the Notes to the Consolidated Financial Statements relate to continuing operations.


Cash and Equivalents

Cash equivalents included money market funds totaling $1.71 billion and $1.46 billion at September 30, 2010 and December 31, 2009, respectively. The carrying value of cash equivalents approximates the fair value, as all investments have maturities of three months or less. For further discussion of money market funds, see Note 10.

Edison International temporarily invests the ending daily cash balance in its primary disbursement accounts until required for check clearing. Edison International reclassified $320 million and $224 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at September 30, 2010 and December 31, 2009, respectively.


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 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. Stock options awarded prior to 2003 and after 2006 were granted without a

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dividend equivalent feature. EPS attributable to Edison International common shareholders was computed as follows:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions, except per share amounts)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Basic earnings per share – continuing operations:

                         

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

  $ 514   $ 404   $ 1,086   $ 642  

Participating securities dividends

    (3 )   (4 )   (5 )   (5 )
       

Income from continuing operations available to common shareholders

  $ 511   $ 400   $ 1,081   $ 637  
       

Weighted average common shares outstanding

    326     326     326     326  
       

Basic earnings per share – continuing operations

  $ 1.57   $ 1.23   $ 3.32   $ 1.95  
       

Diluted earnings per share – continuing operations:

                         

Income from continuing operations available to common shareholders

  $ 511   $ 400   $ 1,081   $ 637  

Income impact of assumed conversions

    2     2     3     2  
       

Income from continuing operations and assumed conversions available to common shareholders

  $ 513   $ 402   $ 1,084   $ 639  
       

Weighted average common shares outstanding

    326     326     326     326  

Incremental shares from assumed conversions

    2     3     2     2  
       

Adjusted weighted average shares – diluted

    328     329     328     328  
       

Diluted earnings per share – continuing operations

  $ 1.57   $ 1.22   $ 3.30   $ 1.95  
   

Stock-based compensation awards to purchase 9,700,218 and 6,279,410 shares of common stock for the three months ended September 30, 2010 and 2009, respectively, and 6,154,826 and 8,645,549 shares of common stock for the nine months ended September 30, 2010 and 2009, 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; and therefore, the effect would have been antidilutive.


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 at September 30, 2010 and December 31, 2009 consisted of the following:

(in millions)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Coal, gas, fuel oil and raw materials

  $ 171   $ 158  

Spare parts, materials and supplies

    376     375  
       

Total

  $ 547   $ 533  
   


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 value of the positions. Edison

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International nets margin and cash collateral deposits subject to a master netting arrangement 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)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Collateral provided to counterparties:

             
 

Offset against derivative liabilities

  $ 9   $ 49  
 

Reflected in margin and collateral deposits

    91     125  

Collateral received from counterparties:

             
 

Offset against derivative assets

    118     124  
 

Reflected in other current liabilities

    56     59  
   


New Accounting Guidance

Accounting Guidance Adopted in 2010

Consolidation – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

The FASB issued an accounting standards update that changes how a company determines when an entity, that is insufficiently capitalized or is not controlled through voting (or similar rights), should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an ability to direct the activities of the entity that most significantly impact the entity's economic performance and whether the entity has an obligation to absorb losses or the right to receive expected returns of the entity. This guidance requires a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. Edison International adopted this guidance prospectively effective January 1, 2010. The impact of adopting this guidance resulted in the deconsolidation of assets totaling $683 million and the consolidation of assets totaling $99 million at January 1, 2010, and resulted in a cumulative effect adjustment which increased retained earnings by $15 million. For further discussion, see Note 13.


Fair Value Measurements and Disclosures

The FASB issued an accounting standards update that provides for new disclosure requirements related to fair value measurements. The requirements, which Edison International adopted effective January 1, 2010, include separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The update also clarified existing disclosure requirements for the level of disaggregation, inputs and valuation techniques. In addition, effective January 1, 2011, the Level 3 reconciliation of fair value measurements using significant unobservable inputs should include gross rather than net information about purchases, sales, issuances and settlements. The guidance impacts disclosures only. For further discussion, see Note 10.


Accounting Guidance Not Yet Adopted

In October 2009, the FASB issued amended guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenue based on those separate deliverables. This update also requires additional

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disclosure related to the significant assumptions used to determine the revenue recognition of the separate deliverables. This guidance is effective beginning January 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements. Edison International is currently assessing the effects this guidance may have on its consolidated financial statements.


Note 2. 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 congestion revenue rights ("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 energy produced and sold in the MRTU market as a result of differences between SCE's load requirements versus the amount of energy delivered from its generating facilities, existing bilateral contracts and CDWR contracts allocated to SCE.

A portion of SCE's purchased power supply is subject to natural gas price volatility. SCE's natural gas price exposure arises from purchasing natural gas for generation at the Mountainview power plant and peaker plants, from bilateral contracts where pricing is based on natural gas prices (this includes contract energy prices for some renewable QFs which are based on the monthly index price of natural gas delivered at the southern California border), and power contracts 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
  September 30, 2010
  December 31, 2009
 
   
 
   
  (Unaudited)
 

Electricity options, swaps and forward arrangements

  GWh     12,721     14,868  

Natural gas options, swaps and forward arrangements

  Bcf     272     266  

Congestion revenue rights

  GWh     146,538     195,367  

Tolling arrangements1

  GWh     115,681     116,398  
   
1
In compliance with a CPUC mandate, SCE held an open, competitive solicitation that produced agreements with different project developers who have agreed to construct new southern California generating resources. SCE has entered into a number of contracts which are recorded as derivative instruments. The contracts provide for fixed capacity payments as well as pricing for energy delivered based on a heat rate and contractual operation and maintenance prices. However, due to uncertainty regarding the availability of required emission credits, some of the new generating resources may not be constructed and the contracts associated with these resources could therefore terminate, at which time SCE would no longer account for these contracts as derivatives.

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Fair Value of Derivative Instruments

The following table summarizes the gross and net fair values of commodity derivative instruments at September 30, 2010:

 
  Derivative Assets
  Derivative Liabilities
   
 
 
       
 
(in millions)
  Short-
Term

  Long-
Term

  Subtotal
  Short-
Term

  Long-
Term

  Subtotal
  Net Liability
 
   
 
  (Unaudited)
 

Non-trading activities:

                                           
 

Economic hedges

  $ 69   $ 192   $ 261   $ 230   $ 1,298   $ 1,528   $ 1,267  
 

Netting and collateral

                (5 )       (5 )   (5 )
       

Total

  $ 69   $ 192   $ 261   $ 225   $ 1,298   $ 1,523   $ 1,262  
   

The following table summarizes the gross and net fair values of commodity derivative instruments at December 31, 2009:

 
  Derivative Assets
  Derivative Liabilities
   
 
 
       
 
(in millions)
  Short-
Term

  Long-
Term

  Subtotal
  Short-
Term

  Long-
Term

  Subtotal
  Net
Liability

 
   
 
  (Unaudited)
 

Non-trading activities:

                                           
 

Economic hedges

  $ 160   $ 187   $ 347   $ 102   $ 496   $ 598   $ 251  
   


Income Statement Impact of Derivative Instruments

SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and recovers these costs, subject to reasonableness review, 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 or 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.

The following table summarizes the components of economic hedging activity:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Realized loss

  $ (53 ) $ (113 ) $ (116 ) $ (307 )

Unrealized gain (loss)

    (165 )   (198 )   (1,022 )   428  
   


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.

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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 $240 million and $91 million, as of September 30, 2010 and December 31, 2009, respectively, for which SCE has posted no collateral to its counterparties. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2010, SCE would be required to post $16 million of additional collateral based on the contractual terms.


Competitive Power Generation

EMG uses derivative instruments to reduce its exposure to market risks that arise from fluctuations in prices of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, EMG's financial results can be affected by fluctuations in interest rates. 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 EMG's consolidated balance sheets with offsetting changes recorded in the consolidated statements of income. For transactions that qualify for accounting hedge treatment, the fair value is recognized, to the extent effective, on EMG's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive income until the related forecasted transaction occurs.

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

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Notional Volumes of Derivative Instruments

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

September 30, 2010  
 
   
   
   
  Hedging Activities    
 
Commodity
  Instrument
  Classification
  Unit of
Measure

  Cash Flow
Hedges

  Economic
Hedges

  Trading
Activities

 
   
 
   
   
   
  (Unaudited)
 
Electricity   Forwards/Futures   Sales   GWh     26,322 1   15,995 3   33,485  
Electricity   Forwards/Futures   Purchases   GWh     408 1   16,529 3   35,741  
Electricity   Capacity   Sales   MW-Day
(in thousands)
    195 2       150 2
Electricity   Capacity   Purchases   MW-Day
(in thousands)
    12 2       461 2
Electricity   Congestion   Sales   GWh         136 4   10,977 4
Electricity   Congestion   Purchases   GWh         1,016 4   210,974 4
Natural gas   Forwards/Futures   Sales   bcf         0.6     37.3  
Natural gas   Forwards/Futures   Purchases   bcf             36.4  
Fuel oil   Forwards/Futures   Sales   barrels         150,000     319,000  
Fuel oil   Forwards/Futures   Purchases   barrels         495,000     329,000  
Coal   Forwards/Futures   Sales   tons             1,794,750  
Coal   Forwards/Futures   Purchases   tons             1,748,250  
   

 

(in millions)
Instrument
  Purpose
  Type of Hedge
  Notional
Amount

  Expiration Date
 
 
   
   
  (Unaudited)
   
Amortizing interest rate swap   Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt   Cash flow   $ 145   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
 

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December 31, 2009
 
   
 
   
   
   
  Hedging Activities
   
 
 
   
   
   
       
 
Commodity
  Instrument
  Classification
  Unit of
Measure

  Cash Flow
Hedges

  Economic
Hedges

  Trading
Activities

 
   
 
   
   
   
  (Unaudited)
 
Electricity   Forwards/Futures   Sales   GWh     24,355 1   26,838 3   23,306  
Electricity   Forwards/Futures   Purchases   GWh     106 1   25,971 3   23,404  
Electricity   Capacity   Sales   MW-Day
(in thousands)
    254 2   1 2   597 2
Electricity   Capacity   Purchases   MW-Day
(in thousands)
    11 2   2 2   736 2
Electricity   Congestion   Sales   GWh         136 4   10,212 4
Electricity   Congestion   Purchases   GWh         1,576 4   181,930 4
Natural gas   Forwards/Futures   Sales   bcf         3.3     30.8  
Natural gas   Forwards/Futures   Purchases   bcf             30.6  
Fuel oil   Forwards/Futures   Sales   barrels         250,000     120,000  
Fuel oil   Forwards/Futures   Purchases   barrels         625,000     120,000  
   

 

(in millions)
Instrument
  Purpose
  Type of Hedge
  Notional
Amount

  Expiration Date
 
 
   
   
  (Unaudited)
   
Amortizing interest rate swap   Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt   Cash flow   $ 160   June 2016
 
1
EMG's hedge products include forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the fossil-fueled facilities which meet the normal sales and purchase 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 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.

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Fair Value of Derivative Instruments

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

September 30, 2010  
 
  Derivative Assets
  Derivative Liabilities
   
 
 
       
 
(in millions)
  Short-term
  Long-term
  Subtotal
  Short-term
  Long-term
  Subtotal
  Net Assets
 
   
 
  (Unaudited)
 

Non-trading activities

                                           
 

Cash flow hedges

  $ 151   $ 33   $ 184   $ 4   $ 36   $ 40   $ 144  
 

Economic hedges

    108     7     115     101     7     108     7  

Trading activities

    246     137     383     209     70     279     104  
       

    505     177     682     314     113     427     255  

Netting and
collateral received1

    (400 )   (103 )   (503 )   (308 )   (81 )   (389 )   (114 )
       

Total

  $ 105   $ 74   $ 179   $ 6   $ 32   $ 38   $ 141  
   

 

December 31, 2009  
 
  Derivative Assets
  Derivative Liabilities
   
 
 
       
 
(in millions)
  Short-term
  Long-term
  Subtotal
  Short-term
  Long-term
  Subtotal
  Net Assets
 
   
 
  (Unaudited)
 

Non-trading activities

                                           
 

Cash flow hedges

  $ 240   $ 17   $ 257   $ 69   $ 6   $ 75   $ 182  
 

Economic hedges

    202     8     210     180         180     30  

Trading activities

    234     111     345     182     41     223     122  
       

    676     136     812     431     47     478     334  

Netting and
collateral received1

    (479 )   (55 )   (534 )   (426 )   (32 )   (458 )   (76 )
       

Total

  $ 197   $ 81   $ 278   $ 5   $ 15   $ 20   $ 258  
   
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.

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Income Statement Impact of Derivative Instruments

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

 
  Cash Flow Hedge Activity1
Nine Months Ended
September 30,
   
(in millions)
  2010
  2009
  Income Statement
Location

 
 
  (Unaudited)
   

Accumulated other comprehensive income derivative gain at January 1

  $ 175   $ 398    

Effective portion of changes in fair value

    102     100    

Reclassification from accumulated other comprehensive income to net income

    (134 )   (179 ) Competitive power generation revenue
         

Accumulated other comprehensive income derivative gain at September 30

  $ 143   $ 319    
 
1
Unrealized derivative gains are before income taxes. The after-tax amounts recorded in accumulated other comprehensive income at September 30, 2010 and 2009 were $86 million and $192 million, respectively.

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 a net gain of $4 million and $11 million during the third quarters of 2010 and 2009, respectively, and $5 million and $16 million during the nine months ended September 30, 2010 and 2009, respectively, representing the amount of cash flow hedge ineffectiveness and are reflected in "Competitive power generation" revenue on the consolidated statements of income.

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 September 30,
  Nine Months Ended September 30,
 
 
   
     
(in millions)
  Income Statement Location
  2010
  2009
  2010
  2009
 
   
 
   
  (Unaudited)
 
Economic hedges   Competitive power generation revenue   $ 7   $ 19   $   $ 35  
    Fuel costs     2     (2 )       12  
Trading activities   Competitive power generation revenue     28     16     108     43  
   


Contingent Features/Credit Related Exposure

Certain derivative instruments contain margin and collateral deposit requirements. Since EME's credit ratings are below investment grade, EME has provided collateral in the form of cash and letters of credit for the benefit of counterparties related to the net of accounts payable, accounts receivable, unrealized losses and unrealized gains in connection with derivative activities. Certain derivative contracts do not require margin, but contain provisions that require EME 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

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by EME 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. The aggregate fair value of all derivative instruments with credit-risk-related contingent features is in an asset position at September 30, 2010 and, accordingly, the contingent features described above do not currently have a liquidity exposure. Future increases in power prices could expose EME, Midwest Generation or EMMT to termination payments or additional collateral postings under the contingent features described above.


Note 3. Liabilities and Lines of Credit

Long-Term Debt

In March 2010, SCE issued $500 million of 5.5% first and refunding mortgage bonds due in 2040. In May 2010, SCE reissued $144 million of 5.0% tax-exempt pollution control bonds due in 2035. In August 2010, SCE issued $500 million of 4.5% first and refunding mortgage bonds due in 2040. These issuances are part of long-term financing plans to fund SCE's capital program.

In July 2010, EMG completed through its subsidiary, Laredo Ridge Wind, LLC, a non-recourse financing of its interests in the Laredo Ridge wind project. The financing included a $53 million bridge loan, secured by the expected U.S. Treasury grant, immediately due to be fully repaid upon receipt of the U.S. Treasury grant and no later than December 31, 2011. As of September 30, 2010, there was $50 million outstanding under the bridge loan at a weighted average interest rate of 2.76% classified as long-term obligations.

EMG consolidated the Ambit project on January 1, 2010. At September 30, 2010, this project had $71 million of bonds payable, which are supported by a letter of credit. Principal payments are due annually through October 1, 2017. Interest rates are reset weekly based on current bond yields for similar securities. The average interest rate for the nine months ended September 30, 2010 was 0.27%. Annual maturities of this debt at September 30, 2010 for the next five years are summarized as follows: $8 million in 2010, $8 million in 2011, $9 million in 2012, $10 million in 2013, and $10 million in 2014. In January 2010, Edison Capital repaid in full its medium-term loans. The balance of these loans was $89 million at December 31, 2009.

In September 2010, Edison International (parent) issued $400 million of 3.75% senior notes due in 2017. The proceeds from these bonds were used to repay short-term borrowings under the revolving credit facility and the remainder for corporate liquidity purposes.


Credit Agreements and Short-Term Debt

In March 2010, SCE replaced its $500 million 364-day revolving credit facility with a new $500 million three-year credit facility that terminates in March 2013.

In March 2010, EMG completed through its subsidiary, Cedro Hill Wind, LLC, a non-recourse financing of its interests in the Cedro Hill wind project. The financing included a $135 million construction loan that is required to be converted to a 15-year amortizing term loan by May 31, 2011, subject to meeting specified conditions. As of September 30, 2010, there was $78 million outstanding under the construction loan at a weighted average interest rate of 3.26%.

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In July 2010, EMG completed through its subsidiary, Laredo Ridge Wind, LLC, a non-recourse financing of its interests in the Laredo Ridge wind project. The financing included a $75 million construction loan required to be converted to a 15-year amortizing term loan by August 31, 2011, subject to meeting specified conditions. As of September 30, 2010, there was $20 million outstanding under the construction loan at a weighted average interest rate of 3.01% classified as a construction loan.


Letters of Credit

Letters of credit issued under SCE's credit facilities aggregated $11 million and are scheduled to expire in twelve months or less. As of September 30, 2010, letters of credit issued under EME and its subsidiaries' credit facilities aggregated $133 million and are scheduled to expire as follows: $8 million in 2010 and $125 million in 2011.


Note 4. Income Taxes

Effective Tax Rate

The table below contains a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision from continuing operations attributable to common shareholders:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Provision for income tax at federal statutory rate of 35%

  $ 266   $ 223   $ 471   $ 166  

Increase (decrease) in income tax from:

                         
 

Items presented with related state income tax, net

                         
   

Global Settlement related

    (37 )       (175 )   (298 )
   

Change in tax accounting method for asset removal costs

            (40 )    
 

State tax – net of federal benefit

    34     5     57     1  
 

Health care legislation

            39      
 

Production and housing credits

    (14 )   (12 )   (48 )   (46 )
 

Property-related and other

    (2 )   16     (43 )   8  
       

Total income tax expense from continuing operations

  $ 247   $ 232   $ 261   $ (169 )
       

Pre-tax income from continuing operations

  $ 761   $ 636   $ 1,347   $ 473  
       

Effective tax rate

    32%     36%     19%     (36% )
   

The CPUC requires flow-through rate-making 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.


Global Settlement

During 2010, Edison International recognized a $175 million earnings benefit relating to the Global Settlement, including $138 million in the second quarter resulting from acceptance by the California Franchise Tax Board of the tax positions finalized with the IRS in 2009 and revision to interest recorded on the federal Global Settlement, and $37 million in the third quarter resulting from receipt of the final interest determination from the California Franchise Tax Board.

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During the nine months ended September 30, 2009, Edison International recorded a consolidated after-tax earnings charge of $274 million related to the Global Settlement finalized with the IRS and termination of Edison Capital's cross-border leases ($920 million pre-tax loss). (See discussion of Global Settlement in "Item 8. Edison International Notes to Consolidated Financial Statements—Note 4. Income Taxes" of the 2009 Form 10-K.)


Change in Tax Accounting Method for Asset Removal Costs

During the second quarter of 2010, the IRS approved Edison International's request to change its tax accounting method for asset removal costs primarily related to SCE's infrastructure replacement program. As a result, Edison International recognized a $40 million earnings benefit ($28 million of which relates to asset removal costs incurred prior to 2010) from deducting asset removal costs earlier in the construction cycle. These deductions are recorded on a flow-through basis.


Health Care Legislation

During the first quarter of 2010, Edison International recognized 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 Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, includes a provision that eliminates the federal tax deduction of retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies. Although this change does not take effect until January 1, 2013, Edison International is required to recognize the full accounting impact of the legislation in its financial statements in the period of enactment.


Accounting for Uncertainty in Income Taxes

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits from January 1 to September 30 for 2010 and 2009:

(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Balance at January 1

  $ 664   $ 2,237  

Tax positions taken during the current year:

             
 

Increases

    60     134  

Tax positions taken during a prior year:

             
 

Increases

    251     135  
 

Decreases

    (86 )   (30 )

Decreases for settlements during the period

    (82 )   (1,807 )
       

Balance at September 30

  $ 807   $ 669  
   

As of September 30, 2010 and December 31, 2009, respectively, if recognized, $363 million and $374 million of unrecognized tax benefits would impact the effective tax rate.

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Accrued Interest and Penalties

The total amount of accrued interest and penalties related to Edison International's income tax liabilities was $255 million and $380 million as of September 30, 2010 and December 31, 2009, respectively.

The net after-tax interest and penalties recognized in income tax expense was a benefit of $7 million for the three months ended September 30, 2010, compared to an expense of $7 million for the same period in 2009. Net after-tax interest and penalties recognized in income tax expense was a benefit of $95 million and $92 million for the nine months ended September 30, 2010 and 2009, respectively.

The Internal Revenue Service examination phase of Edison International's federal income tax returns for tax years 2003 through 2006 is anticipated to be completed by the end of 2010. During the third quarter, Edison International received a proposed adjustment increasing the taxable gain on the 2004 sale of EME's international assets, which, if sustained, would result in federal and state tax payments of approximately $152 million, including interest. The Internal Revenue Service examination team is considering whether to assess penalties in addition to this proposed tax adjustment. Edison International does not agree with the proposed adjustment and expects to file an appeal with the Internal Revenue Service after the examination phase is completed. Finally, the Internal Revenue Service examination team, during the third quarter, has informed Edison International that it has completed its review of certain other tax positions and will not be proposing adjustments. The IRS examination team may propose additional adjustments prior to completing the 2003 – 2006 examination.


Note 5. Compensation and Benefit Plans

Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

During the nine months ended September 30, 2010, Edison International made 2009 plan year contributions of $13 million, 2010 plan year contributions of $82 million and expects to make $30 million of additional 2010 plan year contributions during the remainder of 2010. Annual contributions made to most of SCE's pension plans are recovered through CPUC-approved regulatory mechanisms. Annual contributions to these plans are expected to be, at a minimum, equal to the related annual expense.

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Expense components are:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Service cost

  $ 34   $ 32   $ 102   $ 96  

Interest cost

    54     52     162     155  

Expected return on plan assets

    (52 )   (42 )   (156 )   (125 )

Amortization of prior service cost

    2     4     6     12  

Amortization of net loss

    7     14     21     42  
       

Expense under accounting standards

    45     60     135     180  

Regulatory adjustment – deferred

    (14 )   (24 )   (42 )   (72 )
       

Total expense recognized

  $ 31   $ 36   $ 93   $ 108  
   


Postretirement Benefits Other Than Pensions

During the nine months ended September 30, 2010, Edison International made 2010 plan year contributions of $22 million and expects to make $33 million of additional 2010 plan year contributions during the remainder of 2010. Annual contributions made to SCE plans are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the total annual expense for these plans.

Expense components are:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Service cost

  $ 8   $ 8   $ 24   $ 24  

Interest cost

    31     31     93     93  

Expected return on plan assets

    (25 )   (20 )   (75 )   (60 )

Amortization of prior service cost (credit)

    (9 )   (8 )   (27 )   (24 )

Amortization of net loss

    8     11     24     33  
       

Total expense

  $ 13   $ 22   $ 39   $ 66  
   


Stock-Based Compensation

During the first quarter of 2010, Edison International granted its 2010 stock-based compensation awards, which included stock options, performance shares and restricted stock units. Total stock-based compensation expense (reflected in the caption "Operation and maintenance" on the consolidated statements of income) was $9 million for both the three months ended September 30, 2010 and 2009, and $26 million and $25 million for the nine months ended September 30, 2010 and 2009, respectively. The income tax benefit recognized in the consolidated statements of income was $3 million and $4 million for the three months ended September 30, 2010 and 2009, respectively, and $10 million for both the nine months ended September 30, 2010 and 2009. Excess tax benefits included in "Settlements of stock-based compensation – net" in the financing section of the consolidated statements of cash

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flows were $5 million and $6 million for the nine months ended September 30, 2010 and 2009, respectively.


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

 
   
 
  (Unaudited)
 

Outstanding at December 31, 2009

    17,368,032   $ 32.15              

Granted

    3,804,916     33.28              

Expired

    (29,975 )   47.06              

Forfeited

    (184,324 )   30.76              

Exercised

    (928,242 )   21.18              
                   

Outstanding at September 30, 2010

    20,030,407     32.86     6.41        
             

Vested and expected to vest at September 30, 2010

    19,524,599     32.88     6.36   $ 101,533,965  
       

Exercisable at September 30, 2010

    11,310,570     33.13     4.83   $ 67,096,297  
   

Cash outflows to purchase Edison International shares in the open market to settle stock option exercises were $17 million and $2 million for the three months ended September 30, 2010 and 2009, respectively, and were $30 million and $8 million for the nine months ended September 30, 2010 and 2009, respectively. Cash inflows from participants to exercise stock options were $10 million and $1 million for the three months ended September 30, 2010 and 2009, respectively, and were $19 million and $5 million for the nine months ended September 30, 2010 and 2009, respectively. The tax benefit realized from options exercised was $3 million and less than $1 million for the three months ended September 30, 2010 and 2009, respectively, and $5 million and $1 million for the nine months ended September 30, 2010 and 2009, respectively.


Performance Shares

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

 
  Equity Awards
  Liability Awards
 
 
     
 
  Shares
  Weighted-Average
Grant Date
Fair Value

  Shares
  Weighted-Average
Fair Value1

 
   
 
  (Unaudited)
 

Nonvested at December 31, 2009

    343,452   $ 35.41     343,452        

Granted

    144,518     32.12     144,518        

Forfeited

    (70,203 )   55.18     (70,203 )      
                       

Nonvested at September 30, 2010

    417,767     30.95     417,767   $ 15.22  
   
1
The current portion of nonvested performance shares classified as liability awards is reflected in the caption "Other current liabilities" and the long-term portion is reflected in "Pensions and benefits" on the consolidated balance sheets.

There were no performance shares paid in 2009 or 2010.

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Note 6. Commitments and Contingencies

Lease Commitments

SCE entered into two 20-year power purchase contracts which are classified as capital leases and are expected to be recorded on the consolidated balance sheets upon commencement of the contracts in 2012 and 2013. SCE's commitments upon commencement are estimated to be: $38 million in 2012, $98 million in 2013, $120 million in 2014, and $2.1 billion for the period remaining thereafter (amounts representing executory costs and interest are $490 million and $911 million, respectively).


Other Commitments

At September 30, 2010, SCE had power purchase contracts with additional commitments estimated to be: $30 million for the remainder of 2010, $94 million in 2011, $77 million in 2012, $53 million in 2013, $49 million in 2014, and $1 billion for the period remaining thereafter.

In October 2010, SCE completed its 2010 annual request for offers and entered into new power purchase contracts with commitments estimated to be: $35 million in 2011, $122 million in 2012, $163 million in 2013, and $69 million in 2014.

At September 30, 2010, EMG's subsidiaries had firm commitments to spend approximately $199 million during the remainder of 2010 and $79 million in 2011 on capital and construction expenditures. These expenditures primarily relate to the construction of wind projects. 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.

EME has entered into various turbine supply agreements with vendors to support its wind development efforts. As of September 30, 2010, EME had commitments, excluding turbines subject to the legal dispute described below, to purchase 46 wind turbines (69 MW) and had 2 wind turbines (6 MW) in storage to be used for future wind projects. EME has payment commitments related to wind turbines of $82 million due in 2011.

Excluded from the turbine commitments referred to above are commitments under a turbine supply agreement between Mitsubishi Power Systems Americas, Inc. and EME, which was subject to a legal dispute as of September 30, 2010. On October 8, 2010, EME and the Mitsubishi entities entered into a settlement agreement with respect to the dispute. As a result of the settlement agreement, EME's $68 million deposit previously paid under the original contract will be applied to the purchase price for 23 wind turbines (55 MW). Within the next three years, EME may elect to deploy 60 additional wind turbines (144 MW). EME 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. EME further agreed to payments of up to $40 million for settlement of remaining disputes on turbines purchased.

At September 30, 2010, Midwest Generation and Homer City had fuel purchase commitments with various third-party suppliers for the purchase of coal. Based on the contract provisions, which consist of fixed prices, subject to adjustment clauses, these minimum commitments are estimated to aggregate $883 million, summarized as follows: $136 million for the remainder of 2010, $461 million in 2011, $253 million in 2012, and $33 million in 2013.

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At September 30, 2010, Midwest Generation and Homer City each had contractual agreements for the transport of coal to their respective facilities. The commitments under these contracts are based on either actual coal purchases or minimum quantities. Accordingly, contractual obligations for transportation based on actual coal purchases are derived from committed coal volumes set forth in fuel supply contracts. The minimum commitments under these contracts are estimated to aggregate $300 million, summarized as follows: $75 million for the remainder of 2010, and $225 million in 2011.

SCE and EME have letters of credit outstanding under their credit facilities. For further discussion, see Note 3.


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 include performance guarantees, guarantees of debt 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 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." The sale-leaseback participants have requested similar indemnification. 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 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 2011. There were approximately 220 cases for which Midwest Generation was potentially liable and that had not been settled and dismissed at September 30, 2010. Midwest Generation had recorded a $57 million liability at September 30, 2010 for previous, pending and future claims.

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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 Facilities

In connection with the acquisition of the Homer City facilities, 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 facilities, Homer City agreed to indemnify the lessors for specified environmental liabilities. Due to the nature of the obligation under this indemnity provision, it is not subject to a maximum potential liability and does not have an expiration date. For discussion of the NOV received by Homer City and associated indemnity claims, see "—Contingencies—Homer City New Source Review Notice of Violation." 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 September 30, 2010, EME had recorded a liability of $42 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 asset 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 facilities 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

SCE 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. SCE's obligations under these agreements may be limited in terms of time and/or amount, and in some instances SCE 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. SCE 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.


Environmental Developments

Edison International is subject to numerous environmental laws and regulations, which typically require a lengthy and complex process for obtaining licenses, permits and approvals and require it to incur substantial costs to operate existing facilities, construct and operate new facilities, and mitigate or remove the effect of past operations on the environment.

Possible developments, such as the enactment of more stringent environmental laws and regulations, proceedings that may be initiated by environmental and other regulatory authorities, cases in which new theories of liability are recognized, and settlements agreed to by other companies that establish precedent or expectations for the power industry, could affect the costs and the manner in which

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business is conducted, and could cause substantial additional capital expenditures or operational expenditures or the ceasing of operations at certain facilities. There is no assurance that any additional costs arising from such developments would be recovered from customers or that Edison International's financial position, results of operations and cash flows would not be materially affected by these developments.


Midwest Generation Environmental Compliance Plans and Costs

During the third quarter of 2010, Midwest Generation continued its permitting and planning activities for NOx and SO2 controls to meet the requirements of the CPS. Midwest Generation has received all necessary permits from the Illinois EPA allowing the installation of selective non-catalytic reduction (SNCR) technology on multiple units to meet the NOx portion of the CPS, and is engaged with the Illinois EPA with respect to permitting the installation of equipment to meet required reductions for SO2.

Work continued on the possible use of flue gas desulfurization (FGD) technology using dry scrubbing with sodium-based sorbents as a method to comply with the SO2 portion of the CPS. Testing of this technology demonstrated significant reductions in SO2 emissions when using the type of coal used by Midwest Generation. Use of this technology in combination with the type of coal employed by Midwest Generation is expected to require substantially less capital and installation time than the spray dryer absorber technology originally contemplated, but would likely result in higher ongoing operating costs and may consequently result in lower dispatch rates and competitiveness of Midwest Generation's plants, depending on competitors' costs. Also, the use of dry scrubbing with sodium-based sorbents to meet environmental regulations will likely require Midwest Generation to incur the costs of upgrading its particulate removal systems.

Based on the work to date, Midwest Generation estimates the cost of retrofitting all units, using dry scrubbing with sodium-based sorbents to comply with CPS requirements for SO2 emissions, and associated upgrading of particulate removal systems, would be approximately $1.2 billion in 2010 dollars. If completed, these expenditures would be incurred over multiple years.

Decisions regarding whether or not to proceed with the above projects or other approaches to compliance remain subject to a number of factors, such as market conditions, regulatory and legislative developments, and forecasted commodity prices and capital and operating costs applicable at the time decisions are required or made. Midwest Generation could also elect to shut down units, instead of installing controls, to be in compliance with the CPS. Therefore, decisions about any particular combination of retrofits and shutdowns it may ultimately employ also remain subject to conditions applicable at the time decisions are required or made. Due to existing uncertainties about these factors, Midwest Generation may defer final decisions about particular units for the maximum time available. Accordingly, final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital that is budgeted may not occur until 2012 for some of the units and potentially later for others.


Homer City Environmental Issues and Capital Resource Limitations

Homer City operates selective catalytic reduction equipment on all three units to reduce NOx emissions, operates FGD equipment on Unit 3 to reduce SO2 emissions, and uses coal-cleaning equipment on site to reduce the ash and sulfur content of raw coal to meet both combustion and environmental requirements. Homer City may be required to install additional environmental equipment on Unit 1 and Unit 2 to comply with environmental regulations for future operations. For further information, see "—Transport Rule" and "—Homer City New Source Review Notice of

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Violation." Restrictions under the agreements entered into as part of Homer City's 2001 sale-leaseback transaction could affect, and in some cases significantly limit or prohibit, Homer City's ability to incur indebtedness or make capital expenditures. Homer City will have limited ability to obtain additional outside capital for such projects without amending its lease and related agreements. EME is under no contractual obligation to provide funding to Homer City.


Greenhouse Gas Regulation

In June 2010, the US EPA finalized the Prevention of Significant Deterioration ("PSD") and Title V GHG tailoring rule. The effective date of the final rule is August 2, 2010. The emissions thresholds for CO2 equivalents in the final rule are as follows:

 
January – June 2011   75,000 tons per year for new and modified sources already subject to PSD for pollutants other than GHGs

July 2011 – June 2013

 

100,000 tons per year for new sources, and 75,000 tons per year for modified sources
 

Numerous legal challenges to the greenhouse gas tailoring rule have been filed. As written, the rule applies to all sources meeting the thresholds that are built or modified after January 1, 2011. If controls are required to be installed at the facilities of Edison International subsidiaries in the future in order to reduce greenhouse gas emissions pursuant to regulations issued by the US EPA or others, the potential impact will depend on the nature of the controls applied, which remains uncertain.


Transport Rule

In July 2010, the US EPA issued a Notice of Proposed Rulemaking for a proposed rule, known as the Transport Rule, which would require 31 eastern states (including Pennsylvania and Illinois) and the District of Columbia to reduce power plant emissions of NOx and SO2 substantially, starting in 2012, with additional reductions in 2014. The Transport Rule would replace the Clean Air Interstate Rule, which had been remanded to the US EPA in 2008 for revision.

The US EPA has proposed three possible approaches to emissions allowance trading. Under its preferred approach, a pollution limit would be set for each state, intrastate trading would be permitted among power plants, and limited interstate trading would also be permitted consistent with the requirement that each state meet its own pollution control obligations. Under the first alternative, a pollution limit would be set for each state, and only intrastate trading of allowances would be permitted. Under the second alternative, a pollution limit would be set for each state, an emissions limit would be set for each power plant, and limited emissions averaging would be permitted among affected units.

Under the Transport Rule, each covered state would initially be subject to a federal implementation plan designed to reduce pollution that significantly contributed to nonattainment of, or interferes with the maintenance of, NAAQS in other states. States would be able to choose to develop state implementation plans to replace the federal implementation plans.

The Transport Rule is scheduled to be finalized in 2011. The Clean Air Interstate Rule will remain in place until that time. EME believes that the US EPA's preferred approach to emissions allowance trading would provide allowance allocations which are adequate for the Midwest Generation plants based on projected emissions using the Illinois CPS allowable emission rates. If adopted as proposed,

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the Transport Rule may require the installation of additional environmental equipment to reduce SO2 emissions at Units 1 and 2 of the Homer City facilities.


National Ambient Air Quality Standard for Sulfur Dioxide

In June 2010, the US EPA finalized the primary NAAQS for SO2 by establishing a new one-hour standard at a level of 75 parts per billion. The final standard is in line with EME's expectations and is being taken into account in EME's environmental compliance strategy. Revisions to state implementation plans to achieve compliance with the new standard are due to be submitted to the US EPA by February 2014. The US EPA anticipates that the deadline for attainment with the SO2 NAAQS will be August 2017 (five years after the US EPA intends to finalize initial determinations as to the areas of the country that are and are not in attainment with the primary SO2 NAAQS).


Hazardous Substances and Hazardous Waste Laws

In June 2010, the US EPA published proposed regulations relating to coal combustion wastes. Two different proposed approaches are under consideration. The first approach, under which the US EPA would list these wastes as special wastes subject to regulation under Subtitle C of the Resource Conservation and Recovery Act (the section for hazardous wastes), could require EME to incur additional capital and operating costs. The second approach, under which the US EPA would regulate these wastes under Subtitle D of the Resource Conservation and Recovery Act (the section for nonhazardous wastes), is substantially similar to the requirements of existing regulations. Comments on the proposed regulations are due November 19, 2010.


California Renewable Energy Developments

In September 2010, CARB voted to adopt a Renewable Electricity Standard regulation, which would require most retail sellers of electricity in California to procure 33% of their electricity from eligible renewable energy resources by 2020. The potential impact of the Standard will depend on provisions, which have not yet been finalized, and therefore remains uncertain. SCE believes that achieving a 33% renewables portfolio standard in this timeframe will be highly ambitious, given the magnitude of the infrastructure build-out required and the slow pace of transmission permitting and approvals.


Once-Through Cooling

In May 2010, the California State Water Resources Board issued a final policy, which establishes closed-cycle wet cooling as required technology for retrofitting existing once-through cooled plants like San Onofre and many of the existing fossil-fueled power plants along the California coast. The final policy requires an independent engineering study to be completed prior to the fourth quarter of 2013 regarding the feasibility of compliance by California's two coastal nuclear power plants. Depending on the results of the study, the required compliance may result in significant capital expenditures at San Onofre and may affect its operations. The 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 to the extent other coastal power plants in California are forced to shut down or limit operations. The policy has the potential to adversely affect California's nineteen once-through cooled power plants, which provide over 21,000 MW of combined, in-state generation capacity, including over 9,100 MW of capacity interconnected within SCE's service territory.

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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 of September 30, 2010, Edison International's recorded estimated minimum liability to remediate its 29 identified sites at SCE (23 sites) and EME (6 sites primarily related to Midwest Generation) was $42 million, of which $38 million was related to SCE. 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 sites could exceed its recorded liability by up to $228 million, 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. In addition to its identified sites (sites in which the upper end of the range of costs is at least $1 million), SCE also has 34 immaterial sites for which total liability ranges from $5 million (the recorded minimum liability) to $10 million.

The CPUC allows SCE to recover 90% of its environmental remediation costs at certain sites, representing $34 million of its recorded liability, through an incentive mechanism (SCE may request to include additional sites). Under this mechanism, SCE will recover 90% of cleanup costs through customer rates; shareholders fund the remaining 10%, with the opportunity to recover these costs from insurance carriers and other third parties. SCE has successfully settled insurance claims with all responsible carriers. SCE expects to recover costs incurred at its remaining sites through customer rates. SCE has recorded a regulatory asset of $39 million for its estimated minimum environmental cleanup costs expected to be recovered through customer rates.

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

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 $3 million and $2 million for the three months ended September 30, 2010 and 2009, respectively, and were $7 million for both the nine months ended September 30, 2010 and 2009.

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

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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.


Federal and State Income Taxes

Edison International's federal income tax returns are currently under examination by the IRS for tax years 2003 through 2006 and are subject to examination through tax year 2009. Edison International's combined California state franchise tax returns are subject to examination for tax years 1991 through 2009. For further discussion, see Note 4.


2010 FERC Rate Case

In September 2009, the FERC issued an order allowing SCE to implement its proposed 2010 rates effective March 1, 2010, subject to refund. The proposed rates would increase SCE's FERC revenue requirement by $107 million, or 24%, over the 2009 FERC revenue requirement primarily due to an increase in transmission rate base, and would result in an approximate 1% increase to SCE's overall system average rate. SCE has terminated settlement negotiations and begun the litigation process for the proposed 2010 rates. A final decision is expected in the second half of 2011.


FERC Transmission Incentives and CWIP Proceedings

In November 2007, the FERC issued an order granting ROE incentive adders, recovery of the ROE and incentive adders in the CWIP proceedings, and 100% recovery of abandoned plant costs (if any) for three of SCE's transmission projects. The current ROE incentive adders are: 100 basis point adder for DCR, 125 basis point adder for Tehachapi, and 75 basis point adder for Rancho Vista. The CPUC filed an appeal of the November order, which had been stayed pending final resolution by the FERC of the 2008 CWIP proceeding. In April 2010, the FERC issued an order on SCE's 2008 CWIP proceeding. The order sets SCE's 2008 base ROE (before incentives) at 9.54% and establishes a methodology for determining the base ROE for 2009 and 2010 CWIP incentives. In May 2010, SCE filed an application for rehearing with the FERC. The order did not have a material impact on SCE's earnings or cash flows. The collected 2008 through 2010 CWIP revenue requirements are subject to refund, pending a final FERC order on these matters.


Homer City New Source Review Notice of Violation

Recent Developments

In May 2010, Homer City received an NOV from the US EPA. The new NOV alleges claims similar to those in the 2008 NOV, but it adds nonattainment New Source Review requirements to the alleged PSD violations. It also adds two prior owners of the Homer City facilities as parties.

In July 2010, Homer City received a 60-day Notice of Intent to Sue signed by the State of New York and the Pennsylvania Department of Environmental Protection (PADEP), stating their intent to file a citizen suit based on the same or similar theories advanced by the US EPA in the NOV. The Notice of Intent to Sue also named the sale-leaseback owner participants of the Homer City facilities, Homer City's general partner and limited partner, and two prior owners of the Homer City facilities.

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Background

In June 2008, Homer City received an NOV from the US EPA alleging that, beginning in 1988, Homer City (or former owners of the Homer City facilities) performed repair or replacement projects at Homer City Units 1 and 2 without first obtaining construction permits as required by the PSD requirements of the CAA. The US EPA also alleges that Homer City has failed to file timely and complete Title V permits. The NOV does not specify the penalties or other relief that the US EPA seeks for the alleged violations. On June 30, 2009 and January 2, 2010, the US EPA issued requests for information to Homer City under Section 114 of the CAA. Homer City is working on a response to the requests. Homer City has met with the US EPA and has expressed its intent to explore the possibility of a settlement. If no settlement is reached and the U.S. Department of Justice files suit, litigation could take many years to resolve the issues alleged in the NOV. EME cannot predict the outcome of this matter or estimate the impact on its facilities, its results of operations, financial position or cash flows.

Homer City has sought indemnification for liability and defense costs associated with the NOV from the sellers under the asset purchase agreement pursuant to which Homer City acquired the Homer City facilities. The sellers responded by denying the indemnity obligation, but accepting a portion of defense costs related to the claims.

Homer City notified the sale-leaseback owner participants of the Homer City facilities of the NOV under the operative indemnity provisions of the sale-leaseback documents. The owner participants of the Homer City facilities, in turn, sought indemnification and defense from Homer City for costs and liabilities associated with the Homer City NOV. Homer City responded by recognizing its indemnity obligation and defense of the claims on terms consistent with its contractual obligations.


Midwest Generation New Source Review Lawsuit

Recent Developments

In March 2010, the Federal District Court for the Northern District of Illinois dismissed nine of the ten counts related to PSD requirements in the complaint filed by the US EPA and the State of Illinois against Midwest Generation, holding that, as a subsequent owner, Midwest Generation could not be held liable under the PSD provisions for modifications allegedly made by Commonwealth Edison, the prior owner of the Midwest Generation plants. The Court also dismissed the tenth count to the extent it sought civil penalties under the CAA, as barred by the applicable statute of limitations. The decision did not address (i) 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, or (ii) the complaint in intervention filed by a group of Chicago-based environmental action groups, which also alleges opacity and particulate matter violations.

In April 2010, the US EPA formally issued to EME the same NOV that was issued to Midwest Generation in 2007. The transmittal letter stated that the action was based on a review of the asset purchase agreement for the Midwest Generation plants and that the NOV was being issued to EME as a successor in interest to Commonwealth Edison.

In June 2010, the US EPA, the State of Illinois, and several environmental groups filed amended complaints in the New Source Review litigation. The amended complaints are similar to the prior complaints, but seek to add Commonwealth Edison and EME as defendants and introduce new legal theories to impose liability on Midwest Generation and EME. Midwest Generation and EME have

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filed a motion to dismiss the amended complaints, and a status hearing has been scheduled for February 2011.


Background

In August 2007, Midwest Generation received an NOV from the US EPA alleging that, beginning in the early 1990s and into 2003, Midwest Generation or Commonwealth Edison performed repair or replacement projects at six Illinois coal-fired electric generating stations in violation of the PSD requirements and of the New Source Performance Standards of the 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. At approximately the same time, Commonwealth Edison received an NOV substantially similar to the Midwest Generation NOV. Midwest Generation, Commonwealth Edison, the US EPA, and the U.S. Department of Justice, along with several Chicago-based environmental action groups, had discussions designed to explore the possibility of a settlement but no settlement resulted.

In August 2009, the US EPA and the State of Illinois filed a complaint in the Northern District of Illinois against Midwest Generation, but not Commonwealth Edison, alleging claims substantially similar to those in the NOV. 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 those required under the CPS. By order dated January 19, 2010, the Court allowed a group of Chicago-based environmental action groups to intervene in the case.

The owner participants of the Powerton and Joliet Stations have sought indemnification and defense from Midwest Generation and/or EME for costs and liabilities associated with these matters. EME responded by recognizing its indemnity obligation and defense of the claims on terms consistent with its contractual obligations.

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 EME at such time. EME cannot predict the outcome of these matters or estimate the impact on its facilities, its 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

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the Navajo Nation did not have a claim for compensation. In September 2010, the Hopi Tribe settled all of its claims and the remaining parties agreed to engage in mediation. SCE cannot predict the outcome of the Navajo Nation's complaint against SCE.


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 $43 million per year. Insurance premiums are charged to operating expense.


Spent Nuclear Fuel

Under federal law, the 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 the ratepayer.

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Note 7. Consolidated Statements of Changes in Equity

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

 
   
 
  (Unaudited)
 

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

                    (4 )   (39 )   (43 )

Stock-based compensation – net

    5         (12 )   (7 )           (7 )

Noncash stock-based compensation and other

    16         (2 )   14             14  
       

Balance at September 30, 2010

  $ 2,325   $ 26   $ 8,283   $ 10,634   $ 5   $ 907   $ 11,546  
   

The following table provides the changes in equity for the nine months ended September 30, 2009:

 
  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

 
   
 
  (Unaudited)
 

Balance at December 31, 2008

  $ 2,272   $ 167   $ 7,078   $ 9,517   $ 285   $ 907   $ 10,709  

Net income

            637     637     44     38     719  

Other comprehensive loss

        (39 )       (39 )           (39 )

Common stock dividends declared ($0.93 per share)

            (303 )   (303 )           (303 )

Dividends, distributions to noncontrolling interests and other

                    (54 )   (38 )   (92 )

Stock-based compensation – net

    6         (3 )   3             3  

Noncash stock-based compensation and other

    16         (8 )   8             8  
       

Balance at September 30, 2009

  $ 2,294   $ 128   $ 7,401   $ 9,823   $ 275   $ 907   $ 11,005  
   

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Note 8. Accumulated Other Comprehensive Income

Edison International's accumulated other comprehensive income consists of:

(in millions)
  Cash Flow
Hedges – Net
Unrealized
Gain (Loss)

  Pension and
PBOP – Net
Gain (Loss)

  Pension and
PBOP – Prior
Service Cost

  Accumulated
Other
Comprehensive
Income (Loss)

 
   
 
  (Unaudited)
 

Balance at December 31, 2009

  $ 105   $ (70 ) $ 2   $ 37  

Current period change

    (19 )   8         (11 )
       

Balance at September 30, 2010

  $ 86   $ (62 ) $ 2   $ 26  
   

Included in accumulated other comprehensive income at September 30, 2010 was $104 million, net of tax, in unrealized gains on EMG's commodity-based cash flow hedges; and an $18 million, net of tax, unrealized loss related to interest rate hedges. The maximum period over which a cash flow hedge is designated is through March 31, 2026.

EMG's 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 $89 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 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. The maximum period over which a commodity cash flow hedge is designated is through May 31, 2014.

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Note 9. Supplemental Cash Flows Information

Edison International's supplemental cash flows information is:

 
  Nine Months Ended
September 30,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash payments for interest and taxes

             
 

Interest – net of amounts capitalized

  $ 486   $ 485  
 

Tax payments

    44     393  

Noncash investing and financing activities

             
 

Details of debt exchange:

             
   

Pollution-control bonds redeemed

  $ (303 ) $  
   

Pollution-control bonds issued

    303      
 

Consolidation of variable interest entities:

             
   

Assets other than cash

  $ 94   $  
   

Liabilities and non-controlling interests

    99      
 

Deconsolidation of variable interest entities:

             
   

Assets other than cash

  $ 380   $  
   

Liabilities and non-controlling interests

    476      

Dividends declared but not paid

             
 

Common stock

  $ 103   $ 101  
 

Preferred and preference stock of utility not subject to mandatory redemption

    9     8  
   


Note 10. 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 for a liability should reflect the entity's nonperformance risk. Fair value is determined using a hierarchy to prioritize the inputs to valuation models. 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). The three levels of the fair value hierarchy are:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities;

Level 2—Pricing inputs that 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; and

Level 3—Prices or valuations that require inputs that are both significant to the fair value measurements and unobservable.

Edison International's assets and liabilities carried at fair value primarily consist of derivative contracts, SCE nuclear decommissioning trust investments and money market funds. Derivative contracts are primarily commodity contracts for the purchase and sale of power and gas and include contracts for

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forward physical sales and purchases, options and forward price swaps which settle only on a financial basis (including futures contracts). Derivative contracts can be exchange or over-the-counter traded.

The fair value of derivative contracts takes into account quoted market prices, time value of money, volatility of the underlying commodities and other factors. Derivatives that are exchange traded in active markets for identical assets or liabilities are classified as Level 1. Investments in money market funds are generally classified as Level 1, as fair value is determined by observable market prices in active markets.

EMG's derivative contracts, valued based on forward market prices in active markets (PJM West Hub, Northern Illinois Hub peak and AEP/Dayton) adjusted for nonperformance risks, are classified as Level 2. EMG obtains forward market prices from traded exchanges (Intercontinental Exchange Futures U.S. or New York Mercantile Exchange) and available broker quotes. Then, EMG selects a primary source that best represents traded activity for each market 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 that EMG believes to provide the most liquid market for the commodity. EMG considers broker quotes to be observable when corroborated with other information which may include a combination of prices from exchanges, other brokers and comparison to executed trades.

SCE's Level 2 derivatives primarily consist of natural gas financial swaps and natural gas physical trades for which SCE obtains the applicable Henry Hub, basis, index, or forward market prices from the New York Mercantile Exchange and Intercontinental Exchange.

Level 3 includes the majority of SCE's derivatives, including over-the-counter options, bilateral contracts, capacity contracts, and QF contracts. The fair value of these derivatives 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.

Level 3 also includes derivatives that trade infrequently (such as firm transmission rights and CRRs in the California market, financial transmission rights traded in markets outside California and over-the-counter derivatives at illiquid locations) and long-term power agreements. For illiquid financial transmission rights and CRRs, objective criteria are reviewed, including system congestion and other underlying drivers, and fair value is adjusted when it is concluded that a change in objective criteria would result in a new valuation that better reflects fair value.

Changes in fair values are based on the hypothetical sale of illiquid positions. For illiquid long-term power agreements, fair value is based upon a 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. 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. Derivative contracts with counterparties that have significant nonperformance risks are classified as Level 3.

The fair value of the derivative assets and liabilities are adjusted for nonperformance risk. To assess nonperformance risk, SCE considers default risk and the loss incurred if a counterparty defaults. EME

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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 fair value of derivative assets and derivative liabilities nonperformance risk was $3 million and $9 million, respectively, at September 30, 2010 and was $4 million and $7 million, respectively, at December 31, 2009.

The SCE 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.

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

 
  As of September 30, 2010  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting
and
collateral1

  Total
 
   
 
  (Unaudited)
 

Assets at Fair Value

                               
 

Money market funds2

  $ 1,724   $   $   $   $ 1,724  
       
 

Derivative contracts

                               
   

Electricity

        195     312     (148 )   359  
   

Natural gas

    3     65     16     (3 )   81  
   

Fuel oil

    10             (10 )    
       
   

Subtotal of commodity contracts

    13     260     328     (161 )   440  
       
 

Long-term disability plan

    9                 9  
       
 

Nuclear decommissioning trusts

                               
   

Stocks3

    1,840                 1,840  
   

Municipal bonds

        733             733  
   

Corporate bonds4

        418             418  
   

U.S. government and agency securities

    260     60             320  
   

Short-term investments, primarily cash equivalents5

    3     13             16  
       
   

Subtotal of nuclear decommissioning trusts

    2,103     1,224             3,327  
       

Total assets6

  $ 3,849   $ 1,484   $ 328   $ (161 ) $ 5,500  
   

Liabilities at Fair Value

                               
 

Derivative contracts:

                               
   

Electricity

  $   $ (37 ) $ (1,203 ) $ 44   $ (1,196 )
   

Natural gas

        (323 )   (18 )   5     (336 )
   

Coal

        (3 )       3      
       
   

Subtotal of commodity contracts

        (363 )   (1,221 )   52     (1,532 )
       
   

Interest rate contracts

        (29 )           (29 )
       

Net assets (liabilities)

  $ 3,849   $ 1,092   $ (893 ) $ (109 ) $ 3,939  
   

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  As of December 31, 2009  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting
and
Collateral1

  Total
 
   
 
  (Unaudited)
 

Assets at Fair Value

                               
 

Money market funds2

  $ 1,526   $   $   $   $ 1,526  
       
 

Derivative contracts

                               
   

Electricity

        235     440     (136 )   539  
   

Natural gas

    2     10     76     (2 )   86  
   

Fuel oil

    15             (15 )    
       
   

Subtotal of commodity contracts

    17     245     516     (153 )   625  
       
 

Long-term disability plan

    8                 8  
       
 

Nuclear decommissioning trusts

                               
   

Stocks3

    1,772                 1,772  
   

Municipal bonds

        634             634  
   

Corporate bonds4

        393             393  
   

U.S. government and agency securities

    240     68             308  
   

Short-term investments, primarily cash equivalents5

    1     14             15  
       
   

Subtotal of nuclear decommissioning trusts

    2,013     1,109             3,122  
       

Total assets6

  $ 3,564   $ 1,354   $ 516   $ (153 ) $ 5,281  
   

Liabilities at Fair Value

                               
 

Derivative contracts:

                               
   

Electricity

  $   $ (85 ) $ (433 ) $ 73   $ (445 )
   

Natural gas

    (3 )   (150 )   (21 )   4     (170 )
       
   

Subtotal of commodity contracts

    (3 )   (235 )   (454 )   77     (615 )
       
   

Foreign currency and interest rate contracts

        (21 )           (21 )
       

Net assets (liabilities)

  $ 3,561   $ 1,098   $ 62   $ (76 ) $ 4,645  
   
1
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

2
At September 30, 2010 and December 31, 2009, included in cash and cash equivalents and restricted cash and at December 31, 2009, also included in prepaid expenses and other on Edison International's consolidated balance sheets.

3
At September 30, 2010 and December 31, 2009, approximately 67% of the equity investments were located in the United States.

4
Corporate bonds are diversified. This category included $38 million and $50 million at September 30, 2010 and December 31, 2009, respectively, for collateralized mortgage obligations and other asset backed securities.

5
Excludes net assets of $20 million and $18 million of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases at September 30, 2010 and December 31, 2009, respectively.

6
Excludes $31 million and $32 million of cash surrender value of life insurance investments for deferred compensation at September 30, 2010 and December 31, 2009, respectively.

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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
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Fair value, net asset (liability) at beginning of period

  $ (703 ) $ 357   $ 62   $ (302 )

Total realized/unrealized gains (losses):

                   
 

Included in earnings1

    24     30     51     127  
 

Included in regulatory assets and
liabilities2

    (142 )   (322 )   (924 )   270  
 

Included in accumulated other
comprehensive income

    1         5      

Purchases and settlements, net

    (61 )   (49 )   (80 )   (67 )

Transfers into or out of Level 3

    (12 )   26     (7 )   14  
       

Fair value, net asset (liability) at end
of period

  $ (893 ) $ 42   $ (893 ) $ 42  
   

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

  $ (163 ) $ (281 ) $ (882 ) $ 377  
   
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 $(3) million and $38 million for the three months ended September 30, 2010 and 2009, respectively, and were $1 million and $75 million for the nine months ended September 30, 2010 and 2009, respectively. The remainder of the unrealized gains and 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 2010 and 2009.


Nuclear Decommissioning Trusts

SCE is collecting in rates amounts for the future costs of removal of its nuclear assets, and has placed those amounts in independent decommissioning trusts. Contributions are approximately $31 million per year. Funds collected, together with accumulated earnings, will be utilized solely for decommissioning. The CPUC has set certain restrictions related to the investments of these trusts.

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The following table sets forth amortized cost and fair value of the trust investments:

 
   
  Amortized Cost
  Fair Value
 
 
   
     
(in millions)
  Maturity
Dates1

  September 30,
2010

  December 31,
2009

  September 30,
2010

  December 31,
2009

 
   
 
   
  (Unaudited)
 

Stocks

      $ 848   $ 822   $ 1,840   $ 1,772  

Municipal bonds

    2010 – 2049     618     545     733     634  

Corporate bonds

    2010 – 2044     327     309     418     393  

U.S. government and
agency securities

    2010 – 2040     284     287     320     308  

Short-term investments
and receivables/payables

    2010     34     33     36     33  
             

Total

        $ 2,111   $ 1,996   $ 3,347   $ 3,140  
   
1
Maturity dates as of September 30, 2010.

Trust fund earnings (based on specific identification) increase the trust fund balance and the ARO regulatory liability. Proceeds from sales of securities (which are reinvested) were $302 million and $503 million for the three months ended September 30, 2010 and 2009, respectively, and $902 million and $1.8 billion for the nine months ended September 30, 2010 and 2009, respectively. Unrealized holding gains, net of losses, were $1.2 billion and $1.1 billion at September 30, 2010 and December 31, 2009, respectively. Approximately 92% of the cumulative trust fund contributions were tax-deductible.

The following table sets forth a summary of changes in the fair value of the trust:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Balance at beginning of period

  $ 3,083   $ 2,673   $ 3,140   $ 2,524  
 

Realized gains

    14     35     52     223  
 

Realized losses

        (3 )   (4 )   (142 )
 

Unrealized gains (losses) – net

    233     296     90     444  
 

Other-than-temporary impairment

    (5 )   (2 )   (16 )   (105 )
 

Interest, dividends, contributions and other

    22     26     85     81  
       

Balance at end of period

  $ 3,347   $ 3,025   $ 3,347   $ 3,025  
   

Due to regulatory mechanisms, earnings and realized gains and losses (including other-than-temporary impairments) have no impact on operating revenue or earnings.

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Long-term Debt

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

 
  September 30,
2010

  December 31,
2009

 
 
     
(in millions)
  Carrying
Amount

  Fair
Value

  Carrying
Amount

  Fair
Value

 
   
 
  (Unaudited)
 

Long-term debt, including current portion

  $ 12,160   $ 12,334   $ 10,814   $ 10,452  
   

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 approximate fair value and therefore are not included in the table above.


Note 11. Regulatory Assets and Liabilities

Regulatory assets included on the consolidated balance sheets are:

(in millions)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current:

             
 

Regulatory balancing accounts

  $ 207   $ 94  
 

Energy derivatives

    197     25  
 

Other

        1  
       

    404     120  
       

Long-term:

             
 

Regulatory balancing accounts

    52     43  
 

Deferred income taxes – net

    1,838     1,561  
 

Unamortized nuclear investment – net

    301     340  
 

Nuclear-related ARO investment – net

    243     258  
 

Unamortized coal plant investment – net

    70     73  
 

Unamortized loss on reacquired debt

    273     287  
 

Pensions and other postretirement benefits

    999     1,014  
 

Energy derivatives

    1,201     357  
 

Environmental remediation

    39     36  
 

Other

    211     170  
       

    5,227     4,139  
       

Total regulatory assets

  $ 5,631   $ 4,259  
   

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Regulatory liabilities included on the consolidated balance sheets are:

(in millions)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current:

             
 

Regulatory balancing accounts

  $ 798   $ 363  
 

Other

    6     4  
       

    804     367  
       

Long-term:

             
 

Regulatory balancing accounts

    846     642  
 

ARO

    220     171  
 

Costs of removal

    2,597     2,515  
       

    3,663     3,328  
       

Total regulatory liabilities

  $ 4,467   $ 3,695  
   


Note 12. Other Income and Expenses

Other income and expenses are as follows:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Other Income:

                         
 

Equity AFUDC

  $ 24   $ 60   $ 76   $ 95  
 

Increase in cash surrender value of life insurance policies

    7     4     19     17  
 

Other

    2     5     8     14  
       

Total utility other income

    33     69     103     126  
       

Competitive power generation and parent

        5         5  
       

Total other income

  $ 33   $ 74   $ 103   $ 131  
       

Other Expenses:

                         
 

Civic, political and related activities and donations

  $ 7   $ 11   $ 21   $ 19  
 

Marketing services

    2     1     5     6  
 

Other

    1     1     13     8  
       

Total utility other expenses

    10     13     39     33  
       

Competitive power generation and parent

    2     3         8  
       

Total other expenses

  $ 12   $ 16   $ 39   $ 41  
   

In July 2009, the Mountainview power plant was transferred to utility rate base pursuant to CPUC and FERC approvals which resulted in recognition of $50 million in Equity AFUDC during the three- and nine-month periods ended September 30, 2009.


Note 13. Variable Interest Entities

Effective January 1, 2010, Edison International adopted the FASB's new guidance regarding variable interest entities ("VIEs"). A VIE is defined as a legal entity whose equity owners do not have sufficient

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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 new guidance replaces the predominantly quantitative model for determining which reporting entity, if any, has a controlling financial interest in a VIE with a qualitative approach. Under this new qualitative model, 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 unless specific exceptions or exclusions are met. 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.


Projects or Entities that are Consolidated

At September 30, 2010 and December 31, 2009, EMG had majority interests in 15 wind projects with a total generating capacity of 700 MW that have minority interests held by others. The projects are located in Iowa, Minnesota, New Mexico, Nebraska and Texas. As of December 31, 2009, all of these projects were consolidated by EMG. Upon the application of the new guidance effective January 1, 2010, EMG deconsolidated two of these projects. See further discussion in "—Variable Interests in VIEs that are not Consolidated—Equity Interests." In determining that EMG was the primary beneficiary of the 13 projects consolidated at September 30, 2010, the key factors considered were EMG's ability to direct commercial and operating activities and EMG's obligation to absorb losses and right to receive benefits that could potentially be significant to the variable interest entities.

The following table presents summarized financial information of the wind projects that had minority interests held by others and were consolidated by Edison International:

(in millions)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current assets

  $ 22   $ 73  

Net property, plant and equipment1

    669     944  

Other long-term assets

    2     2  
       
 

Total assets1

  $ 693   $ 1,019  
       

Current liabilities

  $ 15   $ 17  

Long-term obligations net of current maturities

    17     20  

Deferred revenues

    57     58  

Other long-term liabilities

    19     21  
       
 

Total liabilities

  $ 108   $ 116  
       

Noncontrolling interests

  $ 4   $ 76  
   
1
Amounts included assets of $253 million ($247 million of net property, plant and equipment) that were deconsolidated on January 1, 2010.

Assets serving as collateral for the debt obligations had a carrying value of $75 million and $81 million at September 30, 2010 and December 31, 2009, respectively, and primarily consist of property, plant and equipment.

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EMG has a 50% partnership interest in the Ambit project. EMG has the power to direct the commercial and operating activities of the project pursuant to the existing contracts and has the obligation to absorb losses and right to receive benefits from the project. Therefore, under the new guidance, EMG is the primary beneficiary which resulted in the consolidation of the Ambit project by Edison International. Total assets consolidated at September 30, 2010 and January 1, 2010 were $99 million at both dates. Substantially all of the assets of the Ambit project are pledged as collateral for the partnership's debt obligations.


Variable Interests in VIEs that are not Consolidated

Power Purchase Contracts

SCE has power purchase agreements ("PPAs") in which it has a variable interest in 17 VIEs, including 6 tolling agreements where SCE provides the natural gas to operate the plants and 11 contracts with QFs (including the Big 4 projects) 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. SCE does not have control over the operation and maintenance of the facilities considered VIEs and it does not bear operational risk of the facilities. See further discussion of the Big 4 projects below.

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, which are accounted for at fair value. See Note 10 for a discussion on nonperformance risk. Further, 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 6. The aggregate capacity dedicated to SCE for these VIE projects was 4,045 MW at September 30, 2010 and the amounts that SCE paid to these projects were $205 million and $184 million for the three months ended September 30, 2010 and 2009, respectively, and $447 million and $414 million for the nine months ended September 30, 2010 and 2009, respectively. These amounts are recoverable in customer rates.

The following table summarizes as of September 30, 2010, SCE's assets and liabilities and exposure to loss associated with SCE's variable interests in the VIEs described above:

 
  Assets
  Liabilities
   
 
 
       
 
(in millions)
  Short-
Term

  Long-
Term

  Short-
Term

  Long-
Term

  Maximum
Exposure

 
   
 
  (Unaudited)
 

Derivatives

  $   $   $ 50   $ 1,064   $  

Accounts payable

            63          
       

Total

  $   $   $ 113   $ 1,064   $  
   

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The following table summarizes as of December 31, 2009, SCE's assets and liabilities and exposure to loss associated with SCE's variable interests in the VIEs described above:

 
  Assets
  Liabilities
   
 
 
       
 
(in millions)
  Short-
Term

  Long-
Term

  Short-
Term

  Long-
Term

  Maximum
Exposure

 
   
 
  (Unaudited)
 

Derivatives

  $   $ 43   $ 17   $ 385   $ 43  

Accounts payable

            39          
       

Total

  $   $ 43   $ 56   $ 385   $ 43  
   

Realized and unrealized losses are recovered or expected to be recovered from ratepayers in rates, subject to reasonableness review, and therefore are not reflected in earnings.


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. As of September 30, 2010 and December 31, 2009, EMG had significant variable interests in projects that are not consolidated consisting of the Big 4 projects and the Sunrise project. A subsidiary of EMG operates the 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.

As noted previously in "—Projects or Entities that are Consolidated," EMG deconsolidated two renewable wind energy generating facilities, the Elkhorn Ridge wind project and San Juan Mesa wind project, on January 1, 2010. The commercial and operating activities of these entities are directed by a management committee comprised of representatives of each partner. Thus, EMG is not the primary beneficiary of these projects. Accordingly, effective January 1, 2010, EMG accounts for its interests in these projects under the equity method.

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

 
  As of September 30, 2010  
(in millions)
  Investment
  Maximum
Exposure

 
   
 
  (Unaudited)
 

Natural gas-fired projects

  $ 360   $ 360  

Wind projects

    218     218  
   

EMG's maximum exposure to loss in its variable interest entities 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 on a long-term financing of a project 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, 2010, entities which EMG has accounted for under the equity method had indebtedness of $141 million, of which $53 million is proportionate to EMG's ownership interest in these projects.

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Big 4 Projects Consolidated Prior to 2010

Edison International has variable interests in the Big 4 Projects through equity interests held by EMG and power contracts between SCE and the Big 4 Projects that contain variable contract pricing provisions based on the price of natural gas. Prior to 2010, Edison International had determined that SCE was the primary beneficiary of these four VIEs and, therefore, consolidated these projects. Edison International deconsolidated the Big 4 Projects at January 1, 2010 since it did not control the commercial and operating activities of these projects through EMG and SCE. Commercial and operating activities are jointly controlled by a management committee of each VIE. Therefore, neither EMG, SCE nor Edison International on a consolidated basis has control of the entities. In addition, EMG's partner provides the executive director and fuel management services and the steam supply is based on the needs of EMG's partner. The deconsolidation did not result in a gain or loss.

The following table presents the carrying amounts of VIEs consolidated by Edison International at December 31, 2009 (these balances were deconsolidated at January 1, 2010):

(in millions)
  December 31,
2009

 
   
 
  (Unaudited)
 

Cash

  $ 92  

Other current assets

    81  

Competitive power generation and other property, plant and equipment – net

    253  

Other long-term assets

    4  
       
 

Total assets

  $ 430  
       

Current liabilities

  $ 64  

Asset retirement obligations

    17  

Noncontrolling interest

    349  
       
 

Total liabilities and equity

  $ 430  
   


Note 14. Business Segments

Edison International's reportable business segments include its electric utility operation segment (SCE) and a competitive power generation segment (EMG). Prior to January 1, 2010, Edison International reported three business segments: electric utility operations segment, competitive power generation segment and financial services segment. As a result of termination of the cross-border leases during 2009 and the continued decline of the remaining portfolio of the financial services segment, the remaining business activity is no longer significant enough to report separately. Accordingly, the financial services segment has been combined into the competitive power generation segment for all periods presented. The combination of these business activities is consistent with the management structure of EMG and evaluation of performance by Edison International. The significant accounting policies of the segments are the same as those described in Note 1.

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Segment income statement information was:

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
     
(in millions)
  2010
  2009
  2010
  2009
 
   
 
  (Unaudited)
 

Operating Revenue (Loss):

                         

Electric utility

  $ 3,098   $ 3,069   $ 7,504   $ 7,531  

Competitive power generation

    691     596     1,838     1,782  

Parent and other2

    (1 )   (1 )   (2 )   (3 )
       

Consolidated Edison International

  $ 3,788   $ 3,664   $ 9,340   $ 9,310  
       

Net Income (Loss) attributable to Edison International:

                         

Electric utility3

  $ 394   $ 346   $ 858   $ 1,053  

Competitive power generation1,4

    110     60     214     (450 )

Parent and other2,5

    6     (3 )   18     34  
       

Consolidated Edison International

  $ 510   $ 403   $ 1,090   $ 637  
   

Segment balance sheet information was:

(in millions)
  September 30,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Total Assets:

             

Electric utility

  $ 36,227   $ 32,474  

Competitive power generation

    9,407     9,543  

Parent and other2

    (68 )   (573 )
       

Consolidated Edison International

  $ 45,566   $ 41,444  
   
1
Includes earnings (losses) from discontinued operations of $(4) million and $(1) million for the three months ended September 30, 2010 and 2009, respectively, and $4 million and $(5) million for the nine months ended September 30, 2010 and 2009, respectively.

2
Includes amounts from Edison International (parent) and other Edison International subsidiaries that are not significant as a reportable segment, as well as intercompany eliminations.

3
Includes earnings of $42 million and $95 million for the three and nine months ended September 30, 2010, and $300 million for the nine months ended September 30, 2009, related to the federal and state impacts of the Global Settlement. See Note 4.

4
Includes earnings (losses) of $(6) million and $52 million for the three and nine months ended September 30, 2010, and $(624) million for the nine months ended September 30, 2009, related to termination of Edison Capital's cross-border leases and the federal and state impacts of the Global Settlement on EMG. See Note 4.

5
Includes earnings of $1 million and $28 million for the three and nine months ended September 30, 2010, and $50 million for the nine months ended September 30, 2009, related to the federal and state impacts of the Global Settlement. See Note 4.

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

FORWARD-LOOKING STATEMENTS

This MD&A contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect Edison International's current expectations and projections about future events based on Edison International's knowledge of present facts and circumstances and assumptions about future events and include any statement that does not directly relate to a historical or current fact. Other information distributed by Edison International that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this report and elsewhere, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of strategy or of plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ from those currently expected, or that otherwise could impact Edison International, include, but are not limited to:

environmental laws and regulations, at both state and federal levels, or changes in the application of those laws, that could require additional expenditures or otherwise affect the cost and manner of doing business;

cost of capital and the ability to borrow funds and access the capital markets on reasonable terms;

cost and availability of electricity, including the ability to procure sufficient resources to meet expected customer needs in the event of significant counterparty defaults under power-purchase agreements;

changes in the fair value of investments and other assets;

ability of SCE to recover its costs in a timely manner from its customers through regulated rates;

decisions and other actions by the CPUC, the FERC and other regulatory authorities and delays in regulatory actions;

changes in interest rates and rates of inflation, including those rates which may be adjusted by public utility regulators;

governmental, statutory, regulatory or administrative changes or initiatives affecting the electricity industry, including the market structure rules applicable to each market and price mitigation strategies adopted by Independent System Operators and Regional Transmission Organizations;

risks associated with operating nuclear and other power generating facilities, including operating risks; nuclear fuel storage issues; failure, availability, efficiency, output, cost of repairs and retrofits of equipment; and availability and cost of spare parts;

availability and creditworthiness of counterparties and the resulting effects on liquidity in the power and fuel markets and/or the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;

cost and availability of labor, equipment and materials;

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ability to obtain sufficient insurance, including insurance relating to SCE's nuclear facilities and wildfire-related liability, and to recover the costs of such insurance;

ability to recover uninsured losses in connection with wildfire-related liability;

effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards;

potential for penalties or disallowances caused by non-compliance with applicable laws and regulations;

outcome of disputes with state tax authorities regarding tax positions taken by Edison International;

cost and availability of coal, natural gas, fuel oil, and nuclear fuel, and related transportation to the extent not recovered through regulated rate cost escalation provisions or balancing accounts;

cost and availability of emission credits or allowances for emission credits;

transmission congestion in and to each market area and the resulting differences in prices between delivery points;

ability to provide sufficient collateral in support of hedging activities and power and fuel purchased;

weather conditions and natural disasters;

risks inherent in the development of generation projects and transmission and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction, permitting, and governmental approvals; and

risks that competing transmission systems will be built by merchant transmission providers in SCE's territory.

Additional information about risks and uncertainties, including more detail about the factors described above, are discussed throughout this MD&A and in the "Risk Factors" section included in Part I, Item 1A of the 2009 Form 10-K. Readers are urged to read this entire report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect Edison International's business. Forward-looking statements speak only as of the date they are made and Edison International is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by Edison International with the Securities and Exchange Commission.

This MD&A for the three- and nine-month periods ended September 30, 2010 discusses material changes in the consolidated financial condition, results of operations and other developments of Edison International since December 31, 2009, and as compared to the three- and nine-month periods ended September 30, 2009. This discussion presumes that the reader has read or has access to Edison International's MD&A for the calendar year 2009 (the "year-ended 2009 MD&A"), which was included in the 2009 Form 10-K.

Except when otherwise stated, references to each of Edison International, SCE and EMG mean each such company with its subsidiaries on a consolidated basis. References to "Edison International (parent)" or "parent company" mean Edison International on a stand-alone basis, not consolidated with its subsidiaries.

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EDISON INTERNATIONAL OVERVIEW

Introduction

This overview is presented in six sections:

Highlights of operating results,

SCE capital program,

SCE 2012 General Rate Case,

Environmental developments,

EMG renewables program, and

Parent company liquidity.

The overview is presented as an update to the overview presented in the 2009 Form 10-K. See pages 62 to 69 of the 2009 Form 10-K for additional information on these topics.


Highlights of Operating Results

 
  Three Months Ended
September 30,
   
  Nine Months Ended
September 30,
   
 
 
  2010
  2009
  Change
  2010
  2009
  Change
 
   

Net Income (Loss) attributable to Edison International

                                     
 

SCE

  $ 394   $ 346   $ 48   $ 858   $ 1,053   $ (195 )
 

EMG

    110     60     50     214     (450 )   664  
 

Edison International Parent and Other

    6     (3 )   9     18     34 &