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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2011 |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission File Number 1-9936
EDISON INTERNATIONAL
(Exact name of registrant as specified in its charter)
California | 95-4137452 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
2244 Walnut Grove Avenue (P. O. Box 976) Rosemead, California |
91770 |
|
(Address of principal executive offices) | (Zip Code) | |
(626) 302-2222 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class | Outstanding at April 28, 2011 | |
---|---|---|
Common Stock, no par value | 325,811,206 |
i
ii
iii
iv
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
2010 Form 10-K | Edison International's Annual Report on Form 10-K for the year-ended December 31, 2010 | |
2010 Tax Relief Act | Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 |
|
AFUDC | allowance for funds used during construction | |
Ambit project | American Bituminous Power Partners, L.P. | |
AOI | Adjusted Operating Income (Loss) | |
APS | Arizona Public Service Company | |
ARO(s) | asset retirement obligation(s) | |
BACT | best available control technology | |
BART | best available retrofit technology | |
Bcf | billion cubic feet | |
Big 4 | Kern River, Midway-Sunset, Sycamore and Watson natural gas power projects | |
Btu | British thermal units | |
CAA | Clean Air Act | |
CAIR | Clean Air Interstate Rule | |
CAISO | California Independent System Operator | |
CAMR | Clean Air Mercury Rule | |
CARB | California Air Resources Board | |
Commonwealth Edison | Commonwealth Edison Company | |
CDWR | California Department of Water Resources | |
CEC | California Energy Commission | |
coal plants | Midwest Generation coal plants and Homer City plant | |
CPS | Combined Pollutant Standard | |
CPUC | California Public Utilities Commission | |
CRRs | congestion revenue rights | |
DOE | U.S. Department of Energy | |
EME | Edison Mission Energy | |
EMG | Edison Mission Group Inc. | |
EMMT | Edison Mission Marketing & Trading, Inc. | |
EPS | earnings per share | |
ERRA | energy resource recovery account | |
EWG | Exempt Wholesale Generator | |
Exelon Generation | Exelon Generation Company LLC | |
FASB | Financial Accounting Standards Board | |
FERC | Federal Energy Regulatory Commission | |
FGIC | Financial Guarantee Insurance Company | |
FIP(s) | federal implementation plan(s) | |
Four Corners | coal fueled electric generating facility located in Farmington, New Mexico in which SCE holds a 48% ownership interest |
|
GAAP | generally accepted accounting principles | |
GHG | greenhouse gas | |
Global Settlement | A settlement between Edison International and the IRS that resolved federal tax disputes related to Edison Capital's cross-border, leveraged leases through 2009, and all other outstanding federal tax disputes and affirmative claims for tax years 1986 through 2002 and related matters with state tax authorities. | |
GRC | general rate case | |
GWh | gigawatt-hours | |
HAPs | Hazardous Air Pollutants | |
Homer City | EME Homer City Generation L.P., a Pennsylvania limited partnership that leases and operates three coal-fired electric generating units and related facilities located in Indiana County, Pennsylvania |
v
Illinois EPA | Illinois Environmental Protection Agency | |
IRS | Internal Revenue Service | |
ISO | Independent System Operator | |
kWh(s) | kilowatt-hour(s) | |
LIBOR | London Interbank Offered Rate | |
MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations in this report |
|
Midwest Generation | Midwest Generation, LLC | |
Midwest Generation plants | EME's power plants (fossil fuel) located in Illinois | |
MMBtu | million British thermal units | |
Mohave | two coal fueled electric generating facilities that no longer operate located in Clark County, Nevada in which SCE holds a 56% ownership interest |
|
Moody's | Moody's Investors Service | |
MRTU | Market Redesign and Technology Upgrade | |
MW | megawatts | |
MWh | megawatt-hours | |
NAAQS | national ambient air quality standards | |
NAPP | Northern Appalachian | |
NERC | North American Electric Reliability Corporation | |
Ninth Circuit | U.S. Court of Appeals for the Ninth Circuit | |
NOV | notice of violation | |
NOx | nitrogen oxide | |
NRC | Nuclear Regulatory Commission | |
NSR | New Source Review | |
NYISO | New York Independent System Operator | |
PADEP | Pennsylvania Department of Environmental Protection | |
Palo Verde | large pressurized water nuclear electric generating facility located near Phoenix, Arizona in which SCE holds a 15.8% ownership interest |
|
PBOP(s) | postretirement benefits other than pension(s) | |
PBR | performance-based ratemaking | |
PG&E | Pacific Gas & Electric Company | |
PJM | PJM Interconnection, LLC | |
PRB | Powder River Basin | |
PSD | Prevention of Significant Deterioration | |
QF(s) | qualifying facility(ies) | |
ROE | return on equity | |
RPM | Reliability Pricing Model | |
RTO(s) | Regional Transmission Organization(s) | |
S&P | Standard & Poor's Ratings Services | |
San Onofre | large pressurized water nuclear electric generating facility located in south San Clemente, California in which SCE holds a 78.21% ownership interest |
|
SCE | Southern California Edison Company | |
SNCR | selective non-catalytic reduction | |
SDG&E | San Diego Gas & Electric | |
SEC | U.S. Securities and Exchange Commission | |
SIP(s) | state implementation plan(s) | |
SO2 | sulfur dioxide | |
US EPA | U.S. Environmental Protection Agency | |
VIE(s) | variable interest entity(ies) | |
year-ended 2010 MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the 2010 Form 10-K |
|
vi
Consolidated Statements of Income |
Edison International |
||||||
---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
||||||
(in millions, except per-share amounts, unaudited) |
2011 |
2010 |
|||||
Electric utility |
$ | 2,230 | $ | 2,159 | |||
Competitive power generation |
552 | 652 | |||||
Other |
| (1 | ) | ||||
Total operating revenue |
2,782 | 2,810 | |||||
Fuel |
258 | 295 | |||||
Purchased power |
508 | 608 | |||||
Operations and maintenance |
1,149 | 1,037 | |||||
Depreciation, decommissioning and amortization |
417 | 369 | |||||
Lease terminations and other |
| 3 | |||||
Total operating expenses |
2,332 | 2,312 | |||||
Operating income |
450 | 498 | |||||
Interest and dividend income |
4 | 19 | |||||
Equity in income (loss) from unconsolidated affiliates net |
(5 | ) | 18 | ||||
Other income |
41 | 34 | |||||
Interest expense net of amounts capitalized |
(196 | ) | (168 | ) | |||
Other expenses |
(13 | ) | (8 | ) | |||
Income from continuing operations before income taxes |
281 | 393 | |||||
Income tax expense |
65 | 150 | |||||
Income from continuing operations |
216 | 243 | |||||
Income (loss) from discontinued operations net of tax |
(2 | ) | 6 | ||||
Net income |
214 | 249 | |||||
Dividends on preferred and preference stock of utility |
14 | 13 | |||||
Net income attributable to Edison International common shareholders |
$ | 200 | $ | 236 | |||
Amounts attributable to Edison International common shareholders: |
|||||||
Income from continuing operations, net of tax |
$ | 202 | $ | 230 | |||
Income (loss) from discontinued operations, net of tax |
(2 | ) | 6 | ||||
Net income attributable to Edison International common shareholders |
$ | 200 | $ | 236 | |||
Basic earnings per common share attributable to Edison International common shareholders: |
|||||||
Weighted-average shares of common stock outstanding |
326 | 326 | |||||
Continuing operations |
$ | 0.62 | $ | 0.70 | |||
Discontinued operations |
(0.01 | ) | 0.02 | ||||
Total |
$ | 0.61 | $ | 0.72 | |||
Diluted earnings per common share attributable to Edison International common shareholders: |
|||||||
Weighted-average shares of common stock outstanding, including effect of dilutive securities |
328 | 328 | |||||
Continuing operations |
$ | 0.62 | $ | 0.70 | |||
Discontinued operations |
(0.01 | ) | 0.02 | ||||
Total |
$ | 0.61 | $ | 0.72 | |||
Dividends declared per common share |
$ | 0.320 | $ | 0.315 | |||
The accompanying notes are an integral part of these consolidated financial statements.
1
Consolidated Statements of Comprehensive Income |
Edison International |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
||||||||
(in millions, unaudited) |
2011 |
2010 |
|||||||
Net income |
$ | 214 | $ | 249 | |||||
Other comprehensive income (loss), net of tax: |
|||||||||
Pension and postretirement benefits other than pensions: |
|||||||||
Net gain arising during the period |
| 12 | |||||||
Amortization of net (gain) loss included in net income |
3 | (8 | ) | ||||||
Prior service credit arising during the period |
| 2 | |||||||
Amortization of prior service credit |
| (2 | ) | ||||||
Unrealized gain (loss) on derivatives qualified as cash flow hedges: |
|||||||||
Unrealized holding gain arising during the period, net of income tax expense of $4 and $62 for 2011 and 2010, respectively |
6 | 95 | |||||||
Reclassification adjustments included in net income, net of income tax benefit of $6 and $14 for 2011 and 2010, respectively |
(10 | ) | (20 | ) | |||||
Other comprehensive income (loss) |
(1 | ) | 79 | ||||||
Comprehensive income |
213 | 328 | |||||||
Less: Comprehensive income attributable to noncontrolling interests |
14 | 13 | |||||||
Comprehensive income attributable to Edison International |
$ | 199 | $ | 315 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Consolidated Balance Sheets |
Edison International |
||||||
---|---|---|---|---|---|---|---|
(in millions, unaudited) |
March 31, 2011 |
December 31, 2010 |
|||||
ASSETS |
|||||||
Cash and cash equivalents |
$ | 1,298 | $ | 1,389 | |||
Receivables, less allowances of $87 and $85 for uncollectible accounts at respective dates |
782 | 931 | |||||
Accrued unbilled revenue |
410 | 442 | |||||
Inventory |
586 | 568 | |||||
Prepaid taxes |
533 | 390 | |||||
Derivative assets |
115 | 133 | |||||
Restricted cash |
10 | 2 | |||||
Margin and collateral deposits |
50 | 65 | |||||
Regulatory assets |
407 | 378 | |||||
Other current assets |
145 | 124 | |||||
Total current assets |
4,336 | 4,422 | |||||
Nuclear decommissioning trusts |
3,619 | 3,480 | |||||
Investments in unconsolidated affiliates |
544 | 559 | |||||
Other investments |
232 | 223 | |||||
Total investments |
4,395 | 4,262 | |||||
Utility property, plant and equipment, less accumulated depreciation of $6,488 and $6,319 at respective dates |
25,276 | 24,778 | |||||
Competitive power generation and other property, plant and equipment, less accumulated depreciation of $1,940 and $1,865 at respective dates |
5,437 | 5,406 | |||||
Total property, plant and equipment |
30,713 | 30,184 | |||||
Derivative assets |
355 | 437 | |||||
Restricted deposits |
40 | 47 | |||||
Rent payments in excess of levelized rent expense under plant operating leases |
1,219 | 1,187 | |||||
Regulatory assets |
4,450 | 4,347 | |||||
Other long-term assets |
653 | 644 | |||||
Total long-term assets |
6,717 | 6,662 | |||||
|
|||||||
|
|||||||
|
|||||||
Total assets |
$ |
46,161 |
$ |
45,530 |
|||
The accompanying notes are an integral part of these consolidated financial statements.
3
Edison International |
|||||||
---|---|---|---|---|---|---|---|
Consolidated Balance Sheets |
|
|
|||||
(in millions, except share amounts, unaudited) |
March 31, 2011 |
December 31, 2010 |
|||||
LIABILITIES AND EQUITY |
|||||||
Short-term debt |
$ | 334 | $ | 115 | |||
Current portion of long-term debt |
53 | 48 | |||||
Accounts payable |
1,059 | 1,362 | |||||
Accrued taxes |
54 | 52 | |||||
Accrued interest |
221 | 205 | |||||
Customer deposits |
211 | 217 | |||||
Derivative liabilities |
222 | 217 | |||||
Regulatory liabilities |
778 | 738 | |||||
Other current liabilities |
761 | 998 | |||||
Total current liabilities |
3,693 | 3,952 | |||||
Long-term debt |
12,522 | 12,371 | |||||
Deferred income taxes |
5,908 | 5,625 | |||||
Deferred investment tax credits |
120 | 122 | |||||
Customer advances |
112 | 112 | |||||
Derivative liabilities |
476 | 468 | |||||
Pensions and benefits |
2,282 | 2,260 | |||||
Asset retirement obligations |
2,576 | 2,561 | |||||
Regulatory liabilities |
4,733 | 4,524 | |||||
Other deferred credits and other long-term liabilities |
2,030 | 2,041 | |||||
Total deferred credits and other liabilities |
18,237 | 17,713 | |||||
Total liabilities |
34,452 | 34,036 | |||||
Commitments and contingencies (Note 9) |
|||||||
Common stock, no par value (800,000,000 shares authorized; 325,811,206 shares issued and outstanding at each date) |
2,340 | 2,331 | |||||
Accumulated other comprehensive loss |
(77 | ) | (76 | ) | |||
Retained earnings |
8,413 | 8,328 | |||||
Total Edison International's common shareholders' equity |
10,676 | 10,583 | |||||
Preferred and preference stock of utility |
1,030 | 907 | |||||
Other noncontrolling interests |
3 | 4 | |||||
Total noncontrolling interests |
1,033 | 911 | |||||
Total equity |
11,709 | 11,494 | |||||
Total liabilities and equity |
$ | 46,161 | $ | 45,530 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
Consolidated Statements of Cash Flows |
Edison International |
|||||||
---|---|---|---|---|---|---|---|---|
|
Three months ended March 31, |
|||||||
(in millions, unaudited) |
2011 |
2010 |
||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 214 | $ | 249 | ||||
Less: Income (loss) from discontinued operations |
(2 | ) | 6 | |||||
Income from continuing operations |
216 | 243 | ||||||
Adjustments to reconcile to net cash provided by operating activities: |
||||||||
Depreciation, decommissioning and amortization |
417 | 369 | ||||||
Regulatory impacts of net nuclear decommissioning trust earnings (reflected in accumulated depreciation) |
41 | 38 | ||||||
Other amortization |
37 | 24 | ||||||
Lease terminations and other |
| 3 | ||||||
Stock-based compensation |
7 | 7 | ||||||
Equity in income (loss) from unconsolidated affiliates net |
5 | (18 | ) | |||||
Distributions and dividends from unconsolidated entities |
5 | 22 | ||||||
Deferred income taxes and investment tax credits |
226 | 218 | ||||||
Income from leveraged leases |
(1 | ) | (1 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Receivables |
128 | 150 | ||||||
Inventory |
(18 | ) | (2 | ) | ||||
Margin and collateral deposits net of collateral received |
15 | (6 | ) | |||||
Prepaid taxes |
(143 | ) | (104 | ) | ||||
Other current assets |
(6 | ) | (47 | ) | ||||
Rent payments in excess of levelized rent expense |
(32 | ) | (45 | ) | ||||
Accounts payable |
(49 | ) | (138 | ) | ||||
Accrued taxes |
1 | (6 | ) | |||||
Other current liabilities |
(207 | ) | (182 | ) | ||||
Derivative assets and liabilities net |
106 | 695 | ||||||
Regulatory assets and liabilities net |
(42 | ) | (636 | ) | ||||
Other assets |
(7 | ) | (11 | ) | ||||
Other liabilities |
21 | 20 | ||||||
Operating cash flows from discontinued operations |
(2 | ) | 6 | |||||
Net cash provided by operating activities |
718 | 599 | ||||||
Cash flows from financing activities: |
||||||||
Long-term debt issued |
82 | 541 | ||||||
Long-term debt issuance costs |
(1 | ) | (14 | ) | ||||
Long-term debt repaid |
(9 | ) | (343 | ) | ||||
Preference stock issued |
123 | | ||||||
Short-term debt financing net |
294 | 192 | ||||||
Settlements of stock-based compensation net |
(7 | ) | (1 | ) | ||||
Dividends and distributions to noncontrolling interests |
(13 | ) | (13 | ) | ||||
Dividends paid |
(104 | ) | (103 | ) | ||||
Net cash provided by financing activities |
$ | 365 | $ | 259 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Edison International |
|||||||
---|---|---|---|---|---|---|---|
Consolidated Statements of Cash Flows |
|
|
|||||
|
Three months ended March 31, |
||||||
(in millions, unaudited) |
2011 |
2010 |
|||||
Cash flows from investing activities: |
|||||||
Capital expenditures |
$ | (1,133 | ) | $ | (951 | ) | |
Proceeds from sale of nuclear decommissioning trust investments |
622 | 286 | |||||
Purchases of nuclear decommissioning trust investments and other |
(669 | ) | (335 | ) | |||
Proceeds from partnerships and unconsolidated subsidiaries, net of investment |
5 | 32 | |||||
Investments in other assets |
1 | (54 | ) | ||||
Effect of consolidation and deconsolidation of variable interest entities |
| (91 | ) | ||||
Net cash used by investing activities |
(1,174 | ) | (1,113 | ) | |||
Net decrease in cash and cash equivalents |
(91 | ) | (255 | ) | |||
Cash and cash equivalents, beginning of period |
1,389 | 1,673 | |||||
Cash and cash equivalents, end of period |
$ | 1,298 | $ | 1,418 | |||
The accompanying notes are an integral part of these consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Edison International has two business segments for financial reporting purposes: an electric utility operation segment (SCE) and a competitive power generation segment (EMG). SCE is an investor-owned public utility primarily engaged in the business of supplying electricity to an approximately 50,000-square-mile area of southern California. EMG is the holding company for its principal wholly owned subsidiary, EME. EME is a holding company with subsidiaries and affiliates engaged in the business of developing, acquiring, owning or leasing, operating and selling energy and capacity from independent power production facilities. EME also engages in hedging and energy trading activities in competitive power markets through its Edison Mission Marketing & Trading, Inc. ("EMMT") subsidiary.
Basis of Presentation
Edison International's significant accounting policies were described in Note 1 of "Edison International Notes to Consolidated Financial Statements" included in the 2010 Form 10-K. Edison International follows the same accounting policies for interim reporting purposes, with the exception of accounting principles adopted as of January 1, 2011, discussed below in "New Accounting Guidance." This quarterly report should be read in conjunction with the financial statements and notes included in the 2010 Form 10-K.
In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to fairly state the consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the operating results for the full year.
The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Cash Equivalents
Cash equivalents included investments in money market funds totaling $1.0 billion and $1.1 billion at March 31, 2011 and December 31, 2010, respectively. Generally, the carrying value of cash equivalents equals the fair value, as all investments have maturities of three months or less.
Edison International temporarily invests the ending daily cash balance in its primary disbursement accounts until required for check clearing. Edison International reclassified $207 million and $197 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at March 31, 2011 and December 31, 2010, respectively.
Inventory
Inventory is stated at the lower of cost or market, cost being determined by the weighted-average cost method for fuel, and the average cost method for materials and supplies. Inventory consisted of the following:
(in millions) |
March 31, 2011 |
December 31, 2010 |
|||||
---|---|---|---|---|---|---|---|
Coal, gas, fuel oil and other raw materials |
$ | 204 | $ | 184 | |||
Spare parts, materials and supplies |
382 | 384 | |||||
Total inventory |
$ | 586 | $ | 568 | |||
Earnings Per Share
Edison International computes EPS using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security. Edison International's
7
participating securities are stock-based compensation awards payable in common shares, including stock options, performance shares and restricted stock units, which earn dividend equivalents on an equal basis with common shares. Stock options awarded during the period 2003 through 2006 received dividend equivalents. EPS attributable to Edison International common shareholders was computed as follows:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Basic earnings per share continuing operations: |
|||||||
Income from continuing operations attributable to common shareholders, net of tax |
$ | 202 | $ | 230 | |||
Participating securities dividends |
| (1 | ) | ||||
Income from continuing operations available to common shareholders |
$ | 202 | $ | 229 | |||
Weighted average common shares outstanding |
326 | 326 | |||||
Basic earnings per share continuing operations |
$ | 0.62 | $ | 0.70 | |||
Diluted earnings per share continuing operations: |
|||||||
Income from continuing operations available to common shareholders |
$ | 202 | $ | 229 | |||
Income impact of assumed conversions |
1 | 1 | |||||
Income from continuing operations available to common shareholders and assumed conversions |
$ | 203 | $ | 230 | |||
Weighted average common shares outstanding |
326 | 326 | |||||
Incremental shares from assumed conversions |
2 | 2 | |||||
Adjusted weighted average shares diluted |
328 | 328 | |||||
Diluted earnings per share continuing operations |
$ | 0.62 | $ | 0.70 | |||
Stock-based compensation awards to purchase 8,980,322 and 5,998,238 shares of common stock were outstanding for the three months ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the awards was greater than the average market price of the common shares and, therefore, the effect would have been antidilutive.
New Accounting Guidance
Accounting Guidance Adopted in 2011
RevenueMultiple-Deliverables
In October 2009, the Financial Accounting Standards Board (FASB) issued amended guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenues based on those separate deliverables. This update also requires additional disclosure related to the significant assumptions used to determine the revenue recognition of the separate deliverables. This guidance is required to be applied prospectively to new or significantly modified revenue arrangements. Edison International adopted this guidance effective January 1, 2011. The adoption of this accounting standards update did not have a material impact on Edison International's consolidated results of operations, financial position or cash flows.
Fair Value Measurements and Disclosures
The FASB issued an accounting standards update modifying the disclosure requirements related to fair value measurements. Under these requirements, purchases and settlements for Level 3 fair value measurements are presented on a gross basis, rather than net. Edison International adopted this guidance effective January 1, 2011.
8
Note 2. Consolidated Statements of Changes in Equity
The following table provides the changes in equity for the three months ended March 31, 2011.
|
Equity Attributable to Edison International | Noncontrolling Interests | |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Common Stock |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Subtotal |
Other |
Preferred and Preference Stock |
Total Equity |
|||||||||||||||
Balance at December 31, 2010 |
$ | 2,331 | $ | (76 | ) | $ | 8,328 | $ | 10,583 | $ | 4 | $ | 907 | $ | 11,494 | |||||||
Net income (loss) |
| | 200 | 200 | | 14 | 214 | |||||||||||||||
Other comprehensive loss |
| (1 | ) | | (1 | ) | | | (1 | ) | ||||||||||||
Common stock dividends declared ($0.32 per share) |
| | (104 | ) | (104 | ) | | | (104 | ) | ||||||||||||
Dividends, distributions to noncontrolling interests and other |
| | | | (1 | ) | (14 | ) | (15 | ) | ||||||||||||
Stock-based compensation and other |
2 | | (9 | ) | (7 | ) | | | (7 | ) | ||||||||||||
Noncash stock-based compensation |
7 | | (2 | ) | 5 | | | 5 | ||||||||||||||
Issuance of preference stock |
| | | | | 123 | 123 | |||||||||||||||
Balance at March 31, 2011 |
$ | 2,340 | $ | (77 | ) | $ | 8,413 | $ | 10,676 | $ | 3 | $ | 1,030 | $ | 11,709 | |||||||
The following table provides the changes in equity for the three months ended March 31, 2010:
|
Equity Attributable to Edison International | Noncontrolling Interests | |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Common Stock |
Accumulated Other Comprehensive Income |
Retained Earnings |
Subtotal |
Other |
Preferred and Preference Stock |
Total Equity |
|||||||||||||||
Balance at December 31, 2009 |
$ | 2,304 | $ | 37 | $ | 7,500 | $ | 9,841 | $ | 258 | $ | 907 | $ | 11,006 | ||||||||
Net income |
| | 236 | 236 | | 13 | 249 | |||||||||||||||
Other comprehensive income |
| 79 | | 79 | | | 79 | |||||||||||||||
Deconsolidation of variable interest entities |
| | | | (249 | ) | | (249 | ) | |||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
| | 15 | 15 | | | 15 | |||||||||||||||
Common stock dividends declared ($0.315 per share) |
| | (103 | ) | (103 | ) | | | (103 | ) | ||||||||||||
Dividends, distributions to noncontrolling interests and other |
| | | | (2 | ) | (13 | ) | (15 | ) | ||||||||||||
Stock-based compensation and other |
2 | | (2 | ) | | | | | ||||||||||||||
Noncash stock-based compensation |
5 | | (4 | ) | 1 | | | 1 | ||||||||||||||
Balance at March 31, 2010 |
$ | 2,311 | $ | 116 | $ | 7,642 | $ | 10,069 | $ | 7 | $ | 907 | $ | 10,983 | ||||||||
Note 3. Variable Interest Entities
A variable interest entity ("VIE") is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE.
9
Commercial and operating activities are generally the factors that most significantly impact the economic performance of VIEs in which Edison International has a variable interest. Commercial and operating activities include construction, operation and maintenance, fuel procurement, dispatch and compliance with regulatory and contractual requirements.
Categories of Variable Interest Entities
Projects or Entities that are Consolidated
At March 31, 2011 and December 31, 2010, EMG consolidated 13 wind projects with a total generating capacity of 500 MW that have minority interests held by others. EMG also had a 50% partnership interest in the American Bituminous Power Partners, L.P. project, commonly referred to as the Ambit project.
The following table presents summarized financial information of the projects that were consolidated by EMG:
(in millions) |
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Current assets |
$ | 36 | $ | 26 | ||||
Net property, plant and equipment |
726 | 739 | ||||||
Other long-term assets |
5 | 6 | ||||||
Total assets |
$ | 767 | $ | 771 | ||||
Current liabilities |
$ |
23 |
$ |
25 |
||||
Long-term debt net of current maturities |
70 | 71 | ||||||
Deferred revenues |
72 | 71 | ||||||
Other long-term liabilities |
21 | 21 | ||||||
Total liabilities |
$ | 186 | $ | 188 | ||||
Noncontrolling interests |
$ |
4 |
$ |
4 |
||||
Assets serving as collateral for the debt obligations had a carrying value of $167 million and $163 million at March 31, 2011 and December 31, 2010, respectively, and primarily consist of property, plant and equipment.
Variable Interest in VIEs that are not Consolidated
Power Purchase Contracts
SCE has 16 power purchase agreements ("PPAs") that are considered variable interests in VIEs, including 6 tolling agreements through which SCE provides the natural gas to operate the plants and 10 contracts with QFs that contain variable pricing provisions based on the price of natural gas. SCE has concluded that it is not the primary beneficiary of these VIEs since it does not control the commercial and operating activities of these entities. In general, because payments for capacity are the primary source of income, the most significant economic activity for SCE's VIEs is the operation and maintenance of the power plants.
As of the balance sheet date, the carrying amount of assets and liabilities in SCE's consolidated balance sheet that relate to its involvement with VIEs result from amounts due under the PPAs or the fair value of those derivative contracts. These are accounted for at fair value. Under these contracts, SCE recovers the costs incurred under its approved long-term power procurement plans. SCE has no residual interest in the entities and has not provided or guaranteed any debt or equity support, liquidity arrangements, performance guarantees or other commitments associated with these contracts other than the purchase commitments described in Note 9, so there is no significant potential exposure to loss as a result of SCE's involvement with these VIEs. The aggregate capacity dedicated to SCE for these VIE projects was 3,820 MW at March 31, 2011 and the amounts that SCE paid to these projects were $86 million and $125 million for the three months ended March 31, 2011 and 2010, respectively. These amounts are recovered in customer rates.
10
Equity Interests
EMG accounts for domestic energy projects in which it has a 50% or less ownership interest, and cannot exercise unilateral control, under the equity method. At March 31, 2011 and December 31, 2010, EMG had five significant variable interests in natural gas projects that are not consolidated, consisting of the Big 4 projects (Kern River, Midway-Sunset, Sycamore and Watson) and the Sunrise project. A subsidiary of EMG operates three of the four Big 4 projects and EMG's partner provides the fuel management services. In addition, the executive director of these projects is provided by EMG's partner. Commercial and operating activities are jointly controlled by a management committee of each VIE. Accordingly, EMG continues to account for its variable interests under the equity method.
At March 31, 2011 and December 31, 2010, EMG accounts for its interests in two renewable wind generating facilities, the Elkhorn Ridge and San Juan Mesa projects, under the equity method. The commercial and operating activities of these entities are directed by a management committee composed of representatives of each partner. Thus, EMG is not the primary beneficiary of these projects. In addition, EMG accounts for its interests in a wind project under construction, Community Wind North, under the equity method.
The following table presents the carrying amount of EMG's investments in unconsolidated VIEs and the maximum exposure to loss for each investment:
|
March 31, 2011 | ||||||
---|---|---|---|---|---|---|---|
(in millions) |
Investment |
Maximum Exposure |
|||||
Natural gas-fired projects |
$ | 315 | $ | 315 | |||
Renewable energy projects |
227 | 227 | |||||
EMG's maximum exposure to loss in its VIEs accounted for under the equity method is generally limited to its investment in these entities. Two of EMG's domestic energy projects have long-term debt that is secured by a pledge of assets of the project entity, but does not provide for recourse to EMG. Accordingly, a default under such project financings could result in foreclosure on the assets of the project entity resulting in a loss of some or all of EMG's investment, but would not require EMG to contribute additional capital. At March 31, 2011, entities which EMG has accounted for under the equity method had indebtedness of $115 million, of which $41 million is proportionate to EMG's ownership interest in these two projects.
Note 4. Fair Value Measurements
Recurring Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or liability should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk.
Edison International categorizes financial assets and liabilities into a fair value hierarchy based on valuation inputs used to derive fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
11
The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
|
As of March 31, 2011 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Level 1 |
Level 2 |
Level 3 |
Netting and Collateral1 |
Total |
||||||||||||
Assets at Fair Value |
|||||||||||||||||
Money market funds2 |
$ | 1,044 | $ | | $ | | $ | | $ | 1,044 | |||||||
Derivative contracts: |
|||||||||||||||||
Electricity |
| 68 | 260 | (54 | ) | 274 | |||||||||||
Natural gas |
| 66 | 8 | | 74 | ||||||||||||
Fuel oil |
7 | | | (7 | ) | | |||||||||||
Tolling |
| | 122 | | 122 | ||||||||||||
Subtotal of commodity contracts |
7 | 134 | 390 | (61 | ) | 470 | |||||||||||
Long-term disability plan |
9 | | | | 9 | ||||||||||||
Nuclear decommissioning trusts: |
|||||||||||||||||
Stocks3 |
2,068 | | | | 2,068 | ||||||||||||
Municipal bonds |
| 772 | | | 772 | ||||||||||||
Corporate bonds4 |
| 320 | | | 320 | ||||||||||||
U.S. government and agency securities |
251 | 103 | | | 354 | ||||||||||||
Short-term investments, primarily cash equivalents5 |
| 80 | | | 80 | ||||||||||||
Subtotal of nuclear decommissioning trusts |
2,319 | 1,275 | | | 3,594 | ||||||||||||
Total assets6 |
3,379 | 1,409 | 390 | (61 | ) | 5,117 | |||||||||||
Liabilities at Fair Value |
|||||||||||||||||
Derivative contracts: |
|||||||||||||||||
Electricity |
| 13 | 53 | (14 | ) | 52 | |||||||||||
Natural gas |
| 255 | 7 | (4 | ) | 258 | |||||||||||
Tolling |
| | 374 | | 374 | ||||||||||||
Subtotal of commodity contracts |
| 268 | 434 | (18 | ) | 684 | |||||||||||
Interest rate contracts |
| 14 | | | 14 | ||||||||||||
Total liabilities |
| 282 | 434 | (18 | ) | 698 | |||||||||||
Net assets (liabilities) |
$ | 3,379 | $ | 1,127 | $ | (44 | ) | $ | (43 | ) | $ | 4,419 | |||||
12
|
As of December 31, 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Level 1 |
Level 2 |
Level 3 |
Netting and Collateral1 |
Total |
||||||||||||
Assets at Fair Value |
|||||||||||||||||
Money market funds2 |
$ | 1,100 | $ | | $ | | $ | | $ | 1,100 | |||||||
Derivative contracts: |
|||||||||||||||||
Electricity |
| 70 | 363 | (61 | ) | 372 | |||||||||||
Natural gas |
1 | 69 | 11 | (1 | ) | 80 | |||||||||||
Fuel oil |
8 | | | (8 | ) | | |||||||||||
Tolling |
| | 118 | | 118 | ||||||||||||
Subtotal of commodity contracts |
9 | 139 | 492 | (70 | ) | 570 | |||||||||||
Long-term disability plan |
9 | | | | 9 | ||||||||||||
Nuclear decommissioning trusts: |
|||||||||||||||||
Stocks3 |
2,029 | | | | 2,029 | ||||||||||||
Municipal bonds |
| 790 | | | 790 | ||||||||||||
Corporate bonds4 |
| 346 | | | 346 | ||||||||||||
U.S. government and agency securities |
215 | 73 | | | 288 | ||||||||||||
Short-term investments, primarily cash equivalents5 |
1 | 31 | | | 32 | ||||||||||||
Subtotal of nuclear decommissioning trusts |
2,245 | 1,240 | | | 3,485 | ||||||||||||
Total assets6 |
3,363 | 1,379 | 492 | (70 | ) | 5,164 | |||||||||||
Liabilities at Fair Value |
|||||||||||||||||
Derivative contracts: |
|||||||||||||||||
Electricity |
| 13 | 40 | (21 | ) | 32 | |||||||||||
Natural gas |
| 286 | 11 | (4 | ) | 293 | |||||||||||
Tolling |
| | 344 | | 344 | ||||||||||||
Coal |
| 1 | | (1 | ) | | |||||||||||
Subtotal of commodity contracts |
| 300 | 395 | (26 | ) | 669 | |||||||||||
Interest rate contracts |
| 16 | | | 16 | ||||||||||||
Total liabilities |
| 316 | 395 | (26 | ) | 685 | |||||||||||
Net assets (liabilities) |
$ | 3,363 | $ | 1,063 | $ | 97 | $ | (44 | ) | $ | 4,479 | ||||||
13
The following table sets forth a summary of changes in the fair value of Level 3 assets and liabilities:
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
||||||
Fair value, net asset at beginning of period |
$ | 97 | $ | 62 | ||||
Total realized/unrealized gains (losses): |
||||||||
Included in earnings1 |
| 45 | ||||||
Included in regulatory assets and liabilities2 |
(134 | ) | (487 | ) | ||||
Included in accumulated other comprehensive income |
1 | 6 | ||||||
Purchases |
5 | 6 | ||||||
Settlements |
(11 | ) | (28 | ) | ||||
Transfers in or out of Level 3 |
(2 | ) | (1 | ) | ||||
Fair value, net liability at end of period |
$ | (44 | ) | $ | (397 | ) | ||
Change during the period in unrealized losses related to assets and liabilities held at the end of the period3 |
$ | (139 | ) | $ | (422 | ) | ||
Edison International determines the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no significant transfers between levels during 2011 and 2010.
Valuation Techniques Used to Determine Fair Value
Level 1
Includes assets and liabilities where fair value is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. Financial assets and liabilities classified as Level 1 include exchange-traded equity securities, exchange traded derivatives, U.S. treasury securities and money market funds.
Level 2
Pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the derivative instrument. Financial assets and liabilities utilizing Level 2 inputs include fixed-income securities and over-the-counter derivatives.
Derivative contracts that are over-the-counter traded are valued using pricing models to determine the net present value of estimated future cash flows and are generally classified as Level 2. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary source that best represents traded activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes or prices from exchanges are used to validate and corroborate the primary source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity. Broker quotes are incorporated when corroborated with other information which may include a combination of prices from exchanges, other brokers and comparison to executed trades.
14
Level 3
Includes financial assets and liabilities where fair value is determined using techniques that require significant unobservable inputs. Over-the-counter options, bilateral contracts, capacity contracts, QF contracts, derivative contracts that trade infrequently (such as congestion revenue rights ("CRRs") in the California market and over-the-counter derivatives at illiquid locations), long-term power agreements, and derivative contracts with counterparties that have significant nonperformance risks are generally valued using pricing models that incorporate unobservable inputs and are classified as Level 3. Assumptions are made in order to value derivative contracts in which observable inputs are not available. In circumstances where Edison International cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, Edison International continues to assess valuation methodologies used to determine fair value.
For derivative contracts that trade infrequently (illiquid financial transmission rights and CRRs), changes in fair value are based on models forecasting the value of those contracts. The models' inputs are reviewed and the fair value is adjusted when it is concluded that a change in inputs would result in a new valuation that better reflects the fair value of those derivative contracts. For illiquid long-term power agreements, fair value is based upon the discounting of future electricity and natural gas prices derived from a proprietary model using the risk free discount rate for a similar duration contract, adjusted for credit risk and market liquidity. Changes in fair value are based on changes to forward market prices, including forecasted prices for illiquid forward periods. The fair value of the majority of SCE's derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models which may require SCE to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.
Nonperformance Risk
The fair value of the derivative assets and liabilities are adjusted for nonperformance risk. To assess nonperformance risks, SCE considers the probability of and the estimated loss incurred if a party to the transaction were to default. SCE also considers collateral, netting agreements, guarantees and other forms of credit support when assessing nonperformance. EMG reviews credit ratings of counterparties (and related default rates based on such credit ratings) and prices of credit default swaps. The market price (or premium) for credit default swaps represents the price that a counterparty would pay to transfer the risk of default, typically bankruptcy, to another party. A credit default swap is not directly comparable to the credit risks of derivative contracts, but provides market information of the related risk of nonperformance. The nonperformance risk adjustment represented an insignificant amount at both March 31, 2011 and December 31, 2010.
Nuclear Decommissioning Trusts
SCE's nuclear decommissioning trust investments include equity securities, U.S. treasury securities and other fixed-income securities. Equity and treasury securities are classified as Level 1 as fair value is determined by observable market prices in active or highly liquid and transparent markets. The remaining fixed-income securities are classified as Level 2. The fair value of these financial instruments is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.
Fair Value of Long-Term Debt Recorded at Carrying Value
The carrying amounts and fair values of long-term debt are:
|
March 31, 2011 | December 31, 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||
Long-term debt, including current portion |
$ | 12,575 | $ | 12,314 | $ | 12,419 | $ | 12,360 | |||||
15
Fair values of long-term debt are based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.
The carrying value of trade receivables, payables and short-term debt approximates fair value.
Note 5. Debt and Credit Agreements
Project Financings
In February 2011, EME completed, through its subsidiary, Viento Funding II, Inc., an amendment of its 2009 non-recourse financing of its interests in the Wildorado, San Juan Mesa and Elkhorn Ridge wind projects. The amendment increased the financing amount to $255 million, which included a $227 million ten-year term loan (expiring in December 2020), a $23 million seven-year letter of credit facility and a $5 million seven-year working capital facility. At March 31, 2011, $227 million was outstanding under this loan. The amount of outstanding letters of credit was $13 million. Interest under the term loan accrues at London Interbank Offered Rate (LIBOR) plus 2.75% initially with the rate increasing 0.25% on every fourth anniversary.
Credit Agreements
At March 31, 2011, SCE's outstanding short-term debt was $200 million at a weighted-average interest rate of 0.35%. This short-term debt was supported by a $2.4 billion credit facility. At December 31, 2010, there was no outstanding short-term debt. At March 31, 2011, letters of credit issued under SCE's credit facilities aggregated $73 million and are scheduled to expire in twelve months or less.
As of March 31, 2011, a subsidiary of EMG had a $10 million letter of credit facility with $2 million outstanding letters of credit.
At March 31, 2011, Edison International (Parent)'s outstanding short-term debt was $81 million at a weighted-average interest rate of 0.61%. At December 31, 2010, the outstanding short-term debt was $19 million at a weighted-average interest rate of 0.63%.
Letters of Credit
At March 31, 2011, standby letters of credit under EME's credit facility aggregated $80 million and were scheduled to expire as follows: $53 million in 2011 and $27 million in 2012. In addition, letters of credit under EME's subsidiaries' credit facilities aggregated $41 million, $3 million of which was under the Midwest Generation, LLC (Midwest Generation) credit facility, and were scheduled to expire as follows: $7 million in 2011, $16 million in 2012, $10 million in 2017, and $8 million in 2018. Certain letters of credit are subject to automatic annual renewal provisions.
Note 6. Derivative Instruments and Hedging Activities
Electric Utility
Commodity Price Risk
SCE is exposed to commodity price risk which represents the potential impact that can be caused by a change in the market value of a particular commodity. SCE's hedging program reduces ratepayer exposure to variability in market prices related to SCE's power and gas activities. As part of this program, SCE enters into energy options, swaps, forward arrangements, tolling arrangements and CRRs. These transactions are pre-approved by the CPUC or executed in compliance with CPUC-approved procurement plans. SCE recovers its related hedging costs through the ERRA balancing account, and as a result, exposure to commodity price risk is not expected to impact earnings, but may impact cash flows.
SCE's electricity price exposure arises from electricity purchased from the California wholesale market as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities, power purchase agreements and CDWR contracts allocated to SCE.
16
SCE's natural gas price exposure arises from natural gas purchased for generation at the Mountainview power plant and peaker plants, QF contracts where pricing is based on a monthly natural gas index and power purchase agreements in which SCE has agreed to provide the natural gas needed for generation, referred to as tolling arrangements.
Notional Volumes of Derivative Instruments
The following table summarizes the notional volumes of derivatives used for hedging activities:
|
|
Economic Hedges | |||||||
---|---|---|---|---|---|---|---|---|---|
Commodity |
Unit of Measure |
March 31, 2011 |
December 31, 2010 |
||||||
Electricity options, swaps and forwards |
GWh | 32,795 | 32,138 | ||||||
Natural gas options, swaps and forwards |
Bcf | 208 | 250 | ||||||
Congestion revenue rights |
GWh | 167,668 | 181,291 | ||||||
Tolling arrangements |
GWh | 113,541 | 114,599 | ||||||
Fair Value of Derivative Instruments
The following table summarizes the gross and net fair values of commodity derivative instruments at March 31, 2011:
|
Derivative Assets | Derivative Liabilities | |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Short- Term |
Long- Term |
Subtotal |
Short- Term |
Long- Term |
Subtotal |
Net Liability |
|||||||||||||||
Non-trading activities |
||||||||||||||||||||||
Economic hedges |
$ | 85 | $ | 302 | $ | 387 | $ | 225 | $ | 475 | $ | 700 | $ | 313 | ||||||||
Netting and collateral |
(8 | ) | (13 | ) | (21 | ) | (10 | ) | (14 | ) | (24 | ) | (3 | ) | ||||||||
Total |
$ | 77 | $ | 289 | $ | 366 | $ | 215 | $ | 461 | $ | 676 | $ | 310 | ||||||||
The following table summarizes the gross and net fair values of commodity derivative instruments at December 31, 2010:
|
Derivative Assets | Derivative Liabilities | |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Short- Term |
Long- Term |
Subtotal |
Short- Term |
Long- Term |
Subtotal |
Net Liability |
|||||||||||||||
Non-trading activities |
||||||||||||||||||||||
Economic hedges |
$ | 87 | $ | 367 | $ | 454 | $ | 216 | $ | 449 | $ | 665 | $ | 211 | ||||||||
Netting and collateral |
| | | (4 | ) | | (4 | ) | (4 | ) | ||||||||||||
Total |
$ | 87 | $ | 367 | $ | 454 | $ | 212 | $ | 449 | $ | 661 | $ | 207 | ||||||||
Income Statement Impact of Derivative Instruments
SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and expects to recover these costs from ratepayers. As a result, realized gains and losses are not reflected in earnings, but may temporarily affect cash flows. Due to expected future recovery from ratepayers, unrealized gains and losses are recorded as regulatory assets and liabilities and therefore are also not reflected in earnings. The results of derivative activities and related regulatory offsets are recorded in cash flows from operating activities in the consolidated statements of cash flows.
17
The following table summarizes the components of economic hedging activity:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Realized losses |
$ | (39 | ) | $ | (24 | ) | |
Unrealized losses |
(96 | ) | (581 | ) | |||
Contingent Features/Credit Related Exposure
Certain derivative instruments and power procurement contracts under SCE's power and natural gas hedging activities contain collateral requirements. SCE has historically provided collateral in the form of cash and/or letters of credit for the benefit of counterparties. These requirements can vary depending upon the level of unsecured credit extended by counterparties, changes in market prices relative to contractual commitments and other factors.
Certain of these power contracts contain a provision that requires SCE to maintain an investment grade credit rating from each of the major credit rating agencies, referred to as a "credit-risk-related contingent feature." If SCE's credit rating were to fall below investment grade, SCE may be required to pay the derivative liability or post additional collateral. The aggregate fair value of all derivative liabilities with these credit-risk-related contingent features was $82 million and $67 million as of March 31, 2011 and December 31, 2010, respectively, for which SCE has posted no collateral and $4 million of collateral to its counterparties for the respective periods. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2011, SCE would be required to post $2 million of collateral.
Counterparty Default Risk Exposure
As part of SCE's procurement activities, SCE contracts with a number of utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. If a counterparty were to default on its contractual obligations, SCE could be exposed to potentially volatile spot markets for buying replacement power or selling excess power. In addition, SCE would be exposed to the risk of non-payment of accounts receivable, primarily related to sales of excess energy and realized gains on derivative instruments. However, all of the contracts that SCE has entered into with counterparties are either entered into under SCE's short-term or long-term procurement plan which has been approved by the CPUC, or the contracts are approved by the CPUC before becoming effective. As a result of regulatory recovery mechanisms, losses from non-performance are not expected to affect earnings, but may temporarily affect cash flows.
To manage credit risk, SCE looks at the risk of a potential default by counterparties. Credit risk is measured by the loss that would be incurred if counterparties failed to perform pursuant to the terms of their contractual obligations. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary.
Competitive Power Generation
EMG uses derivative instruments to reduce EMG's exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, EMG's financial results can be affected by fluctuations in interest rates. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that EMG does not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.
Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on Edison International's consolidated balance sheets with offsetting changes recorded on the consolidated statements of income. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, to the extent effective, on Edison International's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive income until the related forecasted
18
transaction occurs. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.
Derivative instruments that are utilized for trading purposes are measured at fair value and included on the consolidated balance sheets as derivative assets or liabilities. Changes in fair value are recognized in operating revenues on the consolidated statements of income.
Where EMG's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, EMG presents its derivative assets and liabilities on a net basis on the consolidated balance sheets.
Notional Volumes of Derivative Instruments
The following table summarizes the notional volumes of derivatives used for hedging and trading activities:
March 31, 2011 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Hedging Activities | |
|||||||||||
Commodity |
Instrument |
Classification |
Unit of Measure |
Cash Flow Hedges |
Economic Hedges |
Trading Activities |
||||||||||
Electricity | Forwards/Futures | Sales | GWh | 16,899 | 1 | 20,400 | 3 | 33,336 | ||||||||
Electricity | Forwards/Futures | Purchases | GWh | 306 | 1 | 21,079 | 3 | 35,455 | ||||||||
Electricity | Capacity | Sales | MW-Day (in thousands) |
186 | 2 | | 123 | 2 | ||||||||
Electricity | Capacity | Purchases | MW-Day (in thousands) |
21 | 2 | | 379 | 2 | ||||||||
Electricity | Congestion | Sales | GWh | | 136 | 4 | 9,244 | 4 | ||||||||
Electricity | Congestion | Purchases | GWh | | 863 | 4 | 146,786 | 4 | ||||||||
Natural gas | Forwards/Futures | Sales | bcf | | | 27.4 | ||||||||||
Natural gas | Forwards/Futures | Purchases | bcf | | | 28.6 | ||||||||||
Fuel oil | Forwards/Futures | Sales | barrels | | | 35,000 | ||||||||||
Fuel oil | Forwards/Futures | Purchases | barrels | | 240,000 | 35,000 | ||||||||||
Coal | Forwards/Futures | Sales | tons | | | 2,731,000 | ||||||||||
Coal | Forwards/Futures | Purchases | tons | | | 2,638,000 | ||||||||||
(in millions) | |||||||||
---|---|---|---|---|---|---|---|---|---|
Instrument |
Purpose |
Type of Hedge |
Notional Amount |
Expiration Date |
|||||
Amortizing interest rate swap | Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt | Cash flow | $ | 92 | June 2016 | ||||
Amortizing interest rate swap |
Convert floating rate (6-month LIBOR) debt to fixed rate (3.415%) debt |
Cash flow |
113 |
December 2020 |
|||||
Amortizing interest rate swap |
Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt |
Cash flow |
122 |
December 2025 |
|||||
Amortizing forward starting interest rate swap |
Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt |
Cash flow |
68 |
March 2026 |
|||||
19
December 31, 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Hedging Activities | |
|||||||||||
Commodity |
Instrument |
Classification |
Unit of Measure |
Cash Flow Hedges |
Economic Hedges |
Trading Activities |
||||||||||
Electricity | Forwards/Futures | Sales | GWh | 16,799 | 1 | 22,456 | 3 | 34,630 | ||||||||
Electricity | Forwards/Futures | Purchases | GWh | 408 | 1 | 22,931 | 3 | 37,669 | ||||||||
Electricity | Capacity | Sales | MW-Day (in thousands) |
190 | 2 | | 136 | 2 | ||||||||
Electricity | Capacity | Purchases | MW-Day (in thousands) |
8 | 2 | | 419 | 2 | ||||||||
Electricity | Congestion | Sales | GWh | | 136 | 4 | 12,020 | 4 | ||||||||
Electricity | Congestion | Purchases | GWh | | 1,143 | 4 | 187,689 | 4 | ||||||||
Natural gas | Forwards/Futures | Sales | bcf | | | 30.6 | ||||||||||
Natural gas | Forwards/Futures | Purchases | bcf | | | 34.3 | ||||||||||
Fuel oil | Forwards/Futures | Sales | barrels | | 250,000 | 10,000 | ||||||||||
Fuel oil | Forwards/Futures | Purchases | barrels | | 490,000 | 10,000 | ||||||||||
Coal | Forwards/Futures | Sales | tons | | | 2,630,500 | ||||||||||
Coal | Forwards/Futures | Purchases | tons | | | 2,645,500 | ||||||||||
(in millions) | |||||||||
---|---|---|---|---|---|---|---|---|---|
Instrument |
Purpose |
Type of Hedge |
Notional Amount |
Expiration Date |
|||||
Amortizing interest rate swap | Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt | Cash flow | $ | 138 | June 2016 | ||||
Amortizing forward starting interest rate swap |
Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt |
Cash flow |
122 |
December 2025 |
|||||
Amortizing forward starting interest rate swap |
Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt |
Cash flow |
68 |
March 2026 |
|||||
Fair Value of Derivative Instruments
The following table summarizes the fair value of derivative instruments reflected on EMG's consolidated balance sheets:
March 31, 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivative Assets | Derivative Liabilities | |
|||||||||||||||||||
|
Net Assets |
|||||||||||||||||||||
(in millions) |
Short-term |
Long-term |
Subtotal |
Short-term |
Long-term |
Subtotal |
||||||||||||||||
Non-trading activities |
||||||||||||||||||||||
Cash flow hedges |
$ | 44 | $ | 6 | $ | 50 | $ | 9 | $ | 23 | $ | 32 | $ | 18 | ||||||||
Economic hedges |
59 | 6 | 65 | 56 | 1 | 57 | 8 | |||||||||||||||
Trading activities |
139 | 96 | 235 | 106 | 26 | 132 | 103 | |||||||||||||||
|
242 | 108 | 350 | 171 | 50 | 221 | 129 | |||||||||||||||
Netting and collateral received1 |
(204 | ) | (42 | ) | (246 | ) | (164 | ) | (35 | ) | (199 | ) | (47 | ) | ||||||||
Total |
$ | 38 | $ | 66 | $ | 104 | $ | 7 | $ | 15 | $ | 22 | $ | 82 | ||||||||
20
December 31, 2010 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Derivative Assets | Derivative Liabilities | |
|||||||||||||||||||
|
Net Assets |
|||||||||||||||||||||
(in millions) |
Short-term |
Long-term |
Subtotal |
Short-term |
Long-term |
Subtotal |
||||||||||||||||
Non-trading activities |
||||||||||||||||||||||
Cash flow hedges |
$ | 54 | $ | 2 | $ | 56 | $ | 10 | $ | 25 | $ | 35 | $ | 21 | ||||||||
Economic hedges |
77 | 2 | 79 | 71 | | 71 | 8 | |||||||||||||||
Trading activities |
184 | 103 | 287 | 148 | 29 | 177 | 110 | |||||||||||||||
|
315 | 107 | 422 | 229 | 54 | 283 | 139 | |||||||||||||||
Netting and collateral received1 |
(269 | ) | (37 | ) | (306 | ) | (223 | ) | (35 | ) | (258 | ) | (48 | ) | ||||||||
Total |
$ | 46 | $ | 70 | $ | 116 | $ | 6 | $ | 19 | $ | 25 | $ | 91 | ||||||||
Income Statement Impact of Derivative Instruments
The following table provides the activity of accumulated other comprehensive income, containing information about the changes in the fair value of cash flow hedges, to the extent effective, and reclassification from accumulated other comprehensive income into results of operations:
|
Cash Flow Hedge Activity1 Three Months Ended March 31, |
|
||||||
---|---|---|---|---|---|---|---|---|
|
Income Statement Location |
|||||||
(in millions) |
2011 |
2010 |
||||||
Accumulated other comprehensive income derivative gain at January 1 |
$ | 27 | $ | 175 | ||||
Effective portion of changes in fair value |
10 | 157 | ||||||
Reclassification from accumulated other comprehensive income to net income |
(16 | ) | (34 | ) | Competitive power generation | |||
Accumulated other comprehensive income derivative gain at March 31 |
$ | 21 | $ | 298 | ||||
For additional information related to accumulated other comprehensive income, see Note 11.
The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EMG recorded net gains of $2 million and $9 million during the first quarters of 2011 and 2010, respectively, in competitive power generation revenues on the consolidated statements of income representing the amount of cash flow hedge ineffectiveness.
The effect of realized and unrealized gains (losses) from derivative instruments used for economic hedging and trading purposes on the consolidated statements of income is presented below:
|
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|---|
(in millions) |
Income Statement Location |
2011 |
2010 |
||||||
Economic hedges |
Competitive power generation | $ | 6 | $ | (4 | ) | |||
|
Fuel | 6 | 1 | ||||||
Trading activities |
Competitive power generation |
16 |
47 |
||||||
21
Contingent Features
Certain derivative instruments contain margin and collateral deposit requirements. Since EMG's credit ratings are below investment grade, EMG has provided collateral in the form of cash and letters of credit for the benefit of derivative counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features was in an asset position at March 31, 2011 and, accordingly, the contingent features described below do not currently have liquidity exposure. Certain derivative contracts do not require margin, but contain provisions that require EMG or Midwest Generation to comply with the terms and conditions of their respective credit facilities. The credit facilities each contain financial covenants. Some hedge contracts include provisions related to a change in control or material adverse effect resulting from amendments or modifications to the related credit facility. Failure by EMG or Midwest Generation to comply with these provisions may result in a termination event under the hedge contracts, enabling the counterparties to terminate and liquidate all outstanding transactions and demand immediate payment of amounts owed to them. EMMT has hedge contracts that do not require margin, but provide that each party can request additional credit support in the form of adequate assurance of performance in the case of an adverse development affecting the other party. Future increases in power prices could expose EMG, Midwest Generation or EMMT to termination payments or additional collateral postings under the contingent features described above.
Margin and Collateral Deposits
Margin and collateral deposits include cash deposited with counterparties and brokers, and cash received from counterparties and brokers as credit support under energy contracts. The amount of margin and collateral deposits generally varies based on changes in the fair value of the related positions. Edison International nets counterparty receivables and payables where balances exist under master netting agreements. Edison International presents the portion of its margin and collateral deposits netted with its derivative positions on its consolidated balance sheets. The following table summarizes margin and collateral deposits provided to and received from counterparties:
(in millions) |
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Collateral provided to counterparties: |
||||||||
Offset against derivative liabilities |
$ | 5 | $ | 8 | ||||
Reflected in margin and collateral deposits |
50 | 65 | ||||||
Collateral received from counterparties: |
||||||||
Offset against derivative assets |
48 | 52 | ||||||
22
Effective Tax Rate
The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision from continuing operations.
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
||||||
Income from continuing operations before income taxes |
$ | 281 | $ | 393 | ||||
Provision for income tax at federal statutory rate of 35% |
98 | 138 | ||||||
Increase (decrease) in income tax from: |
||||||||
State tax net of federal benefit |
9 | 14 | ||||||
Health care legislation1 |
| 39 | ||||||
Production and housing credits |
(18 | ) | (15 | ) | ||||
Property-related and other |
(24 | ) | (26 | ) | ||||
Total income tax expense from continuing operations |
$ | 65 | $ | 150 | ||||
Effective tax rate |
23 | % | 38 | % | ||||
The CPUC requires flow-through ratemaking treatment for the current tax benefit arising from certain property-related and other temporary differences which reverse over time. The accounting treatment for these temporary differences results in recording regulatory assets and liabilities for amounts that would otherwise be recorded to deferred income tax expense.
Accounting for Uncertainty in Income Taxes
Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained on audit. The guidance requires the disclosure of all unrecognized tax benefits, which includes both the reserves recorded for tax positions on filed tax returns and the unrecognized portion of affirmative claims.
Unrecognized Tax Benefits
The following table provides a reconciliation of unrecognized tax benefits:
(in millions) |
2011 |
2010 |
||||||
---|---|---|---|---|---|---|---|---|
Balance at January 1, |
$ | 565 | $ | 664 | ||||
Tax positions taken during the current year: |
||||||||
Increases |
20 | 16 | ||||||
Tax positions taken during a prior year: |
||||||||
Increases |
| 123 | ||||||
Decreases |
(5 | ) | (20 | ) | ||||
Balance at March 31, |
$ | 580 | $ | 783 | ||||
As of March 31, 2011 and December 31, 2010, respectively, if recognized, $460 million and $455 million of the unrecognized tax benefits would impact the effective tax rate.
23
Edison International's federal income tax returns and its California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 are currently under review by the Franchise Tax Board. The IRS examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included proposed adjustments for the following two items:
Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011.
Accrued Interest and Penalties
The total amount of accrued interest and penalties related to Edison International's income tax liabilities was $217 million and $213 million as of March 31, 2011 and December 31, 2010, respectively.
The net after-tax interest and penalties recognized in income tax expense was $3 million and $15 million for the three months ended March 31, 2011 and 2010, respectively.
Note 8. Compensation and Benefit Plans
Pension Plans and Postretirement Benefits Other Than Pensions
Pension Plans
During the three months ended March 31, 2011, Edison International made 2010 plan year contributions of $2 million, 2011 plan year contributions of $28 million and expects to make $4 million of additional 2010 plan year contributions and $96 million of additional 2011 plan year contributions during the remainder of 2011. Annual contributions made to most of SCE's pension plans are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the annual expense.
Expense components are:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Service cost |
$ | 43 | $ | 34 | |||
Interest cost |
52 | 54 | |||||
Expected return on plan assets |
(60 | ) | (52 | ) | |||
Amortization of prior service cost |
2 | 2 | |||||
Amortization of net loss |
6 | 7 | |||||
Expense under accounting standards |
43 | 45 | |||||
Regulatory adjustment deferred |
(6 | ) | (14 | ) | |||
Total expense recognized |
$ | 37 | $ | 31 | |||
Postretirement Benefits Other Than Pensions
During the three months ended March 31, 2011, Edison International made 2011 plan year contributions of $6 million and expects to make $50 million of additional contributions during the remainder of 2011. Annual contributions made to SCE plans are recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the annual expense.
24
Expense components are:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Service cost |
$ | 11 | $ | 8 | |||
Interest cost |
33 | 31 | |||||
Expected return on plan assets |
(28 | ) | (25 | ) | |||
Amortization of prior service cost (credit) |
(9 | ) | (9 | ) | |||
Amortization of net loss |
9 | 8 | |||||
Total expense |
$ | 16 | $ | 13 | |||
Stock-Based Compensation
During the first quarter of 2011, Edison International granted its 2011 stock-based compensation awards, which included stock options, performance shares and restricted stock units.
Stock Options
The following is a summary of the status of Edison International stock options:
|
|
Weighted-Average | |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Stock options |
Exercise Price |
Remaining Contractual Term (Years) |
Aggregate Intrinsic Value (in millions) |
|||||||||
Outstanding at December 31, 2010 |
19,142,209 | $ | 33.28 | ||||||||||
Granted |
3,228,721 | 37.92 | |||||||||||
Expired |
(51,629 | ) | 48.45 | ||||||||||
Forfeited |
(117,177 | ) | 31.18 | ||||||||||
Exercised |
(508,164 | ) | 25.09 | ||||||||||
Outstanding at March 31, 2011 |
21,693,960 | 34.14 | 6.51 | ||||||||||
Vested and expected to vest at March 31, 2011 |
21,205,360 | 34.15 | 6.46 | $ | 115 | ||||||||
Exercisable at March 31, 2011 |
13,075,275 | 34.35 | 5.02 | 83 | |||||||||
At March 31, 2011, there was $32 million of total unrecognized compensation cost related to stock options, net of expected forfeitures. That cost is expected to be recognized over a weighted-average period of approximately three years.
Performance Shares
The following is a summary of the status of Edison International nonvested performance shares:
|
Equity Awards | |
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Liability Awards | ||||||||||||
|
|
Weighted-Average Grant Date Fair Value |
|||||||||||
|
Shares |
Shares |
Weighted-Average Fair Value |
||||||||||
Nonvested at December 31, 2010 |
415,028 | $ | 30.99 | 415,028 | $ | 34.74 | |||||||
Granted |
144,624 | 31.65 | 144,624 | ||||||||||
Forfeited |
(108,648 | ) | 44.09 | (108,648 | ) | ||||||||
Nonvested at March 31, 2011 |
451,004 | 28.05 | 451,004 | 26.02 | |||||||||
The current portion of nonvested performance shares classified as liability awards is reflected in "Other current liabilities" and the long-term portion is reflected in "Pensions and benefits" on the consolidated balance sheets.
25
At March 31, 2011, there was $7 million (based on the March 31, 2011 fair value of performance shares classified as equity awards) of total unrecognized compensation cost related to performance shares. That cost is expected to be recognized over a weighted-average period of approximately two years.
Restricted Stock Units
The following is a summary of the status of Edison International nonvested restricted stock units granted to SCE employees:
|
Restricted Stock Units |
Weighted-Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Nonvested at December 31, 2010 |
644,796 | $ | 32.18 | ||||
Granted |
241,417 | 37.93 | |||||
Forfeited |
(7,448 | ) | 30.95 | ||||
Paid Out |
(93,831 | ) | 54.85 | ||||
Nonvested at March 31, 2011 |
784,934 | $ | 31.89 | ||||
At March 31, 2011, there was $14 million of total unrecognized compensation cost related to restricted stock units, net of expected forfeitures, which is expected to be recognized as follows: $6 million in 2011, $6 million in 2012 and $2 million in 2013.
Supplemental Data on Stock Based Compensation
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions, except per award amounts) |
2011 |
2010 |
||||||
Stock based compensation expense1 |
$ | 6 | $ | 8 | ||||
Income tax benefits related to stock compensation expense |
2 | 3 | ||||||
Excess tax benefits2 |
2 | 1 | ||||||
Stock options |
||||||||
Cash used to purchase shares to settle options |
19 | 7 | ||||||
Cash from participants to exercise stock options |
13 | 5 | ||||||
Value of options exercised |
6 | 2 | ||||||
Restricted stock units |
||||||||
Value of shares settled |
5 | | ||||||
Tax benefits realized from settlement of awards |
2 | | ||||||
No performance shares were settled as of March 31, 2011 and 2010, respectively.
Note 9. Commitments and Contingencies
Third-Party Power Purchase Agreements
During the first quarter of 2011, SCE entered into a renewable energy power purchase contract which is classified as an operating lease. SCE's additional commitments under this contract are estimated to be: $29 million each year in 2012 2015 and $468 million for the period remaining thereafter.
Other Commitments
Fuel Supply Contracts
At March 31, 2011, Midwest Generation and EMG Homer City Generation L.P. ("Homer City") had commitments to purchase coal from third-party suppliers at fixed prices, subject to adjustment clauses.
26
These commitments are estimated to aggregate $677 million, summarized as follows: $373 million for the remainder of 2011, $255 million in 2012 and $49 million in 2013.
Turbine Commitments
At March 31, 2011, EMG had commitments to purchase wind turbines of $90 million due in 2011. EMG's failure to schedule turbine delivery by June 2011 would result in a termination obligation equal to its turbine deposit, which would result in a $21 million charge against earnings. EMG has identified a project in which to place these turbines. However, there is no assurance that development will be completed and the turbines will be used for this project.
On October 8, 2010, an agreement was reached to settle disputes included in the complaint filed by EMG against Mitsubishi Power Systems Americas, Inc. and Mitsubishi Heavy Industries, Ltd. with respect to a wind turbine generator supply agreement. As a result of this agreement, EMG may elect to deploy up to 60 additional wind turbines (aggregating 144 MW) that were part of the original contract, or may be obligated to make a payment of up to $30 million following the end of the three-year period if it has not elected to deploy the additional turbines and if certain other criteria apply. In April 2011, the 55 MW Pinnacle wind project in West Virginia, which will deploy the 23 wind turbines purchased from Mitsubishi, commenced construction.
Capital Expenditures
At March 31, 2011, EMG's subsidiaries had firm commitments to spend approximately $153 million during the remainder of 2011 on capital and construction expenditures. These expenditures primarily relate to selective non-catalytic reduction ("SNCR") equipment at the Midwest Generation plants, the construction of wind projects and non-environmental improvements at the coal plants. EMG intends to fund these expenditures through project level and turbine vendor financing, U.S. Treasury grants, cash on hand and cash generated from operations.
Guarantees and Indemnities
Edison International's subsidiaries have various financial and performance guarantees and indemnifications which are issued in the normal course of business. As discussed below, these contracts included performance guarantees and indemnifications.
Environmental Indemnities Related to the Midwest Generation Plants
In connection with the acquisition of the Midwest Generation plants, EME agreed to indemnify Commonwealth Edison Company ("Commonwealth Edison") with respect to specified environmental liabilities before and after December 15, 1999, the date of sale. The indemnification claims are reduced by any insurance proceeds and tax benefits related to such claims and are subject to a requirement that Commonwealth Edison takes all reasonable steps to mitigate losses related to any such indemnification claim. This indemnification for environmental liabilities is not limited in term and would be triggered by a valid claim from Commonwealth Edison. Also, in connection with the sale-leaseback transaction related to the Powerton and Joliet Stations in Illinois, EME agreed to indemnify the lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnities, a maximum potential liability cannot be determined. Commonwealth Edison has advised EME that Commonwealth Edison believes it is entitled to indemnification for all liabilities, costs, and expenses that it may be required to bear as a result of the litigation discussed below under "ContingenciesMidwest Generation New Source Review Lawsuit." Except as discussed below, EME has not recorded a liability related to these environmental indemnities.
Midwest Generation entered into a supplemental agreement with Commonwealth Edison and Exelon Generation Company LLC on February 20, 2003 to resolve a dispute regarding interpretation of its reimbursement obligation for asbestos claims under the environmental indemnities set forth in the Asset Sale Agreement. Under this supplemental agreement, Midwest Generation agreed to reimburse Commonwealth Edison and Exelon Generation for 50% of specific asbestos claims pending as of February 2003 and related expenses less recovery of insurance costs, and agreed to a sharing arrangement for liabilities and expenses associated with future asbestos-related claims as specified in the agreement. As a general matter, Commonwealth Edison and Midwest Generation apportion responsibility for future
27
asbestos-related claims based upon the number of exposure sites that are Commonwealth Edison locations or Midwest Generation locations. The obligations under this agreement are not subject to a maximum liability. The supplemental agreement had an initial five-year term with an automatic renewal provision for subsequent one-year terms (subject to the right of either party to terminate); pursuant to the automatic renewal provision, it has been extended until February 2012. There were approximately 228 cases for which Midwest Generation was potentially liable and that had not been settled and dismissed at March 31, 2011. Midwest Generation had recorded a liability of $56 million at March 31, 2011 related to this contract indemnity.
The amounts recorded by Midwest Generation for the asbestos-related liability are based upon a number of assumptions. Future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be higher or lower than projected.
Environmental Indemnity Related to the Homer City Plant
In connection with the acquisition of the Homer City plant, Homer City agreed to indemnify the sellers with respect to specified environmental liabilities before and after the date of sale. Payments would be triggered under this indemnity by a valid claim from the sellers. EME guaranteed this obligation of Homer City. Also, in connection with the sale-leaseback transaction related to the Homer City plant, Homer City agreed to indemnify the lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnity provisions, they are not subject to a maximum potential liability and do not have expiration dates. For discussion of the New Source Review lawsuit filed against Homer City, see "ContingenciesHomer City New Source Review Lawsuit." EME has not recorded a liability related to this indemnity.
Indemnities Provided under Asset Sale and Sale-Leaseback Agreements
The asset sale agreements for the sale of EME's international assets contain indemnities from EME to the purchasers, including indemnification for taxes imposed with respect to operations of the assets prior to the sale and for pre-closing environmental liabilities. Not all indemnities under the asset sale agreements have specific expiration dates. Payments would be triggered under these indemnities by valid claims from the sellers or purchasers, as the case may be. At March 31, 2011, EME had recorded a liability of $44 million related to these matters.
In connection with the sale of various domestic assets, EME has from time to time provided indemnities to the purchasers for taxes imposed with respect to operations of the assets prior to the sale. EME has also provided indemnities to purchasers for items specified in each agreement (for example, specific pre-existing litigation matters and/or environmental conditions). Due to the nature of the obligations under these indemnity agreements, a maximum potential liability cannot be determined.
Not all indemnities under the asset sale agreements have specific expiration dates. Payments would be triggered under these indemnities by valid claims from the sellers or purchasers, as the case may be. No significant amounts are recorded as a liability for these matters.
In connection with the sale-leaseback transactions related to the Homer City plant in Pennsylvania, the Powerton and Joliet Stations in Illinois and, previously, the Collins Station in Illinois, EME and several of its subsidiaries entered into tax indemnity agreements. Although the Collins Station lease terminated in April 2004, Midwest Generation's tax indemnity agreement with the former lease equity investor is still in effect. Under these tax indemnity agreements, these entities agreed to indemnify the lessors in the sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax indemnity agreement, including specified defaults under the respective leases. The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these potential obligations, EME cannot determine a maximum potential liability which would be triggered by a valid claim from the lessors. No significant amounts are recorded as a liability for these matters.
28
Indemnity Provided as Part of the Acquisition of Mountainview
In connection with the acquisition of the Mountainview power plant, SCE agreed to indemnify the seller with respect to specific environmental claims related to SCE's previously owned San Bernardino Generating Station, divested by SCE in 1998 and reacquired as part of the Mountainview acquisition. SCE retained certain responsibilities with respect to environmental claims as part of the original divestiture of the station. The aggregate liability for either party to the purchase agreement for damages and other amounts is a maximum of $60 million. This indemnification for environmental liabilities expires on or before March 12, 2033. SCE has not recorded a liability related to this indemnity.
Mountainview Filter Cake Indemnity
The Mountainview power plant utilizes water from on-site groundwater wells and City of Redlands ("City") recycled water for cooling purposes. Unrelated to the operation of the plant, the groundwater contains perchlorate. The pumping of the water removes perchlorate from the aquifer beneath the plant and concentrates it in the plant's wastewater treatment "filter cake." Use of this impacted groundwater for cooling purposes was mandated by Mountainview's California Energy Commission permit. SCE has indemnified the City for cleanup or associated actions related to groundwater contaminated by perchlorate due to the disposal of filter cake at the City's solid waste landfill. The obligations under this agreement are not limited to a specific time period or subject to a maximum liability. SCE has not recorded a liability related to this indemnity.
Other Edison International Indemnities
Edison International provides other indemnifications through contracts entered into in the normal course of business. These are primarily indemnifications against adverse litigation outcomes in connection with underwriting agreements, and specified environmental indemnities and income taxes with respect to assets sold. Edison International's obligations under these agreements may be limited in terms of time and/or amount, and in some instances Edison International may have recourse against third parties for certain indemnities. The obligated amounts of these indemnifications often are not explicitly stated, and the overall maximum amount of the obligation under these indemnifications cannot be reasonably estimated. Edison International has not recorded a liability related to these indemnities.
Contingencies
In addition to the matters disclosed in these Notes, Edison International is involved in other legal, tax and regulatory proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of business. Edison International believes the outcome of these other proceedings will not materially affect its results of operations or liquidity.
Midwest Generation New Source Review Lawsuit
In August 2009, the United States Environmental Protection Agency ("US EPA") and the State of Illinois filed a complaint in the Northern District of Illinois against Midwest Generation, but not Commonwealth Edison, alleging that Midwest Generation or Commonwealth Edison performed repair or replacement projects at six Illinois coal-fired electric generating stations in violation of the Prevention of Significant Deterioration ("PSD") requirements and of the New Source Performance Standards of the Clean Air Act ("CAA"), including alleged requirements to obtain a construction permit and to install controls sufficient to meet best available control technology ("BACT") emissions rates. The US EPA also alleged that Midwest Generation and Commonwealth Edison violated certain operating permit requirements under Title V of the CAA. Finally, the US EPA alleged violations of certain opacity and particulate matter standards at the Midwest Generation plants. In addition to seeking penalties ranging from $25,000 to $37,500 per violation, per day, the complaint calls for an injunction ordering Midwest Generation to install controls sufficient to meet BACT emissions rates at all units subject to the complaint; to obtain new PSD or New Source Review permits for those units; to amend its applications under Title V of the CAA; to conduct audits of its operations to determine whether any additional modifications have occurred; and to offset and mitigate the harm to public health and the environment caused by the alleged CAA violations. The remedies sought by the plaintiffs in the lawsuit could go well beyond the requirements of the Combined Pollutant Standard ("CPS"). Several Chicago-based environmental action groups have intervened in the case.
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In March 2010, nine of the ten counts related to PSD requirements in the complaint were dismissed, and the tenth count was also dismissed to the extent it sought civil penalties under the CAA, as barred by the applicable statute of limitations. Following those dismissals, the government plaintiffs filed an amended complaint, with claims that attempted to add Commonwealth Edison and EME as defendants and introduce new legal theories to impose liability on Midwest Generation and EME. In March 2011, the court again dismissed the nine PSD claims previously dismissed in 2010, along with claims related to alleged violations of Title V of the CAA to the extent based on the dismissed PSD claims. The court also dismissed all claims asserted against Commonwealth Edison and EME. The court denied a motion to dismiss a claim by the Chicago-based environmental action groups for civil penalties in the remaining PSD claim, but noted that the plaintiffs will be required to convince the court that the statute of limitations should be equitably tolled. The court did not address other counts in the complaint that allege violations of opacity and particulate matter limitations under the Illinois State Implementation Plan and Title V of the CAA. Trial of the liability portion of the case is scheduled to commence June 3, 2013.
An adverse decision could involve penalties and remedial actions that could have a material adverse impact on the financial condition and results of operations of Midwest Generation and EME. EME cannot predict the outcome of these matters or estimate the impact on the Midwest Generation plants, or its and Midwest Generation's results of operations, financial position or cash flows.
Homer City New Source Review Lawsuit
In January 2011, the US EPA filed a complaint in the Western District of Pennsylvania against Homer City, the sale-leaseback owner participants of the Homer City plant, and two prior owners of the Homer City plant. The complaint alleges violations of the PSD and Title V provisions of the CAA and its implementing regulations, including requirements contained in the Pennsylvania State Implementation Plan, as a result of projects in the 1990s performed by prior owners without PSD permits and the subsequent failure to incorporate emissions limitations that meet BACT into the station's Title V operating permit. In addition to seeking penalties ranging from $32,500 to $37,500 per violation, per day, the complaint calls for an injunction ordering Homer City to install controls sufficient to meet BACT emissions rates at all units subject to the complaint; to obtain new PSD or New Source Review permits for those units; to amend its applications under Title V of the CAA; to conduct audits of its operations to determine whether any additional modifications have occurred; and to offset and mitigate the harm to public health and the environment caused by the alleged CAA violations. Pennsylvania Department of Environmental Protection, the State of New York and the State of New Jersey have intervened in the lawsuit.
Also in January 2011, two residents filed a complaint in the Western District of Pennsylvania, on behalf of themselves and all others similarly situated, against Homer City, the sale-leaseback owner participants of the Homer City plant, two prior owners of the Homer City plant, EME, and Edison International, claiming that emissions from the Homer City plant had adversely affected their health and property values. The plaintiffs seek to have their suit certified as a class action and request injunctive relief, the funding of a health assessment study and medical monitoring, compensatory and punitive damages.
In April 2011, Homer City filed motions to dismiss both complaints. An adverse decision could involve penalties, remedial actions and damages that could have a material adverse impact on the financial condition and results of operations of Homer City and EME. EME cannot predict the outcome of these matters or estimate the impact on the Homer City plant, or its and Homer City's results of operations, financial position or cash flows.
Navajo Nation Litigation
The Navajo Nation filed a complaint in June 1999 against SCE, among other defendants, arising out of the coal supply agreement for Mohave. Subsequently, the Hopi Tribe was added as an additional plaintiff. As amended in April 2010, the Navajo Nation's complaint asserts claims for, among other things, interference with fiduciary duties and contractual relations, fraudulent misrepresentations by nondisclosure, and various contract-related claims. The complaint claims that the defendants' actions prevented the Navajo Nation from obtaining the full value in royalty rates for the coal supplied to Mohave. The complaint seeks damages of not less than $600 million, plus interest thereon, and punitive damages of not less than $1 billion. No trial date has been set for this litigation. In April 2009, in a related case filed in December 1993 against the U.S. Government, the U.S. Supreme Court found that the Navajo Nation did not have a claim for compensation. In October 2010, the Hopi Tribe settled all of its claims and the remaining parties
30
agreed to engage in mediation. SCE cannot predict the outcome of the Navajo Nation's complaint against SCE.
Environmental Remediation
Edison International records its environmental remediation liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. Edison International reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operations and maintenance, monitoring and site closure. Unless there is a probable amount, Edison International records the lower end of this reasonably likely range of costs (reflected in "Other long-term liabilities") at undiscounted amounts as timing of cash flows is uncertain.
As of March 31, 2011, Edison International's recorded estimated minimum liability to remediate its 29 identified material sites (sites in which the upper end of the range of costs is at least $1 million) at SCE (24 sites) and EMG (5 sites primarily related to Midwest Generation) was $59 million, of which $52 million was related to SCE, including $20 million related to San Onofre. In addition to its identified material sites, SCE also has 33 immaterial sites for which the total minimum recorded liability was $3 million. Edison International's other subsidiaries have no identified remediation sites. The ultimate costs to clean up Edison International's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process, such as: the extent and nature of contamination; the scarcity of reliable data for identified sites; the varying costs of alternative cleanup methods; developments resulting from investigatory studies; the possibility of identifying additional sites; and the time periods over which site remediation is expected to occur. Edison International believes that, due to these uncertainties, it is reasonably possible that cleanup costs at these identified material sites and immaterial sites could exceed its recorded liability by up to $190 million and $7 million, respectively, all of which is related to SCE. The upper limit of this range of costs was estimated using assumptions least favorable to Edison International among a range of reasonably possible outcomes.
The CPUC allows SCE to recover 90% of its environmental remediation costs at certain sites, representing $28 million of its recorded liability, through an incentive mechanism (SCE may request to include additional sites). Under this mechanism, SCE recovers 90% of cleanup costs through customer rates; shareholders fund the remaining 10%, with the opportunity to recover these costs from insurance carriers and other third parties. SCE has successfully settled insurance claims with all responsible carriers. SCE expects to recover costs incurred at its remaining sites through customer rates. SCE has recorded a regulatory asset of $52 million at March 31, 2011 for its estimated minimum environmental cleanup costs expected to be recovered through customer rates.
Edison International's identified sites include several sites for which there is a lack of currently available information, including the nature and magnitude of contamination, and the extent, if any, that Edison International may be held responsible for contributing to any costs incurred for remediating these sites. Thus, no reasonable estimate of cleanup costs can be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30 years. Remediation costs in each of the next several years are expected to range from $3 million to $18 million. Recorded costs were $4 million and less than $1 million for the three months ended March 31, 2011 and 2010, respectively.
Based on currently available information, Edison International believes it is unlikely that it will incur amounts in excess of the upper limit of the estimated range for its identified sites and, based upon the CPUC's regulatory treatment of environmental remediation costs incurred at SCE, Edison International believes that costs ultimately recorded will not materially affect its results of operations, financial position or cash flows. There can be no assurance, however, that future developments, including additional information about existing sites or the identification of new sites, will not require material revisions to such estimates.
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Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to the amount of available financial protection, which is currently approximately $12.6 billion. SCE and other owners of San Onofre and Palo Verde have purchased the maximum private primary insurance available ($375 million). The balance is covered by a loss sharing program among nuclear reactor licensees. If a nuclear incident at any licensed reactor in the United States results in claims and/or costs which exceed the primary insurance at that plant site, all nuclear reactor licensees could be required to contribute their share of the liability in the form of a deferred premium.
Based on its ownership interests, SCE could be required to pay a maximum of approximately $235 million per nuclear incident. However, it would have to pay no more than approximately $35 million per incident in any one year. If the public liability limit above is insufficient, federal law contemplates that additional funds may be appropriated by Congress. This could include an additional assessment on all licensed reactor operators as a measure for raising further federal revenue.
Property damage insurance covers losses up to $500 million, including decontamination costs, at San Onofre and Palo Verde. Decontamination liability and property damage coverage exceeding the primary $500 million also has been purchased in amounts greater than federal requirements. Additional insurance covers part of replacement power expenses during an accident-related nuclear unit outage. A mutual insurance company owned by entities with nuclear facilities issues these policies. If losses at any nuclear facility covered by the arrangement were to exceed the accumulated funds for these insurance programs, SCE could be assessed retrospective premium adjustments of up to approximately $48 million per year. Insurance premiums are charged to operating expense.
Spent Nuclear Fuel
Under federal law, the Department of Energy ("DOE") is responsible for the selection and construction of a facility for the permanent disposal of spent nuclear fuel and high-level radioactive waste. The DOE did not meet its contractual obligation to begin acceptance of spent nuclear fuel by January 31, 1998. Extended delays by the DOE have led to the construction of costly alternatives and associated siting and environmental issues. Currently, both San Onofre and Palo Verde have interim storage for spent nuclear fuel on site sufficient for the current license period.
In January 2004, SCE, as operating agent of San Onofre, filed a complaint against the DOE in the United States Court of Federal Claims seeking damages for the DOE's failure to meet its obligation to begin accepting spent nuclear fuel from San Onofre. In June 2010, the United States Court of Federal Claims issued a decision granting SCE damages of approximately $142 million to recover costs incurred through December 31, 2005, which has been appealed by the DOE. Additional legal action would be necessary to recover damages incurred after that date. Any damages recovered would be returned to SCE ratepayers or used to offset past or future fuel decommissioning or storage costs for the benefit of ratepayers.
Note 10. Regulatory and Environmental Developments
Environmental Developments
Greenhouse Gas Regulation
In March 2011, a California court issued an order suspending CARB's regulations implementing a California cap-and-trade program. The order would also potentially apply to other measures included in the regulations. The CARB has the right to appeal the ruling.
In April 2011, California enacted a law requiring that California utilities purchase 33% of their electricity requirements from renewable resources. The law requires the CPUC to adopt implementing regulations. The impact of the new 33% law will depend on the content of yet to be adopted implementing regulations, which remains uncertain.
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Hazardous Air Pollutant Regulations
In March 2011, the US EPA issued draft "National Emission Standards for Hazardous Air Pollutants," limiting emissions of hazardous air pollutants ("HAPs") from coal- and oil-fired electrical generating units. The regulations are expected to be finalized by November 2011. Based on its continuing review, EMG does not expect these standards, if adopted, would require Midwest Generation to make material changes to the approach to compliance with state and federal environmental regulations that it contemplates for CPS compliance. Midwest Generation expects to continue to develop and implement a compliance program that includes the use of activated carbon injection, upgrades to particulate removal systems and dry sorbent injection, combined with its use of low sulfur Powder River Basin ("PRB") coal, to meet emission limits for criteria pollutants, such as nitrogen oxide ("NOx") and sulfur dioxide ("SO2") as well as for HAPs, such as mercury, acid gas and non-mercury metals. With respect to the Homer City plant, the proposed standards, like the pending Clean Air Transport Rule, will require additional reductions in and controls for SO2 emissions.
Water Quality
Once-Through Cooling Issues
In March 2011, the US EPA proposed draft standards under the federal Clean Water Act which would affect cooling water intake structures at generating facilities. The standards are intended to protect aquatic organisms by reducing capture in screens attached to cooling water intake structures (impingement) and in the water volume brought into the facilities (entrainment). The regulations are expected to be finalized by July 2012. Edison International is still evaluating the proposed standards but believes, from a preliminary review, that compliance with the proposed standards regarding impingement will be achievable without incurring material additional capital expenditures or operating costs for both the Midwest Generation plants and the Homer City plant. The required measures to comply with the proposed standards regarding entrainment are subject to the discretion of the permitting authority, and Edison International is unable at this time to assess potential costs of compliance, which could be significant for the Midwest Generation plants and San Onofre, but are not expected to be material for the Homer City plant, which already has cooling towers.
In addition to the proposed draft US EPA standards, the existing California once-through cooling policy may result in significant capital expenditures at San Onofre and may affect its operations. The California policy may also significantly impact SCE's ability to procure generating capacity from fossil-fueled plants that use ocean water in once-through cooling systems, system reliability and the cost of electricity if other coastal power plants in California are forced to shut down or limit operations.
Note 11. Accumulated Other Comprehensive Loss
Edison International's accumulated other comprehensive loss consists of:
(in millions) |
Unrealized Gain (Loss) on Cash Flow Hedges |
Pension and PBOP Net Gain (Loss) |
Pension and PBOP Prior Service Cost |
Accumulated Other Comprehensive Loss |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2010 |
$ | 16 | $ | (87 | ) | $ | (5 | ) | $ | (76 | ) | ||
Current period change |
(4 | ) | 3 | | (1 | ) | |||||||
Balance at March 31, 2011 |
$ | 12 | $ | (84 | ) | $ | (5 | ) | $ | (77 | ) | ||
Included in accumulated other comprehensive loss at March 31, 2011 was $21 million, net of tax, of unrealized gains on commodity-based cash flow hedges; and $9 million, net of tax, of unrealized losses related to interest rate hedges. The maximum period over which a commodity cash flow hedge is designated is May 31, 2014.
Unrealized gains on commodity hedges consist of futures and forward electricity contracts that qualify for hedge accounting. These gains arise because current forecasts of future electricity prices in these markets are lower than the contract prices. Approximately $21 million of unrealized gains on cash flow hedges, net of tax, are expected to be reclassified into earnings during the next 12 months. Management expects that
33
reclassification of net unrealized gains will increase energy revenues recognized at market prices. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result of changes in market conditions.
Note 12. Supplemental Cash Flows Information
Edison International's supplemental cash flows information is:
|
Three months ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||||
Cash payments (receipts) for interest and taxes: |
|||||||||
Interest net of amounts capitalized |
$ | 155 | $ | 137 | |||||
Tax payments (refunds) net |
(45 | ) | 10 | ||||||
Noncash investing and financing activities: |
|||||||||
Accrued capital expenditures |
$ | 461 | $ | 309 | |||||
Consolidation of variable interest entities: |
|||||||||
Assets other than cash |
$ | | $ | (94 | ) | ||||
Liabilities and noncontrolling interests |
| 99 | |||||||
Deconsolidation of variable interest entities: |
|||||||||
Assets other than cash |
$ | | $ | 380 | |||||
Liabilities and noncontrolling interests |
| (476 | ) | ||||||
Dividends declared but not paid: |
|||||||||
Common stock |
$ | 104 | $ | 103 | |||||
Preferred and preference stock of utility |
10 | 8 | |||||||
Note 13. Preferred and Preference Stock of Utility
In March 2011, SCE issued 1,250,000 shares of 6.5% Series D preference stock (cumulative, $100 liquidation value). The Series D preference stock may not be redeemed prior to March 1, 2016. After March 1, 2016, SCE may, at its option, redeem the shares, in whole or in part. These shares are not subject to mandatory redemption.
Note 14. Regulatory Assets and Liabilities
Regulatory assets included on the consolidated balance sheets are:
(in millions) |
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Current: |
||||||||
Regulatory balancing accounts |
$ | 227 | $ | 213 | ||||
Energy derivatives |
173 | 162 | ||||||
Other |
7 | 3 | ||||||
|
407 | 378 | ||||||
Long-term: |
||||||||
Deferred income taxes net |
1,878 | 1,855 | ||||||
Pensions and other postretirement benefits |
1,094 | 1,097 | ||||||
Unamortized generation investment net |
339 | 355 | ||||||
Unamortized loss on reacquired debt |
263 | 268 | ||||||
Energy derivatives |
261 | 177 | ||||||
Nuclear-related ARO investment net |
167 | 154 | ||||||
Unamortized distribution investment net |
109 | 105 | ||||||
Regulatory balancing accounts |
52 | 56 | ||||||
Other |
287 | 280 | ||||||
|
4,450 | 4,347 | ||||||
Total Regulatory Assets |
$ | 4,857 | $ | 4,725 | ||||
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Regulatory liabilities included on the consolidated balance sheets are:
(in millions) |
March 31, 2011 |
December 31, 2010 |
|||||
---|---|---|---|---|---|---|---|
Current: |
|||||||
Regulatory balancing accounts |
$ | 775 | $ | 733 | |||
Other |
3 | 5 | |||||
|
778 | 738 | |||||
Long-term: |
|||||||
Costs of removal |
2,648 | 2,623 | |||||
ARO |
1,251 | 1,099 | |||||
Regulatory balancing accounts |
834 | 802 | |||||
|
4,733 | 4,524 | |||||
Total Regulatory Liabilities |
$ | 5,511 | $ | 5,262 | |||
Nuclear Decommissioning Trusts
Future nuclear decommissioning costs of removal of nuclear assets are expected to be funded from independent decommissioning trusts, which currently receive contributions of approximately $23 million per year included in SCE customer rates. Contributions to the decommissioning trusts are reviewed every three years by the CPUC. If additional funds are needed for decommissioning, it is probable that the additional funds will be recoverable through customer rates. 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.
The following table sets forth amortized cost and fair value of the trust investments:
|
|
Amortized Cost |
Fair Value |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
||||||||||||||
(in millions) |
Longest Maturity Dates |
March 31, 2011 |
December 31, 2010 |
March 31, 2011 |
December 31, 2010 |
||||||||||
Stocks |
| $ | 845 | $ | 895 | $ | 2,068 | $ | 2,029 | ||||||
Municipal bonds |
2049 | 683 | 706 | 772 | 790 | ||||||||||
Corporate bonds |
2044 | 263 | 288 | 320 | 346 | ||||||||||
U.S. government and agency securities |
2040 | 331 | 270 | 354 | 288 | ||||||||||
Short-term investments and receivables/payables |
One-year | 100 | 26 | 105 | 27 | ||||||||||
Total |
$ | 2,222 | $ | 2,185 | $ | 3,619 | $ | 3,480 | |||||||
Trust fund earnings (based on specific identification) increase the trust fund balance and the ARO regulatory liability. Proceeds from sales of securities (which are reinvested) were $622 million and $286 million for the three months ended March 31, 2011 and 2010, respectively. Unrealized holding gains, net of losses, were $1.4 billion and $1.3 billion at March 31, 2011 and December 31, 2010, 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:
(in millions) |
2011 |
2010 |
|||||
---|---|---|---|---|---|---|---|
Balance at January 1, |
$ | 3,480 | $ | 3,140 | |||
Realized gains net |
23 | 21 | |||||
Unrealized gains net |
102 | 62 | |||||
Other-than-temporary impairments |
(9 | ) | (3 | ) | |||
Interest, dividends, contributions and other |
23 | 28 | |||||
Balance at March 31, |
$ | 3,619 | $ | 3,248 | |||
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Due to regulatory mechanisms, earnings and realized gains and losses (including other-than-temporary impairments) have no impact on operating revenue or earnings.
Note 16. Other Income and Expenses
Other income and expenses are as follows:
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
||||||
Other income: |
||||||||
Equity AFUDC |
$ | 29 | $ | 27 | ||||
Increase in cash surrender value of life insurance policies |
7 | 6 | ||||||
Other |
2 | 1 | ||||||
Total utility other income |
38 | 34 | ||||||
Competitive power generation and other income |
3 | | ||||||
Total other income |
$ | 41 | $ | 34 | ||||
Other expenses: |
||||||||
Civic, political and related activities and donations |
$ | 7 | $ | 5 | ||||
Other |
6 | 5 | ||||||
Total utility other expenses |
13 | 10 | ||||||
Competitive power generation and other expenses |
| (2 | ) | |||||
Total other expenses |
$ | 13 | $ | 8 | ||||
Edison International has two business segments for financial reporting purposes: an electric utility operation segment (SCE) and a competitive power generation segment (EMG). The significant accounting policies of the segments are the same as those described in Note 1.
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Reportable Segments Information
The following is information (including the elimination of intercompany transactions) related to Edison International's reportable segments:
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Operating Revenue: |
|||||||
Electric utility |
$ | 2,232 | $ | 2,159 | |||
Competitive power generation |
552 | 652 | |||||
Parent and other2 |
(2 | ) | (1 | ) | |||
Consolidated Edison International |
2,782 | 2,810 | |||||
Net Income (Loss) attributable to Edison International: |
|||||||
Electric utility |
222 | 164 | |||||
Competitive power generation1 |
(20 | ) | 77 | ||||
Parent and other2 |
(2 | ) | (5 | ) | |||
Consolidated Edison International |
$ | 200 | $ | 236 | |||
Segment balance sheet information was:
(in millions) |
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Total Assets: |
||||||||
Electric utility |
$ | 36,344 | $ | 35,906 | ||||
Competitive power generation |
9,771 | 9,597 | ||||||
Parent and other2 |
46 | 27 | ||||||
Consolidated Edison International |
$ | 46,161 | $ | 45,530 | ||||
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q 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:
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Additional information about risks and uncertainties, including more detail about the factors described above, is contained throughout this MD&A and in Edison International's 2010 Form 10-K, including the "Risk Factors" section in Part I, Item 1A. Readers are urged to read this entire report, including the information incorporated by reference, as well as the 2010 Form 10-K, 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 U.S. Securities and Exchange Commission.
This MD&A for the three months ended March 31, 2011 discusses material changes in the consolidated financial condition, results of operations and other developments of Edison International since December 31, 2010, and as compared to the three months ended March 31, 2010. This discussion presumes that the reader has read or has access to Edison International's MD&A for the calendar year 2010 (the "year-ended 2010 MD&A"), which was included in the 2010 Form 10-K.
EDISON INTERNATIONAL MANAGEMENT OVERVIEW
Highlights of Operating Results
|
Three months ended March 31, |
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
|||||||||||
(in millions) |
2011 |
2010 |
Change |
||||||||
Net Income (Loss) Attributable to Edison International |
|||||||||||
SCE |
$ | 222 | $ | 164 | $ | 58 | |||||
EMG |
(20 | ) | 77 | (97 | ) | ||||||
Edison International Parent and Other |
(2 | ) | (5 | ) | 3 | ||||||
Edison International Consolidated |
200 | 236 | (36 | ) | |||||||
Non-Core Items |
|||||||||||
SCE tax impact of health care legislation |
| (39 | ) | 39 | |||||||
EMG discontinued operations |
(2 | ) | 6 | (8 | ) | ||||||
Total non-core items |
(2 | ) | (33 | ) | 31 | ||||||
Core Earnings (Losses) |
|||||||||||
SCE |
222 | 203 | 19 | ||||||||
EMG |
(18 | ) | 71 | (89 | ) | ||||||
Edison International Parent and Other |
(2 | ) | (5 | ) | 3 | ||||||
Edison International Consolidated |
$ | 202 | $ | 269 | $ | (67 | ) | ||||
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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 (losses) 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 less income or loss from discontinued operations and income or loss from significant discrete items that management does not consider representative of ongoing earnings, such as: exit activities, including lease terminations, sale of certain assets, early debt extinguishment costs and other activities that are no longer continuing; asset impairments and certain tax, regulatory or legal settlements or proceedings.
SCE's 2011 core earnings increased $19 million primarily due to rate base growth.
EMG's 2011 core earnings decreased $89 million primarily due to unplanned outages at Homer City, lower energy prices, distributions from EMG's Doga and March Point projects during 2010 (none received in 2011) and lower trading revenue.
Consolidated non-core items for Edison International included an after tax earnings charge of $39 million recorded in 2010 to reverse previously recognized federal tax benefits eliminated by federal health care legislation enacted in 2010. The health care law eliminated the federal tax deduction for retiree health care costs to the extent those costs are eligible for federal Medicare Part D subsidies.
During the first quarter, SCE's capital investment program focused on upgrading, maintaining and expanding SCE's transmission and distribution system; maintaining and replacing generation asset equipment; and installing smart meters. Total capital expenditures (including accruals) were $765 million during the first quarter of 2011 compared to $640 million during the same period in 2010.
SCE continues to project that 2011 capital investments will be in the range of $3.9 billion to $4.4 billion and that 2011 2014 total capital investment spending will be in the range of $15.6 billion to $17.5 billion. Actual capital spending will be affected by regulatory approval, permitting, market and other factors as discussed further under "SCE: Liquidity and Capital ResourcesCapital Investment Plan" in the year-ended 2010 MD&A.
As discussed in the year-ended 2010 MD&A, SCE is required to update its 2012 GRC application to reflect, among other things, the impacts of governmental and legislative actions. In April 2011, the IRS issued guidance for determining bonus depreciation enacted in the 2010 Tax Relief Act. On April 28, 2011, SCE submitted an update of its 2012 GRC application primarily to reflect bonus depreciation deductions under the 2010 Tax Relief Act, reducing its base rate revenue requirement by $38 million, $133 million and $145 million in 2012, 2013 and 2014, respectively. The decrease in base rate revenue requirement is due to a reduction in rate base from inclusion of higher deferred income taxes resulting from bonus depreciation. SCE's revised request, after considering the effects of sales growth, would result in incremental customer rate increases of $828 million, $152 million and $514 million in 2012, 2013 and 2014, respectively.
The current schedule anticipates a final decision on SCE's 2012 GRC by the end of 2011. To the extent a final decision is delayed, the CPUC has authorized the establishment of a GRC memorandum account, which will make the revenue requirement ultimately adopted by the CPUC effective as of January 1, 2012.
Nuclear Industry and Regulatory Response to Events in Japan
As discussed in the 2010 Form 10-K under the heading "Nuclear Power Plant Regulation," SCE is subject to the jurisdiction of the NRC with respect to its ownership interest in San Onofre and Palo Verde. In light of the significant safety events at the Fukushima Daiichi nuclear plant in Japan resulting from the recent earthquake and tsunami, the NRC plans to perform additional operational and safety reviews of nuclear
40
facilities in the United States. The lessons learned from the Japanese events and NRC reviews may impact future operations and capital requirements at United States nuclear facilities, including the operations and capital requirements of SCE's nuclear facilities.
The profitability of EMG's competitive power generation operations is expected to be significantly lower in 2011 as a result of lower realized energy prices driven by the expiration of hedge contracts, higher fuel costs and unplanned outages at the Homer City plant during the first quarter. In addition, the profitability of EME's Midwest Generation plants is expected to be adversely affected in 2012 by a decline in capacity prices (projected to begin in June 2012) and higher rail transportation costs (due to the expiration at the end of 2011 of a favorable long-term rail contract). As a result, EMG may incur net losses during 2011 and in subsequent years unless energy prices recover or its costs decline.
At March 31, 2011, EMG and its subsidiaries had $1.2 billion in cash and cash equivalents and $981 million of liquidity available from credit facilities that expire in 2012. EMG's principal subsidiary, EME, had $3.7 billion of senior notes outstanding at March 31, 2011, $500 million of which mature in 2013. EMG's business plans are focused on operating effectively through the current commodity price cycle and on environmental compliance and renewable energy plans as described below.
Midwest Generation Environmental Compliance Plans and Costs
During the first quarter of 2011, Midwest Generation continued its permitting and planning activities for NOx and SO2 controls to meet the requirements of the CPS. In February 2011, the Illinois Environmental Protection Agency issued construction permits authorizing Midwest Generation to install a dry sorbent injection system using Trona or other sodium-based sorbents at the Powerton Station's Units 5 and 6.
Decisions regarding whether or not to proceed with retrofitting units to comply with CPS requirements for SO2 emissions remain subject to a number of factors, such as market conditions, regulatory and legislative developments, and forecasted commodity prices and capital and operating costs applicable at the time decisions are required or made. Midwest Generation could also elect to temporarily or permanently shut down units, instead of installing controls, to be in compliance with the CPS.
Therefore, decisions about any particular combination of retrofits and shutdowns it may ultimately employ also remain subject to conditions applicable at the time decisions are required or made. Due to existing uncertainties about these factors, Midwest Generation intends to defer final decisions about particular units for the maximum time available. Accordingly, final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital that is budgeted may not occur until 2012 for some of the units and potentially later for others.
In March 2011, the US EPA issued draft "National Emission Standards for Hazardous Air Pollutants," limiting emissions of HAPs from coal- and oil-fired electrical generating units. The regulations are expected to be finalized by November 2011. Based on its continuing review, EME does not expect these standards, if adopted, would require Midwest Generation to make material changes to the approach to compliance with state and federal environmental regulations that it contemplates for CPS compliance. Midwest Generation expects to continue to develop and implement a compliance program that includes the use of activated carbon injection, upgrades to particulate removal systems and dry sorbent injection, combined with its use of low sulfur PRB coal, to meet emissions limits for criteria pollutants, such as NOx and SO2 as well as for HAPs, such as mercury, acid gas and non-mercury metals.
On February 10, 2011, a steam pipe ruptured at Unit 1 of the Homer City plant, taking the unit off line. Homer City took Unit 2 off line, which has the same design and operating conditions, to further evaluate the equipment due to the risk of a similar failure. On April 5, 2011, Unit 1 returned to service after making needed repairs, including replacing all pipes similar to the ruptured pipe. Unit 2 is undergoing similar repairs and is expected to return to service in the second quarter of 2011.
The unplanned outages at Units 1 and 2 and the continuation of low power prices have impacted Homer City's liquidity. As a result, in order to have sufficient working capital available for operating expenses and
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to pay the equity portion of Homer City's rent payment that was due April 1, 2011 to the owner-lessors, Homer City had to defer certain fuel deliveries, arrange for accelerated payments by EMMT for future energy deliveries under an intercompany agreement in place between EMMT and Homer City, and draw $12 million from the $20 million equity rent reserve established under its sale-leaseback transaction documents. Homer City must restore the equity rent reserve account and continue to make equity rent payments in order to be entitled to make future distributions. The advance payments made and currently anticipated in April are expected to total approximately $30 million. It is currently anticipated that all such amounts will be applied against amounts invoiced by EMMT under an intercompany agreement within the next six months, but the actual rate at which such advance payments will be applied will depend upon prevailing power prices and other factors. To further stabilize Homer City's liquidity, effective April 1, 2011, EMMT assigned to Homer City the benefit of an arrangement that allows EMMT to deliver power into the NYISO from Homer City. Accordingly, effective April 1, 2011, these revenues will now be recorded as part of Homer City's revenues in lieu of their prior classification as EMMT trading revenues. EMMT realized trading revenues of $28 million under this arrangement in 2010.
The actions described above also resulted in Homer City being in compliance with the covenant requirements under the sale-leaseback documents at March 31, 2011. Under these documents, the rent payments are comprised of two components, a senior rent portion and an equity rent portion. The senior rent is used exclusively for debt service to the holders of the senior secured bonds issued in connection with the sale-leaseback transaction, while the equity rent is paid to the owner-lessors. In order to pay the equity portion of the rent, among other requirements, Homer City is required to meet historical and projected senior rent service coverage ratios of 1.7 to 1 (subject to reduction to 1.3 to 1 under certain circumstances).
For additional information, see "EMG: Liquidity and Capital ResourcesDebt Covenants and Dividend Restrictions" and "Item 1A. Risk FactorsRisks Relating to EMGLiquidity Risks" in the 2010 Form 10-K.
Environmental Regulation Developments
For a discussion of environmental regulation developments regarding Greenhouse Gas Regulation, Hazardous Air Pollutant Regulations and Once-Through Cooling Issues, see "Edison International Notes to Consolidated Financial StatementsNote 10. Regulatory and Environmental Developments."
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SOUTHERN CALIFORNIA EDISON COMPANY
SCE's results of operations are derived mainly through two sources:
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 on capital projects recovered through CPUC-authorized mechanisms outside the GRC process. Differences between authorized amounts 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 that provide for recovery (with no return), 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.
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, 2011 |
Three months ended March 31, 2010 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||
(in millions) |
Utility Earning Activities |
Utility Cost- Recovery Activities |
Total Consolidated |
Utility Earning Activities |
Utility Cost- Recovery Activities |
Total Consolidated |
||||||||||||||
Operating revenue |
$ | 1,363 | $ | 869 | $ | 2,232 | $ | 1,265 | $ | 894 | $ | 2,159 | ||||||||
Fuel and purchased power |
| 584 | 584 | | 689 | 689 | ||||||||||||||
Operations and maintenance |
528 | 256 | 784 | 519 | 194 | 713 | ||||||||||||||
Depreciation, decommissioning and amortization |
317 | 27 | 344 | 300 | 9 | 309 | ||||||||||||||
Property taxes and other |
75 | 2 | 77 | 68 | | 68 | ||||||||||||||
Total operating expenses |
920 | 869 | 1,789 | 887 | 892 | 1,779 | ||||||||||||||
Operating income |
443 | | 443 | 378 | 2 | 380 | ||||||||||||||
Net interest expense and other |
(84 | ) | | (84 | ) | (72 | ) | (2 | ) | (74 | ) | |||||||||
Income before income taxes |
359 | | 359 | 306 | | 306 | ||||||||||||||
Income tax expense |
123 | | 123 | 129 | | 129 | ||||||||||||||
Net income |
236 | | 236 | 177 | | 177 | ||||||||||||||
Dividends on preferred and preference stock |
14 | | 14 | 13 | | 13 | ||||||||||||||
Net income available for common stock |
$ | 222 | $ | | $ | 222 | $ | 164 | $ | | $ | 164 | ||||||||
Core Earnings1 |
$ | 222 | $ | 203 | ||||||||||||||||
Non-Core Earnings: |
||||||||||||||||||||
Tax impact of health care legislation |
| (39 | ) | |||||||||||||||||
Total SCE GAAP Earnings |
$ | 222 | $ | 164 | ||||||||||||||||
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Utility earning activities were primarily affected by the following:
See "Income Taxes" below for more information on lower income taxes during 2011 compared to the same period in 2010.
Utility Cost-Recovery Activities
Utility cost-recovery activities were primarily affected by the following:
Supplemental Operating Revenue Information
SCE's retail billed and unbilled revenue (excluding wholesale sales and balancing account over/undercollections) was $2.1 billion and $2.0 billion for the three months ended March 31, 2011 and 2010, respectively. The increase reflects a rate increase of $90 million and a sales volume increase of $30 million. The rate increase reflects higher system average rates for 2011 compared to the same period in 2010, primarily due to the implementation of rates authorized in the CPUC 2009 GRC decision and the 2010 FERC rate case. As a result of the CPUC-authorized decoupling mechanism, SCE does not bear the volumetric risk related to retail electricity sales (see "Item 1. BusinessSouthern California Edison CompanyOverview of Ratemaking Mechanisms" in the 2010 Form 10-K).
SCE remits to CDWR and does not recognize as revenue the amounts that 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. The amounts collected and remitted to CDWR were $275 million and $296 million for the three months ended March 31, 2011 and 2010, respectively. The CDWR-related rates in 2011 continue to reflect an approximately $585 million refund of operating reserves that CDWR can release as their contracts terminate. Total customer rates are expected to increase as
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CDWR operating reserves are fully refunded. The power contracts that CDWR allocated to SCE will terminate by the end of 2011. SCE's revenue and related purchased power expense is expected to increase as these CDWR contracts are replaced by power purchase agreements entered into by SCE.
The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision.
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
||||||
Income before income taxes |
$ | 359 | $ | 306 | ||||
Provision for income tax at federal statutory rate of 35% |
125 | 107 | ||||||
Increase (decrease) in income tax from: |
||||||||
State tax net of federal benefit |
12 | 9 | ||||||
Health care legislation1 |
| 39 | ||||||
Property-related and other |
(14 | ) | (26 | ) | ||||
Total income tax expense |
$ | 123 | $ | 129 | ||||
Effective tax rate |
34 | % | 42 | % | ||||
The decreased benefit provided by property-related and other items was primarily due to lower deductions for asset removal costs and internally developed software in the first quarter of 2011 compared to the respective period in 2010.
LIQUIDITY AND CAPITAL RESOURCES
SCE's ability to operate its business, complete planned capital projects, and implement its business strategy are dependent upon its cash flow and access to the capital markets to finance its activities. SCE's overall cash flows fluctuate based on, among other things, its ability to recover its costs in a timely manner from its customers through regulated rates, changes in commodity prices and volumes, collateral requirements, dividend payments made to Edison International, and the outcome of tax and regulatory matters.
SCE expects to fund its continuing obligations, projected capital expenditures for 2011 and dividends to Edison International through cash and equivalents on hand, operating cash flows, tax benefits and capital market financings of debt and preferred equity, as needed. SCE also has availability under its credit facilities if additional funding and liquidity are necessary to meet operating and capital requirements.
As of March 31, 2011, SCE had approximately $53 million of cash and equivalents. SCE had two credit facilities: a $2.4 billion five-year credit facility that matures in February 2013, with four one-year options to extend by mutual consent, and a $500 million three-year credit facility that matures in March 2013.
(in millions) |
Credit Facilities |
|||
---|---|---|---|---|
Commitment |
$ | 2,894 | ||
Outstanding borrowings supported by credit facilities |
(200 | ) | ||
Outstanding letters of credit |
(73 | ) | ||
Amount available |
$ | 2,621 | ||
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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, 2011, SCE's debt to total capitalization ratio was 0.46 to 1.
The CPUC regulates SCE's capital structure and limits the dividends it may pay Edison International. In SCE's most recent cost of capital proceeding, the CPUC set an authorized capital structure for SCE which included a common equity component of 48%. SCE may make distributions to Edison International as long as the common equity component of SCE's capital structure remains at or above the 48% authorized level on a 13-month weighted average basis. At March 31, 2011, SCE's 13-month weighted-average common equity component of total capitalization was 50.8% resulting in the capacity to pay $471 million in additional dividends.
During the first quarter of 2011, SCE made a $115 million dividend payment to its parent, Edison International. Future dividend amounts and timing of distributions are dependent upon several factors including the actual level of capital expenditures, operating cash flows and earnings.
Margin and Collateral Deposits
Derivative Instruments and Power Procurement Contracts
Certain derivative instruments and power procurement contracts under SCE's power and natural gas hedging activities contain collateral requirements. The table below provides the amount of collateral posted by SCE to its counterparties as well as the potential collateral that would be required as of March 31, 2011.
(in millions) | ||||
---|---|---|---|---|
Collateral posted as of March 31, 20111 |
$ | 80 | ||
Incremental collateral requirements for power procurement contracts resulting from a |
53 | |||
Posted and potential collateral requirements for derivative instruments and power procurement contracts2 |
$ | 133 | ||
Workers Compensation Self-Insurance Fund
SCE is self-insured for workers compensation claims. SCE assesses workers compensation claims that have been asserted and those that have been incurred but not reported to determine the probable amount of losses that should be recorded. The Department of Industrial Relations for the State of California requires companies that are self-insured for workers compensation to post collateral (in the form of cash and/or letters of credits) based on the estimated workers' compensation liability if a company's bond rating were to fall below "B." As of March 31, 2011, if SCE's bond rating were to fall below a "B" rating, SCE would be required to post $209 million for its workers compensation self-insurance plan.
Historical Consolidated Cash Flows
The table below sets forth condensed historical cash flow information for SCE.
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Condensed Consolidated Statement of Cash Flows
|
Three months ended March 31, |
||||||
---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
|||||
Net cash provided by operating activities |
$ | 672 | $ | 313 | |||
Net cash provided by financing activities |
190 | 305 | |||||
Net cash used by investing activities |
(1,066 | ) | (1,014 | ) | |||
Net decrease in cash and cash equivalents |
$ | (204 | ) | $ | (396 | ) | |
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased $359 million in the first quarter of 2011 compared to the first quarter of 2010 primarily reflecting higher net tax receipts of $104 million in 2011 compared to 2010 related to accelerated depreciation benefits and net cash inflows related to balancing account over- and under-collections. The 2011 change was also due to the timing of cash receipts and disbursements related to working capital items.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the first quarter of 2011 was $190 million consisting of the following significant events:
Net cash provided by financing activities for the first quarter of 2010 was $305 million consisting of the following significant events:
Net Cash Used by Investing Activities
Cash flows from investing activities are driven primarily by capital expenditures and funding of nuclear decommissioning trusts. Capital expenditures were $1.0 billion and $867 million for the three months ended March 31, 2011 and 2010, respectively, primarily related to transmission and distribution investments. Net purchases of nuclear decommissioning trust investments and other were $47 million and $49 million for the three months ended March 31, 2011 and 2010, respectively.
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Contractual Obligations and Contingencies
For a discussion of power purchase commitments, see "Edison International Notes to Consolidated Financial StatementsNote 9. Commitments and ContingenciesThird-Party Power Purchase Agreements."
SCE has contingencies related to the Navajo Nation Litigation, nuclear insurance and spent nuclear fuel, which are discussed in "Edison International Notes to Consolidated Financial StatementsNote 9. Commitments and Contingencies."
As of March 31, 2011, SCE had 24 identified material sites for remediation and recorded an estimated minimum liability of $52 million. SCE expects to recover 90% of its remediation costs at certain sites. See "Edison International Notes to Consolidated Financial StatementsNote 9. Commitments and Contingencies" for further discussion.
SCE's primary market risks include fluctuations in interest rates, commodity prices and volumes, and counterparty credit. Fluctuations in interest rates can affect earnings and cash flows. Fluctuations in commodity prices and volumes and counterparty credit losses may temporarily affect cash flows, but are not expected to affect earnings due to expected recovery through regulatory mechanisms. SCE uses derivative instruments, as appropriate, to manage its market risks. For a further discussion of SCE's market risk exposures, including commodity price risk, credit risk and interest rate risk, see "Edison International Notes to Consolidated Financial StatementsNote 6. Derivative and Hedging Activities" and "Note 4. Fair Value Measurements" and see "SCE: Market Risk ExposuresCommodity Price Risk" in the year-ended 2010 MD&A.
The fair value of outstanding derivative instruments used at SCE to mitigate its exposure to commodity price risk was a net liability of $310 million and $207 million at March 31, 2011 and December 31, 2010, respectively. For further discussion of fair value measurements and the fair value hierarchy, see "Edison International Notes to Consolidated Financial StatementsNote 4. Fair Value Measurements."
Credit risk exposure from counterparties for power and gas trading activities is measured as the sum of net accounts receivable (accounts receivable less accounts payable) and the current fair value of net derivative assets (derivative assets less derivative liabilities) reflected on the consolidated balance sheets. SCE enters into master agreements which typically provide for a right of setoff. Accordingly, SCE's credit risk exposure from counterparties is based on a net exposure under these agreements. SCE manages the credit risk on the portfolio for both rated and non-rated counterparties based on credit ratings using published ratings of counterparties and other publicly disclosed information, such as financial statements, regulatory filings, and press releases, to guide it in the process of setting credit levels, risk limits and contractual agreements,
48
including master netting agreements. As of March 31, 2011, the amount of balance sheet exposure as described above, by the credit ratings of SCE's counterparties, was as follows:
|
March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Exposure2 |
Collateral |
Net Exposure |
||||||||
S&P Credit Rating1 |
|||||||||||
A or higher |
$ | 151 | $ | | $ | 151 | |||||
A- |
14 | | 14 | ||||||||
Not rated3 |
122 | (50 | ) | 72 | |||||||
Total |
$ | 287 | $ | (50 | ) | $ | 237 | ||||
The credit risk exposure set forth in the table above is composed of $7 million of net accounts receivable and $280 million representing the fair value, adjusted for counterparty credit reserves, of derivative contracts.
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Results of Continuing Operations
This section discusses operating results for the three months ended March 31, 2011 and 2010. EMG's continuing operations include the coal plants, renewable energy and gas-fired projects, energy trading, and gas-fired projects under contract, corporate interest expense and general and administrative expenses. EMG's discontinued operations include all international operations, except the Doga project.
The following table is a summary of competitive power generation results of operations for the periods indicated.
|
Three months ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2011 |
2010 |
||||||
Competitive power generation operating revenue |
$ | 552 | $ | 652 | ||||
Fuel |
182 | 213 | ||||||
Other operation and maintenance |