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EX-4.(E) - INDENTURE - Energy Future Holdings Corp /TX/dex4e.htm
EX-4.(F) - JUNIOR LIEN PLEDGE AGREEMENT - Energy Future Holdings Corp /TX/dex4f.htm
EX-99.(A) - CONDENSED STATEMENT OF CONSOLIDATED INCOME - Energy Future Holdings Corp /TX/dex99a.htm
EX-32.(B) - SECTION 906 CERT. - PRINCIPAL FINANCIAL OFFICER - Energy Future Holdings Corp /TX/dex32b.htm
EX-32.(A) - SECTION 906 CERT. - PRINCIPAL EXECUTIVE OFFICER - Energy Future Holdings Corp /TX/dex32a.htm
EX-31.(A) - SECTION 302 CERT. - PRINCIPAL EXECUTIVE OFFICER - Energy Future Holdings Corp /TX/dex31a.htm
EX-99.(D) - ENERGY FUTURE INTERMEDIATE HOLDINGS CONSOLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99d.htm
EX-31.(B) - SECTION 302 CERT. - PRINCIPAL FINANCIAL OFFICER - Energy Future Holdings Corp /TX/dex31b.htm
EX-10.(B) - FORM OF FIRST AMENDMENT TO DEED OF TRUST - Energy Future Holdings Corp /TX/dex10b.htm
EX-99.(C) - TCEH ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99c.htm
EX-99.(B) - EFH CORP. CONSLIDATED ADJUSTED EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/dex99b.htm
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

— 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   Ö      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   Ö   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  Ö

As of April 28, 2011, there were 1,672,312,118 shares of common stock, without par value, outstanding 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 Months Ended March 31, 2011 and 2010

   1
 

Condensed Statements of Consolidated Comprehensive Income (Loss) –

Three Months Ended March 31, 2011 and 2010

   1
 

Condensed Statements of Consolidated Cash Flows –

Three Months Ended March 31, 2011 and 2010

   2
 

Condensed Consolidated Balance Sheets –

March 31, 2011 and December 31, 2010

   3
 

Notes to Condensed Consolidated Financial Statements

   4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    46
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    72
Item 4.   Controls and Procedures    78
Item 5.   Other Information    78
PART II.   OTHER INFORMATION   
Item 1.   Legal Proceedings    80
Item 1A.   Risk Factors    80
Item 6.   Exhibits    83
SIGNATURE    86

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 quarterly 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 company’s financial statements for financial reporting purposes. However, these references should not be interpreted to imply that the relevant 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.

 

2010 Form 10-K   

EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2010

Adjusted EBITDA   

Adjusted EBITDA means EBITDA adjusted to exclude noncash 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 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 US 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.

CFTC   

Commodity Futures Trading Commission

CPNPC   

Refers to Comanche Peak Nuclear Power Company LLC, which was formed by subsidiaries of TCEH (holding an 88% equity interest) and Mitsubishi Heavy Industries Ltd. (MHI) (holding a 12% equity interest) for the purpose of developing two new nuclear generation units and obtaining a combined operating license from the NRC for the 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.

 

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EFH Corp. Senior Notes   

Refers collectively to EFH Corp.’s 10.875% Senior Notes due November 1, 2017 (EFH Corp. 10.875% Notes) and EFH Corp.’s 11.25%/12.00% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes).

EFH Corp. Senior Secured Notes   

Refers collectively to EFH Corp.’s 9.75% Senior Secured Notes due October 15, 2019 (EFH Corp. 9.75% Notes) and EFH Corp.’s 10.000% Senior Secured Notes due January 15, 2020 (EFH Corp. 10% Notes).

EFIH   

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), 10.000% Senior Secured Notes due December 1, 2020 (EFIH 10% Notes) and 11% Senior Secured Second Lien Notes due October 1, 2021 (EFIH 11% Notes).

EPA   

US Environmental Protection Agency

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

GAAP   

generally accepted accounting principles

GWh   

gigawatt-hours

IRS   

US Internal Revenue Service

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

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.

 

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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., 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 Notes   

Refers to TCEH’s 11.5% Senior Secured Notes due October 1, 2020.

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.

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.

 

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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)

 

     Three Months Ended March 31,  
     2011     2010  
     (millions of dollars)  

Operating revenues

   $ 1,672      $ 1,999   

Fuel, purchased power costs and delivery fees

     (830     (1,047

Net gain (loss) from commodity hedging and trading activities

     (94     1,213   

Operating costs

     (216     (197

Depreciation and amortization

     (369     (342

Selling, general and administrative expenses

     (165     (187

Franchise and revenue-based taxes

     (21     (22

Other income (Note 15)

     41        33   

Other deductions (Note 15)

     (4     (11

Interest income

     2        10   

Interest expense and related charges (Note 15)

     (643     (954
                

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

     (627     495   

Income tax (expense) benefit

     215        (203

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

     50        63   
                

Net income (loss)

   $ (362   $ 355   
                

See Notes to Financial Statements.

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended March 31,  
     2011     2010  
     (millions of dollars)  

Net income (loss)

   $ (362   $ 355   

Other comprehensive income, net of tax effects:

    

Effects related to pension and other retirement benefit obligations (net of tax expense of $3 and $2)

     5        4   

Cash flow hedges — derivative value net loss related to hedged transactions recognized during the period and reported in net income (net of tax benefit of $4 and $10)

     7        19   
                

Total other comprehensive income

     12        23   
                

Comprehensive income (loss)

   $ (350   $ 378   
                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2011     2010  
     (millions of dollars)  

Cash flows — operating activities:

    

Net income (loss)

   $ (362   $ 355   

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

    

Depreciation and amortization

     451        435   

Deferred income tax expense (benefit) – net

     (255     220   

Unrealized net (gain) loss from mark-to-market valuations of commodity positions

     316        (993

Unrealized net (gain) loss from mark-to-market valuations of interest rate swaps (Note 6)

     (142     107   

Interest expense on toggle notes payable in additional principal (Notes 6 and 15)

     57        139   

Equity in earnings of unconsolidated subsidiaries

     (50     (63

Distributions of earnings from unconsolidated subsidiaries

     16        30   

Debt extinguishment gains (Note 6)

            (14

Bad debt expense (Note 5)

     14        36   

Accretion expense related to asset retirement and mining reclamation obligations

     13        13   

Stock-based incentive compensation expense

            9   

Losses on dedesignated cash flow hedges (interest rate swaps)

     10        29   

Other, net

     (3     (7

Changes in operating assets and liabilities:

    

Impact of accounts receivable securitization program (Note 5)

            (383

Margin deposits – net

     84        45   

Other operating assets and liabilities

     179        144   
                

Cash provided by operating activities

     328        102   
                

Cash flows — financing activities:

    

Issuances of long-term debt (Note 6)

            500   

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

     (71     (132

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

     5        393   

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

     (222     (700

Decrease in note payable to unconsolidated subsidiary

     (9     (9

Contributions from noncontrolling interests

     6        6   

Debt exchange and issuance costs

            (10

Other, net

     (1     9   
                

Cash provided by (used in) financing activities

     (292     57   
                

Cash flows — investing activities:

    

Capital expenditures

     (149     (328

Nuclear fuel purchases

     (98     (44

Investment redeemed from derivative counterparty (Note 11)

            400   

Proceeds from sale of environmental allowances and credits

     1        3   

Purchases of environmental allowances and credits

     (4     (5

Proceeds from sales of nuclear decommissioning trust fund securities

     734        564   

Investments in nuclear decommissioning trust fund securities

     (738     (568

Other, net

     14        (13
                

Cash provided by (used in) investing activities

     (240     9   
                

Net change in cash and cash equivalents

     (204     168   

Effect of deconsolidation of Oncor Holdings

            (29

Cash and cash equivalents — beginning balance

     1,534        1,189   
                

Cash and cash equivalents — ending balance

   $ 1,330      $ 1,328   
                

See Notes to Financial Statements.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2011
    December 31,
2010
 
     (millions of dollars)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,330      $ 1,534   

Restricted cash (Note 15)

     36        33   

Trade accounts receivable — net (includes $515 and $612 in pledged amounts related to a VIE (Notes 3 and 5))

     780        999   

Inventories (Note 15)

     394        395   

Commodity and other derivative contractual assets (Note 11)

     2,474        2,732   

Margin deposits related to commodity positions

     100        166   

Other current assets

     78        60   
                

Total current assets

     5,192        5,919   

Restricted cash (Note 15)

     1,135        1,135   

Receivables from unconsolidated subsidiary (Note 13)

     1,460        1,463   

Investments in unconsolidated subsidiary (Note 2)

     5,588        5,544   

Other investments (Note 15)

     708        697   

Property, plant and equipment — net (Note 15)

     20,170        20,366   

Goodwill (Note 4)

     6,152        6,152   

Identifiable intangible assets — net (Note 4)

     2,363        2,400   

Commodity and other derivative contractual assets (Note 11)

     1,754        2,071   

Other noncurrent assets, principally unamortized debt issuance costs

     607        641   
                

Total assets

   $ 45,129      $ 46,388   
                
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term borrowings (includes $101 and $96 related to a VIE (Notes 3 and 6))

   $ 1,004      $ 1,221   

Long-term debt due currently (Note 6)

     463        669   

Trade accounts payable

     492        681   

Payables due to unconsolidated subsidiary (Note 13)

     244        254   

Commodity and other derivative contractual liabilities (Note 11)

     2,000        2,283   

Margin deposits related to commodity positions

     649        631   

Accumulated deferred income taxes

     8        11   

Accrued interest

     671        411   

Other current liabilities

     317        442   
                

Total current liabilities

     5,848        6,603   

Accumulated deferred income taxes

     5,102        5,350   

Commodity and other derivative contractual liabilities (Note 11)

     749        869   

Notes or other liabilities due to unconsolidated subsidiary (Note 13)

     393        384   

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

     34,370        34,226   

Other noncurrent liabilities and deferred credits (Note 15)

     4,922        4,867   
                

Total liabilities

     51,384        52,299   

Commitments and Contingencies (Note 7)

    

Equity (Note 8):

    

EFH Corp. shareholders’ equity

     (6,340     (5,990

Noncontrolling interests in subsidiaries

     85        79   
                

Total equity

     (6,255     (5,911
                

Total liabilities and equity

   $ 45,129      $ 46,388   
                

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. As discussed in Note 3, Oncor (and its majority owner, Oncor Holdings) are not consolidated in EFH Corp.’s financial statements 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 Holdings and its subsidiaries. See Note 14 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 2010 Form 10-K. 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 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 2010 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.

 

2. EQUITY METHOD INVESTMENTS

Oncor Holdings

Investments in unconsolidated subsidiary totaled $5.588 billion and $5.544 billion as of March 31, 2011 and December 31, 2010, respectively, and consisted of Oncor Holdings (100% owned), which we account for under the equity method (see Note 3). Oncor Holdings owns approximately 80% of Oncor, which is engaged in regulated electricity transmission and distribution operations in Texas. Distribution revenues from TCEH represented 34% and 38% of total revenues for Oncor Holdings for the three months ended March 31, 2011 and 2010, respectively. Condensed statements of consolidated income of Oncor Holdings for the three months ended March 31, 2011 and 2010 are presented below:

 

     Three Months Ended March 31,
     2011   2010

Operating revenues

     $ 706       $ 703  

Operation and maintenance expenses

       (258 )       (249 )

Depreciation and amortization

       (172 )       (166 )

Taxes other than income taxes

       (97 )       (94 )

Other income

       8         11  

Other deductions

       (2 )       (2 )

Interest income

       10         10  

Interest expense and related charges

       (90 )       (86 )
                    

Income before income taxes

       105         127  

Income tax expense

       (42 )       (48 )
                    

Net income

       63         79  

Net income attributable to noncontrolling interests

       (13 )       (16 )
                    

Net income attributable to Oncor Holdings

     $ 50       $ 63  
                    

 

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Assets and liabilities of Oncor Holdings as of March 31, 2011 and December 31, 2010 are presented below:

 

     March 31,
2011
   December  31,
2010
ASSETS          

Current assets:

         

Cash and cash equivalents

     $ 12        $ 33  

Restricted cash

       56          53  

Trade accounts receivable — net

       275          254  

Trade accounts and other receivables from affiliates

       177          182  

Income taxes receivable from EFH Corp.

       67          72  

Inventories

       102          96  

Accumulated deferred income taxes

       11          10  

Prepayments

       77          75  

Other current assets

       8          5  
                     

Total current assets

       785          780  

Restricted cash

       16          16  

Other investments

       74          78  

Property, plant and equipment — net

       9,851          9,676  

Goodwill

       4,064          4,064  

Note receivable due from TCEH

       169          178  

Regulatory assets — net

       1,710          1,782  

Other noncurrent assets

       303          264  
                     

Total assets

     $ 16,972        $   16,838  
                     
LIABILITIES          

Current liabilities:

         

Short-term borrowings

     $ 516        $ 377  

Long-term debt due currently

       114          113  

Trade accounts payable — nonaffiliates

       147          125  

Accrued taxes other than income

       69          133  

Accrued interest

       61          108  

Other current liabilities

       103          109  
                     

Total current liabilities

       1,010          965  

Accumulated deferred income taxes

       1,560          1,516  

Investment tax credits

       31          32  

Long-term debt, less amounts due currently

       5,309          5,333  

Other noncurrent liabilities and deferred credits

       2,002          1,996  
                     

Total liabilities

     $ 9,912        $ 9,842  
                     

 

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3. CONSOLIDATION OF VARIABLE INTEREST ENTITIES

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. Accounting standards require consolidation of a VIE if we have (a) the power to direct the significant activities of the VIE and (b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary). Our VIEs consist of equity investees. 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.

As discussed below, our balance sheet includes assets and liabilities of VIEs that meet the consolidation standards. Oncor Holdings, which holds an approximate 80% interest in Oncor, is not consolidated in EFH Corp.’s financial statements because the structural and operational “ring-fencing” measures discussed in Note 1 prevent us from having power to direct the significant activities of Oncor Holdings or Oncor. We account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, because, while we do not have the power to direct Oncor’s significant activities, we do 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.

Consolidated VIEs

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

We also 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 are as follows:

 

Assets:

   March 31,
2011
     December 31,
2010
    

Liabilities:

   March 31,
2011
     December 31,
2010
 

Cash and cash equivalents

   $ 11       $ 9      

Short-term borrowings (a)

   $ 101       $ 96   

Accounts receivable (a)

     515         612      

Trade accounts payable

     4         3   

Property, plant and equipment

     120         112      

Other current liabilities

     5         1   
                          

Other assets, including $2 million of current assets in both periods

     7         8            
                          

Total assets

   $ 653       $ 741      

Total liabilities

   $ 110       $ 100   
                                      

 

 

 

(a) As a result of accounting guidance related to transfers of financial assets, the balance sheet as of March 31, 2011 and December 31, 2010 reflects $515 million and $612 million, respectively, of pledged accounts receivable and $101 million and $96 million, respectively, 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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4. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

The following table provides the goodwill balances as of March 31, 2011 and December 31, 2010, all of which relate to our competitive business. There were no changes to the goodwill balances in the three months ended March 31, 2011. None of the goodwill is being deducted for tax purposes.

 

Goodwill before impairment charges

   $ 18,342   

Accumulated impairment charges

     (12,190
        

Balance as of March 31, 2011 and December 31, 2010

   $ 6,152   
        

Identifiable Intangible Assets

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

 

     March 31, 2011      December 31, 2010  

Identifiable Intangible Asset

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

Retail customer relationship

   $ 463       $ 306       $ 157       $ 463       $ 293       $ 170   

Favorable purchase and sales contracts

     548         266         282         548         257         291   

Capitalized in-service software

     292         107         185         278         97         181   

Environmental allowances and credits

     988         325         663         986         304         682   

Mining development costs

     52         19         33         47         17         30   
                                                     

Total intangible assets subject to amortization

   $ 2,343       $ 1,023         1,320       $ 2,322       $ 968         1,354   
                                         

Trade name (not subject to amortization)

           955               955   

Mineral interests (not currently subject to amortization)

           88               91   
                             

Total intangible assets

         $   2,363             $   2,400   
                             

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

 

          Three Months Ended March 31,  

Identifiable Intangible Asset

  

Income Statement Line

   2011      2010  

Retail customer relationship

  

Depreciation and amortization

   $ 13       $ 20   

Favorable purchase and sales contracts

  

Operating revenues/fuel, purchased power costs and delivery fees

     9         14   

Capitalized in-service software

  

Depreciation and amortization

     10         8   

Environmental allowances and credits

  

Fuel, purchased power costs and delivery fees

     21         22   

Mining development costs

  

Depreciation and amortization

     2         2   
                    

Total amortization expense

      $ 55       $ 66   
                    

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

   Amortization
Expense
 

2011

   $ 201   

2012

     158   

2013

     136   

2014

     119   

2015

     100   

 

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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 an amended transfers and servicing accounting standard effective January 1, 2010, 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 the effective date of the amended accounting standard, the activity was accounted for as a sale of accounts receivable in accordance with previous accounting standards, which resulted in the funding being recorded as a reduction of accounts receivable.

The maximum funding amount currently available under the accounts receivable securitization program is $350 million. Program funding increased from $96 million as of December 31, 2010 to $101 million as of March 31, 2011. Under the terms of the program, available funding was reduced by $37 million of customer deposits held by the originator because TCEH’s credit ratings were lower than Ba3/BB-.

All new trade receivables under the program generated by the originator are continuously purchased by TXU Receivables Company with the proceeds from collections of receivables previously purchased. 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 $414 million and $516 million as of March 31, 2011 and December 31, 2010, 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 and are reported as interest expense and related charges. The discount also funds a servicing fee, which is reported as SG&A expense, paid by TXU Receivables Company to EFH Corporate Services Company (Service Co.), a direct wholly-owned subsidiary of EFH Corp., which provides recordkeeping services and is the collection agent for the program.

Program fee amounts were as follows:

 

     Three Months Ended March 31,  
     2011     2010  

Program fees

   $ 2      $ 2   

Program fees as a percentage of average funding (annualized)

     6.8     2.2

Activities of TXU Receivables Company were as follows:

 

     Three Months Ended March 31,  
     2011     2010  

Cash collections on accounts receivable

   $ 1,334      $ 1,541   

Face amount of new receivables purchased

     (1,237     (1,479

Discount from face amount of purchased receivables

     3        3   

Program fees paid to funding entities

     (2     (2

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

     (1     (1

Decrease in subordinated notes payable

     (102     (72
                

Financing cash flows provided to originator under the program

   $ (5   $ (10
                

 

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

The program, which expires in October 2013, may be terminated upon the occurrence of a number of specified events, including if the delinquency ratio (delinquent for 31 days) for the sold receivables, the default ratio (delinquent for 91 days or deemed uncollectible), the dilution ratio (reductions for discounts, disputes and other allowances) or the days collection outstanding ratio exceed stated thresholds, and the funding entities do not waive such event of termination. The thresholds apply to the entire portfolio of sold receivables. In addition, the program may be terminated if TXU Receivables Company or Service Co. defaults in any payment with respect to debt in excess of $50,000 in the aggregate for such entities, or if TCEH, any affiliate of TCEH acting as collection agent other than Service Co., any parent guarantor of the originator or the originator shall default in any payment with respect to debt (other than hedging obligations) in excess of $200 million in the aggregate for such entities. As of March 31, 2011, there were no such events of termination.

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

Trade Accounts Receivable

 

     March 31,
2011
    December 31,
2010
 

Wholesale and retail trade accounts receivable, including $515 and $612 in pledged retail receivables

   $ 811      $ 1,063   

Allowance for uncollectible accounts

     (31     (64
                

Trade accounts receivable — reported in balance sheet

   $ 780      $ 999   
                

Gross trade accounts receivable as of March 31, 2011 and December 31, 2010 included unbilled revenues of $262 million and $297 million, respectively.

Allowance for Uncollectible Accounts Receivable

 

     Three Months Ended March 31,  
     2011     2010  

Allowance for uncollectible accounts receivable as of beginning of period

   $ 64      $ 81   

Increase for bad debt expense

     14        36   

Decrease for account write-offs

     (21     (43

Reversal of reserve related to counterparty bankruptcy (Note 15)

     (26       
                

Allowance for uncollectible accounts receivable as of end of period

   $ 31      $ 74   
                

Receivables from Unconsolidated Subsidiary

Receivables from unconsolidated subsidiary are measured at historical cost and primarily consist of Oncor’s obligation under the EFH Corp. pension and OPEB plans. EFH Corp. reviews Oncor’s credit scores to assess the overall collectability of its affiliated receivables, which totaled $1.460 billion and $1.463 billion as of March 31, 2011 and December 31, 2010, respectively. There were no credit loss allowances as of March 31, 2011. See Note 13 for additional information about related party transactions.

 

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6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

As of March 31, 2011, outstanding short-term borrowings totaled $1.004 billion, which included $903 million under the TCEH Revolving Credit Facility at a weighted average interest rate of 3.75%, excluding certain customary fees, and $101 million under the accounts receivable securitization program discussed in Note 5.

As of December 31, 2010, outstanding short-term borrowings totaled $1.221 billion, which included $1.125 billion under the TCEH Revolving Credit Facility at a weighted average interest rate of 3.80%, excluding certain customary fees, and $96 million under the accounts receivable securitization program.

Credit Facilities

Credit facilities with cash borrowing and/or letter of credit availability as of March 31, 2011 are presented below. The facilities are all senior secured facilities of TCEH. See “April 2011 Amendment, Extension and Repayments of TCEH Senior Secured Facilities” below for discussion of amendments, extensions and repayments of the facilities in April 2011.

 

          As of March 31, 2011  
           
Authorized Borrowers and Facility   

Maturity

Date

  

Facility

Limit

    

Letters of

Credit

    

Cash

Borrowings

     Availability  
   

TCEH Revolving Credit Facility (a)

   October 2013    $ 2,700       $       $ 903       $ 1,680   

TCEH Letter of Credit Facility (b)

   October 2014      1,250                 1,250           
                                      

Subtotal TCEH

      $ 3,950       $       $ 2,153       $ 1,680   
                                      

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 as of March 31, 2011 includes $112 million of commitments from Lehman that were only available from the fronting banks and the swingline lender and excludes $117 million of requested cash draws that have not been funded by Lehman. In conjunction with the amendment, extension and repayments of the TCEH Senior Secured Facilities in April 2011, the cash borrowings under the TCEH Revolving Credit Facility funded by Lehman were repaid and Lehman’s commitment to loan funds under the TCEH Revolving Credit Facility was terminated. All outstanding borrowings under this facility as of March 31, 2011 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 $887 million issued as of March 31, 2011 are supported by the restricted cash, and the remaining letter of credit availability totals $248 million.
(c) Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 260 million MMBtu as of March 31, 2011. As of March 31, 2011, there were no borrowings under this facility.

 

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Table of Contents

Long-Term Debt

As of March 31, 2011 and December 31, 2010, long-term debt consisted of the following:

 

    

March 31,

2011

   

December 31,

2010

 
        

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   

0.212% Floating Series 2001D-2 due May 1, 2033 (b)

     97        97   

0.289% Floating Taxable Series 2001I due December 1, 2036 (c)

     62        62   

0.212% 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)

     (129     (132

Senior Secured Facilities (see details of April 2011 transactions below):

    

3.769% TCEH Initial Term Loan Facility maturing October 10, 2014 (e)(f)(g)

     15,854        15,895   

3.759% TCEH Delayed Draw Term Loan Facility maturing October 10, 2014 (e)(f)

     4,024        4,034   

3.746% TCEH Letter of Credit Facility maturing October 10, 2014 (f)

     1,250        1,250   

0.230% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (h)

              

Other:

    

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

     1,873        1,873   

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

     1,292        1,292   

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

     1,406        1,406   

15.00% Senior Secured Second Lien Notes due April 1, 2021

     336        336   

15.00% Senior Secured Second Lien Notes due April 1, 2021, Series B

     1,235        1,235   

7.000% Fixed Senior Notes due March 15, 2013

     5        5   

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

     28        42   

Capital lease obligations

     73        76   

Other

     3        3   

Unamortized fair value discount (d)

     (2     (2
                

Total TCEH

     28,783        28,848   
                

EFCH

    

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

     46        46   

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

     45        46   

1.104% 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)

     (9     (10
                

Total EFCH

   $ 91      $ 91   
                

 

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Table of Contents
    

March 31,

2011

   

December 31,

2010

 
        

EFH Corp. (parent entity)

    

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

   $ 359      $ 359   

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

     571        571   

9.75% Fixed Senior Secured Notes due October 15, 2019

     115        115   

10.000% Fixed Senior Secured Notes due January 15, 2020

     1,061        1,061   

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

     434        434   

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

     740        740   

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

     744        744   

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

     64        68   

Unamortized fair value premium related to Building Financing (d)

     14        15   

Capital lease obligations

     2        4   

Unamortized fair value discount (d)

     (466     (476
                

Total EFH Corp.

     3,638        3,635   
                

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        2,180   
                

Total EFIH

     2,321        2,321   
                

Total EFH Corp. consolidated

     34,833        34,895   

Less amount due currently

     (463     (669
                

Total long-term debt

   $ 34,370      $ 34,226   
                

 

 

 

(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 March 31, 2011. 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 March 31, 2011. This series is in a weekly interest rate mode and is classified as long-term as it is supported by long-term irrevocable letters of credit.

(d)

Amount represents unamortized fair value adjustments recorded under purchase accounting.

(e)

Interest rate swapped to fixed on $17.87 billion principal amount.

(f)

Interest rates in effect as of March 31, 2011.

(g)

Amounts exclude $20 million that is held by EFH Corp. and eliminated in consolidation.

(h)

Interest rate in effect as of March 31, 2011, excluding a quarterly maintenance fee of $11 million. See “Credit Facilities” above for more information.

(i)

Amounts exclude $173 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)

Amounts exclude $1.428 billion and $2.296 billion of EFH Corp. 10.875% Notes and EFH Corp. Toggle Notes, respectively, that are held by EFIH and eliminated in consolidation.

(k)

Amounts exclude $9 million, $6 million and $3 million of the Series P, Series Q and Series R notes, respectively, that are held by EFIH and eliminated in consolidation.

(l)

This financing is secured and will be serviced with cash drawn by the beneficiary of a letter of credit.

Debt Repayments — Repayments of long-term debt in the three months ended March 31, 2011 totaled $71 million and included $51 million of principal payments at scheduled maturity dates and $19 million in contractual payments under capitalized lease obligations.

 

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April 2011 Amendment, Extension and Repayments of TCEH Senior Secured Facilities — Borrowings under these facilities totaled $22.031 billion as of March 31, 2011. In April 2011, (i) the Credit Agreement governing the TCEH Senior Secured Facilities was amended, (ii) the maturity dates of approximately 80% of the borrowings under the term loans (initial term loans and delayed draw term loans) and deposit letter of credit loans under the TCEH Senior Secured Facilities and approximately 70% of the commitments under the TCEH Revolving Credit Facility were extended, (iii) borrowings totaling $1.6 billion under the TCEH Senior Secured Facilities were repaid from proceeds of issuance of $1.750 billion principal amount of TCEH 11.5% Senior Secured Notes as discussed below and (iv) the amount of commitments under the TCEH Revolving Credit Facility was reduced by $646 million. TCEH paid transaction costs totaling approximately $850 million in connection with the amendment and extensions.

The amendment to the Credit Agreement included, among other things, amendments to certain covenants contained in the TCEH Senior Secured Facilities (including the financial maintenance covenant), as well as acknowledgement by the lenders that (i) the terms of the intercompany notes receivable (as described below) from EFH Corp. payable to TCEH complied with the TCEH Senior Secured Facilities, including the requirement that these loans be made on an “arm’s-length” basis, and (ii) no mandatory repayments were required to be made by TCEH relating to “excess cash flows,” as defined under covenants of the TCEH Senior Secured Facilities, for fiscal years 2008, 2009 and 2010.

As amended, the maximum ratios for the secured debt to Adjusted EBITDA financial maintenance covenant are 8.00 to 1.00 for test periods ending from March 31, 2011 through December 31, 2014, and decline over time to 5.50 to 1.00 for the test periods ending March 31, 2017 and thereafter. The previous maximum ratios were 6.75 to 1.00 for the test periods ending December 31, 2010 through September 30, 2011, declining over time to 5.75 to 1.00 for the test period ending March 31, 2014 and thereafter. In addition, (i) up to $1.5 billion principal amount of TCEH senior secured first lien notes (including the TCEH Senior Secured Notes discussed below), to the extent the proceeds are used to repay term loans and deposit letter of credit loans under the TCEH Senior Secured Facilities and (ii) all senior secured second lien debt will be excluded for the purposes of the secured debt to Adjusted EBITDA financial maintenance covenant.

The amendment contains certain provisions related to intercompany loans to EFH Corp. payable to TCEH on demand that arise from cash loaned for (i) debt principal and interest payments (the “P&I Note”) and (ii) other general corporate purposes of EFH Corp. (the “SG&A Note”). In addition to the acknowledgements described above, TCEH agreed in the Amendment:

 

   

not to make any further loans to EFH Corp. under the SG&A Note (as of April 19, 2011, the outstanding balance of the SG&A Note was $233 million, after the repayment discussed below);

   

that borrowings outstanding under the P&I Note will not exceed $2 billion in the aggregate at any time (as of March 31, 2011, the outstanding balance of the P&I Note was $955 million), and

   

that the sum of (i) the outstanding indebtedness (including guarantees) issued by EFH Corp. or any subsidiary of EFH Corp. (including EFIH) secured by a second-priority lien on the equity interests that EFIH owns in Oncor Holdings (EFIH Second-Priority Debt) and (b) the aggregate outstanding amount of the SG&A Note and P&I Note will not exceed, at any time, the maximum amount of EFIH Second-Priority Debt permitted by the indenture governing the EFH Corp. 10% Notes as in effect on April 7, 2011.

Further, in connection with the amendment, in April 2011 the following actions were completed related to the intercompany loans:

 

   

EFH Corp. repaid $770 million of borrowings under the SG&A Note (using proceeds from TCEH’s repayment of the $770 million TCEH borrowed from EFH Corp. in January 2011 under a demand note), and

   

EFIH and EFCH guaranteed, on an unsecured basis, the remaining balance of the SG&A Note (consistent with the existing EFIH and EFCH unsecured guarantees of the P&I Note and the EFH Corp. Senior Notes discussed below).

 

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Pursuant to the extension of the TCEH Senior Secured Facilities in April 2011:

 

   

the maturity of $15.402 billion principal amount of first lien term loans held by accepting lenders was extended from October 10, 2014 to October 10, 2017 and the interest rate with respect to the extended term loans was increased from LIBOR plus 3.50% to LIBOR plus 4.50%;

 

   

the maturity of $1.020 billion principal amount of its first lien deposit letter of credit loans held by accepting lenders was extended from October 10, 2014 to October 10, 2017 and the interest rate with respect to the extended deposit letter of credit loans was increased from LIBOR plus 3.50% to LIBOR plus 4.50%, and

 

   

the maturity of $1.414 billion of the commitments (of which related cash borrowings totaled $452 million as of April 19, 2011) under the TCEH Revolving Credit Facility held by accepting lenders was extended from October 10, 2013 to October 10, 2016, the interest rate with respect to the extended revolving commitments was increased from LIBOR plus 3.50% to LIBOR plus 4.50% and the undrawn fee with respect to such commitments was increased from 0.50% to 1.00%.

Upon the effectiveness of the extension, TCEH paid an up-front extension fee of 350 basis points on extended term loans and extended deposit letter of credit loans.

Each of the extended loans described above includes a “springing maturity” provision pursuant to which (i) in the event that more than $500 million aggregate principal amount of the TCEH 10.25% Notes due in 2015 (other than notes held by EFH Corp. or its controlled affiliates as of March 31, 2011 to the extent held as of the determination date) or more than $150 million aggregate principal amount of the TCEH Toggle Notes due in 2016 (other than notes held by EFH Corp. or its controlled affiliates as of March 31, 2011 to the extent held as of the determination date), as applicable, remain outstanding as of 91 days prior to the maturity date of the applicable notes and (ii) TCEH’s total debt to Adjusted EBITDA ratio (as defined in the TCEH Senior Secured Facilities) is greater than 6.00 to 1.00 at the applicable determination date, then the maturity date of the extended loans will automatically change to 90 days prior to the maturity date of the applicable notes.

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 on a first priority basis by (i) substantially all of the current and future assets of TCEH and TCEH’s subsidiaries who are guarantors of such facilities and (ii) pledges of the capital stock of TCEH and certain current and future direct or indirect subsidiaries of TCEH.

Amounts borrowed under the TCEH Revolving Facility may be reborrowed from time to time until October 2013 with respect to the $640 million of commitments not extended and until October 2016 with respect to the $1.414 billion of commitments that were extended; such amounts borrowed totaled $205 million and $452 million, respectively, as of April 19, 2011. The TCEH Commodity Collateral Posting Facility will mature in December 2012.

April 2011 Issuance of TCEH 11.5% Senior Secured Notes — In April 2011, TCEH and TCEH Finance issued $1.750 billion principal amount of 11.5% Senior Secured Notes due 2020, and used the net proceeds to:

 

   

repay $770 million principal amount of term loans (representing amortization payments that otherwise would have been paid from March 2011 through September 2014);

   

repay $188 million principal amount of deposit letter of credit loans;

   

repay $646 million of borrowings under the TCEH Revolving Credit Facility (with commitments under the facility being reduced by the same amount), and

   

fund $134 million of the approximately $850 million of total transaction costs associated with the amendment and extension of the TCEH Senior Secured Facilities discussed above.

 

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The TCEH Senior Secured Notes mature in October 2020, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1, beginning July 1, 2011, at a fixed rate of 11.5% per annum. The notes are unconditionally guaranteed on a joint and several basis by EFCH and each subsidiary of TCEH (collectively, the Guarantors). The notes are secured, on a first-priority basis, by security interests in all of the assets of TCEH, and the guarantees are secured on a first-priority basis by all of the assets and equity interests held by the Guarantors, in each case, to the extent such assets and equity interests secure obligations under the TCEH Senior Secured Facilities (the TCEH Collateral), subject to certain exceptions and permitted liens.

The TCEH Senior Secured Notes were issued in private placements and are not registered under the Securities Act. The 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 and second-priority debt of TCEH to the extent of the value of the TCEH Collateral and are senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated 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 Notes by the Guarantors are effectively senior to any unsecured and second-priority debt of the Guarantors to the extent of the value of the TCEH Collateral. The guarantees are effectively subordinated to all debt of the Guarantors secured by assets that are not part of the TCEH Collateral, to the extent of the value of the collateral securing that debt.

The indenture for the TCEH Senior Secured Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, TCEH’s and its restricted subsidiaries’ ability to:

 

   

make restricted payments, including certain investments;

   

incur debt and issue preferred stock;

   

create liens;

   

enter into mergers or consolidations;

   

sell or otherwise dispose of certain assets, and

   

engage in certain transactions with affiliates.

The indenture also contains customary events of default, including, among others, failure to pay principal or interest on the notes when due. If certain events of default occur under the indenture, the trustee or the holders of at least 30% of aggregate principal amount of all outstanding TCEH Senior Secured Notes may declare the principal amount on all such notes to be due and payable immediately.

Until April 1, 2014, TCEH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the TCEH Senior Secured Notes from time to time at a redemption price of 111.5% of the aggregate principal amount of the notes being redeemed, plus accrued interest. TCEH may redeem the notes at any time prior to April 1, 2016 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 the notes, in whole or in part, at any time on or after April 1, 2016, 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 the notes at 101% of their principal amount, plus accrued interest.

April 2011 EFIH Debt Exchanges — In private exchanges in April 2011, EFIH and EFIH Finance issued $406 million principal amount of 11% Senior Secured Second Lien Notes due 2021 in exchange for $428 million of EFH Corp. debt consisting of $163 million principal amount of EFH Corp. 10.875% Notes due 2017, $229 million principal amount of EFH Corp. Toggle Notes due 2017 and $36 million principal amount of EFH Corp. 5.55% Series P Senior Notes due 2014. EFIH intends to hold the acquired securities as an investment. The EFIH 11% Notes are secured on a second-priority basis by the EFIH Collateral described in the discussion of the EFH Corp. 10% Senior Secured Notes below.

 

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Information Regarding Other Significant Outstanding Debt

TCEH 10.25% Senior Notes (including Series B) and 10.50/11.25% Senior Toggle Notes (collectively, the TCEH Senior Notes) — The TCEH 10.25% Notes mature in November 2015, with interest payable in cash semi-annually in arrears on May 1 and November 1 at a fixed rate of 10.25% per annum. The Toggle Notes mature in November 2016, with interest payable semi-annually in arrears on May 1 and November 1 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, TCEH 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.

These notes had a total principal amount as of March 31, 2011 of $4.571 billion (excluding $323 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.

TCEH 15% Senior Secured Second Lien Notes (including Series B)These notes mature in April 2021, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1 at a fixed rate of 15% per annum, and had a total principal amount of $1.571 billion as of March 31, 2011. The notes are unconditionally guaranteed on a joint and several basis by EFCH and, subject to certain exceptions, each subsidiary of TCEH that guarantees the TCEH Senior Secured Facilities (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 Facilities (the TCEH Collateral), subject to certain exceptions (including the elimination of the pledge of equity interests of any Subsidiary Guarantor to the extent that separate financial statements would be required to be filed with the SEC for such Subsidiary Guarantor under Rule 3-16 of Regulation S-X) and permitted liens. The guarantee from EFCH is not secured.

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 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.

EFH Corp. 10% Senior Secured Notes — These notes mature in January 2020, with interest payable in cash semi-annually in arrears on January 15 and July 15 at a fixed rate of 10% per annum, and had a total principal amount of $1.061 billion as of March 31, 2011. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH. The guarantee from EFIH is 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 EFIH Collateral). The guarantee from EFCH is not secured. EFIH’s guarantee of the EFH Corp. 10% Notes is secured by the EFIH 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 were issued in private placements with registration rights. In March 2011, EFH Corp. completed an offer to exchange notes registered under the Securities Act that have substantially identical terms (other than transfer restrictions) for the EFH Corp. 10% Notes.

 

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EFH Corp. 10.875% Senior Notes and 11.25/12.00% Senior Toggle Notes (collectively, EFH Corp. Senior Notes) — These notes mature in November 2017, with interest payable in cash semi-annually in arrears on May 1 and November 1 at a fixed rate for the 10.875% Notes of 10.875% per annum and for the Toggle Notes a fixed rate of 11.250% per annum for cash interest and 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.

These notes had a total principal amount as of March 31, 2011 of $930 million (excluding $3.724 billion principal amount held by EFIH) and are fully and unconditionally guaranteed on a joint and several unsecured basis by EFCH and EFIH.

EFIH 10% Senior Secured Notes — These notes mature in December 2020, with interest payable in cash semi-annually in arrears on June 1 and December 1 at a fixed rate of 10% per annum, and had a total principal amount of $2.180 billion as of March 31, 2011. The EFIH 10% Notes are secured by the EFIH Collateral on an equal and ratable basis with the EFIH 9.75% Notes and EFIH’s guarantee of the EFH Corp. Senior Secured Notes.

Interest Rate Swap Transactions

As of March 31, 2011, TCEH has entered into interest rate swap transactions pursuant to which payment of the floating interest rates on an aggregate of $17.87 billion principal amount of senior secured term loans of TCEH were exchanged for interest payments at fixed rates of between 5.6% and 8.3% on debt maturing from 2012 to 2014. Swaps related to an aggregate $2.60 billion principal amount of debt expired or were terminated in the three months ended March 31, 2011, and swaps related to an aggregate $4.67 billion principal amount of debt (growing to $8.64 billion over time, primarily as existing swaps expire) were entered into in the three months ended March 31, 2011. Subsequent to the end of the quarter through April 27, 2011, TCEH entered into additional swaps related to an aggregate $781 million principal amount of debt (growing to $1.936 billion over time to October 2014, primarily as existing swaps expire).

As of March 31, 2011, 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 $12.70 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 0.1910%. In the three months ended March 31, 2011, interest rate basis swaps related to an aggregate $2.5 billion principal amount of TCEH senior secured term loans expired, and no additional basis swaps were entered into by 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 $142 million in net gains and $107 million in net losses in the three months ended March 31, 2011 and 2010, respectively. The cumulative unrealized mark-to-market net liability related to the swaps totaled $1.277 billion as of March 31, 2011, of which $94 million (pre-tax) was reported in accumulated other comprehensive income.

 

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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 March 31, 2011, both the aggregate maximum amount of residual values guaranteed and the estimated residual recoveries totaled $13 million. These leased assets consist primarily of rail cars. The average life of the residual value guarantees under the lease portfolio is approximately 5 years.

See Note 6 above and Note 11 to Financial Statements in the 2010 Form 10-K for discussion of guarantees and security for certain of our indebtedness.

Letters of Credit

As of March 31, 2011, TCEH had outstanding letters of credit under its credit facilities totaling $887 million as follows:

 

   

$495 million to support risk management and trading margin requirements in the normal course of business, including over-the-counter hedging transactions and collateral postings with ERCOT;

   

$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);

   

$73 million to support TCEH’s REP’s financial requirements with the PUCT, and

   

$111 million for miscellaneous credit support requirements.

Litigation Related to Generation Facilities

In November 2010, an administrative appeal challenging the decision of the TCEQ to renew and amend Oak Grove Management Company LLC’s (Oak Grove) (a wholly-owned subsidiary of TCEH) Texas Pollutant Discharge Elimination System (TPDES) permit related to water discharges was filed by Robertson County: Our Land, Our Lives and Roy Henrichson in the Travis County, Texas District Court. Plaintiffs seek a reversal of the TCEQ’s order and a remand back to the TCEQ for further proceedings. In addition to this administrative appeal, in November 2010, two other petitions were filed in Travis County, Texas District Court by Sustainable Energy and Economic Development Coalition and Paul and Lisa Rolke, respectively, who were non-parties to the administrative hearing before the State Office of Administrative Hearings, challenging the TCEQ’s decision to renew and amend Oak Grove’s TPDES permit and asking the District Court to remand the matter to the TCEQ for further proceedings. Although we cannot predict the outcome of these proceedings, we believe that the renewal and amendment of the Oak Grove TPDES permit are protective of the environment and that the application for and the processing of Oak Grove’s TPDES permit renewal and amendment by the TCEQ were in accordance with applicable law. There can be no assurance that the outcome of these matters would not result in an adverse impact on our financial condition, results of operations or liquidity.

 

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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. 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. Subsequently, in December 2010, 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 Monticello generation facility. We cannot predict whether the Sierra Club will actually file suit or the outcome of any resulting proceedings.

Regulatory 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. We are cooperating with the EPA and responding in good faith to the EPA’s request, but we are unable to predict the outcome of this matter.

Other Proceedings

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

 

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 debt (as defined in the indenture) to Adjusted EBITDA, in each case, consolidated with its subsidiaries other than Oncor Holdings and its subsidiaries. EFH Corp.’s consolidated leverage ratio was 8.8 to 1.0 as of March 31, 2011.

In addition, the indentures governing the EFIH Notes generally restrict EFIH from making any cash distribution to EFH Corp. for the ultimate purpose of making a cash dividend on our common stock unless at the time, and after giving effect to such dividend, EFIH’s consolidated leverage ratio is equal to or less than 6.0 to 1.0. Under the indentures governing the EFIH Notes, the term “consolidated leverage ratio” is defined as the ratio of EFIH’s consolidated total debt (as defined in the indentures) to EFIH’s Adjusted EBITDA on a consolidated basis (including Oncor’s Adjusted EBITDA). EFIH’s consolidated leverage ratio was 5.4 to 1.0 as of March 31, 2011.

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 dividend on our common stock unless at the time, and after giving effect to such dividend, 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. As of March 31, 2011, that ratio was 8.1 to 1.0.

 

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In addition, the TCEH Senior Secured Facilities and indentures governing the TCEH Senior Notes, TCEH Senior Secured 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 the indentures governing such notes. See discussion in Note 6 regarding amendments to the TCEH Senior Secured Facilities affecting intercompany loans from TCEH to EFH Corp.

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. has not declared or paid any dividends since the Merger.

Distributions from Oncor — Oncor’s distributions to us totaled $16 million and $30 million in the three months ended March 31, 2011 and 2010, respectively. 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 US 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 of which $52 million ($34 million after tax) has been spent through March 31, 2011, and removing the effects of the $860 million goodwill impairment charge from fourth quarter 2008 net income available for distribution. As of March 31, 2011, $177 million was available for distribution to Oncor’s members under the cumulative net income restriction, of which approximately 80% relates to EFH Corp.’s ownership interest in Oncor.

Oncor’s distributions are further limited by an agreement with the PUCT 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 March 31, 2011, the regulatory capitalization ratio was 59.4% debt and 40.6% equity. 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 US 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). As of March 31, 2011, $83 million was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest in Oncor.

Noncontrolling Interests

As discussed in Note 3, EFH Corp. consolidates a joint venture formed for the purpose of developing two new nuclear generation units, which results in a noncontrolling interests component of equity. Net loss attributable to the noncontrolling interests was immaterial for the three months ended March 31, 2011 and 2010.

 

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Equity

The following table presents the changes to equity during the three months ended March 31, 2011.

 

     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, 2010

   $ 2       $ 7,937       $ (13,666   $ (263   $ 79       $ (5,911

Net income (loss)

                     (362                    (362

Change in unrecognized gains related to pension and OPEB costs

                            5                5   

Net effects of cash flow hedges

                            7                7   

Investment by noncontrolling interests

                                   6         6   
                                                   

Balance as of March 31, 2011

   $ 2       $ 7,937       $ (14,028   $ (251   $ 85       $ (6,255
                                                   

 

 

(a)

Authorized shares totaled 2,000,000,000 as of March 31, 2011. Outstanding shares totaled 1,672,312,118 and 1,671,812,118 as of March 31, 2011 and December 31, 2010, respectively.

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

 

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

Balance as of December 31, 2009

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

Net income

                     355                      355   

Effects of EFH Corp. stock-based incentive compensation plans

             10                              10   

Change in unrecognized gains related to pension and OPEB costs

                            4               4   

Net effects of cash flow hedges

                            19               19   

Effects of deconsolidation of Oncor Holdings

                                   (1,363     (1,363

Investment by noncontrolling interests

                                   6        6   
                                                  

Balance as of March 31, 2010

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

 

 

(a)

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

 

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9.

FAIR VALUE MEASUREMENTS

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

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

 

   

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

 

   

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

 

   

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

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

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

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.

 

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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 March 31, 2011, 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

   $ 570       $ 3,472       $ 64       $ 12       $ 4,118   

Interest rate swaps

             110                         110   

Nuclear decommissioning trust – equity securities (c)

     207         129                         336   

Nuclear decommissioning trust – debt securities (c)

             224                         224   
                                            

Total assets

   $ 777       $ 3,935       $ 64       $ 12       $ 4,788   
                                            

Liabilities:

              

Commodity contracts

   $ 653       $ 611       $ 60       $ 12       $ 1,336   

Interest rate swaps

             1,413                         1,413   
                                            

Total liabilities

   $ 653       $ 2,024       $ 60       $ 12       $ 2,749   
                                            

 

 

(a)

Level 3 assets and liabilities consist primarily of a complex wind generation purchase contract 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 15.

As of December 31, 2010, assets and liabilities measured at fair value on a recurring basis consisted of the following:

 

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

Assets:

              

Commodity contracts

   $ 727       $ 3,575       $ 401       $ 2       $ 4,705   

Interest rate swaps

             98                         98   

Nuclear decommissioning trust – equity securities (c)

     192         121                         313   

Nuclear decommissioning trust – debt securities (c)

             223                         223   
                                            

Total assets

   $ 919       $ 4,017       $ 401       $ 2       $ 5,339   
                                            

Liabilities:

              

Commodity contracts

   $ 875       $ 672       $ 59       $ 2       $ 1,608   

Interest rate swaps

             1,544                         1,544   
                                            

Total liabilities

   $ 875       $ 2,216       $ 59       $ 2       $ 3,152   
                                            

 

 

(a)

Level 3 assets and liabilities consist primarily of a complex 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 15.

In conjunction with ERCOT’s transition to a nodal wholesale market structure effective December 2010, 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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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 Level 1 and Level 2 of the fair value hierarchy for the three months ended March 31, 2011 or 2010. See the table below for discussion of transfers between Level 2 and Level 3.

The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to commodity contracts) for the three months ended March 31, 2011 and 2010:

 

     Three Months Ended March 31,  
     2011     2010  

Balance as of beginning of period

   $ 342      $ 81   

Total realized and unrealized gains (losses) included in net income (loss) (a)

     (18     51   

Purchases, issuances and settlements (b):

    

Purchases

     10        39   

Issuances

     (1     (30

Settlements

     16        9   

Transfers into Level 3 (c)

              

Transfers out of Level 3 (c)

     (345     6   
                

Balance as of end of period

   $ 4      $ 156   
                

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

   $ 7      $ 54   

 

 

 

(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. Transfers in and out occur at the end of each quarter, which is when the assessments are performed. Significant transfers out occurred during the three months ended March 31, 2011 for natural gas collars for 2014; these derivatives are now categorized as Level 2 due to an increase in option market trading activity in forward periods.

 

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10.

FAIR VALUE OF NONDERIVATIVE FINANCIAL INSTRUMENTS

The carrying amounts and related estimated fair values of significant nonderivative financial instruments as of March 31, 2011 and December 31, 2010 were as follows:

 

     March 31, 2011      December 31, 2010  
         Carrying    
Amount
     Fair
    Value  (a)    
         Carrying    
Amount
     Fair
    Value  (a)    
 

On balance sheet liabilities:

           

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

   $ 34,757       $ 28,616       $ 34,815       $ 26,594   

Off balance sheet liabilities:

           

Financial guarantees

   $       $ 7       $       $ 9   

 

 

(a)

Fair value determined in accordance with accounting standards related to the determination of fair value.

(b)

Excludes capital leases.

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

 

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 largely 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.

 

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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 (with the column totals representing the net positions of the contracts) as reported in the balance sheets as of March 31, 2011 and December 31, 2010:

 

March 31, 2011

 
     Derivative assets      Derivative liabilities        
         Commodity    
contracts
        Interest rate    
swaps
         Commodity    
contracts
        Interest rate    
swaps
            Total          

Current assets

   $ 2,388      $ 83       $ 3      $      $ 2,474   

Noncurrent assets

     1,726        27         1               1,754   

Current liabilities

     (3             (1,247     (750     (2,000

Noncurrent liabilities

     (5             (81     (663     (749
                                         

Net assets (liabilities)

   $ 4,106      $ 110       $ (1,324   $ (1,413   $ 1,479   
                                         

December 31, 2010

 
     Derivative assets      Derivative liabilities        
     Commodity
contracts
    Interest rate
swaps
     Commodity
contracts
    Interest rate
swaps
    Total  

Current assets

   $ 2,637      $ 95       $      $      $ 2,732   

Noncurrent assets

     2,068        3                       2,071   

Current liabilities

     (2             (1,542     (739     (2,283

Noncurrent liabilities

                    (64     (805     (869
                                         

Net assets (liabilities)

   $ 4,703      $ 98       $ (1,606   $ (1,544   $ 1,651   
                                         

As of March 31, 2011 and December 31, 2010, 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 $561 million and $479 million in net liabilities as of March 31, 2011 and December 31, 2010, respectively. 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.

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 March 31,      

Derivative (Income statement presentation)

               2011                  2010  

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

   $ (18   $ 1,203   

Interest rate swaps (Interest expense and related charges)

     (19     (276
                

Net gain (loss)

   $ (37   $ 927   
                

 

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

 

         Amount of loss recognized in    
OCI (effective portion)
    

Income statement presentation of loss reclassified

from accumulated OCI into income

(effective portion)

         Three Months Ended       
March 31,
 
     Three Months Ended
March 31,
       

Derivative

   2011      2010         2011     2010  

Interest rate swaps

   $       $      

Interest expense and related charges

   $ (10   $ (29
        

Depreciation and amortization

     (1       

Commodity contracts

                  

Fuel, purchased power costs and delivery fees

              
                         
        

Operating revenues

              
                         

Total

   $       $          $ (11   $ (29
                                     

There were no transactions designated as cash flow hedges during the three months ended March 31, 2011 and 2010.

Accumulated other comprehensive income related to cash flow hedges as of March 31, 2011 and December 31, 2010 totaled $62 million and $69 million in net losses (after-tax), respectively, substantially all of which relates to interest rate swaps. We expect that $15 million of net losses (after-tax) related to cash flow hedges included in accumulated other comprehensive income as of March 31, 2011 will be reclassified into net income during the next twelve months as the related hedged transactions affect net income.

Derivative Volumes — The following table presents the gross notional amounts of derivative volumes as of March 31, 2011 and December 31, 2010:

 

           March 31, 2011                  December 31, 2010               

Derivative type

   Notional Volume          Unit of Measure      

Interest rate swaps:

        

Floating/fixed

   $ 19,573       $ 17,500         Million US dollars   

Basis

   $ 12,700       $ 15,200         Million US dollars   

Natural gas:

        

Long-term hedge forward sales and purchases (a)

     2,434         2,681         Million MMBtu   

Locational basis swaps

     1,099         1,092         Million MMBtu   

All other

     803         887         Million MMBtu   

Electricity

     143,908         143,776         GWh   

Congestion Revenue Rights (b)

     12,523         15,782         GWh   

Coal

     6         6         Million tons   

Fuel oil

     95         109         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 1.0 billion MMBtu as of March 31, 2011 and December 31, 2010.

(b)

Represents gross forward purchases associated with instruments used to hedge price differences between settlement points in the new nodal wholesale market design implemented by ERCOT.

 

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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 credit rating agency; however, due to our credit ratings being below investment grade, substantially all of such collateral posting requirements are already effective.

As of March 31, 2011 and December 31, 2010, the fair value of liabilities related to derivative instruments under agreements with credit risk-related contingent features that were not fully cash collateralized totaled $423 million and $408 million, respectively. The liquidity exposure associated with these liabilities was reduced by cash and letter of credit postings with the counterparties totaling $88 million and $65 million as of March 31, 2011 and December 31, 2010, respectively. If all the credit risk-related contingent features related to these derivatives had been triggered, including cross default provisions, as of March 31, 2011 and December 31, 2010, the remaining related liquidity requirement would have totaled $13 million and $18 million, respectively, after reduction for net accounts receivable and derivative assets under netting arrangements.

In addition, certain derivative agreements that are collateralized primarily with asset liens include indebtedness cross-default provisions that could result in the settlement of such contracts if there were a failure under other financing arrangements to meet payment terms or to comply with other covenants that could result in the acceleration of such indebtedness. As of March 31, 2011 and December 31, 2010, the fair value of derivative liabilities subject to such cross-default provisions, largely related to interest rate swaps, totaled $1.636 billion and $1.865 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 March 31, 2011 and December 31, 2010 to reduce the liquidity exposure. If all the credit risk-related contingent features related to these derivatives, including amounts related to cross-default provisions, had been triggered as of March 31, 2011 and December 31, 2010, the remaining related liquidity requirement would have totaled $519 million and $674 million, respectively, after reduction for derivative assets under netting arrangements (before consideration of the amount of assets under the liens). See Note 6 for a description of other obligations that are supported by asset liens.

As discussed immediately above, the aggregate fair values of liabilities under derivative agreements with credit risk-related contingent features, including cross-default provisions, totaled $2.059 billion and $2.273 billion as of March 31, 2011 and December 31, 2010, 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 March 31, 2011, total credit risk exposure to all counterparties related to derivative contracts totaled $4.3 billion (including associated accounts receivable). The net exposure to those counterparties totaled $1.4 billion as of March 31, 2011 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 $1.3 billion. As of March 31, 2011, the credit risk exposure to the banking and financial sector represented 95% 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 $559 million. Exposure to the banking and financial sector counterparties is considered to be within an acceptable level of risk tolerance because a significant majority 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, results of operations and liquidity.

 

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Table of Contents

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.

 

12.

PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS (OPEB) COSTS

Net pension and OPEB costs for the three months ended March 31, 2011 and 2010 are comprised of the following:

 

         Three Months Ended March 31,      
     2011     2010  

Components of net pension costs:

    

Service cost

   $ 11      $ 11   

Interest cost

     41        39   

Expected return on assets

     (39     (40

Amortization of net loss

     22        13   
                

Net pension costs

     35        23   
                

Components of net OPEB costs:

    

Service cost

     3        3   

Interest cost

     16        15   

Expected return on assets

     (3     (3

Amortization of net loss

     7        5   
                

Net OPEB costs

     23        20   
                

Total net pension and OPEB costs

     58        43   

Less amounts expensed by Oncor (and not consolidated)

     (9     (9

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

     (33     (22
                

Net amounts recognized as expense by EFH Corp. and consolidated subsidiaries

   $ 16      $ 12   
                

The discount rates reflected in net pension and OPEB costs in 2011 are 5.50% and 5.55%, respectively. The expected rates of return on pension and OPEB plan assets reflected in the 2011 cost amounts are 7.7% and 7.1%, respectively.

We made cash contributions related to our pension and OPEB plans totaling $14 million and $6 million, respectively, in the first quarter of 2011, of which $18 million was contributed by Oncor. We expect to make additional contributions of $161 million and $19 million, respectively, in the remainder of 2011, of which $173 million is expected to be contributed by Oncor.

 

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13.

RELATED PARTY TRANSACTIONS

The following represent our significant related-party transactions.

 

   

We incur an annual management fee under the terms of a management agreement with the Sponsor Group for which we accrued $9 million for both the three months ended March 31, 2011 and 2010. 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 each member of the Sponsor Group have from time to time engaged in commercial banking transactions with us and/or provided financial advisory services to us, in each case in the normal course of business, and participated on terms similar to nonaffiliated lenders in the April 2011 amendment and extension of the TCEH Senior Secured Facilities discussed in Note 6.

 

   

Goldman, Sachs & Co. (Goldman), an affiliate of GS Capital Partners, acted as a joint lead arranger and joint book-runner in the April 2011 amendment and extension of the TCEH Senior Secured Facilities discussed in Note 6 and received fees totaling $17 million. Goldman also acted as a joint book-running manager and initial purchaser in the issuance of $1.750 billion principal amount of TCEH 11.5% Notes as part of the April 2011 amendment and extension and received fees totaling $9 million. Affiliates of KKR and TPG Capital, L.P. served as advisors to these transactions and each received $5 million as compensation for their services. Goldman acted as an initial purchaser in the issuance of $500 million principal amount of EFH Corp. 10% Notes in January 2010 for which it received fees totaling $3 million.

 

   

Affiliates of GS Capital Partners are parties to certain commodity and interest rate hedging transactions with us in the normal course of business.

 

   

Affiliates of the Sponsor Group have, and in the future 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 $239 million and $264 million for the three months ended March 31, 2011 and 2010, respectively. The fees are based on rates regulated by the PUCT that apply to all REPs. The balance sheet as of March 31, 2011 and December 31, 2010 reflects amounts due currently to Oncor totaling $138 million and $143 million, respectively (included in 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 $208 million ($39 million current portion included in payables due to unconsolidated subsidiary) and $217 million ($39 million current portion included in payables due to unconsolidated subsidiary) as of March 31, 2011 and December 31, 2010, respectively. TCEH’s payments on the note totaled $9 million for both the three months ended March 31, 2011 and 2010.

 

   

TCEH reimburses Oncor for interest expense on Oncor’s bankruptcy-remote financing subsidiary’s securitization bonds. This interest expense, which is paid on a monthly basis, totaled $8 million and $10 million for the three months ended March 31, 2011 and 2010, respectively.

 

   

A subsidiary of EFH Corp. charges Oncor for financial and other administrative services at cost, which totaled $8 million and $7 million for the three months ended March 31, 2011 and 2010, respectively.

 

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Under Texas regulatory provisions, the trust fund for decommissioning the Comanche Peak nuclear generation facility, reported in other investments on the balance sheet, is funded by a delivery fee surcharge billed to REPs by Oncor and remitted monthly to TCEH (totaling $4 million for each of the three months ended March 31, 2011 and 2010), 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 March 31, 2011 and December 31, 2010, the excess of the trust fund balance over the decommissioning liability resulted in a payable to Oncor totaling $225 million and $206 million, respectively, included in noncurrent liabilities due to unconsolidated subsidiary in the balance sheet.

 

   

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 March 31, 2011 and December 31, 2010, the amount due to Oncor Holdings totaled $92 million (including $25 million noncurrent portion expected to be collected in 2012) and $72 million, respectively, and is included in payables due to unconsolidated subsidiary. There were no income tax payments from Oncor in the three months ended March 31, 2011 or 2010.

 

   

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 both March 31, 2011 and December 31, 2010, TCEH had posted letters 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 March 31, 2011 and December 31, 2010, the balance sheet of EFH Corp. reflects such unfunded liabilities and a corresponding receivable from Oncor in the amount of $1.460 billion and $1.463 billion, respectively, 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 in the event, which has not occurred, two or more rating agencies downgrade Oncor’s credit ratings below investment grade.

 

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14.

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 Note 3 for discussion of the reporting of Oncor Holdings and, accordingly, the Regulated Delivery segment, as an equity method investment.

Corporate and Other represents the remaining nonsegment operations consisting primarily of 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 to Financial Statements in the 2010 Form 10-K. We evaluate performance based on income from continuing operations. We account for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

 

         Three Months Ended March 31,      
     2011     2010  

Operating revenues (all Competitive Electric)

   $ 1,672      $ 1,999   
                

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

    

Regulated Delivery (net of minority interest of $13 and $16)

   $ 50      $ 63   
                

Net income (loss):

    

Competitive Electric

   $ (320   $ 431   

Regulated Delivery

     50        63   

Corporate and Other

     (92     (139
                

Consolidated

   $ (362   $ 355   
                

 

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15.

SUPPLEMENTARY FINANCIAL INFORMATION

Stock-Based Compensation

In December 2010, in consideration of the desire to enhance retention incentives, EFH Corp. offered employee grantees of all stock options (excluding named executive officers and a limited number of other employees) the right to exchange their vested and unvested options for restricted stock units payable in shares (at a ratio of two options for each stock unit). The restricted stock units vest as common shares of EFH Corp. in September 2014. The exchange offer closed in late February 2011, and substantially all eligible employees accepted the offer, which resulted in the issuance of 9.4 million restricted stock units in exchange for 16.1 million Time-Based Options (including 5.2 million that were vested) and 2.8 million Performance-Based Options (including 2.0 million that were vested). In addition, 0.4 million restricted stock units were issued as compensation to management employees and directors in the three months ended March 31, 2011.

In addition, 0.4 million and 0.2 million shares of common stock were awarded as compensation in the three months ended March 31, 2011 and 2010, respectively, to board members. Of the restricted stock units payable in cash previously granted to certain management employees, 0.6 million vested in the three months ended March 31, 2010.

Expenses recognized for restricted stock units payable in shares totaled $0.6 million for the three months ended March 31, 2011. Expenses recognized for options granted totaled $1.1 million and $7 million for the three months ended March 31, 2011 and 2010, respectively. Expenses recognized for deferred shares and other common stock awarded as compensation totaled $1.8 million and $2 million for the three months ended March 31, 2011 and 2010, respectively. In addition, as a result of the decline in value of EFH Corp. shares, in the three months ended March 31, 2011, a credit of $3.5 million was recorded related to restricted stock units payable in cash.

Other Income and Deductions

 

         Three Months Ended March 31,      
     2011      2010  

Other income:

     

Settlement of counterparty bankruptcy claims (a) (b)

   $ 21       $   

Property damage claim (a)

     7           

Franchise tax refund (a)

     6           

Office space rental income (c)

     3         3   

Debt extinguishment gains (Note 6) (c)

             14   

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

             7   

Sales tax refund (a)

             5   

Other

     4         4   
                 

Total other income

   $ 41       $ 33   
                 

Other deductions:

     

Ongoing pension and OPEB expense related to discontinued businesses (c)

   $ 2       $ 3   

Net charges related to cancelled development of generation facilities (a)

     1         1   

Severance charges

             2   

Other

     1         5   
                 

Total other deductions

   $ 4       $ 11   
                 

 

 

(a)

Reported in Competitive Electric segment.

(b)

Represents net cash received as a result of the settlement of bankruptcy claims against a hedging/trading counterparty. A reserve of $26 million was established in 2008 related to amounts then due from the counterparty.

(c)

Reported in Corporate and Other.

 

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Interest Expense and Related Charges

 

         Three Months Ended March 31,      
     2011     2010  

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

   $ 684      $ 658   

Accrued interest to be paid with additional toggle notes

     57        139   

Unrealized mark-to-market net (gain) loss on interest rate swaps (Note 6)

     (142     107   

Amortization of interest rate swap losses at dedesignation of hedge accounting

     10        29   

Amortization of fair value debt discounts resulting from purchase accounting

     13        19   

Amortization of debt issuance costs and discounts

     29        33   

Capitalized interest

     (8     (31
                

Total interest expense and related charges

   $ 643      $ 954   
                

Restricted Cash

 

         March 31, 2011              December 31, 2010      
         Current    
Assets
         Noncurrent    
Assets
         Current    
Assets
         Noncurrent    
Assets
 

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

   $       $ 1,135       $       $ 1,135   

Amounts related to margin deposits held

     36                 33           
                                   

Total restricted cash

   $ 36       $ 1,135       $ 33       $ 1,135   
                                   

Inventories by Major Category

 

         March 31,    
2011
         December 31,    
2010
 

Materials and supplies

   $ 163       $ 162   

Fuel stock

     200         198   

Natural gas in storage

     31         35   
                 

Total inventories

   $ 394       $ 395   
                 

Other Investments

 

         March 31,    
2011
         December 31,    
2010
 

Nuclear decommissioning trust

   $ 560       $ 536   

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

     104         117   

Land

     41         41   

Miscellaneous other

     3         3   
                 

Total other investments

   $ 708       $ 697   
                 

 

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

 

     March 31, 2011  
         Cost (a)              Unrealized gain              Unrealized loss             Fair market    
value
 

Debt securities (b)

   $ 223       $ 5       $ (4   $ 224   

Equity securities (c)

     218         131         (13     336   
                                  

Total

   $ 441       $ 136       $ (17   $ 560   
                                  
     December 31, 2010  
     Cost (a)      Unrealized gain      Unrealized loss     Fair market
value
 

Debt securities (b)

   $ 221       $ 6       $ (4   $ 223   

Equity securities (c)

     213         115         (15     313   
                                  

Total

   $ 434       $ 121       $ (19   $ 536   
                                  

 

 

 

(a)

Includes realized gains and losses of securities sold.

(b)

The investment objective for debt securities is to invest in a diversified tax efficient portfolio with an overall portfolio rating of AA or above as graded by S&P or Aa2 by Moody’s. The debt securities are heavily weighted with municipal bonds. The debt securities had an average coupon rate of 4.05% and 4.61% and an average maturity of 6.5 years and 8.8 years as of March 31, 2011 and December 31, 2010, respectively.

(c)

The investment objective for equity securities is to invest tax efficiently and to match the performance of the S&P 500 Index.

Debt securities held as of March 31, 2011 mature as follows: $110 million in one to five years, $45 million in five to ten years and $69 million after ten years.

The following table summarizes proceeds from sales of available-for-sale securities and the related realized gains and losses from such sales.

 

         Three Months Ended March 31,      
     2011      2010  

Realized gains

   $       $ 1   

Realized losses

     (2        

Proceeds from sale of securities

     734         564   

Property, Plant and Equipment

As of March 31, 2011 and December 31, 2010, property, plant and equipment of $20.2 billion and $20.4 billion, respectively, is stated net of accumulated depreciation and amortization of $4.5 billion and $4.2 billion, respectively.

 

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Asset Retirement and Mining Reclamation Obligations

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

The following table summarizes the changes to these obligations, reported in other current liabilities and other noncurrent liabilities and deferred credits in the balance sheet, during the three months ended March 31, 2011:

 

Liability as of January 1, 2011

   $ 493   

Additions:

  

Accretion

     12   

Reductions:

  

Payments, essentially all mining reclamation

     (16
        

Liability as of March 31, 2011

     489   

Less amounts due currently

     39   
        

Noncurrent liability as of March 31, 2011

   $ 450   
        

Other Noncurrent Liabilities and Deferred Credits

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

 

         March 31, 2011              December 31, 2010      

Uncertain tax positions (including accrued interest)

   $ 1,818       $ 1,806   

Retirement plan and other employee benefits

     1,902         1,895   

Asset retirement and mining reclamation obligations

     450         452   

Unfavorable purchase and sales contracts

     667         673   

Other

     85         41   
                 

Total other noncurrent liabilities and deferred credits

   $ 4,922       $ 4,867   
                 

The conclusion of all issues contested with the IRS from the 1997 through 2002 audit, including IRS Joint Committee review, is expected to occur before the end of 2012. Upon such conclusion, we expect to reduce the liability for uncertain tax positions by approximately $700 million with an offsetting decrease in deferred tax assets that arose largely from previous payments of alternative minimum taxes. No cash income tax liability is expected related to the conclusion of the 1997 through 2002 audit. Other than the items discussed immediately above, we do not expect the total amount of liabilities recorded related to uncertain tax positions to significantly increase or decrease within the next 12 months.

Unfavorable Purchase and Sales Contracts – The amortization of unfavorable purchase and sales contracts totaled $6 million in both the three months ended March 31, 2011 and 2010. Favorable purchase and sales contracts are recorded as intangible assets (see Note 4).

The estimated amortization of unfavorable purchase and sales contracts for each of the five fiscal years from December 31, 2010 is as follows:

 

Year

       Amount      

2011

   $ 27   

2012

     27   

2013

     26   

2014

     25   

2015

     25   

 

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Supplemental Cash Flow Information

 

         Three Months Ended March 31,      
     2011      2010  

Cash payments (receipts) related to:

     

Interest paid (a)

   $ 424       $ 427   

Capitalized interest

     (8      (31
                 

Interest paid (net of capitalized interest) (a)

     416         396   

Income taxes

     (31      2   

Noncash investing and financing activities:

     

Noncash construction expenditures (b)

     43         99   

Debt exchange transactions

             14   

Capital leases

             6   

 

 

 

(a)

Net of interest received on interest rate swaps.

(b)

Represents end-of-period accruals.

 

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16. SUPPLEMENTAL GUARANTOR CONDENSED FINANCIAL INFORMATION

As of March 31, 2011, EFH Corp. had outstanding $359 million principal amount of EFH Corp. 10.875% Notes and $571 million principal amount of EFH Corp. Toggle Notes (collectively, the EFH Corp. Senior Notes) and $115 million principal amount of EFH Corp. 9.75% Notes and $1.061 billion principal amount of EFH Corp. 10% Notes (collectively, the EFH Corp. Senior Secured Notes). The EFH Corp. Senior Notes and Senior Secured Notes are unconditionally guaranteed by EFCH and EFIH, 100% owned subsidiaries of EFH Corp. (collectively, the Guarantors) on an unsecured basis except for EFIH’s guarantee of the EFH Corp. Senior Secured Notes, which is secured by a pledge of all membership interests and other investments EFIH owns or holds in Oncor Holdings or any of Oncor Holdings’ subsidiaries as described in Note 6. The guarantees issued by the Guarantors are full and unconditional, joint and several guarantees of the EFH Corp. Senior Notes and Senior Secured Notes. The guarantees by EFCH and the guarantee of the EFH Corp. Senior Notes by EFIH rank equally with any senior unsecured indebtedness of the Guarantors and rank effectively junior to all of the secured indebtedness of the Guarantors to the extent of the assets securing that indebtedness. All other subsidiaries of EFH Corp., either direct or indirect, do not guarantee the EFH Corp. Senior Notes and EFH Corp. Senior Secured Notes (collectively, the Non-Guarantors). The indentures governing the EFH Corp. Senior Notes and EFH Corp. Senior Secured Notes contain certain restrictions, subject to certain exceptions, on EFH Corp.’s ability to pay dividends or make investments. See Note 8.

The following tables have been prepared in accordance with Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered” in order to present the condensed consolidating statements of income and cash flows of EFH Corp. (the Parent/Issuer), the Guarantors and the Non-Guarantors for the three months ended March 31, 2011 and 2010 and the consolidating balance sheets as of March 31, 2011 and December 31, 2010 of the Parent/Issuer, the Guarantors and the Non-Guarantors. Investments in consolidated subsidiaries are accounted for under the equity method. The presentations reflect the application of SEC Staff Accounting Bulletin Topic 5-J, “Push Down Basis of Accounting Required in Certain Limited Circumstances,” including the effects of the push down of the $930 million principal amount of EFH Corp. Senior Notes and $771 million principal amount of the EFH Corp. Senior Secured Notes to the Guarantors as of both March 31, 2011 and December 31, 2010 (see Note 6). Amounts pushed down reflect Merger-related debt and additional debt guaranteed by the Guarantors that was issued by EFH Corp. to refinance Merger-related or other debt existing at the time of the Merger.

EFH Corp. (Parent) received no dividends/distributions from its consolidated subsidiaries in the three months ended March 31, 2011 or 2010.

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income (Loss)

For the Three Months Ended March 31, 2011

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $      $      $ 1,672      $      $ 1,672   

Fuel, purchased power costs and delivery fees

                   (830            (830

Net gain (loss) from commodity hedging and trading activities

                   (94            (94

Operating costs

                   (216            (216

Depreciation and amortization

                   (369            (369

Selling, general and administrative expenses

     (5            (160            (165

Franchise and revenue-based taxes

                   (21            (21

Other income

            6        35               41   

Other deductions

                   (4            (4

Interest income

     53        145        70        (266     2   

Interest expense and related charges

     (277     (110     (533     277        (643
                                        

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

     (229     41        (450     11        (627

Income tax (expense) benefit

            79        (15     154        (3     215   

Equity in earnings of consolidated subsidiaries

     (262     (301            563          

Equity in earnings of unconsolidated subsidiaries (net of tax)

     50        50               (50     50   
                                        

Net income (loss)

     (362     (225     (296     521        (362

Net income attributable to noncontrolling interests

                                   
                                        

Net income (loss) attributable to EFH Corp.

   $ (362   $ (225   $ (296   $ 521      $ (362
                                        

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Income

For the Three Months Ended March 31, 2010

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-Guarantors     Eliminations     Consolidated  

Operating revenues

   $      $      $ 1,999      $      $ 1,999   

Fuel, purchased power costs and delivery fees

                   (1,047            (1,047

Net gain from commodity hedging and trading activities

                   1,213               1,213   

Operating costs

                   (197            (197

Depreciation and amortization

                   (342            (342

Selling, general and administrative expenses

     (6            (181            (187

Franchise and revenue-based taxes

                   (22            (22

Other income

     8               25               33   

Other deductions

                   (11            (11

Interest income

     58        1        43        (92     10   

Interest expense and related charges

     (262     (148     (776     232        (954
                                        

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

     (202     (147     704        140        495   

Income tax (expense) benefit

     59        49        (261     (50     (203

Equity in earnings of consolidated subsidiaries

          435        450               (885       

Equity in earnings of unconsolidated subsidiaries (net of tax)

     63        63               (63     63   
                                        

Net income

     355        415        443        (858     355   

Net income attributable to noncontrolling interests

                                   
                                        

Net income attributable to EFH Corp.

   $ 355      $ 415      $ 443      $ (858   $ 355   
                                        

 

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ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2011

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-guarantors     Eliminations     Consolidated  

Cash provided by operating activities

   $ (41   $ 20      $ 349      $      $ 328   
                                        

Cash flows – financing activities:

          

Repayments/repurchases of long-term borrowings

            (1     (70            (71

Net short-term borrowings under accounts receivable securitization program

                   5               5   

Change in other short-term borrowings

                   (222            (222

Contributions from noncontrolling interests

                   6               6   

Change in notes/advances – affiliates

     (696     (4     761        (70     (9

Other, net

                   (1            (1
                                        

Cash provided by (used in) financing activities

     (696     (5     479        (70     (292
                                        

Cash flows – investing activities:

          

Capital expenditures and nuclear fuel purchases

                   (247            (247

Proceeds from sale of environmental allowances and credits

                   1               1   

Purchases of environmental allowances and credits

                   (4            (4

Proceeds from sales of nuclear decommissioning trust fund securities

                   734               734   

Investments in nuclear decommissioning trust fund securities

                   (738            (738

Change in notes/advances – affiliates

                   (70     70          

Other, net

     5               9               14   
                                        

Cash provided by (used in) investing activities

     5               (315     70        (240
                                        

Net change in cash and cash equivalents

     (732     15        513               (204

Cash and cash equivalents – beginning balance

         1,443        43        48               1,534   
                                        

Cash and cash equivalents – ending balance

   $ 711      $ 58      $ 561      $      $ 1,330   
                                        

 

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Table of Contents

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(millions of dollars)

 

     Parent/
Issuer
    Guarantors     Non-guarantors     Eliminations     Consolidated  

Cash provided by operating activities

   $ 42      $ 22      $ 38      $      $ 102   
                                        

Cash flows – financing activities:

          

Issuances of long-term borrowings

     500                             500   

Repayments/repurchases of long-term borrowings

            (1     (131            (132

Net short-term borrowings under accounts receivable securitization program

                   393               393   

Change in other short-term borrowings

                   (700            (700

Contributions from noncontrolling interests

                   6               6   

Change in notes/advances – affiliates

     (753     9        700        44          

Other, net

     (10                          (10
                                        

Cash provided by (used in) financing activities

     (263