EIX 9.30.2011 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
|
| | |
(Mark One) |
S | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended September 30, 2011 |
£ | | 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 S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer S | Accelerated filer £ | Non-accelerated filer £ (Do not check if a smaller reporting company) | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
|
| | |
Class | | Outstanding at October 31, 2011 |
Common Stock, no par value | | 325,811,206 |
TABLE OF CONTENTS
GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
|
| | |
2010 Form 10-K | | Edison International's Annual Report on Form 10-K for the year-ended December 31, 2010 |
2010 Tax Relief Act | | Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 |
AFUDC | | allowance for funds used during construction |
Ambit project | | American Bituminous Power Partners, L.P. |
AOI | | Adjusted Operating Income (Loss) |
APS | | Arizona Public Service Company |
ARO(s) | | asset retirement obligation(s) |
BACT | | best available control technology |
BART | | best available retrofit technology |
Bcf | | billion cubic feet |
Big 4 | | Kern River, Midway-Sunset, Sycamore and Watson natural gas power projects |
Btu | | British thermal units |
CAA | | Clean Air Act |
CAIR | | Clean Air Interstate Rule |
CAISO | | California Independent System Operator |
CAMR | | Clean Air Mercury Rule |
CARB | | California Air Resources Board |
CDWR | | California Department of Water Resources |
CEC | | California Energy Commission |
coal plants | | Midwest Generation coal plants and Homer City plant |
Commonwealth Edison | | Commonwealth Edison Company |
CPS | | Combined Pollutant Standard |
CPUC | | California Public Utilities Commission |
CSAPR | | Cross-State Air Pollution Rule |
CRRs | | congestion revenue rights |
DOE | | U.S. Department of Energy |
EME | | Edison Mission Energy |
EMG | | Edison Mission Group Inc. |
EMMT | | Edison Mission Marketing & Trading, Inc. |
EPS | | earnings per share |
ERRA | | energy resource recovery account |
EWG | | Exempt Wholesale Generator |
Exelon Generation | | Exelon Generation Company LLC |
FASB | | Financial Accounting Standards Board |
FERC | | Federal Energy Regulatory Commission |
FGIC | | Financial Guarantee Insurance Company |
FIP(s) | | federal implementation plan(s) |
Four Corners | | coal fueled electric generating facility located in Farmington, New Mexico in which SCE holds a 48% ownership interest |
GAAP | | generally accepted accounting principles |
GHG | | greenhouse gas |
Global Settlement | | A settlement between Edison International and the IRS that resolved federal tax disputes related to Edison Capital's cross-border, leveraged leases through 2009, and all other outstanding federal tax disputes and affirmative claims for tax years 1986 through 2002 and related matters with state tax authorities. |
|
| | |
GRC | | general rate case |
GWh | | gigawatt-hours |
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 |
Illinois EPA | | Illinois Environmental Protection Agency |
IRS | | Internal Revenue Service |
ISO | | Independent System Operator |
kWh(s) | | kilowatt-hour(s) |
LIBOR | | London Interbank Offered Rate |
MD&A | | Management's Discussion and Analysis of Financial Condition and Results of Operations in this report |
Midwest Generation | | Midwest Generation, LLC, a Delaware limited liability company that owns and/or leases, and that operates, the Midwest Generation plants |
Midwest Generation plants | | Midwest Generation's power plants (fossil fuel) located in Illinois |
MMBtu | | million British thermal units |
Mohave | | two coal fueled electric generating facilities that no longer operate located in Clark County, Nevada in which SCE holds a 56% ownership interest |
Moody's | | Moody's Investors Service |
MRTU | | Market Redesign and Technology Upgrade |
MW | | megawatts |
MWh | | megawatt-hours |
NAAQS | | national ambient air quality standards |
NAPP | | Northern Appalachian |
NERC | | North American Electric Reliability Corporation |
Ninth Circuit | | U.S. Court of Appeals for the Ninth Circuit |
NOV | | notice of violation |
NOx | | nitrogen oxide |
NRC | | Nuclear Regulatory Commission |
NSR | | New Source Review |
NYISO | | New York Independent System Operator |
PADEP | | Pennsylvania Department of Environmental Protection |
Palo Verde | | large pressurized water nuclear electric generating facility located near Phoenix, Arizona in which SCE holds a 15.8% ownership interest |
PBOP(s) | | postretirement benefits other than pension(s) |
PBR | | performance-based ratemaking |
PG&E | | Pacific Gas & Electric Company |
PJM | | PJM Interconnection, LLC |
PRB | | Powder River Basin |
PSD | | Prevention of Significant Deterioration |
QF(s) | | qualifying facility(ies) |
ROE | | return on equity |
RPM | | Reliability Pricing Model |
RTO(s) | | Regional Transmission Organization(s) |
S&P | | Standard & Poor's Ratings Services |
San Onofre | | large pressurized water nuclear electric generating facility located in south San Clemente, California in which SCE holds a 78.21% ownership interest |
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 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
Consolidated Statements of Income | Edison International | |
| | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in millions, except per-share amounts, unaudited) | 2011 | | 2010 | | 2011 | | 2010 |
Electric utility | $ | 3,385 |
| | $ | 3,097 |
| | $ | 8,060 |
| | $ | 7,502 |
|
Competitive power generation | 596 |
| | 691 |
| | 1,686 |
| | 1,838 |
|
Total operating revenue | 3,981 |
| | 3,788 |
| | 9,746 |
| | 9,340 |
|
Fuel | 352 |
| | 328 |
| | 866 |
| | 877 |
|
Purchased power | 1,264 |
| | 1,118 |
| | 2,422 |
| | 2,337 |
|
Operations and maintenance | 1,119 |
| | 1,102 |
| | 3,531 |
| | 3,287 |
|
Depreciation, decommissioning and amortization | 436 |
| | 378 |
| | 1,288 |
| | 1,127 |
|
Total operating expenses | 3,171 |
| | 2,926 |
| | 8,107 |
| | 7,628 |
|
Operating income | 810 |
| | 862 |
| | 1,639 |
| | 1,712 |
|
Interest and dividend income | 4 |
| | 4 |
| | 38 |
| | 27 |
|
Equity in income from unconsolidated affiliates – net | 56 |
| | 62 |
| | 68 |
| | 101 |
|
Other income | 27 |
| | 33 |
| | 110 |
| | 103 |
|
Interest expense | (203 | ) | | (175 | ) | | (601 | ) | | (518 | ) |
Other expenses | (11 | ) | | (12 | ) | | (37 | ) | | (39 | ) |
Income from continuing operations before income taxes | 683 |
| | 774 |
| | 1,217 |
| | 1,386 |
|
Income tax expense | 242 |
| | 247 |
| | 369 |
| | 261 |
|
Income from continuing operations | 441 |
| | 527 |
| | 848 |
| | 1,125 |
|
Income (loss) from discontinued operations – net of tax | — |
| | (4 | ) | | (3 | ) | | 4 |
|
Net income | 441 |
| | 523 |
| | 845 |
| | 1,129 |
|
Dividends on preferred and preference stock of utility | 15 |
| | 13 |
| | 44 |
| | 39 |
|
Other noncontrolling interests | — |
| | — |
| | (1 | ) | | — |
|
Net income attributable to Edison International common shareholders | $ | 426 |
| | $ | 510 |
| | $ | 802 |
| | $ | 1,090 |
|
Amounts attributable to Edison International common shareholders: | | | | | | | |
Income from continuing operations, net of tax | $ | 426 |
| | $ | 514 |
| | $ | 805 |
| | $ | 1,086 |
|
Income (loss) from discontinued operations, net of tax | — |
| | (4 | ) | | (3 | ) | | 4 |
|
Net income attributable to Edison International common shareholders | $ | 426 |
| | $ | 510 |
| | $ | 802 |
| | $ | 1,090 |
|
Basic earnings per common share attributable to Edison International common shareholders: | | | | | | | |
Weighted-average shares of common stock outstanding | 326 |
| | 326 |
| | 326 |
| | 326 |
|
Continuing operations | $ | 1.31 |
|
| $ | 1.57 |
|
| $ | 2.47 |
|
| $ | 3.32 |
|
Discontinued operations | — |
| | (0.01 | ) | | (0.01 | ) | | 0.01 |
|
Total | $ | 1.31 |
| | $ | 1.56 |
| | $ | 2.46 |
| | $ | 3.33 |
|
Diluted earnings per common share attributable to Edison International common shareholders: | | | | | | | |
Weighted-average shares of common stock outstanding, including effect of dilutive securities | 329 |
| | 328 |
| | 329 |
| | 328 |
|
Continuing operations | $ | 1.30 |
| | $ | 1.57 |
| | $ | 2.46 |
| | $ | 3.30 |
|
Discontinued operations | — |
| | (0.01 | ) | | (0.01 | ) | | 0.01 |
|
Total | $ | 1.30 |
| | $ | 1.56 |
| | $ | 2.45 |
| | $ | 3.31 |
|
Dividends declared per common share | $ | 0.320 |
| | $ | 0.315 |
| | $ | 0.960 |
| | $ | 0.945 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1
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| | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income | | Edison International | |
| | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in millions, unaudited) | 2011 | | 2010 | | 2011 | | 2010 |
Net income | $ | 441 |
| | $ | 523 |
| | $ | 845 |
| | $ | 1,129 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Pension and postretirement benefits other than pensions: | | | | | | | |
Net gain arising during the period, net of income tax expense of $2 for the nine months ended September 30, 2010 | — |
| | 1 |
| | — |
| | 13 |
|
Amortization of net (gain) loss included in net income, net of income tax expense (benefit) of $1 and $1 for the three months and $4 and $(3) for the nine months ended September 30, 2011 and 2010, respectively | 3 |
| | 1 |
| | 7 |
| | (5 | ) |
Prior service credit arising during the period, net of income tax expense of $1 for the nine months ended September 30, 2010 | — |
| | — |
| | — |
| | 2 |
|
Amortization of prior service credit, net of income tax benefit of $1 for the nine months ended September 30, 2010 | — |
| | — |
| | — |
| | (2 | ) |
Unrealized gain (loss) on derivatives qualified as cash flow hedges: | | | | | | | |
Unrealized holding gain (loss) arising during the period, net of income tax expense (benefit) of $(19) and $29 for the three months and $(24) and $41 for the nine months ended September 30, 2011 and 2010, respectively | (30 | ) | | 43 |
| | (38 | ) | | 61 |
|
Reclassification adjustments included in net loss, net of income tax benefit of none and $5 for the three months and $12 and $54 for the nine months ended September 30, 2011 and 2010, respectively | — |
| | (7 | ) | | (17 | ) | | (80 | ) |
Other comprehensive income (loss) | (27 | ) | | 38 |
| | (48 | ) | | (11 | ) |
Comprehensive income | 414 |
| | 561 |
| | 797 |
| | 1,118 |
|
Less: Comprehensive income attributable to noncontrolling interests | 15 |
| | 13 |
| | 43 |
| | 39 |
|
Comprehensive income attributable to Edison International | $ | 399 |
| | $ | 548 |
| | $ | 754 |
| | $ | 1,079 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
|
| | | | | | | |
Consolidated Balance Sheets | Edison International | |
| | | |
(in millions, unaudited) | September 30, 2011 | | December 31, 2010 |
ASSETS | | | |
Cash and cash equivalents | $ | 1,384 |
| | $ | 1,389 |
|
Receivables, less allowances of $97 and $85 for uncollectible accounts at respective dates | 1,218 |
| | 931 |
|
Accrued unbilled revenue | 709 |
| | 442 |
|
Inventory | 592 |
| | 568 |
|
Prepaid taxes | 72 |
| | 390 |
|
Derivative assets | 100 |
| | 133 |
|
Restricted cash | 15 |
| | 2 |
|
Margin and collateral deposits | 54 |
| | 65 |
|
Regulatory assets | 454 |
| | 378 |
|
Other current assets | 153 |
| | 124 |
|
Total current assets | 4,751 |
| | 4,422 |
|
Nuclear decommissioning trusts | 3,393 |
| | 3,480 |
|
Investments in unconsolidated affiliates | 569 |
| | 559 |
|
Other investments | 231 |
| | 223 |
|
Total investments | 4,193 |
| | 4,262 |
|
Utility property, plant and equipment, less accumulated depreciation of $6,745 and $6,319 at respective dates | 26,490 |
| | 24,778 |
|
Competitive power generation and other property, plant and equipment, less accumulated depreciation of $2,083 and $1,865 at respective dates | 5,579 |
| | 5,406 |
|
Total property, plant and equipment | 32,069 |
| | 30,184 |
|
Derivative assets | 191 |
| | 437 |
|
Restricted deposits | 43 |
| | 47 |
|
Rent payments in excess of levelized rent expense under plant operating leases | 1,320 |
| | 1,187 |
|
Regulatory assets | 4,486 |
| | 4,347 |
|
Other long-term assets | 619 |
| | 644 |
|
Total long-term assets | 6,659 |
| | 6,662 |
|
| | | |
| | | |
| | | |
| | | |
| | | |
Total assets | $ | 47,672 |
| | $ | 45,530 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
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| | | | | | | |
Consolidated Balance Sheets | Edison International | |
| | | |
(in millions, except share amounts, unaudited) | September 30, 2011 | | December 31, 2010 |
LIABILITIES AND EQUITY | | | |
Short-term debt | $ | 560 |
| | $ | 115 |
|
Current portion of long-term debt | 51 |
| | 48 |
|
Accounts payable | 1,224 |
| | 1,362 |
|
Accrued taxes | 128 |
| | 52 |
|
Accrued interest | 207 |
| | 205 |
|
Customer deposits | 203 |
| | 217 |
|
Derivative liabilities | 290 |
| | 217 |
|
Regulatory liabilities | 734 |
| | 738 |
|
Other current liabilities | 764 |
| | 998 |
|
Total current liabilities | 4,161 |
| | 3,952 |
|
Long-term debt | 13,010 |
| | 12,371 |
|
Deferred income taxes | 6,003 |
| | 5,625 |
|
Deferred investment tax credits | 89 |
| | 122 |
|
Customer advances | 133 |
| | 112 |
|
Derivative liabilities | 344 |
| | 468 |
|
Pensions and benefits | 2,293 |
| | 2,260 |
|
Asset retirement obligations | 2,658 |
| | 2,561 |
|
Regulatory liabilities | 4,481 |
| | 4,524 |
|
Other deferred credits and other long-term liabilities | 2,454 |
| | 2,041 |
|
Total deferred credits and other liabilities | 18,455 |
| | 17,713 |
|
Total liabilities | 35,626 |
| | 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) | 2,346 |
| | 2,331 |
|
Accumulated other comprehensive loss | (124 | ) | | (76 | ) |
Retained earnings | 8,793 |
| | 8,328 |
|
Total Edison International's common shareholders' equity | 11,015 |
| | 10,583 |
|
Preferred and preference stock of utility | 1,029 |
| | 907 |
|
Other noncontrolling interests | 2 |
| | 4 |
|
Total noncontrolling interests | 1,031 |
| | 911 |
|
Total equity | 12,046 |
| | 11,494 |
|
Total liabilities and equity | $ | 47,672 |
| | $ | 45,530 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
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| | | | | | | |
Consolidated Statements of Cash Flows | Edison International | |
| |
| Nine months ended September 30, |
(in millions, unaudited) | 2011 | | 2010 |
Cash flows from operating activities: | | | |
Net income | $ | 845 |
| | $ | 1,129 |
|
Less: Income (loss) from discontinued operations | (3 | ) | | 4 |
|
Income from continuing operations | 848 |
| | 1,125 |
|
Adjustments to reconcile to net cash provided by operating activities: | | | |
Depreciation, decommissioning and amortization | 1,288 |
| | 1,127 |
|
Regulatory impacts of net nuclear decommissioning trust earnings | 131 |
| | 106 |
|
Other amortization | 112 |
| | 90 |
|
Stock-based compensation | 22 |
| | 20 |
|
Equity in income from unconsolidated affiliates – net | (68 | ) | | (101 | ) |
Distributions from unconsolidated entities | 52 |
| | 76 |
|
Deferred income taxes and investment tax credits | 373 |
| | 414 |
|
Proceeds from U.S. treasury grants | 310 |
| | 92 |
|
Income from leveraged leases | (4 | ) | | (3 | ) |
Changes in operating assets and liabilities: | | | |
Receivables | (205 | ) | | (184 | ) |
Inventory | (20 | ) | | (27 | ) |
Margin and collateral deposits – net of collateral received | 6 |
| | 32 |
|
Prepaid taxes | 318 |
| | 33 |
|
Other current assets | (319 | ) | | (224 | ) |
Rent payments in excess of levelized rent expense | (133 | ) | | (148 | ) |
Accounts payable | 178 |
| | 28 |
|
Accrued taxes | 76 |
| | (23 | ) |
Other current liabilities | (189 | ) | | (129 | ) |
Derivative assets and liabilities – net | 137 |
| | 1,079 |
|
Regulatory assets and liabilities – net | (73 | ) | | (530 | ) |
Other assets | (14 | ) | | (40 | ) |
Other liabilities | 1 |
| | (67 | ) |
Operating cash flows from discontinued operations | (3 | ) | | 4 |
|
Net cash provided by operating activities | 2,824 |
| | 2,750 |
|
Cash flows from financing activities: | | | |
Long-term debt issued | 686 |
| | 1,652 |
|
Long-term debt issuance costs | (24 | ) | | (35 | ) |
Long-term debt repaid | (97 | ) | | (371 | ) |
Bonds purchased | (86 | ) | | — |
|
Preference stock issued – net | 123 |
| | — |
|
Short-term debt financing – net | 573 |
| | 13 |
|
Settlements of stock-based compensation – net | (14 | ) | | (7 | ) |
Dividends and distributions to noncontrolling interests | (43 | ) | | (39 | ) |
Dividends paid | (313 | ) | | (308 | ) |
Net cash provided by financing activities | $ | 805 |
| | $ | 905 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
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| | | | | | | |
Consolidated Statements of Cash Flows | Edison International | |
| | | |
| Nine months ended September 30, |
(in millions, unaudited) | 2011 | | 2010 |
Cash flows from investing activities: | | | |
Capital expenditures | $ | (3,491 | ) | | $ | (3,129 | ) |
Purchase of interest in acquired companies | (3 | ) | | (4 | ) |
Proceeds from sale of nuclear decommissioning trust investments | 2,108 |
| | 903 |
|
Purchases of nuclear decommissioning trust investments and other | (2,254 | ) | | (1,036 | ) |
Proceeds from partnerships and unconsolidated subsidiaries, net of investment | 6 |
| | 35 |
|
Investments in other assets | — |
| | 3 |
|
Effect of consolidation and deconsolidation of variable interest entities | — |
| | (91 | ) |
Net cash used by investing activities | (3,634 | ) | | (3,319 | ) |
Net increase (decrease) in cash and cash equivalents | (5 | ) | | 336 |
|
Cash and cash equivalents, beginning of period | 1,389 |
| | 1,673 |
|
Cash and cash equivalents, end of period | $ | 1,384 |
| | $ | 2,009 |
|
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 ("GAAP") for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three- and nine-month periods ended September 30, 2011 are not necessarily indicative of the operating results for the full year.
The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Cash Equivalents
Cash equivalents included investments in money market funds totaling $1.1 billion at both September 30, 2011 and December 31, 2010. Generally, the carrying value of cash equivalents equals the fair value, as these investments have maturities of three months or less.
Edison International temporarily invests the ending daily cash balance in its primary disbursement accounts until required for check clearing. Edison International reclassified $215 million and $197 million of checks issued against these accounts, but not yet paid by the financial institution, from cash to accounts payable at September 30, 2011 and December 31, 2010, respectively.
Inventory
Inventory is stated at the lower of cost or market, cost being determined by the weighted-average cost method for fuel, and the average cost method for materials and supplies. Inventory consisted of the following:
|
| | | | | | | |
(in millions) | September 30, 2011 | | December 31, 2010 |
Coal, gas, fuel oil and other raw materials | $ | 191 |
| | $ | 184 |
|
Spare parts, materials and supplies | 401 |
| | 384 |
|
Total inventory | $ | 592 |
| | $ | 568 |
|
Earnings Per Share
Edison International computes earnings per share ("EPS") using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security. Edison International's participating securities are stock-based compensation awards payable in common shares, including stock options, performance shares and restricted stock units, which earn dividend equivalents on an equal basis with common shares. Stock options awarded during the period 2003 through 2006 received dividend equivalents. EPS attributable to Edison International common shareholders was computed as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in millions) | 2011 | | 2010 | | 2011 | | 2010 |
Basic earnings per share – continuing operations: | | | | | | | |
Income from continuing operations attributable to common shareholders, net of tax | $ | 426 |
| | $ | 514 |
| | $ | 805 |
| | $ | 1,086 |
|
Participating securities dividends | — |
| | (3 | ) | | — |
| | (5 | ) |
Income from continuing operations available to common shareholders | $ | 426 |
| | $ | 511 |
| | $ | 805 |
| | $ | 1,081 |
|
Weighted average common shares outstanding | 326 |
| | 326 |
| | 326 |
| | 326 |
|
Basic earnings per share – continuing operations | $ | 1.31 |
|
| $ | 1.57 |
|
| $ | 2.47 |
|
| $ | 3.32 |
|
Diluted earnings per share – continuing operations: | | | | | | | |
Income from continuing operations available to common shareholders | $ | 426 |
| | $ | 511 |
| | $ | 805 |
| | $ | 1,081 |
|
Income impact of assumed conversions | 1 |
| | 2 |
| | 3 |
| | 3 |
|
Income from continuing operations available to common shareholders and assumed conversions | $ | 427 |
| | $ | 513 |
| | $ | 808 |
| | $ | 1,084 |
|
Weighted average common shares outstanding | 326 |
| | 326 |
| | 326 |
| | 326 |
|
Incremental shares from assumed conversions | 3 |
| | 2 |
| | 3 |
| | 2 |
|
Adjusted weighted average shares – diluted | 329 |
| | 328 |
| | 329 |
| | 328 |
|
Diluted earnings per share – continuing operations | $ | 1.30 |
| | $ | 1.57 |
| | $ | 2.46 |
| | $ | 3.30 |
|
Stock-based compensation awards to purchase 5,943,378 and 9,700,218 shares of common stock for the three months ended September 30, 2011 and 2010, respectively, and 8,970,290 and 6,154,826 shares of common stock for the nine months ended September 30, 2011 and 2010 respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the awards was greater than the average market price of the common shares during the respective periods and, therefore, the effect would have been antidilutive.
New Accounting Guidance
Accounting Guidance Adopted in 2011
Revenue—Multiple-Deliverables
In October 2009, the Financial Accounting Standards Board ("FASB") issued amended guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenues based on those separate deliverables. This update also requires additional disclosure related to the significant assumptions used to determine the revenue recognition of the separate deliverables. This guidance is required to be applied prospectively to new or significantly modified revenue arrangements. Edison International adopted this guidance effective January 1, 2011. The adoption of this accounting standards update did not have a material impact on Edison International's consolidated results of operations, financial position or cash flows.
Fair Value Measurements and Disclosures
The FASB issued an accounting standards update modifying the disclosure requirements related to fair value measurements. Under these requirements, purchases and settlements for Level 3 fair value measurements are presented on a gross basis, rather than net. Edison International adopted this guidance effective January 1, 2011.
Accounting Guidance Not Yet Adopted
Fair Value Measurement
In May 2011, the FASB issued an accounting standards update modifying the fair value measurement and disclosure guidance. This guidance prohibits grouping of financial instruments for purposes of fair value measurement and requires the value be based on the individual security. This amendment also results in new disclosures primarily related to Level 3 measurements including quantitative disclosure about unobservable inputs and assumptions, a description of the valuation processes and a narrative description of the sensitivity of the fair value to changes in unobservable inputs. Edison International will adopt this
guidance effective January 1, 2012 and does not expect the adoption of this standard will have a material impact on Edison International's consolidated statements of income, financial position or cash flows.
Presentation of Comprehensive Income
In June 2011, the FASB issued an accounting standards update on the presentation of comprehensive income. An entity can elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. Edison International will adopt this guidance effective January 1, 2012. Edison International currently presents the statement of comprehensive income immediately following the statement of income and expects to continue to do so. The adoption of this accounting standards update does not change the items that constitute net income and other comprehensive income.
Note 2. Consolidated Statements of Changes in Equity
The following table provides the changes in equity for the nine months ended September 30, 2011. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Attributable to Edison International | | Noncontrolling Interests | | |
(in millions) | Common Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Subtotal | | Other | | Preferred and Preference Stock | | Total Equity |
Balance at December 31, 2010 | $ | 2,331 |
| | $ | (76 | ) | | $ | 8,328 |
| | $ | 10,583 |
| | $ | 4 |
| | $ | 907 |
| | $ | 11,494 |
|
Net income (loss) | — |
| | — |
| | 802 |
| | 802 |
| | (1 | ) | | 44 |
| | 845 |
|
Other comprehensive loss | — |
| | (48 | ) | | — |
| | (48 | ) | | — |
| | — |
| | (48 | ) |
Common stock dividends declared ($0.96 per share) | — |
| | — |
| | (313 | ) | | (313 | ) | | — |
| | — |
| | (313 | ) |
Dividends, distributions to noncontrolling interests and other | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (44 | ) | | (45 | ) |
Stock-based compensation and other | 7 |
| | — |
| | (21 | ) | | (14 | ) | | — |
| | — |
| | (14 | ) |
Noncash stock-based compensation and other | 22 |
| | — |
| | (3 | ) | | 19 |
| | — |
| | (1 | ) | | 18 |
|
Purchase of noncontrolling interests1 | (14 | ) | | — |
| | — |
| | (14 | ) | | — |
| | — |
| | (14 | ) |
Issuance of preference stock | — |
| | — |
| | — |
| | — |
| | — |
| | 123 |
| | 123 |
|
Balance at September 30, 2011 | $ | 2,346 |
| | $ | (124 | ) | | $ | 8,793 |
| | $ | 11,015 |
| | $ | 2 |
| | $ | 1,029 |
| | $ | 12,046 |
|
| |
1 | During the nine months ended September 30, 2011, EMG purchased the remaining interests in Pinnacle Wind Force, LLC, and Broken Bow I, LLC and all assets of the Crofton Bluffs project. All three projects are now 100% owned by EMG. The purchases of the noncontrolling interests were accounted for as equity transactions between controlling and noncontrolling interest holders. |
The following table provides the changes in equity for the nine months ended September 30, 2010. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Attributable to Edison International | | Noncontrolling Interests | | |
(in millions) | Common Stock | | Accumulated Other Comprehensive Income | | Retained Earnings | | Subtotal | | Other | | Preferred and Preference Stock | | Total Equity |
Balance at December 31, 2009 | $ | 2,304 |
| | $ | 37 |
| | $ | 7,500 |
| | $ | 9,841 |
| | $ | 258 |
| | $ | 907 |
| | $ | 11,006 |
|
Net income | — |
| | — |
| | 1,090 |
| | 1,090 |
| | — |
| | 39 |
| | 1,129 |
|
Other comprehensive loss | — |
| | (11 | ) | | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
Deconsolidation of variable interest entities | — |
| | — |
| | — |
| | — |
| | (249 | ) | | — |
| | (249 | ) |
Cumulative effect of a change in accounting principle, net of tax | — |
| | — |
| | 15 |
| | 15 |
| | — |
| | — |
| | 15 |
|
Common stock dividends declared ($0.945 per share) | — |
| | — |
| | (308 | ) | | (308 | ) | | — |
| | — |
| | (308 | ) |
Dividends, distributions to noncontrolling interests and other | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (39 | ) | | (43 | ) |
Stock-based compensation and other | 5 |
| | — |
| | (12 | ) | | (7 | ) | | — |
| | — |
| | (7 | ) |
Noncash stock-based compensation and other | 16 |
| | — |
| | (2 | ) | | 14 |
| | — |
| | — |
| | 14 |
|
Balance at September 30, 2010 | $ | 2,325 |
| | $ | 26 |
| | $ | 8,283 |
| | $ | 10,634 |
| | $ | 5 |
| | $ | 907 |
| | $ | 11,546 |
|
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. Commercial and operating activities are generally the factors that most significantly impact the economic performance of VIEs in which Edison International has a variable interest. Commercial and operating activities include construction, operation and maintenance, fuel procurement, dispatch and compliance with regulatory and contractual requirements.
Categories of Variable Interest Entities
Projects or Entities that are Consolidated
At September 30, 2011 and December 31, 2010, EMG consolidated 13 and 14 projects, respectively, with a total generating capacity of 570 MW and 580 MW, respectively, that have interests held by others. In April 2011, EMG sold its 75% ownership interest in a Minnesota wind project.
The following table presents summarized financial information of the projects that were consolidated by EMG:
|
| | | | | | | |
(in millions) | September 30, 2011 | | December 31, 2010 |
Current assets | $ | 40 |
| | $ | 26 |
|
Net property, plant and equipment | 702 |
| | 739 |
|
Other long-term assets | 6 |
| | 6 |
|
Total assets | $ | 748 |
| | $ | 771 |
|
Current liabilities | $ | 28 |
| | $ | 25 |
|
Long-term debt net of current portion | 67 |
| | 71 |
|
Deferred revenues | 69 |
| | 71 |
|
Other long-term liabilities | 21 |
| | 21 |
|
Total liabilities | $ | 185 |
| | $ | 188 |
|
Noncontrolling interests | $ | 2 |
| | $ | 4 |
|
At September 30, 2011 and December 31, 2010, assets serving as collateral for the debt obligations had a carrying value of $160 million and $163 million, respectively, and primarily consist of property, plant and equipment.
Variable Interest in VIEs that are not Consolidated
Power Purchase Contracts
SCE has 16 power purchase agreements ("PPAs") that have variable interests in VIEs, including 6 tolling agreements through which SCE provides the natural gas to fuel the plants and 10 contracts with qualifying facilities ("QFs") that contain variable pricing provisions based on the price of natural gas. SCE has concluded that it is not the primary beneficiary of these VIEs since it does not control the commercial and operating activities of these entities. In general, because payments for capacity are the primary source of income, the most significant economic activity for SCE's VIEs is the operation and maintenance of the power plants.
As of the balance sheet date, the carrying amount of assets and liabilities in SCE's consolidated balance sheet that relate to its involvement with VIEs result from amounts due under the PPAs or the fair value of those derivative contracts. Under these contracts, SCE recovers the costs incurred under its approved long-term power procurement plans. SCE has no residual interest in the entities and has not provided or guaranteed any debt or equity support, liquidity arrangements, performance guarantees or other commitments associated with these contracts other than the purchase commitments described in Note 9. As a result, there is no significant potential exposure to loss as a result of SCE's involvement with these VIEs. The aggregate capacity dedicated to SCE for these VIE projects was 3,820 MW at September 30, 2011 and the amounts that SCE paid to these projects were $178 million and $205 million for the three months ended September 30, 2011 and 2010, respectively, and $347 million and
$447 million for the nine months ended September 30, 2011 and 2010, respectively. These amounts are recovered in customer rates.
Equity Interests
EMG accounts for domestic gas and wind energy projects in which it has less than a 100% ownership interest, and cannot exercise unilateral control, under the equity method. At September 30, 2011 and December 31, 2010, EMG had five significant variable interests in natural gas projects that are not consolidated, consisting of the Big 4 projects (Kern River, Midway-Sunset, Sycamore and Watson) and the Sunrise project. A subsidiary of EMG operates three of the four Big 4 projects and the Sunrise project and EMG's partner provides the fuel management services for the Big 4 projects. In addition, the executive director of these projects is provided by EMG's partner. Commercial and operating activities are jointly controlled by a management committee of each VIE. Accordingly, EMG accounts for its variable interests under the equity method.
EMG accounts for its interest in three renewable wind generating facilities under the equity method. At December 31, 2010, EMG had interests in 2 renewable wind generating facilities, the Elkhorn Ridge and San Juan Mesa projects. In addition to these 2 projects, at September 30, 2011, EMG had interests in Community Wind North, which achieved commercial operation on May 28, 2011. The commercial and operating activities of these entities are jointly directed by representatives of each partner. Thus, EMG is not the primary beneficiary of these projects.
The following table presents the carrying amount of EMG's investments in unconsolidated VIEs and the maximum exposure to loss for each investment:
|
| | | | | | | |
| September 30, 2011 |
(in millions) | Investment | | Maximum Exposure |
Natural gas-fired projects | $ | 340 |
| | $ | 340 |
|
Renewable energy projects | 228 |
| | 228 |
|
EMG's maximum exposure to loss in its VIEs accounted for under the equity method is generally limited to its investment in these entities. One of EMG's domestic energy projects has long-term debt that is secured by a pledge of project entity assets, but does not provide for recourse to EMG. Accordingly, a default under the project financing could result in foreclosure on the assets of the project entity resulting in a loss of some or all of EMG's investment, but would not require EMG to contribute additional capital. At September 30, 2011, entities which EMG has accounted for under the equity method had indebtedness of $64 million, of which $16 million is proportionate to EMG's ownership interest in this project.
Note 4. Fair Value Measurements
Recurring Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, referred to as an exit price. Fair value of an asset or liability should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk.
Edison International categorizes financial assets and liabilities into a fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
|
| | | | | | | | | | | | | | | | | | | |
| As of September 30, 2011 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Netting and Collateral1 | | Total |
Assets at Fair Value | | | | | | | | | |
Money market funds2 | $ | 1,056 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,056 |
|
Derivative contracts: | | | | | | | | | |
Electricity | — |
| | 43 |
| | 213 |
| | (36 | ) | | 220 |
|
Natural gas | 2 |
| | 61 |
| | 10 |
| | (6 | ) | | 67 |
|
Fuel oil | 2 |
| | — |
| | — |
| | (2 | ) | | — |
|
Tolling | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Coal | — |
| | 1 |
| | — |
| | (1 | ) | | — |
|
Subtotal of commodity contracts | 4 |
| | 105 |
| | 227 |
| | (45 | ) | | 291 |
|
Long-term disability plan | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Nuclear decommissioning trusts: | | | | | | | | | |
Stocks3 | 1,721 |
| | — |
| | — |
| | — |
| | 1,721 |
|
Municipal bonds | — |
| | 767 |
| | — |
| | — |
| | 767 |
|
U.S. government and agency securities | 378 |
| | 123 |
| | — |
| | — |
| | 501 |
|
Corporate bonds4 | — |
| | 318 |
| | — |
| | — |
| | 318 |
|
Short-term investments, primarily cash equivalents5 | 2 |
| | 151 |
| | — |
| | — |
| | 153 |
|
Subtotal of nuclear decommissioning trusts | 2,101 |
| | 1,359 |
| | — |
| | — |
| | 3,460 |
|
Total assets6 | 3,170 |
| | 1,464 |
| | 227 |
| | (45 | ) | | 4,816 |
|
Liabilities at Fair Value | | | | | | | | | |
Derivative contracts: | | | | | | | | | |
Electricity | — |
| | 17 |
| | 84 |
| | (18 | ) | | 83 |
|
Natural gas | — |
| | 240 |
| | 12 |
| | (12 | ) | | 240 |
|
Fuel oil | 1 |
| | — |
| | — |
| | (1 | ) | | — |
|
Tolling | — |
| | — |
| | 231 |
| | — |
| | 231 |
|
Subtotal of commodity contracts | 1 |
| | 257 |
| | 327 |
| | (31 | ) | | 554 |
|
Interest rate contracts | — |
| | 80 |
| | — |
| | — |
| | 80 |
|
Total liabilities | 1 |
| | 337 |
| | 327 |
| | (31 | ) | | 634 |
|
Net assets (liabilities) | $ | 3,169 |
| | $ | 1,127 |
| | $ | (100 | ) | | $ | (14 | ) | | $ | 4,182 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2010 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Netting and Collateral1 | | Total |
Assets at Fair Value | | | | | | | | | |
Money market funds2 | $ | 1,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,100 |
|
Derivative contracts: | | | | | | | | | |
Electricity | — |
| | 70 |
| | 363 |
| | (61 | ) | | 372 |
|
Natural gas | 1 |
| | 69 |
| | 11 |
| | (1 | ) | | 80 |
|
Fuel oil | 8 |
| | — |
| | — |
| | (8 | ) | | — |
|
Tolling | — |
| | — |
| | 118 |
| | — |
| | 118 |
|
Subtotal of commodity contracts | 9 |
| | 139 |
| | 492 |
| | (70 | ) | | 570 |
|
Long-term disability plan | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Nuclear decommissioning trusts: | | | | | | | | | |
Stocks3 | 2,029 |
| | — |
| | — |
| | — |
| | 2,029 |
|
Municipal bonds | — |
| | 790 |
| | — |
| | — |
| | 790 |
|
Corporate bonds4 | — |
| | 346 |
| | — |
| | — |
| | 346 |
|
U.S. government and agency securities | 215 |
| | 73 |
| | — |
| | — |
| | 288 |
|
Short-term investments, primarily cash equivalents5 | 1 |
| | 31 |
| | — |
| | — |
| | 32 |
|
Subtotal of nuclear decommissioning trusts | 2,245 |
| | 1,240 |
| | — |
| | — |
| | 3,485 |
|
Total assets6 | 3,363 |
| | 1,379 |
| | 492 |
| | (70 | ) | | 5,164 |
|
Liabilities at Fair Value | | | | | | | | | |
Derivative contracts: | | | | | | | | | |
Electricity | — |
| | 13 |
| | 40 |
| | (21 | ) | | 32 |
|
Natural gas | — |
| | 286 |
| | 11 |
| | (4 | ) | | 293 |
|
Tolling | — |
| | — |
| | 344 |
| | — |
| | 344 |
|
Coal | — |
| | 1 |
| | — |
| | (1 | ) | | — |
|
Subtotal of commodity contracts | — |
| | 300 |
| | 395 |
| | (26 | ) | | 669 |
|
Interest rate contracts | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
Total liabilities | — |
| | 316 |
| | 395 |
| | (26 | ) | | 685 |
|
Net assets (liabilities) | $ | 3,363 |
| | $ | 1,063 |
| | $ | 97 |
| | $ | (44 | ) | | $ | 4,479 |
|
| |
1 | Represents the netting of assets and liabilities under master netting agreements and cash collateral across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
| |
2 | Money market funds are included in cash and cash equivalents and restricted cash on Edison International's consolidated balance sheets. |
| |
3 | Approximately 69% and 67% of the equity investments were located in the United States at September 30, 2011 and December 31, 2010, respectively. |
| |
4 | At September 30, 2011 and December 31, 2010, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $21 million and $27 million, respectively. |
| |
5 | Excludes net liabilities of $67 million and $5 million at September 30, 2011 and December 31, 2010, respectively, of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases. |
| |
6 | Excludes $31 million at both September 30, 2011 and December 31, 2010, of cash surrender value of life insurance investments for deferred compensation. |
The following table sets forth a summary of changes in the fair value of Level 3 assets and liabilities:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in millions) | 2011 | | 2010 | | 2011 | | 2010 |
Fair value, net asset (liabilities) at beginning of period | $ | (275 | ) | | $ | (703 | ) | | $ | 97 |
| | $ | 62 |
|
Total realized/unrealized gains (losses): | | | | | | | |
Included in earnings1 | (4 | ) | | 24 |
| | 14 |
| | 51 |
|
Included in regulatory assets and liabilities2 | 162 |
| 3 | (142 | ) | | (220 | ) | 3 | (924 | ) |
Included in accumulated other comprehensive income | 1 |
| | 1 |
| | (2 | ) | | 5 |
|
Purchases | 24 |
| | 15 |
| | 51 |
| | 48 |
|
Settlements | (8 | ) | | (76 | ) | | (38 | ) | | (128 | ) |
Transfers in or out of Level 3 | — |
| | (12 | ) | | (2 | ) | | (7 | ) |
Fair value, net liability at end of period | $ | (100 | ) | | $ | (893 | ) | | $ | (100 | ) | | $ | (893 | ) |
Change during the period in unrealized losses related to assets and liabilities held at the end of the period4 | $ | (110 | ) | | $ | (163 | ) | | $ | (425 | ) | | $ | (882 | ) |
| |
1 | Reported in "Competitive power generation" revenue on Edison International's consolidated statements of income. |
| |
2 | Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities. |
| |
3 | Includes the elimination of the fair value of derivatives with SCE's consolidated affiliates. |
| |
4 | Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income was a loss of $3 million for the three months ended September 30, 2010, and gains of $7 million and $1 million for the nine months ended September 30, 2011 and 2010, respectively. The remainder of the unrealized losses relate to SCE. See 2 above. |
Edison International determines the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no significant transfers between levels during 2011 and 2010.
Valuation Techniques Used to Determine Fair Value
Level 1
Includes financial 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.
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), 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 September 30, 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 value and fair value of long-term debt are:
|
| | | | | | | | | | | | | | | |
| September 30, 2011 | | December 31, 2010 |
(in millions) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt, including current portion | $ | 13,061 |
| | $ | 13,500 |
| | $ | 12,419 |
| | $ | 12,360 |
|
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
Long-Term Debt
In May 2011, SCE issued $500 million of 3.875% first and refunding mortgage bonds due in 2021. The proceeds from these bonds were used to repay commercial paper borrowings and to fund SCE's capital program. In October 2011, SCE issued $150 million of floating rate first and refunding mortgage bonds due in 2014. The proceeds from these bonds were used to finance fuel inventories.
In May 2011 and September 2011, SCE purchased $56 million and $30 million, respectively, of its variable rate tax-exempt bonds.
Project Financings
Walnut Creek
On July 27, 2011, EMG completed, through wholly owned subsidiaries, non-recourse financings to fund construction of the Walnut Creek project, a 479 MW natural gas-fired peaker plant in southern California. The financings included floating rate construction loans totaling $495 million that will convert to 10-year amortizing term loans by June 30, 2013, subject to meeting specified conditions, and also included $122 million of letter of credit ($40 million outstanding at September 30, 2011) and working capital facilities.
The non-recourse financings were completed in two parts. A construction plus term loan financing of $442 million that initially accrues interest at the London Interbank Offered Rate (LIBOR) plus 2.25% and increases by 0.25% after the third, sixth and ninth anniversaries of the term conversion date. An interest rate swap agreement for a portion of the construction loan fixed the floating rate at 0.81% beginning November 30, 2011 through March 31, 2013. The effective rate for the outstanding loan of $44 million was 2.48% at September 30, 2011. Under the swap agreement for majority of the term loan, the fixed interest rate will be 3.54% beginning June 28, 2013 through May 31, 2023 and the effective rate is expected to be 5.84%.
A second construction plus term loan financing of $53 million was obtained by a holding company that accrues interest at LIBOR plus 4.00% over the entire term. An interest rate swap agreement for a portion of the construction loan fixed the floating rate at 0.79% beginning July 29, 2011 through May 31, 2013. The effective rate for the outstanding loan of $49 million was 4.94% at September 30, 2011. Under the swap agreement for the majority of the term loan, the fixed interest rate will be 4.00% beginning June 28, 2013 through May 31, 2023 and the effective rate is expected to be 8.00%, Both outstanding loans were recorded in long-term debt on Edison International's consolidated balance sheet at September 30, 2011.
Viento Funding II Wind Financing Amendment
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 September 30, 2011, $216 million was outstanding under this loan. The amount of outstanding letters of credit was $23 million. Interest under the term loan accrues at LIBOR plus 2.75% initially with the rate increasing 0.25% on every fourth anniversary.
Credit Agreements and Short-Term Debt
At September 30, 2011, SCE's outstanding short-term debt was $550 million at a weight