EIX 2012 Q1


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
 
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 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 April 30, 2012
Common Stock, no par value
 
325,811,206
 
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii


GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2011 Form 10-K
 
Edison International's Annual Report on Form 10-K for the year-ended December 31, 2011
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
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
GECC
 
General Electric Capital Corporation
GHG
 
greenhouse gas


iii


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
MATS
 
Mercury and Air Toxics Standards
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


iv


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)



v
























(This page has been left blank intentionally.)


1


PART I.    FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS
Consolidated Statements of Income
 
Edison International
 
 
 
 
 
 
Three months ended March 31,
(in millions, except per-share amounts, unaudited)
 
2012
 
2011
Electric utility
 
$
2,412

 
$
2,230

Competitive power generation
 
444

 
552

Total operating revenue
 
2,856

 
2,782

Fuel
 
283

 
258

Purchased power
 
615

 
508

Operation and maintenance
 
1,184

 
1,149

Depreciation, decommissioning and amortization
 
456

 
417

Asset impairments and other
 
14

 
—

Total operating expenses
 
2,552

 
2,332

Operating income
 
304

 
450

Interest and dividend income
 
3

 
4

Equity in loss from unconsolidated affiliates – net
 
(1
)
 
(5
)
Other income
 
31

 
41

Interest expense
 
(212
)
 
(196
)
Other expenses
 
(10
)
 
(13
)
Income from continuing operations before income taxes
 
115

 
281

Income tax expense
 
—

 
65

Income from continuing operations
 
115

 
216

Loss from discontinued operations, net of tax
 
(1
)
 
(2
)
Net income
 
114

 
214

Dividends on preferred and preference stock of utility
 
19

 
14

Other noncontrolling interests
 
2

 
—

Net income attributable to Edison International common shareholders
 
$
93

 
$
200

Amounts attributable to Edison International common shareholders:
 
 
 
 
Income from continuing operations, net of tax
 
$
94

 
$
202

Loss from discontinued operations, net of tax
 
(1
)
 
(2
)
Net income attributable to Edison International common shareholders
 
$
93

 
$
200

Basic earnings (loss) per common share attributable to Edison International common shareholders:
 
 
 
 
Weighted-average shares of common stock outstanding
 
326

 
326

Continuing operations
 
$
0.28

 
$
0.62

Discontinued operations
 
—

 
(0.01
)
Total
 
$
0.28

 
$
0.61

Diluted earnings (loss) per common share attributable to Edison International common shareholders:
 
 
 
 
Weighted-average shares of common stock outstanding, including effect of dilutive securities
 
329

 
328

Continuing operations
 
$
0.28

 
$
0.62

Discontinued operations
 
—

 
(0.01
)
Total
 
$
0.28

 
$
0.61

Dividends declared per common share
 
$
0.325

 
$
0.320


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

2


Consolidated Statements of Comprehensive Income
 
Edison International
 
 
 
 
 
 
Three months ended March 31,
(in millions, unaudited)
 
2012
 
2011
Net income
 
$
114

 
$
214

Other comprehensive income (loss), net of tax:
 
 
 
 
Pension and postretirement benefits other than pensions:
 
 
 
 
Amortization of net loss included in net income, net of income tax expense of $4 and $1 for 2012 and 2011, respectively
 
7

 
3

Unrealized gain (loss) on derivatives qualified as cash flow hedges:
 
 
 
 
Unrealized holding gain arising during the period, net of income tax expense of $17 and $4 for 2012 and 2011, respectively
 
25

 
6

Reclassification adjustments included in net income, net of income tax benefit of $8 and $6 for 2012 and 2011, respectively
 
(11
)
 
(10
)
Other comprehensive income (loss)
 
21

 
(1
)
Comprehensive income
 
135

 
213

Less: Comprehensive income attributable to noncontrolling interests
 
21

 
14

Comprehensive income attributable to Edison International
 
$
114

 
$
199



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

3


Consolidated Balance Sheets
 
Edison International
 
 
 
 
 
 
(in millions, unaudited)
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,483

 
$
1,469

Receivables, less allowances of $76 and $75 for uncollectible accounts at respective dates
 
753

 
908

Accrued unbilled revenue
 
508

 
519

Inventory
 
579

 
624

Prepaid taxes
 
121

 
88

Derivative assets
 
90

 
106

Restricted cash and cash equivalents
 
187

 
103

Margin and collateral deposits
 
96

 
58

Regulatory assets
 
692

 
494

Other current assets
 
206

 
115

Total current assets
 
4,715

 
4,484

Nuclear decommissioning trusts
 
3,853

 
3,592

Investments in unconsolidated affiliates
 
522

 
525

Other investments
 
221

 
211

Total investments
 
4,596

 
4,328

Utility property, plant and equipment, less accumulated depreciation of $7,088 and $6,894 at respective dates
 
28,133

 
27,569

Competitive power generation and other property, plant and equipment, less accumulated depreciation of $1,478 and $1,408 at respective dates
 
4,547

 
4,547

Total property, plant and equipment
 
32,680

 
32,116

Derivative assets
 
117

 
128

Restricted deposits
 
60

 
51

Rent payments in excess of levelized rent expense under plant operating leases
 
798

 
760

Regulatory assets
 
5,713

 
5,466

Other long-term assets
 
705

 
706

Total long-term assets
 
7,393

 
7,111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
49,384

 
$
48,039



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

4


Consolidated Balance Sheets
 
Edison International
 
 
 
 
 
 
(in millions, except share amounts, unaudited)
 
March 31,
2012
 
December 31,
2011
LIABILITIES AND EQUITY
 
 
 
 
Short-term debt
 
$
343

 
$
429

Current portion of long-term debt
 
61

 
57

Accounts payable
 
1,067

 
1,419

Accrued taxes
 
112

 
52

Accrued interest
 
229

 
205

Customer deposits
 
195

 
199

Derivative liabilities
 
255

 
268

Regulatory liabilities
 
645

 
670

Other current liabilities
 
768

 
1,049

Total current liabilities
 
3,675

 
4,348

Long-term debt
 
14,131

 
13,689

Deferred income taxes
 
5,686

 
5,396

Deferred investment tax credits
 
88

 
89

Customer advances
 
141

 
138

Derivative liabilities
 
803

 
547

Pensions and benefits
 
2,882

 
2,912

Asset retirement obligations
 
2,730

 
2,688

Regulatory liabilities
 
5,103

 
4,670

Other deferred credits and other long-term liabilities
 
2,538

 
2,476

Total deferred credits and other liabilities
 
19,971

 
18,916

Total liabilities
 
37,777

 
36,953

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)
 
2,325

 
2,360

Accumulated other comprehensive loss
 
(118
)
 
(139
)
Retained earnings
 
7,783

 
7,834

Total Edison International's common shareholders' equity
 
9,990

 
10,055

Preferred and preference stock of utility
 
1,374

 
1,029

Other noncontrolling interests
 
243

 
2

Total noncontrolling interests
 
1,617

 
1,031

Total equity
 
11,607

 
11,086

Total liabilities and equity
 
$
49,384

 
$
48,039



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

5


Consolidated Statements of Cash Flows
 
Edison International
 
 
 
Three months ended March 31,
(in millions, unaudited)
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net income
 
$
114

 
$
214

Less: Loss from discontinued operations
 
(1
)
 
(2
)
Income from continuing operations
 
115

 
216

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
 
Depreciation, decommissioning and amortization
 
456

 
417

Regulatory impacts of net nuclear decommissioning trust earnings
 
77

 
41

Other amortization
 
26

 
37

Asset impairments and other
 
15

 
—

Stock-based compensation
 
8

 
7

Equity in loss from unconsolidated affiliates
 
1

 
5

Distributions from unconsolidated affiliates
 
—

 
5

Deferred income taxes and investment tax credits
 
(22
)
 
226

Income from leveraged leases
 
(1
)
 
(1
)
Proceeds from U.S. treasury grants
 
29

 
—

Changes in operating assets and liabilities:
 
 
 
 
Receivables
 
118

 
128

Inventory
 
44

 
(18
)
Margin and collateral deposits – net of collateral received
 
(36
)
 
15

Prepaid taxes
 
(33
)
 
(143
)
Other current assets
 
22

 
(6
)
Rent payments in excess of levelized rent expense
 
(38
)
 
(32
)
Accounts payable
 
(78
)
 
(49
)
Accrued taxes
 
322

 
1

Other current liabilities
 
(426
)
 
(207
)
Derivative assets and liabilities – net
 
295

 
106

Regulatory assets and liabilities – net
 
(254
)
 
(42
)
Other assets
 
(7
)
 
(7
)
Other liabilities
 
45

 
21

Operating cash flows from discontinued operations
 
(1
)
 
(2
)
Net cash provided by operating activities
 
677

 
718

Cash flows from financing activities:
 
 
 
 
Long-term debt issued
 
449

 
82

Long-term debt issuance costs
 
(8
)
 
(1
)
Long-term debt repaid
 
(9
)
 
(9
)
Preference stock issued – net
 
345

 
123

Short-term debt financing – net
 
(86
)
 
294

Settlements of stock-based compensation – net
 
(28
)
 
(7
)
Cash contributions from noncontrolling interests
 
238

 
—

Dividends and distributions to noncontrolling interests
 
(14
)
 
(13
)
Dividends paid
 
(106
)
 
(104
)
Net cash provided by financing activities
 
$
781

 
$
365


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

6


Consolidated Statements of Cash Flows
 
Edison International
 
 
 
Three months ended March 31,
(in millions, unaudited)
 
2012
 
2011
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
$
(1,276
)
 
$
(1,133
)
Proceeds from sale of nuclear decommissioning trust investments
 
602

 
622

Purchases of nuclear decommissioning trust investments and other
 
(684
)
 
(669
)
Proceeds from partnerships and unconsolidated subsidiaries, net of investment
 
1

 
5

Investments in other assets
 
(87
)
 
1

Net cash used by investing activities
 
(1,444
)
 
(1,174
)
Net increase (decrease) in cash and cash equivalents
 
14

 
(91
)
Cash and cash equivalents, beginning of period
 
1,469

 
1,389

Cash and cash equivalents, end of period
 
$
1,483

 
$
1,298



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

7


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 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 2011 Form 10-K. The same accounting policies are followed for interim reporting purposes, with the exception of accounting principles adopted as of January 1, 2012, discussed below in "—New Accounting Guidance." This quarterly report should be read in conjunction with the financial statements and notes included in the 2011 Form 10-K.
In the opinion of management, all adjustments, consisting of 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, 2012 are not necessarily indicative of the operating results for the full year.
The December 31, 2011 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 $1.2 billion and $1.3 billion at March 31, 2012 and December 31, 2011, respectively. 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 $178 million and $220 million of checks issued, but not yet paid by the financial institution, from cash to accounts payable at March 31, 2012 and December 31, 2011, respectively.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at March 31, 2012 and December 31, 2011 included $97 million received from a wind financing that was held in escrow at those dates and is expected to be released in the second quarter of 2012 when the project achieves certain completion milestones. At March 31, 2012, restricted cash and cash equivalents also included $74 million to support outstanding letters of credit issued under EMG's letter of credit facilities.
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, 2012
 
December 31, 2011
Coal, gas, fuel oil and other raw materials
$
170

 
$
211

Spare parts, materials and supplies
409

 
413

Total inventory
$
579

 
$
624


8



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 March 31,
(in millions)
2012
 
2011
Basic earnings per share – continuing operations:
 
 
 
Income from continuing operations attributable to common shareholders, net of tax
$
94

 
$
202

Participating securities dividends
—

 
—

Income from continuing operations available to common shareholders
$
94

 
$
202

Weighted average common shares outstanding
326

 
326

Basic earnings per share – continuing operations
$
0.28

 
$
0.62

Diluted earnings per share – continuing operations:
 
 
 
Income from continuing operations available to common shareholders
$
94

 
$
202

Income impact of assumed conversions
—

 
1

Income from continuing operations available to common shareholders and assumed conversions
$
94

 
$
203

Weighted average common shares outstanding
326

 
326

Incremental shares from assumed conversions
3

 
2

Adjusted weighted average shares – diluted
329

 
328

Diluted earnings per share – continuing operations
$
0.28

 
$
0.62

Stock-based compensation awards to purchase 8,602,107 and 8,980,322 shares of common stock were outstanding for the three months ended March 31, 2012 and 2011, 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 2012
Fair Value Measurement
In May 2011, the Financial Accounting Standards Board ("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 adopted this guidance effective January 1, 2012. For further information, see Note 4.
Presentation of Comprehensive Income
In June 2011 and December 2011, the FASB issued accounting standards updates 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 adopted this guidance January 1, 2012, and elected to present two separate but consecutive statements. The adoption of these accounting standards updates did not change the items that constitute net income and other comprehensive income.

9



Accounting Guidance Not Yet Adopted
Offsetting Assets and Liabilities
In December 2011, the FASB issued an accounting standards update modifying the disclosure requirements about the nature of an entity's rights of offsetting assets and liabilities in the statement of financial position under master netting agreements and related arrangements associated with financial and derivative instruments. The guidance requires increased disclosure of the gross and net recognized assets and liabilities, collateral positions and narrative descriptions of setoff rights. Edison International will adopt this guidance effective January 1, 2013.
Note 2.    Consolidated Statements of Changes in Equity
The following table provides the changes in equity for the three months ended March 31, 2012.
 
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, 2011
$
2,360

 
$
(139
)
 
$
7,834

 
$
10,055

 
$
2

 
$
1,029

 
$
11,086

Net income
—

 
—

 
93

 
93

 
2

 
19

 
114

Other comprehensive income
—

 
21

 
—

 
21

 
—

 
—

 
21

Contributions from noncontrolling interests1
—

 
—

 
—

 
—

 
238

 
—

 
238

Transfer of assets to Capistrano Wind Partners2
(50
)
 
—

 
—

 
(50
)
 
—

 
—

 
(50
)
Common stock dividends declared ($0.325 per share)
—

 
—

 
(106
)
 
(106
)
 
—

 
—

 
(106
)
Dividends, distributions to noncontrolling interests and other
—

 
—

 
—

 
—

 
1

 
(19
)
 
(18
)
Stock-based compensation and other
8

 
—

 
(36
)
 
(28
)
 
—

 
—

 
(28
)
Noncash stock-based compensation and other
7

 
—

 
(2
)
 
5

 
—

 
—

 
5

Issuance of preference stock
—

 
—

 
—

 
—

 
—

 
345

 
345

Balance at March 31, 2012
$
2,325

 
$
(118
)
 
$
7,783

 
$
9,990

 
$
243

 
$
1,374

 
$
11,607

1 
Funds contribution by third-party investors related to the Capistrano Wind equity capital raise are reported in noncontrolling interest. For further information, see Note 3.
2 
Additional paid in capital was reduced $50 million related to a new tax basis in the assets transferred to Capistrano Wind Partners. For further information, see Note 3.

10



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
—

 
—

 
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 and other
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

Note 3.    Variable Interest Entities
Categories of Variable Interest Entities
Projects or Entities that are Consolidated
At March 31, 2012 and December 31, 2011, EMG consolidated 16 and 13 projects, respectively, with a total generating capacity of 861 MW and 570 MW, respectively, that have noncontrolling interests held by others. Projects consolidated at March 31, 2012 increased from the projects consolidated at December 31, 2011, due to the Capistrano Wind equity capital transaction as discussed below. In determining that EMG was the primary beneficiary of the projects that are consolidated, key factors considered were EMG's ability to direct commercial and operating activities and EMG's obligation to absorb losses of the variable interest entities.
The following table presents summarized financial information of the projects that were consolidated by EMG:
(in millions)
March 31,
2012
 
December 31,
2011
Current assets
$
87

 
$
36

Net property, plant and equipment
1,194

 
675

Other long-term assets
18

 
5

Total assets
$
1,299

 
$
716

Current liabilities
$
32

 
$
28

Long-term debt net of current portion
179

 
57

Deferred revenues
174

 
69

Other long-term liabilities
56

 
22

Total liabilities
$
441

 
$
176

Noncontrolling interests
$
242

 
$
2


11



Assets serving as collateral for the debt obligations had a carrying value of $474 million and $136 million at March 31, 2012 and December 31, 2011, respectively, and primarily consist of property, plant and equipment.
Capistrano Wind Equity Capital
As part of its plan to obtain third-party equity capital to finance the development of a portion of EMG's wind portfolio, on February 13, 2012, Edison Mission Wind sold its indirect equity interests in the Cedro Hill wind project (150 MW in Texas), the Mountain Wind Power I project (61 MW in Wyoming) and the Mountain Wind Power II project (80 MW in Wyoming) to a new venture, Capistrano Wind Partners. Outside investors provided $238 million of the funding. Capistrano Wind Partners also agreed to acquire the Broken Bow I wind project (80 MW in Nebraska) and the Crofton Bluffs wind project (40 MW in Nebraska) for consideration expected to include $140 million from the same outside investors upon the satisfaction of specified conditions, including commencement of commercial operation and conversion of project debt financing to term. In March 2012, EME received a distribution of the proceeds from outside investors, which will be used for general corporate purposes. Through their ownership of Capistrano Wind Holdings, an indirect subsidiary of EME, Edison Mission Wind, and EME's parent company, Mission Energy Holding Company (MEHC), own 100% of the Class A equity interests in Capistrano Wind Partners, and the Class B preferred equity interests are held by outside investors. Under the terms of the formation documents, preferred equity interests receive 100% of the cash available for distribution, up to a scheduled amount to target a return and thereafter cash distributions are shared. Cash available for distribution includes 90% of the tax benefits realized by MEHC and contributed to Capistrano Wind Partners.
Edison Mission Wind retains indirect beneficial ownership of the common equity in the projects, net of a $4 million preferred investment made by MEHC, and retains responsibilities for managing the operations of Capistrano Wind Holdings and its projects, and accordingly, EMG will continue to consolidate these projects. The $238 million contributed by the third-party interests is reflected in "Other noncontrolling interests" on Edison International's consolidated balance sheets at March 31, 2012. This transaction was accounted for as a transfer among entities under common control and, therefore, resulted in no change in the book basis of the transferred assets. However, the transaction did trigger a taxable gain and new tax basis in the assets with a corresponding adjustment to deferred taxes and a reduction to equity of $50 million.
EMG's share in the earnings or losses of the Capistrano Wind entities is calculated under the hypothetical liquidation book value ("HLBV") method due to complex preferences in distribution provisions. The income from the Cedro Hill, Mountain Wind Power I and Mountain Wind Power II wind projects attributable to noncontrolling interests was $2 million for the first quarter of 2012.
Variable Interest in VIEs that are not Consolidated
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 these 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 through demonstration of compliance with its CPUC-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 March 31, 2012 and the amounts that SCE paid to these projects were $78 million and $86 million for the three months ended March 31, 2012 and 2011, respectively. These amounts are recoverable in customer rates, subject to reasonableness review.
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 considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk which was not material as of March 31, 2012 and December 31, 2011.

12



Assets and liabilities are categorized into a three-level 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:
 
March 31, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting
and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
1,222

 
$
—

 
$
—

 
$
—

 
$
1,222

Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
144

 
143

 
(93
)
 
194

Natural gas
6

 
4

 
—

 
(10
)
 
—

Fuel oil
7

 
—

 
—

 
(7
)
 
—

Tolling
—

 
—

 
13

 
—

 
13

Subtotal of derivative contracts
13

 
148

 
156

 
(110
)
 
207

Long-term disability plan
8

 
—

 
—

 
—

 
8

Nuclear decommissioning trusts:
 
 
 
 
 
 
 
 
 
Stocks3
2,124

 
—

 
—

 
—

 
2,124

Municipal bonds
—

 
696

 
—

 
—

 
696

U.S. government and agency securities
481

 
161

 
—

 
—

 
642

Corporate bonds4
—

 
369

 
—

 
—

 
369

Short-term investments, primarily cash equivalents5
2

 
34

 
—

 
—

 
36

Subtotal of nuclear decommissioning trusts
2,607

 
1,260

 
—

 
—

 
3,867

Total assets6
3,850

 
1,408

 
156

 
(110
)
 
5,304

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
13

 
99

 
(28
)
 
84

Natural gas
—

 
258

 
48

 
(81
)
 
225

Tolling
—

 
—

 
671

 
—

 
671

Subtotal of derivative contracts
—

 
271

 
818

 
(109
)
 
980

Interest rate contracts
—

 
78

 
—

 
—

 
78

Total liabilities
—

 
349

 
818

 
(109
)
 
1,058

Net assets (liabilities)
$
3,850

 
$
1,059

 
$
(662
)
 
$
(1
)
 
$
4,246


13



 
December 31, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting
and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
1,321

 
$
—

 
$
—

 
$
—

 
$
1,321

Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
66

 
218

 
(62
)
 
222

Natural gas
4

 
5

 
—

 
(7
)
 
2

Fuel oil
4

 
—

 
—

 
(4
)
 
—

Tolling
—

 
—

 
10

 
—

 
10

Subtotal of commodity contracts
8

 
71

 
228

 
(73
)
 
234

Long-term disability plan
8

 
—

 
—

 
—

 
8

Nuclear decommissioning trusts:
 
 
 
 
 
 
 
 
 
Stocks3
1,899

 
—

 
—

 
—

 
1,899

Municipal bonds
—

 
756

 
—

 
—

 
756

U.S. government and agency securities
433

 
147

 
—

 
—

 
580

Corporate bonds4
—

 
317

 
—

 
—

 
317

Short-term investments, primarily cash equivalents5
—

 
15

 
—

 
—

 
15

Subtotal of nuclear decommissioning trusts
2,332

 
1,235

 
—

 
—

 
3,567

Total assets6
3,669

 
1,306

 
228

 
(73
)
 
5,130

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
13

 
77

 
(21
)
 
69

Natural gas
—

 
234

 
23

 
(52
)
 
205

Tolling
—

 
—

 
451

 
—

 
451

Subtotal of commodity contracts
—

 
247

 
551

 
(73
)
 
725

Interest rate contracts
—

 
90

 
—

 
—

 
90

Total liabilities
—

 
337

 
551

 
(73
)
 
815

Net assets (liabilities)
$
3,669

 
$
969

 
$
(323
)
 
$
—

 
$
4,315

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 and cash equivalents on Edison International's consolidated balance sheets.
3 
Approximately 69% and 70% of the equity investments were located in the United States at March 31, 2012 and December 31, 2011, respectively.
4 
At March 31, 2012 and December 31, 2011, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $38 million and $22 million, respectively.
5 
Excludes net payables of $14 million and net receivables of $25 million at March 31, 2012 and December 31, 2011, respectively, of interest and dividend receivables as well as receivables and payables related to pending securities sales and purchases.
6 
Excludes $30 million and $31 million at March 31, 2012 and December 31, 2011, respectively, of cash surrender value of life insurance investments for deferred compensation.

14



The following table sets forth a summary of changes in the fair value of Level 3 net derivative assets and liabilities:
 
March 31,
(in millions)
2012
 
2011
Fair value of net assets (liabilities) at beginning of period
$
(323
)
 
$
97

Total realized/unrealized gains (losses):
 
 
 
Included in earnings1
(15
)
 
—

Included in regulatory assets and liabilities2
(293
)
3 
(134
)
Included in accumulated other comprehensive income4
2

 
1

Purchases
27

 
5

Settlements
(9
)
 
(11
)
Transfers out of Level 35
(51
)
 
(2
)
Fair value of net liabilities at end of period
$
(662
)
 
$
(44
)
Change during the period in unrealized losses related to assets and liabilities held at the end of the period6
$
(295
)
 
$
(139
)
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 
Included in reclassification adjustments in Edison International's consolidated statements of other comprehensive income.
5 
Transfers out of Level 3 into Level 2 occurred due to significant observable inputs becoming available as the transactions near maturity.
6 
Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income were $(7) million and $(6) million for the years ended March 31, 2012 and 2011, respectively. The remainder of the unrealized losses relate to SCE. See 2 above.
The fair value for transfers in and transfers out of each level is determined at the end of each reporting period. There were no transfers between Levels 1 and 2 during three months ended March 31, 2012 and 2011.
Valuation Techniques Used to Determine Fair Value
Level 1
The fair value of Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded equity securities and derivatives, U.S. treasury securities and money market funds.
Level 2
The fair value of Level 2 assets and liabilities is determined using the income approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. This level includes fixed-income securities, over-the-counter derivatives and interest rate swaps. For further discussion on fixed-income securities, see "—Nuclear Decommissioning Trusts" below.
Over-the-counter derivative contracts are valued using standard pricing models to determine the net present value of estimated future cash flows. 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 price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges or comparison to executed trades are used to validate and corroborate the primary price 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.

15



Level 3
The fair value of Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options, tolling arrangements and derivative contracts that trade infrequently such as congestion revenue rights ("CRRs") and long-term power agreements.
Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available and the fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.
Level 3 Valuation Process
The process of determining fair value is the responsibility of the risk department which reports to the chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges and internal valuation techniques that use both standard and proprietary models to determine fair value. Each reporting period, the risk and key finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness.
The following table sets forth the valuation techniques and significant unobservable inputs used to determine fair value for Level 3 assets and liabilities:
March 31, 2012
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
Fair Value (in millions)
 
 
Range
 
Assets
 
Liabilities
Valuation Technique(s)
Unobservable Input
(Weighted Average)
Electricity:
 
 
 
 
 
 
Options
$
12

 
$
86

Option model
Volatility of gas prices
25% – 48% (38%)
 
 
 
 
 
Volatility of power prices
29% – 60% (43%)
 
 
 
 
 
Power prices
$24.50 – $52.30 ($35.40)
Forwards
37

 
56

Discounted cash flow
Power prices
$2.10 – $54.00 ($30.96)
Congestion contracts
101

 
—

Market simulation model
Load forecast
7,645 MW – 26,334 MW
 
 
 
 
 
Power prices
$(46.19) – $240.30
 
 
 
 
 
Gas prices
$3.79 – $9.32
Congestion contracts
49

 
13

Discounted cash flow
Congestion prices
$(8.20) – $10.32 ($0.21)
Gas options
—

 
48

Option model
Volatility of gas prices
26% – 48% (41%)
Tolling
13

 
671

Option model
Volatility of gas prices
18% – 48% (23%)
 
 
 
 
 
Volatility of power prices
26% – 60% (30%)
 
 
 

 
Power prices
$20.00 – $89.50 ($53.40)
Netting
(56
)
 
(56
)
 
 
 
Total derivative contracts
$
156

 
$
818

 
 
 

16



Level 3 Fair Value Sensitivity
Gas Options, Power Options, and Tolling Arrangements
The fair values of option contracts and tolling arrangements contain intrinsic value and time value. Intrinsic value is the difference between the market price and strike price of the underlying commodity. Time value is made up of several components, including volatility, time to expiration, and interest rates. The fair value of option contracts changes as the underlying commodity price moves away or towards the strike price. The option model for tolling arrangements reflects plant specific information such as operating and start-up costs.
For tolling arrangements and certain gas and power option contracts where Edison International subsidiaries are the buyer, increases in volatility of the underlying commodity prices would result in increases to fair value as it represents greater price movement risk. As power and gas prices increase, the fair value of the option contracts and tolling arrangements tends to increase. The valuation of power option contracts and tolling arrangements is also impacted by the correlation between gas and power prices. As the correlation increases, the fair value of power option contracts and tolling arrangements tends to decline.
Forward Power Contracts
Generally, an increase (decrease) in long term forward power prices at illiquid locations where Edison International subsidiaries are the seller relative to the contract price will decrease (increase) fair value. Inversely as a buyer, an increase (decrease) in long term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.
Congestion Contracts
When valuation is based on a discounted cash flow model and Edison International subsidiaries are the buyer, generally an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value.
When valuation is based on a market simulation model and Edison International subsidiaries are the buyer, generally increases (decreases) in forecasted load would result in increases (decreases) to fair value. In general, an increase (decreases) in electricity and gas prices at illiquid locations tends to result in increases (decreases) to fair value; however, changes in electricity and gas prices in opposite directions may have varying results on fair value.
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:
 
March 31, 2012
 
December 31, 2011
(in millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current portion
$
14,192

 
$
14,194

 
$
13,746

 
$
14,264

Fair value of short-term and long-term debt is classified as Level 2 and 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 of new issue prices and relevant credit information.
The carrying value of trade receivables, payables and short-term debt approximates fair value.

17



Note 5.    Debt and Credit Agreements
Project Financings
Effective March 2012, EME completed through subsidiaries two nonrecourse financings of its interests in the Broken Bow and Crofton Bluffs wind projects. The financings included construction loans totaling $79 million that are required to be converted to 15-year amortizing term loans by March 31, 2013, subject to meeting specified conditions, $13 million letter of credit facilities; and $6 million working capital facilities. Interest under the construction and term loans will accrue at London Interbank Offered Rate ("LIBOR") plus 2.875%, with the term loan rate increasing 0.125% after the third, sixth, ninth and twelfth years. As of March 31, 2012, no amounts were outstanding under the construction loans and letters of credit facilities.
In December 2011, EME completed, through its subsidiary, Tapestry Wind, LLC, a nonrecourse financing of its interests in the Taloga, Buffalo Bear and Pinnacle wind projects. A total of $97 million of cash proceeds received from the $214 million 10-year partially amortizing term loan was deposited into an escrow account as of December 31, 2011. On February 22, 2012, a neighbor of the Pinnacle project filed a formal complaint with the West Virginia Public Service Commission requesting that the Commission order the project to shut down at night due to alleged noise emissions. The release of the loan proceeds in escrow is subject to resolution of the complaint or further due diligence from the lenders. EME expects the loan proceeds to be released in the second quarter of 2012.
Long-Term Debt
In March 2012, SCE issued $400 million of 4.05% first and refunding mortgage bonds due in 2042. The proceeds from these bonds were used to repay commercial paper borrowings and to fund SCE's capital program.
Credit Agreements and Short-Term Debt
At March 31, 2012, SCE's outstanding commercial paper was $330 million at a weighted-average interest rate of 0.40%. This commercial paper was supported by a $2.3 billion credit facility. At December 31, 2011, the outstanding short-term debt was $419 million at a weighted-average interest rate of 0.44%. At March 31, 2012, letters of credit issued under SCE's credit facilities aggregated $63 million and are scheduled to expire in twelve months or less.
In February 2012, EME terminated its $564 million revolving credit facility and entered into $55 million bridge letter of credit facilities which expire June 8, 2012 and which are secured by cash collateral of at least equal to the issued amount. In the first quarter of 2012, EME also completed a $100 million letter of credit facility for EME's general corporate needs and for its projects, which expires on June 30, 2014. Letters of credit issued under this facility are secured by cash collateral at least equal to the issued amount.
At March 31, 2012, Edison International (Parent)'s outstanding short-term debt was $13 million at a weighted-average interest rate of 0.87%. This short-term debt was supported by a $1.4 billion credit facility. At December 31, 2011, the outstanding short-term debt was $10 million at a weighted-average interest rate of 0.66%.
Letters of Credit
Letters of credit under EME's and its subsidiaries' credit facilities aggregated $179 million and were scheduled to expire as follows: $122 million in 2012, $29 million in 2013, $10 million in 2017 and $18 million in 2018. Standby letters of credit include $40 million issued in connection with the power purchase agreement with Southern California Edison, an affiliate of EME, under the Walnut Creek credit facility. Certain letters of credit are subject to automatic annual renewal provisions. At March 31, 2012, EME had $71 million in letters of credit which were supported by $74 million of cash collateral.
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 customer exposure to variability in market prices related to SCE's power and gas activities. As part of this program, SCE enters into options, swaps, forwards, tolling arrangements and CRRs. These transactions are approved by the CPUC or executed in compliance with CPUC-approved procurement plans. SCE recovers its related hedging costs through the energy resource recovery account ("ERRA") balancing account, and as a result, exposure to commodity price risk is not expected to impact earnings, but may impact cash flows.

18



SCE's electricity price exposure arises from energy purchased from and sold to wholesale markets as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities and power purchase agreements.
SCE's natural gas price exposure arises from natural gas purchased for 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,
2012
 
December 31,
2011
Electricity options, swaps and forwards
GWh
28,611
 
30,881
Natural gas options, swaps and forwards
Bcf
258
 
300
Congestion revenue rights
GWh
150,896
 
166,163
Tolling arrangements
GWh
103,491
 
104,154
Fair Value of Derivative Instruments
The following table summarizes the gross and net fair values of commodity derivative instruments at March 31, 2012:
 
 
Derivative Assets
 
Derivative Liabilities1
 
 
(in millions)
 
Short-Term
 
Long-Term
 
Subtotal
 
Short-Term
 
Long-Term
 
Subtotal
 
Net
Liability
Non-trading activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Economic hedges
 
$
65

 
$
72

 
$
137

 
$
338

 
$
1,153

 
$
1,491

 
$
1,354

Netting and collateral
 
(14
)
 
(7
)
 
(21
)
 
(84
)
 
(18
)
 
(102
)
 
(81
)
Total
 
$
51

 
$
65

 
$
116

 
$
254

 
$
1,135

 
$
1,389

 
$
1,273

1 
Includes the fair value of derivatives with SCE's consolidated affiliates; however, in Edison International’s consolidated financial statements, the fair value of such derivatives is eliminated.
The following table summarizes the gross and net fair values of commodity derivative instruments at December 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
 
$
86

 
$
85

 
$
171

 
$
303

 
$
856

 
$
1,159

 
$
988

Netting and collateral
 
(21
)
 
(15
)
 
(36
)
 
(37
)
 
(51
)
 
(88
)
 
(52
)
Total
 
$
65

 
$
70

 
$
135

 
$
266

 
$
805

 
$
1,071

 
$
936

Income Statement Impact of Derivative Instruments
SCE recognizes realized gains and losses on derivative instruments as purchased power expense and expects that such gains or losses will be part of the purchase power costs recovered from customers. As a result, realized gains and losses are not reflected in earnings, but may temporarily affect cash flows. Due to expected future recovery from customers, 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.

19



The following table summarizes the components of economic hedging activity:
 
Three months ended March 31,
(in millions)
2012
 
2011
Realized losses
$
(55
)
 
$
(39
)
Unrealized losses
(361
)
 
(96
)
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 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 $285 million and $216 million as of March 31, 2012 and December 31, 2011, respectively, for which SCE has posted no collateral to its counterparties for the respective periods. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2012, SCE would be required to post $67 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. Substantially all of the contracts that SCE has executed with counterparties are either entered into under SCE's procurement plan which has been pre-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 its exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, transmission rights and 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 EMG's consolidated balance sheets as derivative assets or liabilities with offsetting changes recorded on the consolidated statements of operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on EMG's consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive loss until reclassified into earnings when the related forecasted transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings.

20



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, with offsetting changes recognized in operating revenues on the consolidated statements of operations.
The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.
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 its 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, 2012