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- and nine-month periods ended September 30, 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.

Interim Financial Statements

On September 21, 2012, EME Homer City Generation L.P. ("Homer City") and Homer City Generation L.P., an affiliate of General Electric Capital Corporation ("GECC"), entered into a Master Transaction Agreement ("Homer City MTA") for the divestiture by Homer City of substantially all of its remaining assets and certain specified liabilities.

Beginning in the third quarter of 2012, Homer City met the definition of a discontinued operation and was classified separately in Edison International's consolidated financial statements. Previously issued financial statements have been restated to reflect discontinued operations reported subsequent to the original issuance date. For further information, see Note 18—Discontinued Operations. Except as indicated, amounts in the notes to the consolidated financial statements relate to continuing operations of Edison International.

Cash Equivalents

Cash equivalents included investments in money market funds totaling $933 million and $1.3 billion at September 30, 2012 and December 31, 2011, respectively. Generally, the carrying value of cash equivalents equals the fair value, as these investments have original 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 $234 million and $220 million of checks issued, but not yet paid by the financial institution, from cash to accounts payable at September 30, 2012 and December 31, 2011, respectively.

Restricted Cash and Cash Equivalents, and Restricted Deposits

Restricted cash and cash equivalents at September 30, 2012 and December 31, 2011 included $97 million received from a wind project financing that was held in escrow at those dates. At September 30, 2012, restricted deposits included $48 million to support outstanding letters of credit issued under EME'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)	September 30, 2012		December 31, 2011
Coal, gas, fuel oil and other raw materials	$	138	$	143
Spare parts, materials and supplies	370		376
Total inventory	$	508	$	519

Revenue Recognition

Electric Utility Revenue

Operating revenue is recognized when electricity is delivered and includes amounts for services rendered but unbilled at the end of each reporting period. During the first nine months of 2012, pending the outcome of the 2012 GRC, SCE recognized GRC-related revenue based on the 2011 authorized revenue requirement included in customer rates. A GRC memorandum account has been established for SCE, which will make the 2012 revenue requirement ultimately adopted by the CPUC effective as of January 1, 2012.

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)	2012		2011		2012		2011
Basic earnings per share – continuing operations:
Income from continuing operations attributable to common shareholders, net of tax	$	266	$	411	$	486	$	805
Participating securities dividends	—		—		—		—
Income from continuing operations available to common shareholders	$	266	$	411	$	486	$	805
Weighted average common shares outstanding	326		326		326		326
Basic earnings per share – continuing operations	$	0.81	$	1.26	$	1.49	$	2.47
Diluted earnings per share – continuing operations:
Income from continuing operations available to common shareholders	$	266	$	411	$	486	$	805
Income impact of assumed conversions	—		2		1		3
Income from continuing operations available to common shareholders and assumed conversions	$	266	$	413	$	487	$	808
Weighted average common shares outstanding	326		326		326		326
Incremental shares from assumed conversions	3		3		2		3
Adjusted weighted average shares – diluted	329		329		328		329
Diluted earnings per share – continuing operations	$	0.81	$	1.25	$	1.48	$	2.46

Stock-based compensation awards to purchase 3,238,581 and 5,943,378 shares of common stock for the three months ended September 30, 2012 and 2011, respectively, and 4,819,683 and 8,970,290 shares of common stock for the nine months ended September 30, 2012 and 2011, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the awards was greater than the average market price of the common shares and therefore, the effect would have been antidilutive.

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.

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.