Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

Note 7. Income Taxes

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):

		Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)		2011			2010			2011			2010
Income (loss) from continuing operations before income taxes		$	31		$	176		$	(120	)	$	184
Provision (benefit) for income taxes at federal statutory rate of 35%		$	11		$	62		$	(42	)	$	65
Increase (decrease) in income tax from:
	State tax-net of federal provision (benefit) (excludes state tax settlement)		—			7			(9	)		5
	Production tax credits, net		(11	)		(12	)		(47	)		(45	)
	Resolution of 1986-2002 state tax issues		—			4			—			(16	)
	Other		(2	)		(3	)		(6	)		2
Total provision (benefit) for income taxes from continuing operations		$	(2	)	$	58		$	(104	)	$	11
Effective tax rate			6%			33%			87%			6%

At September 30, 2011, EME has recognized deferred tax assets of $179 million related to net operating losses carryforwards and $161 million related to production tax credit carryforwards that expire between 2030 and 2032, if unused.

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

There was no change in unrecognized tax benefits from December 31, 2010. As of September 30, 2011 and December 31, 2010, $148 million of the unrecognized tax benefits, if recognized, would impact the effective tax rate.

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.

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 $191 million, including interest and penalties through September 30, 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.

Accrued Interest and Penalties

The total amount of accrued interest and penalties related to EME's income tax liabilities was $41 million and $32 million as of September 30, 2011 and December 31, 2010, respectively.

The net after-tax interest expense (income) and penalties recognized in income tax expense was $3 million and $16 million for the three months ended September 30, 2011 and 2010, respectively, and $6 million and $10 million for the nine months ended September 30, 2011 and 2010, respectively.

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. These provisions are expected to result in a consolidated Edison International net operating loss for federal income tax purposes for 2011, and delay tax-allocation payments to EME until tax benefits are fully utilized by Edison International on a consolidated basis, which may take several years. In August 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 as a result of the reallocation of tax obligations from an expected Edison International consolidated net operating loss in 2011.