Income Taxes

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:



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2013			2012			2013			2012
Edison International:
Income from continuing operations before income taxes	$	665		$	610		$	863		$	1,204
Provision for income tax at federal statutory rate of 35%	233			214			302			421
Increase (decrease) in income tax from:
State tax, net of federal benefit	22			46			5			60
Property-related	(57		)	(20		)	(121		)	(39		)
Uncertain tax positions	(5		)	1			13			2
Other	(16		)	(13		)	(26		)	(23		)
Total income tax expense from continuing operations	$	177		$	228		$	173		$	421
Effective tax rate	26.6		%	37.4		%	20.0		%	35.0		%
SCE:
Income from continuing operations before income taxes	$	685		$	564		$	913		$	1,186
Provision for income tax at federal statutory rate of 35%	240			197			319			415
Increase (decrease) in income tax from:
State tax, net of federal benefit	21			10			12			30
Property-related	(57		)	(19		)	(121		)	(39		)
Uncertain tax positions	(6		)	1			11			1
Other	(15		)	(13		)	(25		)	(23		)
Total income tax expense from continuing operations	$	183		$	176		$	196		$	384
Effective tax rate	26.7		%	31.2		%	21.5		%	32.4		%

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.

Property-related items include recognition of income tax benefits from repair deductions for income tax purposes.

Tax Disputes

Edison International's federal income tax returns and its 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 are currently under review by the Franchise Tax Board.

Tax Years 2003 – 2006

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 $205 million, including interest and penalties through September 30, 2013 (the IRS has asserted a 40% penalty for understatement of tax liability related to this matter).


•	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 $99 million, including interest through September 30, 2013.

Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011. The appeals process to date has not resulted in a change in the proposed adjustment by the IRS on the taxable gain on the 2004 sale of EME's international assets. If a deficiency notice is issued on this item, it would require payment of the tax, interest and any penalties within 90 days of its issuance or a filing of a petition in United States Tax Court.

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 September 30, 2013. Edison International disagrees with the proposed adjustment and filed a protest with the IRS in April 2013.

Net Operating Loss and Tax Credit Carryforwards

Edison International recently completed filing its 2012 tax returns. As adjusted for the amounts reflected in these tax returns, Edison International had $311 million of federal tax credit carryforwards of which $289 million expire between 2029 and 2032 and the remainder has no expiration date. In addition, as adjusted for the amounts reflected in these tax returns there were $1.3 billion of net operating loss carryforwards (tax effected) of which $32 million expire between 2015 and 2024, and the remainder expire in 2031 and 2032.

As adjusted for the amounts reflected in these tax returns, SCE had $44 million of federal tax credit carryforwards of which $30 million expire between 2030 and 2032 and the remainder has no expiration date. In addition, as adjusted for the amounts reflected in these tax returns, there were $177 million of net operating loss carryforwards (tax effected) of which $18 million expire between 2015 and 2016, and the remainder expires in 2031 and 2032.

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. Edison International continues to consolidate EME for federal and certain combined state tax returns. Under federal and state tax regulations, a tax deconsolidation of EME in future periods, as expected through the bankruptcy proceeding would reduce the amounts that Edison International would be eligible to use in future periods. As a result of the expected future tax deconsolidation and separation of EME from Edison International, Edison International has recorded a valuation allowance based on the estimated amount of such benefits as calculated under the applicable federal and state tax regulations. During the third quarter of 2013, Edison International revised its estimate of the tax impact of net operating losses and valuation allowance based on completion of the 2012 tax returns, as well as the estimated impact during 2013, which resulted in a $25 million tax provision (recorded as part of discontinued operations). The tax impact related to completion of the 2012 tax returns resulted from lower net operating losses from EME and an increase in the amount of projected net operating loss retained by EME upon deconsolidation and separation from Edison International. Changes in the amount of tax attributes may impact the amount of the valuation allowance and thereby affect income or losses from discontinued operations (see Note 16).