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Compensation and Benefit Plans
 12 Months Ended
Dec. 31, 2012
Defined Benefit Pension Plans and Defined Benefit Postretirement Plans Disclosure [Abstract]  
Compensation and Benefit Plans
Compensation and Benefit Plans
Employee Savings Plan
The 401(k) defined contribution savings plan is designed to supplement employees' retirement income. The following employer contributions were made for continuing operations:
 
Edison International
 
SCE
(in millions)
Years ended December 31,
2012
$
85

 
$
84

2011
84

 
83

2010
77

 
76


Pension Plans and Postretirement Benefits Other Than Pensions
Pension Plans
Noncontributory defined benefit pension plans (some with cash balance features) cover most employees meeting minimum service requirements. SCE recognizes pension expense for its nonexecutive plan as calculated by the actuarial method used for ratemaking. The expected contributions (all by the employer) for Edison International and SCE are approximately $220 million and $182 million, respectively, for the year ending December 31, 2013. Annual contributions made to most of SCE's pension plans are anticipated to be recovered through CPUC-approved regulatory mechanisms. Annual contributions to these plans are expected to be, at a minimum, equal to the related annual expense.
The funded position of Edison International's pension is sensitive to changes in market conditions. Changes in overall interest rate levels significantly affect the company's liabilities, while assets held in the various trusts established to fund Edison International's long-term pension are affected by movements in the equity and bond markets. The market value of the investments (reflecting investment returns, contributions and benefit payments) within the plan trusts declined 35% during 2008. This reduction in value of plan assets combined with increased liabilities has resulted in a change in the pension plan funding status from a surplus to a material deficit, which will result in increased future expense and cash contributions. The Edison International pension remains underfunded as liabilities have increased significantly as a result of steady declines in interest rates. Due to SCE's regulatory recovery treatment, the unfunded status is offset by a regulatory asset.
Non-Executive Retirement Plan Liabilities of EME
The employees of EME and its subsidiaries participate in a number of qualified retirement plans that are sponsored by either Edison International or SCE. Under these benefit plans EME is obligated to make contributions to fund the costs of the plans. Edison International Parent has not guaranteed the obligations of EME, however, under the Internal Revenue Code and applicable state statutes, Edison International Parent is jointly liable for qualified retirement plans. As a result of the EME Chapter 11 bankruptcy filing, Edison International has recorded an $80 million long-term liability related to employees of EME participation in these plans which is reflected in the table below. Under the Plan Support Agreement, Edison International plans to transfer the stock of EME to the unsecured creditors no later than December 31, 2014. Accordingly, it is currently expected that no future service will be earned after 2014 under these plans and the table below includes projected salary increases for 2013 and 2014 only. As a result, a curtailment has been reflected in the table below. For further information on the EME Chapter 11 bankruptcy filing, refer to Note 17.
Transfer of Certain Postretirement Benefits to Edison International
In March 2012, Edison International agreed to assume the liabilities for active employees of SCE and EME under the specified plans related to pension benefits. EME is obligated to fund costs on an after tax basis each pay period while SCE is obligated to reimburse Edison International upon settlement of liabilities on an after tax basis.
Information on plan assets and benefit obligations for continuing and discontinued operations is shown below:
 
Edison International
 
SCE
 
Years ended December 31,
(in millions)
2012
 
2011
 
2012
 
2011
Change in projected benefit obligation
 
 
 
 
 
 
 
Projected benefit obligation at beginning of year
$
4,493

 
$
4,080

 
$
4,112

 
$
3,732

Service cost
179

 
165

 
156

 
145

Interest cost
196

 
210

 
176

 
192

Liability transferred to Edison International
23

 
—

 
(92
)
 
—

Actuarial loss
370

 
327

 
318

 
311

Curtailment
(26
)
 
—

 
—

 
—

Benefits paid
(253
)
 
(289
)
 
(236
)
 
(268
)
Deconsolidation of EME1
(34
)
 
—

 
—

 
—

Projected benefit obligation at end of year
$
4,948

 
$
4,493

 
$
4,434

 
$
4,112

Change in plan assets
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
3,153

 
$
3,235

 
$
2,971

 
$
3,066

Actual return on plan assets
460

 
61

 
431

 
58

Employer contributions
182

 
146

 
154

 
115

Benefits paid
(253
)
 
(289
)
 
(236
)
 
(268
)
Fair value of plan assets at end of year
$
3,542

 
$
3,153

 
$
3,320

 
$
2,971

Funded status at end of year
$
(1,406
)
 
$
(1,340
)
 
$
(1,114
)
 
$
(1,141
)
Amounts recognized in the consolidated balance sheets consist of:
 
 
 
 
 
 
 
Current liabilities
$
(19
)
 
$
(11
)
 
$
(6
)
 
$
(6
)
Long-term liabilities
(1,387
)
 
(1,329
)
 
(1,108
)
 
(1,135
)
 
$
(1,406
)
 
$
(1,340
)
 
$
(1,114
)
 
$
(1,141
)
Amounts recognized in accumulated other comprehensive loss consist of:
 
 
 
 
 
 
 
Prior service cost
$
—

 
$
1

 
$
—

 
$
—

Net loss
127

 
139

 
40

 
41

 
$
127

 
$
140

 
$
40

 
$
41

Amounts recognized as a regulatory asset:
 
 
 
 
 
 
 
Prior service cost
$
30

 
$
34

 
$
30

 
$
34

Net loss
999

 
955

 
999

 
955

 
$
1,029

 
$
989

 
$
1,029

 
$
989

Total not yet recognized as expense
$
1,156

 
$
1,129

 
$
1,069

 
$
1,030

Accumulated benefit obligation at end of year
$
4,609

 
$
4,157

 
$
4,171

 
$
3,817

Pension plans with an accumulated benefit obligation in excess of plan assets:
 
 
 
 
 
 
 
Projected benefit obligation
$
4,948

 
$
4,493

 
$
4,434

 
$
4,112

Accumulated benefit obligation
4,609

 
4,157

 
4,171

 
3,817

Fair value of plan assets
3,542

 
3,153

 
3,320

 
2,971

Weighted-average assumptions used to determine obligations at end of year:
 
 
 
 
 
 
 
Discount rate
3.75
%
 
4.5
%
 
3.75
%
 
4.5
%
Rate of compensation increase
4.5
%
 
4.5
%
 
4.5
%
 
4.5
%

1
The retirement plan liabilities of EME have been deconsolidated as a result of the bankruptcy filing by EME, except for qualified pension plans that Edison International is jointly liable with EME under the Internal Revenue Code. See Note 17 for further information.
Expense components for continuing operations are:
 
Edison International
 
SCE
 
Years ended December 31,
(in millions)
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Service cost
$
163

 
$
149

 
$
133

 
$
160

 
$
145

 
$
132

Interest cost
183

 
196

 
196

 
180

 
192

 
193

Expected return on plan assets
(217
)
 
(226
)
 
(200
)
 
(217
)
 
(225
)
 
(201
)
Settlement costs
5

 
—

 
—

 
4

 
—

 
—

Amortization of prior service cost
3

 
7

 
8

 
3

 
7

 
8

Amortization of net loss
61

 
25

 
20

 
57

 
22

 
17

Expense under accounting standards
$
198

 
$
151

 
$
157

 
$
187

 
$
141

 
$
149

Regulatory adjustment (deferred)
(19
)
 
(28
)
 
(52
)
 
(19
)
 
(28
)
 
(52
)
Total expense recognized
$
179

 
$
123

 
$
105

 
$
168

 
$
113

 
$
97


Other changes in plan assets and benefit obligations recognized in other comprehensive income for continuing operations:
 
Edison International
 
SCE
 
Years ended December 31,
(in millions)
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Net loss
$
36

 
$
13

 
$
18

 
$
20

 
$
8

 
$
15

Amortization of prior service cost
—

 
—

 
(1
)
 
—

 
—

 
—

Amortization of net loss
(10
)
 
(11
)
 
(8
)
 
(6
)
 
(7
)
 
(4
)
Total recognized in other comprehensive loss
$
26

 
$
2

 
$
9

 
$
14

 
$
1

 
$
11

Total recognized in expense and other comprehensive income
$
205

 
$
125

 
$
114

 
$
182

 
$
114

 
$
108


In accordance with authoritative guidance on rate-regulated enterprises, SCE records regulatory assets and liabilities instead of charges and credits to other comprehensive income (loss) for the portion of SCE's postretirement benefit plans that are recoverable in utility rates. The estimated amounts that will be amortized to expense in 2013 and the net loss expected to be reclassified from accumulated other comprehensive loss for continuing operations are as follows:
(in millions)
Edison International
 
SCE
Unrecognized net loss to be amortized
$
61

 
$
56

Unrecognized prior service cost to be amortized
3

 
3

Net loss to be reclassified
13

 
8


Edison International and SCE used the following weighted-average assumptions to determine expense for continuing operations:
 
Years ended December 31,
 
2012
 
2011
 
2010
Discount rate
4.5
%
 
5.25
%
 
6.0
%
Rate of compensation increase
4.5
%
 
5.0
%
 
5.0
%
Expected long-term return on plan assets
7.5
%
 
7.5
%
 
7.5
%

The following benefit payments, which reflect expected future service, are expected to be paid:
 
Edison International
 
SCE
(in millions)
Years ended December 31,
2013
$
327

 
$
295

2014
322

 
295

2015
372

 
303

2016
349

 
310

2017
350

 
311

2018 – 2022
1,736

 
1,568


Postretirement Benefits Other Than Pensions
Most non-union employees retiring at or after age 55 with at least 10 years of service may be eligible for postretirement medical, dental, vision and life insurance and other benefits. Eligibility for a company contribution toward the cost of these benefits in retirement depends on a number of factors, including the employee's hire date. The expected contributions (all by the employer) to the PBOP trust for both Edison International and SCE are $30 million for the year ending December 31, 2013. Annual contributions made to SCE plans are anticipated to be recovered through CPUC-approved regulatory mechanisms and are expected to be, at a minimum, equal to the total annual expense for these plans.
The funded position of Edison International's PBOP is sensitive to changes in market conditions. Changes in overall interest rate levels significantly affect the company's liabilities, while assets held in the various trusts established to fund Edison International's other postretirement benefits are affected by movements in the equity and bond markets. The market value of the investments (reflecting investment returns, contributions and benefit payments) within the plan trust declined 33% during 2008. This reduction in the value of plan assets resulted in an increase in the plan's underfunded status and will also result in increased future expense and increased future contributions. Edison International's PBOP is underfunded as liabilities have increased significantly as a result of steady declines in interest rates. Due to SCE's regulatory recovery treatment, the unfunded status is offset by a regulatory asset.
Information on plan assets and benefit obligations for continuing and discontinuing operations is shown below:
 
Edison International
 
SCE
 
Years ended December 31,
(in millions)
2012
 
2011
 
2012
 
2011
Change in benefit obligation
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
2,553

 
$
2,425

 
$
2,415

 
$
2,295

Service cost
47

 
43

 
47

 
40

Interest cost
108

 
121

 
108

 
114

Other costs
2

 
—

 
2

 
—

Actuarial (gain) loss
(86
)
 
47

 
(86
)
 
46

Plan participants' contributions
16

 
18

 
16

 
18

Medicare Part D subsidy received
4

 
5

 
4

 
5

Benefits paid
(54
)
 
(106
)
 
(54
)
 
(103
)
Deconsolidation of EME1
(130
)
 
—

 
—

 
—

Benefit obligation at end of year
$
2,460

 
$
2,553

 
$
2,452

 
$
2,415

Change in plan assets
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
1,570

 
$
1,606

 
$
1,570

 
$
1,606

Actual return on assets
212

 
11

 
212

 
10

Employer contributions
52

 
36

 
52

 
34

Plan participants' contributions
16

 
18

 
16

 
18

Medicare Part D subsidy received
4

 
5

 
4

 
5

Benefits paid
(54
)
 
(106
)
 
(54
)
 
(103
)
Fair value of plan assets at end of year
$
1,800

 
$
1,570

 
$
1,800

 
$
1,570

Funded status at end of year
$
(660
)
 
$
(983
)
 
$
(652
)
 
$
(845
)
Amounts recognized in the consolidated balance sheets consist of:
 
 
 
 
 
 
 
Current liabilities
$
(18
)
 
$
(19
)
 
$
(18
)
 
$
(16
)
Long-term liabilities
(642
)
 
(964
)
 
(634
)
 
(829
)
 
$
(660
)
 
$
(983
)
 
$
(652
)
 
$
(845
)
Amounts recognized in accumulated other comprehensive loss (income) consist of:
 
 
 
 
 
 
 
Prior service cost (credit)
$
—

 
$
8

 
$
—

 
$
—

Net loss
5

 
27

 
—

 
—

 
$
5

 
$
35

 
$
—

 
$
—

Amounts recognized as a regulatory asset (liability):
 
 
 
 
 
 
 
Prior service credit
$
(89
)
 
$
(125
)
 
$
(89
)
 
$
(125
)
Net loss
610

 
839

 
610

 
839

 
$
521

 
$
714

 
$
521

 
$
714

Total not yet recognized as expense
$
526

 
$
749

 
$
521

 
$
714

Weighted-average assumptions used to determine obligations at end of year:
 
 
 
 
 
 
 
Discount rate
4.25
%
 
4.75
%
 
4.25
%
 
4.75
%
Assumed health care cost trend rates:
 
 
 
 
 
 
 
Rate assumed for following year
8.5
%
 
9.5
%
 
8.5
%
 
9.5
%
Ultimate rate
5.0
%
 
5.25
%
 
5.0
%
 
5.25
%
Year ultimate rate reached
2020

 
2019

 
2020

 
2019

1
The postretirement plan liabilities of EME have been deconsolidated as a result of the bankruptcy filing by EME. See Note 17 for further information.
Expense components for continuing operations are:
 
Edison International
 
SCE
 
Years ended December 31,
(in millions)
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Service cost
$
47

 
$
40

 
$
35

 
$
47

 
$
40

 
$
34

Interest cost
108

 
115

 
121

 
108

 
114

 
121

Expected return on plan assets
(108
)
 
(111
)
 
(101
)
 
(109
)
 
(111
)
 
(100
)
Other costs
2

 
—

 
—

 
2

 
—

 
—

Amortization of prior service credit
(35
)
 
(35
)
 
(36
)
 
(35
)
 
(35
)
 
(37
)
Amortization of net loss
39

 
26

 
35

 
39

 
26

 
35

Total expense
$
53

 
$
35

 
$
54

 
$
52

 
$
34

 
$
53


The net gain (loss) recognized in Edison International's other comprehensive income for continuing operations was zero, $1 million and $(1) million for the years ended December 31, 2012, 2011 and 2010, respectively. The amortization of prior service credit recognized in Edison International's other comprehensive for continuing operations was zero for both of the years ended December 31, 2012 and 2011 and $1 million for the year ended December 31, 2010.
In accordance with authoritative guidance on rate-regulated enterprises, SCE records regulatory assets and liabilities instead of charges and credits to other comprehensive income (loss) for the portion of SCE's postretirement benefit plans that are recoverable in utility rates. The estimated amounts that will be amortized to expense in 2013 for continuing operations are as follows:
(in millions)
Edison International
 
SCE
Unrecognized net loss to be amortized
$
28

 
$
28

Unrecognized prior service credit to be amortized
(36
)
 
(36
)

The amount of net loss expected to be reclassified from other comprehensive loss for Edison International's continuing operations and SCE is less than $1 million and zero, respectively.
Edison International and SCE used the following weighted-average assumptions to determine expense for continuing operations:
 
Years ended December 31,
 
2012
 
2011
 
2010
Discount rate
4.75
%
 
5.5
%
 
6.0
%
Expected long-term return on plan assets
7.0
%
 
7.0
%
 
7.0
%
Assumed health care cost trend rates:
 
 
 
 
 
Current year
9.5
%
 
9.75
%
 
8.25
%
Ultimate rate
5.25
%
 
5.5
%
 
5.5
%
Year ultimate rate reached
2019

 
2019

 
2016


A one-percentage-point change in assumed health care cost trend rate would have the following effects on continuing operations:
 
Edison International
 
SCE
(in millions)
One-Percentage-Point Increase
 
One-Percentage-Point Decrease
 
One-Percentage-Point Increase
 
One-Percentage-Point Decrease
Effect on accumulated benefit obligation as of December 31, 2012
$
276

 
$
(228
)
 
$
275

 
$
(227
)
Effect on annual aggregate service and interest costs
13

 
(11
)
 
13

 
(11
)

The following benefit payments are expected to be paid:
 
Edison International
 
SCE
(in millions)
Years ended December 31,
2013
$
91

 
$
90

2014
97

 
97

2015
103

 
103

2016
109

 
109

2017
116

 
116

2018 – 2022
662

 
659


Plan Assets
Description of Pension and Postretirement Benefits Other than Pensions Investment Strategies
The investment of plan assets is overseen by a fiduciary investment committee. Plan assets are invested using a combination of asset classes, and may have active and passive investment strategies within asset classes. Target allocations for 2012 and 2011 pension plan assets are 30% for U.S. equities, 16% for non-U.S. equities, 35% for fixed income, 15% for opportunistic and/or alternative investments and 4% for other investments. Target allocations for 2012 and 2011 PBOP plan assets are 41% for U.S. equities, 17% for non-U.S. equities, 34% for fixed income, 7% for opportunistic and/or alternative investments, and 1% for other investments. Edison International employs multiple investment management firms. Investment managers within each asset class cover a range of investment styles and approaches. Risk is managed through diversification among multiple asset classes, managers, styles and securities. Plan, asset class and individual manager performance is measured against targets. Edison International also monitors the stability of its investment managers' organizations.
Allowable investment types include:
•
United States Equities: Common and preferred stocks of large, medium, and small companies which are predominantly United States-based.
•
Non-United States Equities: Equity securities issued by companies domiciled outside the United States and in depository receipts which represent ownership of securities of non-United States companies.
•
Fixed Income: Fixed income securities issued or guaranteed by the United States government, non-United States governments, government agencies and instrumentalities including municipal bonds, mortgage backed securities and corporate debt obligations. A portion of the fixed income positions may be held in debt securities that are below investment grade.
Opportunistic, Alternative and Other Investments:
•
Opportunistic: Investments in short to intermediate term market opportunities. Investments may have fixed income and/or equity characteristics and may be either liquid or illiquid.
•
Alternative: Limited partnerships that invest in non-publicly traded entities.
•
Other: Investments diversified among multiple asset classes such as global equity, fixed income currency and commodities markets. Investments are made in liquid instruments within and across markets. The investment returns are expected to approximate the plans' expected investment returns.
Asset class portfolio weights are permitted to range within plus or minus 3%. Where approved by the fiduciary investment committee, futures contracts are used for portfolio rebalancing and to reallocate portfolio cash positions. Where authorized, a few of the plans' investment managers employ limited use of derivatives, including futures contracts, options, options on futures and interest rate swaps in place of direct investment in securities to gain efficient exposure to markets. Derivatives are not used to leverage the plans or any portfolios.
Determination of the Expected Long-Term Rate of Return on Assets
The overall expected long-term rate of return on assets assumption is based on the long-term target asset allocation for plan assets and capital markets return forecasts for asset classes employed. A portion of the PBOP trust asset returns are subject to taxation, so the expected long-term rate of return for these assets is determined on an after-tax basis.
Capital Markets Return Forecasts
Our capital markets return forecast methodologies primarily use a combination of historical market data, current market conditions, proprietary forecasting expertise, complex models to develop asset class return forecasts and a building block approach. The forecasts are developed using variables such as real risk-free interest, inflation, and asset class specific risk premiums. For equities, the risk premium is based on an assumed average equity risk premium of 5% over cash. The forecasted return on private equity and opportunistic investments are estimated at a 2% premium above public equity, reflecting a premium for higher volatility and lower liquidity. For fixed income, the risk premium is based off of a comprehensive modeling of credit spreads.
Fair Value of Plan Assets
The PBOP Plan and the Southern California Edison Company Retirement Plan Trust (Master Trust) assets include investments in equity securities, U.S. treasury securities, other fixed-income securities, common/collective funds, mutual funds, other investment entities, foreign exchange and interest rate contracts, and partnership/joint ventures. Equity securities, U.S. treasury securities, mutual and money market funds are classified as Level 1 as fair value is determined by observable, unadjusted quoted market prices in active or highly liquid and transparent markets. Common/collective funds are valued at the net asset value ("NAV") of shares held. Although common/collective funds are determined by observable prices, they are classified as Level 2 because they trade in markets that are less active and transparent. The fair value of the underlying investments in equity mutual funds and equity common/collective funds are based upon stock-exchange prices. The fair value of the underlying investments in fixed-income common/collective funds, fixed-income mutual funds and other fixed income securities including municipal bonds are based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information. Foreign exchange and interest rate contracts are classified as Level 2 because the values are based on observable prices but are not traded on an exchange. Futures contracts trade on an exchange and therefore are classified as Level 1. Two of the partnerships are classified as Level 2 since these investments can be readily redeemed at NAV and the underlying investments are liquid, publicly traded fixed-income securities which have observable prices. The remaining partnerships/joint ventures are classified as Level 3 because fair value is determined primarily based upon management estimates of future cash flows. Other investment entities are valued similarly to common collective funds and are therefore classified as Level 2. The Level 1 registered investment companies are either mutual or money market funds. The remaining funds in this category are readily redeemable at NAV and classified as Level 2 and are discussed further at footnote 7 to the pension plan master trust investments table below.
Edison International reviews the process/procedures of both the pricing services and the trustee to gain an understanding of the inputs/assumptions and valuation techniques used to price each asset type/class. The trustee and Edison International's validation procedures for pension and PBOP equity and fixed income securities are the same as the nuclear decommissioning trusts. For further discussion see Note 4. The values of Level 1 mutual and money market funds are publicly quoted. The trustees obtain the values of common/collective and other investment funds from the fund managers. The values of partnerships are based on partnership valuation statements updated for cash flows. SCE's investment managers corroborate the trustee fair values.
Pension Plan
The following table sets forth the Master Trust investments for Edison International and SCE that were accounted for at fair value as of December 31, 2012 by asset class and level within the fair value hierarchy:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporate stocks1
$
743

 
$
—

 
$
—

 
$
743

Common/collective funds2
—

 
635

 
—

 
635

U.S. government and agency securities3
242

 
350

 
—

 
592

Partnerships/joint ventures4
—

 
166

 
414

 
580

Corporate bonds5
—

 
508

 
—

 
508

Other investment entities6
—

 
271

 
—

 
271

Registered investment companies7
98

 
28

 
—

 
126

Interest-bearing cash
24

 
—

 
—

 
24

Other
1

 
100

 
—

 
101

Total
$
1,108

 
$
2,058

 
$
414

 
$
3,580

Receivables and payables, net
 

 
 

 
 

 
(38
)
Net plan assets available for benefits
 

 
 

 
 

 
$
3,542

SCE's share of net plan assets
 
 
 
 
 
 
$
3,320

Edison International Parent and Other's share of net plan assets
 
 
 
 
 
 
7

EME's share of net plan assets
 
 
 
 
 
 
215

The following table sets forth the Master Trust investments that were accounted for at fair value as of December 31, 2011 by asset class and level within the fair value hierarchy:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporate stocks1
$
642

 
$
—

 
$
—

 
$
642

Common/collective funds2
—

 
582

 
—

 
582

U.S. government and agency securities3
104

 
351

 
—

 
455

Partnerships/joint ventures4
—

 
140

 
448

 
588

Corporate bonds5
—

 
497

 
—

 
497

Other investment entities6
—

 
247

 
—

 
247

Registered investment companies7
79

 
29

 
—

 
108

Interest-bearing cash
5

 
—

 
—

 
5

Other
(1
)
 
69

 
—

 
68

Total
$
829

 
$
1,915

 
$
448

 
$
3,192

Receivables and payables, net
 

 
 

 
 

 
(39
)
Net plan assets available for benefits
 

 
 

 
 

 
$
3,153

SCE's share of net plan assets
 
 
 
 
 
 
$
2,971

Edison International Parent and Other's share of net plan assets
 
 
 
 
 
 
5

EME's share of net plan assets
 
 
 
 
 
 
177

1 
Corporate stocks are diversified. For 2012 and 2011, respectively, performance is primarily benchmarked against the Russell Indexes (60% and 60%) and Morgan Stanley Capital International (MSCI) index (40% and 40%).
2 
At December 31, 2012 and 2011, respectively, the common/collective assets were invested in equity index funds that seek to track performance of the Standard and Poor's (S&P 500) Index (29% and 29%), Russell 200 and Russell 1000 indexes (28% and 27%) and the MSCI Europe, Australasia and Far East (EAFE) Index (11% and 10%). A non-index U.S. equity fund representing 25% and 23% of this category for 2012 and 2011, respectively, is actively managed. Another fund representing 6% and 8% of this category for 2012 and 2011, respectively, is a global asset allocation fund.
3 
Level 1 U.S. government and agency securities are U.S. treasury bonds and notes. Level 2 primarily relates to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
4 
Partnerships/joint venture Level 2 investments consist primarily of a partnership which invests in publicly traded fixed income securities, primarily from the banking and finance industry and U.S. government agencies. At December 31, 2012 and 2011, respectively, approximately 56% and 55% of the Level 3 partnerships are invested in (1) asset backed securities, including distressed mortgages and (2) commercial and residential loans and debt and equity of banks. The remaining Level 3 partnerships are invested in small private equity and venture capital funds. Investment strategies for these funds include branded consumer products, early stage technology, California geographic focus, and diversified US and non-US fund-of-funds.
5 
Corporate bonds are diversified. At December 31, 2012 and 2011, respectively, this category includes $65 million and $53 million for collateralized mortgage obligations and other asset backed securities of which $7 million and $10 million are below investment grade.
6 
Other investment entities were primarily invested in (1) emerging market equity securities, (2) a hedge fund that invests through liquid instruments in a global diversified portfolio of equity, fixed income, interest rate, foreign currency and commodities markets, and (3) domestic mortgage backed securities.
7 
Level 1 of registered investment companies primarily consisted of a global equity mutual fund which seeks to outperform the MSCI World Total Return Index. Level 2 primarily consisted of government inflation-indexed bonds and a short-term bond fund.
At December 31, 2012 and 2011, approximately 66% and 69%, respectively, of the publicly traded equity investments, including equities in the common/collective funds, were located in the United States.
The following table sets forth a summary of changes in the fair value of Edison International's and SCE's Level 3 investments:
(in millions)
2012
 
2011
Fair value, net at beginning of period
$
448

 
$
345

Actual return on plan assets:
 
 
 
Relating to assets still held at end of period
88

 
6

Relating to assets sold during the period
13

 
22

Purchases
98

 
130

Dispositions
(233
)
 
(55
)
Transfers in and/or out of Level 3
—

 
—

Fair value, net at end of period
$
414

 
$
448


Postretirement Benefits Other than Pensions
The following table sets forth the PBOP Plan's financial assets for SCE that were accounted for at fair value as of December 31, 2012 by asset class and level within the fair value hierarchy:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Common/collective funds1
$
—

 
$
723

 
$
—

 
$
723

Corporate stocks2
361

 
—

 
—

 
361

Corporate notes and bonds3
—

 
210

 
—

 
210

Partnerships4
—

 
17

 
166

 
183

U.S. government and agency securities5
131

 
31

 
—

 
162

Registered investment companies6
68

 
—

 
—

 
68

Interest bearing cash
24

 
—

 
—

 
24

Other7
6

 
104

 
—

 
110

Total
$
590

 
$
1,085

 
$
166

 
$
1,841

Receivables and payables, net
 

 
 

 
 

 
(41
)
Combined net plan assets available for benefits
 

 
 

 
 

 
$
1,800

The following table sets forth the PBOP Plan's financial assets for SCE that were accounted for at fair value as of December 31, 2011 by asset class and level within the fair value hierarchy:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Common/collective funds1
$
—

 
$
642

 
$
—

 
$
642

Corporate stocks2
319

 
—

 
—

 
319

Corporate notes and bonds3
—

 
177

 
—

 
177

Partnerships4
—

 
16

 
130

 
146

U.S. government and agency securities5
100

 
42

 
—

 
142

Registered investment companies6
80

 
—

 
—

 
80

Interest bearing cash
12

 
—

 
—

 
12

Other7
4

 
71

 
—

 
75

Total
$
515

 
$
948

 
$
130

 
$
1,593

Receivables and payables, net
 

 
 

 
 

 
(23
)
Combined net plan assets available for benefits
 

 
 

 
 

 
$
1,570

1 
At December 31, 2012 and 2011, respectively, 60% and 63% of the common/collective assets are invested in a large cap index fund which seeks to track performance of the Russell 1000 index. 23% and 21% of the assets in this category are in index funds which seek to track performance in the MSCI Europe, Australasia and Far East (EAFE) Index. 6% and 6% of this category are invested in a privately managed bond fund and 6% and 6% in a fund which invests in equity securities the fund manager believes are undervalued.
2 
Corporate stock performance is primarily benchmarked against the Russell Indexes (50% and 53%) and the MSCI All Country World (ACWI) index (50% and 47%) for 2012 and 2011, respectively.
3 
Corporate notes and bonds are diversified and include approximately $20 million and $14 million for commercial collateralized mortgage obligations and other asset backed securities at December 31, 2012 and 2011, respectively.
4 
At December 31, 2012 and 2011, respectively, 82% and 81% of the Level 3 partnerships category is invested in (1) asset backed securities including distressed mortgages, (2) distressed companies and (3) commercial and residential loans and debt and equity of banks.
5 
Level 1 U.S. government and agency securities are U.S. treasury bonds and notes. Level 2 primarily relates to the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.
6 
Level 1 registered investment companies consist of an investment grade corporate bond mutual fund and a money market fund.
7 
Other includes $73 million and $60 million of municipal securities at December 31, 2012 and 2011, respectively.
At December 31, 2012 and 2011, approximately 66% and 69%, respectively, of the publicly traded equity investments, including equities in the common/collective funds, were located in the United States.
The following table sets forth a summary of changes in the fair value of PBOP Level 3 investments:
(in millions)
2012
 
2011
Fair value, net at beginning of period
$
130

 
$
92

Actual return on plan assets
 
 
 
Relating to assets still held at end of period
20

 
(3
)
Relating to assets sold during the period
5

 
6

Purchases
35

 
48

Dispositions
(24
)
 
(13
)
Transfers in and/or out of Level 3
—

 
—

Fair value, net at end of period
$
166

 
$
130


Stock-Based Compensation
Edison International maintains a shareholder approved incentive plan (the 2007 Performance Incentive Plan) that includes stock-based compensation. The maximum number of shares of Edison International's common stock authorized to be issued or transferred pursuant to awards under the 2007 Performance Incentive Plan, as amended, is 49.5 million shares, plus the number of any shares subject to awards issued under Edison International's prior plans and outstanding as of April 26, 2007, which expire, cancel or terminate without being exercised or shares being issued ("carry-over shares"). As of December 31, 2012, Edison International had approximately 26 million shares remaining for future issuance under its stock-based compensation plans.
Stock Options
Under various plans, Edison International has granted stock options at exercise prices equal to the average of the high and low price and, beginning in 2007, at the closing price at the grant date. Edison International may grant stock options and other awards related to or with a value derived from its common stock to directors and certain employees. Options generally expire 10 years after the grant date and vest over a period of four years of continuous service, with expense recognized evenly over the requisite service period, except for awards granted to retirement-eligible participants, as discussed in "Stock-Based Compensation" in Note 1. Stock options granted in 2003 through 2006 accrue dividend equivalents for the first five years of the option term. Stock options granted in 2007 and later have no dividend equivalent rights except for options granted to Edison International's Board of Directors in 2007. Unless transferred to nonqualified deferral plan accounts, dividend equivalents accumulate without interest. Dividend equivalents are paid in cash after the vesting date. Edison International has discretion to pay certain dividend equivalents in shares of Edison International common stock. Additionally, Edison International will substitute cash awards to the extent necessary to pay tax withholding or any government levies.
The fair value for each option granted was determined as of the grant date using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires various assumptions noted in the following table:
 
Years ended December 31,
 
2012
 
2011
 
2010
Expected terms (in years)
6.9
 
7.0
 
7.3
Risk-free interest rate
1.1% – 1.7%
 
1.4% – 3.1%
 
2.0% – 3.2%
Expected dividend yield
2.8% – 3.1%
 
3.1% – 3.5%
 
3.3% – 4.0%
Weighted-average expected dividend yield
3.0%
 
3.4%
 
3.8%
Expected volatility
17.4% – 18.3%
 
18.2% – 19.0%
 
18.8% – 19.8%
Weighted-average volatility
18.3%
 
18.9%
 
19.8%

The expected term represents the period of time for which the options are expected to be outstanding and is primarily based on historical exercise and post-vesting cancellation experience and stock price history. The risk-free interest rate for periods within the contractual life of the option is based on a zero coupon U.S. Treasury STRIPS (separate trading of registered interest and principal of securities) whose maturity equals the option's expected term on the measurement date. Expected volatility is based on the historical volatility of Edison International's common stock for the length of the option's expected term for 2012. The volatility period used was 83 months, 84 months and 87 months at December 31, 2012, 2011 and 2010, respectively.
The following is a summary of the status of Edison International stock options:
 
 
 
Weighted-Average
 
 
 
Stock options
 
Exercise
Price
 
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in millions)
Edison International:
 
 
 
 
 
 
 
Outstanding at December 31, 2011
19,714,214

 
$
34.86

 
 
 
 

Granted
3,769,948

 
43.18

 
 
 
 

Expired
(219,983
)
 
48.21

 
 
 
 

Forfeited
(223,458
)
 
40.08

 
 
 
 

Exercised
(3,808,998
)
 
26.35

 
 
 
 

Outstanding at December 31, 2012
19,231,723

 
37.96

 
6.11
 
 

Vested and expected to vest at December 31, 2012
18,958,712

 
37.99

 
6.04
 
$
146

Exercisable at December 31, 2012
10,642,547

 
38.09

 
4.57
 
88

SCE:
 
 
 
 
 
 
 
Outstanding at December 31, 2011
10,526,540

 
$
34.60

 
 
 
 

Granted
2,072,892

 
43.21

 
 
 
 

Expired
(107,854
)
 
49.06

 
 
 
 

Forfeited
(176,938
)
 
39.79

 
 
 
 

Exercised
(2,173,557
)
 
26.90

 
 
 
 

Affiliate transfers, net
167,378

 
35.42

 
 
 
 
Outstanding at December 31, 2012
10,308,461

 
37.73

 
6.14
 
 

Vested and expected to vest at December 31, 2012
9,952,333

 
37.74

 
6.08
 
$
81

Exercisable at December 31, 2012
5,683,815

 
37.12

 
4.51
 
48


At December 31, 2012, total unrecognized compensation cost related to stock options and the weighted-average period the cost is expected to be recognized are as follows:
(in millions)
Edison International
 
SCE
Unrecognized compensation cost, net of expected forfeitures
$
14

 
$
11

Weighted-average period (in years)
2

 
2


Performance Shares
A target number of contingent performance shares were awarded to executives in March 2010, March 2011 and March 2012, and vest at the end of December 2012, 2013 and 2014, respectively. Performance shares awarded contain dividend equivalent reinvestment rights. An additional number of target contingent performance shares are credited based on dividends on Edison International common stock for which the ex-dividend date falls within the performance period; these additional performance shares are subject to the same terms and conditions as the original performance shares. The vesting of the 2010 and 2011 grants is dependent upon a market performance condition and three years of continuous service subject to a prorated adjustment for employees who are terminated under certain circumstances or retire, but payment cannot be accelerated. The market performance condition is based on Edison International's total shareholder return relative to the total shareholder return of a specified group of peer companies at the end of a three-calendar-year period. The number of performance shares earned is determined based on Edison International's ranking among these companies. The vesting of the 2012 grants is dependent upon the service condition described above and the following performance conditions: half of the 2012 grants to each executive is subject to the market performance condition described above, while the other half is subject to a financial performance condition based on Edison International's three-year average annual "core" earnings per share, as defined in the Edison International 2012 Long-Term Incentives Terms and Conditions, measured against target levels. The number of performance shares earned from the 2012 grants is determined based on these two performance conditions. The number of performance shares earned from each year's grants could range from zero to twice the target number (plus additional units credited as dividend equivalents). Performance shares earned are settled half in cash and half in common stock; however, Edison International has discretion under certain of the awards to pay the half subject to cash settlement in common stock. Edison International also has discretion to pay certain dividend equivalents in Edison International common stock. Additionally, cash awards are substituted to the extent necessary to pay tax withholding or any government levies. The portion of performance shares that can be settled in cash is classified as a share-based liability award. The fair value of these shares is remeasured at each reporting period and the related compensation expense is adjusted. The portion of performance shares payable in common stock is classified as a share-based equity award. Compensation expense related to these shares is based on the grant-date fair value, which for each share is determined as the closing price of Edison International common stock on the grant date; however, with respect to the portion of the performance shares payable in common stock that is subject to the financial performance condition described above, the number of performance shares expected to be earned is subject to revision and update at each reporting period, with a related adjustment of compensation expense. Performance shares expense is recognized ratably over the requisite service period based on the fair values determined (subject to the adjustments discussed above), except for awards granted to retirement-eligible participants.
The fair value of market condition performance shares is determined using a Monte Carlo simulation valuation model. The Monte Carlo simulation valuation model requires various assumptions noted in the following table:
 
Years ended December 31,
 
2012
 
2011
 
2010
Equity awards
 
 
 
 
 
Grant date risk-free interest rate
0.4
%
 
1.2
%
 
1.3
%
Grant date expected volatility
13.2
%
 
20.4
%
 
21.6
%
Liability awards1
 

 
 

 
 

Expected volatility
12.1
%
 
15.9
%
 
20.6
%
Risk-free interest rate:
 

 
 

 
 

2012 awards
0.4
%
 
*

 
*

2011 awards
0.2
%
 
0.3
%
 
*

2010 awards
*

 
0.2
%
 
0.6
%
*
Not applicable
1 
The portion of performance shares classified as share-based liability awards are revalued at each reporting period.
The risk-free interest rate is based on the daily spot rate on the grant or valuation date on U.S. Treasury zero coupon issue or STRIPS with terms nearest to the remaining term of the performance shares and is used as a proxy for the expected return for the specified group of peer companies. Expected volatility is based on the historical volatility of Edison International's (and the specified group of peer companies') common stock for the most recent 36 months. Historical volatility for each company in the specified group is obtained from a financial data services provider.
The following is a summary of the status of Edison International nonvested performance shares:
 
Equity Awards
 
Liability Awards
 
Shares
 
Weighted-Average
Grant Date
Fair Value
 
Shares
 
Weighted-Average
Fair Value
Edison International:
 
 
 
 
 
 
 
Nonvested at December 31, 20111
287,693

 
$
31.60

 
287,471

 
$
34.26

Granted
95,862

 
51.43

 
95,619

 
 

Forfeited
(6,010
)
 
40.85

 
(5,942
)
 
 
Vested2
(135,124
)
 
32.23

 
(135,077
)
 
 

Nonvested at December 31, 2012
242,421

 
38.86

 
242,071

 
46.23

SCE:
 
 
 
 
 
 
 
Nonvested at December 31, 20111
160,225

 
$
31.62

 
160,225

 
$
34.52

Granted
52,684

 
51.48

 
52,512

 
 

Forfeited
(4,296
)
 
41.76

 
(4,363
)
 
 
Vested2
(79,124
)
 
32.05

 
(79,133
)
 
 

Affiliate transfers, net
2,451

 
32.16

 
2,450

 
 
Nonvested at December 31, 2012
131,940

 
38.87

 
131,691

 
46.19

1 
Excludes performance shares that were paid in 2012 as performance targets were met at December 31, 2011.
2 
Relates to performance shares that expired with zero value as performance targets were not met at December 31, 2012.
The current portion of nonvested performance shares classified as liability awards is reflected in "Other current liabilities" and the long-term portion is reflected in "Pensions and benefits" on Edison International's and SCE's consolidated balance sheets.
At December 31, 2012, total unrecognized compensation cost related to performance shares (based on the December 31, 2012 fair value of performance shares classified as equity awards) and the weighted-average period the cost is expected to be recognized are as follows:
(in millions)
Edison International
 
SCE
Unrecognized compensation cost
$
4

 
$
2

Weighted-average period (in years)
2

 
2


Restricted Stock Units
Restricted stock units were awarded to Edison International's and SCE's executives in March 2010, March 2011 and March 2012 and vest and become payable in January 2013, 2014 and 2015, respectively. Each restricted stock unit awarded is a contractual right to receive one share of Edison International common stock, if vesting requirements are satisfied. Restricted stock units awarded contain dividend equivalent reinvestment rights. An additional number of restricted stock units will be credited based on dividends on Edison International common stock for which the ex-dividend date falls within the performance period. The vesting of Edison International's restricted stock units is dependent upon continuous service through the end of the three-calendar-year-plus-two-days vesting period. Vesting is subject to a pro-rated adjustment for employees who are terminated under certain circumstances or retire. Cash awards are substituted to the extent necessary to pay tax withholding or any government levies.
The following is a summary of the status of Edison International nonvested restricted stock units:
 
Edison International
 
SCE
 
Restricted
Stock Units
 
Weighted-Average
Grant Date
Fair Value
 
Restricted
Stock Units
 
Weighted-Average
Grant Date
Fair Value
Nonvested at December 31, 2011
737,635

 
$
32.20

 
411,566

 
$
32.14

Granted
227,902

 
43.17

 
125,217

 
43.20

Forfeited
(12,139
)
 
39.94

 
(9,071
)
 
40.23

Vested
(273,930
)
 
26.37

 
(166,352
)
 
26.85

Affiliate transfers, net
—

 
—

 
7,193

 
31.43

Nonvested at December 31, 2012
679,468

 
$
38.09

 
368,553

 
$
38.07


The fair value for each restricted stock unit awarded is determined as the closing price of Edison International common stock on the grant date.
Compensation expense related to these shares, which is based on the grant-date fair value, is recognized ratably over the requisite service period, except for awards whose holders become eligible for retirement vesting during the service period, in which case recognition is accelerated into the year the holders become eligible for retirement vesting. At December 31, 2012, total unrecognized compensation cost related to restricted stock units is expected to be recognized as follows:
(in millions)
Edison International
 
SCE
Unrecognized compensation cost, net of expected forfeitures
$
6

 
$
4

Cost to be recognized in 2013
4

 
3

Cost to be recognized in 2014
2

 
1


Supplemental Data on Stock-Based Compensation
 
Edison International
 
SCE
 
Years ended December 31,
(in millions, except per award amounts)
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Stock-based compensation expense1:
 
 
 
 
 
 
 
 
 
 
 
Stock options
$
18

 
$
14

 
$
14

 
$
10

 
$
9

 
$
10

Performance shares
7

 
5

 
8

 
4

 
3

 
6

Restricted stock units
9

 
6

 
6

 
5

 
4

 
5

Other
1

 
5

 
7

 
—

 
4

 
6

Total stock-based compensation expense
$
35

 
$
30

 
$
35

 
$
19

 
$
20

 
$
27

Income tax benefits related to stock compensation expense
$
14

 
$
12

 
$
13

 
$
8

 
$
8

 
$
11

Excess tax benefits (expense)2
(6
)
 
12

 
7

 
(13
)
 
11

 
4

Stock options:
 
 
 
 
 
 
 
 
 
 
 
Weighted average grant date fair value per option granted
$
5.22

 
$
5.61

 
$
4.89

 
$
5.22

 
$
5.61

 
$
4.87

Fair value of options vested
17

 
18

 
18

 
10

 
10

 
11

Cash used to purchase shares to settle options
169

 
90

 
61

 
96

 
46

 
27

Cash from participants to exercise stock options
101

 
59

 
38

 
59

 
28

 
18

Value of options exercised
68

 
31

 
23

 
37

 
18

 
9

Tax benefits from options exercised
27

 
12

 
9

 
15

 
7

 
4

Performance shares classified as equity awards:
 
 
 
 
 
 
 
 
 
 
 
Weighted average grant date fair value per share granted
$
51.43

 
$
29.97

 
$
32.25

 
$
51.48

 
$
29.40

 
$
32.19

Fair value of shares vested
4

 
4

 
4

 
3

 
2

 
3

Value of shares settled
4

 
—

 
—

 
2

 
—

 
—

Tax benefits realized from settlement of awards
2

 
—

 
—

 
1

 
—

 
—

Performance shares classified as liability awards:
 
 
 
 
 
 
 
 
 
 
 
Value of shares settled
4

 
—

 
—

 
2

 
—

 
—

Tax benefits realized from settlement of awards
2

 
—

 
—

 
1

 
—

 
—

Restricted stock units:
 
 
 
 
 
 
 
 
 
 
 
Values of shares settled
$
7

 
$
6

 
$
—

 
$
4

 
$
5

 
$
—

Tax benefits realized from settlement of awards
3

 
3

 
—

 
2

 
2

 
—

Weighted average grant date fair value per unit granted
43.17

 
38.01

 
32.12

 
43.20

 
38.07

 
33.38

1 
Reflected in "Operations and maintenance" on Edison International's and SCE's consolidated statements of income.
2 
Reflected in "Settlements of stock-based compensation, net" in the financing section of Edison International's and SCE's consolidated statements of cash flows.
Workforce Reduction
In 2012, SCE announced plans for downsizing to bring the San Onofre organization and cost structure in line with industry peers. At December 31, 2012, SCE had recorded $36 million in estimated cash severance costs (SCE's share) related to the San Onofre workforce reduction. Also, in 2012, as part of a separate reorganization event, SCE implemented plans to reduce its workforce and has recorded estimated severance costs of $76 million as of December 31, 2012. The workforce reductions reflect SCE's strategic direction to optimize its cost structure and to minimize impacts on customer rates as well as aligning the cost structure with its peers. SCE began to reduce the workforce in the fourth quarter of 2012 related to both of these restructuring actions and will continue during 2013. It is expected that SCE will complete the severance payments in 2013. The severance costs are included in "Operation and maintenance" in the consolidated income statements.