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EX-99.(C) - TCEH CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99c.htm
EX-32.(B) - SECTION 906 CERTIFICATION - PFO - Energy Future Holdings Corp /TX/dex32b.htm
EX-31.(A) - SECTION 302 CERTIFICATION - PEO - Energy Future Holdings Corp /TX/dex31a.htm
EX-99.(B) - ENERGY FUTURE HOLDINGS CORP. CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99b.htm
EX-32.(A) - SECTION 906 CERTIFICATION - PEO - Energy Future Holdings Corp /TX/dex32a.htm
EX-99.(A) - CONDENSED STATEMENT OF CONSOLIDATED INCOME - Energy Future Holdings Corp /TX/dex99a.htm
EX-99.(D) - EFIH CONSOLIDATED ADJUSTED EBITDA - Energy Future Holdings Corp /TX/dex99d.htm
EX-31.(B) - SECTION 302 CERTIFICATION - PFO - Energy Future Holdings Corp /TX/dex31b.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 SEPTEMBER 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 October 28, 2010, there were 1,671,877,542 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 Nine Months Ended September 30, 2010 and 2009      1   
  Condensed Statements of Consolidated Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2010 and 2009      2   
  Condensed Statements of Consolidated Cash Flows – Nine Months Ended September 30, 2010 and 2009      3   
  Condensed Consolidated Balance Sheets – September 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      61   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      99   
Item 4.   Controls and Procedures      105   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      105   
Item 1A.   Risk Factors      105   
Item 6.   Exhibits      106   
SIGNATURE      109   

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”), EFCH, EFIH, 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 vice versa.

 

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GLOSSARY

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

 

2009 Form 10-K    EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009
Adjusted EBITDA    Adjusted EBITDA means EBITDA adjusted to exclude non-cash items, unusual items and other adjustments allowable under certain of our debt arrangements. See the definition of EBITDA below. Adjusted EBITDA and EBITDA are not recognized terms under GAAP and, thus, are non-GAAP financial measures. We are providing Adjusted EBITDA in this Form 10-Q (see reconciliations 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.
baseload    Refers to the minimum constant level of electricity demand in a system, such as ERCOT, and/or to the electricity generation facilities or capacity normally expected to operate continuously throughout the year to serve such demand, such as our nuclear and lignite/coal-fueled generation units.
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.
EFCH    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).

 

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EFIH    Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings.
EFIH Finance    Refers to EFIH Finance Inc., a direct, wholly-owned subsidiary of EFIH, formed for the sole purpose of serving as co-issuer with EFIH of certain debt securities.
EFIH Notes    Refers collectively to EFIH’s and EFIH Finance’s 9.75% Senior Secured Notes due October 15, 2019 (EFIH 9.75% Notes) and EFIH’s and EFIH Finance’s 10.000% Senior Secured Notes due December 1, 2020 (EFIH 10% Notes).
EPA    US Environmental Protection Agency
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
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.

 

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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.
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
NYMEX    Refers to the New York Mercantile Exchange, a physical commodity futures exchange.
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 EFIH 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

 

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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
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 EFCH 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.
TCEH Senior Secured Second Lien Notes    Refers collectively to TCEH’s 15% Senior Secured Second Lien Notes due April 1, 2021 and TCEH’s 15% Senior Secured Second Lien Notes due April 1, 2021, Series B.
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.

 

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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 Reliability Entity, Inc., 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

 

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PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Operating revenues

   $ 2,607      $ 2,885      $ 6,599      $ 7,366   

Fuel, purchased power costs and delivery fees

     (1,400     (870     (3,521     (2,171

Net gain from commodity hedging and trading activities

     992        123        2,272        1,003   

Operating costs

     (197     (388     (623     (1,171

Depreciation and amortization

     (352     (456     (1,043     (1,286

Selling, general and administrative expenses

     (187     (277     (560     (792

Franchise and revenue-based taxes

     (24     (94     (73     (259

Impairment of goodwill (Note 4)

     (4,100     —          (4,100     (90

Other income (Note 16)

     1,033        45        1,278        71   

Other deductions (Note 16)

     (4     (32     (23     (50

Interest income

     —          18        9        30   

Interest expense and related charges (Note 16)

     (1,018     (1,039     (3,092     (2,136
                                

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

     (2,650     (85     (2,877     515   

Income tax (expense) benefit

     (370     31        (336     (254

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

     118        —          240        —     
                                

Net income (loss)

     (2,902     (54     (2,973     261   

Net income attributable to noncontrolling interests

     —          (26     —          (54
                                

Net income (loss) attributable to EFH Corp.

   $ (2,902   $ (80   $ (2,973   $ 207   
                                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(millions of dollars)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Net income (loss)

   $ (2,902   $ (54   $ (2,973   $ 261   

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

        

Reclassification of pension and other retirement benefit costs (net of tax expense of $8, $— , $8 and $—)

     15        —          15        —     

Cash flow hedges:

        

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

     —          (4     —          (20

Derivative value net loss related to hedged transactions recognized during the period and reported in net income (loss) (net of tax benefit of $7, $21, $25 and $53)

     13        41        49        99   
                                

Total effect of cash flow hedges

     13        37        49        79   
                                

Total adjustments to net income (loss)

     28        37        64        79   
                                

Comprehensive income (loss)

     (2,874     (17     (2,909     340   

Comprehensive income attributable to noncontrolling interests

     —          (26     —          (54
                                

Comprehensive income (loss) attributable to EFH Corp.

   $ (2,874   $ (43   $ (2,909   $ 286   
                                

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)

 

     Nine Months Ended September 30,  
     2010     2009  

Cash flows – operating activities:

    

Net income (loss)

   $ (2,973   $ 261   

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

    

Depreciation and amortization

     1,321        1,598   

Deferred income tax expense – net

     562        152   

Impairment of goodwill (Note 4)

     4,100        90   

Write off of regulatory assets (Note 16)

     —          25   

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

     269        248   

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

     (1,615     (713

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

     542        (527

Losses on dedesignated cash flow hedges (interest rate swaps)

     73        140   

Equity in earnings of unconsolidated subsidiaries

     (240     —     

Distributions of earnings from unconsolidated subsidiaries

     141        —     

Net gain on debt exchanges (Note 6)

     (1,166     —     

Bad debt expense (Note 5)

     88        84   

Stock-based incentive compensation expense

     13        12   

Reversal of use tax accrual

     —          (23

Net gain on sale of assets

     (81     (1

Other, net

     2        (3

Changes in operating assets and liabilities:

    

Impact of accounts receivable securitization program (Note 5)

     (383     284   

Margin deposits – net

     164        260   

Deferred advanced metering system revenues

     —          51   

Other operating assets and liabilities

     149        (195
                

Cash provided by operating activities

     966        1,743   
                

Cash flows – financing activities:

    

Issuances of long-term debt (Note 6)

     500        522   

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

     (1,002     (297

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

     228        —     

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

     (873     200   

Decrease in note payable to unconsolidated subsidiary

     (27     —     

Contributions from noncontrolling interests

     24        42   

Distributions paid to noncontrolling interests

     —          (32

Debt exchange and issuance costs

     (46     (36

Other, net

     29        21   
                

Cash provided by (used in) financing activities

     (1,167     420   
                

Cash flows – investing activities:

    

Capital expenditures

     (709     (1,877

Nuclear fuel purchases

     (84     (157

Money market fund redemptions

     —          142   

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

     400        (400

Proceeds from sale of assets

     141        41   

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

     —          115   

Other changes in restricted cash

     (31     3   

Proceeds from sales of environmental allowances and credits

     7        22   

Purchases of environmental allowances and credits

     (13     (23

Proceeds from sales of nuclear decommissioning trust fund securities

     937        2,972   

Investments in nuclear decommissioning trust fund securities

     (949     (2,983

Other, net

     (6     18   
                

Cash used in investing activities

     (307     (2,127
                

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (CONT.)

(Unaudited)

(millions of dollars)

 

     Nine Months Ended September 30,  
     2010     2009  

Net change in cash and cash equivalents

     (508     36   

Effects of deconsolidation of Oncor Holdings

     (29     —     

Cash and cash equivalents – beginning balance

     1,189        1,689   
                

Cash and cash equivalents – ending balance

   $ 652      $ 1,725   
                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(millions of dollars)

 

     September 30,
2010
    December 31,
2009

(see Note 2)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 652      $ 1,189   

Investment posted with counterparty (Note 11)

     —          425   

Restricted cash (Note 16)

     31        48   

Trade accounts receivable – net (2010 includes $885 in pledged amounts related to a VIE (Notes 3 and 5))

     1,256        1,260   

Inventories

     388        485   

Commodity and other derivative contractual assets (Note 11)

     3,520        2,391   

Accumulated deferred income taxes

     60        5   

Margin deposits related to commodity positions

     196        187   

Other current assets

     66        136   
                

Total current assets

     6,169        6,126   

Restricted cash (Note 16)

     1,135        1,149   

Receivables from unconsolidated subsidiary (Note 14)

     1,270        —     

Investments in unconsolidated subsidiaries (Note 2)

     5,525        44   

Other investments (Note 16)

     667        706   

Property, plant and equipment – net (Note 16)

     20,530        30,108   

Goodwill (Note 4)

     6,152        14,316   

Identifiable intangible assets – net (Note 4)

     2,466        2,876   

Regulatory assets – net

     —          1,959   

Commodity and other derivative contractual assets (Note 11)

     2,553        1,533   

Other noncurrent assets, principally unamortized debt issuance costs

     647        845   
                

Total assets

   $ 47,114      $ 59,662   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term borrowings (2010 includes $228 related to a VIE (Notes 3 and 6))

   $ 308      $ 1,569   

Long-term debt due currently (Note 6)

     252        417   

Trade accounts payable

     647        896   

Payables due to unconsolidated subsidiary (Note 14)

     279        —     

Commodity and other derivative contractual liabilities (Note 11)

     3,065        2,392   

Margin deposits related to commodity positions

     693        520   

Accrued interest

     651        526   

Other current liabilities

     380        744   
                

Total current liabilities

     6,275        7,064   

Accumulated deferred income taxes

     5,317        6,131   

Investment tax credits

     —          37   

Commodity and other derivative contractual liabilities (Note 11)

     1,422        1,060   

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

     372        —     

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

     35,169        41,440   

Other noncurrent liabilities and deferred credits (Note 16)

     4,627        5,766   
                

Total liabilities

     53,182        61,498   
                

Commitments and Contingencies (Note 7)

    

Equity (Note 8):

    

EFH Corp. shareholders’ equity

     (6,139     (3,247

Noncontrolling interests in subsidiaries

     71        1,411   
                

Total equity

     (6,068     (1,836
                

Total liabilities and equity

   $ 47,114      $ 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 as of 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

As of January 1, 2010, we adopted new FASB guidance that requires reconsideration of consolidation conclusions for all VIEs and other entities with which we are involved. 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.

As of January 1, 2010, we adopted new FASB 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. 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:

 

     September 30,
2010
     December 31,
2009
 

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

   $ 5,525       $ —     

Investment in natural gas gathering pipeline business (b)

     —           44   
                 

Total investments in unconsolidated subsidiaries

   $ 5,525       $ 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 38% of total revenues for Oncor Holdings for both the nine months ended September 30, 2010 and 2009. Condensed statements of consolidated income of Oncor Holdings for the three and nine months ended September 30, 2010 and 2009 are presented below:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2010     2009     2010     2009  

Operating revenues

   $ 831      $ 770      $ 2,236      $ 2,037   

Operation and maintenance expenses

     (256     (245     (757     (698

Depreciation and amortization

     (176     (147     (507     (405

Taxes other than income taxes

     (100     (99     (287     (287

Other income

     8        10        28        30   

Other deductions

     (1     (30     (5     (39

Interest income

     9        13        29        32   

Interest expense and related charges

     (87     (85     (259     (258
                                

Income before income taxes

     228        187        478        412   

Income tax expense

     (80     (56     (177     (141
                                

Net income

     148        131        301        271   

Net income attributable to noncontrolling interests

     (30     (26     (61     (54
                                

Net income attributable to Oncor Holdings

   $ 118      $ 105      $ 240      $ 217   
                                

 

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

 

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

Current assets:

     

Cash and cash equivalents

   $ 11       $ 29   

Restricted cash

     63         47   

Trade accounts receivable — net

     291         243   

Trade accounts and other receivables from affiliates

     220         188   

Income taxes receivable from EFH Corp.

     59         —     

Inventories

     94         92   

Accumulated deferred income taxes

     1         10   

Prepayments

     75         76   

Other current assets

     4         8   
                 

Total current assets

     818         693   

Restricted cash

     16         14   

Other investments

     76         72   

Property, plant and equipment — net

     9,529         9,174   

Goodwill

     4,064         4,064   

Note receivable due from TCEH

     189         217   

Regulatory assets — net

     1,652         1,959   

Other noncurrent assets

     238         51   
                 

Total assets

   $ 16,582       $ 16,244   
                 
LIABILITIES      

Current liabilities:

     

Short-term borrowings

   $ 428       $ 616   

Long-term debt due currently

     111         108   

Trade accounts payable – nonaffiliates

     111         129   

Income taxes payable to EFH Corp.

     —           5   

Accrued taxes other than income

     116         137   

Accrued interest

     73         104   

Other current liabilities

     94         106   
                 

Total current liabilities

     933         1,205   

Accumulated deferred income taxes

     1,478         1,369   

Investment tax credits

     34         37   

Long-term debt, less amounts due currently

     5,395         4,996   

Other noncurrent liabilities and deferred credits

     1,775         1,879   
                 

Total liabilities

   $ 9,615       $ 9,486   
                 

 

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Oncor Debt Issue and Exchange

In September 2010, Oncor issued $475 million aggregate principal amount of 5.250% senior secured notes maturing in September 2040. Oncor used the net proceeds of approximately $465 million from the sale of the notes to repay borrowings under its revolving credit facility, including loans under the revolving credit facility made by certain of the initial purchasers or their affiliates, and for general corporate purposes. The notes are secured by a first priority lien equally and ratably with all of Oncor’s other secured indebtedness.

In October 2010, Oncor issued approximately $324.4 million aggregate principal amount of 5.000% senior secured notes due 2017 and approximately $126.3 million aggregate principal amount of 5.750% senior secured notes due 2020 in exchange for an equivalent principal amount of its outstanding 6.375% senior secured notes due 2012 and 5.950% senior secured notes due 2013, respectively, that were validly tendered. Oncor did not receive any cash proceeds from the exchange.

 

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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 CPNPC’s equity interests, respectively (see Note 8).

The carrying amounts and classifications of the assets and liabilities related to our consolidated VIEs as of September 30, 2010 are as follows:

 

Assets:

     

Liabilities:

  

Cash and cash equivalents

   $ 9      

Short-term borrowings (a)

   $ 228   

Accounts receivable (a)

     885      

Trade accounts payable

     4   

Property, plant and equipment

     105      

Other current liabilities

     1   
              

Other assets, including $2 of current assets

     8         
              

Total assets

   $ 1,007      

Total liabilities

   $ 233   
                    

 

(a) As a result of the January 1, 2010 adoption of new accounting guidance related to transfers of financial assets, the balance sheet as of September 30, 2010 reflects $885 million of pledged accounts receivable and $228 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 we 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 both 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 the 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 the 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. Our maximum exposure to loss from our variable interests in VIEs 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

The following table provides the goodwill balances as of September 30, 2010 and the changes in such balances for the nine months ended September 30, 2010. With the deconsolidation of Oncor (including its $4.064 billion goodwill balance) effective January 1, 2010, the amounts below relate only to our competitive business. None of the goodwill is being deducted for tax purposes.

 

As of January 1, 2010:

  

Goodwill before impairment charges

   $ 18,342   

Accumulated impairment charges (a)

     (8,090
        

Balance as of January 1, 2010

     10,252   

Changes – nine months ended September 30, 2010:

  

Impairment charge

     (4,100
        

As of September 30, 2010:

  

Goodwill before impairment charges

     18,342   

Accumulated impairment charges

     (12,190
        

Balance as of September 30, 2010

   $ 6,152   
        

 

(a) Includes $20 million recorded in Corporate and Other results.

Goodwill Impairment

In the third quarter 2010, we recorded a $4.1 billion noncash goodwill impairment charge related to the Competitive Electric segment. The impairment charge reflected the estimated effect of lower wholesale power prices on the enterprise value of the Competitive Electric segment, driven by the sustained decline in forward natural gas prices, as indicated by our cash flow projections and declines in market values of securities of comparable companies.

The calculation of the goodwill impairment involved the following steps: first, we estimated the debt-free enterprise value of our competitive business taking into account future estimated cash flows and current securities values of comparable companies; second, we estimated the fair values of the individual operating assets and liabilities of our competitive business; third, we calculated “implied” goodwill as the excess of the estimated enterprise value over the estimated value of the net operating assets; and finally, we compared the implied goodwill amount to the carrying value of goodwill and recorded an impairment charge for the amount the carrying value of goodwill exceeded implied goodwill.

The impairment determination involved significant assumptions and judgments. The calculations supporting the estimates of the enterprise value of our competitive business and the fair values of certain of its operating assets and liabilities utilized models that take into consideration multiple inputs, including commodity prices, discount rates, debt yields, securities prices of comparable companies and other inputs, assumptions regarding each of which could have a significant effect on valuations. The fair value measurements resulting from these models are classified as non-recurring Level 3 measurements consistent with accounting standards related to the determination of fair value (see Note 9).

The goodwill impairment testing in the third quarter 2010 resulted from current market conditions, and the annual impairment testing required by accounting rules remains scheduled for December 1, 2010. We cannot predict the likelihood or amount of any future impairment.

 

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Identifiable Intangible Assets

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

 

     As of September 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       $ 274       $ 189       $ 463       $ 215       $ 248   

Favorable purchase and sales contracts

     548         247         301         700         374         326   

Capitalized in-service software

     271         88         183         490         167         323   

Environmental allowances and credits

     994         282         712         992         212         780   

Land easements

     —           —           —           188         72         116   

Mining development costs

     47         14         33         32         5         27   
                                                     

Total intangible assets subject to amortization

   $ 2,323       $ 905         1,418       $ 2,865       $ 1,045         1,820   
                                         

Trade name (not subject to amortization)

           955               955   

Mineral interests (not currently subject to amortization)

           93               101   
                             

Total intangible assets

         $ 2,466             $ 2,876   
                             

 

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

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

 

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

Identifiable Intangible Asset

  

Income Statement Line

  

Segment

  2010     2009     2010     2009  

Retail customer relationship

   Depreciation and amortization    Competitive Electric   $ 20      $ 21      $ 59      $ 64   

Favorable purchase and sales contracts

   Operating revenues/fuel, purchased power costs and delivery fees    Competitive Electric     1        18        25        91   

Capitalized in-service software

   Depreciation and amortization    All (a)     9        16        26        39   

Environmental allowances and credits

   Fuel, purchased power costs and delivery fees    Competitive Electric     25        25        69        66   

Land easements

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

Mining development costs

   Depreciation and amortization    Competitive Electric     3        1        8        2   
                                     

Total amortization expense

        $ 58      $ 82      $ 187      $ 264   
                                     

 

(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

     192   

2012

     151   

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 as of December 31, 2009 to $228 million as of September 30, 2010. Under the terms of the program, available funding was reduced by $42 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 $657 million and $463 million as of September 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 September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Program fees

   $ 2      $ 2      $ 7      $ 9   

Program fees as a percentage of average funding (annualized)

     4.8     1.3     3.3     2.4

Funding under the program decreased $155 million for the nine months ended September 30, 2010 and increased $284 million for the nine months ended September 30, 2009.

 

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Activities of TXU Receivables Company were as follows:

 

     Nine Months
Ended September 30,
 
     2010     2009  

Cash collections on accounts receivable

   $ 4,828      $ 4,660   

Face amount of new receivables purchased

     (4,867     (5,165

Discount from face amount of purchased receivables

     9        11   

Program fees paid to funding entities

     (7     (9

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

     (2     (2

Increase in subordinated notes payable

     194        221   
                

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

   $ 155      $ (284
                

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 September 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

 

     September 30,
2010 (a)
    December 31,
2009
 

Wholesale and retail trade accounts receivable, including $885 in pledged retail receivables as of September 30, 2010

   $ 1,328      $ 1,726   

Undivided interests in retail accounts receivable sold by TXU Receivables Company

     —          (383

Allowance for uncollectible accounts

     (72     (83
                

Trade accounts receivable — reported in balance sheet

   $ 1,256      $ 1,260   
                

 

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

Gross trade accounts receivable as of September 30, 2010 and December 31, 2009 included unbilled revenues totaling $351 million and $546 million, respectively.

Allowance for Uncollectible Accounts Receivable

 

     Nine Months Ended September 30,  
     2010     2009  

Allowance for uncollectible accounts receivable as of beginning of period

   $ 81      $ 70   

Increase for bad debt expense

     88        84   

Decrease for account write-offs

     (97     (67

Other

     —          (1
                

Allowance for uncollectible accounts receivable as of end of period

   $ 72      $ 86   
                

 

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6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

As of September 30, 2010, outstanding short-term borrowings totaled $308 million, which included $80 million under TCEH credit facilities at a weighted average interest rate of 3.84%, excluding certain customary fees, and $228 million under the accounts receivable securitization program discussed in Note 5.

As of 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 as of September 30, 2010 are presented below. The facilities are all senior secured facilities of TCEH.

 

            As of September 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       $ —         $ 80       $ 2,620   

TCEH Letter of Credit Facility (b)

     October 2014         1,250         —           1,250         —     
                                      

Subtotal TCEH

      $ 3,950       $ —         $ 1,330       $ 2,620   
                                      

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 $229 million of commitments from Lehman that are only available from the fronting banks and the swingline lender. All outstanding borrowings under this facility as of September 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 $725 million issued as of September 30, 2010 are supported by the restricted cash, and the remaining letter of credit availability totals $410 million.
(c) Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 435 million MMBtu as of September 30, 2010. As of September 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

As of September 30, 2010 and December 31, 2009, long-term debt consisted of the following:

 

     September 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   

0.277% Floating Series 2001D-2 due May 1, 2033 (b)

     97        97   

0.297% Floating Taxable Series 2001I due December 1, 2036 (c)

     62        62   

0.286% 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)

     (136     (147

Senior Secured Facilities:

    

3.828% TCEH Initial Term Loan Facility maturing October 10, 2014 (e)(f)(g)

     15,936        16,079   

3.758% TCEH Delayed Draw Term Loan Facility maturing October 10, 2014 (e)(f)

     4,044        4,075   

3.756% TCEH Letter of Credit Facility maturing October 10, 2014 (f)

     1,250        1,250   

0.250% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (h)

     —          —     

Other:

    

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

     2,813        2,944   

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

     1,850        1,913   

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

     1,992        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

     80        153   

Unamortized fair value discount (d)

     (3     (4
                

Total TCEH

   $ 29,408      $ 29,810   
                

 

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     September 30,
2010
    December 31,
2009
 

EFCH

    

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

     47        50   

1.266% 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 EFCH

     97        99   
                

EFH Corp. (parent entity)

    

10.875% Fixed Senior Notes due November 1, 2017 (k)

     359        1,831   

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

     539        2,797   

9.75% Fixed Senior Secured Notes due October 15, 2019

     115        115   

10.000% Fixed Senior Secured Notes due January 15, 2020

     1,061        —     

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

     434        983   

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

     740        740   

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

     744        744   

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

     68        75   

Unamortized fair value premium related to Building Financing (d)

     15        17   

Capital lease obligations

     5        —     

Unamortized fair value discount (d)

     (485     (599
                

Total EFH Corp.

     3,595        6,703   
                

EFIH

    

9.75% Fixed Senior Secured Notes due October 15, 2019

     141        141   

10.000% Fixed Senior Secured Notes due December 1, 2020

     2,180        —     
                

Total EFIH

     2,321        141   
                

Oncor (n) (o)

    

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 (o) (p)

    

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

     35,421        41,857   

Less amount due currently

     (252     (417
                

Total long-term debt

   $ 35,169      $ 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 as of September 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 as of September 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 as of September 30, 2010.

 

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(g) Amount excludes $20 million that is held by EFH Corp. and eliminated in consolidation.
(h) Interest rate in effect as of September 30, 2010, excluding a quarterly maintenance fee of $11 million. See “Credit Facilities” above for more information.
(i) Amounts exclude $187 million and $150 million of the TCEH Senior Notes and TCEH Senior Notes, Series B, respectively, that are held either by EFH Corp. or EFIH and eliminated in consolidation.
(j) Amount excludes $70 million that is held by EFH Corp. and eliminated in consolidation.
(k) Amounts exclude $1.428 billion and $2.166 billion of 10.875% Notes and Toggle Notes, respectively, that are held by EFIH and eliminated in consolidation.
(l) Amounts exclude $9 million, $6 million and $3 million of the Series P, Series Q and Series R notes, respectively, that are held by EFIH and eliminated in consolidation.
(m) This financing is secured and will be serviced with cash drawn by the beneficiary of a letter of credit.
(n) Secured with first priority lien.
(o) See Notes 1 and 3 for discussion of the deconsolidation of Oncor Holdings effective as of January 1, 2010.
(p) 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 $247 million included $154 million of principal payments at scheduled maturity dates as well as other repayments totaling $93 million principally related to capitalized leases. See “2010 Debt Exchanges, Repurchases and Issuances” below for discussion of $4.722 billion principal amount of debt acquired in debt exchanges and repurchases completed in the nine months ended September 30, 2010 and $913 million principal amount of debt acquired in debt exchanges and repurchases in October 2010.

During the second quarter, EFH Corp. issued, 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.

2010 Debt Exchanges, Repurchases and Issuances — Debt exchanges and repurchases completed year-to-date October 28, 2010 resulted in acquisitions of $5.635 billion aggregate principal amount of outstanding EFH Corp. and TCEH debt with due dates largely 2017 or earlier in exchange for $3.077 billion aggregate principal amount of new debt and $1.042 billion in cash. The new debt issued in exchange transactions consisted of $2.180 billion aggregate principal amount of EFIH 10% Notes due 2020, $561 million aggregate principal amount of EFH Corp. 10% Notes due 2020 and $336 million aggregate principal amount of TCEH 15% Senior Secured Second Lien Notes due 2021. EFH Corp. also issued $500 million principal amount of EFH Corp. 10% Notes due 2020 for cash, and TCEH issued $350 million principal amount of TCEH 15% Senior Secured Second Lien Notes (Series B) due 2021 for cash. A discussion of these transactions, which were private, except as noted, and descriptions of the EFIH 10% Notes, EFH Corp. 10% Notes and TCEH 15% Senior Secured Second Lien Notes are presented below.

 

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Transactions completed in October 2010 were as follows:

 

   

TCEH and TCEH Finance issued $336 million aggregate principal amount of TCEH 15% Senior Secured Second Lien Notes due 2021 in exchange for $423 million aggregate principal amount of TCEH 10.25% Notes (plus accrued interest paid in cash) and $55 million aggregate principal amount of TCEH Toggle Notes (together, the TCEH Senior Notes).

 

   

TCEH and TCEH Finance issued $350 million aggregate principal amount of TCEH 15% Senior Secured Second Lien Notes (Series B) due 2021, and used $290 million of the proceeds to acquire TCEH Senior Notes as described immediately below. The remaining net proceeds totaling $53 million are being held in escrow pending their use for the payment, repayment or prepayment of term loans under the TCEH Senior Secured Facilities and/or the repurchase of outstanding principal amounts of TCEH Senior Notes. If proceeds remain in the escrow account on March 31, 2013, the issuers will be required to use such amounts to offer to repurchase TCEH 15% Senior Secured Second Lien Notes (Series B) due 2021 at a price of 100% of the principal amount thereof, plus accrued interest.

 

   

TCEH repurchased $226 million principal amount of TCEH 10.25% Notes and $200 million principal amount of TCEH Toggle Notes for $290 million in cash using the proceeds from the issuance described immediately above and paid accrued interest from cash on hand.

 

   

EFH Corp. repurchased $9 million principal amount of TCEH Toggle Notes for $5 million in cash.

Transactions completed in the three months ended September 30, 2010 were as follows:

 

   

In a public (registered with the SEC) debt exchange transaction, EFIH and EFIH Finance (together, the Issuers) issued $2.180 billion aggregate principal amount of EFIH 10% Notes due 2020 and paid $500 million in cash, plus accrued interest, in exchange for $2.166 billion aggregate principal amount of EFH Corp. Toggle Notes and $1.428 billion aggregate principal amount of EFH Corp. 10.875% Notes (together, the EFH Corp. Senior Notes).

 

   

EFH Corp. issued $455 million principal amount of EFH Corp. 10% Notes due 2020 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.

 

   

EFH Corp. repurchased $28 million principal amount of EFH Corp. Toggle Notes, $13 million principal amount of TCEH 10.25% Notes and $15 million principal amount of TCEH Toggle Notes for $36 million in cash plus accrued interest.

These transactions resulted in debt extinguishment gains totaling $1.023 billion (reported as other income).

In connection with the registered debt exchange transaction, EFH Corp. received the requisite consents from holders of the EFH Corp. Senior Notes and executed a supplemental indenture to incorporate certain amendments to the indenture that governs the EFH Corp. Senior Notes. These amendments, among other things, eliminate substantially all of the restrictive covenants related to the EFH Corp. Senior Notes, eliminate certain events of default, modify covenants regarding mergers and consolidations, and modify or eliminate certain other provisions.

 

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Transactions completed in the three months ended June 30, 2010 were as follows:

 

   

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.

 

   

EFH Corp. issued $72 million principal amount of EFH Corp. 10% Notes due 2020 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 (reported as other income).

Transactions completed in the three months ended March 31, 2010 were as follows:

 

   

EFH Corp. issued $500 million aggregate principal amount of EFH Corp. 10% Notes due 2020, with the proceeds intended to be used for general corporate purposes including debt exchanges and repurchases.

 

   

EFH Corp. issued $34 million principal amount of EFH Corp. 10% Notes due 2020 in exchange for $20 million principal amount of EFH Corp. Toggle Notes and $27 million principal amount of TCEH Toggle Notes resulting in a debt extinguishment gain of $14 million (reported as other income).

The EFH Corp. notes acquired by EFIH and the TCEH notes and initial term loans under the TCEH Senior Secured Facilities acquired by EFH Corp. are held as an investment, and are eliminated in consolidation. All other securities acquired in the above transactions have been cancelled.

EFIH 10% Notes — The EFIH 10% Notes mature in December 2020, with interest payable in cash semi-annually in arrears on June 1 and December 1, beginning December 1, 2010, at a fixed rate of 10% per annum. The EFIH 10% Notes are secured by EFIH’s pledge of 100% of the membership interests and other investments it owns in Oncor Holdings (such membership interests and other investments, the Collateral). The EFIH 10% Notes are secured on an equal and ratable basis with the EFIH 9.75% Notes and EFIH’s guarantee of the EFH Corp. Senior Secured Notes.

The EFIH 10% Notes are senior obligations of the Issuers and rank equally in right of payment with all existing and future senior indebtedness of the Issuers (including the EFIH 9.75% Notes and EFIH’s guarantees of the EFH Corp. Senior Secured Notes). The EFIH 10% Notes are effectively senior to all unsecured indebtedness of the Issuers, to the extent of the value of the Collateral, and are effectively subordinated to any indebtedness of the Issuers secured by assets of the Issuers other than the Collateral, to the extent of the value of the assets securing such indebtedness. Furthermore, the EFIH 10% Notes are (i) structurally subordinated to all indebtedness and other liabilities of EFIH’s subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries, any of EFIH’s future foreign subsidiaries and any other unrestricted subsidiaries and (ii) senior in right of payment to any future subordinated indebtedness of the Issuers.

The EFIH 10% Notes and the indenture governing such notes restrict the Issuers’ and their respective 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 transactions with affiliates. These covenants are subject to a number of important limitations and exceptions. The notes and the related 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 the 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. Currently, there are no restricted subsidiaries under the notes and the related indenture (other than EFIH Finance, which has no assets). Oncor Holdings, Oncor and their respective subsidiaries are unrestricted subsidiaries under the EFIH 10% Notes and the related indenture and, accordingly, are not subject to any of the restrictive covenants in the notes and the related indenture.

 

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Until December 1, 2013, the Issuers may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 10% Notes from time to time at a redemption price of 110% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest, if any. The Issuers may redeem the EFIH 10% Notes, in whole or in part, at any time prior to December 1, 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. The Issuers may redeem any of the EFIH 10% Notes, in whole or in part, at any time on or after December 1, 2015, at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control (as defined in the indenture), the Issuers may be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any.

EFH Corp. 10% Notes — The EFH Corp. 10% Notes mature in January 2020, with interest payable in cash semi-annually in arrears on January 15 and July 15, beginning July 15, 2010, at a fixed rate of 10% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH. The guarantee from EFIH is secured by the pledge of the Collateral. The guarantee from EFCH is not secured. EFIH’s guarantee of the EFH Corp. 10% Notes is secured by the Collateral on an equal and ratable basis with the EFIH Notes and EFIH’s guarantee of the EFH Corp. 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 EFIH is effectively senior to all unsecured indebtedness of EFIH 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.

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 related 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. 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. 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.

 

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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.

TCEH 15% Senior Secured Second Lien NotesThe TCEH 15% Senior Secured Second Lien Notes and the TCEH 15% Senior Secured Second Lien Notes (Series B) (collectively, the TCEH Senior Secured Second Lien Notes) mature in April 2021, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1, beginning January 1, 2011, at a fixed rate of 15% per annum. The notes are unconditionally guaranteed on a joint and several basis by EFCH and subsidiary guarantors (collectively, the Guarantors). The notes are secured, on a second-priority basis, by security interests in all of the assets of TCEH, and the guarantees (other than the guarantee of EFCH) are secured on a second-priority basis by all of the assets and equity interests of all of the Guarantors other than EFCH (collectively, the Subsidiary Guarantors), in each case, to the extent such assets and security interests secure obligations under the TCEH Senior Secured Credit Facilities on a first-priority basis (the TCEH Collateral), subject to certain exceptions and permitted liens. The guarantee from EFCH is not secured.

The TCEH Senior Secured Second Lien Notes are a senior obligation and rank equally in right of payment with all senior indebtedness of TCEH, are senior in right of payment to all existing or future unsecured debt of TCEH to the extent of the value of the TCEH Collateral (after taking into account any first-priority liens on the TCEH Collateral) and are senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated to TCEH’s obligations under the TCEH Senior Secured Credit Facilities and TCEH’s commodity and interest rate hedges that are secured by a first-priority lien on the TCEH Collateral and any future obligations subject to first-priority liens on the TCEH Collateral, to the extent of the value of the TCEH Collateral, and to all secured obligations of TCEH that are secured by assets other than the TCEH Collateral, to the extent of the value of the assets securing such obligations.

The guarantees of the TCEH Senior Secured Second Lien Notes from the Subsidiary Guarantors are effectively senior to any unsecured debt of the Subsidiary Guarantors to the extent of the value of the TCEH Collateral (after taking into account any first-priority liens on the TCEH Collateral). These guarantees are effectively subordinated to all debt of the Subsidiary Guarantors secured by the TCEH Collateral on a first-priority basis or that is secured by assets that are not part of the TCEH Collateral, to the extent of the value of the collateral securing that debt. EFCH’s guarantee ranks equally with its unsecured debt (including debt it guarantees on an unsecured basis) and is effectively subordinated to any of its secured debt to the extent of the value of the collateral securing that debt.

The TCEH Senior Secured Second Lien Notes and indenture governing such notes restrict TCEH’s and its restricted subsidiaries’ ability to, among other things, make restricted payments, including certain investments, incur debt and issue preferred stock, incur liens, pay dividends, merge, consolidate or sell assets and engage in transactions with affiliates. These covenants are subject to a number of limitations and exceptions. These notes and related indenture also contain customary events of default, including, among others, failure to pay principal or interest on the notes when due. In general, all of the series of TCEH Senior Secured Second Lien Notes vote together as a single class. As a result, if certain events of default occur under the related indenture, the trustee or the holders of at least 30% of aggregate principal amount of all outstanding TCEH Senior Secured Second Lien Notes may declare the principal amount on all such notes to be due and payable immediately.

Until October 1, 2013, TCEH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of each series of the TCEH Senior Secured Second Lien Notes from time to time at a redemption price of 115.00% of the aggregate principal amount of the notes being redeemed, plus accrued interest. TCEH may redeem each series of the notes at any time prior to October 1, 2015 at a price equal to 100% of their principal amount, plus accrued interest and the applicable premium as defined in the indenture. TCEH may also redeem each series of the notes, in whole or in part, at any time on or after October 1, 2015, at specified redemption prices, plus accrued interest. Upon the occurrence of a change of control (as described in the indenture), TCEH must offer to repurchase each series of the notes at 101% of their principal amount, plus accrued interest.

 

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The TCEH Senior Secured Second Lien Notes were issued in private placements and have not been registered under the Securities Act. TCEH has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the TCEH Senior Secured Second Lien Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the TCEH Senior Secured Second Lien Notes unless such notes meet certain transferability conditions (as described in the related registration rights agreement). If the registration statement is required and has not been filed and declared effective within 365 days after the original issue date (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.

TCEH Senior Secured Facilities — The applicable rate on borrowings under the TCEH Initial Term Loan Facility, the TCEH Delayed Draw Term Loan Facility, the TCEH Revolving Credit Facility and the TCEH Letter of Credit Facility as of September 30, 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 $21.310 billion as of September 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, debt 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 EFCH, 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.

 

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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.

TCEH Senior Notes — 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. TCEH’s 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 as of September 30, 2010 of $6.655 billion (excluding $407 million principal amount held by EFH Corp. and EFIH) and are fully and unconditionally guaranteed on a joint and several unsecured basis by TCEH’s direct parent, EFCH (which owns 100% of TCEH and its subsidiary guarantors), and by each subsidiary that guarantees the TCEH Senior Secured Facilities.

The issuers may redeem the TCEH 10.25% Notes and TCEH Toggle 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 10.25% Notes and TCEH Toggle 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 EFCH 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 — 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. 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 as of September 30, 2010 of $898 million (excluding $3.594 billion principal amount held by EFIH) and are fully and unconditionally guaranteed on a joint and several unsecured basis by EFCH and EFIH.

EFH Corp. may 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 related 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.

TCEH Interest Rate Swap Transactions — As of September 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 principal amount 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.

 

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As of September 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 nine months ended September 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 nine months ended September 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 $181 million and $542 million in net losses in the three and nine months ended September 30, 2010, respectively, and $138 million in net losses and $527 million in net gains in the three and nine months ended September 30, 2009, respectively. The cumulative unrealized mark- to- market net liability related to the swaps totaled $1.755 billion as of September 30, 2010, of which $120 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.

 

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7. COMMITMENTS AND CONTINGENCIES

Guarantees

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

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

Residual value guarantees in operating leases — We are the lessee under various operating leases that guarantee the residual values of the leased assets. As of September 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 debt.

Letters of Credit

As of September 30, 2010, TCEH had outstanding letters of credit under its credit facilities totaling $725 million as follows:

 

   

$325 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

 

   

$108 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. Subsequently, the non-parties to the original administrative proceeding non-suited their claims, thus ending their legal challenge. In July 2010, the court issued an order rejecting the remaining plaintiff’s claims and upholding the TCEQ’s issuance of the Oak Grove air permit. The plaintiff did not appeal the court’s order. Accordingly, the matter has been resolved favorably for us, and the judgment in the case is now final.

 

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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. Alcoa did not appeal the final judgment.

In September 2010, the Sierra Club filed a lawsuit in the US District Court for the Eastern District of Texas (Texarkana Division) against EFH Corp. and Luminant Generation Company LLC (a wholly-owned subsidiary of TCEH) for alleged violations of the Clean Air Act at Luminant’s Martin Lake generation facility. As previously disclosed, in July 2008, the Sierra Club had given Luminant notice of its intention to sue. While we are unable to estimate any possible loss or predict the outcome of the litigation, we believe that the Sierra Club’s claims are without merit, and we intend to vigorously defend this litigation. In addition, 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. 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 the 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 ostensible deviations from emissions limits at Sandow Unit 5 resulting from force majeure events, as that term is defined in the Consent Decree. In September 2010, Sandow Power, the DOJ, the EPA and the private plaintiffs filed with the court a notice of settlement regarding these force majeure claims, and the court subsequently issued an order approving that settlement. The settlement involves a payment to the US Treasury that is not material 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 common 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 on a pro forma basis, after giving effect to such distribution, EFH Corp.’s consolidated leverage ratio is equal to or less than 7.0 to 1.0. For purposes of this calculation, “consolidated leverage ratio” is defined as the ratio of consolidated total indebtedness (as defined in the indenture) to Adjusted EBITDA, in each case, consolidated with its subsidiaries other than Oncor Holdings and its subsidiaries. In addition, the indenture governing the EFIH Notes generally restricts EFIH 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, EFIH’s consolidated leverage ratio is equal to or less than 6.0 to 1.0. Under the indenture governing the EFIH Notes, the term “consolidated leverage ratio” is defined as the ratio of EFIH’s consolidated total indebtedness (as defined in the indenture) to EFIH’s Adjusted EBITDA on a consolidated basis (including Oncor’s Adjusted EBITDA).

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 indentures governing the TCEH Senior Notes and TCEH Senior Secured Second Lien Notes generally restrict TCEH’s ability to make distributions or loans to any of its parent companies, EFCH 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. As of September 30, 2010, EFH Corp. demand notes payable to TCEH totaled $1.690 billion, of which $704 million is related to principal and interest payments. Such principal and interest amounts are guaranteed by EFCH and EFIH 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. Such adjustments include deducting the $72 million ($46 million after-tax) one-time refund to customers in September 2008, net accretion of fair value adjustments resulting from purchase accounting and funds spent as part of the $100 million commitment for additional demand-side management or other energy efficiency initiatives (see Note 6 to the 2009 Form 10-K Financial Statements) of which $35 million ($23 million after tax) has been spent through September 30, 2010, and removing the effects of the $860 million goodwill impairment charge from fourth quarter 2008 net income available for distribution. As a result, $9 million of Oncor’s $149 million net income earned in the three months ended September 30, 2010 was restricted from being used to make distributions of membership interests under the cumulative net income restriction.

Oncor’s distributions are further limited by an agreement that its 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. As of September 30, 2010 and December 31, 2009, the regulatory capitalization ratio was 59.7% debt and 40.3% equity and 58.1% debt and 41.9% equity, respectively. The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes transition bonds issued by Oncor Electric Delivery Transition Bond Company. Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of accounting for the Merger (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). Oncor is required to file a quarterly Earnings Monitor Report with the PUCT that sets forth its debt-to-equity ratio. This Earnings Monitor Report shall not be deemed a part of, or incorporated by reference into, this report on Form 10-Q. Accordingly, as of September 30, 2010, $35 million of Oncor’s membership interests was available for distribution under the capital structure restriction, of which approximately 80% relates to EFH Corp.’s ownership interest.

Noncontrolling Interests

Of the noncontrolling interests balance as of 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 September 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 nine months ended September 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 as of December 31, 2009

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

Net loss

     —           —          (2,973     —          —          (2,973

Effects of EFH Corp. stock-based incentive compensation plans

     —           19        —          —          —          19   

Change in unrecognized gains related to pension and OPEB costs

     —           —          —          15        —          15   

Net effects of cash flow hedges

     —           —          —          49        —          49   

Effects of deconsolidation of Oncor Holdings

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

Investment by noncontrolling interests

     —           —          —          —          24        24   

Stock repurchases

     —           (2     —          —          —          (2

Other

     —           —          —          —          (1     (1
                                                 

Balance as of September 30, 2010

   $ 2       $ 7,931      $ (13,827   $ (245   $ 71      $ (6,068
                                                 

 

(a) Authorized shares totaled 2,000,000,000 as of September 30, 2010. Outstanding shares totaled 1,669,277,542 and 1,668,065,133 as of September 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.

As of September 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

   $ 1,165       $ 4,166       $ 538       $ 62       $ 5,931   

Interest rate swaps

     —           142         —           —           142   

Nuclear decommissioning trust – equity securities (c)

     170         109         —           —           279   

Nuclear decommissioning trust – debt securities (c)

     —           229         —           —           229   
                                            

Total assets

   $ 1,335       $ 4,646       $ 538       $ 62       $ 6,581   
                                            

Liabilities:

              

Commodity contracts

   $ 1,350       $ 866       $ 284       $ 62       $ 2,562   

Interest rate swaps

     —           1,925         —           —           1,925   
                                            

Total liabilities

   $ 1,350       $ 2,791       $ 284       $ 62       $ 4,487   
                                            

 

(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, certain natural gas positions (collars) in the long-term hedging program and certain power transactions valued at illiquid pricing locations as discussed below.
(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.

As ERCOT transitions to a nodal wholesale market structure, we have entered (and expect to increasingly enter) into certain derivative transactions that are valued at illiquid pricing locations (unobservable inputs), thus requiring classification as Level 3 assets or liabilities. As the nodal market matures and more transactions and pricing information becomes available for these pricing locations, we expect more of the valuation inputs to become observable.

 

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As of 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 nine months ended September 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 nine months ended September 30, 2010 and 2009:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Balance as of beginning of period

   $ 169      $ (72   $ 81      $ (72

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

        

Included in net income (loss)

     118        42        182        57   

Included in other comprehensive income (loss)

     —          (6     —          (31

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

     (24     (6     7        (15

Transfers into Level 3 (c)

     (11     1        (10     1   

Transfers out of Level 3 (c)

     2        —          (6     19   
                                

Balance as of end of period

   $ 254      $ (41   $ 254      $ (41
                                

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

   $ 116      $ 44      $ 199      $ 61   

 

(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.

 

10. FAIR VALUE OF NONDERIVATIVE FINANCIAL INSTRUMENTS

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

 

     September 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

   $ 35,336       $ 26,835       $ 36,600       $ 29,115   

Oncor (c)

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

Total

   $ 35,336       $ 26,835       $ 41,704       $ 34,759   

Off balance sheet liabilities:

           

Financial guarantees

   $ —         $ 4       $ —         $ 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 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 as of September 30, 2010 and December 31, 2009:

 

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

Current assets

   $ 3,364      $ 141       $ 15      $ —        $ 3,520   

Noncurrent assets

     2,518        1         34        —          2,553   

Current liabilities

     (6     —           (2,258     (801     (3,065

Noncurrent liabilities

     (7     —           (291     (1,124     (1,422
                                         

Net assets (liabilities)

   $ 5,869      $ 142       $ (2,500   $ (1,925   $ 1,586   
                                         

 

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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 September 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 $503 million and $358 million in net liabilities as of September 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 on net income of derivatives not under hedge accounting, including realized and unrealized effects:

 

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

Derivative (Income statement presentation)

   2010     2009     2010     2009  

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

   $ 979      $ 136      $ 2,255      $ 1,026   

Interest rate swaps (Interest expense and related charges)

     (350     (317     (1,048     16   
                                

Net gain (loss)

   $ 629      $ (181   $ 1,207      $ 1,042   
                                

 

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The following tables present the pre-tax effect on net income and other comprehensive income (OCI) of derivative instruments previously accounted for as cash flow hedges:

 

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

Derivative

   Three Months
Ended

September 30, 2010
     Nine Months
Ended
September 30, 2010
    

Income statement presentation of loss reclassified
from accumulated OCI into income

(effective portion)

   Three Months
Ended

September 30, 2010
    Nine Months
Ended

September 30, 2010
 

Interest rate swaps

   $ —         $ —         Interest expense and related charges    $ (19   $ (72
         Depreciation and amortization      (1     (1

Commodity contracts

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

Total

   $ —         $ —            $ (20   $ (74
                                     

 

     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

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

September 30, 2009
    Nine Months
Ended

September 30, 2009
 

Interest rate swaps

   $  —        $  —        Interest expense and related charges    $ (56   $ (140

Commodity contracts

     (6     (31   Fuel, purchased power costs and delivery fees      (6     (10
                       
       Operating revenues      —          (2
                       

Total

   $ (6   $ (31      $ (62   $ (152
                                   

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

Accumulated other comprehensive income related to cash flow hedges as of September 30, 2010 and December 31, 2009 totaled $79 million and $128 million in net losses (after-tax), respectively, substantially all of which relates to interest rate swaps. We expect that $26 million of net losses related to cash flow hedges included in accumulated other comprehensive income as of September 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 as of September 30, 2010 and December 31, 2009:

 

      September 30, 2010      December 31, 2009     

Unit of Measure

Derivative type

   Notional Volume     

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)

     2,727         3,402       Million MMBtu

Locational basis swaps

     1,006         1,010       Million MMBtu

All other

     1,094         1,433       Million MMBtu

Electricity

     172,010         198,230       GWh

Coal

     7         6       Million tons

Fuel oil

     116         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 1.25 billion MMBtu and 1.6 billion MMBtu as of September 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 credit ratings being below investment grade, substantially all of such collateral posting requirements are already effective.

As of September 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 $620 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 $94 million and $152 million as of September 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 September 30, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $24 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 September 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 $2.358 billion and $1.482 billion, respectively, (before consideration of the amount of assets under the liens). No cash collateral or letters of credit were posted with these counterparties as of September 30, 2010 to reduce the liquidity exposure, but $489 million of such collateral was posted as of December 31, 2009, with the decline reflecting the return of collateral from counterparties to certain interest rate swaps related to TCEH debt as discussed above in this note. If all the credit risk-related contingent features related to these derivatives, including amounts related to cross-default provisions, had been triggered as of September 30, 2010 and December 31, 2009, the remaining related liquidity requirement would have totaled $1.124 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 $2.978 billion and $2.169 billion as of September 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 September 30, 2010, total credit risk exposure to all counterparties related to derivative contracts totaled $6.1 billion (including associated accounts receivable). The net exposure to those counterparties totaled $2.2 billion as of September 30, 2010 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 $1.6 billion. As of September 30, 2010, the credit risk exposure to the banking and financial sector represented 94% of the total credit risk exposure, a significant amount of which is related to the long-term hedging program, and the largest net exposure to a single counterparty totaled approximately $1.0 billion. 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 nine months ended September 30, 2010 and 2009 are comprised of the following:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Components of net pension costs:

        

Service cost

   $ 11      $ 10      $ 32      $ 28   

Interest cost

     41        40        120        119   

Expected return on assets

     (40     (41     (120     (124

Amortization of prior service cost

     —          —          —          —     

Amortization of net loss

     15        4        42        7   
                                

Net pension costs

     27        13        74        30   
                                

Components of net OPEB costs:

        

Service cost

     3        3        9        8   

Interest cost

     16        15        46        46   

Expected return on assets

     (5     (3     (11     (10

Amortization of transition obligation

     —          —          1        —     

Amortization of prior service cost

     —          —          (1     —     

Amortization of net loss

     6        3        16        9   
                                

Net OPEB costs

     20        18        60        53   
                                

Total net pension and OPEB costs

     47        31        134        83   

Less amounts expensed by Oncor

     (9     —          (27     —     

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

     (23     (18     (66     (51
                                

Amount recognized as expense by EFH Corp. and consolidated subsidiaries

   $ 15      $ 13      $ 41      $ 32   
                                

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 $28 million and $17 million, respectively, in the first nine months of 2010, of which $40 million was contributed by Oncor. We expect to make additional contributions of $15 million and $7 million, respectively, in the remainder of 2010, of which $17 million is 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 September 30, 2010 and 2009, and $27 million for both the nine months ended September 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.

 

   

Fees paid to Goldman, Sachs & Co. (Goldman) related to debt issuances and exchanges total $11 million in 2010 through October, described as follows. 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 and received fees totaling $3 million. Goldman acted as a dealer manager and solicitation agent in the debt exchange offers completed in August 2010 as discussed in Note 6 and received fees of $7 million. Goldman also acted as an initial purchaser in the issuance of $350 million principal amount of TCEH 15% Senior Secured Second Lien Notes (Series B) in October 2010 as discussed in Note 6 and received fees totaling $1 million.

 

   

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 $317 million and $839 million for the three and nine months ended September 30, 2010, respectively. The fees are based on rates regulated by the PUCT that apply to all REPs. The balance sheet as of September 30, 2010 reflects amounts due currently to Oncor totaling $182 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 $227 million ($38 million current portion included in net payables due to unconsolidated subsidiary) as of September 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 $28 million for the three and nine months ended September 30, 2010, respectively.

 

   

A subsidiary of EFH Corp. charges Oncor for financial and other administrative services at cost, which totaled $9 million and $27 million for the three and nine months ended September 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. As of September 30, 2010, the excess of the trust fund balance over the decommissioning liability resulted in a payable to Oncor totaling $183 million included in noncurrent liabilities due to unconsolidated subsidiary in the balance sheet.

The intercompany receivable/payable with Oncor has changed from a receivable of $85 million as of January 1, 2010 to a payable of $183 million as of September 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. As of September 30, 2010, the amount due to Oncor Holdings totaled $59 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 September 30, 2010, TCEH had posted a letter of credit in the amount of $14 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, as of September 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 businesses, general corporate expenses and interest on EFH Corp. (parent entity), EFIH and EFCH 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 September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Operating revenues:

        

Competitive Electric

   $ 2,607      $ 2,433      $ 6,599      $ 6,144   

Regulated Delivery

     —          770        —          2,037   

Corporate and Other

     —          3        —          16   

Eliminations

     —          (321     —          (831
                                

Consolidated

   $ 2,607      $ 2,885      $ 6,599      $ 7,366   
                                

Affiliated revenues included in operating revenues:

        

Competitive Electric

   $ —        $ 2      $ —        $ 5   

Regulated Delivery

     —          316        —          813   

Corporate and Other

     —          3        —          13   

Eliminations

     —          (321     —          (831
                                

Consolidated

   $ —        $ —        $ —        $ —     
                                

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

        

Regulated Delivery

   $ 118      $ —        $ 240      $ —     
                                

Net income (loss):

        

Competitive Electric

   $ (3,710   $ (44   $ (3,705   $ 436   

Regulated Delivery

     118        132        240        272   

Corporate and Other

     690        (142     492        (447
                                

Consolidated

   $ (2,902   $ (54   $ (2,973   $ 261   
                                

 

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16. SUPPLEMENTARY FINANCIAL INFORMATION

Regulated Versus Unregulated Operations

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

Operating revenues

        

Regulated

   $ —        $ 770      $ —        $ 2,037   

Unregulated

     2,607        2,436        6,599        6,160   

Intercompany sales eliminations – regulated

     —          (316     —          (813

Intercompany sales eliminations – unregulated

     —          (5     —          (18
                                

Total operating revenues

     2,607        2,885        6,599        7,366   

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

     (1,400     (870     (3,521     (2,171

Net gain from commodity hedging and trading activities – unregulated

     992        123        2,272        1,003   

Operating costs – regulated

     —          (228     —          (668

Operating costs – unregulated

     (197     (160     (623     (503

Depreciation and amortization – regulated

     —          (147     —          (405

Depreciation and amortization – unregulated

     (352     (309     (1,043     (881

Selling, general and administrative expenses – regulated

     —          (50     —          (139

Selling, general and administrative expenses – unregulated

     (187     (227     (560     (653

Franchise and revenue-based taxes – regulated

     —          (67     —          (185

Franchise and revenue-based taxes – unregulated

     (24     (27     (73     (74

Impairment of goodwill

     (4,100     —          (4,100     (90

Other income

     1,033        45        1,278        71   

Other deductions

     (4     (32     (23     (50

Interest income

     —          18        9        30   

Interest expense and other charges

     (1,018     (1,039     (3,092     (2,136
                                

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

   $ (2,650   $ (85   $ (2,877   $ 515   
                                

 

(a) Includes unregulated cost of fuel consumed of $414 million and $360 million for the three months ended September 30, 2010 and 2009, respectively, and $1.094 billion and $943 million for the nine months ended September 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 September 30,      Nine Months Ended September 30,  
     2010      2009      2010      2009  

Other income:

           

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

   $ —         $ 10       $ —         $ 30   

Debt extinguishment gains (Note 6) (a)

     1,023         —           1,166         —     

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

     —           —           37         —     

Gain on sale of land/water rights (b)

     —           —           44         —     

Reversal of reserve recorded in purchase accounting (c)

     —           23         —           23   

Fee received related to interest rate swap/commodity hedge derivative agreement (b) (Note 11)

     —           6         —           6   

Office space rental income (a)

     3         —           9         —     

Insurance/litigation settlements (b)

     6         —           6         —     

Sales tax refund

     —           3         5         3   

Other

     1         3         11         9   
                                   

Total other income

   $ 1,033       $ 45       $ 1,278       $ 71   
                                   

Other deductions:

           

Write-off of regulatory assets (d)

   $ —         $ 25       $ —         $ 25   

Ongoing pension and OPEB expense related to discontinued businesses

     1         —           6         —     

Severance charges

     —           —           2         6   

Net charges related to cancelled development of generation facilities

     —           1         2         3   

Other

     3         6         13         16   
                                   

Total other deductions

   $ 4       $ 32       $ 23       $ 50   
                                   

 

(a) Reported in Corporate and Other segment.
(b) Reported in Competitive Electric segment.
(c) Reversal of a use tax accrual, related to periods prior to the Merger, due to a state ruling in 2009 (reported in Competitive Electric segment).
(d) The PUCT’s order in Oncor’s rate review in 2009 resulted in the denial of recovery of certain regulatory assets, primarily related to business restructuring costs and rate case expenses (reported in Regulated Delivery segment).

Interest Expense and Related Charges

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

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

   $ 672      $ 743      $ 1,999      $ 2,232   

Accrued interest to be paid with additional toggle notes (Note 6)

     106        131        384        387   

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

     181        138        542        (527

Amortization of interest rate swap losses at dedesignation of hedge accounting

     19        56        72        140   

Amortization of fair value debt discounts resulting from purchase accounting

     14        17        49        56   

Amortization of debt issuance costs and discounts

     32        34        99        104   

Capitalized interest

     (6     (80     (53     (256
                                

Total interest expense and related charges

   $ 1,018      $ 1,039      $ 3,092      $ 2,136   
                                

 

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Restricted Cash

 

     September 30, 2010      December 31, 2009  
     Current
Assets
     Noncurrent
Assets