Income Taxes

Current and Deferred Taxes

The provision (benefit) for income taxes is composed of the following:



	Years Ended December 31,
(in millions)	2011			2010			2009
Continuing Operations
Current
Federal	$	50		$	(288	)	$	(176	)
State	(45		)	18			(35		)
Total current	5			(270		)	(211		)
Deferred
Federal	$	(731	)	$	278		$	187
State	(130		)	11			40
Total deferred	(861		)	289			227
Provision (benefit) for income taxes from continuing operations	(856		)	19			16
Discontinued operations	4			9			(2		)
Total	$	(852	)	$	28		$	14

EME recorded a tax benefit of $16 million in 2010 resulting from acceptance by the California Franchise Tax Board of the tax positions finalized with the Internal Revenue Service in 2009 for the tax years 1986 through 2002.

The components of income (loss) before income taxes applicable to continuing operations and discontinued operations are as follows:



	Years Ended December 31,
(in millions)	2011			2010		2009
Continuing operations	$	(1,932	)	$	178	$	217
Discontinued operations	1			13		(9		)
Total	$	(1,931	)	$	191	$	208

The components of net accumulated deferred income tax asset (liability) were:



	December 31,
(in millions)	2011		2010
Deferred tax assets
Accrued charges and liabilities	$	303	$	201
Net operating loss carryforwards	326		—
Production tax and other credit carryforwards	194		60
Derivative instruments	49		—
Other	—		2
Total	872		263
Deferred tax liabilities
Basis differences in property	$	638	$	1,117
Deferred investment tax credit	5		4
State taxes	20		9
Other	6		3
Total	669		1,133
Deferred tax assets and (liabilities), net	$	203	$	(870	)
Classification of net accumulated deferred income taxes
Included in other assets	$	205	$	—
Included in current liabilities	$	2	$	34
Included in deferred taxes and tax credits	$	—	$	836

As of December 31, 2011, EME had $903 million of federal net operating loss carryforwards which expire in 2031, $169 million of state net operating loss carryforwards which expire between 2015 and 2031, if unused. Additionally, there were $194 million of federal tax credit carryforwards of which $179 million expire between 2029 and 2031, if unused, and the remainder have no expiration date. These net operating loss carryforwards and federal tax credit carryforwards resulted in $520 million of deferred tax assets at December 31, 2011.

Effective Tax Rate

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



	Years Ended December 31,
(in millions)	2011			2010			2009
Income (loss) from continuing operations before income taxes	$	(1,932	)	$	178		$	217
Provision (benefit) for income taxes at federal statutory rate of 35%	$	(676	)	$	62		$	76
Increase (decrease) in income tax from:
State tax-net of federal benefit¹	(104		)	9			7
Production tax credits, net	(66		)	(61		)	(55		)
Qualified production deduction	(6		)	15			(2		)
Deferred tax adjustments	(8		)	6			—
Resolution of 1986-2002 state tax issues	—			(16		)	—
Other	4			4			(10		)
Total provision (benefit) for income taxes from continuing operations	$	(856	)	$	19		$	16
Effective tax rate	44		%	11		%	7		%


¹	Excludes state tax settlement in 2010.

Accounting for Uncertainty in Income Taxes

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits:



(in millions)	2011		2010			2009
Balance at January 1	$	153	$	115		$	144
Tax positions taken during the current year
Increases	9		—			—
Decreases	—		—			—
Tax positions taken during a prior year
Increases	9		126			11
Decreases	—		(80		)	—
Increases (decreases) for settlements during the period	—		(8		)	(40		)
Decreases resulting from a lapse in statute of limitations	—		—			—
Balance at December 31	$	171	$	153		$	115

As of December 31, 2011 and 2010, $166 million and $148 million, respectively, of the unrecognized tax benefits, if recognized, would impact the effective tax rate. EME believes that it is reasonably possible that unrecognized tax benefits could be reduced by an amount up to $10 million within the next 12 months.

Edison International's federal income tax returns and California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 remain subject to audit.

Accrued Interest and Penalties

The total amount of accrued interest and penalties related to EME's income tax liabilities was $47 million and $32 million as of December 31, 2011 and 2010, respectively.

The net after-tax interest and penalties recognized in income tax expense was $10 million, $19 million and $(45) million for 2011, 2010 and 2009, respectively.

Tax Dispute

The Internal Revenue Service examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included a proposed adjustment related to EME. The EME-related proposed adjustment increases the taxable gain on the 2004 sale of EME's international assets, which if sustained, would result in a federal tax payment of approximately $193 million, including interest and penalties through December 31, 2011 (the Internal Revenue Service has asserted a 40% penalty for understatement of tax liability related to this matter). Edison International disagrees with the proposed adjustment and filed a protest with the Internal Revenue Service in the first quarter of 2011. The disputed tax matter is currently being considered in appeals.

Bonus Depreciation Impact on EME

The Small Business Jobs Act of 2010 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended 50% bonus depreciation for qualifying property through 2012 and created a new 100% bonus depreciation for qualifying property placed in service between September 9, 2010 and December 31, 2011. As a result of these provisions, Edison International has a consolidated net operating loss for federal income tax purposes for 2011. EME does not expect tax benefits to be fully utilized by Edison International on a consolidated basis for several years. In the third quarter of 2011, EME received tax-allocation payments of $182 million as a result of the carryback of Edison International consolidated net operating losses for 2010. However, EME expects to make tax-allocation payments to Edison International during 2012 of approximately $185 million as a result of the reallocation of tax obligations from an expected Edison International consolidated net operating loss in 2011.