Attached files

file filename
EX-31.(A) - SECTION 302 CERTIFICATION - CEO - Energy Future Holdings Corp /TX/dex31a.htm
EX-99.(A) - CONDENSED CONSOLIDATED STATEMENT OF INCOME - Energy Future Holdings Corp /TX/dex99a.htm
EX-99.(B) - EFH CONSOLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99b.htm
EX-31.(B) - SECTION 302 CERTIFICATION - CFO - Energy Future Holdings Corp /TX/dex31b.htm
EX-32.(B) - SECTION 906 CERTIFICATION - CFO - Energy Future Holdings Corp /TX/dex32b.htm
EX-99.(C) - TCEH CONSOLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99c.htm
EX-32.(A) - SECTION 906 CERTIFICATION - CEO - Energy Future Holdings Corp /TX/dex32a.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

— OR —

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-12833

Energy Future Holdings Corp.

(Exact name of registrant as specified in its charter)

 

Texas   75-2669310
(State of incorporation)   (I.R.S. Employer Identification No.)

 

1601 Bryan Street, Dallas, TX 75201-3411   (214) 812-4600
(Address of principal executive offices)(Zip Code)   (Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨ (The registrant is not currently required to submit such files.)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨             Accelerated filer  ¨            Non-Accelerated filer  x            Smaller reporting company  ¨

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 29, 2009, there were 1,667,774,579 shares of common stock outstanding, without par value, of Energy Future Holdings Corp. (substantially all of which were owned by Texas Energy Future Holdings Limited Partnership, Energy Future Holdings Corp.’s parent holding company, and none of which is publicly traded).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

          PAGE
GLOSSARY    ii
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Condensed Statements of Consolidated Income (Loss) – Three and Nine Months Ended September 30, 2009 and 2008    1
   Condensed Statements of Consolidated Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2009 and 2008    2
   Condensed Statements of Consolidated Cash Flows – Nine Months Ended September 30, 2009 and 2008    3
   Condensed Consolidated Balance Sheets – September 30, 2009 and December 31, 2008    4
   Notes to Condensed Consolidated Financial Statements    5
   Report of Independent Registered Public Accounting Firm    53
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    54
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    94
Item 4.    Controls and Procedures    100
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    100
Item 1A.    Risk Factors    100
Item 5.    Other Information    100
Item 6.    Exhibits    101
SIGNATURE    103

Energy Future Holdings Corp.’s (EFH Corp.) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public, free of charge, on the EFH Corp. website at http://www.energyfutureholdings.com, as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission. The information on EFH Corp.’s website shall not be deemed a part of, or incorporated by reference into, this report on Form 10-Q. Readers should not rely on or assume the accuracy of any representation or warranty in any agreement that EFH Corp. has filed as an exhibit to this Form 10-Q because such representation or warranty may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties’ risk allocation in the particular transaction, may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes or may no longer continue to be true as of any given date.

This Form 10-Q and other Securities and Exchange Commission filings of EFH Corp. and its subsidiaries occasionally make references to EFH Corp. (or “we,” “our,” “us” or “the company”), EFC Holdings, Intermediate Holding, TCEH, TXU Energy, Luminant, Oncor Holdings or Oncor when describing actions, rights or obligations of their respective subsidiaries. These references reflect the fact that the subsidiaries are consolidated with their respective parent companies for financial reporting purposes. However, these references should not be interpreted to imply that the parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or that the subsidiary company is undertaking an action or has the rights or obligations of its parent company or any other affiliate.

 

i


Table of Contents

GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

 

2008 Form 10-K    EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2008 as recast in a Current Report on Form 8-K filed on May 20, 2009 to reflect the adoption of new accounting and disclosure guidance related to noncontrolling interests
Adjusted EBITDA    Adjusted EBITDA means EBITDA adjusted to exclude non-cash items, unusual items and other adjustments allowable under certain of our debt arrangements. See the definition of EBITDA below. Adjusted EBITDA and EBITDA are not recognized terms under GAAP and, thus, are non-GAAP financial measures. We are providing Adjusted EBITDA in this Form 10-Q (see reconciliation in Exhibit 99(b) and 99(c)) solely because of the important role that Adjusted EBITDA plays in respect of the certain covenants contained in our debt arrangements. We do not intend for Adjusted EBITDA (or EBITDA) to be an alternative to net income as a measure of operating performance or an alternative to cash flows from operating activities as a measure of liquidity or an alternative to any other measure of financial performance presented in accordance with GAAP. Additionally, we do not intend for Adjusted EBITDA (or EBITDA) to be used as a measure of free cash flow available for management’s discretionary use, as the measure excludes certain cash requirements such as interest payments, tax payments and other debt service requirements. Because not all companies use identical calculations, our presentation of Adjusted EBITDA (and EBITDA) may not be comparable to similarly titled measures of other companies.
Competitive Electric segment    Refers to the EFH Corp. business segment that consists principally of TCEH.
CREZ    Competitive Renewable Energy Zone
DOE    US Department of Energy
EBITDA    Refers to earnings (net income) before interest expense, income taxes, depreciation and amortization. See the definition of Adjusted EBITDA above.
EFC Holdings    Refers to Energy Future Competitive Holdings Company, a direct subsidiary of EFH Corp. and the direct parent of TCEH.
EFH Corp.    Refers to Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context. Its major subsidiaries include TCEH and Oncor.
EFH Corp. Senior Notes    Refers collectively to EFH Corp.’s 10.875% Senior Notes due November 1, 2017 (EFH Corp. Cash-Pay Notes) and EFH Corp.’s 11.25%/12.00% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes).
EFIH Finance    Refers to EFIH Finance Inc, a direct, wholly-owned subsidiary of Intermediate Holding, formed for the sole purpose of serving as co-issuer with Intermediate Holding of certain debt securities.
EPA    US Environmental Protection Agency
EPC    engineering, procurement and construction

 

ii


Table of Contents
ERCOT    Electric Reliability Council of Texas, the independent system operator and the regional coordinator of various electricity systems within Texas
FASB    Financial Accounting Standards Board, the designated organization in the private sector for establishing standards for financial accounting and reporting
FERC    US Federal Energy Regulatory Commission
Fitch    Fitch Ratings, Ltd. (a credit rating agency)
GAAP    generally accepted accounting principles
GWh    gigawatt-hours
Intermediate Holding    Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings.
IRS    US Internal Revenue Service
kWh    kilowatt-hours
LIBOR    London Interbank Offered Rate. An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.
Luminant    Refers to subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation, development and construction of new generation facilities, wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas.
market heat rate    Heat rate is a measure of the efficiency of converting a fuel source to electricity. The market heat rate is based on the price offer of the marginal supplier in Texas (generally natural gas plants) in generating electricity and is calculated by dividing the wholesale market price of electricity by the market price of natural gas.
Merger    The transaction referred to in “Merger Agreement” (defined immediately below) that was completed on October 10, 2007.
Merger Agreement    Agreement and Plan of Merger, dated February 25, 2007, under which Texas Holdings agreed to acquire EFH Corp.
MMBtu    million British thermal units
Moody’s    Moody’s Investors Services, Inc. (a credit rating agency)
MW    megawatts
MWh    megawatt-hours
NRC    US Nuclear Regulatory Commission
Oncor    Refers to Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings and an indirect subsidiary of EFH Corp., and/or its consolidated bankruptcy-remote financing subsidiary, Oncor Electric Delivery Transition Bond Company LLC, depending on context, that is engaged in regulated electricity transmission and distribution activities.

 

iii


Table of Contents
Oncor Holdings    Refers to Oncor Electric Delivery Holdings Company LLC, a direct wholly-owned subsidiary of Intermediate Holding and the direct majority owner of Oncor, that is consolidated as a variable interest entity under consolidations accounting standards.
Oncor Ring-Fenced Entities    Refers to Oncor Holdings and its direct and indirect subsidiaries, including Oncor.
OPEB    other postretirement employee benefits
PUCT    Public Utility Commission of Texas
PURA    Texas Public Utility Regulatory Act
Purchase accounting    The purchase method of accounting for a business combination as prescribed by GAAP, whereby the cost or “purchase price” of a business combination, including the amount paid for the equity and direct transaction costs are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill.
Regulated Delivery segment    Refers to the EFH Corp. business segment, the substantial majority of which consists of the activities of Oncor.
REP    retail electric provider
RRC    Railroad Commission of Texas, which among other things, has oversight of lignite mining activity in Texas
S&P    Standard & Poor’s Ratings Services, a division of the McGraw Hill Companies Inc. (a credit rating agency)
SEC    US Securities and Exchange Commission
SG&A    selling, general and administrative
Sponsor Group    Collectively, the investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (KKR), TPG Capital, L.P. and GS Capital Partners, an affiliate of Goldman Sachs & Co. (See Texas Holdings below.)
TCEH    Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFC Holdings and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context, that is engaged in electricity generation, wholesale and retail energy markets and development and construction activities. Its major subsidiaries include Luminant and TXU Energy.
TCEH Finance    Refers to TCEH Finance, Inc., a direct, wholly-owned subsidiary of TCEH, formed for the sole purpose of serving as co-issuer with TCEH of certain debt securities.
TCEH Senior Notes    Refers collectively to TCEH’s 10.25% Senior Notes due November 1, 2015 and 10.25% Senior Notes Series B due November 1, 2015 (collectively, TCEH Cash-Pay Notes) and TCEH’s 10.50%/11.25% Senior Toggle Notes due November 1, 2016 (TCEH Toggle Notes).
TCEH Senior Secured Facilities    Refers collectively to the TCEH Initial Term Loan Facility, TCEH Delayed Draw Term Loan Facility, TCEH Revolving Credit Facility, TCEH Letter of Credit Facility and TCEH Commodity Collateral Posting Facility. See Note 4 to Financial Statements for details of these facilities.

 

iv


Table of Contents
TCEQ    Texas Commission on Environmental Quality
Texas Holdings    Refers to Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group that owns substantially all of the common stock of EFH Corp.
Texas Holdings Group    Refers to Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring-Fenced Entities.
Texas Transmission    Refers to Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor. Texas Transmission is not affiliated with EFH Corp., any of its subsidiaries or any member of the Sponsor Group.
TXU Energy    Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of TCEH engaged in the retail sale of electricity to residential and business customers. TXU Energy is a REP in competitive areas of ERCOT.
TXU Gas    TXU Gas Company, a former subsidiary of EFH Corp.
US    United States of America

 

v


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Operating revenues

   $ 2,885      $ 3,695      $ 7,366      $ 9,001   

Fuel, purchased power costs and delivery fees

     (870     (1,631     (2,171     (3,867

Net gain (loss) from commodity hedging and trading activities

     123        6,045        1,003        (248

Operating costs

     (388     (370     (1,171     (1,120

Depreciation and amortization

     (456     (431     (1,286     (1,217

Selling, general and administrative expenses

     (277     (249     (792     (712

Franchise and revenue-based taxes

     (94     (92     (259     (259

Impairment of goodwill (Note 2)

     —          —          (90     —     

Other income (Note 13)

     45        14        71        43   

Other deductions (Note 13)

     (32     (541     (50     (583

Interest income

     18        9        30        22   

Interest expense and related charges (Note 13)

     (1,039     (831     (2,136     (2,505
                                

Income (loss) before income taxes

     (85     5,618        515        (1,445

Income tax (expense) benefit

     31        (2,001     (254     462   
                                

Net income (loss)

     (54     3,617        261        (983

Net income attributable to noncontrolling interests

     (26     —          (54     —     
                                

Net income (loss) attributable to EFH Corp.

   $ (80   $ 3,617      $ 207      $ (983
                                

See Notes to Financial Statements.

 

1


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Net income (loss)

   $ (54   $ 3,617      $ 261      $ (983

Other comprehensive income (loss), net of tax effects:

        

Reclassification of pension and other retirement benefit costs (net of tax expense of $— in all periods)

     —          —          —          1   

Cash flow hedges:

        

Net decrease in fair value of derivatives (net of tax benefit of $2, $76, $11 and $99)

     (4     (141     (20     (184

Derivative value net loss related to hedged transactions recognized during the period and reported in net income (loss) (net of tax benefit of $21, $22, $53 and $45)

     41        42        99        84   
                                

Total effect of cash flow hedges

     37        (99     79        (100
                                

Total adjustments to net income (loss)

     37        (99     79        (99
                                

Comprehensive income (loss) operations

     (17     3,518        340        (1,082

Comprehensive income attributable to noncontrolling interests

     (26     —          (54     —     
                                

Comprehensive income (loss) attributable to EFH Corp.

   $ (43   $ 3,518      $ 286      $ (1,082
                                

See Notes to Financial Statements.

 

2


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(millions of dollars)

 

     Nine Months Ended September 30,  
     2009     2008  

Cash flows – operating activities:

    

Net income (loss)

   $ 261      $ (983

Adjustments to reconcile net income (loss) to cash provided by operating activities:

    

Depreciation and amortization

     1,738        1,554   

Deferred income tax expense (benefit)

     152        (433

Impairment of goodwill (Note 2)

     90        —     

Write off of regulatory assets (Note 13)

     25        —     

Impairment of emission allowances intangible assets

     —          501   

Charge related to Lehman bankruptcy (Note 13)

     —          26   

Unrealized net (gains) losses from mark-to-market valuations of commodity positions

     (713     221   

Unrealized net gains from mark-to-market valuations of interest rate swaps

     (527     (36

Bad debt expense

     84        58   

Stock-based incentive compensation expense

     12        26   

Reversal of use tax accrual (Note 13)

     (23     —     

Other – net

     (4     18   

Changes in operating assets and liabilities:

    

Margin deposits – net

     260        (236

Deferred advanced metering system revenues (Note 13)

     51        —     

Other operating assets and liabilities

     337        241   
                

Cash provided by operating activities

     1,743        957   
                

Cash flows – financing activities:

    

Issuances of long-term debt/securities

    

Pollution control revenue bonds

     —          242   

Other long-term debt (Note 4)

     522        2,535   

Common stock

     —          34   

Repayments/repurchases of long-term debt/securities:

    

Pollution control revenue bonds

     —          (242

Other long-term debt (Note 4)

     (297     (432

Common stock

     —          (1

Increase in short-term borrowings (Note 4)

     200        902   

Contributions from noncontrolling interests

     42        —     

Distributions paid to noncontrolling interests

     (32     —     

Debt discount, financing and reacquisition expenses

     (36     (19

Other – net

     21        33   
                

Cash provided by financing activities

     420        3,052   
                

Cash flows – investing activities:

    

Capital expenditures

     (1,847     (2,067

Nuclear fuel purchases

     (157     (112

Money market fund redemptions (investments)

     142        (242

Investment posted with derivative counterparty (Note 7)

     (400     —     

Reduction of restricted cash related to pollution control revenue bonds

     —          29   

Reduction of restricted cash related to letter of credit facility (Note 4)

     115        —     

Transfer of cash collateral from (to) custodian account

     3        (20

Net proceeds from sale of assets

     1        53   

Net proceeds from sale of controlling interest in natural gas gathering pipeline business

     40        —     

Proceeds from sales of environmental allowances and credits

     22        30   

Purchases of environmental allowances and credits

     (23     (18

Proceeds from sales of nuclear decommissioning trust fund securities

     2,972        747   

Investments in nuclear decommissioning trust fund securities

     (2,983     (758

Cost to remove retired property

     (30     (26

Other

     18        10   
                

Cash used in investing activities

     (2,127     (2,374
                

Net change in cash and cash equivalents

     36        1,635   

Cash and cash equivalents – beginning balance

     1,689        281   
                

Cash and cash equivalents – ending balance

   $ 1,725      $ 1,916   
                

See Notes to Financial Statements.

 

3


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(millions of dollars)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,725      $ 1,689   

Investment posted with counterparty (Note 7)

     417        —     

Investments held in money market fund

     —          142   

Restricted cash (Note 13)

     64        55   

Trade accounts receivable – net (Note 3)

     1,014        1,219   

Income taxes receivable – net

     —          42   

Inventories (Note 13)

     484        426   

Commodity and other derivative contractual assets (Note 7)

     2,619        2,534   

Accumulated deferred income taxes

     101        44   

Margin deposits related to commodity positions

     158        439   

Other current assets

     145        165   
                

Total current assets

     6,727        6,755   
                

Restricted cash (Note 13)

     1,150        1,267   

Investments (Note 13)

     744        645   

Property, plant and equipment – net (Note 13)

     30,019        29,522   

Goodwill (Note 2)

     14,316        14,386   

Intangible assets – net (Note 2)

     2,907        2,993   

Regulatory assets – net (Note 13)

     1,755        1,892   

Commodity and other derivative contractual assets (Note 7)

     1,153        962   

Other noncurrent assets, principally unamortized debt issuance costs

     880        841   
                

Total assets

   $ 59,651      $ 59,263   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term borrowings (Note 4)

   $ 1,437      $ 1,237   

Long-term debt due currently (Note 4)

     326        385   

Trade accounts payable

     738        1,143   

Commodity and other derivative contractual liabilities (Note 7)

     2,649        2,908   

Margin deposits related to commodity positions

     504        525   

Accrued interest

     856        524   

Other current liabilities

     694        612   
                

Total current liabilities

     7,204        7,334   
                

Accumulated deferred income taxes

     6,063        5,926   

Investment tax credits

     38        42   

Commodity and other derivative contractual liabilities (Note 7)

     1,343        2,095   

Long-term debt, less amounts due currently (Note 4)

     41,442        40,838   

Other noncurrent liabilities and deferred credits (Note 13)

     5,375        5,205   
                

Total liabilities

     61,465        61,440   

Commitments and Contingencies (Note 5)

    

Equity (Note 6):

    
                

EFH Corp. shareholders’ equity

     (3,234     (3,532

Noncontrolling interests in subsidiaries

     1,420        1,355   
                

Total equity

     (1,814     (2,177
                

Total liabilities and equity

   $ 59,651      $ 59,263   
                

See Notes to Financial Statements.

 

4


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

EFH Corp., a Texas corporation, is a Dallas-based holding company conducting its operations principally through its TCEH and Oncor subsidiaries. TCEH is a holding company for subsidiaries engaged in competitive electricity market activities largely in Texas, including electricity generation, development and construction of new generation facilities, wholesale energy sales and purchases, commodity risk management and trading activities, and retail electricity sales. Oncor is a majority (approximately 80%) owned subsidiary engaged in regulated electricity transmission and distribution operations in Texas.

References in this report to “we,” “our,” “us” and “the company” are to EFH Corp. and/or its subsidiaries, TCEH and/or its subsidiaries, or Oncor and/or its subsidiary as apparent in the context. See “Glossary” for other defined terms.

Various “ring-fencing” measures have been taken to enhance the credit quality of Oncor. Such measures include, among other things: the sale of a 19.75% equity interest in Oncor to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; Oncor’s board of directors being comprised of a majority of independent directors, and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group. The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or other obligations of any member of the Texas Holdings Group. Moreover, Oncor’s operations are conducted, and its cash flows managed, independently from the Texas Holdings Group. Oncor Holdings is consolidated with EFH Corp. as a variable interest entity under consolidations accounting standards.

We have two reportable segments: the Competitive Electric segment, which is comprised principally of TCEH, and the Regulated Delivery segment, which is comprised of Oncor and its wholly-owned bankruptcy-remote financing subsidiary. See Note 12 for further information concerning reportable business segments.

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as the audited financial statements included in the 2008 Form 10-K, with the exception of the adoption of new accounting and disclosure guidance related to derivative instruments and hedging activities, subsequent events and reporting of fair value as discussed below. All adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes included in the 2008 Form 10-K. The results of operations for an interim period may not give a true indication of results for a full year. All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated. Subsequent events have been evaluated through October 29, 2009, the date these condensed consolidated financial statements were issued.

 

5


Table of Contents

Use of Estimates

Preparation of the financial statements requires estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. No material adjustments, other than those disclosed elsewhere herein, were made to previous estimates or assumptions during the current year.

Changes in Accounting Standards

In August 2009, the FASB issued guidance on measuring fair value of liabilities, which provides clarification of fair value measurement when there is limited or no observable data available. This new guidance is effective for periods beginning October 1, 2009. We are evaluating the impact of this new guidance, but currently do not expect a material effect on our financial statements.

In June 2009, the FASB issued “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles,” which establishes the FASB Accounting Standards Codification™ (Codification) as the source of authoritative US GAAP recognized by the FASB to be applied to nongovernmental entities. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not affect reported results of operations, financial condition or cash flows. We implemented the Codification in this Form 10-Q.

In June 2009, the FASB issued new guidance that (i) changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated and (ii) requires additional disclosures. This new guidance is effective for periods beginning after November 15, 2009. We are evaluating the impact of this new guidance, but currently do not expect a material effect on our financial statements.

In June 2009, the FASB issued new guidance regarding accounting for transfers of financial assets that eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures. This new guidance is effective in the first quarter of 2010. We continue to evaluate the impact of this new guidance on our financial statements and footnote disclosures; however, we currently expect that our accounts receivable securitization program discussed in Note 3 will no longer be accounted for as a sale of accounts receivable as a result of the guidance, and the funding under the program will be reported as short-term borrowings. This new guidance will not impact the covenant-related ratio calculations in our debt agreements.

In May 2009, the FASB issued new guidance related to subsequent events that requires disclosure of the date through which we have evaluated subsequent events related to the financial statements being issued and the basis for that date. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. Our adoption of this guidance as of April 1, 2009 did not affect reported results of operations, financial condition or cash flows, and the required disclosure is provided above in “Basis of Presentation.”

In April 2009, the FASB issued new guidance regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance was effective for interim reporting periods ending after June 15, 2009, and we adopted it as of April 1, 2009. This guidance did not change our fair value measurement techniques. However, this guidance requires disclosures of additional detail of securities held in our nuclear decommissioning trust that are provided in Notes 8 and 13.

 

6


Table of Contents

In April 2009, the FASB issued new guidance regarding the recognition and presentation of other-than-temporary impairments, which changed the guidance for recording impairment of investments in debt securities. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, and is expected to affect many utility companies that hold debt securities in nuclear decommissioning trust funds. However, our adoption as of April 1, 2009 did not affect the accounting for our nuclear decommissioning trust fund because the trust balance is reported at fair value, with changes in fair value of the trust resulting in changes in Oncor’s regulatory asset or liability related to the decommissioning cost. This new guidance also requires the disclosure of information about the fair value of the investments for interim reporting as provided in Note 13.

In April 2009, the FASB issued new guidance requiring the disclosure of summarized financial information about the fair value of financial instruments for interim reporting. This new guidance was effective for interim reporting periods ending after June 15, 2009, and we adopted it as of April 1, 2009. As this new guidance provides only disclosure requirements, the adoption did not have any effect on reported results of operations, financial condition or cash flows. The disclosures are provided in Note 9.

In December 2008, the FASB issued new guidance for employers’ disclosures about postretirement benefit plan assets. This new guidance provides enhanced disclosures regarding how investment allocation decisions are made and certain aspects of fair value measurements on plan assets. The required disclosures are intended to provide transparency related to the types of assets and associated risks in an employer’s defined benefit pension or other postretirement employee benefits plan and events in the economy and markets that could have a significant effect on the value of plan assets. These new disclosure requirements are effective for fiscal years ending after December 15, 2009. As this new guidance provides only disclosure requirements, the adoption will not have any effect on reported results of operations, financial condition or cash flows.

In March 2008, the FASB issued amended disclosure guidance for derivative instruments and hedging activities. This amended guidance enhances required disclosures regarding derivatives and hedging activities to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. This guidance was effective with reporting for the three months ended March 31, 2009. As this guidance provides only disclosure requirements, the adoption did not have any effect on reported results of operations or financial condition. The disclosures are provided in Note 7.

In December 2007, the FASB issued amended guidance for accounting for noncontrolling interests in consolidated financial statements effective for fiscal years beginning on or after December 15, 2008. This amended guidance requires noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity. Effective January 1, 2009, on a retrospective basis, we classified the noncontrolling interests created as a result of Oncor’s November 2008 sale of equity interests ($1.355 billion as of December 31, 2008) and those created as part of the nuclear generation development joint venture formed in the first quarter of 2009 as a separate component of equity in the balance sheet, and reported consolidated net income (loss) includes the net income attributable to noncontrolling interests.

 

7


Table of Contents
2. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

Reported goodwill as of September 30, 2009 totaled $14.3 billion, with $10.2 billion assigned to the Competitive Electric segment and $4.1 billion to the Regulated Delivery segment. Reported goodwill as of December 31, 2008 totaled $14.4 billion, with $10.3 billion assigned to the Competitive Electric segment and $4.1 billion to the Regulated Delivery segment. None of this goodwill balance is being deducted for tax purposes.

In the first quarter of 2009, we recorded a $90 million goodwill impairment charge largely related to the Competitive Electric segment. This charge resulted from the completion of fair value calculations supporting the initial $8.860 billion goodwill impairment charge that was recorded in the fourth quarter of 2008. The impairment charge primarily reflected the dislocation in the capital markets during the fourth quarter of 2008 that increased interest rate spreads and the resulting discount rates used in estimating fair values and the effect of declines in market values of debt and equity securities of comparable companies. The impairment determination involved significant assumptions and judgments in estimating enterprise values of the Competitive Electric and Regulated Delivery segments and the fair values of their assets and liabilities. There have been no other goodwill impairments recorded since the Merger.

The calculations supporting the impairment determination utilized models that take into consideration multiple inputs, including commodity prices, debt yields, equity prices of comparable companies and other inputs. Those models were generally used in developing long-term forward price curves for certain commodities and discount rates for determining fair values of our reporting units as well as certain individual assets and liabilities of those businesses. The fair value measurements resulting from such models are classified as Level 3 measurements consistent with accounting standards related to the determination of fair value (see Note 8).

Identifiable Intangible Assets

Identifiable intangible assets reported in the balance sheet are comprised of the following:

 

     As of September 30, 2009    As of December 31, 2008
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net    Gross
Carrying
Amount
   Accumulated
Amortization
   Net

Retail customer relationship

   $ 463    $ 194    $ 269    $ 463    $ 130    $ 333

Favorable purchase and sales contracts

     700      340      360      700      249      451

Capitalized in-service software

     445      153      292      255      116      139

Environmental allowances and credits

     988      187      801      994      121      873

Land easements and other

     203      75      128      203      71      132
                                         

Total intangible assets subject to amortization

   $ 2,799    $ 949      1,850    $ 2,615    $ 687      1,928
                                 

Trade name (not subject to amortization)

           955            955

Mineral interests (not currently subject to amortization)

           102            110
                         

Total intangible assets

         $ 2,907          $ 2,993
                         

 

8


Table of Contents

Amortization expense related to intangible assets consisted of:

 

     Three Months Ended September 30,    Nine Months Ended September 30,

Intangible Asset

(Income Statement line)

  

Segment

   2009    2008    2009    2008

Retail customer relationship (Depreciation and amortization)

  

Competitive Electric

   $ 21    $ 13    $ 64    $ 39

Favorable purchase and sales contracts (Operating revenues/ fuel, purchased power costs and delivery fees)

  

Competitive Electric

     18      9      91      115

Capitalized in-service software (Depreciation and amortization)

  

All

     16      11      39      33

Environmental allowances and credits (Fuel, purchased power costs and delivery fees)

  

Competitive Electric

     25      28      66      77

Land easements and other (Depreciation and amortization)

  

All

     2      1      4      2
                              

Total amortization expense

      $ 82    $ 62    $ 264    $ 266
                              

Estimated Amortization of Intangible Assets The estimated aggregate amortization expense related to identifiable intangible assets for each of the next five fiscal years is as follows:

 

Year

   Amount

2009

   $ 365

2010

     265

2011

     205

2012

     161

2013

     135

 

9


Table of Contents
3. TRADE ACCOUNTS RECEIVABLE AND SALE OF RECEIVABLES PROGRAM

TXU Energy participates in an accounts receivable securitization program, the activity under which is accounted for as a sale of accounts receivable in accordance with transfers and servicing accounting standards (see Note 1 for discussion of a new accounting standard effective in the first quarter of 2010). Under the program, TXU Energy (originator) sells trade accounts receivable to TXU Receivables Company, which is a special purpose entity created for the purpose of purchasing receivables from the originator and is a consolidated wholly-owned bankruptcy-remote direct subsidiary of EFH Corp. TXU Receivables Company sells undivided interests in the purchased accounts receivable for cash to special purpose entities established by financial institutions (the funding entities).

Program funding totaled $700 million at September 30, 2009, the maximum amount currently available under the accounts receivable securitization program.

All new trade receivables under the program generated by the originator are continuously purchased by TXU Receivables Company with the proceeds from collections of receivables previously purchased. Changes in the amount of funding under the program, through changes in the amount of undivided interests sold by TXU Receivables Company, reflect seasonal variations in the level of accounts receivable, changes in collection trends and other factors such as changes in sales prices and volumes. TXU Receivables Company has issued subordinated notes payable to the originator for the difference between the face amount of the uncollected accounts receivable purchased, less a discount, and cash paid to the originator that was funded by the sale of the undivided interests. The balance of the subordinated notes payable, which is eliminated in consolidation, totaled $489 million and $268 million at September 30, 2009 and December 31, 2008, respectively.

The discount from face amount on the purchase of receivables from the originator principally funds program fees paid to the funding entities. The program fees, which are also referred to as losses on sale of the receivables under transfers and servicing accounting standards, consist primarily of interest costs on the underlying financing. The discount also funds a servicing fee paid by TXU Receivables Company to EFH Corporate Services Company, a direct wholly-owned subsidiary of EFH Corp., which provides recordkeeping services and is the collection agent for the program.

Program fee amounts, which are reported in SG&A expenses, were as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Program fees

   $ 2      $ 7      $ 9      $ 18   

Program fees as a percentage of average funding (annualized)

     1.3     4.2     2.4     5.2

The trade accounts receivable balance reported in the September 30, 2009 consolidated balance sheet includes $1.189 billion face amount of retail accounts receivable sold and has been reduced by proceeds from the sale of undivided interests in those receivables totaling $700 million. Funding under the program increased $284 million and $337 million for the nine month periods ending September 30, 2009 and 2008, respectively. Funding increases or decreases under the program are reflected as operating cash flow activity in the statement of cash flows. The carrying amount of the retained interests in the accounts receivable balance approximated fair value due to the short-term nature of the collection period.

 

10


Table of Contents

Activities of TXU Receivables Company were as follows:

 

     Nine Months Ended September 30,  
     2009     2008  

Cash collections on accounts receivable

   $ 4,660      $ 4,881   

Face amount of new receivables purchased

     (5,165     (5,263

Discount from face amount of purchased receivables (to fund fees paid)

     11        22   

Program fees paid to funding entities

     (9     (18

Servicing fees paid to EFH Corp. subsidiary for recordkeeping and collection services

     (2     (3

Increase in subordinated notes payable

     221        44   
                

Operating cash flows provided to originator under the program

   $ (284   $ (337
                

The program, which expires in October 2013, may be terminated upon the occurrence of a number of specified events, including if the delinquency ratio (delinquent for 31 days) for the sold receivables, the default ratio (delinquent for 91 days or deemed uncollectible), the dilution ratio (reductions for discounts, disputes and other allowances) or the days collection outstanding ratio exceed stated thresholds, and the funding entities do not waive such event of termination. The thresholds apply to the entire portfolio of sold receivables. In addition, the program may be terminated if TXU Receivables Company or the EFH Corp. subsidiary acting as collection agent defaults in any payment with respect to debt in excess of $50,000 in the aggregate for such entities, or if TCEH, any affiliate of TCEH acting as collection agent other than the EFH Corp. subsidiary, any parent guarantor of the originator or the originator shall default in any payment with respect to debt (other than hedging obligations) in excess of $200 million in the aggregate for such entities. As of September 30, 2009, there were no such events of termination.

Upon termination of the program, cash flows would be delayed as collections of sold receivables would be used by TXU Receivables Company to repurchase the undivided interests from the funding entities instead of purchasing new receivables. The level of cash flows would normalize in approximately 16 to 30 days.

The subordinated notes issued by TXU Receivables Company are subordinated to the undivided interests of the funding entities in the purchased receivables.

Trade Accounts Receivable

 

     September 30,
2009
    December 31,
2008
 

Gross wholesale and retail trade accounts receivable

   $ 1,800      $ 1,705   

Undivided interests in retail accounts receivable sold by TXU Receivables Company

     (700     (416

Allowance for uncollectible accounts

     (86     (70
                

Trade accounts receivable – reported in balance sheet

   $ 1,014      $ 1,219   
                

Gross trade accounts receivable at September 30, 2009 and December 31, 2008 included unbilled revenues of $526 million and $505 million, respectively.

Allowance for Uncollectible Accounts Receivable

 

     Nine Months Ended September 30,  
     2009     2008  

Allowance for uncollectible accounts receivable as of beginning of period

   $ 70      $ 32   

Increase for bad debt expense

     84        58   

Decrease for account write-offs

     (67     (47

Charge related to Lehman bankruptcy

     —          26   

Other

     (1     —     
                

Allowance for uncollectible accounts receivable as of end of period

   $ 86      $ 69   
                

 

11


Table of Contents
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

At September 30, 2009, we had outstanding short-term borrowings of $1.437 billion at a weighted average interest rate of 2.60%, excluding certain customary fees, at the end of the period. Short-term borrowings under credit facilities totaled $900 million for TCEH and $537 million for Oncor.

At December 31, 2008, we had outstanding short-term borrowings of $1.237 billion at a weighted average interest rate of 3.41%, excluding certain customary fees, at the end of the period. Short-term borrowings under credit facilities totaled $900 million for TCEH and $337 million for Oncor.

Credit Facilities

Our credit facilities with cash borrowing and/or letter of credit availability at September 30, 2009 are presented below. The facilities are all senior secured facilities of the authorized borrower.

 

     At September 30, 2009

Authorized Borrowers and Facility

  

Maturity

Date

   Facility
Limit
   Letters of
Credit
   Cash
Borrowings
   Availability

TCEH Delayed Draw Term Loan Facility (a)

   October 2014    $ 4,100    $ —      $ 4,085    $ —  

TCEH Revolving Credit Facility (b)

   October 2013      2,700      38      900      1,736

TCEH Letter of Credit Facility (c)

   October 2014      1,250      —        1,250      —  
                              

Subtotal TCEH (d)

      $ 8,050    $ 38    $ 6,235    $ 1,736
                              

TCEH Commodity Collateral Posting Facility (e)

   December 2012      Unlimited    $ —      $ —        Unlimited

Oncor Revolving Credit Facility (f)

   October 2013    $ 2,000    $ —      $ 537    $ 1,341

 

(a) Facility was used to fund expenditures for constructing certain new generation facilities and environmental upgrades of existing generation facilities. Availability amount excludes $15 million of commitments from a subsidiary of Lehman Brothers Holding Inc. (such subsidiary, Lehman) that has filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Borrowings are classified as long-term debt.
(b) Facility used for letters of credit and borrowings for general corporate purposes. Borrowings are classified as short-term borrowings. Availability amount includes $141 million of commitments from Lehman that are only available from the fronting banks and the swingline lender and excludes $26 million of requested cash draws that have not been funded by Lehman. All outstanding borrowings under this facility at September 30, 2009 bear interest at LIBOR plus 3.5%, and a commitment fee is payable quarterly in arrears at a rate per annum equal to 0.50% of the average daily unused portion of the facility.
(c) Facility used for issuing letters of credit for general corporate purposes, including, but not limited to, providing collateral support under hedging arrangements and other commodity transactions that are not eligible for funding under the TCEH Commodity Collateral Posting Facility. The borrowings under this facility were drawn at the inception of the facility, are classified as long-term debt, and except for $115 million related to a letter of credit drawn in June 2009, have been retained as restricted cash. Letters of credit totaling $676 million issued as of September 30, 2009 are supported by the restricted cash, and the remaining letter of credit availability totals $459 million.
(d) Pursuant to PUCT rules, TCEH is required to maintain available capacity under its credit facilities to assure adequate credit worthiness of TCEH’s REP subsidiaries, including the ability to return retail customer deposits, if necessary. As a result, at September 30, 2009, the total availability under the TCEH credit facilities should be further reduced by $237 million.
(e) Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 650 million MMBtu as of September 30, 2009. As of September 30, 2009, there were no borrowings under this facility. See “TCEH Senior Secured Facilities” below for additional information.
(f) Facility used by Oncor for its general corporate purposes. Borrowings are classified as short-term borrowings. Availability amount excludes $122 million of commitments from Lehman. All outstanding borrowings under this facility at September 30, 2009 bear interest at LIBOR plus 0.350%, and a facility fee is payable (currently at a rate per annum equal to 0.125%) on the commitments under the facility. The interest rate and facility fee rate per annum declined in June 2009 from LIBOR plus 0.425% and 0.150%, respectively, due to a two notch upgrade in Oncor’s credit ratings by Moody’s.

 

12


Table of Contents

Long-Term Debt

At September 30, 2009 and December 31, 2008, long-term debt consisted of the following:

 

     September 30,
2009
    December 31,
2008
 

TCEH

    

Pollution Control Revenue Bonds:

    

Brazos River Authority:

    

5.400% Fixed Series 1994A due May 1, 2029

   $ 39      $ 39   

7.700% Fixed Series 1999A due April 1, 2033

     111        111   

6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1, 2013 (a)

     16        16   

7.700% Fixed Series 1999C due March 1, 2032

     50        50   

8.250% Fixed Series 2001A due October 1, 2030

     71        71   

5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011 (a)

     217        217   

8.250% Fixed Series 2001D-1 due May 1, 2033

     171        171   

0.450% Floating Series 2001D-2 due May 1, 2033 (b)

     97        97   

0.340% Floating Taxable Series 2001I due December 1, 2036 (c)

     62        62   

0.450% Floating Series 2002A due May 1, 2037 (b)

     45        45   

6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013 (a)

     44        44   

6.300% Fixed Series 2003B due July 1, 2032

     39        39   

6.750% Fixed Series 2003C due October 1, 2038

     52        52   

5.400% Fixed Series 2003D due October 1, 2029, remarketing date October 1, 2014 (a)

     31        31   

5.000% Fixed Series 2006 due March 1, 2041

     100        100   

Sabine River Authority of Texas:

    

6.450% Fixed Series 2000A due June 1, 2021

     51        51   

5.500% Fixed Series 2001A due May 1, 2022, remarketing date November 1, 2011 (a)

     91        91   

5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011 (a)

     107        107   

5.200% Fixed Series 2001C due May 1, 2028

     70        70   

5.800% Fixed Series 2003A due July 1, 2022

     12        12   

6.150% Fixed Series 2003B due August 1, 2022

     45        45   

Trinity River Authority of Texas:

    

6.250% Fixed Series 2000A due May 1, 2028

     14        14   

Unamortized fair value discount related to pollution control revenue bonds (d)

     (150     (161

Senior Secured Facilities:

    

3.754% TCEH Initial Term Loan Facility maturing October 10, 2014 (e)(f)

     16,121        16,244   

3.754% TCEH Delayed Draw Term Loan Facility maturing October 10, 2014 (e)(f)

     4,085        3,562   

3.754% TCEH Letter of Credit Facility maturing October 10, 2014 (f)

     1,250        1,250   

0.243% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (g)

     —          —     

Other:

    

10.25% Fixed Senior Notes due November 1, 2015

     3,000        3,000   

10.25% Fixed Senior Notes Series B due November 1, 2015

     2,000        2,000   

10.50 / 11.25% Senior Toggle Notes due November 1, 2016

     1,848        1,750   

7.000% Fixed Senior Notes due March 15, 2013

     5        5   

7.100% Promissory Note due January 5, 2009

     —          65   

7.460% Fixed Secured Facility Bonds with amortizing payments through January 2015

     55        67   

Capital lease obligations

     158        159   

Unamortized fair value discount (d)

     (5     (6
                

Total TCEH

   $ 29,902      $ 29,470   
                

 

13


Table of Contents
     September 30,
2009
    December 31,
2008
 

EFC Holdings

    

9.580% Fixed Notes due in semiannual installments through December 4, 2019

   $ 55      $ 55   

8.254% Fixed Notes due in quarterly installments through December 31, 2021

     51        53   

1.283% Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037 (f)

     1        1   

8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037

     8        8   

Unamortized fair value discount (d)

     (12     (12
                

Total EFC Holdings

     103        105   
                

EFH Corp. (parent entity)

    

10.875% Fixed Senior Notes due November 1, 2017

     2,000        2,000   

11.25 / 12.00% Senior Toggle Notes due November 1, 2017

     2,650        2,500   

4.800% Fixed Senior Notes Series O due November 15, 2009

     3        3   

5.550% Fixed Senior Notes Series P due November 15, 2014

     1,000        1,000   

6.500% Fixed Senior Notes Series Q due November 15, 2024

     750        750   

6.550% Fixed Senior Notes Series R due November 15, 2034

     750        750   

8.820% Building Financing due semiannually through February 11, 2022 (h)

     75        80   

Unamortized fair value premium related to Building Financing (d)

     17        22   

Unamortized fair value discount (d)

     (619     (661
                

Total EFH Corp.

     6,626        6,444   
                

Oncor (i)

    

6.375% Fixed Senior Notes due May 1, 2012

     700        700   

5.950% Fixed Senior Notes due September 1, 2013

     650        650   

6.375% Fixed Senior Notes due January 15, 2015

     500        500   

6.800% Fixed Senior Notes due September 1, 2018

     550        550   

7.000% Fixed Debentures due September 1, 2022

     800        800   

7.000% Fixed Senior Notes due May 1, 2032

     500        500   

7.250% Fixed Senior Notes due January 15, 2033

     350        350   

7.500% Fixed Senior Notes due September 1, 2038

     300        300   

Unamortized discount

     (15     (16
                

Total Oncor

     4,335        4,334   

Oncor Electric Delivery Transition Bond Company LLC (j)

    

4.030% Fixed Series 2003 Bonds due in semiannual installments through February 15, 2010

     13        54   

4.950% Fixed Series 2003 Bonds due in semiannual installments through February 15, 2013

     130        130   

5.420% Fixed Series 2003 Bonds due in semiannual installments through August 15, 2015

     145        145   

3.520% Fixed Series 2004 Bonds due in semiannual installments through November 15, 2009

     10        39   

4.810% Fixed Series 2004 Bonds due in semiannual installments through November 15, 2012

     221        221   

5.290% Fixed Series 2004 Bonds due in semiannual installments through May 15, 2016

     290        290   
                

Total Oncor Electric Delivery Transition Bond Company LLC

     809        879   

Unamortized fair value discount related to transition bonds (d)

     (7     (9
                

Total Oncor consolidated

     5,137        5,204   
                

Total EFH Corp. consolidated

     41,768        41,223   

Less amount due currently

     (326     (385
                

Total long-term debt

   $ 41,442      $ 40,838   
                

 

(a) These series are in the multiannual interest rate mode and are subject to mandatory tender prior to maturity on the mandatory remarketing date. On such date, the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at September 30, 2009. These series are in a daily interest rate mode and are classified as long-term as they are supported by long-term irrevocable letters of credit.
(c) Interest rate in effect at September 30, 2009. This series is in a weekly interest rate mode and is classified as long-term as it is supported by long-term irrevocable letters of credit.
(d) Amount represents unamortized fair value adjustments recorded under purchase accounting.
(e) Interest rate swapped to fixed on $17.55 billion principal amount.
(f) Interest rates in effect at September 30, 2009.
(g) Interest rates in effect at September 30, 2009, excluding a quarterly maintenance fee of approximately $11 million. See “Credit Facilities” above for more information.
(h) This financing is secured and will be serviced with $115 million in restricted cash drawn in June 2009 by the beneficiary of a letter of credit. The issuer elected not to extend the expiration date of the letter of credit, and TCEH elected to allow the drawing in lieu of reissuing the letter of credit under the TCEH Revolving Credit Facility. The remaining $104 million of the prepayment (net of $11 million of debt service payments) is included in other current assets and other noncurrent assets on the balance sheet.
(i) Secured with first priority lien as discussed under “Oncor Revolving Credit Facility” below.
(j) These bonds are nonrecourse to Oncor and were issued to securitize a regulatory asset.

 

14


Table of Contents

Debt-Related Activity in 2009 — Repayments of long-term debt in 2009 totaling $297 million represented principal payments at scheduled maturity dates as well as other repayments totaling $39 million, principally related to capitalized leases. Payments at scheduled amortization or maturity dates included $123 million repaid under the TCEH Initial Term Loan Facility, $70 million of Oncor transition bond principal payments and $65 million of a TCEH promissory note.

Increases in long-term debt during 2009 totaling $522 million consisted of borrowings under the TCEH Delayed Draw Term Loan Facility, which was fully drawn as of July 2009, to fund expenditures related to construction of new generation facilities and environmental upgrades of existing lignite/coal-fueled generation facilities. In addition, long-term debt increased as a result of the issuance of $150 million of EFH Corp.’s 11.25%/12.00% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes) and $98 million of TCEH’s 10.50%/11.25% Senior Toggle Notes due November 1, 2016 (TCEH Toggle Notes) in lieu of cash interest payments as discussed below.

EFH Corp. and TCEH have the option every six months at their discretion, ending with the payment due November 1, 2012, to use the payment-in-kind (PIK) feature of their respective toggle notes in lieu of making cash interest payments. Once EFH Corp. and/or TCEH make a PIK election, the election is valid for each succeeding interest payment period until EFH Corp. and/or TCEH revoke the applicable election.

EFH Corp. made its May 2009 interest payment and will make its November 2009 and May 2010 interest payments by using the PIK feature of the EFH Corp. Toggle Notes. During the applicable interest periods, the interest rate on the toggle notes is increased from 11.25% to 12.00%. EFH Corp. increased the aggregate principal amount of the EFH Corp. Toggle Notes by $150 million on May 1, 2009 and will further increase the aggregate principal amount of the EFH Corp. Toggle Notes by $159 million on November 1, 2009 and $169 million on May 1, 2010. The elections increased liquidity as of May 1, 2009 by an amount equal to approximately $141 million and will further increase liquidity as of November 1, 2009 and May 1, 2010 by an amount equal to approximately $149 million and approximately $158 million, respectively, with such amounts constituting the amount of cash interest that otherwise would have been payable on the respective dates, and will increase the expected annual cash interest expense by approximately $54 million, constituting the additional cash interest that will be payable with respect to the $478 million of additional toggle notes. These amounts may be affected by the debt exchange offers discussed below.

Similarly, TCEH made its May 2009 interest payment and will make its November 2009 and May 2010 interest payments by using the PIK feature of the TCEH Toggle Notes. During the applicable interest periods, the interest rate on the toggle notes is increased from 10.50% to 11.25%. TCEH increased the aggregate principal amount of the TCEH Toggle Notes by $98 million on May 1, 2009 and will further increase the aggregate principal amount of the TCEH Toggle Notes by approximately $104 million on November 1, 2009 and $110 million on May 1, 2010. The elections increased liquidity as of May 1, 2009 by an amount equal to approximately $92 million and will further increase liquidity as of November 1, 2009 and May 1, 2010 by an amount equal to approximately $97 million and approximately $103 million, respectively, with such amounts constituting the amount of cash interest that otherwise would have been payable on the respective dates, and will increase the expected annual cash interest expense by approximately $33 million, constituting the additional cash interest that will be payable with respect to the $312 million of additional toggle notes.

 

15


Table of Contents

Debt Exchange Offers and Consent Solicitations — In October 2009, EFH Corp., Intermediate Holding and EFIH Finance, a wholly-owned subsidiary of Intermediate Holding, (collectively, the Offerors) commenced offers to exchange certain EFH Corp. outstanding debt securities, consisting of the EFH Corp. Senior Notes and EFH Corp.’s Series P, Q and R notes (collectively, the EFH Corp. Securities), and the TCEH Cash-Pay Notes for up to $3.0 billion of new 9.75% senior secured notes due 2019 (new senior secured notes) to be issued by EFH Corp. ($1.35 billion) and Intermediate Holding and EFIH Finance ($1.65 billion), upon the terms and subject to certain conditions set forth in the prospectus relating to the exchange offers (Prospectus) and the related Consent and Letter of Transmittal. The purpose of the exchange offers is to reduce the outstanding principal amount and extend the weighted average maturity of the long-term debt of EFH Corp. and its subsidiaries. Under the terms of the exchange offers, the maximum principal amount of aggregate EFH Corp. Securities and TCEH Cash-Pay Notes that could be exchanged is approximately $4.9 billion.

Concurrent with the exchange offers, and upon the terms and subject to the conditions more fully described in the Prospectus and the related Consent and Letter of Transmittal, EFH Corp. is soliciting consents from holders of the EFH Corp. Securities to certain proposed amendments. The proposed amendments would eliminate substantially all of the restrictive covenants in the indentures governing the EFH Corp. Securities, eliminate certain events of default, modify covenants regarding mergers and consolidations, and modify or eliminate certain other provisions.

The exchange offers are not conditioned on any minimum principal amount of EFH Corp. Securities or TCEH Cash-Pay Notes being tendered or the issuance of a minimum principal amount of new senior secured notes or the receipt of requisite consents to adopt any of the proposed amendments to the indentures governing the EFH Corp. Securities. However, the exchange offers are subject to certain other conditions, including the conditions (which conditions cannot be waived) that the Registration Statement (as defined below), of which the Prospectus forms a part, has been declared effective by the SEC and that each series of the new senior secured notes to be issued in the exchange offers are approved for listing on the New York Stock Exchange, subject to notice of issuance, each as more fully described in the Prospectus. Subject to applicable law, the Offerors have the right to amend any of the exchange offers or the consent solicitations at any time and for any reason and to terminate or withdraw any of the exchange offers and consent solicitations if any of the conditions described in the Prospectus are not satisfied.

The Offerors filed a registration statement on Form S-4 (Registration Statement) relating to the exchange offers and the consent solicitations with the SEC on October 5, 2009 as amended on October 23, 2009. The Registration Statement has not yet become effective and the new senior secured notes may not be issued, nor may the exchange offers be completed, until such time as the Registration Statement has been declared effective by the SEC and is not subject to a stop order or any proceedings for that purpose. There is no assurance that the exchange offers and consent solicitations will be completed or that they will be completed on the terms and conditions described in the Prospectus.

TCEH Senior Secured Facilities — The applicable rate on borrowings under the TCEH Initial Term Loan Facility, the TCEH Delayed Draw Term Loan Facility, the TCEH Revolving Credit Facility and the TCEH Letter of Credit Facility as of September 30, 2009 is provided in the long-term debt table above and reflects LIBOR-based borrowings.

 

16


Table of Contents

In August 2009, the Credit Agreement governing the TCEH Senior Secured Facilities was amended to reduce the existing first lien capacity under the TCEH Senior Secured Facilities by $1.25 billion in exchange for the ability for TCEH to issue up to an additional $4 billion of secured notes or loans ranking junior to TCEH’s first lien obligations, provided that:

 

   

such notes or loans mature later than the latest maturity date of any of the initial term loans under the TCEH Senior Secured Facilities, and

 

   

any net cash proceeds from any such issuances are used (i) in exchange for, or to refinance, repay, retire, refund or replace indebtedness of TCEH or (ii) to acquire, directly or indirectly, all or substantially all of the property and assets or business of another person or to finance the purchase price, cost of design, acquisition, construction, repair, restoration, replacement, expansion, installation or improvement of certain fixed or capital assets.

In addition, the amended Credit Agreement permits TCEH to, among other things:

 

   

issue new secured notes or loans, which may include, in each case, indebtedness secured on a pari passu basis with the obligations under the TCEH Senior Secured Facilities, so long as, in each case, among other things, the net cash proceeds from any such issuance are used to prepay certain loans under the TCEH Senior Secured Facilities at par;

 

   

agree with individual lenders to extend the maturity of their term loans or extend or refinance their revolving credit commitments under the TCEH Senior Secured Facilities, and pay increased interest rates or otherwise modify the terms of their loans or revolving commitments in connection with such an extension, and

 

   

exclude from the financial maintenance covenant under the TCEH Senior Secured Facilities any new debt issued that ranks junior to TCEH’s first lien obligations under the TCEH Senior Secured Facilities.

The TCEH Senior Secured Facilities are unconditionally guaranteed jointly and severally on a senior secured basis by EFC Holdings and subject to certain exceptions, each existing and future direct or indirect wholly-owned US restricted subsidiary of TCEH. The TCEH Senior Secured Facilities, including the guarantees thereof, certain commodity hedging transactions and the interest rate swaps described under “TCEH Interest Rate Hedges” below are secured by (a) substantially all of the current and future assets of TCEH and TCEH’s subsidiaries who are guarantors of such facilities and (b) pledges of the capital stock of TCEH and certain current and future direct or indirect subsidiaries of TCEH.

The TCEH Initial Term Loan Facility is required to be repaid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of such facility (approximately $41 million quarterly), with the balance payable in October 2014. The TCEH Delayed Draw Term Loan Facility is required to be repaid in equal quarterly installments beginning in December 2009 in an aggregate annual amount equal to 1% of the actual principal outstanding under such facility as of such date, with the balance payable in October 2014. Amounts borrowed under the TCEH Revolving Facility may be reborrowed from time to time until October 2013. The TCEH Letter of Credit Facility and TCEH Commodity Collateral Posting Facility will mature in October 2014 and December 2012, respectively.

TCEH Senior Notes — Borrowings under TCEH’s and TCEH Finance’s (collectively, the Co-Issuers) 10.25% Senior Notes due November 1, 2015 and 10.25% Senior Notes Series B due November 1, 2015 (collectively, TCEH Cash-Pay Notes) bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 10.25% per annum. Borrowings under the TCEH Toggle Notes bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 10.50% per annum for cash interest and at a fixed rate of 11.25% per annum for PIK Interest (as defined below). For any interest period until November 1, 2012, the Co-Issuers may elect to pay interest on the notes (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new TCEH Toggle Notes (Payment-in-Kind or PIK Interest); or (iii) 50% in cash and 50% in PIK Interest.

 

17


Table of Contents

The TCEH Cash-Pay Notes and the TCEH Toggle Notes (collectively, the TCEH Senior Notes) are fully and unconditionally guaranteed on a joint and several basis by TCEH’s direct parent, EFC Holdings (which owns 100% of TCEH and its subsidiary guarantors), and by each subsidiary that guarantees the TCEH Senior Secured Facilities.

The Co-Issuers may redeem the TCEH Cash-Pay Notes, in whole or in part, at any time on or after November 1, 2011, or the TCEH Toggle Notes, in whole or in part, at any time on or after November 1, 2012, at specified redemption prices, plus accrued and unpaid interest, if any. In addition, before November 1, 2010, the Co-Issuers may redeem with the cash proceeds of certain equity offerings up to 35% of the aggregate principal amount of TCEH Cash-Pay Notes and TCEH Toggle Notes from time to time at a redemption price of 110.250% and 110.500%, respectively, of their respective aggregate principal amount plus accrued and unpaid interest, if any. The Co-Issuers may also redeem the TCEH Cash-Pay Notes at any time prior to November 1, 2011 or the TCEH Toggle Notes at any time prior to November 1, 2012 at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. Upon the occurrence of a change in control of TCEH, the Co-Issuers must offer to repurchase the TCEH Senior Notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

EFH Corp. Senior Notes — Borrowings under EFH Corp.’s 10.875% Senior Notes due November 1, 2017 (EFH Corp. Cash-Pay Notes) bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 10.875% per annum. Borrowings under EFH Corp.’s 11.250%/12.000% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes and collectively with the EFH Corp. Cash-Pay Notes, the EFH Corp. Senior Notes) bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 11.250% per annum for cash interest and at a fixed rate of 12.000% per annum for PIK Interest. For any interest period until November 1, 2012, EFH Corp. may elect to pay interest on the notes, at EFH Corp.’s option (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new EFH Corp. Toggle Notes; or (iii) 50% in cash and 50% in PIK Interest.

The EFH Corp. Senior Notes are fully and unconditionally guaranteed on a joint and several basis by EFC Holdings and Intermediate Holding.

EFH Corp. may redeem the EFH Corp. Senior Notes, in whole or in part, at any time on or after November 1, 2012, at specified redemption prices, plus accrued and unpaid interest, if any. In addition, before November 1, 2010, EFH Corp. may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFH Corp. Toggle Notes from time to time at a redemption price of 110.875% of the aggregate principal amount of the EFH Corp. Cash-Pay Notes, plus accrued and unpaid interest, if any, or 111.250% of aggregate principal amount of the EFH Corp. Toggle Notes, plus accrued and unpaid interest, if any. EFH Corp. may also redeem the EFH Corp. Senior Notes at any time prior to November 1, 2012 at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. Upon the occurrence of a change in control of EFH Corp., EFH Corp. must offer to repurchase the EFH Corp. Senior Notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

TCEH Interest Rate Swap Transactions As of September 30, 2009, TCEH has entered into interest rate swap transactions pursuant to which payment of the floating interest rates on an aggregate of $17.55 billion of senior secured term loans of TCEH were exchanged for interest payments at fixed rates of between 7.3% and 8.3% on debt maturing from 2009 to 2014. Interest rate swaps on an aggregate of $15.05 billion were being accounted for as cash flow hedges related to variable interest rate cash flows until August 29, 2008, at which time these swaps were dedesignated as cash flow hedges as a result of the intent to change the variable interest rate terms of the hedged debt (from three-month LIBOR to one-month LIBOR) in connection with the planned execution of interest rate basis swaps (discussed immediately below) to further reduce the fixed borrowing costs. Based on the fair value of the positions, the cumulative unrealized mark-to-market net losses related to these interest rate swaps totaled $431 million (pre-tax) at the dedesignation date and was recorded in accumulated other comprehensive income. This balance will be reclassified into net income as interest on the hedged debt is reflected in net income. No ineffectiveness gains or losses were recorded.

 

18


Table of Contents

As of September 30, 2009, TCEH has entered into interest rate basis swap transactions pursuant to which payments at floating interest rates of three-month LIBOR on an aggregate of $18.0 billion principal amount of senior secured term loans of TCEH were exchanged for floating interest rates of one-month LIBOR plus spreads ranging from 0.0625% to 0.353%. These transactions include swaps entered into in the nine months ended September 30, 2009 related to an aggregate $9.55 billion principal amount of senior secured term loans of TCEH and reflect the expiration of swaps in the nine months ended September 30, 2009 that related to an aggregate $4.595 billion principal amount of senior secured term loans of TCEH.

The interest rate swap counterparties are secured by the same collateral package granted to the lenders under the TCEH Senior Secured Facilities. Subsequent to the dedesignation in August 2008 discussed above, changes in the fair value of such swaps are being reported in the income statement in interest expense and related charges, and such unrealized mark-to-market value changes totaled $138 million in net losses and $36 million in net gains in the three months ended September 30, 2009 and 2008, respectively, and $527 million and $36 million in net gains in the nine months ended September 30, 2009 and 2008, respectively. The cumulative unrealized mark-to-market net liability related to the swaps totaled $1.4 billion at September 30, 2009, of which $238 million (pre-tax) was reported in accumulated other comprehensive income.

See Note 7 for discussion of collateral investments related to certain of these interest rate swaps.

Oncor Secured Revolving Credit Facility — Oncor has a $2.0 billion credit facility to be used for its working capital and general corporate purposes, including issuances of commercial paper and letters of credit. Oncor may request increases in the commitments under the facility in any amount up to $500 million, subject to the satisfaction of certain conditions. Amounts borrowed under the facility, once repaid, can be reborrowed by Oncor from time to time until October 10, 2013. Oncor secured this credit facility with a first priority lien on certain of its transmission and distribution assets. Oncor also secured all of its existing long-term debt securities (excluding the transition bonds) with the same lien in accordance with the terms of those securities. The lien contains customary provisions allowing Oncor to use the assets in its business, as well as to replace and/or release collateral as long as the market value of the aggregate collateral is at least 115% of the aggregate secured debt. The lien may be terminated at Oncor’s option upon the termination of Oncor’s credit facility. Borrowings under this credit facility totaled $537 million and $337 million at September 30, 2009 and December 31, 2008, respectively. The applicable rate on borrowings under this credit facility as of September 30, 2009 was 0.60% (see detail provided in the credit facilities table above).

 

19


Table of Contents
5. COMMITMENTS AND CONTINGENCIES

Generation Development

Construction of three lignite-fueled generation units in Texas, two units at Oak Grove and one unit at Sandow, is nearing completion. The Sandow unit achieved substantial completion (as defined in the EPC Agreement for the unit) on September 30, 2009, and one Oak Grove unit is in the commissioning and start-up phase.

In connection with the acquisition of the development rights to the Sandow unit, a subsidiary of TCEH (Sandow Power Company LLC, or Sandow Power) became a party to a federal consent decree with, among others, the US Department of Justice in August 2007 (the Consent Decree). A 2007 federal court order that was merged into the Consent Decree requires that, among other things, the Sandow unit commence commercial operation (as defined in the Consent Decree) and achieve and maintain certain emission-related deadlines by August 31, 2009. The Sandow unit met the commercial operation deadline by synchronizing to the ERCOT grid in early July 2009. However, due to unforeseen weather events and equipment malfunctions experienced during commissioning and start-up activities, the Sandow unit was not able to meet the emission-related deadlines by August 31, 2009. Under the terms of the Consent Decree, Sandow Power may request an extension to these deadlines from the federal district court that presides over the Consent Decree for certain force majeure events (including such events as the weather events and equipment malfunctions described above). In September 2009, the federal district court granted Sandow Power’s request for force majeure relief and gave Sandow Power an additional sixty-one days from August 31, 2009 to begin achieving compliance with the applicable Consent Decree deadlines.

TCEH has received the air permits for the Sandow and Oak Grove units. However, the issuances of the air permits have been challenged as discussed below under “Litigation Related to Generation Facilities.”

Construction work-in-process asset balances for the Oak Grove units totaled approximately $3.3 billion as of September 30, 2009, which includes the effects of the fair value adjustments related to purchase accounting and capitalized interest. In the unexpected event the development of the Oak Grove units was cancelled due to air permit challenges, the cancellation exposure as of September 30, 2009 totaled $3.4 billion, which includes the carrying value of the project and up to approximately $100 million of termination obligations. This estimated exposure amount excludes any potential recovery values for assets acquired to date and for assets already owned prior to executing such agreements that are being utilized in these projects.

 

20


Table of Contents

Litigation Related to Generation Facilities

In September 2007, an administrative appeal challenging the order of the TCEQ issuing the air permit for construction and operation of the Oak Grove generation facility in Robertson County, Texas was filed in the State District Court of Travis County, Texas. Plaintiffs asked that the District Court reverse the TCEQ’s approval of the Oak Grove air permit and the TCEQ’s adoption and approval of the TCEQ Executive Director’s Response to Comments, and remand the matter back to TCEQ for further proceedings. In addition to this administrative appeal, two other petitions were filed in Travis County District Court by non-parties to the administrative hearing before the TCEQ and the State Office of Administrative Hearings (SOAH) seeking to challenge the TCEQ’s issuance of the Oak Grove air permit and asking the District Court to remand the matter to the SOAH for further proceedings. Finally, the plaintiffs in these two additional lawsuits filed a third, joint petition claiming insufficiencies in the Oak Grove application, permit, and process and seeking party status and remand to the SOAH for further proceedings. One of the plaintiffs has asked the District Court to consolidate all these proceedings, and the Attorney General of Texas, on behalf of TCEQ, filed pleas to the jurisdiction seeking dismissal of all but the administrative appeal. In May 2009, the District Court dismissed the claims that contest the merits of the TCEQ’s permitting decision, but declined to dismiss the claims that contest the process by which the TCEQ handled the permit application. Oak Grove Management Company LLC (a subsidiary of TCEH) has subsequently intervened in these proceedings and has filed its own pleas to the jurisdiction asking the court to dismiss the remaining collateral attack claims. In October 2009, one of the plaintiffs ended its legal challenge to the permit. We believe the Oak Grove air permit granted by the TCEQ was issued in accordance with applicable law. There can be no assurance that the outcome of these matters will not adversely impact the Oak Grove project.

In June and September 2008, administrative appeals were filed in the State District Court of Travis County, Texas to challenge the administrative action of the TCEQ Executive Director in issuing an air permit alteration for the previously-permitted construction and operation of the Sandow 5 generation facility in Milam County, Texas, and the failure of the TCEQ to overturn that administrative action. Plaintiffs asked that the District Court reverse the issuance of the permit alteration. The Attorney General of Texas, on behalf of TCEQ, is defending the issuance of the permit alteration. Sandow Power has intervened in support of the TCEQ. The plaintiff’s brief was filed in late August 2009, and the Attorney General of Texas and Sandow Power have filed responsive briefs. We believe the Sandow 5 air permit alteration administratively issued by the Executive Director of the TCEQ was issued in accordance with applicable law. There can be no assurance that the outcome of these matters will not adversely impact the Sandow 5 project.

In July 2008, the Sierra Club announced that it may sue Luminant, after the expiration of a 60-day waiting period, for violating federal Clean Air Act provisions in connection with Luminant’s Martin Lake generation facility. We cannot predict whether the Sierra Club will actually file suit relating to Martin Lake or the outcome of any such proceeding.

Other Litigation

In September 2005, a lawsuit was filed in the US District Court for the Northern District of Texas, Dallas Division against EFH Corp. (then known as TXU Corp.) and C. John Wilder, EFH Corp.’s former Chief Executive Officer. The plaintiffs asserted claims on behalf of themselves and a putative class of owners of certain EFH Corp. securities who tendered such securities in connection with a tender offer conducted by EFH Corp. in 2004. The plaintiffs alleged violations of the provisions of Sections 14(e), 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. In August 2006, the District Court dismissed this litigation with prejudice. In 2007, the US Court of Appeals for the Fifth Circuit remanded the dismissal to the District Court in light of the US Supreme Court’s then-recent decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd. On remand, in April 2008, the District Court again dismissed this litigation with prejudice. In April 2009, the US Court of Appeals for the Fifth Circuit affirmed the dismissal of all claims. In June 2009, the plaintiffs requested that the US Supreme Court review the merits of the case. In October 2009, the US Supreme Court denied the plaintiff’s petition for review. Accordingly, this litigation has concluded.

 

21


Table of Contents

In July 2008, Alcoa Inc. filed a lawsuit in Milam County, Texas district court against Luminant Generation and Luminant Mining (wholly-owned subsidiaries of TCEH), later adding EFH Corp., a number of its subsidiaries, Texas Holdings and Texas Energy Future Capital Holdings LLC as parties to the suit. The lawsuit makes various claims concerning the operation of the Sandow Unit 4 generation facility and the Three Oaks lignite mine, including claims for breach of contract, breach of fiduciary duty, fraud, tortious interference, civil conspiracy and conversion. The plaintiff requests money damages of no less than $500 million, declaratory judgment, rescission and other forms of equitable relief. An agreed scheduling order is currently in place setting trial for May 2010. While we are unable to estimate any possible loss or predict the outcome of this litigation, we believe the plaintiff’s claims made in this litigation are without merit and, accordingly, intend to vigorously defend this litigation.

Regulatory Investigations and Reviews

In June 2008, the EPA issued a request for information to TCEH under EPA’s authority under Section 114 of the Clean Air Act. The stated purpose of the request is to obtain information necessary to determine compliance with the Clean Air Act, including New Source Review Standards and air permits issued by the TCEQ for the Big Brown, Monticello and Martin Lake generation facilities. The company is cooperating with the EPA and is responding in good faith to the EPA’s request, but is unable to predict the outcome of this matter.

Other Proceedings

In addition to the above, we are involved in various other legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect on our financial position, results of operations or cash flows.

Guarantees

We have entered into contracts that contain guarantees to outside parties that could require performance or payment under certain conditions. Material guarantees are discussed below.

Disposed TXU Gas operationsIn connection with the TXU Gas transaction in October 2004, EFH Corp. agreed to indemnify Atmos Energy Corporation (Atmos), until October 1, 2014, for up to $500 million for any liability related to assets retained by TXU Gas, including certain inactive gas plant sites not acquired by Atmos, and up to $1.4 billion for contingent liabilities associated with preclosing tax and employee related matters. The maximum aggregate amount that we may be required to pay is $1.9 billion. To date, we have not been required to make any payments to Atmos under any of these indemnity obligations, and no such payments are currently anticipated.

Residual value guarantees in operating leases — We are the lessee under various operating leases that guarantee the residual values of the leased assets. At September 30, 2009, the aggregate maximum amount of residual values guaranteed was approximately $51 million with an estimated residual recovery of approximately $56 million. These leased assets consist primarily of mining equipment, rail cars and vehicles. The average life of the residual value guarantees under the lease portfolio is approximately four years.

See Note 4 above and Note 15 to Financial Statements in the 2008 Form 10-K for discussion of guarantees and security for certain of our indebtedness.

 

22


Table of Contents

Letters of Credit

At September 30, 2009, TCEH had outstanding letters of credit under its credit facilities totaling $714 million as follows:

 

   

$360 million to support risk management and trading margin requirements in the normal course of business, including over-the-counter hedging transactions;

 

   

$208 million to support floating rate pollution control revenue bond debt with an aggregate principal amount of $204 million (the letters of credit are available to fund the payment of such debt obligations and expire in 2014);

 

   

$65 million for collateral funding transactions with counterparties to interest rate swap agreements related to TCEH debt (see Note 7), and

 

   

$81 million for miscellaneous credit support requirements.

Long-Term Contractual Obligations and Commitments — In the nine months ended September 30, 2009, we entered into contractual obligations for fuel for our generation facilities totaling approximately $320 million to purchase nuclear fuel in periods between 2010 and 2020 and totaling approximately $153 million to purchase coal in periods between 2010 and 2012.

 

6. EQUITY

Dividend Restrictions

The indenture governing the EFH Corp. Senior Notes includes covenants that, among other things and subject to certain exceptions, restrict our ability to pay dividends or make other distributions in respect of our capital stock. Accordingly, essentially all of our net income is restricted from being used to make distributions on our common stock unless such distributions are expressly permitted under the indenture and/or after such distributions, on a pro forma basis, after giving effect to such payment, our consolidated leverage ratio is equal to or less than 7.0 to 1.0. Consolidated leverage ratio is generally defined as the ratio of consolidated total indebtedness (as defined in the indenture) to Adjusted EBITDA, in each case, on a consolidated basis, excluding Oncor Holdings and its subsidiaries.

The TCEH Senior Secured Facilities generally restrict TCEH from making any distribution to any of its parent companies for the ultimate purpose of making a distribution to Texas Holdings unless at the time, and after giving effect to such distribution, its consolidated total debt (as defined in the TCEH Senior Secured Facilities) to Adjusted EBITDA would be equal to or less than 6.5 to 1.0. In addition, the TCEH Senior Secured Facilities and Indenture generally restrict TCEH’s ability to make distributions or loans to any of its parent companies, EFC Holdings and EFH Corp., unless such distributions or loans are expressly permitted under the TCEH Senior Secured Facilities and Indenture. Those agreements generally permit TCEH to make unlimited distributions or loans to its parent companies for corporate overhead costs, SG&A expenses, taxes and principal and interest payments. In addition, those agreements contain certain investment and dividend baskets that would allow TCEH to make additional distributions and/or loans to its parent companies up to the amount of such baskets. At September 30, 2009, EFH Corp. notes payable to TCEH totaled $1.112 billion.

In addition, under applicable law, we would be prohibited from paying any dividend to the extent that immediately following payment of such dividend, there would be no statutory surplus or we would be insolvent. See “Shareholder Actions” below.

EFH Corp. has not paid any cash dividends subsequent to the Merger.

 

23


Table of Contents

Shareholder Actions

In May 2009, the shareholders of EFH Corp. approved the reduction of the stated capital of EFH Corp.’s common stock, no par value per share, to an amount equal to $0.001 for each outstanding share of common stock, resulting in total stated value of outstanding common stock of $2 million. Also in May 2009, EFH Corp.’s board of directors approved a decrease in additional paid-in capital of the same amount and the allocation of $0.001 per share to stated value of common stock upon issuance of any authorized but unissued shares of common stock that may occur from time to time, with the remainder of any amounts received for such shares allocated to additional paid-in capital.

Noncontrolling Interests

In November 2008, Oncor sold equity interests to Texas Transmission. Oncor also indirectly sold equity interests to certain members of its board of directors and its management team. Accordingly, after giving effect to all equity issuances, as of September 30, 2009, Oncor’s ownership was as follows: 80.03% held indirectly by EFH Corp., 0.22% held indirectly by Oncor’s management and board of directors and 19.75% held by Texas Transmission (see Note 1). Of the noncontrolling interests balance at September 30, 2009 in the table below, $1.378 billion related to Oncor’s noncontrolling interests.

In connection with the filing of a combined operating license application with the NRC for two new nuclear generation units, in January 2009, TCEH and Mitsubishi Heavy Industries Ltd. (MHI) formed a joint venture, known as Comanche Peak Nuclear Power Company LLC, to further the development of the two new nuclear generation units using MHI’s US–Advanced Pressurized Water Reactor technology. Under the terms of the joint venture agreement, a subsidiary of TCEH owns an 88% interest in the venture and a subsidiary of MHI owns a 12% interest. This joint venture is a variable interest entity, and a subsidiary of TCEH is considered the primary beneficiary under consolidations accounting standards.

Equity

The following table presents the changes to equity during the nine months ended September 30, 2009.

 

     EFH Corp. Shareholders’ Equity        
     Common
Stock (a)
   Additional
Paid-in
Capital
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests (b)
    Total
Equity
 

Balance at December 31, 2008

   $  —      $ 8,045      $ (11,198   $ (379   $ 1,355      $ (2,177

Net income

     —        —          207        —          54        261   

Effects of shareholder actions related to stated value of common stock

     2      (2     —          —          —          —     

Effects of EFH Corp. stock-based incentive compensation plans

     —        12        —          —          —          12   

Net effects of cash flow hedges

     —        —          —          79        —          79   

Distributions to noncontrolling interests

     —        —          —          —          (32     (32

Investment by noncontrolling interests

     —        —          —          —          42        42   

Other

     —        —          —          —          1        1   
                                               

Balance at September 30, 2009

   $ 2    $ 8,055      $ (10,991   $ (300   $ 1,420      $ (1,814
                                               

 

(a) Authorized shares totaled 2,000,000,000 ($0.001 stated value) as of September 30, 2009. Outstanding shares totaled 1,666,346,008 and 1,667,149,663 as of September 30, 2009 and December 31, 2008, respectively.
(b) See Note 1 for discussion of adoption of amended guidance for accounting for noncontrolling interests in consolidated financial statements.

 

24


Table of Contents
7. COMMODITY AND OTHER DERIVATIVE CONTRACTUAL ASSETS AND LIABILITIES

Risk Management Hedging Strategy

We enter into physical and financial derivative instruments, such as options, swaps, futures and forward contracts, primarily to manage commodity price risk and interest rate risk exposure. Our principal activities involving derivatives consist of a long-term hedging program and the hedging of interest costs on our long-term debt. See Note 8 for a discussion of the fair value of all derivatives.

Long-Term Hedging Program — TCEH has a long-term hedging program designed to reduce exposure to changes in future electricity prices due to changes in the price of natural gas, thereby hedging future revenues from electricity sales and related cash flows. In ERCOT, the wholesale price of electricity is correlated to the price of natural gas. Under the program, TCEH has entered into market transactions involving natural gas-related financial instruments and has sold forward natural gas over the next five years. These transactions are intended to hedge a majority of electricity price exposure related to expected baseload generation for this period. Changes in the fair value of the instruments under the long-term hedging program are reported in the income statement in net gain (loss) from commodity hedging and trading activities.

Interest Rate Swap Transactions — Interest rate swap agreements are used to reduce exposure to interest rate changes by converting floating-rate debt to a fixed basis, thereby hedging future interest costs and related cash flows. Interest rate basis swaps are used to effectively reduce the hedged borrowing costs. Changes in the fair value of the swaps are recorded as unrealized gains and losses in interest expense and related charges. See Note 4 for additional information about these and other interest rate swap agreements.

Other Commodity Hedging and Trading Activity — In addition to the long-term hedging program, TCEH enters into derivatives, including electricity, natural gas, fuel oil and coal instruments, generally for shorter-term hedging purposes. To a limited extent, TCEH also enters into derivative transactions for proprietary trading purposes, principally in natural gas and electricity markets.

As of September 30, 2009, commodity positions accounted for as cash flow hedges, which represent a small portion of economic hedge positions, reduce exposure to variability of future cash flows through 2009.

The following table provides detail of commodity and other derivative contractual assets and liabilities as presented in the balance sheet at September 30, 2009:

 

     Derivatives not under hedge accounting     Cash flow
hedges
       
     Derivative assets    Derivative liabilities     Derivative
liabilities
       
     Commodity
contracts
    Interest
rate
swaps
   Commodity
contracts
    Interest rate
swaps
    Commodity
contracts
    Total  

Current assets

   $ 2,517      $ 91    $ 11      $ —        $  —        $ 2,619   

Noncurrent assets

     1,118        5      30        —          —          1,153   

Current liabilities

     (28     —        (1,910     (709     (2     (2,649

Noncurrent liabilities

     (19     —        (524     (800     —          (1,343
                                               

Net assets (liabilities)

   $ 3,588      $ 96    $ (2,393   $ (1,509   $ (2   $ (220
                                               

 

25


Table of Contents

Margin deposits that contractually offset these derivative instruments are reported separately in the balance sheet and totaled $396 million and $190 million in net liabilities at September 30, 2009 and December 31, 2008, respectively, which do not include the collateral investments related to certain interest rate swaps and commodity positions discussed immediately below. Amounts presented in the above table do not reflect netting of assets and liabilities with the same counterparties under existing netting arrangements. This presentation can result in significant volatility in derivative assets and liabilities because we may enter into offsetting positions with the same counterparties, resulting in both assets and liabilities, and the underlying commodity prices can change significantly from period to period.

In early 2009, we entered into collateral funding transactions with counterparties to certain interest rate swap agreements related to TCEH debt. Under the terms of these transactions, which we elected to enter into as a cash management measure, as of September 30, 2009 EFH Corp. (parent) has posted $400 million in cash and TCEH has posted $65 million in letters of credit to the counterparties, with the outstanding balance of such collateral earning interest. TCEH had also entered into commodity hedging transactions with one of these counterparties, and under an arrangement effective August 2009, both the interest rate swaps and certain of the commodity hedging transactions with the counterparty are under the same derivative agreement, which continues to be secured by a first-lien interest in the assets of TCEH. At September 30, 2009, the net mark-to-market liability under the derivative agreements exceeded the collateral posted under such agreements. In particular, the net commodity and interest rate swap mark-to-market liability related to the $400 million cash posting totaled $685 million at September 30, 2009. We are not required to post any additional collateral to these counterparties, regardless of the net mark-to-market liability under the applicable derivative agreement, and the applicable counterparty will return the cash collateral to the extent the mark-to-market liability under the applicable derivative agreement falls below the funded amount, subject to a $50 million minimum transfer amount. The counterparties are required to return any remaining collateral, along with accrued and unpaid interest, on March 31, 2010. The cash collateral was recorded as an investment and is presented in the balance sheet (including accrued interest) as a separate line item under current assets.

The following table presents the pre-tax effect of derivatives not under hedge accounting on net income, including realized and unrealized effects, for the three and nine months ended September 30, 2009:

 

Derivative (Income statement presentation)

   Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009

Commodity contracts (Net gain (loss) from commodity hedging and trading activities)

   $ 136      $ 1,026

Interest rate swaps (Interest expense and related charges)

     (317     16
              

Net gain (loss)

   $ (181   $ 1,042
              

Results for the three and nine months ended September 30, 2008 include net “day one” losses totaling $10 million and $68 million, respectively, primarily associated with commodity contracts entered into at below market prices. Substantially all of these amounts represent losses associated with related series of transactions involving natural gas financial instruments intended to hedge exposure to future changes in electricity prices. The losses are reported in the income statement in net gain (loss) from commodity hedging and trading activities, consistent with other mark-to-market hedging and trading gains and losses, and are included in the results of the Competitive Electric segment.

 

26


Table of Contents

The following tables present the pre-tax effect of derivative instruments accounted for as cash flow hedges on net income (loss) and other comprehensive income (loss) (OCI) for the three and nine months ended September 30, 2009:

 

Three Months Ended September 30, 2009

 

Derivative

   Amount of (loss)
recognized in OCI
(effective portion)
   

Income statement presentation of gain (loss)

reclassified from accumulated OCI into income

(effective portion)

   Amount  

Interest rate swaps

   $  —        Interest expense and related charges    $ (56

Commodity contracts

     (6   Fuel, purchased power costs and delivery fees      (6
             
     Operating revenues      —     
             

Total

   $ (6      $ (62
                   

Nine Months Ended September 30, 2009

 

Derivative

   Amount of (loss)
recognized in OCI
(effective portion)
   

Income statement presentation of gain (loss)

reclassified from accumulated OCI into income

(effective portion)

   Amount  

Interest rate swaps

   $  —        Interest expense and related charges    $ (140

Commodity contracts

     (31   Fuel, purchased power costs and delivery fees      (10
             
     Operating revenues      (2
             

Total

   $ (31      $ (152
                   

There were no ineffectiveness net gains or losses related to transactions currently designated as cash flow hedges in the three and nine months ended September 30, 2009.

Accumulated other comprehensive income related to cash flow hedges at September 30, 2009 totaled $159 million in net losses (after-tax), substantially all of which relates to interest rate swaps. We expect that $82 million of net losses related to cash flow hedges included in accumulated other comprehensive income as of September 30, 2009 will be reclassified into net income during the next twelve months as the related hedged transactions affect net income.

 

27


Table of Contents

The following table presents the gross notional amounts of derivative volumes at September 30, 2009:

 

Derivative type

   Notional Volume    Unit of Measure

Interest rate swaps:

     

Floating/fixed

   $ 19,250    Million US dollars

Basis

   $ 18,000    Million US dollars

Natural gas:

     

Long-term hedge forward sales and purchases (a)

     3,522    Million MMBtu

Locational basis swaps

     909    Million MMBtu

All other

     1,366    Million MMBtu

Electricity

     190,431    GWh

Coal

     7    Million tons

Fuel oil

     166    Million gallons

 

  (a) Represents gross notional forward sales, purchases and options of fixed and basis (price point) transactions in the long-term hedging program. The net amount of these transactions, excluding basis transactions, is 1.7 billion MMBtu.

Credit Risk-Related Contingent Features

The agreements that govern our derivative instrument transactions may contain certain credit risk-related contingent features that could trigger liquidity requirements in the form of cash collateral, letters of credit or some other form of credit enhancement. Certain of those agreements require the posting of collateral if our credit rating is downgraded by one or more of the credit rating agencies; however, due to our below investment grade ratings, substantially all of such collateral posting requirements are already effective.

As of September 30, 2009, the fair value of liabilities related to derivative instruments under agreements with credit risk-related contingent features that were not fully cash collateralized totaled $850 million. The liquidity exposure associated with these liabilities was reduced by cash and letter of credit postings with the counterparties totaling $162 million as of September 30, 2009. If all the credit risk-related contingent features related to these derivatives had been triggered, including cross default provisions, as of September 30, 2009, the remaining related liquidity requirement would have totaled $28 million after reduction for net accounts receivable and derivative assets under netting arrangements.

In addition, certain derivative agreements that are collateralized primarily with asset liens include indebtedness cross-default provisions that could result in the settlement of such contracts if there were a failure under other financing arrangements to meet payment terms or to comply with other covenants that could result in the acceleration of such indebtedness. As of September 30, 2009, the fair value of derivative liabilities subject to such cross-default provisions, largely related to interest rate swaps, totaled $1.716 billion (before consideration of the amount of assets under the liens). The liquidity exposure associated with these liabilities was reduced by cash collateral and letters of credit posted with counterparties totaling $483 million as of September 30, 2009. If all the credit risk-related contingent features related to these derivatives, including amounts related to cross-default provisions, had been triggered as of September 30, 2009, the remaining related liquidity requirement would have totaled $810 million after reduction for derivative assets under netting arrangements (before consideration of the amount of assets under the liens). See Note 15 to the Financial Statements in the 2008 Form 10-K for a description of other obligations that are supported by asset liens.

 

28


Table of Contents

As discussed immediately above, the aggregate fair values of liabilities under derivative agreements with credit risk-related contingent features, including cross-default provisions, totaled $2.566 billion at September 30, 2009. This amount is before consideration of cash and letter of credit collateral posted, net accounts receivable and derivative assets under netting arrangements and assets under related liens.

Some commodity derivative contracts contain credit risk-related contingent features that do not provide for specific amounts to be posted if the features are triggered. These provisions include material adverse change, performance assurance, and other clauses that generally provide counterparties with the right to request additional credit enhancements. The amounts disclosed above exclude credit risk-related contingent features that do not provide for specific amounts or exposure calculations.

While the disclosures above address our derivative liabilities, we also manage our counterparty credit exposure with respect to derivative assets.

 

8. FAIR VALUE MEASUREMENTS

Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use a “mid-market” valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities subject to fair value measurement on a recurring basis. We primarily use the market approach for recurring fair value measurements and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs.

We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:

 

   

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 assets and liabilities include exchange traded commodity contracts. For example, a significant number of our derivatives are NYMEX futures and swaps transacted through clearing brokers for which prices are actively quoted.

 

   

Level 2 valuations use inputs, in the absence of actively quoted market prices, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. Our Level 2 valuations utilize over-the-counter broker quotes, quoted prices for similar assets or liabilities that are corroborated by correlations or other mathematical means and other valuation inputs. For example, our Level 2 assets and liabilities include forward commodity positions at locations for which over-the-counter broker quotes are available.

 

   

Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. We use the most meaningful information available from the market combined with internally developed valuation methodologies to develop our best estimate of fair value. For example, our Level 3 assets and liabilities include certain derivatives whose values are derived from pricing models that utilize multiple inputs to the valuations, including inputs that are not observable or easily corroborated through other means.

 

29


Table of Contents

We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis. These methods include, among others, the use of broker quotes and statistical relationships between different price curves.

In utilizing broker quotes, we attempt to obtain multiple quotes from brokers that are active in the commodity markets in which we participate (and require at least one quote from two brokers to determine a pricing input as observable); however, not all pricing inputs are quoted by brokers. The number of broker quotes received for certain pricing inputs varies depending on the depth of the trading market, each individual broker’s publication policy, recent trading volume trends and various other factors. In addition, for valuation of interest rate swaps, we use a combination of dealer provided market valuations (generally non-binding) and Bloomberg valuations based on month-end interest rate curves and standard rate swap valuation models.

Certain derivatives and financial instruments are valued utilizing option pricing models that take into consideration multiple inputs including commodity prices, volatility factors, discount rates and other inputs. Additionally, when there is not a sufficient amount of observable market data, valuation models are developed that incorporate proprietary views of market factors. Those valuation models are generally used in developing long-term forward price curves for certain commodities. We believe the development of such curves is consistent with industry practice; however, the fair value measurements resulting from such curves are classified as Level 3.

With respect to amounts presented in the following fair value hierarchy table, the fair value measurement of an asset or liability (e.g. a contract) is required to fall in its entirety in one level, based on the lowest level input that is significant to the fair value measurement. Certain assets and liabilities would be classified in Level 2 instead of Level 3 of the hierarchy except for the effects of credit reserves and non-performance risk adjustments, respectively. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability being measured.

At September 30, 2009, assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

     Level 1    Level 2    Level 3 (a)    Reclassification
(b)
   Total

Assets:

              

Commodity contracts

   $ 1,035    $ 2,276    $ 277    $ 88    $ 3,676

Interest rate swaps

     —        96      —        —        96

Nuclear decommissioning trust – equity securities (c)

     142      99      —        —        241

Nuclear decommissioning trust – debt securities (c)

     —        216      —        —        216
                                  

Total assets

   $ 1,177    $ 2,687    $ 277    $ 88    $ 4,229
                                  

Liabilities:

              

Commodity contracts

   $ 1,133    $ 944    $ 318    $ 88    $ 2,483

Interest rate swaps

     —        1,509      —        —        1,509
                                  

Total liabilities

   $ 1,133    $ 2,453    $ 318    $ 88    $ 3,992
                                  

 

(a) Level 3 assets and liabilities consist primarily of more complex long-term power purchase and sales agreements, including longer-term wind generation purchase contracts and certain natural gas positions (collars) in the long-term hedging program.
(b) Represents the effects of reclassification of the assets and liabilities to conform to the balance sheet presentation of current and long-term assets and liabilities.
(c) The nuclear decommissioning trust investment is included in the Investments line on the balance sheet. See Note 13.

 

30


Table of Contents

At December 31, 2008, assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

     Level 1    Level 2    Level 3 (a)    Total

Assets:

           

Commodity contracts

   $ 1,010    $ 2,061    $ 283    $ 3,354

Interest rate swaps

     —        142      —        142

Nuclear decommissioning trust – equity securities (b)

     109      83      —        192

Nuclear decommissioning trust – debt securities (b)

     —        193      —        193
                           

Total assets

   $ 1,119    $ 2,479    $ 283    $ 3,881
                           

Liabilities:

           

Commodity contracts

   $ 1,288    $ 1,274    $ 355    $ 2,917

Interest rate swaps

     —        2,086      —        2,086
                           

Total liabilities

   $ 1,288    $ 3,360    $ 355    $ 5,003
                           

 

  (a) Level 3 assets and liabilities consist primarily of more complex long-term power purchase and sales agreements, including longer-term wind generation purchase contracts and certain natural gas positions (collars) in the long-term hedging program.
  (b) The nuclear decommissioning trust investment is included in the Investments line on the balance sheet.

Commodity contracts consist primarily of natural gas, electricity, fuel oil and coal derivative instruments entered into for hedging purposes and include physical contracts that have not been designated “normal” purchases or sales. See Note 7 for further discussion regarding the company’s use of derivative instruments.

Interest rate swaps include variable-to-fixed rate swap instruments that are economic hedges of interest on long-term debt as well as interest rate basis swaps designed to effectively reduce the hedged borrowing costs. See Note 4 for discussion of interest rate swaps.

Nuclear decommissioning trust assets represent securities held for the purpose of funding the future retirement and decommissioning of the nuclear generation units. These investments include equity, debt and other fixed-income securities consistent with investment rules established by the NRC and the PUCT.

 

31


Table of Contents

The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to commodity contracts) for the three and nine months ended September 30, 2009 and 2008:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Balance at beginning of period

   $ (72   $ (539   $ (72   $ (173

Total realized and unrealized gains (losses) (a):

        

Included in net income (loss)

     42        297        57        (48

Included in other comprehensive income (loss)

     (6     (12     (31     3   

Purchases, sales, issuances and settlements (net) (b)

     (6     (42     (15     (45

Net transfers in and/or out of Level 3 (c)

     1        104        20        71   
                                

Balance at end of period

   $ (41   $ (192   $ (41   $ (192
                                

Net change in unrealized gains (losses) included in net income relating to instruments held at end of period (d)

   $ 44      $ 213      $ 61      $ (33

 

(a) Substantially all changes in values of commodity contracts are reported in the income statement in net gain (loss) from commodity hedging and trading activities.
(b) Settlements represent reversals of unrealized mark-to-market valuations of these positions previously recognized in net income. Purchases and issuances reflect option premiums paid or received.
(c) Includes transfers due to changes in the observability of significant inputs used in valuing derivatives. Transfers in are assumed to transfer in at the beginning of the quarter and transfers out at the end of the quarter, which is when the assessments are performed. Any changes in value during the period are reported as unrealized gains and losses in net gain (loss) from commodity hedging and trading activities.
(d) Includes unrealized gains and losses of instruments held at the end of the period only related to the periods in which the instrument was classified as a Level 3 asset or liability.

 

32


Table of Contents
9. FAIR VALUE OF NONDERIVATIVE FINANCIAL INSTRUMENTS

The carrying amounts and related estimated fair values of significant nonderivative financial instruments were as follows:

 

     September 30, 2009     December 31, 2008  
     Carrying
Amount
    Fair
Value (a)
    Carrying
Amount
    Fair
Value (a)
 

On balance sheet assets (liabilities):

        

Long-term debt (including current maturities) (b):

        

TCEH, EFH Corp., and other

   $ (36,473   $ (27,627   $ (35,860   $ (24,162

Oncor

   $ (5,137   $ (5,862   $ (5,204   $ (4,990
                                

Total

   $ (41,610   $ (33,489   $ (41,064   $ (29,152

Off balance sheet assets (liabilities):

        

Financial guarantees

   $ —        $ (8   $ —        $ (3

 

(a) Fair value determined in accordance with accounting standards related to the determination of fair value.
(b) Excludes capital leases.

See Notes 7 and 8 for discussion of accounting for financial instruments that are derivatives.

 

10. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS (OPEB) COSTS

Net pension and OPEB costs for the three and nine months ended September 30, 2009 and 2008 are comprised of the following:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2009     2008     2009     2008  

Components of net pension costs:

        

Service cost

   $ 10      $ 12      $ 28      $ 29   

Interest cost

     40        51        119        117   

Expected return on assets

     (41     (56     (124     (133

Prior service cost

     —          —          —          1   

Net loss

     4        —          7        —     
                                

Net pension costs

     13        7        30        14   
                                

Components of net OPEB costs:

        

Service cost

     3        3        8        8   

Interest cost

     15        14        46        44   

Expected return on assets

     (3     (5     (10     (15

Prior service cost

     —          —          —          (1

Net loss

     3        2        9        8   
                                

Net OPEB costs

     18        14        53        44   
                                

Net pension and OPEB costs

     31        21        83        58   

Less amounts deferred principally as a regulatory asset or property

     (18     (10     (51     (32
                                

Net amounts recognized as expense

   $ 13      $ 11      $ 32      $ 26   
                                

 

33


Table of Contents

The discount rates reflected in net pension and OPEB costs in 2009 are 6.90% and 6.85%, respectively. The expected rates of return on pension and OPEB plan assets reflected in the 2009 cost amounts are 8.25% and 7.64%, respectively.

We made cash contributions related to our pension and OPEB plans of $61 million and $16 million, respectively, in the first nine months of 2009, and we expect to make additional contributions of $18 million and $6 million, respectively, in the remainder of 2009.

 

11. RELATED PARTY TRANSACTIONS

We incur an annual management fee under terms of a management agreement with the Sponsor Group for which we accrued $9 million for both the three months ended September 30, 2009 and 2008, and $27 million and $26 million for the nine months ended September 30, 2009 and 2008, respectively. The fee is reported as SG&A expense in Corporate and Other activities.

At the closing of the Merger, TCEH entered into the TCEH Senior Secured Facilities and Oncor entered into a revolving credit facility, each with syndicates of financial institutions and other lenders. These syndicates included affiliates of GS Capital Partners, which is a member of the Sponsor Group. Affiliates of GS Capital Partners and Kohlberg Kravis Roberts & Co. L.P. (a member of the Sponsor Group) have from time to time engaged in commercial banking and financial advisory transactions with us in the normal course of business.

Affiliates of the Sponsor Group are participating in exchange offers announced in October 2009 by EFH Corp., Intermediate Holding and EFIH Finance to exchange new senior secured notes for the EFH Corp. Securities and the TCEH Cash-Pay Notes. Goldman, Sachs & Co. and KKR Capital Markets LLC are acting as dealer managers and TPG Capital, L.P. is serving as an advisor in the exchange offers. (See Note 4 for additional information). These affiliates will be compensated for their services in accordance with the terms of the exchange offer agreements.

Affiliates of Goldman Sachs & Co. are parties to certain commodity and interest rate hedging transactions with us in the normal course of business.

Affiliates of the Sponsor Group may sell or acquire debt or debt securities issued by us in open market transactions or through loan syndications.

 

34


Table of Contents
12. SEGMENT INFORMATION

Our operations are aligned into two reportable business segments: Competitive Electric and Regulated Delivery. The segments are managed separately because they are strategic business units that offer different products or services and involve different risks.

The Competitive Electric segment is engaged in competitive market activities consisting of electricity generation, the development and construction of new generation facilities, wholesale energy sales and purchases, commodity risk management and trading activities, and retail electricity sales to residential and business customers, all largely in Texas. These activities are conducted by TCEH. The results of this segment also include equipment salvage and resale activities related to the 2007 cancellation of the development of eight new coal-fueled generation units; such activities were not material for the periods presented.

The Regulated Delivery segment is engaged in regulated electricity transmission and distribution operations in Texas. These activities are conducted by Oncor, including its wholly-owned bankruptcy-remote financing subsidiary.

Corporate and Other represents the remaining nonsegment operations consisting primarily of general corporate expenses and interest on EFH Corp. (parent entity) and EFC Holdings debt.

The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in Note 1 above and in Note 1 in the 2008 Form 10-K. We evaluate performance based on income from continuing operations. We record intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  

Operating revenues:

       

Competitive Electric

  $ 2,433      $ 3,258      $ 6,144      $ 7,809   

Regulated Delivery

    770        728        2,037        1,969   

Corporate and Other

    3        10        16        27   

Eliminations

    (321     (301     (831     (804
                               

Consolidated

  $ 2,885      $ 3,695      $ 7,366      $ 9,001   
                               

Affiliated revenues included in operating revenues:

       

Competitive Electric

  $ 2      $ 2      $ 5      $ 5   

Regulated Delivery

    316        290        813        775   

Corporate and Other

    3        9        13        24   

Eliminations

    (321     (301     (831     (804
                               

Consolidated

  $ —        $ —        $ —        $ —     
                               

Net income (loss):

       

Competitive Electric

  $ (44   $ 3,611      $ 436      $ (862

Regulated Delivery

    132        139        272        309   

Corporate and Other

    (142     (133     (447     (430
                               

Consolidated

  $ (54   $ 3,617      $ 261      $ (983
                               

 

35


Table of Contents
13. SUPPLEMENTARY FINANCIAL INFORMATION

Regulated Versus Unregulated Operations

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  

Operating revenues

       

Regulated

  $ 770      $ 728      $ 2,037      $ 1,969   

Unregulated

    2,436        3,268        6,160        7,836   

Intercompany sales eliminations – regulated

    (316     (290     (813     (775

Intercompany sales eliminations – unregulated

    (5     (11     (18     (29
                               

Total operating revenues

    2,885        3,695        7,366        9,001   
                               

Fuel, purchased power and delivery fees – unregulated (a)

    (870     (1,631     (2,171     (3,867

Net gain (loss) from commodity hedging and trading activities – unregulated

    123        6,045        1,003        (248

Operating costs – regulated

    (228     (213     (668     (620

Operating costs – unregulated

    (160     (157     (503     (500

Depreciation and amortization – regulated

    (147     (128     (405     (370

Depreciation and amortization – unregulated

    (309     (303     (881     (847

Selling, general and administrative expenses – regulated

    (50     (42     (139     (126

Selling, general and administrative expenses – unregulated

    (227     (207     (653     (586

Franchise and revenue-based taxes – regulated

    (67     (67     (185     (186

Franchise and revenue-based taxes – unregulated

    (27     (25     (74     (73

Impairment of goodwill

    —          —          (90     —     

Other income

    45        14        71        43   

Other deductions

    (32     (541     (50     (583

Interest income

    18        9        30        22   

Interest expense and other charges

    (1,039     (831     (2,136     (2,505
                               

Income (loss) before income taxes

  $ (85   $ 5,618      $ 515      $ (1,445
                               

 

 

(a) Includes unregulated cost of fuel consumed of $360 million and $538 million for the three months ended September 30, 2009 and 2008, respectively, and $943 million and $1.320 billion for the nine months ended September 30, 2009 and 2008, respectively. The balance represents energy purchased for resale and delivery fees net of intercompany eliminations.

 

36


Table of Contents

Other Income and Deductions

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2009   2008   2009   2008

Other income:

       

Accretion of adjustment (discount) of regulatory assets resulting from purchase accounting

  $ 10   $ 11   $ 30   $ 33

Reversal of reserve recorded in purchase accounting (a)

    23     —       23     —  

Fee received related to interest rate swap/commodity hedge derivative agreement (b) (Note 7)

    6     —       6     —  

Mineral rights royalty income

    1     1     3     3

Other

    5     2     9     7
                       

Total other income

  $ 45   $ 14   $ 71   $ 43
                       

Other deductions:

       

Impairment of emission allowances intangible assets

  $ —     $ 499   $ —     $ 501

Charge related to Lehman bankruptcy (c)

    —       26     —       26

Write-off of regulatory assets (Note 13)

    25     —       25     —  

Transition and business optimization costs

    —       8     —       8

Net charges related to cancelled development of generation facilities

    1     2     3     10

Severance charges

    —       —       6     —  

Professional fees incurred related to the Merger

    —       1     —       4

Costs related to 2006 cities rate settlement

    1     —       2     13

Litigation/regulatory settlements

    —       —       —       6

Other

    5     5     14     15
                       

Total other deductions

  $ 32   $ 541   $ 50   $ 583
                       

 

(a) Reversal of a use tax accrual, related to periods prior to the Merger, due to state ruling in the third quarter of 2009. (Reported in Competitive Electric segment.)
(b) Reported in Competitive Electric segment.
(c) Reserve established against amounts due (excluding termination related costs) from subsidiaries of Lehman Brothers Holdings Inc. arising from commodity hedging and trading activities. (Reported in Competitive Electric segment.)

Interest Expense and Related Charges

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  

Interest (including net amounts settled/ accrued under interest rate swaps)

  $ 874      $ 860      $ 2,619      $ 2,583   

Unrealized mark-to-market net (gain) loss on interest rate swaps

    138        (36     (527     (36

Amortization of interest rate swap losses at dedesignation of hedge accounting

    56        17        140        17   

Amortization of fair value debt discounts resulting from purchase accounting

    17        18        56        55   

Amortization of debt issuance costs and discounts

    34        48        104        111   

Capitalized interest, primarily related to generation facility and regulated utility asset construction

    (80     (76     (256     (225
                               

Total interest expense and related charges

  $ 1,039      $ 831      $ 2,136      $ 2,505   
                               

 

37


Table of Contents

Restricted Cash

 

     At September 30, 2009    At December 31, 2008
     Current
Assets
   Noncurrent
Assets
   Current
Assets
   Noncurrent
Assets

Amounts related to the TCEH Letter of Credit Facility (See Note 4)

   $ —      $ 1,135    $ —      $ 1,250

Amounts related to margin deposits held

     —        —        4      —  

Amounts related to securitization (transition) bonds

     64      15      51      17
                           

Total restricted cash

   $ 64    $ 1,150    $ 55    $ 1,267
                           

Inventories by Major Category

 

    September 30,
2009
  December 31,
2008

Materials and supplies

  $ 234   $ 199

Fuel stock

    222     162

Natural gas in storage

    28     65
           

Total inventories

  $ 484   $ 426
           

Investments

 

    September 30,
2009
  December 31,
2008

Nuclear decommissioning trust

  $ 457   $ 385

Assets related to employee benefit plans, including employee savings programs, net of distributions

    208     210

Land

    44     44

Investment in natural gas gathering pipeline business (a)

    31     —  

Miscellaneous other

    4     6
           

Total investments

  $ 744   $ 645
           

 

   
  (a) A controlling interest in this previously consolidated subsidiary was sold in August 2009.

 

38


Table of Contents

Nuclear Decommissioning Trust Investments in a trust that will be used to fund the costs to decommission the Comanche Peak nuclear generation plant are carried at fair value. Decommissioning costs are being recovered from Oncor’s customers as a delivery fee surcharge over the life of the plant and deposited in the trust fund. Net gains and losses on investments in the trust fund are offset by a corresponding adjustment to a regulatory asset/liability. A summary of investments in the fund follows:

 

     September 30, 2009
     Cost (a)   Unrealized gain   Unrealized loss     Fair market value

Debt securities (b)

   $ 210   $ 9   $ (3   $ 216

Equity securities (c)

     191     71     (21     241
                          

Total

   $ 401   $ 80   $ (24   $ 457
                          
      December 31, 2008
     Cost (a)   Unrealized gain   Unrealized loss     Fair market value

Debt securities (b)

   $ 203   $ 4   $ (14   $ 193

Equity securities (c)

     181     46     (35     192
                          

Total

   $ 384   $ 50   $ (49   $ 385
                          

 

(a) Includes realized gains and losses of securities sold.
(b) The investment objective for debt securities is to invest in a diversified tax efficient portfolio with an overall portfolio rating of AA or above as graded by S&P or Aa2 by Moody’s. The debt securities are heavily weighted with municipal bonds. The debt securities had an average coupon rate of 4.15% and 3.77% and an average maturity of 8.3 years and 8.0 years at September 30, 2009 and December 31, 2008, respectively.
(c) The investment objective for equity securities is to invest tax efficiently and to match the performance of the S&P 500 Index.

Debt securities held at September 30, 2009 mature as follows: $79 million in one to five years, $33 million in five to ten years and $104 million after ten years.

Property, Plant and Equipment

As of September 30, 2009 and December 31, 2008, property, plant and equipment of $30.0 billion and $29.5 billion, respectively, is stated net of accumulated depreciation and amortization of $6.7 billion and $5.6 billion, respectively.

 

39


Table of Contents

Asset Retirement Obligations

These liabilities primarily relate to nuclear generation plant decommissioning, land reclamation related to lignite mining, removal of lignite/coal-fueled plant ash treatment facilities and generation plant asbestos removal and disposal costs. There is no earnings impact with respect to the recognition of the asset retirement costs for nuclear decommissioning, as all costs are recoverable through the regulatory process as part of Oncor’s rates.

The following table summarizes the changes to the asset retirement liability, reported in other noncurrent liabilities and deferred credits in the balance sheet, during the nine months ended September 30, 2009:

 

Asset retirement liability at January 1, 2009

   $ 859   

Additions:

  

Accretion

     45   

Reductions:

  

Payments, essentially all mining reclamation

     (21
        

Asset retirement liability at September 30, 2009

   $ 883   
        

 

40


Table of Contents

Oncor’s Regulatory Assets and Liabilities

Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT. Components of the regulatory assets and liabilities are provided in the table below; amounts not earning a return through rate regulation are noted. On August 31, 2009, the PUCT issued a final order on Oncor’s rate review filed in June 2008. The rate review included a determination of the recoverability of regulatory assets as of December 31, 2007, including the recoverability period of those assets deemed allowable by the PUCT. The PUCT’s findings included denial of recovery of certain regulatory assets, primarily related to business restructuring costs and rate case expenses, which resulted in a $25 million charge ($16 million after-tax) in the third quarter 2009 reported in other deductions in the Regulated Delivery segment.

 

    Remaining Rate
Recovery/Amortization
Period as of
September 30, 2009
  Carrying Amount
    September 30,
2009
  December 31,
2008

Regulatory assets:

     

Generation-related regulatory assets securitized by transition bonds (a)

  7 years   $ 787   $ 865

Employee retirement costs

  5 years     84     —  

Employee retirement costs to be reviewed (b)(c)

  To be determined     37     100

Employee retirement liability (a)(c)(d)

  To be determined     542     559

Self-insurance reserve (primarily storm recovery costs) – net

  7 years     142     —  

Self-insurance reserve to be reviewed (b)(c)

  To be determined     109     214

Nuclear decommissioning cost under-recovery (a)(c)(e)

  Not applicable     90     127

Securities reacquisition costs (pre-industry restructure)

  8 years     63     68

Securities reacquisition costs (post-industry restructure)

  Terms of

related debt

    28     29

Recoverable amounts for/in lieu of deferred income taxes – net

  Life of related
asset or liability
    76     77

Rate case expenses (f)

  Largely 3 years     9     10

Rate case expenses to be reviewed (b)(c)

  To be determined     2     —  

Advanced meter customer education costs

  10 years     4     2

Deferred conventional meter depreciation

  10 years     2     —  

Business restructuring costs (g)

  Not applicable     —       20
             

Total regulatory assets

      1,975     2,071
             

Regulatory liabilities:

     

Committed spending for demand-side management initiatives (a)

  3 years     87     96

Deferred advanced metering system revenues

  10 years     51     —  

Investment tax credit and protected excess deferred taxes

  Various     46     49

Over-collection of securitization (transition) bond revenues (a)

  7 years     32     28

Other regulatory liabilities (a)

  Various     4     6
             

Total regulatory liabilities

      220     179
             

Net regulatory asset

    $ 1,755   $ 1,892
             

 

(a) Not earning a return in the regulatory rate-setting process.
(b) Costs incurred since the period covered under the last rate review.
(c) Recovery is specifically authorized by statute, subject to reasonableness review by the PUCT.
(d) Represents unfunded liabilities recorded in accordance with pension and OPEB accounting standards.
(e) Offset by an intercompany payable to TCEH.
(f) Rate case expenses totaling $4 million were disallowed by the PUCT and written off in the third quarter of 2009.
(g) All previously recorded business restructuring costs were disallowed by the PUCT and written off in the third quarter of 2009.

 

41


Table of Contents

As part of purchase accounting, the carrying value of the generation-related regulatory assets was reduced by $213 million, and this amount is being accreted to other income over the approximate nine-year recovery period remaining as of the date of the Merger.

In September 2008, the PUCT approved a settlement for Oncor to recover its estimated future investment for advanced metering deployment. Oncor began billing the advanced metering surcharge in the January 2009 billing month cycle. The surcharge is expected to total $1.023 billion over the 11-year recovery period and includes a cost recovery factor of $2.19 per month per residential retail customer and $2.39 to $5.15 per month for non-residential retail customers. We account for the difference between the surcharge billings for advanced metering facilities and the allowed revenues under the surcharge provisions, which are based on expenditures and an allowed return, as a regulatory asset or liability; such differences arise principally as a result of timing of expenditures. As indicated in the table above, the regulatory liability at September 30, 2009 totaled $51 million.

Exit Liabilities

As part of purchase accounting for the Merger, we accrued $54 million in costs expected to be incurred related to the termination and transition of outsourcing arrangements. We incurred $7 million and $17 million of the exit liabilities in the three and nine months ended September 30, 2009, respectively, and the remaining accrual is expected to be settled no later than June 30, 2010, the targeted date of completion of transition of outsourced activities back to us or to service providers.

Other Noncurrent Liabilities and Deferred Credits

The balance of other noncurrent liabilities and deferred credits consists of the following:

 

     September 30,
2009
   December 31,
2008

Uncertain tax positions (including accrued interest)

   $ 1,924    $ 1,780

Retirement plan and other employee benefits

     1,446      1,451

Asset retirement obligations

     883      859

Unfavorable purchase and sales contracts

     707      727

Liabilities related to subsidiary tax sharing agreement

     314      299

Other

     101      89
             

Total other noncurrent liabilities and deferred credits

   $ 5,375    $ 5,205
             

We do not expect the total amount of liabilities recorded related to uncertain tax positions to significantly increase or decrease within the next 12 months. As of September 30, 2009, the federal income tax benefit on the interest accrued on uncertain tax positions is recorded as accumulated deferred income taxes.

Unfavorable Purchase and Sales Contracts — The amortization of unfavorable purchase and sales contracts totaled $7 million and $6 million in the three months ended September 30, 2009 and 2008, respectively, and $21 million and $23 million in the nine months ended September 30, 2009 and 2008, respectively. Favorable purchase and sales contracts are recorded as intangible assets (see Note 2).

 

42


Table of Contents

The estimated amortization of unfavorable purchase and sales contracts for each of the five succeeding fiscal years from December 31, 2008 is as follows:

 

Year

   Amount

2009

   $ 27

2010

     27

2011

     27

2012

     27

2013

     26

Liabilities Related to Subsidiary Tax Sharing Agreement — Amount represents the noncontrolling interests’ portion of the previously recorded net deferred tax liabilities of Oncor. Upon the sale of noncontrolling interests in Oncor (see Note 6), Oncor became a partnership for US federal income tax purposes, and the temporary differences which gave rise to the deferred taxes will, over time, become taxable to the noncontrolling interests. Under a tax sharing agreement among Oncor and its equity holders, Oncor reimburses its equity holders for federal income taxes as the partnership earnings become taxable to such holders. Accordingly, as the temporary differences become taxable, the equity holders will be reimbursed by Oncor. In the unlikely event such amounts are not reimbursed under the tax sharing agreement, it is probable they would be refunded to rate payers. The net changes in the liability for the nine months ended September 30, 2009 of $15 million reflected changes in temporary differences.

Supplemental Cash Flow Information

 

    Nine Months Ended September 30,  
    2009     2008  

Cash payments (receipts) related to:

   

Interest paid (a)

  $ 2,042      $ 2,262   

Capitalized interest

    (256     (225
               

Interest paid (net of capitalized interest) (a)

    1,786        2,307   

Income taxes

    (38     (61

Noncash investing and financing activities:

   

Issuance of toggle notes in lieu of cash interest for EFH Corp. and TCEH

    248        —     

Noncash construction expenditures (b)

    132        180   

Capital leases

    15        13   

 

   
  (a) Net of interest received on interest rate swaps.
  (b) Represents end-of-period accruals.

 

43


Table of Contents
14. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION

In 2007, EFH Corp. issued $2.0 billion 10.875% Senior Notes Due 2017 and $2.5 billion 11.25%/12.00% Senior Toggle Notes Due 2017 (collectively, the EFH Corp. Senior Notes). In May 2009, EFH Corp. issued an additional $150 million of the EFH Corp. Toggle Notes (see Note 4). The EFH Corp. Senior Notes are unconditionally guaranteed by EFC Holdings and Intermediate Holding, 100% owned subsidiaries of EFH Corp. (collectively, the Guarantors) on an unsecured basis. The guarantees issued by the Guarantors are full and unconditional, joint and several guarantees of the EFH Corp. Senior Notes. The guarantees rank equally with any senior unsecured indebtedness of the Guarantors and rank effectively junior to all of the secured indebtedness of the Guarantors to the extent of the assets securing that indebtedness. All other subsidiaries of EFH Corp., either direct or indirect, do not guarantee the EFH Corp. Senior Notes (collectively, the Non-Guarantors). The indenture governing the EFH Corp. Senior Notes contains certain restrictions, subject to certain exceptions, on EFH Corp.’s ability to pay dividends or make investments. See Note 6.

The following tables have been prepared in accordance with Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered” in order to present the condensed consolidating statements of income of EFH Corp. (the Parent/Issuer), the Guarantors and the Non-Guarantors for the three-month and nine-month periods ended September 30, 2009 and 2008, the condensed consolidating statements of cash flows of the Parent/Issuer, the Guarantors and the Non-Guarantors for the nine-month periods ended September 30, 2009 and 2008 and the condensed consolidating balance sheets as of September 30, 2009 and December 31, 2008 of the Parent/Issuer, the Guarantors and the Non-Guarantors. Investments in consolidated subsidiaries are accounted for under the equity method. The presentations reflect the application of SEC Staff Accounting Bulletin Topic 5-J, Push Down Basis of Accounting Required in Certain Limited Circumstances, including the effects of the push down of the $4.65 billion and $4.5 billion EFH Corp. Senior Notes to the Guarantors as of September 30, 2009 and December 31, 2008, respectively (see Notes 4 and 5).

EFH Corp. (Parent) received dividends from its consolidated subsidiaries totaling $117 million and $213 million for the nine months ended September 30, 2009 and 2008, respectively.

 

44


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Three Months Ended September 30, 2009

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 2,885      $ —        $ 2,885   

Fuel, purchased power costs and delivery fees

     —          —          (870     —          (870

Net gain from commodity hedging and trading activities

     —          —          123        —          123   

Operating costs

     —          —          (388     —          (388

Depreciation and amortization

     —          —          (456     —          (456

Selling, general and administrative expenses

     (29     —          (248     —          (277

Franchise and revenue-based taxes

     —          —          (94     —          (94

Other income

     —          —          45        —          45   

Other deductions

     —          —          (32     —          (32

Interest income

     62        —          46        (90     18   

Interest expense and related charges

     (250     (142     (876     229        (1,039
                                        

Income (loss) before income taxes and equity earnings of subsidiaries

     (217     (142     135        139        (85

Income tax (expense) benefit

     75        48        (46     (46     31   

Equity earnings of subsidiaries

     62        81        —          (143     —     
                                        

Net income (loss)

     (80     (13     89        (50     (54

Net income attributable to noncontrolling interests

     —          —          (26     —          (26
                                        

Net income (loss) attributable to EFH Corp.

   $ (80   $ (13   $ 63      $ (50   $ (80
                                        

 

45


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Three Months Ended September 30, 2008

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 3,695      $ —        $ 3,695   

Fuel, purchased power costs and delivery fees

     —          —          (1,631     —          (1,631

Net gain from commodity hedging and trading activities

     —          —          6,045        —          6,045   

Operating costs

     —          —          (372     2        (370

Depreciation and amortization

     —          —          (431     —          (431

Selling, general and administrative expenses

     (29     —          (219     (1     (249

Franchise and revenue-based taxes

     —          —          (92     —          (92

Other income

     —          —          14        —          14   

Other deductions

     (9     —          (532     —          (541

Interest income

     43        —          44        (78     9   

Interest expense and related charges

     (229     (131     (677     206        (831
                                        

Income (loss) before income taxes and equity earnings of subsidiaries

     (224     (131     5,844        129        5,618   

Income tax (expense) benefit

     87        45        (2,088     (45     (2,001

Equity earnings of subsidiaries

     3,754        3,768        —          (7,522     —     
                                        

Net income (loss)

   $ 3,617      $ 3,682      $ 3,756      $ (7,438   $ 3,617   
                                        

 

46


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Nine Months Ended September 30, 2009

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 7,366      $ —        $ 7,366   

Fuel, purchased power costs and delivery fees

     —          —          (2,171     —          (2,171

Net gain from commodity hedging and trading activities

     —          —          1,003        —          1,003   

Operating costs

     —          —          (1,171     —          (1,171

Depreciation and amortization

     —          —          (1,286     —          (1,286

Selling, general and administrative expenses

     (92     —          (700     —          (792

Franchise and revenue-based taxes

     —          (1     (258     —          (259

Impairment of goodwill

     —          —          (90     —          (90

Other income

     2        —          69        —          71   

Other deductions

     (3     —          (47     —          (50

Interest income

     173        —          103        (246     30   

Interest expense and related charges

     (727     (423     (1,647     661        (2,136
                                        

Income (loss) before income taxes and equity earnings of subsidiaries

     (647     (424     1,171        415        515   

Income tax (expense) benefit

     213        141        (468     (140     (254

Equity earnings of subsidiaries

     641        710        —          (1,351     —     
                                        

Net income

     207        427        703        (1,076     261   

Net income attributable to noncontrolling interests

     —          —          (54     —          (54
                                        

Net income attributable to EFH Corp.

   $ 207      $ 427      $ 649      $ (1,076   $ 207   
                                        

 

47


Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Nine Months Ended September 30, 2008

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 9,001      $ —        $ 9,001   

Fuel, purchased power costs and delivery fees

     —          —          (3,867     —          (3,867

Net loss from commodity hedging and trading activities

     —          —          (248     —          (248

Operating costs

     —          —          (1,120