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TABLE OF CONTENTS

Table of Contents

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



FORM 10-Q



(Mark One)
ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 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 May 3, 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

 

16
 
Note 4. Income Taxes

 

17
 
Note 5. Compensation and Benefit Plans

 

18
 
Note 6. Commitments and Contingencies

 

20
 
Note 7. Consolidated Statement of Changes in Equity

 

30
 
Note 8. Accumulated Other Comprehensive Income

 

31
 
Note 9. Supplemental Cash Flows Information

 

32
 
Note 10. Fair Value Measurements

 

32
 
Note 11. Regulatory Assets and Liabilities

 

38
 
Note 12. Other Income and Expenses

 

39
 
Note 13. Variable Interest Entities

 

39
 
Note 14. Business Segments

 

43

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

 

45
 
FORWARD-LOOKING STATEMENTS

 

45

EDISON INTERNATIONAL OVERVIEW
 
Introduction

 

47
 
Highlights of Operating Results

 

47
 
SCE Capital Program

 

48
 
Environmental Developments

 

49
    Midwest Generation Environmental Compliance Plans and Costs   49
    California Renewable Energy Developments   49
    Once-Through Cooling   49
 
EMG Renewables Program

 

50
    Mitsubishi Lawsuit   50
 
Parent Company Liquidity

 

50

Table of Contents

SOUTHERN CALIFORNIA EDISON COMPANY
 
RESULTS OF OPERATIONS

 

51
 
Electric Utility Results of Operations

 

52
    Utility Earning Activities   53
      2010 vs. 2009   53
    Utility Cost-Recovery Activities   54
      2010 vs. 2009   54
    Supplemental Operating Revenue Information   54
    Effective Income Tax Rates   54
 
LIQUIDITY AND CAPITAL RESOURCES

 

55
 
Available Liquidity

 

55
    Debt Covenant   55
 
Regulatory Proceedings

 

55
    Energy Efficiency Risk/Reward Incentive Mechanism   55
    2010 FERC Rate Case   56
 
Dividend Restrictions

 

56
 
Margin and Collateral Deposits

 

56
 
Historical Consolidated Cash Flow

 

57
    Condensed Consolidated Statement of Cash Flows   57
      Cash Flows Provided by Operating Activities   57
      Cash Flows Provided (Used) by Financing Activities   57
      Cash Flows Used by Investing Activities   58
 
Contractual Obligations and Contingencies

 

58
    Contractual Obligations   58
    Contingencies   58
      Environmental Remediation   58
 
MARKET RISK EXPOSURES

 

58
 
Interest Rate Risk

 

58
 
Commodity Price Risk

 

59
    Natural Gas and Electricity Price Risk   59
 
Credit Risk

 

59

EDISON MISSION GROUP
 
RESULTS OF OPERATIONS

 

61
 
Results of Continuing Operations

 

61
    Adjusted Operating Income (AOI) – Overview   62
    Adjusted Operating Income from Consolidated Operations   64
      Midwest Generation Plants   64
      Homer City Facilities   65
      Non-GAAP Disclosures – Fossil-Fueled Facilities   66
        Adjusted Operating Income   66
      Seasonal Disclosure – Fossil-Fueled Facilities   66
      Renewable Energy Projects   67
      Energy Trading   68
    Adjusted Operating Income from Leveraged Lease Activities   68
    Adjusted Operating Income from Lease Termination and Other   68
    Adjusted Operating Income from Unconsolidated Affiliates   68

Table of Contents

      Doga   68
      March Point   68
      Seasonal Disclosure   68
    Interest Related Income (Expense)   69
    Income Taxes   69
 
Results of Discontinued Operations

 

69
 
Derivative Instruments

 

69
    Unrealized Gains and Losses   69
    Fair Value Disclosures   70
 
LIQUIDITY AND CAPITAL RESOURCES

 

71
 
Available Liquidity

 

71
 
Global Settlement

 

71
 
Capital Investment Plan

 

72
    Estimated Expenditures for Existing Projects   72
    Estimated Expenditures for Future Projects   72
 
Historical Consolidated Cash Flow

 

73
    Condensed Consolidated Statement of Cash Flows   73
      Consolidated Cash Flows Provided by Operating Activities   73
      Consolidated Cash Flows Used by Financing Activities   73
      Consolidated Cash Flows Provided (Used) by Investing Activities   73
 
Credit Ratings

 

74
    Overview   74
    Credit Rating of EMMT   74
    Margin, Collateral Deposits and Other Credit Support for Energy Contracts   74
 
Debt Covenants and Dividend Restrictions

 

75
 
Dividend Restrictions in Major Financings

 

76
    Key Ratios of EME's Principal Subsidiaries Affecting Dividends   76
    EME's Senior Notes and Guaranty of Powerton-Joliet Leases   76
 
Contractual Obligations and Contingencies

 

76
    Fuel Supply Contracts and Coal Transportation Agreements   76
    Midwest Generation New Source Review Lawsuit   76
 
Off-Balance Sheet Transactions

 

76
 
Environmental Matters and Regulations

 

77
 
MARKET RISK EXPOSURES

 

77
 
Commodity Price Risk

 

77
    Energy Price Risk Affecting Sales from the Fossil-Fueled Facilities   77
    Capacity Price Risk   79
    Basis Risk   79
    Coal and Transportation Price Risk   80
    Emission Allowances Price Risk   80
 
Credit Risk

 

81
 
Interest Rate Risk

 

82

EDISON INTERNATIONAL PARENT AND OTHER
 
RESULTS OF OPERATIONS

 

83

Table of Contents

  LIQUIDITY AND CAPITAL RESOURCES   83
 
Historical Cash Flow

 

83
    Condensed Statement of Cash Flows   83
      Cash Flows Provided (Used) by Financing Activities   83

EDISON INTERNATIONAL (CONSOLIDATED)
 
Contractual Obligations

 

84
 
New Accounting Guidance

 

84

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

84

ITEM 4. CONTROLS AND PROCEDURES

 

84
 
Disclosure Controls and Procedures

 

84
 
Changes in Internal Control Over Financial Reporting

 

84


PART II. OTHER INFORMATION


 


85

ITEM 1. LEGAL PROCEEDINGS

 

85
 
Homer City New Source Review Notice of Violation

 

85
 
Midwest Generation New Source Review Lawsuit

 

85
 
Mitsubishi Lawsuit

 

85
 
Navajo Nation Litigation

 

85

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

 

86

ITEM 6. EXHIBITS

 

87

SIGNATURE

 

88

Table of Contents


GLOSSARY

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

AB   Assembly Bill
AFUDC   allowance for funds used during construction
Ambit project   American Bituminous Power Partners, L.P.
AOI   Adjusted Operating Income
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
Fitch   Fitch Ratings
FTRs   firm transmission rights
Four Corners   coal-fired electric generating facility located in Farmington, New Mexico
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.
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   Mohave Generating Station
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   Palo Verde Nuclear Generating Station
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
ROE   return on equity
RPM   reliability pricing model
RTO   Regional Transmission Organization
S&P   Standard & Poor's Ratings Services

ii


Table of Contents

San Onofre   San Onofre Nuclear Generating Station
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
March 31,
 
(in millions, except per-share amounts)
  2010
  2009
 
   
 
  (Unaudited)
 

Electric utility

  $ 2,159   $ 2,189  

Competitive power generation

    652     624  

Other

    (1 )   (1 )
       

Total operating revenue

    2,810     2,812  
       

Fuel

    295     387  

Purchased power

    608     540  

Operations and maintenance

    1,037     969  

Depreciation, decommissioning and amortization

    369     342  

Lease terminations and other

    3     21  
       

Total operating expenses

    2,312     2,259  
       

Operating income

    498     553  

Interest and dividend income

    19     10  

Equity in income (loss) from partnerships and unconsolidated subsidiaries – net

    18     (8 )

Other income

    34     26  

Interest expense – net of amounts capitalized

    (168 )   (187 )

Other expenses

    (8 )   (6 )
       

Income from continuing operations before income taxes

    393     388  

Income tax expense

    150     122  
       

Income from continuing operations

    243     266  

Income from discontinued operations – net of tax

    6     3  
       

Net income

    249     269  

Less: Net income attributable to noncontrolling interests

    13     19  
       

Net income attributable to Edison International common shareholders

  $ 236   $ 250  
       

Amounts attributable to Edison International common shareholders:

             

Income from continuing operations, net of tax

  $ 230   $ 247  

Income from discontinued operations, net of tax

    6     3  
       

Net income attributable to Edison International common shareholders

  $ 236   $ 250  
       

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

             

Weighted-average shares of common stock outstanding

    326     326  

Continuing operations

  $ 0.70   $ 0.75  

Discontinued operations

    0.02     0.01  
       

Total

  $ 0.72   $ 0.76  
       

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

             

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

    328     327  

Continuing operations

  $ 0.70   $ 0.75  

Discontinued operations

    0.02     0.01  
       

Total

  $ 0.72   $ 0.76  
       

Dividends declared per common share

  $ 0.315   $ 0.310  
   

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

1


Table of Contents

   
Consolidated Statements of Comprehensive Income
  Edison International
 
 
 
Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Net income

  $ 249   $ 269  

Other comprehensive income, net of tax:

             
 

Pension and postretirement benefits other than pensions:

             
   

Net gain arising during the period

    12      
   

Amortization of net (gain) loss included in net income

    (8 )   2  
   

Prior service adjustment arising during the period

    2      
   

Amortization of prior service adjustment

    (2 )    
 

Unrealized gain on derivatives qualified as cash flow hedges:

             
   

Unrealized holding gain arising during the period, net of income tax expense of $62 and $98 for 2010 and 2009, respectively

    95     151  
   

Reclassification adjustments included in net income, net of income tax expense of $14 and $32 for 2010 and 2009, respectively

    (20 )   (49 )
       

Other comprehensive income

    79     104  
       

Comprehensive income

    328     373  

Less: Comprehensive income attributable to noncontrolling interests

    13     19  
       

Comprehensive income attributable to Edison International

  $ 315   $ 354  
   

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

2


Table of Contents

   
Consolidated Balance Sheets
  Edison International
 
(in millions)
 
March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

ASSETS

             

Cash and equivalents

  $ 1,418   $ 1,673  

Short-term investments

    10     10  

Receivables, less allowances of $53 for uncollectible accounts at both dates

    843     1,017  

Accrued unbilled revenue

    360     347  

Inventory

    522     533  

Derivative assets

    324     357  

Restricted cash

    66     69  

Margin and collateral deposits

    129     125  

Regulatory assets

    303     120  

Deferred income taxes

        3  

Other current assets

    292     176  
       

Total current assets

    4,267     4,430  
       

Competitive power generation and other property – less accumulated depreciation of $1,669 and $2,231 at respective dates

    4,917     5,147  

Nuclear decommissioning trusts

    3,248     3,140  

Investments in partnerships and unconsolidated subsidiaries

    527     216  

Investments in leveraged leases

    162     160  

Other investments

    98     91  
       

Total investments and other assets

    8,952     8,754  
       

Utility plant, at original cost:

             
 

Transmission and distribution

    22,674     22,214  
 

Generation

    2,680     2,667  

Accumulated depreciation

    (6,064 )   (5,921 )

Construction work in progress

    2,790     2,701  

Nuclear fuel, at amortized cost

    314     305  
       

Total utility plant

    22,394     21,966  
       

Derivative assets

    223     268  

Restricted deposits

    44     43  

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

    1,083     1,038  

Regulatory assets

    4,675     4,139  

Other long-term assets

    719     806  
       

Total long-term assets

    6,744     6,294  
       

Total assets

 
$

42,357
 
$

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)
 
March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

LIABILITIES AND EQUITY

             

Short-term debt

  $ 277   $ 85  

Current portion of long-term debt

    46     377  

Accounts payable

    977     1,347  

Accrued taxes

    190     186  

Accrued interest

    215     196  

Customer deposits

    234     238  

Derivative liabilities

    179     107  

Regulatory liabilities

    288     367  

Deferred income taxes

    155      

Other current liabilities

    696     884  
       

Total current liabilities

    3,257     3,787  
       

Long-term debt

    11,025     10,437  
       

Deferred income taxes

    4,522     4,334  

Deferred investment tax credits

    100     102  

Customer advances

    112     119  

Derivative liabilities

    931     529  

Pensions and benefits

    2,090     2,061  

Asset retirement obligations

    3,274     3,241  

Regulatory liabilities

    3,521     3,328  

Other deferred credits and other long-term liabilities

    2,542     2,500  
       

Total deferred credits and other liabilities

    17,092     16,214  
       

Total liabilities

    31,374     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)

    2,311     2,304  

Accumulated other comprehensive income

    116     37  

Retained earnings

    7,642     7,500  
       

Total Edison International's common shareholders' equity

    10,069     9,841  

Noncontrolling interests

    7     258  

Preferred and preference stock of utility not subject to mandatory redemption

    907     907  
       

Total equity

    10,983     11,006  
       

    

             

    

             

Total liabilities and equity

 
$

42,357
 
$

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
 
 
 
Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash flows from operating activities:

             

Net income

  $ 249   $ 269  

Less: Income from discontinued operations

    6     3  
       

Income from continuing operations

    243     266  

Adjustments to reconcile to net cash provided by operating activities:

             
 

Depreciation, decommissioning and amortization

    369     342  
 

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

    38     32  
 

Other amortization

    24     26  
 

Lease terminations and other

    3     21  
 

Stock-based compensation

    7     5  
 

Equity in (income) loss from partnerships and unconsolidated subsidiaries – net

    (18 )   8  
 

Distributions and dividends from unconsolidated entities

    22     (3 )
 

Deferred income taxes and investment tax credits

    218     63  
 

Income from leveraged leases

    (1 )   (11 )

Changes in operating assets and liabilities:

             
 

Receivables

    150     86  
 

Inventory

    (2 )   4  
 

Restricted cash

    3      
 

Margin and collateral deposits – net of collateral received

    (6 )   (23 )
 

Other current assets

    (154 )   37  
 

Rent payments in excess of levelized rent expense

    (45 )   (49 )
 

Accounts payable

    (138 )   (141 )
 

Accrued taxes

    (6 )   85  
 

Other current liabilities

    (182 )   (44 )
 

Derivative assets and liabilities – net

    695     (220 )
 

Regulatory assets and liabilities – net

    (636 )   244  
 

Other assets

    (11 )   (13 )
 

Other liabilities

    20     (32 )

Operating cash flows from discontinued operations

    6     3  
       

Net cash provided by operating activities

    599     686  
       

Cash flows from financing activities:

             

Long-term debt issued

    547     750  

Long-term debt issuance costs

    (20 )   (10 )

Long-term debt repaid

    (343 )   (179 )

Bonds repurchased

        (219 )

Short-term debt financing – net

    192     (585 )

Stock-based compensation – net

    (1 )   1  

Dividends and distributions to noncontrolling interests

    (13 )   (25 )

Dividends paid

    (103 )   (101 )
       

Net cash provided (used) by financing activities

  $ 259   $ (368 )
   

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

5


Table of Contents

   
Consolidated Statements of Cash Flows
  Edison International
 
 
 
Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash flows from investing activities:

             

Capital expenditures

  $ (951 ) $ (785 )

Purchase of interest in acquired companies

        (6 )

Proceeds from termination of leases

        121  

Proceeds from sale of nuclear decommissioning trust investments

    286     658  

Purchases of nuclear decommissioning trust investments and other

    (335 )   (700 )

Proceeds from partnerships and unconsolidated subsidiaries, net of investment

    32     10  

Maturities and sale of short-term investments

    2     1  

Purchase of short-term investments

    (1 )   (1 )

Investments in other assets

    (55 )   11  
       

Net cash used by investing activities

    (1,022 )   (691 )
       

Effect of consolidation of variable interest entities

    5      

Effect of deconsolidation of variable interest entities

    (96 )    
       

Net decrease in cash and equivalents

    (255 )   (373 )

Cash and equivalents, beginning of period

    1,673     3,916  
       

Cash and equivalents, end of period

  $ 1,418   $ 3,543  
   

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Edison International


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 its 2009 Annual Report on 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 month period ended March 31, 2010 are not necessarily indicative of the operating results for the full year.

Management has performed an evaluation of subsequent events through the date the financial statements were issued.

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 $1.05 billion and $1.46 billion at March 31, 2010 and December 31, 2009, respectively. The carrying value of cash equivalents equals the fair value, as all investments have maturities of less than three months. For further discussion of money market funds, see Note 10.

Edison International has a cash management program under which the ending daily cash balance in its primary disbursement accounts are temporarily invested until required for check clearing. Edison International reclassified $240 million and $224 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at March 31, 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

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participating securities are stock-based compensation awards payable in common shares, including stock options, performance shares and restricted stock units, which earn dividend equivalents on an equal basis with common shares. Stock options awarded during the period 2003 through 2006 received dividend equivalents. Stock options awarded prior to 2002 and after 2006 were granted without a dividend equivalent feature. EPS attributable to Edison International common shareholders was computed as follows:

 
  Three Months Ended March 31,  
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Basic earnings per share – continuing operations:

             

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

  $ 230   $ 247  

Participating securities dividends

    (1 )   (2 )
       

Income from continuing operations available to common shareholders

  $ 229   $ 245  
       

Weighted average common shares outstanding

    326     326  
       

Basic earnings per share – continuing operations

  $ 0.70   $ 0.75  
       

Diluted earnings per share – continuing operations:

             

Income from continuing operations available to common shareholders

  $ 229   $ 245  

Income impact of assumed conversions

    1      
       

Income from continuing operations available to common shareholders and assumed conversions

  $ 230   $ 245  
       

Weighted average common shares outstanding

    326     326  

Incremental shares from assumed conversions

    2     1  
       

Adjusted weighted average shares – diluted

    328     327  
       

Diluted earnings per share – continuing operations

  $ 0.70   $ 0.75  
   

Stock-based compensation awards to purchase 5,998,238 and 8,660,629 shares of common stock for the three months ended March 31, 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 March 31, 2010 and December 31, 2009 consisted of the following:

(in millions)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Coal, gas, fuel oil and raw materials

  $ 155   $ 158  

Spare parts, materials and supplies

    367     375  
       

Total

  $ 522   $ 533  
   

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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 International presents margin and cash collateral deposits subject to a master netting arrangement netted with its derivative positions on its consolidated balance sheets. The following table summarizes margin and collateral deposits provided to and received from counterparties:

(in millions)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Collateral provided to counterparties:

             
 

Offset against derivative liabilities

  $ 15   $ 49  
 

Reflected in margin and collateral deposits

    129     125  

Collateral received from counterparties:

             
 

Offset against derivative assets

    210     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.

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Fair Value Measurements and Disclosures

The FASB issued an accounting standards update that provides for new disclosure requirements related to fair value measurements. Requirements, 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

Accounting pronouncements recently issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC that were effective after March 31, 2010 are not expected to have a material effect on Edison International's consolidated results of operations, financial position or cash flows.


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 Mountainview and peaker plants, from bilateral contracts where pricing is based on natural gas prices (this includes contract energy prices for most 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.

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Notional Volumes of Derivative Instruments

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

 
   
  March 31, 2010
  December 31, 2009
 
 
   
     
Commodity
  Unit of Measure
  Economic Hedges
  Economic Hedges
 
   
 
   
  (Unaudited)
 

Electricity options, swaps and forward arrangements

  GWh     14,943     14,868  

Natural gas options, swaps and forward arrangements

  Bcf     251     266  

Congestion revenue rights

  GWh     180,518     195,367  

Tolling arrangements1

  GWh     116,398     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.


Fair Value of Derivative Instruments

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

  $ 132   $ 141   $ 273   $ 190   $ 920   $ 1,110   $ 837  

Netting and collateral

    (2 )       (2 )   (12 )       (12 )   (10 )
       

Total

  $ 130   $ 141   $ 271   $ 178   $ 920   $ 1,098   $ 827  
   

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  

Netting and collateral

                             
       

Total

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

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Income Statement Impact of Derivative Instruments

SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and recovers these costs from ratepayers. As a result, realized gains and losses do not affect earnings, but may temporarily affect cash flows. Due to expected future recovery from ratepayers, unrealized gains and losses are deferred and are not recognized as purchased-power expense and therefore do not affect 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 March 31,
 
 
     
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Realized gains/(losses)

  $ (24 ) $ (98 )

Unrealized gains/(losses)

    (581 )   333  
   


Contingent Features/Credit-Related Exposure

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

Certain of these power contracts contain a provision that requires SCE to maintain an investment grade credit rating from each of the major credit rating agencies, referred to as a "credit-risk-related contingent feature." If SCE's credit rating were to fall below investment grade, SCE may be required to pay the derivative liability or post additional collateral. The aggregate fair value of all derivative liabilities with these credit-risk-related contingent features was $213 million and $91 million, as of March 31, 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 March 31, 2010, SCE would be required to post $16 million of collateral.


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 the 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 the consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive income until the related forecasted transaction occurs.

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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.


Notional Volumes of Derivative Instruments

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

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

  Cash Flow
Hedges

  Economic
Hedges

  Trading
Activities

 
   
 
   
   
   
  (Unaudited)
 
Electricity   Forwards/Futures   Sales   GWh     31,324   1   23,042   3   25,986  
Electricity   Forwards/Futures   Purchases   GWh     65   1   22,364   3   26,011  
Electricity   Capacity   Sales   MW-Day
(in thousands)
    190   2   1   2   395   2
Electricity   Capacity   Purchases   MW-Day
(in thousands)
    4   2   1   2   538   2
Electricity   Congestion   Sales   GWh         136   4   7,871   4
Electricity   Congestion   Purchases   GWh         719   4   131,579   4
Natural gas   Forwards/Futures   Sales   BCF         2.5     40.0  
Natural gas   Forwards/Futures   Purchases   BCF             37.1  
Fuel oil   Forwards/Futures   Sales   Barrels             234,000  
Fuel oil   Forwards/Futures   Purchases   Barrels         375,000     244,000  
   

 

(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

Amortizing forward starting interest rate swap

  Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt   Cash flow     122   December 2025
 

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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 gross fair value of derivative instruments:

March 31, 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

  $ 292   $ 44   $ 336   $ 17   $ 9   $ 26   $ 310  
 

Economic hedges

    257     4     261     231     3     234     27  

Trading activities

    315     146     461     255     75     330     131  
       

    864     194     1,058     503     87     590     468  

Netting and collateral received

   
(670

)
 
(112

)
 
(782

)
 
(502

)
 
(75

)
 
(577

)
 
(205

)
       

Total

  $ 194   $ 82   $ 276   $ 1   $ 12   $ 13   $ 263  
   

December 31, 2009

 
   

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 received

   
(479

)
 
(55

)
 
(534

)
 
(426

)
 
(32

)
 
(458

)
 
(76

)
       

Total

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


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
Three Months
Ended March 31,
   
 
  Income Statement
Location

(in millions)
  2010
  2009
 
 
  (Unaudited)
   

Accumulated other comprehensive income derivative gain at January 1

  $ 175   $ 398    

Effective portion of changes in fair value

    157     249    

Reclassification from accumulated other comprehensive income to net income

    (34 )   (81 ) Operating
revenue
         

Accumulated other comprehensive income derivative gain at March 31

  $ 298   $ 566    
 
1
Unrealized derivative gains are before income taxes. The after-tax amounts recorded in accumulated other comprehensive income at March 31, 2010 and 2009 were $180 million and $342 million, respectively.

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The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EMG recorded net gains of $9 million and none during the first quarters of 2010 and 2009, respectively, representing the amount of cash flow hedge ineffectiveness and are reflected in operating revenues 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
March 31,
 
 
  Income Statement Location
 
(in millions)
  2010
  2009
 
   
 
   
  (Unaudited)
 
Economic hedges   Operating revenue   $ (4 ) $ 14  
    Fuel expense     1      

Trading activities

 

Operating revenue

 

 

47

 

 

10

 
   


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 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 March 31, 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. The bond proceeds were used to repay commercial paper borrowings and for general corporate purposes.

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 $135.3 million construction loan that is required to be converted to a 15-year amortizing term loan by May 31, 2011, subject to specific conditions. As of March 31, 2010, there was $47 million outstanding under the construction loan at a weighted average interest rate of 3.24%.

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Table of Contents

EMG consolidated the Ambit project in the first quarter of 2010. At March 31, 2010, this project had $71 million of bonds payable. 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 quarter ended March 31, 2010 was 0.23%. Annual maturities of this debt at March 31, 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.


Credit Agreements and Short-Term Debt

SCE's short-term debt is generally used to finance fuel inventories, balancing account under-collections and general, temporary cash requirements including power purchase payments. At March 31, 2010, the outstanding short-term debt was $180 million at a weighted-average interest rate of .28%. This short-term debt was supported by a $2.4 billion credit line. At December 31, 2009, the outstanding short-term debt was zero.

Edison International (parent) short-term debt is generally used to finance operating expenses and dividends. At March 31, 2010, the outstanding short-term debt was $97 million at a weighted-average interest rate of .61%. At December 31, 2009, the outstanding short-term debt was $85 million at a weighted-average interest rate of .60%.


Letters of Credit

As of March 31, 2010, letters of credit under EME and its subsidiaries' credit facilities aggregated $128 million and are scheduled to expire as follows: $77 million in 2010 and $51 million in 2011. Letters of credit under SCE's credit facility aggregated $82 million and are scheduled to expire in 2010.


Note 4. Income Taxes

Edison International's effective tax rates were 39% and 33% (excluding income attributable to non-controlling interests) for the three months ended March 31, 2010 and 2009, respectively. The increase in the effective tax rate was primarily due to a $39 million non-cash charge recorded in the first quarter of 2010 to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in March 2010, partially offset by higher property-related flow-through tax deductions in 2010 at SCE. The Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, was enacted in March 2010. The new health care legislation 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.

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.

EMG applied for U.S. Treasury grants in January 2010 for Phase II of the Goat Wind and High Lonesome wind projects in lieu of investment tax credits and received proceeds, pursuant to these applications, of approximately $92 million from the U.S. Treasury Department in April 2010.

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Table of Contents


Accounting for Uncertainty in Income Taxes

Unrecognized tax benefits increased $119 million during the first quarter of 2010 mainly as a result of tax positions taken for a prior period.


Note 5. Compensation and Benefit Plans

Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

For the three months ended March 31, 2010, Edison International made 2010 plan year contributions of $22 million and expects to make $86 million of additional contributions during the remainder of 2010. SCE recovers contributions made to most of its pension plans through CPUC-approved regulatory mechanisms. Annual contributions to these plans are expected to be, at a minimum, equal to the related annual expense.

Expense components are:

 
  Three Months Ended
March 31,

 
 
     
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Service cost

  $ 34   $ 32  

Interest cost

    54     52  

Expected return on plan assets

    (52 )   (42 )

Amortization of prior service cost

    2     4  

Amortization of net loss

    7     14  
       

Expense under accounting standards

    45     60  

Regulatory adjustment – deferred

    (14 )   (37 )
       

Total expense recognized

  $ 31   $ 23  
   


Postretirement Benefits Other Than Pensions

For the three months ended March 31, 2010, Edison International made 2010 plan year contributions of $5 million and expects to make $40 million of additional 2010 plan year contributions during the remainder of 2010. SCE's annual contributions are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to its total annual expense.

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Expense components are:

 
  Three Months Ended
March 31,

 
 
     
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Service cost

  $ 8   $ 11  

Interest cost

    31     36  

Expected return on plan assets

    (25 )   (21 )

Amortization of prior service cost (credit)

    (9 )   (8 )

Amortization of net loss

    8     16  
       

Total expense

  $ 13   $ 34  
   


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 "Other operation and maintenance" on the consolidated statements of income) was $8 million and $5 million for the three months ended March 31, 2010 and 2009, respectively. The income tax benefit recognized in the consolidated statements of income was $3 million and $2 million for the three months ended March 31, 2010 and 2009, respectively. Consistent with SCE's 2009 GRC, no stock-based compensation was capitalized beginning in 2009. Excess tax benefits included in "Stock-based compensation – net" in the financing section of the consolidated statements of cash flows were $1 million and $2 million for the three months ended March 31, 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

    3,614,245     33.30              

Forfeited

    (83,309 )   30.68              

Exercised

    (192,752 )   24.06              
                   

Outstanding at March 31, 2010

    20,706,216     32.43     6.80        
             

Vested and expected to vest at March 31, 2010

    20,202,155     32.44     6.75   $ 108,832,209  
       

Exercisable at March 31, 2010

    12,034,622     32.40     5.25     75,496,476  
   

Cash outflows to purchase Edison International shares in the open market to settle stock option exercises were $7 million and $4 million for the three months ended March 31, 2010 and 2009, respectively. Cash inflows from participants to exercise stock options were $5 million and $3 million for

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the three months ended March 31, 2010 and 2009, respectively. The tax benefit realized from options exercised was less than $1 million for each of the three months ended March 31, 2010 and 2009.


Performance Shares

The following is a summary of the status of Edison International nonvested performance shares classified as equity awards:

 
  Performance Shares
  Weighted-Average
Grant-Date
Fair Value

 
   
 
  (Unaudited)
 

Nonvested at December 31, 2009

    343,452   $ 35.41  

Granted

    136,831     32.50  

Forfeited

    (66,625 )   56.45  
             

Nonvested at March 31, 2010

    413,658     31.06  
   

The following is a summary of the status of Edison International nonvested performance shares classified as liability awards (the current portion is reflected in the caption "Other current liabilities" and the long-term portion is reflected in "Accumulated provision for pensions and benefits" on the consolidated balance sheets):

 
  Performance Shares
  Weighted-Average
Fair Value

 
   
 
  (Unaudited)
 

Nonvested at December 31, 2009

    343,452        

Granted

    136,831        

Forfeited

    (66,625 )      
             

Nonvested at March 31, 2010

    413,658   $ 25.96  
   

There were no performance shares settled in 2009 or 2010.


Note 6. Commitments and Contingencies

Other Commitments

At March 31, 2010, EMG's subsidiaries had firm commitments to spend approximately $462 million during the remainder of 2010 on capital and construction expenditures. These expenditures primarily relate to the construction of wind projects and non-environmental improvements at the fossil-fueled facilities. 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.

EMG has entered into various turbine supply agreements with vendors to support its wind development efforts. As of March 31, 2010, EMG had commitments to purchase 129 wind turbines (268 MW) and had 13 wind turbines (33 MW) in storage to be used for future wind projects. EMG has 59 wind turbines (102 MW) available for future projects, excluding turbines allocated to projects in construction and pending construction and turbines subject to a legal dispute. EMG has payment commitments related to the 59 wind turbines of $82 million remaining in 2010 and $4 million due in 2011.

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EMG's turbine supply agreement with Mitsubishi Power Systems Americas, Inc. is subject to a legal dispute. EMG has made deposits of $68 million for the purchase of 83 wind turbines (199 MW) under this agreement. The resolution of this dispute could impact future payments due under this agreement. The remaining payments under this agreement subject to dispute are $289 million, mostly related to undelivered wind turbines. For additional information regarding this dispute, see "Legal Proceedings" in Part II of this quarterly report.

At March 31, 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 $1.0 billion, summarized as follows: $351 million for the remainder of 2010, $389 million in 2011, $247 million in 2012, and $33 million in 2013.

At March 31, 2010, Midwest Generation and Homer City 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 $369 million, summarized as follows: $198 million for the remainder of 2010, and $171 million in 2011.

EME and SCE 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 obligation 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

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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 217 cases for which Midwest Generation was potentially liable and that had not been settled and dismissed at March 31, 2010. Midwest Generation had recorded a $50 million liability at March 31, 2010 for previous, pending and future claims.

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 the obligations 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 March 31, 2010, EME had recorded a liability of $58 million (of which $20 million is classified as a current liability) 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

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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.


Indemnity Provided as Part of the Acquisition of Mountainview

In connection with the acquisition of Mountainview, 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

SCE's 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, this water 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 guarantee.


Other Edison International Indemnities

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


Contingencies

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

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Environmental Developments

For a more complete discussion of Edison International's environmental contingencies, refer to "Environmental Regulation of Edison International and Subsidiaries" in the 2009 Form 10-K.


Midwest Generation Environmental Compliance Plans and Costs

During the first quarter of 2010, Midwest Generation continued its permitting and planning activities for installation of SNCR technology on multiple units to meet the NOx portion of the Combined Pollutant Standard ("CPS"). In addition, work continues on analysis and evaluation of FGD technology using dry scrubbing with sodium-based sorbents as a method to comply with the SO2 portion of the CPS. Midwest Generation may combine the use of dry scrubbing using sodium-based sorbents with upgrades to unit particulate removal systems to meet environmental regulations.

Testing of FGD technology based on dry scrubbing with sodium-based sorbents demonstrated significant reductions in SO2 emissions when using the low-sulfur coal employed by Midwest Generation; however, further analysis and evaluation is required to determine the appropriate method to comply with the SO2 portion of the CPS. Use of FGD technology based on dry scrubbing with sodium-based sorbents in combination with Midwest Generation's use of low-sulfur coal 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 the plants. If Midwest Generation utilizes dry scrubbing with sodium-based sorbents to meet environmental regulations, it will likely need to upgrade its particulate removal systems.

Midwest Generation cannot predict what specific method of SO2 removal will be used or the total costs that will be incurred to comply with the CPS. A decision regarding whether or not to proceed with the above or other approaches to compliance remains subject to further analysis and the evaluation of factors, such as market conditions, regulatory and legislative developments, and forecasted capital and operating costs. 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, the particular controls that will be installed, and the resulting capital commitments may not occur until 2012 for some of the units and potentially later for others. Midwest Generation could also elect to shut down units, instead of installing controls to be in compliance with the CPS. Midwest Generation continues to evaluate various scenarios and cannot predict the extent of shutdowns and retrofits or the particular combination of retrofits and shutdowns it may ultimately employ to comply with the CPS.


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 future environmental regulations. 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.

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Greenhouse Gas Regulation Developments

The nature of future environmental regulation and legislation will have a substantial impact on Edison International and its subsidiaries. Edison International believes that resolution of current uncertainties about the future, through well-balanced and appropriately flexible regulation and legislation, is needed to support the necessary evolution of the electric industry into using cleaner, more efficient infrastructure and to attract the capital ultimately needed for this effort. Legislative, regulatory, and legal developments related to potential controls over greenhouse gas-emissions in the United States are ongoing. Actions to limit or reduce greenhouse gas emissions could significantly increase the cost of generating electricity from fossil fuels. In the case of utilities, like SCE, these costs are generally borne by customers, whereas the increased costs for competitive generators, like EMG, may not be recovered through market prices for electricity.


Once-Through Cooling

On May 4, 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 gas-fired power plants along the California coast. The final policy requires an independent engineering study to be conducted 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. It may also significantly impact SCE's ability to procure generating capacity from fossil-fuel plants that use ocean water in once-through cooling systems. As a consequence, system reliability and the cost of electricity may be impacted 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.


Environmental Remediation

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 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 additional costs would be recovered from customers or that Edison International's financial position, results of operations and cash flows would not be materially affected.

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.

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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 March 31, 2010, Edison International's recorded estimated minimum liability to remediate its 28 identified sites at SCE (23 sites) and EME (5 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 $171 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 $32 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 less than $1 million and $3 million for the three months ended March 31, 2010 and 2009, respectively.

Based on currently available information, Edison International believes it is unlikely that it will incur amounts in excess of the upper limit of the estimated range for its identified sites and, based upon the CPUC's regulatory treatment of environmental remediation costs incurred at SCE, Edison International believes that costs ultimately recorded will not materially affect its results of operations, financial position or cash flows. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates.


Federal and State Income Taxes

Edison International's federal income tax returns are currently under active examination by the IRS for tax years 2003 through 2006 and are subject to examination through tax year 2009. Edison International's California and other state income tax returns remain open for tax years 1986 through 2009.

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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 revenue requirement by $107 million, or 24%, over the 2009 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: 125 basis point adder for both DPV2 and Tehachapi, and a 75 basis point adder for Rancho Vista. The CPUC filed an appeal of this order, which had been stayed pending final resolution by 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. SCE may seek a rehearing of the order. The order did not have a material impact on SCE's earnings or cash flows. The outcomes of the 2009 and 2010 CWIP proceedings are still pending. The 2010 CWIP revenue requirements are expected to be collected in rates beginning on June 1, 2010. The collected 2008 and 2009 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

On May 6, 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 non-attainment NSR requirements to the alleged PSD violations. It also adds two prior owners of the Homer City facilities as parties.


Background

On June 12, 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 DOJ files suit, litigation could take many years to resolve the issues alleged in the NOV. EMG cannot predict the outcome of this matter or estimate the impact on its facilities, 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.

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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. The Court gave the plaintiffs a deadline of May 14, 2010 to amend their complaint.

On April 2, 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.


Background

On August 3, 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 DOJ, along with several Chicago-based environmental action groups, had discussions designed to explore the possibility of a settlement but no settlement resulted.

On August 27, 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

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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 would have a material adverse impact on the financial condition and results of operations of EMG. EMG cannot predict the outcome of these matters or estimate the impact on its facilities, 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. In April 2009, in a related case filed in December 1993 against the U.S. Government, the U.S. Supreme Court found that the Navajo Nation did not have a claim for compensation. No trial date has been set for this litigation. SCE cannot predict the outcome of the Tribes' complaints 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 utilities with nuclear facilities issues these policies. If losses at any nuclear facility covered by the arrangement were to exceed the accumulated funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to approximately $43 million per year. Insurance premiums are charged to operating expense.

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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.

On January 29, 2004, SCE, as operating agent, 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. The trial was completed in April 2009 but no decision has been issued. SCE cannot predict the outcome of this proceeding or when a decision will be issued by the Court.


Note 7. Consolidated Statement of Changes in Equity

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

 
  Equity Attributable to
Edison International

  Noncontrolling
Interests

   
 
 
       
 
(in millions)
  Common
Stock

  Accumulated
Other
Comprehensive
Income

  Retained
Earnings

  Subtotal
  Other
  Preferred
and
Preference
Stock

  Total
Equity

 
   
 
  (Unaudited)
 

Balance at December 31, 2009

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

Net income

            236     236         13     249  

Other comprehensive income

        79         79             79  

Deconsolidation of variable interest entities

                    (249 )       (249 )

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

            15     15             15  

Common stock dividends declared ($0.315 per share)

            (103 )   (103 )           (103 )

Dividends, distributions to noncontrolling interests and other

                    (2 )   (13 )   (15 )

Stock-based compensation – net

    2         (2 )                

Noncash stock-based compensation and other

    5         (4 )   1             1  
       

Balance at March 31, 2010

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

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

            250     250     6     13     269  

Other comprehensive income

        104         104             104  

Common stock dividends declared ($0.31 per share)

            (101 )   (101 )           (101 )

Dividends, distributions to noncontrolling interests and other

                    (14 )   (13 )   (27 )

Stock-based compensation – net

    2         (1 )   1             1  

Noncash stock-based compensation and other

    4         (7 )   (3 )           (3 )
       

Balance at March 31, 2009

  $ 2,278   $ 271   $ 7,219   $ 9,768   $ 277   $ 907   $ 10,952  
   


Note 8. Accumulated Other Comprehensive Income

Edison International's accumulated other comprehensive income consists of:

(in millions)
  Unrealized
Gain on
Cash Flow
Hedges

  Pension and
PBOP – Net
Gain (Loss)

  Pension and
PBOP – Prior
Service Cost

  Accumulated
Other
Comprehensive
Income

 
   
 
  (Unaudited)
 

Balance at December 31, 2009

  $ 105   $ (70 ) $ 2   $ 37  

Current period change

    75     4         79  
       

Balance at March 31, 2010

  $ 180   $ (66 ) $ 2   $ 116  
   

Included in accumulated other comprehensive income at March 31, 2010 was $183 million, net of tax, of unrealized gains on commodity-based cash flow hedges. 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 $160 million of the unrealized gains on cash flow hedges, net of tax, at March 31, 2010 are expected to be reclassified into earnings during the next 12 months. Management expects that reclassification of net unrealized gains will increase energy revenue 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 December 31, 2012.

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Note 9. Supplemental Cash Flows Information

Edison International's supplemental cash flows information is:

 
  Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Cash payments (receipts) for interest and taxes

             
 

Interest – net of amounts capitalized

  $ 137   $ 137  
 

Tax payments (receipts)

    10     (33 )

Noncash investing and financing activities

             
 

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

    8     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 non-performance 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 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 traded or over-the-counter traded.

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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 (ICE 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 financial natural gas swaps, fixed to floating swaps, and natural gas physical trades for which SCE obtains the applicable Henry Hub and basis 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 (from one or more brokers) 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. SCE has Level 3 fixed to floating swaps for which SCE obtains the applicable Henry Hub and basis forward market prices from the New York Mercantile Exchange. However, these swaps have contract terms that extend beyond observable market data and the unobservable inputs incorporated in the fair value determination are considered significant compared to the overall swap's fair value.

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 is 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.

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In assessing nonperformance risks, Edison International 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 $4 million and $11 million, respectively, at March 31, 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 March 31, 2010  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting and
collateral1

  Total
 
   
 
  (Unaudited)
 

Assets at Fair Value

                               
 

Money market funds2

  $ 1,114   $   $   $   $ 1,114  
       
 

Derivative contracts

                               
   

Electricity

        342     413     (279 )   476  
   

Natural gas

    5     3     70     (7 )   71  
   

Fuel oil

    11             (11 )    
       
   

Sub-total of commodity contracts

    16     345     483     (297 )   547  
       
 

Long-term disability plan

    9                 9  
       
 

Nuclear decommissioning trusts

                               
   

Stocks3

    1,846                 1,846  
   

Municipal bonds

        652             652  
   

Corporate bonds4

        403             403  
   

U.S. government and agency securities

    253     49             302  
   

Short-term investments, primarily cash equivalents5

    12     23             35  
       
   

Sub-total of nuclear decommissioning trusts

    2,111     1,127             3,238  
       

Total assets6

  $ 3,250   $ 1,472   $ 483   $ (297 ) $ 4,908  
   

Liabilities at Fair Value

                               
 

Derivative contracts:

                               
   

Electricity

  $   $ (80 ) $ (828 ) $ 87   $ (821 )
   

Natural gas

    (1 )   (246 )   (52 )   15     (284 )
       
   

Sub-total of commodity contracts

    (1 )   (326 )   (880 )   102     (1,105 )
       
   

Interest rate contracts

        (6 )           (6 )
       

Net assets (liabilities)

  $ 3,249   $ 1,140   $ (397 ) $ (195 ) $ 3,797  
   

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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 )    
       
   

Sub-total 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  
       
   

Sub-total 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 )
       
   

Sub-total 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 March 31, 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 March 31, 2010 and December 31, 2009, approximately 68% and 67% of the equity investments were located in the United States, respectively.

4
Corporate bonds are diversified. At March 31, 2010 and December 31, 2009, this category included $52 million and $50 million, respectively, for collateralized mortgage obligations and other asset backed securities.

5
Excludes net assets of $10 million and $18 million of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases at March 31, 2010 and December 31, 2009, respectively.

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

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

 
  Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

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

  $ 62   $ (305 )

Total realized/unrealized gains (losses):

             
 

Included in earnings1

    45     146  
 

Included in regulatory assets and liabilities2

    (487 )   388  
 

Included in accumulated other comprehensive income

    6      

Purchases and settlements, net

    (22 )   (85 )

Transfers into or out of Level 3

    (1 )   (3 )
       

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

  $ (397 ) $ 141  
   

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

  $ (422 ) $ 464  
   
1
Reported in "Competitive power generation" revenue on Edison International's consolidated statement 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 $46 million and $73 million for the three months ended March 31, 2010 and 2009, respectively. The remainder of the unrealized gains and losses relate to SCE. See (2) above.

There were no significant transfers between levels during the 1st quarter of 2010. Edison International determines the fair value for transfers in and transfers out of each level as of the end of each reporting period.


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 $46 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

  March 31,
2010

  December 31,
2009

  March 31,
2010

  December 31,
2009

 
   
 
   
  (Unaudited)
 

Stocks

      $ 828   $ 822   $ 1,846   $ 1,772  

Municipal bonds

    2010 – 2047     559     545     652     634  

Corporate bonds

    2010 – 2044     325     309     403     393  

U.S. government and agency securities

    2010 – 2039     284     287     302     308  

Short-term investments and receivables/payables

    2010     43     33     45     33  
             

Total

        $ 2,039   $ 1,996   $ 3,248   $ 3,140  
   
1
Maturity dates as of March 31, 2010.

Trust fund earnings (based on specific identification) increase the trust fund balance and the ARO regulatory liability. Realized gains were $21 million and $74 million for the three months ended March 31, 2010 and 2009, respectively. Realized losses were zero and $62 million for the three months ended March 31, 2010 and 2009, respectively. Proceeds from sales of securities (which are reinvested) were $286 million and $658 million for the three months ended March 31, 2010 and 2009, respectively. Unrealized holding gains, net of losses, were $1.2 billion and $1.1 billion at March 31, 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
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Balance at beginning of period

  $ 3,140   $ 2,524  

Realized gains – net

    21     12  

Unrealized gains – net

    62     (73 )

Other-than-temporary impairment

    (3 )   (94 )

Interest, dividends, contributions and other

    28     30  
       

Balance at end of period

  $ 3,248   $ 2,399  
   

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:

 
  Carrying Amount
  Fair Value
 
 
     
(in millions)
  March 31,
2010

  December 31,
2009

  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Long-term debt, including current portion

  $ 11,071   $ 10,814   $ 10,435   $ 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.


Note 11. Regulatory Assets and Liabilities

Regulatory assets included on the consolidated balance sheets are:

(in millions)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current:

             

Regulatory balancing accounts

  $ 166   $ 94  

Energy derivatives

    136     25  

Other

    1     1  
       

    303     120  
       

Long-term:

             

Regulatory balancing accounts

    51     43  

Deferred income taxes – net

    1,640     1,561  

Unamortized nuclear investment – net

    325     340  

Nuclear-related ARO investment – net

    253     258  

Unamortized coal plant investment – net

    73     73  

Unamortized loss on reacquired debt

    282     287  

Pensions and other postretirement benefits

    1,009     1,014  

Energy derivatives

    826     357  

Environmental remediation

    39     36  

Other

    177     170  
       

    4,675     4,139  
       

Total Regulatory Assets

  $ 4,978   $ 4,259  
   

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Regulatory liabilities included on the consolidated balance sheets are:

(in millions)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current:

             

Regulatory balancing accounts

  $ 282   $ 363  

Other

    6     4  
       

    288     367  
       

Long-term:

             

Regulatory balancing accounts

    750     642  

ARO

    230     171  

Costs of removal

    2,541     2,515  
       

    3,521     3,328  
       

Total Regulatory Liabilities

  $ 3,809   $ 3,695  
   


Note 12. Other Income and Expenses

Other income and expenses are as follows:

 
  Three Months Ended
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Other Income:

             

Equity AFUDC

  $ 27   $ 16  

Increase in cash surrender value of life insurance policies

    6     6  

Other

    1     4  
       

Total utility other income

    34     26  
       

Competitive power generation and parent

         
       

Total other income

  $ 34   $ 26  
       

Other Expense:

             

Civic, political and related activities and donations

  $ 5   $ 4  

Other

    5     4  
       

Total utility other expense

    10     8  
       

Competitive power generation and parent

    (2 )   (2 )
       

Total other expenses

  $ 8   $ 6  
   


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 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

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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 March 31, 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 Edison International. Upon the application of the new authoritative guidance effective January 1, 2010, Edison International deconsolidated two of these projects. See further discussion below in "—Projects that are not Consolidated." In determining that EMG was the primary beneficiary of the 13 projects consolidated at March 31, 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)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Current assets

  $ 62   $ 73  

Net property, plant and equipment1

    690     944  

Other long-term assets

    2     2  
       
 

Total assets1

  $ 754   $ 1,019  
       

Current liabilities

  $ 15   $ 17  

Long-term obligations net of current maturities

    19     20  

Deferred revenues

    57     58  

Other long-term liabilities

    19     21  
       
 

Total liabilities

  $ 110   $ 116  
       

Noncontrolling interests

  $ 5   $ 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 $80 million and $81 million at March 31, 2010 and December 31, 2009, respectively, and primarily consist of property, plant and equipment.

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 contractual agreements (including naming the executive director) and has the obligation to absorb losses and the right to receive benefits from the project. Therefore, under the new guidance, EMG is the primary beneficiary

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which resulted in the consolidation of the Ambit project by Edison International. Total assets consolidated at January 1, 2010 and March 31, 2010 were $99 million and $100 million, respectively. 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 non performance 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, so there is no significant potential maximum exposure to loss as a result of its involvement with the VIEs. For contracts accounted for as a derivative, the potential maximum exposure is limited to the derivative asset balance in the tables below. The aggregate capacity dedicated to SCE for these VIE projects was 1,749 MW at March 31, 2010 and the amounts that SCE paid to these projects were $125 million and $116 million for the three-month periods ended March 31, 2010 and March 31, 2009, respectively. These amounts are recoverable in customer rates.

The following table summarizes as of March 31, 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

  $   $   $ 32   $ 700   $  

Accounts Payable

            40          
       

Total

  $   $   $ 72   $ 700   $  
   

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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  
   


Equity Interests

EMG accounts for domestic energy projects where EMG has a 50% or less ownership interest and cannot exercise unilateral control under the equity method. As of March 31, 2010 and December 31, 2009, EMG had five 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. Commercial and operating activities are jointly controlled by a management committee of each VIE. In addition, the executive director of these projects is provided by EMG's partner. Accordingly, EMG continues to account for its variable interests under the equity method.

As noted above, 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 March 31, 2010:

 
  March 31, 2010  
(in millions)
  Investment
  Maximum
Exposure

 
   
 
  (Unaudited)
 

Natural gas-fired projects

  $ 333   $ 333  

Wind projects

    174     174  
   

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 any recourse to EME. 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 March 31, 2010, entities which EMG has accounted for under the equity method had indebtedness of $144 million, of which $60 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. As discussed above, commercial and operating activities are jointly controlled by a management committee of each VIE. 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 segments. 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
March 31,
 
(in millions)
  2010
  2009
 
   
 
  (Unaudited)
 

Operating Revenue (Loss):

             

Electric utility

  $ 2,159   $ 2,189  

Competitive power generation

    652     624  

Parent and other2

    (1 )   (1 )
       

Consolidated Edison International

    2,810     2,812  
       

Net Income (Loss) attributable to Edison International:

             

Electric utility

    164     208  

Competitive power generation1

    77     48  

Parent and other2

    (5 )   (6 )
       

Consolidated Edison International

  $ 236   $ 250  
   

Segment balance sheet information was:

(in millions)
  March 31,
2010

  December 31,
2009

 
   
 
  (Unaudited)
 

Total Assets:

             

Electric utility

  $ 32,975   $ 32,474  

Competitive power generation

    9,787     9,543  

Parent and other2

    (405 )   (573 )
       

Consolidated Edison International

  $ 42,357   $ 41,444  
   
1
Includes earnings from discontinued operations of $6 million and $3 million for the three months ended March 31, 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.

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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, in each case, 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;

risk of counterparty default in hedging transactions or power-purchase and fuel contracts;

weather conditions, natural disasters and other unforeseen events;

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 Edison International's Annual Report on Form 10-K for the year-ended December 31, 2009 ("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 months ended March 31, 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 months ended March 31, 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 five sections:

Highlights of operating results,

SCE capital program,

Environmental developments,

EMG's renewables programs, 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 on Form 10-K for additional information on these topics.


Highlights of Operating Results

 
  Three Months Ended
March 31,
   
 
(in millions)
  2010
  2009
  Change
 
   

Net Income attributable to Edison International

                   
 

SCE

  $ 164   $ 208   $ (44 )
 

EMG

    77     48     29  
 

Edison International Parent and Other

    (5 )   (6 )   1  
       
 

Edison International Consolidated

    236     250     (14 )
       

Non-Core Items

                   
 

SCE – tax impact of health care legislation

    (39 )       (39 )
 

EMG – lease terminations1

        (11 )   11  
 

EMG discontinued operations

    6     3     3  
       
 

Total non-core items

    (33 )   (8 )   (25 )
       

Core Earnings

                   
 

SCE

    203     208     (5 )
 

EMG

    71     56     15  
 

Edison International Parent and Other

    (5 )   (6 )   1  
       
 

Edison International Consolidated

  $ 269   $ 258   $ 11  
   
1
Includes the impact of termination of two of Edison Capital's cross-border leases.

Edison International's earnings are prepared in accordance with generally accepted accounting principles used in the United States. Management uses core earnings by principal operating subsidiary internally for financial planning and for analysis of performance. Core earnings by principal operating subsidiary are also used when communicating with analysts and investors regarding our earnings results to facilitate comparisons of the Company's performance from period to period. Core earnings are a non-GAAP financial measure and may not be comparable to those of other companies. Core earnings are defined as earnings attributable to Edison International shareholders excluding income or loss from discontinued operations and income or loss from significant discrete items that management does not

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consider representative of ongoing earnings, such as: settlement of prior year tax liabilities and change in tax law; exit activities, including lease terminations, asset impairments, sale of certain assets, early debt extinguishment costs and other activities that are no longer continuing; and non-recurring regulatory or legal proceedings.

SCE's 2010 core earnings decreased from 2009 primarily due to higher operating expense, including the impact of curtailed spending in the first quarter of last year until the 2009 CPUC GRC decision was received in March 2009. This decrease was almost entirely offset by rate base growth and higher capitalized financing costs (AFUDC).

EMG's 2010 core earnings increased from 2009 primarily due to higher distributions from EMG's Doga and March Point natural gas facilities and higher trading income. Mainly offsetting this increase were lower results from EMG's merchant coal plants driven primarily by lower energy prices and higher 2009 unrealized gains, partially offset by lower emission costs and higher capacity prices. Renewable project income was lower mainly due to less wind.

Consolidated non-core items for Edison International included:

A non-cash charge of $39 million to reverse previously recognized federal tax benefits eliminated by the federal health care legislation. The Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, was enacted in March 2010. The new health care legislation 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.

An after-tax loss of $11 million in the first quarter of 2009 from termination of two of Edison Capital's cross-border leases.


SCE Capital Program

SCE's capital program continues to be focused primarily in five areas:

Upgrading and constructing new transmission lines to expand capacity to utilize renewable energy, including the Tehachapi, Devers-Colorado River and Eldorado-Ivanpah projects.

Maintaining reliability and expanding capability of SCE's transmission and distribution system.

Developing and installing up to 250 MW of utility-owned solar photovoltaic generating facilities (generally ranging in size from 1 to 2 MW each) on commercial and industrial rooftops and other space in SCE's service territory.

Replacing steam generators at San Onofre intended to enable operations until at least the end of its initial license period in 2022. During the first quarter of 2010, SCE completed the replacement of the steam generators at San Onofre Unit 2 and Unit 2 was returned to service on April 11, 2010. See "SCE: Results of Operations—Electric Utility Results of Operations—Utility Earning Activities" for discussion of the extended outage at San Onofre Unit 2.

Installing "smart" meters in approximately 5.3 million households and small businesses referred to as Edison SmartConnect™. During the first quarter SCE installed approximately 344,000 smart meters, with cumulative installations totaling approximately 495,000.

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SCE continues to plan to utilize much of the cash generated from its operations and issuance of additional debt and preferred equity for its capital program. During the first quarter of 2010, SCE issued $500 million of long-term debt that matures in 2040.

SCE's capital investments (including accruals) during the first quarter of 2010 totaled $640 million. SCE projects that capital investments will be in the range of $3.3 billion to $4.0 billion in 2010 and the 2010 – 2014 total capital investment spending will be in the range of $18 billion to $21.5 billion. The rate of actual capital spending will be affected by permitting, regulatory, market and other factors as discussed further under "SCE: Liquidity and Capital Resources—Capital Investment Plans" in the 2009 Form 10-K.


Environmental Developments

Midwest Generation Environmental Compliance Plans and Costs

During the first quarter of 2010, Midwest Generation continued its permitting and planning activities for installation of SNCR technology on multiple units to meet the NOx portion of the Combined Pollutant Standard ("CPS"). In addition, work continues on analysis and evaluation of FGD technology using dry scrubbing with sodium-based sorbents as a method to comply with the SO2 portion of the CPS. Midwest Generation may combine the use of dry scrubbing using sodium-based sorbents with upgrades to unit particulate removal systems to meet environmental regulations.

Midwest Generation cannot predict what specific method of SO2 removal will be used or the total costs that will be incurred to comply with the CPS. A decision regarding whether or not to proceed with the above or other approaches to compliance remains subject to further analysis and the evaluation of factors, such as market conditions, regulatory and legislative developments and forecasted capital and operating costs. 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, the particular controls that will be installed, and the resulting capital commitments may not occur until 2012 for some of the units and potentially later for others. Midwest Generation could also elect to shut down units, instead of installing controls, to be in compliance with the CPS. Midwest Generation continues to evaluate various scenarios and cannot predict the extent of shutdowns and retrofits or the particular combination of retrofits and shutdowns it may ultimately employ to comply with the CPS.


California Renewable Energy Developments

In March 2010, CARB issued its preliminary draft Renewable Electricity Standard that would require most retail sellers of electricity in California to procure 33% of their electricity from eligible renewable energy resources by 2020. CARB is seeking comments on its draft from stakeholders and plans to issue proposed regulations during the summer of 2010. 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

On May 4, 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 gas-fired power plants along the California coast. The final policy requires an independent engineering study to be conducted 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. It may also significantly impact SCE's ability to procure generating capacity from fossil-fuel plants that use ocean water in once-through cooling systems. As a consequence, system reliability and the cost of

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electricity may be impacted 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.


EMG Renewables Program

EMG had a development pipeline of potential wind projects with projected installed capacity of approximately 4,000 MW at March 31, 2010. EMG has purchase contracts for 102 MW of wind turbines that are to be used for projects not yet under construction as of March 31, 2010, excluding turbine purchase contracts for 199 MW of wind turbines that are subject to a dispute. EMG plans to deploy these wind turbines when projects meet acceptable financial thresholds, have long-term power sales agreements, and can attract long-term project financing. If EMG is unable to develop such projects on acceptable terms and conditions, certain turbine orders may be terminated, which would result in a material charge.

Mitsubishi Lawsuit

EME filed a complaint in the Superior Court of the State of California against Mitsubishi Power Systems Americas, Inc. and Mitsubishi Heavy Industries, Ltd. with respect to a wind turbine generator supply agreement. Matters under dispute include, among other things, the requirement to purchase and pay the remaining purchase price for 199 MW of wind turbines, including related services and warranties, among other items, in the approximate amount of $289 million. The complaint asks the Court for, among other things, an order finding the supply agreement void and unenforceable and for an award of monetary damages, including return to EME of deposits of $68 million previously made for the units subject to dispute. See "Legal Proceedings" in Part II of this quarterly report.


Parent Company Liquidity

The parent company's liquidity and its ability to pay operating expenses and dividends to common shareholders have historically been dependent on dividends from SCE, tax-allocation payments under its tax-allocation agreements with its subsidiaries, and access to bank and capital markets. Given its subsidiaries' plans to use their current cash flows for their respective capital needs, Edison International (parent) expects to incur additional borrowings to fund its own activities.

At March 31, 2010, Edison International (parent) had approximately $22 million of cash and equivalents on hand. The following table summarizes the status of the Edison International (parent) credit facility at March 31, 2010:

(in millions)
  Edison
International
(parent)

 
   

Commitment

  $ 1,426  

Outstanding borrowings

    (97 )

Outstanding letters of credit

     
       

Amount available

  $ 1,329  
   

Edison International has a debt covenant in its credit facility that requires a consolidated debt to total capitalization ratio of less than or equal to 0.65 to 1. At March 31, 2010, Edison International's consolidated debt to total capitalization ratio was 0.53 to 1.

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SOUTHERN CALIFORNIA EDISON COMPANY

RESULTS OF OPERATIONS

SCE's results of operations are derived mainly through two sources:

Utility earning activities, which mainly represent CPUC-and FERC-authorized base rates, which allow a reasonable return, and CPUC-authorized incentive mechanisms; and

Utility cost-recovery activities, which mainly represent CPUC-authorized balancing accounts, which allow recovery of costs incurred or provide mechanisms to track and recover or refund differences in forecasted and actual amounts. Balancing accounts do not allow for a return.

Utility earning activities include base rates that are designed to recover forecasted operation and maintenance costs, certain capital-related carrying costs, interest, taxes and a return, including the return and taxes on capital projects recovered through balancing account mechanisms. Differences between authorized and actual results impact earnings. Also included in utility earning activities are revenues or penalties related to incentive mechanisms, other operating revenue, and regulatory charges or disallowances, if any.

Utility cost-recovery activities include rates which provide for recovery, subject to reasonableness review, of fuel costs, purchased power costs, public purpose related program costs (including energy efficiency and demand-side management programs), certain operation and maintenance expenses, and depreciation expense related to certain projects. There is no return for cost-recovery expenses.

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Electric Utility Results of Operations

The following table is a summary of SCE's results of operations for the periods indicated. The presentation below separately identifies utility earning activities and utility cost-recovery activities.

 
  Three Months Ended
March 31, 2010

  Three Months Ended
March 31, 2009

 
 
     
(in millions)
  Utility
Earning
Activities

  Utility
Cost-
Recovery
Activities

  Total
Consolidated

  Utility
Earning
Activities

  Utility
Cost-
Recovery
Activities1,2

  Total
Consolidated

 
   

Operating revenue

  $ 1,265   $ 894   $ 2,159   $ 1,204   $ 985   $ 2,189  
       

Fuel and purchased power

        689     689         739     739  

Operation and maintenance

    519     194     713     441     217     658  

Depreciation, decommissioning and amortization

    300     9     309     273     12     285  

Property taxes and other

    68         68     66         66  
         

Total operating expenses

    887     892     1,779     780     968     1,748  
       

Operating income

    378     2     380     424     17     441  

Net interest expense and other

    (72 )   (2 )   (74 )   (82 )   (5 )   (87 )
       

Income before income taxes

    306         306     342     12     354  

Income tax expense

    129         129     121         121  
       

Net income

    177         177     221     12     233  

Net income attributable to noncontrolling interest

                    12     12  

Dividends on preferred and preference stock not subject to mandatory redemption

    13         13     13         13  
       

Net income available for common stock

  $ 164   $   $ 164   $ 208   $   $ 208  
       

Core Earnings3

              $ 203               $ 208  

Non-Core Earnings:

                                     
 

Tax impact of health care legislation

                (39 )                
       

Total SCE GAAP Earnings

              $ 164               $ 208  
   
1
Effective January 1, 2010, SCE deconsolidated the Big 4 projects which affects comparability of cost-recovery activities (see "Edison International Notes to Consolidated Financial Statements Note 13. Variable Interest Entities" for further discussion). Included in the three months ended March 31, 2009 were the following balances related to the Big 4 projects:

(in millions)
  Three Months Ended
March 31, 2009

 
   

Operating revenue

  $ 143  
       

Fuel

    102  

Operation and maintenance

    21  

Depreciation

    8  
       

Total operating expenses

    131  
       

Net Income

  $ 12  
   
2
Effective July 1, 2009, SCE transferred Mountainview Power Company, LLC, to SCE (see "Note 8. Property and Plant" in the 2009 Form 10-K for further discussion). As a result of the transfer and for comparability purposes, Mountainview's 2009 activities ($22 million for both operating revenue and total expenses) were reclassified from cost-recovery activities to utility earnings activities consistent with the 2010 regulatory recovery mechanism.

3
See use of Non-GAAP financial measure in "Edison International Overview—Highlights of Operating Results."

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Utility Earning Activities

2010 vs. 2009

Utility earning activities were primarily affected by the following:

Higher operating revenue of $61 million primarily due to the following:

    $40 million increase due to implementation of the 2009 GRC (effective January 1, 2009) which authorized a 4.25% increase in 2010 authorized revenue.

    $25 million increase resulting from the 2009 and 2010 FERC rate cases effective March 1, 2009 and March 1, 2010, respectively (see "SCE: Liquidity and Capital Resources—Regulatory Proceedings—2010 FERC Rate Case" for further discussion).

Higher operation and maintenance expense of $78 million including the impact of curtailed spending in the first quarter of 2009 until the 2009 CPUC GRC decision was received in March 2009. The increase in operation and maintenance expense was primarily in the following areas:

    $30 million of higher transmission and distribution expenses. In addition to the impact of curtailed spending, the 2010 increase reflects higher costs to support system reliability and infrastructure replacement and increases in preventive maintenance work.

    $20 million of higher 2010 generation expenses reflecting $10 million primarily due to additional work identified during the San Onofre Unit 2 scheduled outage and $10 million primarily due to overhaul and outage costs at Four Corners.

    The first two of the four replacement steam generators were installed in San Onofre Unit 2 in the first quarter of 2010 and the final two are expected to be installed in San Onofre Unit 3 in late 2010. During the San Onofre Unit 2 scheduled outage, SCE identified and completed additional work unrelated to the steam generator replacement that resulted in increased operation and maintenance expense and extended the outage beyond SCE's initial estimated timeframe. San Onofre Unit 2 was returned to service on April 11, 2010.

Higher depreciation expense of $27 million primarily resulting from increased capital investments including capitalized software costs.

Lower net interest expense and other of $10 million primarily due to higher capitalized cost of equity and debt (AFUDC) resulting from a higher capitalization rate and level of construction in progress. See "Edison International Notes to Consolidated Financial Statements Note 12. Other Income and Expenses" for further detail of other income and expenses.

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Utility Cost-Recovery Activities

2010 vs. 2009

Excluding the impact of deconsolidation of the Big 4 projects (see "Edison International Notes to Consolidated Financial Statements Note 13. Variable Interest Entities"), utility cost-recovery activities were primarily affected by:

Higher purchased power expense of $68 million primarily due to: higher QF power-purchase expense of $130 million primarily due to higher natural gas prices and higher kWh purchases; and higher ISO-related energy costs of $70 million, including replacement power costs related to the San Onofre Unit 2 scheduled outage. This was partially offset by lower bilateral energy purchase expense of $65 million primarily due to decreased kWh purchases. Realized losses on economic hedging activities were $24 million in 2010 and $98 million in 2009. Changes in realized losses on economic hedging activities were primarily due to settled natural gas prices being lower than average fixed prices.

Lower fuel expense of $16 million primarily due to lower costs at Four Corners (coal) of $10 million resulting from an outage during the first quarter 2010 and lower costs at San Onofre Unit 2 of $5 million resulting from the first quarter 2010 outage described above.


Supplemental Operating Revenue Information

SCE's total consolidated operating revenue was $2.2 billion for both the three months ended March 31, 2010 and 2009, of which $2.0 billion and $1.9 billion were related to retail billed and unbilled revenue (excluding wholesale sales) for March 31, 2010 and 2009, respectively. During the first quarter of 2010, retail billed and unbilled revenue increased $145 million compared to the first quarter of 2009. The increase reflects a rate increase of $182 million and a sales volume decrease of $37 million. The rate increase was due to higher system average rates for the first quarter of 2010 compared to the first quarter of 2009. Effective April 4, 2009, SCE's overall system average rate increased due to the implementation of both revenue allocation and rate design changes authorized in the 2009 GRC and the FERC transmission rate changes authorized in the 2009 FERC rate case. The sales volume decrease was due to the economic downturn. As a result of the CPUC-authorized decoupling mechanism, SCE does not bear the volumetric risk related to electricity sales (see "Overview of Ratemaking Mechanisms" in the 2009 Form 10-K).

Due to warmer weather during the summer months and SCE's rate design, operating revenue during the third quarter of each year is generally higher than other quarters.

Amounts SCE bills and collects from its customers for electric power purchased and sold by the CDWR to SCE's customers, CDWR bond-related costs and a portion of direct access exit fees are remitted to the CDWR and are not recognized as revenue by SCE. The amounts collected and remitted to CDWR were $296 million and $505 million for the three months ended March 31, 2010 and 2009, respectively. Effective January 1, 2010, the CDWR-related rates were decreased primarily to refund CDWR overcollections to customers.


Effective Income Tax Rates

SCE's effective tax rates were 42% and 35% (excluding income attributable to non-controlling interests) for the three months ended March 31, 2010 and 2009, respectively. The increase in the effective tax rate was primarily due to a $39 million non-cash charge recorded in the first quarter of

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2010 to reverse previously recognized federal tax benefits eliminated by the federal health care legislation enacted in March 2010, partially offset by higher property-related flow-through tax deductions in 2010.


LIQUIDITY AND CAPITAL RESOURCES

SCE expects to fund its continuing obligations and projected capital investments for 2010 through cash and equivalents on hand, operating cash flows and incremental capital market financings of debt and preferred equity. SCE also has availability under its credit facilities if additional funding and liquidity are necessary to meet operating and capital requirements.


Available Liquidity

As of March 31, 2010, SCE had approximately $2.7 billion of available liquidity comprised of cash and equivalents and short-term investments and $2.6 billion available under credit facilities. As of March 31, 2010, SCE's long-term debt, including current maturities of long-term debt, was $7.0 billion.

The following table summarizes the status of SCE's credit facilities at March 31, 2010:

(in millions)
  Credit
Facilities1

 
   

Commitment

  $ 2,894  

Outstanding borrowings

    (180 )

Outstanding letters of credit

    (82 )
       

Amount available

  $ 2,632  
   
1
SCE has two revolving credit facilities with various banks; a $2.4 billion five-year credit facility that terminates in February 2013, with four one-year options to extend by mutual consent, and a $500 million three-year credit facility that terminates in March 2013.


Debt Covenant

SCE has a debt covenant in its credit facilities that limits its debt to total capitalization ratio to less than or equal to 0.65 to 1. At March 31, 2010, SCE's debt to total capitalization ratio was 0.46 to 1.


Regulatory Proceedings

Energy Efficiency Risk/Reward Incentive Mechanism

As discussed in the year-ended 2009 MD&A, the CPUC adopted an Energy Efficiency Risk/Reward Incentive Mechanism applicable to the 2006 – 2008 performance period under which SCE expected to receive a $27 million final payment in late 2010. Settlement negotiations on the 2006 – 2008 energy savings and earnings are expected to begin in late May 2010 and SCE expects a CPUC decision on the final payment, if any, in the second half of 2010. There is no assurance that SCE will receive a final payment.

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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 revenue requirement by $107 million, or 24%, over the 2009 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.