Attached files

file filename
EX-4.(C) - FOURTH SUPPLEMENTAL INDENTURE, DATED AS OF MAY 21, 2010 - Energy Future Holdings Corp /TX/dex4c.htm
EX-4.(F) - SEVENTH SUPPLEMENTAL INDENTURE, DATED AS OF JULY 7, 2010 - Energy Future Holdings Corp /TX/dex4f.htm
EX-4.(D) - FIFTH SUPPLEMENTAL INDENTURE, DATED AS OF JULY 2, 2010 - Energy Future Holdings Corp /TX/dex4d.htm
EX-4.(H) - REGISTRATION RIGHTS AGREEMENT, DATED APRIL 12, 2010 - Energy Future Holdings Corp /TX/dex4h.htm
EX-4.(J) - REGISTRATION RIGHTS AGREEMENT, DATED MAY 20, 2010 - Energy Future Holdings Corp /TX/dex4j.htm
EX-4.(A) - SECOND SUPPLEMENTAL INDENTURE, DATED AS OF APRIL 13, 2010 - Energy Future Holdings Corp /TX/dex4a.htm
EX-4.(E) - SIXTH SUPPLEMENTAL INDENTURE, DATED AS OF JULY 6, 2010 - Energy Future Holdings Corp /TX/dex4e.htm
EX-4.(L) - REGISTRATION RIGHTS AGREEMENT, DATED JULY 6, 2010 - Energy Future Holdings Corp /TX/dex4l.htm
EX-4.(M) - REGISTRATION RIGHTS AGREEMENT, DATED JULY 7, 2010 - Energy Future Holdings Corp /TX/dex4m.htm
EX-4.(B) - THIRD SUPPLEMENTAL INDENTURE, DATED AS OF APRIL 14, 2010 - Energy Future Holdings Corp /TX/dex4b.htm
EX-4.(I) - REGISTRATION RIGHTS AGREEMENT, DATED APRIL 13, 2010 - Energy Future Holdings Corp /TX/dex4i.htm
EX-4.(K) - REGISTRATION RIGHTS AGREEMENT, DATED JULY 2, 2010 - Energy Future Holdings Corp /TX/dex4k.htm
EX-10.(B) - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - MARK ALLEN MCFARLAND - Energy Future Holdings Corp /TX/dex10b.htm
EX-10.(D) - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - DAVID A. CAMPBELL - Energy Future Holdings Corp /TX/dex10d.htm
EX-10.(C) - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - JAMES A. BURKE - Energy Future Holdings Corp /TX/dex10c.htm
EX-10.(F) - EMPLOYMENT AGREEMENT - JOEL D. KAPLAN - Energy Future Holdings Corp /TX/dex10f.htm
EX-32.(B) - CERTIFICATION OF PAUL M. KEGLEVIC, PFO, PURSUANT TO SECTION 906 - Energy Future Holdings Corp /TX/dex32b.htm
EX-99.(D) - ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99d.htm
EX-99.(A) - CONDENSED STATEMENT OF CONSOLIDATED INCOME - TWELVE MONTHS ENDED JUNE 30, 2010 - Energy Future Holdings Corp /TX/dex99a.htm
EX-99.(B) - ENERGY FUTURE HOLDINGS CORP. CONSOLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99b.htm
EX-99.(C) - TCEH CONSOLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99c.htm
EX-10.(E) - EMPLOYMENT AGREEMENT - RICHARD J. LANDY - Energy Future Holdings Corp /TX/dex10e.htm
EX-31.(B) - CERTIFICATION OF PAUL M. KEGLEVIC, PFO, PURSUANT TO SECTION 302 - Energy Future Holdings Corp /TX/dex31b.htm
EX-31.(A) - CERTIFICATION OF JOHN YOUNG, PEO, PURSUANT TO SECTION 302 - Energy Future Holdings Corp /TX/dex31a.htm
EX-32.(A) - CERTIFICATION OF JOHN YOUNG, PEO, PURSUANT TO SECTION 906 - Energy Future Holdings Corp /TX/dex32a.htm
EX-10.(A) - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - ROBERT C. WALTERS - Energy Future Holdings Corp /TX/dex10a.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 JUNE 30, 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    (Do not check if a smaller reporting company)    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 July 30, 2010, there were 1,669,277,542 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 (Unaudited)   
  Condensed Statements of Consolidated Income (Loss) – Three and Six Months Ended June 30, 2010 and 2009    1
  Condensed Statements of Consolidated Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2010 and 2009    2
  Condensed Statements of Consolidated Cash Flows – Six Months Ended June 30, 2010 and 2009    3
  Condensed Consolidated Balance Sheets – June 30, 2010 and December 31, 2009    5
  Notes to Condensed Consolidated Financial Statements    6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    56
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    93
Item 4.   Controls and Procedures    99
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings    99
Item 1A.   Risk Factors    99
Item 5.   Other Information    101
Item 6.   Exhibits    102
SIGNATURE    105

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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Table of Contents

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 Exhibits 99(b), 99(c) and 99(d)) 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, wholly-owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context.
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 9.75% Notes    Refers to Intermediate Holding’s and EFIH Finance’s 9.75% Senior Secured Notes due October 15, 2019.
EPA    US Environmental Protection Agency

 

ii


Table of Contents
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.

 

iii


Table of Contents
MMBtu    million British thermal units
Moody’s    Moody’s Investors Services, Inc. (a credit rating agency)
MW    megawatts
MWh    megawatt-hours
NERC    North American Electric Reliability Corporation
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, and/or its subsidiaries, depending on context.
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 that 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

 

iv


Table of Contents
SG&A    selling, general and administrative
Sponsor Group    Refers collectively to 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.
TRE    Refers to Texas Regional Entity, an independent organization that develops reliability standards for the ERCOT region and monitors and enforces compliance with NERC standards and ERCOT protocols.
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
VIE    variable interest entity

 

v


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Operating revenues

   $ 1,993      $ 2,342      $ 3,992      $ 4,481   

Fuel, purchased power costs and delivery fees

     (1,074     (700     (2,121     (1,301

Net gain (loss) from commodity hedging and trading activities

     67        (248     1,280        880   

Operating costs

     (229     (395     (426     (783

Depreciation and amortization

     (350     (423     (692     (830

Selling, general and administrative expenses

     (185     (270     (373     (516

Franchise and revenue-based taxes

     (26     (79     (49     (165

Impairment of goodwill

     —          —          —          (90

Other income (Note 16)

     211        13        244        26   

Other deductions (Note 16)

     (7     (7     (18     (18

Interest income

     —          11        9        12   

Interest expense and related charges (Note 16)

     (1,122     (431     (2,074     (1,096
                                

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

     (722     (187     (228     600   

Income tax (expense) benefit

     237        48        35        (285

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

     59        —          122        —     
                                

Net income (loss)

     (426     (139     (71     315   

Net income attributable to noncontrolling interests

     —          (16     —          (28
                                

Net income (loss) attributable to EFH Corp.

   $ (426   $ (155   $ (71   $ 287   
                                

See Notes to Financial Statements.

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Net income (loss)

   $ (426   $ (139   $ (71   $ 315   

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

        

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

     (4     —          —          —     

Cash flow hedges:

        

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

     —          1        —          (16

Derivative value net loss related to hedged transactions recognized during the period and reported in net income (loss) (net of tax benefit of $8, $17, $18 and $32)

     17        32        36        58   
                                

Total effect of cash flow hedges

     17        33        36        42   
                                

Total adjustments to net income (loss)

     13        33        36        42   
                                

Comprehensive income (loss)

     (413     (106     (35     357   

Comprehensive income attributable to noncontrolling interests

     —          (16     —          (28
                                

Comprehensive income (loss) attributable to EFH Corp.

   $ (413   $ (122   $ (35   $ 329   
                                

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)

 

     Six Months Ended June 30,  
     2010     2009  

Cash flows – operating activities:

    

Net income (loss)

   $ (71   $ 315   

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

    

Depreciation and amortization

     881        1,045   

Deferred income tax expense – net

     3        223   

Impairment of goodwill

     —          90   

Increase of toggle notes in lieu of cash interest (Note 6)

     269        248   

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

     (848     (710

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

     361        (665

Equity in earnings of unconsolidated subsidiaries

     (122     —     

Distributions of earnings from unconsolidated subsidiaries

     87        —     

Net gain on debt exchanges (Note 6)

     (143     —     

Bad debt expense (Note 5)

     59        41   

Stock-based incentive compensation expense

     13        12   

Losses on dedesignated cash flow hedges (interest rate swaps)

     53        84   

Net gain on sale of assets

     (81     —     

Other, net

     1        (3

Changes in operating assets and liabilities:

    

Impact of accounts receivable securitization program (Note 5)

     (383     80   

Margin deposits – net

     25        98   

Deferred advanced metering system revenues

     —          37   

Other operating assets and liabilities

     30        (391
                

Cash provided by operating activities

     134        504   
                

Cash flows – financing activities:

    

Issuances of long-term debt (Note 6)

     500        435   

Repayments and repurchases of long-term debt (Note 6)

     (401     (228

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

     158        —     

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

     (218     205   

Decrease in note payable to unconsolidated subsidiary

     (17     —     

Contributions from noncontrolling interests

     14        32   

Distributions paid to noncontrolling interests

     —          (17

Debt exchange and issuance costs

     (15     (4

Other, net

     18        21   
                

Cash provided by financing activities

     39        444   
                

Cash flows – investing activities:

    

Capital expenditures

     (571     (1,277

Nuclear fuel purchases

     (66     (87

Money market fund redemptions

     —          142   

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

     400        (400

Proceeds from sale of assets

     141        1   

Reduction of letter of credit facility deposited with trustee (Note 6)

     —          115   

Other changes in restricted cash

     (5     14   

Proceeds from sales of environmental allowances and credits

     6        7   

Purchases of environmental allowances and credits

     (10     (14

Proceeds from sales of nuclear decommissioning trust fund securities

     803        2,231   

Investments in nuclear decommissioning trust fund securities

     (811     (2,238

Other, net

     (9     28   
                

Cash used in investing activities

     (122     (1,478
                

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (CONT.)

(Unaudited)

(millions of dollars)

 

Net change in cash and cash equivalents

     51        (530

Effects of deconsolidation of Oncor Holdings

     (29     —     

Cash and cash equivalents – beginning balance

     1,189        1,689   
                

Cash and cash equivalents – ending balance

   $ 1,211      $ 1,159   
                

See Notes to Financial Statements.

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(millions of dollars)

 

     June 30,
2010
    December 31,
2009

(see Note 2)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,211      $ 1,189   

Investment posted with counterparty (Note 11)

     —          425   

Restricted cash (Note 16)

     6        48   

Trade accounts receivable – net (2010 includes $880 in pledged amounts related to a VIE (Notes 3 and 5))

     1,280        1,260   

Inventories

     401        485   

Commodity and other derivative contractual assets (Note 11)

     2,857        2,391   

Accumulated deferred income taxes

     169        5   

Margin deposits related to commodity positions

     173        187   

Other current assets

     76        136   
                

Total current assets

     6,173        6,126   

Restricted cash (Note 16)

     1,135        1,149   

Receivables from unconsolidated subsidiary (Note 14)

     1,270        —     

Investments in unconsolidated subsidiaries (Note 2)

     5,450        44   

Other investments (Note 16)

     628        706   

Property, plant and equipment – net (Note 16)

     20,770        30,108   

Goodwill (Note 4)

     10,252        14,316   

Identifiable intangible assets – net (Note 4)

     2,513        2,876   

Regulatory assets – net

     —          1,959   

Commodity and other derivative contractual assets (Note 11)

     2,132        1,533   

Other noncurrent assets, principally unamortized debt issuance costs

     719        845   
                

Total assets

   $ 51,042      $ 59,662   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term borrowings (2010 includes $158 related to a VIE (Notes 3 and 6))

   $ 893      $ 1,569   

Long-term debt due currently (Note 6)

     253        417   

Trade accounts payable

     724        896   

Net payables due to unconsolidated subsidiary (Note 14)

     218        —     

Commodity and other derivative contractual liabilities (Note 11)

     2,648        2,392   

Margin deposits related to commodity positions

     530        520   

Accrued interest

     457        526   

Other current liabilities

     352        744   
                

Total current liabilities

     6,075        7,064   

Accumulated deferred income taxes

     4,953        6,131   

Investment tax credits

     —          37   

Commodity and other derivative contractual liabilities (Note 11)

     1,336        1,060   

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

     347        —     

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

     36,768        41,440   

Other noncurrent liabilities and deferred credits (Note 16)

     4,771        5,766   
                

Total liabilities

     54,250        61,498   
                

Commitments and Contingencies (Note 7)

    

Equity (Note 8):

    

EFH Corp. shareholders’ equity

     (3,269     (3,247

Noncontrolling interests in subsidiaries

     61        1,411   
                

Total equity

     (3,208     (1,836
                

Total liabilities and equity

   $ 51,042      $ 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 (VIEs) 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 contractual 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 VIEs 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. All acquisitions of outstanding debt for cash, including the notes that had been issued in lieu of cash interest, are presented in the financing activities section of the statement of cash flows. 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 VIEs 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 VIEs 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.

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 does 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:

 

     June 30,
2010
   December 31,
2009

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

   $ 5,450    $ —  

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

     —        44
             

Total investments in unconsolidated subsidiaries

   $ 5,450    $ 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, and the remaining interests were sold in June 2010.

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 registrant), which is engaged in regulated electricity transmission and distribution operations in Texas. Distribution revenues from TCEH represented 37% of total revenues for Oncor Holdings for both the six months ended June 30, 2010 and 2009. Condensed statements of consolidated income of Oncor Holdings for the three and six months ended June 30, 2010 and 2009 are presented below:

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2010     2009     2010     2009  

Operating revenues

   $ 702      $ 653      $ 1,405      $ 1,266   

Operation and maintenance expenses

     (252     (230     (501     (456

Depreciation and amortization

     (164     (132     (331     (258

Taxes other than income taxes

     (93     (90     (187     (187

Other income

     9        10        19        20   

Other deductions

     (2     (4     (3     (8

Interest income

     9        10        19        19   

Interest expense and related charges

     (86     (87     (170     (171
                                

Income before income taxes

     123        130        251        225   

Income tax expense

     (49     (48     (98     (85
                                

Net income

     74        82        153        140   

Net income attributable to noncontrolling interests

     (15     (16     (31     (28
                                

Net income attributable to Oncor Holdings

   $ 59      $ 66      $ 122      $ 112   
                                

 

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Assets and liabilities of Oncor Holdings at June 30, 2010 and December 31, 2009 are presented below:

 

     June 30,
2010
   December 31,
2009
     (millions of dollars)
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 14    $ 29

Restricted cash

     47      47

Trade accounts receivable — net

     282      243

Trade accounts and other receivables from affiliates

     215      188

Income taxes receivable from EFH Corp.

     3      —  

Inventories

     95      92

Accumulated deferred income taxes

     6      10

Prepayments

     82      76

Other current assets

     4      8
             

Total current assets

     748      693

Restricted cash

     16      14

Other investments

     75      72

Property, plant and equipment — net

     9,459      9,174

Goodwill

     4,064      4,064

Note receivable due from TCEH

     199      217

Regulatory assets — net

     1,707      1,959

Other noncurrent assets

     207      51
             

Total assets

   $ 16,475    $ 16,244
             
LIABILITIES      

Current liabilities:

     

Short-term borrowings

   $ 948    $ 616

Long-term debt due currently

     110      108

Trade accounts payable – nonaffiliates

     147      129

Income taxes payable to EFH Corp.

     —        5

Accrued taxes other than income

     80      137

Accrued interest

     102      104

Other current liabilities

     92      106
             

Total current liabilities

     1,479      1,205

Accumulated deferred income taxes

     1,374      1,369

Investment tax credits

     35      37

Long-term debt, less amounts due currently

     4,942      4,996

Other noncurrent liabilities and deferred credits

     1,788      1,879
             

Total liabilities

   $ 9,618    $ 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 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 our existing Comanche Peak nuclear-fueled generation facility 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 June 30, 2010 are as follows:

 

Assets:

     

Liabilities:

  

Cash and cash equivalents

   $ 8   

Short-term borrowings (a)

   $ 158

Accounts receivable (a)

     880   

Trade accounts payable

     3

Property, plant and equipment

     93   

Other current liabilities

     1
            

Other assets, including $2 of current assets

     9      
            

Total assets

   $ 990   

Total liabilities

   $ 162
                

 

(a) As a result of the January 1, 2010 adoption of new accounting guidance related to transfers of financial assets, the balance sheet at June 30, 2010 reflects $880 million of pledged accounts receivable and $158 million of short-term borrowings (see Note 5).

The assets of our consolidated VIEs can only be used to settle the obligations of the VIE, and the creditors of our consolidated VIEs do not have recourse to our general credit.

 

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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 any of our other subsidiaries, (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 Measures 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 by US GAAP) over its activities.

The carrying value of our variable interest in VIEs that we do not consolidate totaled $5.450 billion at June 30, 2010, 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 June 30, 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 change from December 31, 2009 reflects the deconsolidation of Oncor Holdings effective January 1, 2010 due to the adoption of new accounting guidance for consolidation discussed in Note 1, as $4.1 billion of goodwill has been assigned to the Regulated Delivery segment. None of the goodwill is being deducted for tax purposes.

EFH Corp. management continues to evaluate the effect of declining wholesale power prices, largely due to lower natural gas prices, on the carrying value of goodwill related to the Competitive Electric segment. In light of the continuing decline in natural gas prices, this evaluation could result in the recording of a non-cash goodwill impairment charge, possibly in the third quarter 2010.

Identifiable Intangible Assets

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

 

     As of June 30, 2010 (a)    As of December 31, 2009

Identifiable Intangible Asset

   Gross
Carrying
Amount
   Accumulated
Amortization
   Net    Gross
Carrying
Amount
   Accumulated
Amortization
   Net

Retail customer relationship

   $ 463    $ 254    $ 209    $ 463    $ 215    $ 248

Favorable purchase and sales contracts

     700      398      302      700      374      326

Capitalized in-service software

     259      79      180      490      167      323

Environmental allowances and credits

     993      256      737      992      212      780

Land easements

     —        —        —        188      72      116

Mining development costs

     46      11      35      32      5      27
                                         

Total intangible assets subject to amortization

   $ 2,461    $ 998      1,463    $ 2,865    $ 1,045      1,820
                                 

Trade name (not subject to amortization)

           955            955

Mineral interests (not currently subject to amortization)

           95            101
                         

Total intangible assets

         $ 2,513          $ 2,876
                         

 

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

 

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

 

              Three Months Ended June 30,   Six Months Ended June 30,

Identifiable Intangible Asset

  

Income Statement Line

  

Segment

  2010   2009   2010   2009

Retail customer relationship

   Depreciation and amortization    Competitive Electric   $ 19   $ 21   $ 39   $ 43

Favorable purchase and sales contracts

   Operating revenues/fuel, purchased power costs and delivery fees    Competitive Electric     10     32     24     73

Capitalized in-service software

   Depreciation and amortization    All (a)     9     12     17     23

Environmental allowances and credits

   Fuel, purchased power costs and delivery fees    Competitive Electric     22     20     44     41

Land easements

   Depreciation and amortization    Regulated Delivery (a)     —       1     —       2

Mining development costs

   Depreciation and amortization    Competitive Electric     3     —       5     —  
                             

Total amortization expense

        $ 63   $ 86   $ 129   $ 182
                             

 

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

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

   $ 252

2011

     191

2012

     150

2013

     129

2014

     114

 

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5. TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE SECURITIZATION 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.

In June 2010, the accounts receivable securitization program was amended. The amendments, among other things, reduced the maximum funding amount under the program to $350 million from $700 million. Program funding declined from $383 million at December 31, 2009 to $158 million at June 30, 2010. Under the terms of the program, available funding was reduced by $46 million of customer deposits held by the originator because TCEH’s credit ratings were lower than Ba3/BB-. The declines in actual and maximum funding amounts reflected exclusion of receivables under contractual sales agreements.

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. Ongoing 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 $722 million and $463 million at June 30, 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 June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Program fees

   $ 3      $ 3      $ 5      $ 7   

Program fees as a percentage of average funding (annualized)

     4.2     2.9     2.8     3.3

Funding under the program decreased $225 million for the six months ended June 30, 2010 and increased $80 million for the six months ended June 30, 2009.

 

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Activities of TXU Receivables Company were as follows:

 

     Six Months
Ended June 30,
 
     2010     2009  

Cash collections on accounts receivable

   $ 2,921      $ 2,769   

Face amount of new receivables purchased

     (2,955     (2,931

Discount from face amount of purchased receivables

     6        8   

Program fees paid to funding entities

     (5     (7

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

     (1     (1

Increase in subordinated notes payable

     259        82   
                

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

   $ 225      $ (80
                

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 June 30, 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

 

     June 30,
2010 (a)
    December 31,
2009
 

Wholesale and retail trade accounts receivable, including $880 in pledged retail receivables at June 30, 2010

   $ 1,348      $ 1,726   

Undivided interests in retail accounts receivable sold by TXU Receivables Company

     —          (383

Allowance for uncollectible accounts

     (68     (83
                

Trade accounts receivable — reported in balance sheet

   $ 1,280      $ 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 June 30, 2010 and December 31, 2009 included unbilled revenues of $433 million and $546 million, respectively.

Allowance for Uncollectible Accounts Receivable

 

     Six Months Ended June 30,  
     2010     2009  

Allowance for uncollectible accounts receivable as of beginning of period

   $ 81      $ 70   

Increase for bad debt expense

     59        41   

Decrease for account write-offs

     (72     (51

Other

     —          (1
                

Allowance for uncollectible accounts receivable as of end of period

   $ 68      $ 59   
                

 

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6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

At June 30, 2010, outstanding short-term borrowings totaled $893 million, which included $735 million under TCEH credit facilities at a weighted average interest rate of 3.87%, excluding certain customary fees, and $158 million under the accounts receivable securitization 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 June 30, 2010 are presented below. The facilities are all senior secured facilities of TCEH.

 

          At June 30, 2010

Authorized Borrowers and Facility

   Maturity
Date
   Facility
Limit
   Letters of
Credit
   Cash
Borrowings
   Availability

TCEH Revolving Credit Facility (a)

   October 2013    $ 2,700    $ —      $ 735    $ 1,880

TCEH Letter of Credit Facility (b)

   October 2014      1,250      —        1,250      —  
                              

Subtotal TCEH

      $ 3,950    $ —      $ 1,985    $ 1,880
                              

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 $144 million of commitments from Lehman that are only available from the fronting banks and the swingline lender and excludes $85 million of requested cash draws that have not been funded by Lehman. All outstanding borrowings under this facility at June 30, 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 $706 million issued as of June 30, 2010 are supported by the restricted cash, and the remaining letter of credit availability totals $429 million.
(c) Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 490 million MMBtu as of June 30, 2010. As of June 30, 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 June 30, 2010 and December 31, 2009, long-term debt consisted of the following:

 

     June 30,
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   

0.282% Floating Series 2001D-2 due May 1, 2033 (b)

     97        97   

0.370% Floating Taxable Series 2001I due December 1, 2036 (c)

     62        62   

0.282% 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)

     (140     (147

Senior Secured Facilities:

    

3.904% TCEH Initial Term Loan Facility maturing October 10, 2014 (e)(f)(g)

     15,977        16,079   

3.851% TCEH Delayed Draw Term Loan Facility maturing October 10, 2014 (e)(f)

     4,054        4,075   

3.847% TCEH Letter of Credit Facility maturing October 10, 2014 (f)

     1,250        1,250   

0.329% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (h)

     —          —     

Other:

    

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

     2,834        2,944   

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

     1,855        1,913   

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

     2,007        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

     83        153   

Unamortized fair value discount (d)

     (3     (4
                

Total TCEH

   $ 29,499      $ 29,810   
                

 

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     June 30,
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

     48        50   

1.144% 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)

     (10     (11
                

Total EFC Holdings

     98        99   
                

EFH Corp. (parent entity)

    

10.875% Fixed Senior Notes due November 1, 2017

     1,812        1,831   

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

     2,758        2,797   

9.75% Fixed Senior Secured Notes due October 15, 2019

     115        115   

10.000% Fixed Senior Secured Notes due January 15, 2020

     606        —     

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

     983        983   

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

     740        740   

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

     744        744   

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

     71        75   

Unamortized fair value premium related to Building Financing (d)

     16        17   

Capital lease obligations

     7        —     

Unamortized fair value discount (d)

     (569     (599
                

Total EFH Corp.

     7,283        6,703   
                

Intermediate Holding

    

9.75% Fixed Senior Secured Notes due October 15, 2019

     141        141   

Oncor (m) (n)

    

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 (n) (o)

    

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

     37,021        41,857   

Less amount due currently

     (253     (417
                

Total long-term debt

   $ 36,768      $ 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 June 30, 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 June 30, 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 June 30, 2010.
(g) Amount excludes $20 million that is held by EFH Corp. and eliminated in consolidation.
(h) Interest rate in effect at June 30, 2010, excluding a quarterly maintenance fee of $11 million. See “Credit Facilities” above for more information.

 

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(i) Amounts exclude $166 million and $145 million of the TCEH Senior Notes and TCEH Senior Notes, Series B, respectively, that are held by EFH Corp. and Intermediate Holding and eliminated in consolidation.
(j) Amount excludes $55 million that is held by EFH Corp. and eliminated in consolidation.
(k) 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.
(l) 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.
(m) Secured with first priority lien.
(n) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.
(o) 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 $190 million represented principal payments at scheduled maturity dates as well as other repayments totaling $87 million, principally related to capitalized leases. Payments at scheduled amortization or maturity dates included $82 million repaid under the TCEH Initial Term Loan Facility and $21 million repaid under the TCEH Delayed Draw Term Loan Facility. See “2010 Debt Exchanges and Repurchases” below for $460 million principal amount of debt acquired in debt exchanges and repurchases completed in March through June 2010 and $648 million principal amount of debt acquired in debt exchanges and repurchases in July 2010.

Long-term debt increased as a result of EFH Corp. issuing, through the payment-in-kind (PIK) election, $162 million principal amount of its 11.25%/12.00% Senior Toggle Notes due November 2017 (EFH Corp. Toggle Notes) and TCEH issuing, through the PIK election, $110 million principal amount of its 10.50%/11.25% Senior Toggle Notes due November 2016 (TCEH Toggle Notes), in each case, in lieu of making cash interest payments.

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). In various exchange transactions during 2010, EFH Corp. issued an additional $561 million of EFH Corp. 10% Notes (see “2010 Debt Exchanges and Repurchases” below). 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, beginning July 15, 2010, at a fixed rate of 10.00% per annum.

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 an equal and ratable basis with the EFH Corp. 9.75% Senior Secured Notes and EFIH 9.75% 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 guarantees are 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 are structurally subordinated to any existing and future indebtedness and liabilities of EFH Corp.’s subsidiaries that are not guarantors.

 

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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.

Until 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 being redeemed, 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. must 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 private placements 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 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 — Debt exchanges and repurchases completed year-to-date July 2010 resulted in acquisitions of $1.108 billion aggregate principal amount of outstanding EFH Corp. and TCEH debt in exchange for $561 million aggregate principal amount of EFH Corp. 10% Notes due 2020 and $235 million in cash. These transactions are described immediately below.

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 in the first quarter 2010 (reported as other income).

In private transactions completed in April through June 2010, EFH Corp. repurchased $96 million principal amount of EFH Corp. Toggle Notes, $19 million principal amount of EFH Corp. 10.875% Notes, $168 million principal amount of TCEH 10.25% Notes, $8 million principal amount of TCEH Toggle Notes and $20 million principal amount of TCEH’s initial term loans under its Senior Secured Facilities for $211 million in cash plus accrued interest, and also issued an additional $72 million principal amount of EFH Corp. 10% Notes in exchange for $85 million principal amount of EFH Corp. Toggle Notes and $17 million principal amount of TCEH Toggle Notes. These transactions resulted in debt extinguishment gains totaling $129 million in the second quarter 2010 (reported as other income).

In private transactions completed in July 2010, EFH Corp. repurchased $28 million principal amount of EFH Corp. Toggle Notes and $8 million principal amount of TCEH 10.25% Notes for $24 million in cash plus accrued interest, and also issued an additional $455 million principal amount of EFH Corp. 10% Notes in exchange for $549 million principal amount of EFH Corp. 5.55% Series P Senior Notes (EFH Corp. 5.55% Notes), $25 million principal amount of EFH Corp. Toggle Notes, $25 million principal amount of EFH Corp. 10.875% Notes and $13 million principal amount of TCEH 10.25% Notes. These transactions resulted in debt extinguishment gains totaling $93 million.

 

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In connection with the transactions involving the EFH Corp. 5.55% Notes in July 2010, the holder of a majority of the outstanding aggregate principal amount of the EFH Corp. 5.55% Notes gave its consent to certain amendments to the indenture that governs the EFH Corp. 5.55% Notes. As a result of the consent, EFH Corp. and The Bank of New York Mellon, as trustee under the indenture, amended and supplemented the indenture. The amendments to the indenture, among other things, modified or eliminated substantially all of the restrictive covenants contained in the indenture, modified or eliminated certain events of default, modified covenants regarding mergers and consolidations and modified or eliminated certain other provisions of the indenture, including the limitation on the incurrence of secured indebtedness.

The EFH Corp. Toggle and 10.875% Notes acquired in the transactions described above have been cancelled, and the TCEH notes and initial term loans under the TCEH Senior Secured Facilities acquired are held as an investment by EFH Corp.

July 2010 Debt Exchange Offers — In July 2010, Intermediate Holding and EFIH Finance, a wholly-owned subsidiary of Intermediate Holding, (collectively, the Offerors) commenced offers to exchange outstanding EFH Corp. Toggle Notes and EFH Corp. 10.875% Notes (collectively, the Exchange Notes) for up to $2.18 billion aggregate principal amount of new 10.000% senior secured notes due 2020 (new senior secured notes) to be issued by the Offerors and an aggregate of up to $500 million in cash, subject to certain conditions. The purpose of the exchange offers is to reduce the outstanding principal amount and extend the weighted average maturity of the long-term debt of EFH Corp. and its subsidiaries.

Concurrent with the exchange offers, EFH Corp. solicited consents from holders of the Exchange Notes to certain proposed amendments to the indenture that governs the Exchange Notes. The proposed amendments would eliminate substantially all of the restrictive covenants in the indenture, eliminate certain events of default, modify the covenant regarding mergers and consolidations, and modify or eliminate certain other provisions.

EFH Corp. has been advised by the exchange agent for the exchange offers that, as of 5:00 p.m., New York City time, on July 29, 2010, consents were delivered with respect to $4.47 billion aggregate principal amount of outstanding Exchange Notes, representing approximately 99.5% of the outstanding Exchange Notes. As a result, EFH Corp. received the requisite consents to adopt, and executed a supplemental indenture to effectuate, the proposed amendments. This supplemental indenture to the indenture related to the Exchange Notes will not become operative until the exchange offers are complete.

The consummation of the exchange offers is conditioned, among other things, on at least a majority of the outstanding aggregate principal amount of Exchange Notes being validly tendered (and not validly withdrawn) at or prior to midnight, New York City time, on August 12, 2010. Subject to applicable law, the Offerors have the right to amend any of the exchange offers or the consent solicitation at any time and for any reason and to terminate or withdraw any of the exchange offers and consent solicitation if any of the applicable conditions are not satisfied.

The Offerors filed a registration statement on Form S-4 (Registration Statement) relating to the exchange offers and the consent solicitation with the SEC in July 2010. The Registration Statement has not yet become effective, and the new senior secured notes may not be issued, nor may the exchange offers be completed, until such time as the Registration Statement has been declared effective by the SEC and is not subject to a stop order or any proceedings for that purpose. There is no assurance that the exchange offers will be completed or that they will be completed on the contemplated terms and conditions.

 

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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 June 30, 2010 is provided in the long-term debt table and in the discussion of short-term borrowings above and reflects LIBOR-based borrowings. These borrowings totaled $22.016 billion at June 30, 2010, excluding $20 million held by EFH Corp. as a result of debt repurchases.

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

 

   

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

 

   

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

In addition, the amended facilities permit TCEH to, among other things:

 

   

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

 

   

upon making an offer to all lenders within a particular series, agree with lenders of that series to extend the maturity of their term loans or extend or refinance their revolving credit commitments under the TCEH Senior Secured Facilities, and pay increased interest rates or otherwise modify the terms of their loans or revolving commitments in connection with such an extension, and

 

   

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

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 ($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 ($10 million quarterly), 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 10.25% Notes bear interest that is payable 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 that is payable 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. 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) had a total principal amount at June 30, 2010 of $6.696 billion and 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 must offer to repurchase the TCEH Senior Notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

EFH Corp. Senior Notes — The indebtedness under EFH Corp.’s 10.875% Notes bear interest that is payable 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. 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) had a total principal amount at June 30, 2010 of $4.570 billion and are fully and unconditionally guaranteed on a joint and several unsecured basis by EFC Holdings and Intermediate Holding.

Until 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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TCEH Interest Rate Swap Transactions As of June 30, 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 have been entered into in 2010.

As of June 30, 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 $16.30 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%. These transactions include swaps entered into in the six months ended June 30, 2010 related to an aggregate $2.55 billion principal amount of senior secured term loans of TCEH and reflect the expiration of swaps in the six months ended June 30, 2010 related to an aggregate $2.50 billion principal amount of senior secured term loans of TCEH.

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 $254 million and $361 million in net losses in the three and six months ended June 30, 2010 and $460 million and $665 million in net gains in the three and six months ended June 30, 2009. The cumulative unrealized mark-to-market net liability related to the swaps totaled $1.574 billion at June 30, 2010, of which $140 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 that expired in March 2010.

 

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 June 30, 2010, the aggregate maximum amount of residual values guaranteed was $13 million with an estimated residual recovery of $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.

 

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Letters of Credit

At June 30, 2010, TCEH had outstanding letters of credit under its credit facilities totaling $706 million as follows:

 

   

$318 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

 

   

$96 million for miscellaneous credit support requirements.

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. After conducting the hearing in June 2010, the court in July issued its order rejecting the remaining plaintiff’s claims and upholding the TCEQ’s issuance of the permit. We believe the Oak Grove air permit granted by the TCEQ was issued in accordance with applicable law. There can be no assurance that the outcome of these matters will not adversely impact the Oak Grove project.

 

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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 Holdings’ general partner as parties to the suit. The lawsuit made various claims concerning the operation of the Sandow Unit 4 generation facility and the related Three Oaks lignite mine, including claims for breach of contract, breach of fiduciary duty, fraud, tortious interference, civil conspiracy and conversion. The plaintiff requested money damages of no less than $500 million, declaratory judgment, rescission and other forms of equitable relief. In May 2010, the trial court granted a summary judgment dismissing substantially all of Alcoa’s claims other than its breach of contract claims against Luminant Generation and Luminant Mining. On the breach of contract claims against Luminant Generation relating to the Sandow Unit 4 generation facility, a jury rendered a verdict in Luminant Generation’s favor in June 2010. The jury awarded no damages to Alcoa and awarded $10 million in damages to Luminant Generation. In June 2010, the judge presiding in the case ruled in Luminant Mining’s favor on the claims against it, awarding no damages to Alcoa and awarding nearly $2 million in damages to Luminant Mining. As a result, the lawsuit was concluded favorably to Luminant, subject to any appeals. We cannot predict whether Alcoa will file an appeal with respect to the jury’s verdict or the court’s ruling. If such appeals are filed, we intend to vigorously defend the appeals.

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.

Sandow Power Company LLC (Sandow Power), a subsidiary of TCEH, is a party to a federal consent decree (the Consent Decree) with, among others, the US Department of Justice (DOJ) and certain private plaintiffs related to Sandow Power’s Sandow Unit 5 lignite-fueled generation facility. Between December 3, 2009 and March 31, 2010, Sandow Power submitted several force majeure claims to the DOJ regarding deviations from emissions limits at Sandow Unit 5 resulting from force majeure events, as that term is defined in the Consent Decree. In June 2010, Sandow Power and the DOJ agreed to extend, to August 31, 2010, the DOJ’s deadline to respond to these force majeure claims. We anticipate that this extension period will be used to pursue a negotiated resolution of the force majeure claims. We believe that a negotiated resolution of the force majeure claims between Sandow Power, the DOJ and the private plaintiffs, if reached, would likely involve a payment that is immaterial to the company, but in excess of the $100,000 disclosure threshold applicable to such matters.

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.

 

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8. EQUITY

Dividend Restrictions

The indentures governing the EFH Corp. Senior Notes and EFH Corp. 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 9.75% Notes generally restricts Intermediate Holding from making any cash distribution to EFH Corp. for the ultimate purpose of making a cash distribution on our common stock 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 9.75% Notes, the term “consolidated leverage ratio” is defined as the ratio of Intermediate Holding’s consolidated total indebtedness (as defined in the indenture) to Intermediate Holding’s 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 on our common stock 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 June 30, 2010, EFH Corp. demand notes payable to TCEH totaled $1.631 billion, of which $668 million is related to principal and interest payments. Such principal and interest amounts are guaranteed by EFC Holdings and Intermediate Holding on a pari passu basis with their guarantees of the EFH Corp. Senior Notes; the remaining balance of the demand notes is not guaranteed.

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.

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 June 30, 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.

 

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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 six months ended June 30, 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 loss

     —        —          (71     —          —          (71

Effects of EFH Corp. stock-based incentive compensation plans

     —        14        —          —          —          14   

Net effects of cash flow hedges

     —        —          —          36        —          36   

Effects of deconsolidation of Oncor Holdings

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

Investment by noncontrolling interests

     —        —          —          —          14        14   

Stock repurchases

     —        (1     —          —          —          (1

Other

     —        —          —          —          (1     (1
                                               

Balance at June 30, 2010

   $ 2    $ 7,927      $ (10,925   $ (273   $ 61      $ (3,208
                                               

 

(a) Authorized shares totaled 2,000,000,000 as of June 30, 2010. Outstanding shares totaled 1,668,680,542 and 1,668,065,133 as of June 30, 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 June 30, 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

   $ 992    $ 3,447    $ 425    $ 17    $ 4,881

Interest rate swaps

     —        108      —        —        108

Nuclear decommissioning trust – equity securities (c)

     149      98      —        —        247

Nuclear decommissioning trust – debt securities (c)

     —        222      —        —        222
                                  

Total assets

   $ 1,141    $ 3,875    $ 425    $ 17    $ 5,458
                                  

Liabilities:

              

Commodity contracts

   $ 1,150    $ 850    $ 256    $ 17    $ 2,273

Interest rate swaps

     —        1,711      —        —        1,711
                                  

Total liabilities

   $ 1,150    $ 2,561    $ 256    $ 17    $ 3,984
                                  

 

(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 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.

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 and six months ended June 30, 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 and six months ended June 30, 2010 and 2009:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Balance at beginning of period

   $ 156      $ (78   $ 81      $ (72

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

        

Included in net income (loss)

     14        (1     65        16   

Included in other comprehensive income (loss)

     —          1        —          (25

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

     13        7        31        (10

Transfers into Level 3 (c)

     —          —          —          —     

Transfers out of Level 3 (c)

     (14     (1     (8     19   
                                

Balance at end of period

   $ 169      $ (72   $ 169      $ (72
                                

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

   $ 21      $ 2      $ 75      $ 16   

 

(a) Substantially all changes in values of commodity contracts are reported in the income statement in net gain (loss) from commodity hedging and trading activities.
(b) Settlements represent reversals of unrealized mark-to-market valuations of these positions previously recognized in net income. Purchases and issuances reflect option premiums paid or received.
(c) Includes transfers due to changes in the observability of significant inputs. 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.

 

10. FAIR VALUE OF NONDERIVATIVE FINANCIAL INSTRUMENTS

The carrying amounts and related estimated fair values of significant nonderivative financial instruments at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30, 2010    December 31, 2009
     Carrying
Amount
   Fair
Value (a)
   Carrying
Amount
   Fair
Value (a)

On balance sheet liabilities:

           

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

           

TCEH, EFH Corp., and other

   $ 36,931    $ 26,740    $ 36,600    $ 29,115

Oncor (c)

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

Total

   $ 36,931    $ 26,740    $ 41,704    $ 34,759

Off balance sheet liabilities:

           

Financial guarantees

   $ —      $ 5    $ —      $ 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

Strategic Use of Derivatives

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 commodity 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.

Financial Statement Effects of Derivatives

Substantially all commodity and other derivative contractual assets and liabilities arise from mark-to-market accounting consistent with accounting standards related to derivative instruments and hedging activities. The following tables provide detail of commodity and other derivative contractual assets and liabilities as reported in the balance sheets at June 30, 2010 and December 31, 2009:

 

     June 30, 2010        
     Derivative assets    Derivative liabilities        
     Commodity
contracts
    Interest rate
swaps
   Commodity
contracts
    Interest rate
swaps
    Total  

Current assets

   $ 2,740      $ 108    $ 9      $ —        $ 2,857   

Noncurrent assets

     2,129        —        3        —          2,132   

Current liabilities

     (3     —        (1,908     (737     (2,648

Noncurrent liabilities

     (2     —        (360     (974     (1,336
                                       

Net assets (liabilities)

   $ 4,864      $ 108    $ (2,256   $ (1,711   $ 1,005   
                                       

 

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     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 June 30, 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 $367 million and $358 million in net liabilities at June 30, 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 June 30,     Six Months Ended June 30,

Derivative (Income statement presentation)

   2010     2009     2010     2009

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

   $ 73      $ (265   $ 1,276      $ 890

Interest rate swaps (Interest expense and related charges)

     (422     288        (698     333
                              

Net gain (loss)

   $ (349   $ 23      $ 578      $ 1,223
                              

 

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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 and six months ended June 30, 2010 and 2009:

 

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

Derivative

   Three  Months
Ended

June 30, 2010
   Six  Months
Ended
June 30, 2010
  

Income statement presentation of loss reclassified

from accumulated OCI into income

(effective portion)

   Three  Months
Ended

June 30, 2010
    Six  Months
Ended
June 30, 2010
 

Interest rate swaps

   $ —      $ —      Interest expense and related charges    $ (24   $ (53

Commodity contracts

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

Total

   $ —      $ —         $ (25   $ (54
                                 

 

     Amount of gain (loss)
recognized in  OCI

(effective portion)
   

Income statement presentation of loss reclassified

from accumulated OCI into income

(effective portion)

            

Derivative

   Three  Months
Ended

June 30, 2009
   Six  Months
Ended
June 30, 2009
       Three  Months
Ended

June 30, 2009
    Six  Months
Ended
June 30, 2009
 

Interest rate swaps

   $ —      $ —        Interest expense and related charges    $ (44   $ (84

Commodity contracts

     1      (25   Fuel, purchased power costs and delivery fees      (4     (4
                      
        Operating revenues      (1     (2
                        

Total

   $ 1    $ (25      $ (49   $ (90
                                  

There were no transactions designated as cash flow hedges during the three and six months ended June 30, 2010. There were no ineffectiveness net gains or losses related to transactions designated as cash flow hedges in the three and six months ended June 30, 2009.

Accumulated other comprehensive income related to cash flow hedges at June 30, 2010 and December 31, 2009 totaled $92 million and $128 million in net losses (after-tax), respectively, substantially all of which relates to interest rate swaps. We expect that $35 million of net losses related to cash flow hedges included in accumulated other comprehensive income as of June 30, 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 June 30, 2010 and December 31, 2009:

 

     June 30, 2010    December 31, 2009     

Derivative type

   Notional Volume   

Unit of Measure

Interest rate swaps:

        

Floating/fixed

   $ 18,000    $ 18,000    Million US dollars

Basis

   $ 16,300    $ 16,250    Million US dollars

Natural gas:

        

Long-term hedge forward sales and purchases (a)

     2,946      3,402    Million MMBtu

Locational basis swaps

     996      1,010    Million MMBtu

All other

     1,431      1,433    Million MMBtu

Electricity

     178,873      198,230    GWh

Coal

     5      6    Million tons

Fuel oil

     130      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, was 1.4 billion MMBtu and 1.6 billion MMBtu as of June 30, 2010 and December 31, 2009, respectively.

Credit Risk-Related Contingent Features of Derivatives

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 June 30, 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 $619 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 $109 million and $152 million as of June 30, 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 June 30, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $23 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 June 30, 2010 and December 31, 2009, the fair value of derivative liabilities subject to such cross-default provisions, largely related to interest rate swaps, totaled $2.032 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 June 30, 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 June 30, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $1.102 billion 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.

 

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As discussed immediately above, the aggregate fair values of liabilities under derivative agreements with credit risk-related contingent features, including cross-default provisions, totaled $2.651 billion and $2.169 billion at June 30, 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.

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 Related to Derivatives

TCEH has significant concentrations of credit risk with the counterparties to its derivative contracts. As of June 30, 2010, total credit risk exposure to all counterparties related to derivative contracts totaled $5.1 billion (including associated accounts receivable). The net exposure to those counterparties totaled $1.9 billion after taking into effect master netting arrangements, setoff provisions and collateral. The net exposure, assuming setoff provisions in the event of default across all EFH Corp. consolidated subsidiaries, totaled $1.4 billion as of June 30, 2010. As of June 30, 2010, the credit risk exposure to the banking and financial sector represented 93% of the total credit risk exposure, a significant amount of which is related to the long-term hedging program. As of June 30, 2010, the largest net exposure to a single counterparty totaled approximately $750 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 and six months ended June 30, 2010 and 2009 are comprised of the following:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Components of net pension costs:

        

Service cost

   $ 10      $ 9      $ 21      $ 18   

Interest cost

     39        39        78        78   

Expected return on assets

     (39     (41     (79     (83

Amortization of prior service cost

     —          —          —          —     

Amortization of net loss

     13        2        26        4   
                                

Net pension costs

     23        9        46        17   
                                

Components of net OPEB costs:

        

Service cost

     3        3        6        6   

Interest cost

     15        15        30        30   

Expected return on assets

     (3     (3     (6     (6

Amortization of prior service cost

     —          —          —          —     

Amortization of net loss

     5        3        10        6   
                                

Net OPEB costs

     20        18        40        36   
                                

Total net pension and OPEB costs

     43        27        86        53   

Less amounts expensed by Oncor

     (9     —          (18     —     

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

     (21     (17     (42     (33
                                

Amount recognized as expense by EFH Corp. and consolidated subsidiaries

   $ 13      $ 10      $ 26      $ 20   
                                

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 $14 million and $12 million, respectively, in the first half of 2010, including $22 million contributed by Oncor. We expect to make additional contributions of $31 million and $12 million, respectively, in the remainder of 2010, including $37 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 June 30, 2010 and 2009, and $18 million for both the six months ended June 30, 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. Goldman is also acting as a dealer manager and solicitation agent in the ongoing debt exchange offers launched in July 2010 as discussed in Note 6. For its services in connection with the exchange offers and related consent solicitation, we have agreed to pay Goldman an exchange agent fee of up to $5.5 million and an incentive fee of up to $3 million that will be determined at the end of the exchange offers depending on the results of the exchange.

 

   

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’s retail operations incur electricity delivery fees charged by Oncor, which totaled $257 million and $521 million for the three and six months ended June 30, 2010, respectively. The fees are based on rates regulated by the PUCT that apply to all REPs. The balance sheet at June 30, 2010 reflects amounts due currently to Oncor of $177 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 $237 million ($38 million current portion included in net payables due to unconsolidated subsidiary) at June 30, 2010.

 

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TCEH reimburses Oncor for interest expense on Oncor’s bankruptcy-remote financing subsidiary’s securitization bonds. This interest expense totaled $9 million and $19 million for the three and six months ended June 30, 2010, respectively.

 

   

A subsidiary of EFH Corp. charges Oncor for financial and other administrative services at cost, which totaled $10 million and $17 million for the three and six months ended June 30, 2010, respectively.

 

   

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 June 30, 2010, the excess of the trust fund balance over the decommissioning liability resulted in a payable to Oncor totaling $148 million included in noncurrent payables to unconsolidated subsidiary in the balance sheet.

The intercompany receivable/payable with Oncor has changed from a receivable of $85 million on January 1, 2010 to a payable of $148 million on June 30, 2010 due to a new decommissioning cost estimate completed in the second quarter 2010 that resulted in a decline of the liability. The new cost estimate was completed in accordance with regulatory requirements to perform a cost estimate every five years. The lower estimated liability was driven by lower cost escalation assumptions in the new estimate. (Also see Note 16 under “Asset Retirement Obligations.”)

 

   

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 June 30, 2010, the amount due to Oncor Holdings totaled $3 million and is included in 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 June 30, 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, at June 30, 2010, the balance sheet of EFH Corp. reflects such unfunded liabilities and a corresponding receivable from Oncor in the amount of $1.270 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.

 

   

Oncor and Texas Holdings agreed to the terms of a stipulation with major interested parties to resolve all outstanding issues in the PUCT review related to the Merger. As part of this stipulation, TCEH would be required to post a letter of credit in an amount equal to $170 million to secure its payment obligations to Oncor if two or more rating agencies downgrade Oncor’s credit ratings below investment grade.

 

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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, 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 June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Operating revenues:

        

Competitive Electric

   $ 1,993      $ 1,945      $ 3,992      $ 3,711   

Regulated Delivery

     —          653        —          1,266   

Corporate and Other

     —          6        —          13   

Eliminations

       (262     —          (509
                                

Consolidated

   $ 1,993      $ 2,342      $ 3,992      $ 4,481   
                                

Affiliated revenues included in operating revenues:

        

Competitive Electric

   $ —        $ 1      $ —        $ 3   

Regulated Delivery

     —          257        —          496   

Corporate and Other

     —          4        —          10   

Eliminations

     —          (262     —          (509
                                

Consolidated

   $ —        $ —        $ —        $ —     
                                

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

        

Regulated Delivery

   $ 59      $ —        $ 122      $ —     
                                

Net income (loss):

        

Competitive Electric

   $ (427   $ (78   $ 5      $ 479   

Regulated Delivery

     59        82        122        140   

Corporate and Other

     (58     (143     (198     (304
                                

Consolidated

   $ (426   $ (139   $ (71   $ 315   
                                

 

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16. SUPPLEMENTARY FINANCIAL INFORMATION

Regulated Versus Unregulated Operations

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Operating revenues

        

Regulated

   $ —        $ 653      $ —        $ 1,266   

Unregulated

     1,993        1,951        3,992        3,724   

Intercompany sales eliminations – regulated

     —          (257     —          (496

Intercompany sales eliminations – unregulated

     —          (5     —          (13
                                

Total operating revenues

     1,993        2,342        3,992        4,481   

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

     (1,074     (700     (2,121     (1,301

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

     67        (248     1,280        880   

Operating costs – regulated

     —          (221     —          (441

Operating costs – unregulated

     (229     (174     (426     (342

Depreciation and amortization – regulated

     —          (132     —          (258

Depreciation and amortization – unregulated

     (350     (291     (692     (572

Selling, general and administrative expenses – regulated

     —          (44     —          (88

Selling, general and administrative expenses – unregulated

     (185     (226     (373     (428

Franchise and revenue-based taxes – regulated

     —          (58     —          (118

Franchise and revenue-based taxes – unregulated

     (26     (21     (49     (47

Impairment of goodwill

     —          —          —          (90

Other income

     211        13        244        26   

Other deductions

     (7     (7     (18     (18

Interest income

     —          11        9        12   

Interest expense and other charges

     (1,122     (431     (2,074     (1,096
                                

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

   $ (722   $ (187   $ (228   $ 600   
                                

 

 

(a) Includes unregulated cost of fuel consumed of $325 million and $298 million for the three months ended June 30, 2010 and 2009, respectively, and $680 million and $582 million for the six months ended June 30, 2010 and 2009, respectively. The balance represents energy purchased for resale and delivery fees net of intercompany eliminations.

 

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Other Income and Deductions

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2010    2009    2010    2009

Other income:

           

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

   $ —      $ 10    $ —      $ 20

Debt extinguishment gain (Note 6)

     129      —        143      —  

Gain on sale of interest in natural gas gathering pipeline business (a)

     30      —        37      —  

Gain on sale of land/water rights assets resulting from purchase accounting

     44      —        44      —  

Sales tax refund

     —        —        5      —  

Mineral rights royalty income

     —        1      1      2

Other

     8      2      14      4
                           

Total other income

   $ 211    $ 13    $ 244    $ 26
                           

Other deductions:

           

Net charges related to cancelled development of generation facilities

   $ 1    $ 1    $ 2    $ 2

Severance charges

     —        1      2      7

Ongoing pension and OPEB expense related to discontinued businesses

     2      —        5      —  

Other

     4      5      9      9
                           

Total other deductions

   $ 7    $ 7    $ 18    $ 18
                           

 

 

(a) The six months ended June 30, 2010 amount includes adjustments totaling $12 million associated with the sale of a controlling interest in 2009 that arose as a result of completion of fair value determination related to the respective parties’ investment balance and a gain totaling $25 million related to the sale of remaining interests in June 2010.

Interest Expense and Related Charges

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

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

   $ 808      $ 873      $ 1,602      $ 1,745   

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

     254        (460     361        (665

Amortization of interest rate swap losses at dedesignation of hedge accounting

     24        44        53        84   

Amortization of fair value debt discounts resulting from purchase accounting

     19        20        38        39   

Amortization of debt issuance costs and discounts

     33        35        67        69   

Capitalized interest

     (16     (81     (47     (176
                                

Total interest expense and related charges

   $ 1,122      $ 431      $ 2,074      $ 1,096   
                                

Restricted Cash

 

     At June 30, 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

     6      —        1      —  

Amounts related to securitization (transition) bonds

     —        —        47      14
                           

Total restricted cash

   $ 6    $ 1,135    $ 48    $ 1,149
                           

 

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Inventories by Major Category

 

     June 30,
2010
   December 31,
2009

Materials and supplies (a)

   $ 162    $ 248

Fuel stock

     205      204

Natural gas in storage

     34      33
             

Total inventories

   $ 401    $ 485
             

 

 

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

Other Investments

 

     June 30,
2010
   December 31,
2009

Nuclear decommissioning trust

   $ 469    $ 475

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

     115      184

Land

     41      43

Miscellaneous other

     3      4
             

Total investments

   $ 628    $ 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:

 

     June 30, 2010
     Cost (a)    Unrealized gain    Unrealized loss     Fair market value

Debt securities (b)

   $ 216    $ 8    $ (2   $ 222

Equity securities (c)

     203      67      (23     247
                            

Total

   $ 419    $ 75    $ (25   $ 469
                            
     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 4.41% and 4.44% and an average maturity of 7.9 years and 7.8 years at June 30, 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 June 30, 2010 mature as follows: $81 million in one to five years, $37 million in five to ten years and $104 million after ten years.

 

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Table of Contents

Property, Plant and Equipment

As of June 30, 2010 and December 31, 2009, property, plant and equipment of $20.8 billion and $30.1 billion, respectively, is stated net of accumulated depreciation and amortization of $3.5 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 six months ended June 30, 2010:

 

Asset retirement liability at January 1, 2010

   $ 948   

Additions:

  

Accretion

     36   

Reductions:

  

Payments, essentially all mining reclamation

     (20

Adjustment for new cost estimate (a)

     (498
        

Asset retirement liability at June 30, 2010

     466   

Less amounts due currently

     (42
        

Noncurrent asset retirement liability at June 30, 2010

   $ 424   
        

 

(a) Essentially all of the adjustment relates to the nuclear decommissioning liability, which resulted from a new cost estimate completed in the second quarter 2010. In accordance with regulatory requirements, a new cost estimate is completed every five years. A decline in the liability was driven by lower cost escalation assumptions in the new estimate. The reduction in the liability was offset in part by a reduction in the carrying value of the nuclear facility with the balance offset by an increase in the noncurrent liability to Oncor, which in turn resulted in a regulatory liability on Oncor’s balance sheet. (Also see Note 14.)

 

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Table of Contents

Other Noncurrent Liabilities and Deferred Credits

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

 

     June 30,
2010
   December 31,
2009

Uncertain tax positions (including accrued interest)

   $ 1,958    $ 1,999

Retirement plan and other employee benefits

     1,658      1,711

Asset retirement obligations

     424      948

Unfavorable purchase and sales contracts

     687      700

Liabilities related to subsidiary tax sharing agreement (a)

     —        321

Other

     44      87
             

Total other noncurrent liabilities and deferred credits

   $ 4,771    $ 5,766
             

 

 

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

No recent events have occurred that would cause us to materially adjust the total amount of liabilities recorded related to uncertain tax positions, although the amount could change materially within the next 12 months if sufficient progress is made on matters in appeals with the IRS (see Note 8 to Financial Statements in the 2009 Form 10-K).

Unfavorable Purchase and Sales Contracts — The amortization of unfavorable purchase and sales contracts totaled $6 million and $7 million in the three months ended June 30, 2010 and 2009, respectively and $13 and $14 million in the six months ended June 30, 2010 and 2009, respectively. 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

 

     Six Months Ended June 30,  
     2010     2009  

Cash payments (receipts) related to:

    

Interest paid (a)

   $ 1,289      $ 1,513   

Capitalized interest

     (47     (176
                

Interest paid (net of capitalized interest) (a)

     1,242        1,337   

Income taxes

     52        (45

Noncash investing and financing activities:

    

Noncash construction expenditures (b)

     51        175   

Capital leases

     9        15   

 

 

(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, November 2009 and May 2010, EFH Corp. issued an additional $150 million, $159 million and $162 million, respectively, of the EFH Corp. Toggle Notes in payment of accrued interest. 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 the first half of 2010, EFH Corp. issued an additional $106 million of the EFH Corp. 10% Notes in exchange for certain outstanding debt securities. The EFH Corp. Senior Notes and EFH Corp. 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 EFH Corp. Senior Secured Notes (collectively, the Non-Guarantors). The indentures governing the EFH Corp. Senior Notes and EFH Corp. 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 of EFH Corp. (the Parent/Issuer), the Guarantors and the Non-Guarantors for the three-month and six-month periods ended June 30, 2010 and 2009, the condensed consolidating statements of cash flows of the Parent/Issuer, the Guarantors and the Non-Guarantors for the six-month periods ended June 30, 2010 and 2009 and the consolidating balance sheets as of June 30, 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 $4.57 billion and $4.63 billion principal amount of EFH Corp. Senior Notes and $299 million and $115 million principal amount of the EFH Corp. Senior Secured Notes to the Guarantors as of June 30, 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 dividends from its subsidiaries totaling $2 million and $58 million for the six months ended June 30, 2010 and 2009, respectively.

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Three Months Ended June 30, 2010

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Operating revenues

   $ —        $ —        $ 1,993      $ —        $ 1,993   

Fuel, purchased power costs and delivery fees

     —          —          (1,074     —          (1,074

Net gain from commodity hedging and trading activities

     —          —          67        —          67   

Operating costs

     —          —          (229     —          (229

Depreciation and amortization

     —          —          (350     —          (350

Selling, general and administrative expenses

     (6     —          (179     —          (185

Franchise and revenue-based taxes

     —          —          (26     —          (26

Other income

     66        —          81        64        211   

Other deductions

     —          —          (7     —          (7

Interest income

     47        3        75        (125     —     

Interest expense and related charges

     (273     (152     (965     268        (1,122
                                        

Loss before income taxes and equity in earnings of subsidiaries

     (166     (149     (614     207        (722

Income tax benefit

     56        49        203        (71     237   

Equity in earnings of consolidated subsidiaries

     (375     (406     —          781        —     

Equity in earnings of unconsolidated subsidiaries (net of tax)

     59        59