Income Taxes

Current and Deferred Taxes

Edison International's sources of income (loss) before income taxes are:



	Years ended December 31,
(in millions)	2013		2012			2011
Income from continuing operations before income taxes	$	1,221	$	1,861		$	1,668
Discontinued operations before income taxes	—		(2,235		)	(1,931		)
Income (loss) before income tax	$	1,221	$	(374	)	$	(263	)

The components of income tax expense (benefit) by location of taxing jurisdiction are:



	Edison International									SCE
	Years ended December 31,
(in millions)	2013			2012			2011			2013			2012		2011
Current:
Federal	$	(97	)	$	—		$	(279	)	$	(119	)	$	—	$	(275	)
State	(9		)	—			80			(19		)	50		91
	(106		)	—			(199		)	(138		)	50		(184		)
Deferred:
Federal	317			132			727			345			136		757
State	31			135			40			72			28		28
	348			267			767			417			164		785
Total continuing operations	242			267			568			279			214		601
Discontinued operations	(36		)	(549		)	(853		)	—			—		—
Total	$	206		$	(282	)	$	(285	)	$	279		$	214	$	601

The components of net accumulated deferred income tax liability are:



	Edison International					SCE
	December 31,
(in millions)	2013			2012		2013			2012
Deferred tax assets:
Property and software related	$	523		$	600	$	523		$	600
Unrealized gains and losses	579			491		569			477
Loss and credit carryforwards	2,228			1,515		427			125
Regulatory balancing accounts	139			80		139			80
Pension and PBOPs	264			275		86			99
Other	721			723		563			625
Sub-total	4,454			3,684		2,307			2,006
Less valuation allowance	1,380			1,017		—			—
Total	3,074			2,667		2,307			2,006
Deferred tax liabilities:
Property-related	7,879			7,289		7,869			7,279
Capitalized software costs	318			325		318			325
Regulatory balancing accounts	625			296		625			296
Unrealized gains and losses	569			477		569			477
Other	503			471		399			379
Total	9,894			8,858		9,780			8,756
Accumulated deferred income tax liability, net	$	6,820		$	6,191	$	7,473		$	6,750
Classification of accumulated deferred income taxes, net:
Included in deferred credits and other liabilities	$	7,241		$	6,127	$	7,737		$	6,669
Included in current liabilities (assets)	(421		)	64		(264		)	81

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2013, Edison International has $1.9 billion of net operating loss carryforwards (tax effected) of which $36 million expire between 2015 and 2025, and the remainder expires in 2031 and 2032. Edison International also has $399 million of federal tax credit carryforwards of which $376 million expire between 2029 and 2033 and the remainder has no expiration date.

As of December 31, 2013, SCE has $371 million of net operating loss carryforwards (tax effected) of which $18 million expire between 2015 and 2017, and the remainder expire in 2031 and 2033. SCE also has $55 million of federal tax credit carryforwards of which $41 million expire between 2030 and 2033 and the remainder has no expiration date.

Edison International has recorded deferred tax assets related to net operating losses and tax credit carryforwards that pertain to Edison International's consolidated or combined federal and state tax returns, including approximately $1.6 billion related to EME. Edison International continues to consolidate EME for federal and certain combined state tax returns. EME’s Plan of Reorganization, filed in December 2013 ("December Plan of Reorganization"), provides for the transfer of Edison International’s ownership interest to the creditors which would result in a tax deconsolidation of EME. Under federal and state tax regulations, the tax deconsolidation of EME will reduce the amounts of net operating loss and tax credits carryforwards that Edison International would be eligible to use in future periods. As a result of EME's December Plan of Reorganization that would result in a tax deconsolidation of EME, Edison International has recorded a valuation allowance of $1.380 billion based on the estimated amount of such benefits as calculated under the applicable federal and state tax regulations as of December 31, 2013. The deferred income tax benefits recognized by Edison International less the valuation allowance for amounts that would no longer be available upon tax deconsolidation of EME was approximately $220 million. See Note 16 for subsequent events related to the EME bankruptcy.

As of December 31, 2013, Edison International has a tax basis of $544 million (tax-effected) in the stock of EME. To the extent that Edison International's tax basis in EME stock is positive upon tax deconsolidation, Edison International may be entitled to claim a tax deduction equal to the amount of its tax basis. A change in Edison International’s tax basis in the stock of EME can result from a number of items, including, but not limited to, utilization of net operating loss carryforwards and tax payments. Edison International has not recorded a deferred tax asset at December 31, 2013 related to potential tax benefits from a tax deduction related to its tax basis in EME.

Effective Tax Rate

The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision:



	Edison International									SCE
	Years ended December 31,
(in millions)	2013			2012			2011			2013			2012			2011
Income from continuing operations before income taxes	$	1,221		$	1,861		$	1,668		$	1,279		$	1,874		$	1,745
Provision for income tax at federal statutory rate of 35%	427			652			584			448			656			611
Increase (decrease) in income tax from:
Items presented with related state income tax, net:
Repair deductions¹	—			(231		)	—			—			(231		)	—
State tax, net of federal benefit	18			108			85			34			54			80
Property-related²	(192		)	(223		)	(46		)	(192		)	(223		)	(46		)
Accumulated deferred income tax adjustments	—			(41		)	(30		)	—			(41		)	(30		)
Change related to uncertain tax positions	14			40			—			14			36			(3		)
Other	(25		)	(38		)	(25		)	(25		)	(37		)	(11		)
Total income tax expense from continuing operations	$	242		$	267		$	568		$	279		$	214		$	601
Effective tax rate	19.8		%	14.3		%	34.1		%	21.8		%	11.4		%	34.4		%


¹	Edison International made a voluntary election in 2009 to change its tax accounting method for certain repair costs incurred on SCE's transmission, distribution and generation assets. Regulatory treatment for the 2009 – 2011 incremental repairs deductions taken after the 2009 tax accounting method change resulted in SCE recognizing a $231 million earnings benefit in 2012.


²	Includes incremental repair benefit recorded in 2013 and 2012. See discussion of repair deductions below.

The CPUC requires flow-through ratemaking treatment for the current tax benefit arising from certain property-related and other temporary differences which reverse over time. The accounting treatment for these temporary differences results in recording regulatory assets and liabilities for amounts that would otherwise be recorded to deferred income tax expense.

Accounting for Uncertainty in Income Taxes

Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination. The guidance requires the disclosure of all unrecognized tax benefits, which includes both the reserves recorded for tax positions on filed tax returns and the unrecognized portion of affirmative claims.

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits for continuing and discontinued operations:



	Edison International									SCE
	December 31,
(in millions)	2013			2012			2011			2013			2012			2011
Balance at January 1,	$	812		$	631		$	565		$	571		$	373		$	329
Tax positions taken during the current year:
Increases	19			33			39			22			35			34
Tax positions taken during a prior year:
Increases	43			177			102			45			169			82
Decreases	(109		)	(11		)	(75		)	(106		)	(6		)	(72		)
Increases (decreases) – deconsolidation of EME¹	50			(18		)	—			—			—			—
Decreases for settlements during the period	—			—			—			—			—			—
Balance at December 31,	$	815		$	812		$	631		$	532		$	571		$	373

Unrecognized tax benefits of EME have been deconsolidated as a result of the bankruptcy filing by EME, except for tax liabilities that Edison International is jointly liable with EME under the Internal Revenue Code and applicable state statues. See Note 16 for further information. During 2013, Edison International increased the amount of unrecognized tax benefits related to the taxable gain on sale of EME’s international assets by $50 million as a result of unfavorable developments during the fourth quarter of 2013.

As of December 31, 2013 and 2012, if recognized, $653 million and $622 million respectively, of the unrecognized tax benefits would impact Edison International's effective tax rate; and $374 million and $388 million, respectively, of the unrecognized tax benefits would impact SCE's effective tax rate.

Tax Disputes

The IRS examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included proposed adjustments for the following two items:


•	A proposed adjustment increasing the taxable gain on the 2004 sale of EME's international assets, which if sustained, would result in a federal tax payment of approximately $206 million, including interest and penalties through December 31, 2013, see Note 16.


•	A proposed adjustment to disallow a component of SCE's repair allowance deduction, which if sustained, would result in a federal tax payment of approximately $100 million, including interest through December 31, 2013.

Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011. During the fourth quarter of 2013, the Internal Revenue Service advised Edison International that it intends to issue technical advice adverse to Edison International supporting the proposed adjustment by IRS examination increasing the taxable gain on the 2004 sale of EME’s international assets (the technical advice adverse to Edison International was received in February 2014). The technical advice did not address penalties. Edison International is continuing to protest the asserted penalty with IRS Appeals. Edison International anticipates that the IRS will issue a deficiency notice for the tax, interest and possibly penalties related to this issue at the conclusion of the IRS appeals process. After the receipt of such deficiency notice, Edison International will have 90 days to file a petition in United States Tax Court. If a petition is not timely filed, Edison International anticipates after the expiration of the 90-day period, the IRS will assess the underpayment of tax, interest and penalties, if any, and demand payment.

Tax Years 2007 – 2009

The IRS examination phase of tax years 2007 through 2009 was completed during the first quarter of 2013. Edison International received a Revenue Agent Report from the IRS on February 28, 2013 which included a proposed adjustment to disallow a component of SCE's repair allowance deduction (similar to the 2003 – 2006 tax years). The proposed adjustment to disallow a component of SCE's repair allowance deduction, if sustained, would result in a federal tax payment of approximately $74 million, including interest through December 31, 2013. Edison International disagrees with the proposed adjustment and filed a protest with the IRS in April 2013.

Accrued Interest and Penalties

The total amount of accrued interest and penalties related to income tax liabilities for continuing and discontinued operations are:



	Edison International				SCE
	December 31,
(in millions)	2013		2012		2013		2012
Accrued interest and penalties	$	406	$	278	$	88	$	87

The net after-tax interest and penalties recognized in income tax expense are:



	Edison International									SCE
	December 31,
(in millions)	2013			2012			2011			2013		2012			2011
Net after-tax interest and penalties tax benefit (expense)	$	(3	)	$	(10	)	$	(8	)	$	2	$	(11	)	$	(8	)