Discontinued Operations

EME Chapter 11 Bankruptcy Filing

In December 2012, EME and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. EME's December Plan of Reorganization included the sale of substantially all of EME’s assets to NRG Energy, Inc. and the transfer of ownership of EME to unsecured creditors, to the Bankruptcy Court for confirmation. Under the December Plan of Reorganization, the remaining assets of EME, consisting of the NRG sale proceeds, certain EME tax benefits comprised of net operating loss and tax credit carryforwards and causes of action against Edison International or others that were not released under the December Plan of Reorganization, would have re-vested in the Reorganized EME.

Deconsolidation

EME and those subsidiaries in Chapter 11 proceedings retained control of their assets and are authorized to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court. Effective December 17, 2012, Edison International no longer consolidated the earnings and losses of EME or its subsidiaries and has reflected its ownership interest in EME utilizing the cost method of accounting. During the fourth quarter of 2012, Edison International recorded a full impairment of the investment in EME as a result of the deconsolidation of EME, recognition of losses previously deferred in accumulated other comprehensive income, a provision for losses from the EME bankruptcy and estimated tax impacts related to the expected future tax deconsolidation and separation of EME from Edison International. The aggregate impact of these matters resulted in an after tax charge of $1.3 billion. Edison International considered EME to be an abandoned asset under GAAP, and, as a result, the operations of EME prior to December 17, 2012 and for all prior years are reflected as discontinued operations in the consolidated financial statements.

Edison International will not be affected by changes in EME's future financial results, other than those changes related to certain tax matters. Edison International has evaluated the continuing cash flows with EME and determined that these cash flows generated are indirect and immaterial. Edison International's continuing cash flows will not include any significant revenue-producing and cost-generating activities of EME. Shared services support that Edison International and EME provided each other was not material to Edison International's cash flows. Summarized results of discontinued operations:



(in millions)	Year ended December 31, 2013		351 days ended December 16, 2012			Year ended December 31, 2011
Operating revenue	$	—	$	1,626		$	2,180
Loss before income taxes	—		(2,235		)	(1,931		)

Before Edison International classified EME as discontinued operations, Edison International had accounted for EME's Homer City as a discontinued operation. The operating results shown above reflect the operating results of Homer City through December 14, 2012. On December 14, 2012, Homer City and an affiliate of GECC completed the Homer City Master Transaction Agreement ("MTA") between EME Homer City Generation L.P. and General Electric Capital Corporation for the divestiture by Homer City of substantially all of its remaining assets and certain specified liabilities. In the third quarter of 2012, EME recorded a $113 million charge ($68 million after tax) to write down assets held for sale to net realizable value during the third quarter of 2012. The charge was reduced to $89 million ($53 million after tax) when the transaction closed. In the fourth quarter of 2011, EME recorded an impairment charge of $1.03 billion related to Homer City's long-lived assets.

Contingencies

Under the Internal Revenue Code and applicable state statutes, Edison International Parent is jointly liable for qualified retirement plans and federal and specific state tax liabilities. As a result of the deconsolidation and the existence of joint liabilities, Edison International has recorded liabilities at December 31, 2013 of $325 million comprised of $35 million for qualified retirement plans related to plan participants of EME and $290 million for joint tax liabilities. Under the qualified plan documents and tax allocation agreements, EME is obligated to pay for such liabilities and, accordingly, at December 31, 2013 Edison International has recorded corresponding receivables from EME.

EME had indicated that it was preparing a complaint containing claims similar to those alleged by the Official Committee of Unsecured Creditors in a motion filed in the Bankruptcy Court on August 1, 2013 against Edison International, SCE, certain other subsidiaries of Edison International, and present and former directors of Edison International, SCE and EME. See EME potential claims discussed in Note 12. Edison International has not been served with a complaint by EME, but if served would vigorously contest such allegations.

The outcome of the EME bankruptcy proceeding as well as any litigation brought by EME against Edison International is uncertain. At December 31, 2013, management concluded that it is probable that a loss would be incurred and estimated a loss of $150 million. The outcome of the EME bankruptcy could result in losses different than the amounts recorded by Edison International and such amounts could be material.

For a discussion of contingencies related to EME, see Tax Disputes discussed in Note 7 and potential litigation discussed in Note 12.

Subsequent Event

In February 2014, subsequent to the preparation of the financial statements, Edison International, EME and the Consenting Noteholders entered into a Settlement Agreement pursuant to which EME amended its Plan of Reorganization to incorporate the terms of the Settlement Agreement, including extinguishing all existing claims between EME and Edison International. The Amended Plan of Reorganization, including the Settlement Agreement, is subject to the approval of the Bankruptcy Court, which is scheduled for consideration in March 2014.

Under the Amended Plan of Reorganization, EME will emerge from bankruptcy free of liabilities but will remain an indirect wholly-owned subsidiary of Edison International, which will continue to be consolidated with Edison International for income tax purposes. On the effective date of the Amended Plan of Reorganization ("Effective Date"), all of the assets and liabilities of EME that are not otherwise discharged in the bankruptcy or transferred to NRG Energy will be transferred to a newly formed trust or entity under the control of EME’s existing creditors (the "Reorganization Trust"), except for (a) EME’s income tax attributes, which will be retained by the Edison International consolidated income tax group; (b) certain tax and pension related liabilities in the approximate amount of $350 million, which are being assumed by Edison International and for substantially all of which Edison International had joint and several responsibility; and (c) EME’s indirect interest in Capistrano Wind Partners and a small hydroelectric project, which is currently a lease investment of Edison Capital that is expected to be transferred to EME prior to the closing of the settlement.

Edison International has agreed to pay to the Reorganization Trust an amount equal to 50% of EME’s federal and California income tax benefits, which were not previously paid to EME under a tax allocation agreement between Edison International and EME that expired on December 31, 2013 ("EME Tax Attributes") and which are estimated to be approximately $1.191 billion, subject to an estimate updating procedure set forth in the Settlement Agreement that is expected to take up to approximately six months from the Effective Date. On the Effective Date, Edison International will pay the Reorganization Trust $225 million in cash and the balance will be paid in two installment payments to be made on September 30, 2015 and 2016, respectively. The amount of the two installment payments with interest of 5% per annum from the Effective Date will be fixed once the estimate of the EME Tax Attributes is completed but are currently estimated to be approximately $199 million and $210 million, respectively, including applicable interest. Assuming continuation of existing law and tax rates, Edison International also anticipates realization of the tax benefits over a period similar to the period for which it pays for them, and pending the realization of the tax benefits, Edison International will finance the settlement from existing credit lines.

EME and the Reorganization Trust will release Edison International and its subsidiaries, officers, directors, and representatives from all claims, except for those deriving from commercial arrangements between SCE and certain EME subsidiaries and for obligations arising under the Settlement Agreement. Edison International and its subsidiaries that directly and indirectly own EME will provide a similar release to EME and the Reorganization Trust. Under the Amended Plan of Reorganization, Edison International and its subsidiaries will also be beneficiaries of orders of the Bankruptcy Court releasing them from claims of third parties in EME’s bankruptcy proceeding. The Reorganization Trust is obligated to set aside $50 million in escrow to secure its obligations to Edison International under the Settlement Agreement, including its obligation to protect against liabilities, if any, not discharged in the bankruptcy for which the Reorganization Trust remains responsible. Such escrowed amount will decline over time to zero on September 30, 2016.

Approval of the Amended Plan of Reorganization, including the Settlement Agreement, is subject to the determination of the Bankruptcy Court. The final estimate of EME Tax Attributes, which will fix Edison International’s installment obligations to the Reorganization Trust, may differ materially from the current estimate. Subject to effectuation of the settlement and the final determination of the EME Tax Attributes under the Settlement Agreement, Edison International anticipates that consolidated tax benefits it will retain will exceed the sum of liabilities it will assume and payments to the Reorganization Trust by approximately $200 million, and that the transactions contemplated by the Settlement Agreement, if effectuated, will result in its recording approximately $130 million in income in the first quarter of 2014, which is net of amounts recorded prior to the first quarter. Edison International has recorded deferred income tax benefits of EME, less a valuation allowance for amounts that would no longer be available upon tax deconsolidation of EME of approximately $220 million and a $150 million provision for loss related to claims filed against EME in the bankruptcy. The net impact of these items has been approximately $70 million through December 31, 2013 and recorded as part of discontinued operations.

As the Settlement Agreement was entered into in 2014 and is subject to approval by the Bankruptcy Court, it is accounted for as a subsequent event under GAAP and not reflected in the 2013 financial statements (referred to as a "Type II" subsequent event).