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EX-32.(B) - SECTION 906 CERTIFICATION - PFO - Energy Future Holdings Corp /TX/dex32b.htm
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EX-99.(B) - ENERGY FUTURE HOLDINGS CORP. CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99b.htm
EX-32.(A) - SECTION 906 CERTIFICATION - PEO - Energy Future Holdings Corp /TX/dex32a.htm
EX-31.(B) - SECTION 302 CERTIFICATION - PFO - Energy Future Holdings Corp /TX/dex31b.htm
EX-99.(C) - TCEH CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99c.htm
EX-31.(A) - SECTION 302 CERTIFICATION - PEO - Energy Future Holdings Corp /TX/dex31a.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

— 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  þ    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  þ            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  þ

As of April 30, 2010, there were 1,668,680,542 shares of common stock outstanding, stated value $0.001 per share, 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 – Three Months Ended March 31, 2010 and 2009    1
   Condensed Statements of Consolidated Comprehensive Income – Three Months Ended March 31, 2010 and 2009    2
   Condensed Statements of Consolidated Cash Flows – Three Months Ended March 31, 2010 and 2009    3
   Condensed Consolidated Balance Sheets – March 31, 2010 and December 31, 2009    4
   Notes to Condensed Consolidated Financial Statements    5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    51
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    82
Item 4.    Controls and Procedures    88
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    88
Item 1A.    Risk Factors    88
Item 6.    Exhibits    89
SIGNATURE    91

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, or otherwise reflected in, their respective parent companies’ financial statements 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.

 

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GLOSSARY

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

 

2009 Form 10-K    EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009
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
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. 10.875% Notes) and EFH Corp.’s 11.25%/12.00% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes).
EFH Corp. Senior Secured Notes    Refers collectively to EFH Corp.’s 9.75% Senior Secured Notes due October 15, 2019 (EFH Corp. 9.75% Notes) and EFH Corp.’s 10.000% Senior Secured Notes due January 15, 2020 (EFH Corp. 10% 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.
EFIH Notes    Refers to Intermediate Holding’s and EFIH Finance’s 9.75% Senior Secured Notes due October 15, 2019.
EPA    US Environmental Protection Agency

 

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EPC    engineering, procurement and construction
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
GHG    greenhouse gas
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.
kWh    kilowatt-hours
Lehman    Refers to certain subsidiaries of Lehman Brothers Holdings Inc., which filed for bankruptcy under Chapter 11 of the US Bankruptcy Code in 2008.
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 and 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. Market heat rate is the implied relationship between wholesale electricity prices and natural gas prices and is calculated by dividing the wholesale market price of electricity, which is based on the price offer of the marginal supplier in ERCOT (generally natural gas plants), by the market price of natural gas. Forward wholesale electricity market price quotes in ERCOT are generally limited to two or three years; accordingly, forward market heat rates are generally limited to the same time period. Forecasted market heat rates for time periods for which market price quotes are not available are based on fundamental economic factors and forecasts, including electricity supply, demand growth, capital costs associated with new construction of generation supply, transmission development and other factors.
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.

 

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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.
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.
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 US 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, which consists of the operations 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
Securities Act    Securities Act of 1933, as amended

 

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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 are engaged in electricity generation and wholesale and retail energy markets 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 due November 1, 2015 Series B (collectively, TCEH 10.25% 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 6 to Financial Statements for details of these facilities.
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

 

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PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

(millions of dollars)

 

     Three Months Ended March 31,  
     2010     2009  

Operating revenues

   $ 1,999      $ 2,139   

Fuel, purchased power costs and delivery fees

     (1,047     (601

Net gain from commodity hedging and trading activities

     1,213        1,128   

Operating costs

     (197     (387

Depreciation and amortization

     (342     (407

Selling, general and administrative expenses

     (187     (246

Franchise and revenue-based taxes

     (22     (85

Impairment of goodwill

     —          (90

Other income (Note 16)

     33        13   

Other deductions (Note 16)

     (11     (11

Interest income

     10        1   

Interest expense and related charges (Note 16)

     (954     (667
                

Income before income taxes and equity in earnings of unconsolidated subsidiaries

     495        787   

Income tax expense

     (203     (333

Equity in earnings of unconsolidated subsidiaries (net of tax) (Note 2)

     63        —     
                

Net income

     355        454   

Net income attributable to noncontrolling interests

     —          (12
                

Net income attributable to EFH Corp.

   $ 355      $ 442   
                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

(millions of dollars)

 

     Three Months Ended March 31,  
     2010    2009  

Net income

   $ 355    $ 454   

Other comprehensive income, net of tax effects:

     

Reclassification of pension and other retirement benefit costs (net of tax expense of $2 and —)

     4      —     

Cash flow hedges:

     

Net decrease in fair value of derivatives (net of tax benefit of — and $9)

     —        (17

Derivative value net loss related to hedged transactions recognized during the period and reported in net income (net of tax benefit of $10 and $15)

     19      26   
               

Total effect of cash flow hedges

     19      9   
               

Total adjustments to net income

     23      9   
               

Comprehensive income

     378      463   

Comprehensive income attributable to noncontrolling interests

     —        (12
               

Comprehensive income attributable to EFH Corp.

   $ 378    $ 451   
               

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(millions of dollars)

 

     Three Months Ended March 31,  
     2010     2009  

Cash flows – operating activities:

    

Net income

   $ 355      $ 454   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     443        520   

Deferred income tax expense – net

     220        295   

Impairment of goodwill

     —          90   

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

     (993     (1,030

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

     107        (205

Equity in earnings of unconsolidated subsidiaries

     (63     —     

Distributions of earnings from unconsolidated subsidiaries

     30        —     

Net gain on debt exchanges (Note 6)

     (14     —     

Bad debt expense (Note 5)

     36        20   

Stock-based incentive compensation expense

     9        5   

Losses on dedesignated cash flow hedges (interest rate swaps)

     29        40   

Other, net

     (7     —     

Changes in operating assets and liabilities:

    

Impact of accounts receivable sales program (Note 5)

     (383     (34

Margin deposits – net

     45        65   

Deferred advanced metering system revenues

     —          19   

Other operating assets and liabilities

     288        351   
                

Cash provided by operating activities

     102        590   
                

Cash flows – financing activities:

    

Issuances of long-term debt (Note 6)

     500        212   

Repayments of long-term debt (Note 6)

     (132     (152

Increase (decrease) in short-term borrowings (Note 6)

     (700     60   

Decrease in note payable to unconsolidated subsidiary

     (9     —     

Contributions from noncontrolling interests

     6        26   

Distributions paid to noncontrolling interests

     —          (7

Net short-term borrowings under accounts receivable sales program (Note 5)

     393        —     

Debt discount, financing and reacquisition expenses

     (10     (2

Other, net

     9        1   
                

Cash provided by financing activities

     57        138   
                

Cash flows – investing activities:

    

Capital expenditures

     (328     (600

Nuclear fuel purchases

     (44     (46

Money market fund redemptions

     —          142   

Investment redeemed/(posted) with derivative counterparty (Note 11)

     400        (400

Proceeds from sale of environmental allowances and credits

     3        4   

Purchases of environmental allowances and credits

     (5     (9

Proceeds from sales of nuclear decommissioning trust fund securities

     564        1,402   

Investments in nuclear decommissioning trust fund securities

     (568     (1,406

Other, net

     (13     31   
                

Cash provided by (used in) investing activities

     9        (882
                

Net change in cash and cash equivalents

     168        (154

Effects of deconsolidation of Oncor Holdings

     (29     —     

Cash and cash equivalents – beginning balance

     1,189        1,689   
                

Cash and cash equivalents – ending balance

   $ 1,328      $ 1,535   
                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(millions of dollars)

 

     March 31,
2010
    December 31,
2009

(see Note 2)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,328      $ 1,189   

Investment posted with counterparty (Note 11)

     —          425   

Restricted cash (Note 16)

     17        48   

Trade accounts receivable – net (2010 includes $784 in pledged amounts related to a variable interest entity (Notes 3 and 5))

     1,158        1,260   

Inventories

     381        485   

Commodity and other derivative contractual assets (Note 11)

     3,752        2,391   

Accumulated deferred income taxes

     205        5   

Margin deposits related to commodity positions

     211        187   

Other current assets

     74        136   
                

Total current assets

     7,126        6,126   

Restricted cash (Note 16)

     1,135        1,149   

Receivables from unconsolidated subsidiary (Note 14)

     1,348        —     

Investments in unconsolidated subsidiaries (Note 2)

     5,489        44   

Other investments (Note 16)

     653        706   

Property, plant and equipment – net (Note 16)

     21,173        30,108   

Goodwill (Note 4)

     10,252        14,316   

Intangible assets – net (Note 4)

     2,568        2,876   

Regulatory assets – net

     —          1,959   

Commodity and other derivative contractual assets (Note 11)

     2,291        1,533   

Other noncurrent assets, principally unamortized debt issuance costs

     759        845   
                

Total assets

   $ 52,794      $ 59,662   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term borrowings (2010 includes $393 related to a variable interest entity (Notes 3 and 6))

   $ 646      $ 1,569   

Long-term debt due currently (Note 6)

     250        417   

Trade accounts payable

     655        896   

Net payables due to unconsolidated subsidiary (Note 14)

     135        —     

Commodity and other derivative contractual liabilities (Note 11)

     3,530        2,392   

Margin deposits related to commodity positions

     589        520   

Accrued interest

     793        526   

Other current liabilities

     354        744   
                

Total current liabilities

     6,952        7,064   

Accumulated deferred income taxes

     5,198        6,131   

Investment tax credits

     —          37   

Commodity and other derivative contractual liabilities (Note 11)

     1,132        1,060   

Notes or other liabilities due to unconsolidated subsidiary (Note 14)

     208        —     

Long-term debt, less amounts due currently (Note 6)

     36,879        41,440   

Other noncurrent liabilities and deferred credits (Note 16)

     5,230        5,766   
                

Total liabilities

     55,599        61,498   

Commitments and Contingencies (Note 7)

    

Equity (Note 8):

    

EFH Corp. shareholders’ equity

     (2,859     (3,247

Noncontrolling interests in subsidiaries

     54        1,411   
                

Total equity

     (2,805     (1,836
                

Total liabilities and equity

   $ 52,794      $ 59,662   
                

See Notes to Financial Statements.

 

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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 with operations consisting principally of our TCEH and Oncor subsidiaries. TCEH is a holding company for subsidiaries engaged in competitive electricity market activities largely in Texas, including electricity generation, 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. See Note 3 regarding the deconsolidation of Oncor (and its majority owner, Oncor Holdings) as a result of amended consolidation accounting standards related to variable interest entities effective January 1, 2010.

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.

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 15 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 2009 Form 10-K with the exception of the prospective adoption of amended guidance regarding consolidation accounting standards related to variable interest entities that resulted in the deconsolidation of Oncor Holdings as discussed in Note 3 and amended guidance regarding transfers of financial assets that resulted in the accounts receivable securitization program no longer being accounted for as a sale of accounts receivable and the funding under the program now reported as short-term borrowings as discussed in Note 5. Investments in unconsolidated subsidiaries, which are 50% or less owned and/or do not meet accounting standards criteria for consolidation, are accounted for under the equity method (see Notes 2 and 3). 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 2009 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.

 

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Use of Estimates

Preparation of 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 June 2009, the FASB issued new guidance that requires reconsideration of consolidation conclusions for all variable interest entities and other entities with which we are involved. We adopted this new guidance as of January 1, 2010. See Note 3 for discussion of our evaluation of variable interest entities and the resulting deconsolidation of Oncor Holdings and its subsidiaries that resulted in our investment in Oncor Holdings and its subsidiaries being prospectively reported as an equity method investment. There were no other material effects on our financial statements as a result of the adoption of this new guidance. New disclosures are provided in Note 3.

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. We adopted this new guidance as of January 1, 2010. Accordingly, the trade accounts receivable amounts under the accounts receivable securitization program discussed in Note 5 are prospectively reported as pledged balances, and the related funding amounts are reported as short-term borrowings. Prior to January 1, 2010, the activity was accounted for as a sale of accounts receivable in accordance with previous accounting standards, which resulted in the funding being recorded as a reduction of accounts receivable. This new guidance did not impact the covenant-related ratio calculations in our debt agreements.

 

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2. EQUITY METHOD INVESTMENTS

Investments in unconsolidated subsidiaries consisted of the following:

 

     March 31,
2010
   December 31,
2009

Investment in Oncor Holdings (100% owned) (a)

   $ 5,438    $ —  

Investment in natural gas gathering pipeline business (25% owned) (b)

     51      44
             

Total investments in unconsolidated subsidiaries

   $ 5,489    $ 44
             

 

(a) Oncor Holdings was deconsolidated effective January 1, 2010 (see Notes 1 and 3).
(b) A controlling interest in this previously consolidated subsidiary was sold in 2009.

Oncor Holdings

Effective January 1, 2010, we account for our investment in Oncor Holdings under the equity method (see Note 3). Prior to this date, Oncor Holdings was a consolidated subsidiary. Oncor Holdings owns approximately 80% of Oncor (an SEC filer), which is engaged in regulated electricity transmission and distribution operations in Texas. Condensed statements of consolidated income for the three months ended March 31, 2010 and 2009 of Oncor Holdings are presented below:

 

     Three Months
Ended March 31,
 
     2010     2009  

Operating revenues

   $ 703      $ 614   

Operation and maintenance expenses

     (249     (224

Depreciation and amortization

     (166     (126

Taxes other than income taxes

     (94     (97

Other income

     11        10   

Other deductions

     (2     (5

Interest income

     10        9   

Interest expense and related charges

     (86     (86
                

Income before income taxes

     127        95   

Income tax expense

     (48     (36
                
    

Net income

     79        59   

Net income attributable to noncontrolling interests

     (16     (12
                

Net income attributable to Oncor Holdings

   $ 63      $ 47   
                

 

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Assets and liabilities of Oncor Holdings at March 31, 2010 and December 31, 2009 are presented below:

 

     March 31,
2010
   December 31,
2009
     (millions of dollars)
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 23    $ 29

Restricted cash

     55      47

Trade accounts receivable — net

     254      243

Trade accounts and other receivables from affiliates

     183      188

Inventories

     92      92

Accumulated deferred income taxes

     8      10

Other current assets

     81      84
             

Total current assets

     696      693

Restricted cash

     14      14

Other investments

     75      72

Property, plant and equipment — net

     9,312      9,174

Goodwill

     4,064      4,064

Note receivable due from TCEH

     208      217

Regulatory assets — net

     1,977      1,959

Other noncurrent assets

     49      51
             

Total assets

   $ 16,395    $ 16,244
             
LIABILITIES      

Current liabilities:

     

Short-term borrowings

   $ 756    $ 616

Long-term debt due currently

     109      108

Trade accounts payable – nonaffiliates

     145      129

Income taxes payable to EFH Corp.

     48      5

Accrued interest

     72      104

Other current liabilities

     147      243
             

Total current liabilities

     1,277      1,205

Accumulated deferred income taxes

     1,392      1,369

Investment tax credits

     36      37

Long-term debt, less amounts due currently

     4,972      4,996

Other noncurrent liabilities and deferred credits

     1,866      1,879
             

Total liabilities

   $ 9,543    $ 9,486
             

 

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3. CONSOLIDATION OF VARIABLE INTEREST ENTITIES

We adopted amended accounting standards on January 1, 2010 that require consolidation of a variable interest entity (VIE) if we have the power to direct the significant activities of the VIE and the right or obligation to absorb profit and loss from the VIE. A VIE is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us. As discussed below, our balance sheet includes assets and liabilities of VIEs that meet the consolidation standards and also reflects the deconsolidation of Oncor Holdings, which holds an approximate 80% interest in Oncor.

Our variable interests consist of equity investments. In determining the appropriateness of consolidation of a VIE, we evaluate its purpose, governance structure, decision making processes and risks that are passed on to its interest holders. We also examine the nature of any related party relationships among the interest holders of the VIE and the nature of any special rights granted to the interest holders of the VIE.

Consolidated VIEs

See discussion in Note 5 regarding the VIE related to our accounts receivable securitization program that continues to be consolidated under the amended accounting standards.

We also continue to consolidate Comanche Peak Nuclear Power Company LLC (CPNPC), which was formed by subsidiaries of TCEH and Mitsubishi Heavy Industries Ltd. (MHI) for the purpose of developing two new nuclear generation units at Comanche Peak using MHI’s US-Advanced Pressurized Water Reactor technology and to obtain a combined operating license from the NRC. CPNPC is currently financed through capital contributions from the subsidiaries of TCEH and MHI that hold 88% and 12% of the equity interests, respectively (see Note 8).

The carrying amounts and classifications of the assets and liabilities related to our consolidated VIEs as of March 31, 2010 are as follows:

 

March 31, 2010

    

Assets:

       

Liabilities:

  

Cash and cash equivalents

   $ 12     

Short-term borrowings (a)

   $ 393

Accounts receivable (a)

     784     

Trade accounts payable

     3
              

Property, plant and equipment

     87        

Other assets, including $1 of current assets

     6        
              

Total assets

   $ 889     

Total liabilities

   $ 396
                  

 

(a) As a result of the January 1, 2010 adoption of new accounting guidance related to transfers of financial assets, the balance sheet at March 31, 2010 reflects $784 million of pledged accounts receivable and $393 million of short-term borrowings (see Note 5).

The amended accounting standards require identification in the balance sheet of assets of consolidated VIEs that can only be used to settle the obligations of the VIE, as well as liabilities of consolidated VIEs for which the creditors of the VIE do not have recourse to our general credit, both of which apply to all of our consolidated VIEs.

 

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Non-Consolidated VIEs

The adoption of the amended accounting standards resulted in the deconsolidation of Oncor Holdings, which holds an approximate 80% interest in Oncor, and the reporting of our investment in Oncor Holdings under the equity method on a prospective basis.

In reaching the conclusion to deconsolidate, we conducted an extensive analysis of Oncor Holdings’ underlying governing documents and management structure. Oncor Holdings’ unique governance structure was adopted in conjunction with the Merger, when the Sponsor Group, EFH Corp. and Oncor agreed to implement structural and operational measures to “ring-fence” (the Ring-Fencing Measures) Oncor Holdings and Oncor as discussed in Note 1. The Ring-Fencing Measures were designed to prevent, among other things, (i) increased borrowing costs at Oncor due to the attribution to Oncor of debt from our highly-leveraged unregulated operations, (ii) the activities of our unregulated operations following the Merger resulting in the deterioration of Oncor’s business, financial condition and/or investment in infrastructure, and (iii) Oncor becoming substantively consolidated into a bankruptcy proceeding involving any member of the Texas Holdings Group. The Ring-Fencing Measures effectively separated the daily operational and management control of Oncor Holdings and Oncor from EFH Corp. and its other subsidiaries. By implementing the Ring-Fencing Measures, Oncor maintained its investment grade credit rating following the Merger and reaffirmed Oncor’s independence from our unregulated businesses to the PUCT.

We determined the most significant activities affecting the economic performance of Oncor Holdings (and Oncor) are the operation, maintenance and growth of Oncor’s electric transmission and distribution assets and the preservation of its investment grade credit profile. The boards of directors of Oncor Holdings and Oncor have ultimate responsibility for the management of the day-to-day operations of their respective businesses, including the approval of Oncor’s capital expenditure and operating budgets and the timing and prosecution of Oncor’s rate cases. While the boards include members appointed by EFH Corp., a majority of the board members are independent in accordance with rules established by the New York Stock Exchange, and therefore, we concluded for purposes of applying the amended accounting standards that EFH Corp. does not have power to control the activities deemed most significant to Oncor Holdings’ (and Oncor’s) economic performance.

In assessing EFH Corp.’s ability to exercise control over Oncor Holdings and Oncor, we considered whether it could take actions to circumvent the purpose and intent of the Ring-Fencing Measures (including changing the composition of Oncor Holdings’ or Oncor’s board) in order to gain control over the day-to-day operations of either Oncor Holdings or Oncor. We also considered whether (i) EFH Corp. has the unilateral power to dissolve, liquidate or force into bankruptcy either Oncor Holdings or Oncor, (ii) EFH Corp. could unilaterally amend the ring-fencing protections contained in underlying governing documents of Oncor Holdings or Oncor, and (iii) EFH Corp. could control Oncor’s ability to pay distributions and thereby enhance its own cash flow. We concluded that, in each case, no such opportunity exists.

We account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, because we have the ability to exercise significant influence (as defined in accounting standards) over its activities.

The carrying value of our variable interest in VIEs that we do not consolidate totaled $5.489 billion at March 31, 2010, substantially all of which represents our investment in Oncor Holdings, and is reported as investments in unconsolidated subsidiaries in the balance sheet. Our maximum exposure to loss from these interests does not exceed our carrying value. See Note 2 for additional information about equity method investments including condensed income statement and balance sheet data for Oncor Holdings.

 

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4. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

Reported goodwill as of March 31, 2010 and December 31, 2009 totaled $10.2 billion and $14.3 billion, respectively, with $10.2 billion assigned to the Competitive Electric segment. The $4.1 billion assigned to the Regulated Delivery segment as of December 31, 2009 was prospectively deconsolidated with Oncor Holdings as of January 1, 2010 as a result of the adoption of new accounting guidance for consolidation as discussed in Note 1. None of this goodwill balance is being deducted for tax purposes.

Identifiable Intangible Assets

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

 

     As of March 31, 2010 (a)    As of December 31, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net    Gross
Carrying
Amount
   Accumulated
Amortization
   Net
                 

Retail customer relationship

   $ 463    $ 235    $ 228    $ 463    $ 215    $ 248

Favorable purchase and sales contracts

     700      388      312      700      374      326

Capitalized in-service software

     256      71      185      490      167      323

Environmental allowances and credits

     993      234      759      992      212      780

Land easements

     —        —        —        188      72      116

Mining development costs

     39      8      31      32      5      27
                                         

Total intangible assets subject to amortization

   $ 2,451    $ 936      1,515    $ 2,865    $ 1,045      1,820
                                 

Trade name (not subject to amortization)

           955            955

Mineral interests (not currently subject to amortization)

           98            101
                         

Total intangible assets

         $ 2,568          $ 2,876
                         

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective January 1, 2010.

Amortization expense related to intangible assets (including income statement line item) consisted of:

 

                Three Months Ended March 31,

Intangible Asset

  

Income Statement Line

  

Segment

   2010    2009

Retail customer relationship

  

Depreciation and amortization

  

Competitive Electric

   $ 20    $ 21

Favorable purchase and sales contracts

  

Operating revenues/fuel,

purchased power costs and delivery fees

  

Competitive Electric

     14      42

Capitalized in-service software

  

Depreciation and amortization

  

All (a)

     8      11

Environmental allowances and credits

  

Fuel, purchased power costs and

delivery fees

  

Competitive Electric

     22      21

Land easements

  

Depreciation and amortization

  

Regulated Delivery (a)

     —        1

Mining development costs

  

Depreciation and amortization

  

Competitive Electric

     2      —  
                   

Total amortization expense

         $ 66    $ 96
                   

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective January 1, 2010.

 

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

 

Year

   Amount

2010

   $ 248

2011

     189

2012

     147

2013

     127

2014

     113

 

5. TRADE ACCOUNTS RECEIVABLE AND SALE OF RECEIVABLES PROGRAM

TXU Energy participates in EFH Corp.’s accounts receivable securitization program with financial institutions (the funding entities). Under the program, TXU Energy (originator) sells trade accounts receivable to TXU Receivables Company, which is an entity created for the special 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 entities established for this purpose by the funding entities. In accordance with the amended transfers and servicing accounting standard as discussed in Note 1, the trade accounts receivable amounts under the program are reported as pledged balances, and the related funding amounts are reported as short-term borrowings. Prior to January 1, 2010, the activity was accounted for as a sale of accounts receivable in accordance with previous accounting standards, which resulted in the funding being recorded as a reduction of accounts receivable.

The maximum funding amount currently available under the accounts receivable securitization program is $700 million. Program funding totaled $393 million at March 31, 2010. Under the terms of the program, available funding was reduced by the total of $76 million of customer deposits held by the originator at March 31, 2010 because TCEH’s credit ratings were lower than
Ba3/BB-.

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 a subordinated note 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 subordinated note issued by TXU Receivables Company is subordinated to the undivided interests of the funding entities in the purchased receivables. The balance of the subordinated note payable, which is eliminated in consolidation, totaled $391 million and $463 million at March 31, 2010 and December 31, 2009, 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 consist primarily of interest costs on the underlying financing. Consistent with the change in balance sheet presentation of the funding discussed above, the program fees are currently reported as interest expense and related charges but were previously reported as losses on sale of receivables reported in SG&A expense. The discount also funds a servicing fee, which is reported as SG&A expense, paid by TXU Receivables Company to EFH Corporate Services Company (Service Co.), a direct wholly-owned subsidiary of EFH Corp., which provides recordkeeping services and is the collection agent for the program.

Program fee amounts were as follows:

 

     Three Months Ended March 31,  
     2010     2009  

Program fees

   $ 2      $ 4   

Program fees as a percentage of average funding (annualized)

     2.2     3.7

 

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Funding under the program increased $10 million and decreased $34 million for the three month periods ending March 31, 2010 and 2009, respectively.

Activities of TXU Receivables Company were as follows:

 

     Three Months
Ended March 31,
 
     2010     2009  

Cash collections on accounts receivable

   $ 1,541      $ 1,440   

Face amount of new receivables purchased

     (1,479     (1,408

Discount from face amount of purchased receivables

     3        5   

Program fees paid to funding entities

     (2     (4

Servicing fees paid to Service Co. for recordkeeping and collection services

     (1     (1

Increase (decrease) in subordinated notes payable

     (72     2   
                

Financing/operating cash flows used by (provided to) originator under the program

   $ (10   $ 34   
                

Changes in funding under the program have previously been reported as operating cash flows, and the amended accounting rule requires that the amount of funding under the program upon the January 1, 2010 adoption ($383 million) be reported as a use of operating cash flows and a source of financing cash flows. All changes in funding subsequent to adoption of the amended standard are reported as financing activities.

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 Service Co. 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 Service Co., 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 March 31, 2010, there were no such events of termination.

Upon termination of the program, liquidity would be reduced 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.

Trade Accounts Receivable

 

     March 31,
2010 (a)
    December 31,
2009
 

Wholesale and retail trade accounts receivable, including $784 in pledged retail receivables at March 31, 2010

   $ 1,232      $ 1,726   

Undivided interests in retail accounts receivable sold by TXU Receivables Company

     —          (383

Allowance for uncollectible accounts

     (74     (83
                

Trade accounts receivable — reported in balance sheet

   $ 1,158      $ 1,260   
                

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective January 1, 2010.

Gross trade accounts receivable at March 31, 2010 and December 31, 2009 included unbilled revenues of $346 million and $546 million, respectively.

 

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Allowance for Uncollectible Accounts Receivable

 

     Three Months Ended March 31,  
     2010     2009  

Allowance for uncollectible accounts receivable as of beginning of period

   $ 81      $ 70   

Increase for bad debt expense

     36        20   

Decrease for account write-offs

     (43     (29

Other

     —          1   
                

Allowance for uncollectible accounts receivable as of end of period

   $ 74      $ 62   
                

 

6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

At March 31, 2010, outstanding short-term borrowings totaled $646 million, which included $253 million under TCEH credit facilities at a weighted average interest rate of 3.74%, excluding certain customary fees, and $393 million under the sale of receivables program discussed in Note 5.

At December 31, 2009, we had outstanding short-term borrowings of $1.569 billion at a weighted average interest rate of 2.50%, excluding certain customary fees, at the end of the period. Short-term borrowings under credit facilities totaled $953 million for TCEH and $616 million for Oncor.

Credit Facilities

Credit facilities with cash borrowing and/or letter of credit availability at March 31, 2010 are presented below. The facilities are all senior secured facilities of TCEH.

 

           At March 31, 2010

Authorized Borrowers and Facility

   Maturity
Date
   Facility
Limit
   Letters of
Credit
   Cash
Borrowings
   Availability

TCEH Revolving Credit Facility (a)

   October 2013    $ 2,700    $ —      $ 253    $ 2,421

TCEH Letter of Credit Facility (b)

   October 2014      1,250      —        1,250      —  
                              

Subtotal TCEH

      $ 3,950    $ —      $ 1,503    $ 2,421
                              

TCEH Commodity Collateral Posting Facility (c)

   December 2012      Unlimited    $ —      $ —        Unlimited

 

(a) 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 March 31, 2010 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.
(b) 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 $701 million issued as of March 31, 2010 are supported by the restricted cash, and the remaining letter of credit availability totals $434 million.
(c) Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 540 million MMBtu as of March 31, 2010. As of March 31, 2010, there were no borrowings under this facility. See “TCEH Senior Secured Facilities” below for additional information.

 

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Long-Term Debt

At March 31, 2010 and December 31, 2009, long-term debt consisted of the following:

 

     March 31,
2010
    December 31,
2009
 

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   

0.267% Floating Series 2001D-2 due May 1, 2033 (b)

     97        97   

0.248% Floating Taxable Series 2001I due December 1, 2036 (c)

     62        62   

0.267% 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)

     (143     (147

Senior Secured Facilities:

    

3.729% TCEH Initial Term Loan Facility maturing October 10, 2014 (e)(f)

     16,038        16,079   

3.729% TCEH Delayed Draw Term Loan Facility maturing October 10, 2014 (e)(f)

     4,065        4,075   

3.748% TCEH Letter of Credit Facility maturing October 10, 2014 (f)

     1,250        1,250   

0.231% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (g)

     —          —     

Other:

    

10.25% Fixed Senior Notes due November 1, 2015 (h)

     2,944        2,944   

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

     1,913        1,913   

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

     1,925        1,952   

7.000% Fixed Senior Notes due March 15, 2013

     5        5   

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

     42        55   

Capital lease obligations

     86        153   

Unamortized fair value discount (d)

     (4     (4
                

Total TCEH

   $ 29,656      $ 29,810   
                

 

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Table of Contents
     March 31,
2010
    December 31,
2009
 

EFC Holdings

    

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

   $ 51      $ 51   

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

     49        50   

1.049% 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)

     (11     (11
                

Total EFC Holdings

     98        99   
                

EFH Corp. (parent entity)

    

10.875% Fixed Senior Notes due November 1, 2017

     1,831        1,831   

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

     2,777        2,797   

9.75% Fixed Senior Secured Notes due October 15, 2019

     115        115   

10.000% Fixed Senior Secured Notes due January 15, 2020

     534        —     

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

     983        983   

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

     740        740   

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

     744        744   

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

     71        75   

Unamortized fair value premium related to Building Financing (d)

     16        17   

Capital lease obligations

     6        —     

Unamortized fair value discount (d)

     (583     (599
                

Total EFH Corp.

     7,234        6,703   
                

Intermediate Holding

    

9.75% Fixed Senior Secured Notes due October 15, 2019

     141        141   

Oncor (l) (m)

    

6.375% Fixed Senior Notes due May 1, 2012

     —          700   

5.950% Fixed Senior Notes due September 1, 2013

     —          650   

6.375% Fixed Senior Notes due January 15, 2015

     —          500   

6.800% Fixed Senior Notes due September 1, 2018

     —          550   

7.000% Fixed Debentures due September 1, 2022

     —          800   

7.000% Fixed Senior Notes due May 1, 2032

     —          500   

7.250% Fixed Senior Notes due January 15, 2033

     —          350   

7.500% Fixed Senior Notes due September 1, 2038

     —          300   

Unamortized discount

     —          (15
                

Total Oncor

     —          4,335   

Oncor Electric Delivery Transition Bond Company LLC (m) (n)

    

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

     —          13   

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

     —          130   

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

     —          145   

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

     —          197   

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

     —          290   
                

Total Oncor Electric Delivery Transition Bond Company LLC

     —          775   

Unamortized fair value discount related to transition bonds (d)

     —          (6
                

Total Oncor consolidated

     —          5,104   
                

Total EFH Corp. consolidated

     37,129        41,857   

Less amount due currently

     (250     (417
                

Total long-term debt

   $ 36,879      $ 41,440   
                

 

(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 March 31, 2010. 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 March 31, 2010. 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 $16.30 billion principal amount.
(f) Interest rates in effect at March 31, 2010.
(g) Interest rate in effect at March 31, 2010, excluding a quarterly maintenance fee of approximately $11 million. See “Credit Facilities” above for more information.

 

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(h) Amounts exclude $56 million and $87 million of the original and Series B notes, respectively, that are held by EFH Corp. and Intermediate Holding and eliminated in consolidation.
(i) Amount excludes $27 million that is held by EFH Corp. and eliminated in consolidation.
(j) Amounts exclude $9 million, $6 million and $3 million of the Series P, Series Q and Series R notes, respectively, that are held by Intermediate Holding and eliminated in consolidation.
(k) 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.
(l) Secured with first priority lien.
(m) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.
(n) These bonds are nonrecourse to Oncor and were issued to securitize a regulatory asset.

Debt-Related Activity in 2010 — Repayments of long-term debt in 2010 totaling $132 million represented principal payments at scheduled maturity dates as well as other repayments totaling $81 million, principally related to capitalized leases. Payments at scheduled amortization or maturity dates included $41 million repaid under the TCEH Initial Term Loan Facility and $10 million repaid under the TCEH Delayed Draw Term Loan Facility. See “2010 Debt Exchanges and Repurchases” below for $47 million principal amount of debt acquired in a debt exchange completed in March 2010.

EFH Corp. 10% Senior Secured Notes — In January 2010, EFH Corp. issued $500 million aggregate principal amount of 10.000% Senior Secured Notes due 2020 (the EFH Corp. 10% Notes). The notes will mature on January 15, 2020, and interest is payable in cash in arrears on January 15 and July 15 of each year at a fixed rate of 10.00% per annum with the first interest payment due on July 15, 2010.

The EFH Corp. 10% Notes are fully and unconditionally guaranteed on a joint and several basis by EFC Holdings and Intermediate Holding. The guarantee from Intermediate Holding is secured by the pledge of all membership interests and other investments Intermediate Holding owns or holds in Oncor Holdings or any of Oncor Holdings’ subsidiaries (the Collateral). The guarantee from EFC Holdings is not secured. The EFH Corp. 10% Notes are secured by the Collateral on a parity lien basis with the EFH Corp. 9.75% Senior Secured Notes and EFIH Notes.

The EFH Corp. 10% Notes are a senior obligation and rank equally in right of payment with all senior indebtedness of EFH Corp. and are senior in right of payment to any future subordinated indebtedness of EFH Corp. These notes are effectively subordinated to any indebtedness of EFH Corp. secured by assets of EFH Corp. to the extent of the value of the assets securing such indebtedness and structurally subordinated to all indebtedness and other liabilities of EFH Corp.’s non-guarantor subsidiaries.

The guarantees of the EFH Corp. 10% Notes are the general senior obligations of each guarantor and rank equally in right of payment with all existing and future senior indebtedness of each guarantor. The guarantee from Intermediate Holding is effectively senior to all unsecured indebtedness of Intermediate Holding to the extent of the value of the Collateral. The guarantee will be effectively subordinated to all secured indebtedness of each guarantor secured by assets other than the Collateral to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to any existing and future indebtedness and liabilities of EFH Corp.’s subsidiaries that are not guarantors.

The EFH Corp. 10% Notes and indenture governing such notes restrict EFH Corp. and its restricted subsidiaries’ ability to, among other things, make restricted payments, incur debt and issue preferred stock, incur liens, pay dividends, merge, consolidate or sell assets and engage in certain transactions with affiliates. These covenants are subject to a number of limitations and exceptions. These notes and indenture also contain customary events of default, including, among others, failure to pay principal or interest on the notes when due. If certain events of default occur and are continuing under these notes and the related indenture, the trustee or the holders of at least 30% in principal amount outstanding of the notes may declare the principal amount of the notes to be due and payable immediately.

 

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Before January 15, 2013, 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. 10% Notes from time to time at a redemption price of 110.000% of the aggregate principal amount of the notes, plus accrued and unpaid interest, if any. EFH Corp. may redeem the notes at any time prior to January 15, 2015 at a price equal to 100% of their principal amount, plus accrued and unpaid interest and the applicable premium as defined in the indenture. EFH Corp. may also redeem the notes, in whole or in part, at any time on or after January 15, 2015, at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control (as described in the indenture), EFH Corp. may be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

The EFH Corp. 10% Notes were issued in a private placement and have not been registered under the Securities Act. EFH Corp. has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFH Corp. 10% Notes (except for provisions relating to the transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the EFH Corp. 10% Notes. EFH Corp. has agreed to use commercially reasonable efforts to cause the exchange offer to be completed or, if required under special circumstances, to have one or more shelf registration statements declared effective, within 360 days after the January 2010 issue date of the notes. If this obligation is not satisfied (a Registration Default), the annual interest rate on the notes will increase by 25 basis points for the first 90-day period during which a Registration Default continues, and thereafter the annual interest rate on the notes will increase by 50 basis points for the remaining period during which the Registration Default continues. If the Registration Default is cured, the interest rate on the notes will revert to the original level.

2010 Debt Exchanges and Repurchases — In a private exchange completed in March 2010, EFH Corp. issued an additional $34 million principal amount of EFH Corp. 10% Notes in exchange for $20 million principal amount of EFH Corp. Toggle Notes and $27 million principal amount of TCEH Toggle Notes resulting in a debt extinguishment gain of $14 million reported as other income. In private transactions completed in April 2010, EFH Corp. repurchased $5 million principal amount of EFH Corp. 10.875% Notes for cash of $3.64 million plus accrued interest, and also issued an additional $66 million principal amount of EFH Corp. 10% Notes in exchange for $75 million principal amount of EFH Corp. Toggle Notes and $17 million principal amount of TCEH Toggle Notes, resulting in debt extinguishment gains totaling $31 million.

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 March 31, 2010 is provided in the long-term debt table and in the discussion of short-term borrowings above and reflects LIBOR-based borrowings.

Under the terms of the TCEH Senior Secured Facilities, the commitments of the lenders to make loans to TCEH are several and not joint. Accordingly, if any lender fails to make loans to TCEH, TCEH’s available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments 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 Swap Transactions” 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 in an aggregate annual amount equal to 1% of the actual principal outstanding under such facility as of December 2009, 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.

 

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TCEH Senior Notes The indebtedness under TCEH’s and TCEH Finance’s 10.25% Senior Notes due November 1, 2015 and 10.25% Senior Notes due November 1, 2015 Series B (collectively, TCEH 10.25% Notes) bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 10.25% per annum payable in cash. The indebtedness 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. For any interest period until November 2012, the 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 (PIK Interest); or (iii) 50% in cash and 50% in PIK Interest. TCEH elected to pay the PIK Interest for both interest payments in 2009, increasing the principal amount of the TCEH Toggle Notes. Once TCEH makes a PIK election, the election is valid for each succeeding interest payment period until TCEH revokes the election.

The TCEH 10.25% and Toggle Notes (collectively, the TCEH Senior Notes) are fully and unconditionally guaranteed on a joint and several unsecured 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.

Before November 1, 2010, the issuers may redeem with the cash proceeds of certain equity offerings up to 35% of the aggregate principal amount of the TCEH 10.25% and 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 issuers may also redeem the TCEH Senior Notes at any time prior to November 1, 2011 and 2012, respectively, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and the applicable premium as defined in the indenture. The issuers may redeem the TCEH Senior Notes, in whole or in part, at any time on or after November 1, 2011 and 2012, respectively, at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control of EFC Holdings or TCEH, the issuers may be required to offer to repurchase the TCEH Senior Notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

EFH Corp. Senior Notes — The indebtedness under EFH Corp.’s 10.875% Notes bear interest semiannually in arrears on May 1 and November 1 of each year at a fixed rate of 10.875% per annum payable in cash. The indebtedness under EFH Corp.’s Toggle Notes due November 1, 2017 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 (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new EFH Corp. Toggle Notes (PIK Interest); or (iii) 50% in cash and 50% in PIK Interest. EFH Corp. elected to pay PIK Interest for both interest payments in 2009, increasing the principal amount of the EFH Corp. Toggle Notes. Once EFH Corp. makes a PIK election, the election is valid for each succeeding interest payment period until EFH Corp. revokes the election.

The EFH Corp. 10.875% and Toggle Notes (collectively, the EFH Corp. Senior Notes) are fully and unconditionally guaranteed on a joint and several unsecured basis by EFC Holdings and Intermediate Holding.

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 its 10.875% and Toggle Notes from time to time at a redemption price of 110.875% and 111.250%, respectively, of their respective aggregate principal amounts, plus accrued and unpaid interest, if any. EFH Corp. may also redeem these 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 the applicable premium as defined in the indenture. EFH Corp. may also redeem these 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. Upon the occurrence of a change of 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.

 

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EFH Corp. and Intermediate Holding Senior Secured Notes — The indebtedness under EFH Corp.’s 9.75% Senior Secured Notes due October 15, 2019 (the EFH Corp. 9.75% Notes) and Intermediate Holding’s and EFIH Finance’s 9.75% Senior Secured Notes due October 15, 2019 (the EFIH Notes) bear interest semiannually in arrears on April 15 and October 15 of each year at a fixed rate of 9.75% per annum payable in cash. The EFH Corp. 9.75% Notes and the EFH Corp. 10% Notes discussed above are collectively referred to as the EFH Corp. Senior Secured Notes.

The EFH Corp. Senior Secured Notes and EFIH Notes are fully and unconditionally guaranteed on a joint and several basis by EFC Holdings and Intermediate Holding. The guarantee from Intermediate Holding is secured by the pledge of the Collateral. The guarantee from EFC Holdings is not secured. The EFIH Notes are secured by the Collateral on a parity lien basis with the EFH Corp. Senior Secured Notes.

Before October 15, 2012, the respective issuers may redeem the EFH Corp. 9.75% Notes and EFIH Notes, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of each series of the notes from time to time at a redemption price of 109.750% of the aggregate principal amount of such series of notes, plus accrued and unpaid interest, if any. The applicable issuer may also redeem each series of the notes at any time prior to October 15, 2014 at a price equal to 100% of their principal amount, plus accrued and unpaid interest and the applicable premium as defined in the indenture. The applicable issuer may redeem the EFH Corp. 9.75% Notes and EFIH Notes, in whole or in part, at any time on or after October 15, 2014, at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control (as described in the indenture), the applicable issuer may be required to offer to repurchase each series of the notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

TCEH Interest Rate Swap Transactions As of March 31, 2010, TCEH has entered into interest rate swap transactions pursuant to which payment of the floating interest rates on an aggregate of $16.30 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 2010 to 2014. No interest rate swap transactions were entered into in 2010.

As of March 31, 2010, 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 $13.75 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 0.2055%. Swaps related to an aggregate $2.5 billion principal amount of senior secured term loans of TCEH expired in the three months ended March 31, 2010. No interest rate basis swap transactions were entered into in 2010.

The interest rate swap counterparties are proportionately secured by the same collateral package granted to the lenders under the TCEH Senior Secured Facilities. 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 $107 million in net losses in the three months ended March 31, 2010 and $205 million in net gains in the three months ended March 31, 2009. The cumulative unrealized mark-to-market net liability related to the swaps totaled $1.320 billion at March 31, 2010, of which $165 million (pre-tax) was reported in accumulated other comprehensive income.

See Note 11 for discussion of collateral investments related to certain of these interest rate swaps.

 

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7. COMMITMENTS AND CONTINGENCIES

Guarantees

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

Disposed TXU Gas operationsIn connection with the sale of TXU Gas 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 under these indemnities 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 March 31, 2010, the aggregate maximum amount of residual values guaranteed was approximately $13 million with an estimated residual recovery of approximately $13 million. These leased assets consist primarily of rail cars. The average life of the residual value guarantees under the lease portfolio is approximately six years.

See Note 6 above and Note 12 to Financial Statements in the 2009 Form 10-K for discussion of guarantees and security for certain of our indebtedness.

Letters of Credit

At March 31, 2010, TCEH had outstanding letters of credit under its credit facilities totaling $701 million as follows:

 

   

$304 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);

 

   

$84 million to support TCEH’s REP’s financial requirements with the PUCT, and

 

   

$105 million for miscellaneous credit support requirements.

 

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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 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. In December 2009, the Attorney General and Oak Grove Management Company LLC filed pleadings asking the court to dismiss the administrative appeal challenging the permit for want of prosecution by the plaintiffs. In January 2010, the court denied that request and set the case for a hearing on the merits in June 2010. In March 2010, the remaining two non-parties to the administrative hearing before the TCEQ and SOAH filed a notice of non-suit, thus ending their legal challenge. Therefore, only one plaintiff remains in the case. 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 July 2008, Alcoa Inc. filed a lawsuit in the State District Court of Milam County, Texas 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.

In February 2010, the Sierra Club informed Luminant that it may sue Luminant, after the expiration of a 60-day waiting period, for allegedly violating federal Clean Air Act provisions in connection with Luminant’s Big Brown generation facility. This notice is similar to the notice that Luminant received in July 2008 with respect to its Martin Lake generation facility. We cannot predict whether the Sierra Club will actually file suit or the outcome of any resulting proceedings.

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. Historically, as the EPA has pursued its New Source Review enforcement initiative, companies that have received a large and broad request under Section 114, such as the request received by TCEH, have in many instances subsequently received a notice of violation from the EPA, which has in some cases progressed to litigation or settlement. 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.

 

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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.

 

8. EQUITY

Dividend Restrictions

The indentures governing the EFH Corp. Senior Notes and Senior Secured Notes include 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 these indentures and/or after such distributions, on a pro forma basis, after giving effect to such payment, EFH Corp.’s consolidated leverage ratio is equal to or less than 7.0 to 1.0. For purposes of this calculation, “consolidated leverage ratio” is defined as the ratio of consolidated total indebtedness (as defined in the indenture) to Adjusted EBITDA, in each case, consolidated with its subsidiaries other than Oncor Holdings and its subsidiaries. In addition, the indenture governing the EFIH Notes generally restricts Intermediate Holding from making any cash distribution to EFH Corp. for the ultimate purpose of making a cash distribution to Texas Holdings unless at the time, and after giving effect to such distribution, Intermediate Holding’s consolidated leverage ratio is equal to or less than 6.0 to 1.0. Under the indenture governing the EFIH Notes, the term “consolidated leverage ratio” is defined as the ratio of consolidated total indebtedness (as defined in the indenture) to Adjusted EBITDA on a consolidated basis.

The TCEH Senior Secured Facilities generally restrict TCEH from making any cash distribution to any of its parent companies for the ultimate purpose of making a cash 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 governing the TCEH Senior Notes 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 governing the TCEH Senior Notes. 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 March 31, 2010, EFH Corp. notes payable to TCEH totaled $1.405 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.

EFH Corp. did not declare or pay any cash dividends in 2010 or 2009.

Distributions from Oncor — Until December 31, 2012, distributions paid by Oncor to its members are limited to an amount not to exceed Oncor’s net income determined in accordance with GAAP, subject to certain defined adjustments. Distributions are further limited by an agreement that Oncor’s regulatory capital structure, as determined by the PUCT, will be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.

 

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Noncontrolling Interests

Of the noncontrolling interests balance at December 31, 2009 in the table below, $1.363 billion related to Oncor. See Note 1 for discussion of the deconsolidation of Oncor in 2010. As of December 31, 2009 (and March 31, 2010), 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.

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, CPNPC, 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 (see Note 3).

Equity

The following table presents the changes to equity during the three months ended March 31, 2010.

 

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

Balance at December 31, 2009

   $ 2    $ 7,914    $ (10,854   $ (309   $ 1,411      $ (1,836

Net income

     —        —        355        —          —          355   

Effects of EFH Corp. stock-based incentive compensation plans

     —        10      —          —          —          10   

Change in unrecognized gains related to pension and OPEB costs

     —        —        —          4        —          4   

Net effects of cash flow hedges

     —        —        —          19        —          19   

Effects of deconsolidation of Oncor Holdings

     —        —        —          —          (1,363     (1,363

Investment by noncontrolling interests

     —        —        —          —          6        6   
                                              

Balance at March 31, 2010

   $ 2    $ 7,924    $ (10,499   $ (286   $ 54      $ (2,805
                                              

 

(a) Authorized shares totaled 2,000,000,000 as of March 31, 2010. Outstanding shares totaled 1,668,630,992 and 1,668,065,133 as of March 31, 2010 and December 31, 2009, respectively.

 

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9. 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.

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.

 

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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 tables, 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 March 31, 2010, 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

   $ 1,461    $ 4,067    $ 424    $ 17    $ 5,969

Interest rate swaps

     —        74      —        —        74

Nuclear decommissioning trust – equity securities (c)

     166      111      —        —        277

Nuclear decommissioning trust – debt securities (c)

     —        218      —        —        218
                                  

Total assets

   $ 1,627    $ 4,470    $ 424    $ 17    $ 6,538
                                  

Liabilities:

              

Commodity contracts

   $ 1,668    $ 1,287    $ 268    $ 17    $ 3,240

Interest rate swaps

     —        1,422      —        —        1,422
                                  

Total liabilities

   $ 1,668    $ 2,709    $ 268    $ 17    $ 4,662
                                  

 

(a) Level 3 assets and liabilities consist primarily of complex long-term power purchase and sales agreements, including a long-term wind generation purchase contract 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 other investments line on the balance sheet. See Note 16.

 

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At December 31, 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

   $ 918    $ 2,588    $ 350    $ 4    $ 3,860

Interest rate swaps

     —        64      —        —        64

Nuclear decommissioning trust – equity securities (c)

     154      105      —        —        259

Nuclear decommissioning trust – debt securities (c)

     —        216      —        —        216
                                  

Total assets

   $ 1,072    $ 2,973    $ 350    $ 4    $ 4,399
                                  

Liabilities:

              

Commodity contracts

   $ 1,077    $ 796    $ 269    $ 4    $ 2,146

Interest rate swaps

     —        1,306      —        —        1,306
                                  

Total liabilities

   $ 1,077    $ 2,102    $ 269    $ 4    $ 3,452
                                  

 

(a) Level 3 assets and liabilities consist primarily of complex long-term power purchase and sales agreements, including long-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 other investments line on the balance sheet. See Note 16.

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 11 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 6 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.

There were no significant transfers between the levels of the fair value hierarchy for the three months ended March 31, 2010.

 

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The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to commodity contracts) for the three months ended March 31, 2010 and 2009:

 

     Three Months Ended March 31,  
     2010    2009  

Balance at beginning of period

   $ 81    $ (72

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

     

Included in net income (loss)

     51      16   

Included in other comprehensive income (loss)

     —        (26

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

     18      (16

Transfers into Level 3 (c)

     —        —     

Transfers out of Level 3 (c)

     6      20   
               

Balance at end of period

   $ 156    $ (78
               

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

   $ 54    $ 7   

 

(a) Substantially all changes in values of commodity contracts are reported in the income statement in net gain 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. For 2010, in accordance with new accounting guidance issued by the FASB in January 2010, transfers in and out occur at the end of each quarter, which is when the assessments are performed. Prior period transfers in were assumed to transfer in at the beginning of the quarter and transfers out at the end of the quarter.
(d) Includes unrealized gains and losses of instruments held at the end of the period.

 

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10. FAIR VALUE OF NONDERIVATIVE FINANCIAL INSTRUMENTS

The carrying amounts and related estimated fair values of significant nonderivative financial instruments at March 31, 2010 and December 31, 2009 were as follows:

 

     March 31, 2010     December 31, 2009  
     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

   $ (37,037   $ (29,138   $ (36,600   $ (29,115

Oncor (c)

   $ —        $ —        $ (5,104   $ (5,644
                                

Total

   $ (37,037   $ (29,138   $ (41,704   $ (34,759

Off balance sheet assets (liabilities):

        

Financial guarantees

   $ —        $ (6   $ —        $ (6

 

(a) Fair value determined in accordance with accounting standards related to the determination of fair value.
(b) Excludes capital leases.
(c) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.

See Notes 9 and 11 for discussion of accounting for financial instruments that are derivatives.

 

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11. 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 9 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 highly 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 through 2014. 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 fixed rates, 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 6 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.

The following tables provide detail of commodity and other derivative contractual assets and liabilities, substantially all arising from mark-to-market accounting, as reported in the balance sheets at March 31, 2010 and December 31, 2009:

 

     Derivatives not under hedge accounting – March 31, 2010        
     Derivative assets    Derivative liabilities        
     Commodity
contracts
    Interest rate
swaps
   Commodity
contracts
    Interest rate
swaps
    Total  

Current assets

   $ 3,668      $ 72    $ 12      $ —        $ 3,752   

Noncurrent assets

     2,289        2      —          —          2,291   

Current liabilities

     (5     —        (2,803     (722     (3,530

Noncurrent liabilities

     —          —        (432     (700     (1,132
                                       

Net assets (liabilities)

   $ 5,952      $ 74    $ (3,223   $ (1,422   $ 1,381   
                                       

 

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     Derivatives not under hedge accounting – December 31, 2009        
     Derivative assets    Derivative liabilities        
     Commodity
contracts
   Interest rate
swaps
   Commodity
contracts
    Interest rate
swaps
    Total  

Current assets

   $ 2,327    $ 60    $ 4      $ —        $ 2,391   

Noncurrent assets

     1,529      4      —          —          1,533   

Current liabilities

     —        —        (1,705     (687     (2,392

Noncurrent liabilities

     —        —        (441     (619     (1,060
                                      

Net assets (liabilities)

   $ 3,856    $ 64    $ (2,142   $ (1,306   $ 472   
                                      

As of March 31, 2010 and December 31, 2009, there were no derivative positions accounted for as cash flow or fair value hedges.

Margin deposits that contractually offset these derivative instruments are reported separately in the balance sheet and totaled $380 million and $358 million in net liabilities at March 31, 2010 and December 31, 2009, respectively, which do not include the collateral investments related to certain interest rate swaps and commodity positions discussed immediately below. Reported amounts as 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 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 December 31, 2009, EFH Corp. (parent) had posted $400 million in cash and TCEH had 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. In accordance with the agreements, the counterparties returned the collateral, along with accrued interest, on March 31, 2010. As of December 31, 2009, the cash collateral was recorded as an investment and was 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:

 

      Three Months Ended March 31,

Derivative (Income statement presentation)

   2010     2009

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

   $ 1,203      $ 1,155

Interest rate swaps (Interest expense and related charges)

     (276     45
              

Net gain

   $ 927      $ 1,200
              

 

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The following tables present the pre-tax effect of derivative instruments previously accounted for as cash flow hedges on net income and other comprehensive income (OCI) for the three months ended March 31, 2010 and 2009:

 

Three Months Ended March 31, 2010

 

Derivative

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

Income statement presentation of loss reclassified

from accumulated OCI into income

(effective portion)

   Amount  

Interest rate swaps

   $ —        Interest expense and related charges    $ (29

Commodity contracts

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

Total

   $ —           $ (29
                   

Three Months Ended March 31, 2009

 

Derivative

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

Income statement presentation of loss reclassified

from accumulated OCI into income

(effective portion)

   Amount  

Interest rate swaps

   $ —        Interest expense and related charges    $ (40

Commodity contracts

     (26   Fuel, purchased power costs and delivery fees      —     
             
     Operating revenues      (1
             

Total

   $ (26      $ (41
                   

There were no transactions designated as cash flow hedges during the three months ended March 31, 2010. There were no ineffectiveness net gains or losses related to transactions designated as cash flow hedges in the three months ended March 31, 2009.

Accumulated other comprehensive income related to cash flow hedges at March 31, 2010 and December 31, 2009 totaled $109 million and $128 million in net losses (after-tax), respectively, substantially all of which relates to interest rate swaps. We expect that $46 million of net losses related to cash flow hedges included in accumulated other comprehensive income as of March 31, 2010 will be reclassified into net income during the next twelve months as the related hedged transactions affect net income.

 

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Derivative Volumes — The following table presents the gross notional amounts of derivative volumes at March 31, 2010 and December 31, 2009:

 

      March 31, 2010    December 31, 2009    Unit of Measure

Derivative type

   Notional Volume   

Interest rate swaps:

        

Floating/fixed

   $ 18,000    $ 18,000    Million US dollars

Basis

   $ 13,750    $ 16,250    Million US dollars

Natural gas:

        

Long-term hedge forward sales and purchases (a)

     3,182      3,402    Million MMBtu

Locational basis swaps

     998      1,010    Million MMBtu

All other

     1,582      1,433    Million MMBtu

Electricity

     187,168      198,230    GWh

Coal

     5      6    Million tons

Fuel oil

     149      161    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 1.5 billion MMBtu and 1.6 billion MMBtu as of March 31, 2010 and December 31, 2009, respectively.

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 credit ratings, substantially all of such collateral posting requirements are already effective.

As of March 31, 2010 and December 31, 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 $914 million and $687 million, respectively. The liquidity exposure associated with these liabilities was reduced by cash and letter of credit postings with the counterparties totaling $121 million and $152 million as of March 31, 2010 and December 31, 2009, respectively. If all the credit risk-related contingent features related to these derivatives had been triggered, including cross default provisions, as of March 31, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $28 million and $20 million, respectively, 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 March 31, 2010 and December 31, 2009, the fair value of derivative liabilities subject to such cross-default provisions, largely related to interest rate swaps, totaled $1.904 billion and $1.482 billion, respectively, (before consideration of the amount of assets under the liens). There were no cash collateral and letters of credit posted with these counterparties to reduce the liquidity exposure as of March 31, 2010. The liquidity exposure associated with these liabilities was reduced by cash collateral and letters of credit posted with counterparties totaling $489 million as of December 31, 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 March 31, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $973 million and $480 million, respectively, after reduction for derivative assets under netting arrangements (before consideration of the amount of assets under the liens). See Note 12 to Financial Statements in the 2009 Form 10-K for a description of other obligations that are supported by asset liens.

As discussed immediately above, the aggregate fair values of liabilities under derivative agreements with credit risk-related contingent features, including cross-default provisions, totaled $2.818 billion and $2.169 billion at March 31, 2010 and December 31, 2009, respectively. 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.

 

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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.

Concentrations of Credit Risk

TCEH has significant concentrations of credit risk with the counterparties to its derivative contracts. As of March 31, 2010, total credit risk exposure to all counterparties related to derivative contracts totaled $6.1 billion. The net exposure to those counterparties totaled $2.2 billion after taking into effect master netting arrangements, setoff provisions and collateral. As of March 31, 2010, the credit risk exposure to the banking and financial sector represented 92% of the total credit risk exposure, a significant amount of which is related to the long-term hedging program. As of March 31, 2010, the largest net exposure to a single counterparty totaled $909 million. Exposure to the banking and financial sector counterparties is considered to be within an acceptable level of risk tolerance because substantially all of this exposure is with counterparties with credit ratings of “A” or better. However, this concentration increases the risk that a default by any of these counterparties would have a material adverse effect on our financial condition and results of operations.

The transactions with these counterparties contain certain provisions that would require the counterparties to post collateral in the event of a material downgrade in their credit rating. We maintain credit risk policies with regard to our counterparties to minimize overall credit risk. These policies specify authorized risk mitigation tools including, but not limited to, use of standardized master netting contracts and agreements that allow for netting of positive and negative exposures associated with a single counterparty. Credit enhancements such as parent guarantees, letters of credit, surety bonds, liens on assets and margin deposits are also utilized. Prospective material adverse changes in the payment history or financial condition of a counterparty or downgrade of its credit quality result in the reassessment of the credit limit with that counterparty. The process can result in the subsequent reduction of the credit limit or a request for additional financial assurances. An event of default by one or more counterparties could subsequently result in termination-related settlement payments that reduce available liquidity if amounts are owed to the counterparties related to the derivative contracts or delays in receipts of expected settlements if the counterparties owe amounts to us.

 

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

Net pension and OPEB costs for the three months ended March 31, 2010 and 2009 are comprised of the following:

 

     Three Months Ended March 31,  
     2010     2009  

Components of net pension costs:

    

Service cost

   $ 11      $ 9   

Interest cost

     39        39   

Expected return on assets

     (40     (42

Amortization of prior service cost

     —          —     

Amortization of net loss

     13        2   
                

Net pension costs

     23        8   
                

Components of net OPEB costs:

    

Service cost

     3        3   

Interest cost

     15        15   

Expected return on assets

     (3     (3

Amortization of prior service cost

     —          —     

Amortization of net loss

     5        3   
                

Net OPEB costs

     20        18   
                

Total net pension and OPEB costs

     43        26   

Less amounts expensed by Oncor

     (9     —     

Less amounts deferred principally as a regulatory asset or property by Oncor

     (22     (16
                

Amount recognized as expense by EFH Corp. and consolidated subsidiaries

   $ 12      $ 10   
                

The discount rate reflected in net pension and OPEB costs in 2010 is 5.90%. The expected rates of return on pension and OPEB plan assets reflected in the 2010 cost amounts are 8.0% and 7.6%, respectively.

We made cash contributions related to our pension and OPEB plans totaling $1 million and $6 million, respectively, in the first quarter of 2010, including $4 million contributed by Oncor. We expect to make additional contributions of $44 million and $18 million, respectively, in the remainder of 2010, including $55 million expected to be contributed by Oncor.

 

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13. EFFECT OF HEALTH CARE LEGISLATION

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act enacted in March 2010 reduces, effective in 2013, the amount of OPEB costs deductible for federal income tax purposes by the amount of the Medicare Part D subsidy we receive. Under income tax accounting rules, deferred tax assets related to accrued OPEB liabilities must be reduced immediately for the future effect of the legislation. Accordingly, in the three months ended March 31, 2010, EFH Corp.’s and Oncor’s deferred tax assets were reduced by $50 million. Of this amount, $8 million was recorded as a charge to income tax expense and $42 million was recorded as a regulatory asset by Oncor (before gross-up for liability in lieu of deferred income taxes) as the additional income taxes are expected to be recoverable in Oncor’s future rates.

 

14. RELATED PARTY TRANSACTIONS

The following represent the significant related-party transactions of EFH Corp.:

 

   

We incur an annual management fee under the terms of a management agreement with the Sponsor Group for which we accrued $9 million for both the three months ended March 31, 2010 and 2009. The fee is reported as SG&A expense.

 

   

In 2007, TCEH entered into the TCEH Senior Secured Facilities 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.

 

   

Goldman, Sachs & Co. (Goldman) acted as an initial purchaser in the issuance of $500 million principal amount of EFH Corp. 10% Notes in January 2010 as discussed in Note 6. Goldman received fees totaling $3 million for this transaction.

 

   

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.

 

   

TCEH incurs electricity delivery fees charged by Oncor. These fees totaled $264 million for the three months ended March 31, 2010. The balance sheet at March 31, 2010 reflects amounts due currently to Oncor of $146 million (included in net payables due to unconsolidated subsidiary), primarily related to these electricity delivery fees.

 

   

Oncor’s bankruptcy-remote financing subsidiary has issued securitization bonds to recover generation-related regulatory assets through a transition surcharge to its customers. Oncor’s incremental income taxes related to the transition surcharges it collects are being reimbursed by TCEH. Therefore, the balance sheet reflects a noninterest bearing note payable to Oncor of $245 million ($37 million current portion included in net payables due to unconsolidated subsidiary) at March 31, 2010.

 

   

TCEH reimburses Oncor for interest expense on Oncor’s bankruptcy-remote financing subsidiary’s securitization bonds. This interest expense totaled $10 million for the three months ended March 31, 2010.

 

   

A subsidiary of EFH Corp. charges Oncor for financial and other administrative services at cost, which totaled $7 million for the three months ended March 31, 2010.

 

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Under Texas regulatory provisions, the trust fund for decommissioning the Comanche Peak nuclear generation facility, reported in other investments on the balance sheet, is funded by a delivery fee surcharge billed to REPs by Oncor and remitted to TCEH, with the intent that the trust fund assets will be sufficient to fund the decommissioning liability, reported in noncurrent liabilities on the balance sheet. Income and expenses associated with the trust fund and the decommissioning liability incurred by us are offset by a net change in the intercompany receivable/payable with Oncor, which in turn results in a change in Oncor’s net regulatory asset/liability. At March 31, 2010, the excess of the decommissioning liability over the trust fund balance resulted in a receivable from Oncor totaling $76 million included in noncurrent receivables from unconsolidated subsidiary in the balance sheet.

 

   

TCEH had posted cash collateral of $4 million as of March 31, 2010 to Oncor related to interconnection agreements for the generation units being developed by TCEH. The collateral is reported in the balance sheet in other current assets.

 

   

We file a consolidated federal income tax return; however, Oncor Holdings’ federal income tax and Texas margin tax expense and related balance sheet amounts, including income taxes payable to or receivable from EFH Corp., are recorded as if Oncor Holdings files its own income tax return. At March 31, 2010, the amount due from Oncor Holdings totals $48 million and reduces the amount reported as net payables due to unconsolidated subsidiary.

 

   

Certain transmission and distribution utilities in Texas have tariffs in place to assure adequate credit worthiness of any REP to support the REP’s obligation to collect securitization bond-related (transition) charges on behalf of the utility. Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated transition charges over specified time periods. Accordingly, as of March 31, 2010, TCEH had posted a letter of credit in the amount of $16 million for the benefit of Oncor.

 

   

EFH Corp. and Oncor are jointly and severally liable for the funding of the EFH Corp. pension plan and a portion of the OPEB plan obligations. EFH Corp. is liable for the majority of the OPEB plan obligations. Oncor has contractually agreed to reimburse EFH Corp. with respect to certain pension plan and OPEB liabilities. Accordingly, the balance sheet of EFH Corp. reflects such unfunded liabilities and a corresponding receivable from Oncor in the amount of $1.272 billion, classified as noncurrent, which represents the portion of the obligations recoverable by Oncor under regulatory rate-setting provisions and reported by Oncor in its balance sheet.

 

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15. 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 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. See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings and, accordingly, the Regulated Delivery segment, effective as of January 1, 2010.

Corporate and Other represents the remaining nonsegment operations consisting primarily of discontinued operations, general corporate expenses and interest on EFH Corp. (parent entity), Intermediate Holding 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 2009 Form 10-K. We evaluate performance based on income from continuing operations. We account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

 

     Three Months Ended March 31,  
     2010     2009  

Operating revenues:

    

Competitive Electric

   $ 1,999      $ 1,766   

Regulated Delivery

     —          614   

Corporate and Other

     —          7   

Eliminations

     —          (248
                

Consolidated

   $ 1,999      $ 2,139   
                

Affiliated revenues included in operating revenues:

    

Competitive Electric

   $ —        $ 2   

Regulated Delivery

     —          240   

Corporate and Other

     —          6   

Eliminations

     —          (248
                

Consolidated

   $ —        $ —     
                

Equity in earnings of unconsolidated subsidiaries (net of tax):

    

Regulated Delivery (net of minority interest of $16)

   $ 63      $ —     
                

Net income (loss):

    

Competitive Electric

   $ 431      $ 558   

Regulated Delivery

     63        58   

Corporate and Other

     (139     (162
                

Consolidated

   $ 355      $ 454   
                

 

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16. SUPPLEMENTARY FINANCIAL INFORMATION

Regulated Versus Unregulated Operations

 

     Three Months Ended March 31,  
     2010     2009  

Operating revenues

    

Regulated

   $ —        $ 614   

Unregulated

     1,999        1,773   

Intercompany sales eliminations – regulated

     —          (240

Intercompany sales eliminations – unregulated

     —          (8
                

Total operating revenues

     1,999        2,139   

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

     (1,047     (601

Net gain from commodity hedging and trading activities – unregulated

     1,213        1,128   

Operating costs – regulated

     —          (221

Operating costs – unregulated

     (197     (166

Depreciation and amortization – regulated

     —          (125

Depreciation and amortization – unregulated

     (342     (282

Selling, general and administrative expenses – regulated

     —          (44

Selling, general and administrative expenses – unregulated

     (187     (202

Franchise and revenue-based taxes – regulated

     —          (60

Franchise and revenue-based taxes – unregulated

     (22     (25

Impairment of goodwill

     —          (90

Other income

     33        13   

Other deductions

     (11     (11

Interest income

     10        1   

Interest expense and other charges

     (954     (667
                

Income before income taxes and equity in earnings of unconsolidated subsidiaries

   $ 495      $ 787   
                

 

 

(a) Includes unregulated cost of fuel consumed of $355 million and $284 million for the three months ended March 31, 2010 and 2009, respectively. The balance represents energy purchased for resale and delivery fees net of intercompany eliminations.

Stock-Based Compensation

Under the terms of the EFH Corp. 2007 Stock Incentive Plan (SIP), options to purchase 3.6 million and 1.4 million shares of our common stock were issued to certain management employees, directors and advisors in the three months ended March 31, 2010 and 2009, respectively. Of the options granted in the three months ended March 31, 2010, 1.6 million were granted in exchange for previously granted options. Vested awards must be exercised within 10 years of the grant date. The terms of substantially all of the options were fixed at grant date. Options to purchase 0.7 million (including 0.6 million that were vested) and 2.7 million shares (including 0.3 million that were vested) were forfeited during the three months ended March 31, 2010 and 2009, respectively.

In addition, 0.2 million and 0.1 million shares of common stock were awarded as compensation in the three months ended March 31, 2010 and 2009, respectively, to management employees and directors. There were no restricted shares granted in the three months ended March 31, 2010 or March 31, 2009; of the restricted shares previously granted, 600,000 and 32,500 vested in the three months ended March 31, 2010 and 2009, respectively.

Expenses recognized for options granted totaled $7 million and $3 million for the three months ended March 31, 2010 and 2009, respectively. Pursuant to the 2007 SIP, a total of 1.8 million Performance-Based Options that were eligible to vest at the end of 2009 were declared vested by the Organization and Compensation Committee of EFH Corp.’s board of directors due to the extraordinary nature of economic conditions in 2009, despite the established 2009 EBITDA target not being met. Expenses for the three months ended March 31, 2010 included $3 million related to the vesting of these options. Expenses recognized for share awards (restricted and unrestricted) totaled $2 million and $3 million for the three months ended March 31, 2010 and 2009, respectively.

 

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Other Income and Deductions

 

     Three Months Ended March 31,
     2010    2009

Other income:

     

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

   $ —      $ 10

Debt extinguishment gain (Note 6)

     14      —  

Adjustment to gain on sale of partial interest in natural gas gathering

pipeline business (a)

     7      —  

Sales tax refund

     5      —  

Mineral rights royalty income

     —        1

Other

     7      2
             

Total other income

   $ 33    $ 13
             

Other deductions:

     

Net charges related to cancelled development of generation facilities

   $ 1    $ 1

Severance charges

     2      5

Ongoing pension and OPEB expense related to discontinued businesses

     3      —  

Other

     5      5
             

Total other deductions

   $ 11    $ 11
             

 

(a) Adjustment arose as a result of completion of fair value determination related to the respective parties’ investment balance.

Interest Expense and Related Charges

 

     Three Months Ended March 31,  
     2010     2009  

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

   $ 797      $ 873   

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

     107        (205

Amortization of interest rate swap losses at dedesignation of hedge accounting

     29        40   

Amortization of fair value debt discounts resulting from purchase accounting

     19        19   

Amortization of debt issuance costs and discounts

     33        35   

Capitalized interest

     (31     (95
                

Total interest expense and related charges

   $ 954      $ 667   
                

Restricted Cash

 

     At March 31, 2010    At December 31, 2009
     Current
Assets
   Noncurrent
Assets
   Current
Assets
   Noncurrent
Assets

Amounts related to TCEH’s Letter of Credit Facility (See Note 6)

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

Amounts related to margin deposits held

     17      —        1      —  

Amounts related to securitization (transition) bonds

     —        —        47      14
                           

Total restricted cash

   $ 17    $ 1,135    $ 48    $ 1,149
                           

 

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Inventories by Major Category

 

     March 31,
2010
   December 31,
2009

Materials and supplies (a)

   $ 157    $ 248

Fuel stock

     198      204

Natural gas in storage

     26      33
             

Total inventories

   $ 381    $ 485
             

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.

Investments

 

     March 31,
2010
   December 31,
2009

Nuclear decommissioning trust

   $ 495    $ 475

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

     115      184

Land

     41      43

Miscellaneous other

     2      4
             

Total investments

   $ 653    $ 706
             

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.

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 Oncor’s regulatory asset/liability. A summary of investments in the fund follows:

 

     March 31, 2010
     Cost (a)    Unrealized gain    Unrealized loss     Fair market value

Debt securities (b)

   $ 214    $ 6    $ (2   $ 218

Equity securities (c)

     200      93      (16     277
                            

Total

   $ 414    $ 99    $ (18   $ 495
                            
     December 31, 2009
     Cost (a)    Unrealized gain    Unrealized loss     Fair market value

Debt securities (b)

   $ 211    $ 8    $ (3   $ 216

Equity securities (c)

     195      83      (19     259
                            

Total

   $ 406    $ 91    $ (22   $ 475
                            

 

(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 4.18% and 4.44% and an average maturity of 7.6 years and 7.8 years at March 31, 2010 and December 31, 2009, 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 March 31, 2010 mature as follows: $85 million in one to five years, $34 million in five to ten years and $99 million after ten years.

 

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Property, Plant and Equipment

As of March 31, 2010 and December 31, 2009, property, plant and equipment of $21.2 billion and $30.1 billion, respectively, is stated net of accumulated depreciation and amortization of $3.1 billion and $7.1 billion, respectively.

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 current liabilities and other noncurrent liabilities and deferred credits in the balance sheet, during the three months ended March 31, 2010:

 

Asset retirement liability at January 1, 2010

   $  948   

Additions:

  

Accretion

     17   

Reductions:

  

Payments, essentially all mining reclamation

     (9
        

Asset retirement liability at March 31, 2010

     956   

Less amounts due currently

     (48
        

Noncurrent asset retirement liability at March 31, 2010

   $ 908   
        

 

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Other Noncurrent Liabilities and Deferred Credits

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

 

     March 31,
2010
   December 31,
2009

Uncertain tax positions (including accrued interest)

   $ 1,933    $ 1,999

Retirement plan and other employee benefits

     1,647      1,711

Asset retirement obligations

     908      948

Unfavorable purchase and sales contracts

     693      700

Liabilities related to subsidiary tax sharing agreement (a)

     —        321

Other

     49      87
             

Total other noncurrent liabilities and deferred credits

   $ 5,230    $ 5,766
             

 

(a) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.

We do not expect the total amount of liabilities recorded related to uncertain tax positions will significantly increase or decrease within the next 12 months.

Unfavorable Purchase and Sales Contracts — The amortization of unfavorable purchase and sales contracts totaled $7 million in both the three months ended March 31, 2010 and 2009. Favorable purchase and sales contracts are recorded as intangible assets (see Note 4).

The estimated amortization of unfavorable purchase and sales contracts for each of the five fiscal years from December 31, 2009 is as follows:

 

Year

   Amount

2010

   $ 27

2011

     27

2012

     27

2013

     26

2014

     25

Supplemental Cash Flow Information

 

     Three Months Ended March 31,  
     2010     2009  

Cash payments (receipts) related to:

    

Interest paid (a)

   $ 427      $ 541   

Capitalized interest

     (31     (95
                

Interest paid (net of capitalized interest) (a)

     396        446   

Income taxes

     2        (97

Noncash investing and financing activities:

    

Noncash construction expenditures (b)

     99        123   

Debt exchange transaction (Note 6)

     14        —     

Capital leases

     6        10   

 

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

 

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17. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION

In 2007, EFH Corp. issued $2.0 billion EFH Corp. 10.875% Notes and $2.5 billion EFH Corp. Toggle Notes (collectively, the EFH Corp. Senior Notes). In May 2009 and November 2009, EFH Corp. issued an additional $150 million and $159 million, respectively, of the EFH Corp. Toggle Notes. In November 2009, EFH Corp. issued $115 million EFH Corp. 9.75% Notes in exchange for certain outstanding debt securities. In January 2010, EFH Corp. issued $500 million EFH Corp. 10% Notes (collectively with the EFH Corp. 9.75% Notes, the EFH Corp. Senior Secured Notes). In March 2010, EFH Corp. issued an additional $34 million EFH Corp. 10% Notes in exchange for certain outstanding debt securities. The EFH Corp. Senior Notes and Senior Secured Notes are unconditionally guaranteed by EFC Holdings and Intermediate Holding, 100% owned subsidiaries of EFH Corp. (collectively, the Guarantors) on an unsecured basis except for Intermediate Holding’s guarantee of the EFH Corp. Senior Secured Notes, which is secured by a pledge of all membership interests and other investments Intermediate Holding owns or holds in Oncor Holdings or any of Oncor Holdings’ subsidiaries as described in Note 6. The guarantees issued by the Guarantors are full and unconditional, joint and several guarantees of the EFH Corp. Senior Notes and Senior Secured Notes. The guarantees by EFC Holdings and the guarantee of the EFH Corp. Senior Notes by Intermediate Holding 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 and Senior Secured Notes (collectively, the Non-Guarantors). The indentures governing the EFH Corp. Senior Notes and Senior Secured Notes contain certain restrictions, subject to certain exceptions, on EFH Corp.’s ability to pay dividends or make investments. See Note 8.

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 and cash flows of EFH Corp. (the Parent/Issuer), the Guarantors and the Non-Guarantors for the three months ended March 31, 2010 and 2009 and the consolidating balance sheets as of March 31, 2010 and December 31, 2009 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 $4.608 billion and $4.63 billion principal amount of EFH Corp. Senior Notes and $149 million and $115 million principal amount of the EFH Corp. Senior Secured Notes to the Guarantors as of March 31, 2010 and December 31, 2009, respectively (see Note 6). Amounts pushed down reflect Merger-related debt and additional debt guaranteed by the Guarantors that was issued by EFH Corp. to refinance Merger-related or other debt existing at the time of the Merger.

EFH Corp. (Parent) received no dividends from its consolidated subsidiaries for the three months ended March 31, 2010 and $18 million for the three months ended March 31, 2009.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income

For the Three Months Ended March 31, 2010

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 1,999      $ —        $ 1,999   

Fuel, purchased power costs and delivery fees

     —          —          (1,047     —          (1,047

Net gain from commodity hedging and trading activities

     —          —          1,213        —          1,213   

Operating costs

     —          —          (197     —          (197

Depreciation and amortization

     —          —          (342     —          (342

Selling, general and administrative expenses

     (6     —          (181     —          (187

Franchise and revenue-based taxes

     —          —          (22     —          (22

Other income

     8        —          25        —          33   

Other deductions

     —          —          (11     —          (11

Interest income

     58        1        43        (92     10   

Interest expense and related charges

     (262     (148     (776     232        (954
                                        

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

     (202     (147     704        140        495   

Income tax (expense) benefit

     59        49        (261     (50     (203

Equity in earnings of consolidated subsidiaries

     435        450        —          (885     —     

Equity in earnings of unconsolidated subsidiaries (net of tax)

     63        63        —          (63     63   
                                        

Net income

     355        415        443        (858     355   

Net income attributable to noncontrolling interests

     —          —          —          —          —     
                                        

Net income attributable to EFH Corp.

   $ 355      $ 415      $ 443      $ (858   $ 355   
                                        

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income

For the Three Months Ended March 31, 2009

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 2,139      $ —        $ 2,139   

Fuel, purchased power costs and delivery fees

     —          —          (601     —          (601

Net gain from commodity hedging and trading activities

     —          —          1,128        —          1,128   

Operating costs

     —          —          (387     —          (387

Depreciation and amortization

     —          —          (407     —          (407

Selling, general and administrative expenses

     (28     —          (218     —          (246

Franchise and revenue-based taxes

     —          —          (85     —          (85

Impairment of goodwill

     —          —          (90     —          (90

Other income

     —          —          13        —          13   

Other deductions

     —          —          (11     —          (11

Interest income

     51        —          24        (74     1   

Interest expense and related charges

     (235     (141     (503     212        (667
                                        

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

     (212     (141     1,002        138        787   

Income tax (expense) benefit

     70        46        (403     (46     (333

Equity earnings of subsidiaries

     584        622        —          (1,206     —     
                                        

Net income

     442        527        599        (1,114     454   

Net income attributable to noncontrolling interests

     —          —          (12     —          (12
                                        

Net income attributable to EFH Corp.

   $ 442      $ 527      $ 587      $ (1,114   $ 442   
                                        

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-guarantors     Eliminations     Consolidated  

Cash provided by operating activities

   $ 42      $ 22      $ 38      $ —        $ 102   
                                        

Cash flows – financing activities:

          

Issuances of long-term borrowings

     500        —          —          —          500   

Retirements of long-term borrowings

     —          (1     (131     —          (132

Change in short-term borrowings

     —          —          (700     —          (700

Net short-term borrowings under accounts receivable sales program

     —          —          393        —          393   

Contributions from noncontrolling interests

     —          —          6        —          6   

Change in advances – affiliates

     (753     9        700        44        —     

Other, net

     (10     —          —          —          (10
                                        

Cash provided by (used in) financing activities

     (263     8        268        44        57   
                                        

Cash flows – investing activities:

          

Capital expenditures and nuclear fuel purchases

     —          —          (372     —          (372

Investment posted with derivative counterparty

     400        —          —          —          400   

Proceeds from sale of environmental allowances and credits

     —          —          3        —          3   

Purchases of environmental allowances and credits

     —          —          (5     —          (5

Proceeds from sales of nuclear decommissioning trust fund securities

     —          —          564        —          564   

Investments in nuclear decommissioning trust fund securities

     —          —          (568     —          (568

Change in advances – affiliates

     —          —          44        (44     —     

Other, net

     —          —          (13     —          (13
                                        

Cash provided by (used in) investing activities

     400        —          (347     (44     9   
                                        

Net change in cash and cash equivalents

     179        30        (41     —          168   

Effects of deconsolidation of Oncor Holdings

     (29     —          —          —          (29

Cash and cash equivalents – beginning balance

     1,059        —          130        —          1,189   
                                        

Cash and cash equivalents – ending balance

   $ 1,209      $ 30      $ 89      $ —        $ 1,328   
                                        

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2009

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-guarantors     Eliminations     Consolidated  

Cash provided by (used in) operating activities

   $ (12   $ 14      $ 624      $ (36   $ 590   
                                        

Cash flows – financing activities:

          

Issuances of long-term borrowings

     —          —          212        —          212   

Retirements of long-term borrowings

     —          (1     (151     —          (152

Change in short-term borrowings

     —          —          60        —          60   

Contributions from noncontrolling interests

     —          —          26        —          26   

Distributions paid to noncontrolling interests

     —          —          (7     —          (7

Cash dividends paid

     —          (18     (18     36        —     

Change in advances – affiliates

     —          —          (37     37        —     

Other, net

     —          —          (1     —          (1
                                        

Cash provided by (used in) financing activities

     —          (19     84        73        138   
                                        

Cash flows – investing activities:

          

Capital expenditures and nuclear fuel purchases

     —          —          (646     —          (646

Redemption of investment held in money market fund

     —          —          142        —          142   

Investment posted with counterparty

     (400     —          —          —          (400

Proceeds from sale of environmental allowances and credits

     —          —          4        —          4   

Purchases of environmental allowances and credits

     —          —          (9     —          (9

Proceeds from sales of nuclear decommissioning trust fund securities

     —          —          1,402        —          1,402   

Investments in nuclear decommissioning trust fund securities

     —          —          (1,406     —          (1,406

Change in advances – affiliates

     32        5        —          (37     —     

Other, net

     —          —          31        —          31   
                                        

Cash provided by (used in) investing activities

     (368     5        (482     (37     (882