Attached files
| file | filename |
|---|---|
| EX-31.B - CERTIFICATION OF PAUL M. KEGLEVIC - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit31b.htm |
| EX-31.A - CERTIFICATION OF JOHN F. YOUNG - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit31a.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Energy Future Holdings Corp /TX/ | Financial_Report.xls |
| EX-32.B - CERTIFICATION OF PAUL M. KEGLEVIC - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit32b.htm |
| EX-95.A - MINE SAFETY DISCLOSURES - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit95a.htm |
| EX-99.B - TEXAS COMPETITIVE ELECTRIC HOLDINGS COMPANY LLC EBITDA RECONCILIATION - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit99b.htm |
| EX-32.A - CERTIFICATION OF JOHN F. YOUNG - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit32a.htm |
| EX-99.A - TWELVE MONTHS ENDED SEPTEMBER 30, 2014 STATEMENT OF INCOME (LOSS) - Energy Future Holdings Corp /TX/ | efh-2014930xexhibit99a.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
— OR —
o 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 | 46-2488810 | |
(State or other jurisdiction of incorporation or organization) | (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, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 x No o
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 o Accelerated filer o Non-Accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At November 4, 2014, there were 1,669,861,379 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
PAGE | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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. The representations and warranties contained in any agreement that we have filed as an exhibit to this quarterly report on Form 10-Q or that we have or may publicly file in the future may contain representations and warranties made by and to the parties thereto at specific dates. Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties' risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.
This quarterly report on 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 parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or vice versa.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
2013 Form 10-K | EFH Corp.'s Annual Report on Form 10-K for the year ended December 31, 2013, as amended | |
Bankruptcy Filing | Voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code (Bankruptcy Code) in the US Bankruptcy Court for the District of Delaware (Bankruptcy Court) filed on April 29, 2014 by the Debtors | |
CAIR | Clean Air Interstate Rule | |
Competitive Electric segment | the EFH Corp. business segment that consists principally of TCEH | |
Consolidated EBITDA | Consolidated EBITDA means TCEH EBITDA adjusted to exclude noncash items, unusual items and other adjustments allowable under the agreement governing the TCEH DIP Facility. See the definition of EBITDA below. Consolidated EBITDA and EBITDA are not recognized terms under US GAAP and, thus, are non-GAAP financial measures. We are providing Consolidated EBITDA in this Form 10-Q (see reconciliation in Exhibit 99(b)) solely because of the important role that Consolidated EBITDA plays in respect of covenants contained in the agreement governing the TCEH DIP Facility. We do not intend for Consolidated 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 Consolidated 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 Consolidated EBITDA (and EBITDA) may not be comparable to similarly titled measures of other companies. | |
CSAPR | the final Cross-State Air Pollution Rule issued by the EPA in July 2011 (see Note 9 to Financial Statements) | |
DIP Facilities | Refers, collectively, to TCEH's debtor-in-possession financing and EFIH's debtor-in-possession financing. See Note 5 to Financial Statements. | |
Debtors | EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities | |
D.C. Circuit Court | US Court of Appeals for the District of Columbia Circuit | |
EBITDA | earnings (net income) before interest expense, income taxes, depreciation and amortization | |
EFCH | Energy Future Competitive Holdings Company LLC, a direct, wholly owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context | |
EFH Corp. | Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context, whose major subsidiaries include TCEH and Oncor | |
EFIH | Energy Future Intermediate Holding Company LLC, a direct, wholly owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings | |
EFIH Debtors | EFIH and EFIH Finance | |
EFIH Finance | 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 First Lien Notes | Refers, collectively, to EFIH's and EFIH Finance's $503 million principal amount of 6.875% Senior Secured First Lien Notes and $3.482 billion principal amount of 10.000% Senior Secured First Lien Notes. | |
EFIH Second Lien Notes | Refers, collectively, to EFIH's and EFIH Finance's $406 million principal amount of 11% Senior Secured Second Lien Notes and $1.75 billion principal amount of 11.75% Senior Secured Second Lien Notes. | |
EPA | US Environmental Protection Agency | |
ERCOT | Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas | |
ii
ERISA | Employee Retirement Income Security Act of 1974, as amended | |
Federal and State Income Tax Allocation Agreements | EFH Corp. and certain of its subsidiaries (including EFCH, EFIH and TCEH, but not including Oncor Holdings and Oncor) are parties to a Federal and State Income Tax Allocation Agreement, executed on May 15, 2012 but effective as of January 1, 2010. EFH Corp., Oncor Holdings, Oncor, Oncor's third-party minority investor, and Oncor Management Investment LLC are parties to a separate Federal and State Income Tax Allocation Agreement dated November 5, 2008. See Management's Discussion and Analysis, under Financial Condition. | |
Fifth Circuit Court | US Court of Appeals for the Fifth Circuit | |
GAAP | generally accepted accounting principles | |
GWh | gigawatt-hours | |
ICE | the IntercontinentalExchange, an electronic commodity derivative exchange | |
IRS | US Internal Revenue Service | |
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 | subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas | |
market heat rate | Heat rate is a measure of the efficiency of converting a fuel source to electricity. Market heat rate is the implied relationship between wholesale electricity prices and natural gas prices and is calculated by dividing the wholesale market price of electricity, which is based on the price offer of the marginal supplier in ERCOT (generally natural gas plants), by the market price of natural gas. Forward wholesale electricity market price quotes in ERCOT are generally limited to two or three years; accordingly, forward market heat rates are generally limited to the same time period. Forecasted market heat rates for time periods for which market price quotes are not available are based on fundamental economic factors and forecasts, including electricity supply, demand growth, capital costs associated with new construction of generation supply, transmission development and other factors. | |
Merger | the transaction referred to in the Agreement and Plan of Merger, dated February 25, 2007, under which Texas Holdings agreed to acquire EFH Corp., which was completed on October 10, 2007 | |
MMBtu | million British thermal units | |
MW | megawatts | |
MWh | megawatt-hours | |
NOX | nitrogen oxide | |
NRC | US Nuclear Regulatory Commission | |
NYMEX | the New York Mercantile Exchange, a commodity derivatives exchange | |
Oncor | 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 | 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 | Oncor Holdings and its direct and indirect subsidiaries, including Oncor | |
OPEB | Postretirement employee benefits other than pensions | |
Petition Date | April 29, 2014, the date the Debtors made the Bankruptcy Filing | |
PUCT | Public Utility Commission of Texas | |
iii
purchase accounting | The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or "purchase price" of a business combination, including the amount paid for the equity and direct transaction costs are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill. | |
Regulated Delivery segment | the EFH Corp. business segment that consists primarily of our investment in Oncor | |
REP | retail electric provider | |
RSA | Restructuring Support and Lock-Up Agreement | |
RCT | Railroad Commission of Texas, which among other things, has oversight of lignite mining activity in Texas | |
S&P | Standard & Poor's Ratings (a credit rating agency) | |
SEC | US Securities and Exchange Commission | |
Securities Act | Securities Act of 1933, as amended | |
SG&A | selling, general and administrative | |
SO2 | sulfur dioxide | |
Sponsor Group | Refers, collectively, to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Global, LLC (together with its affiliates, TPG) and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Holdings. | |
TCEH | 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 market activities, and whose major subsidiaries include Luminant and TXU Energy | |
TCEH Debtors | EFCH, TCEH and the subsidiaries of TCEH that are Debtors in the Chapter 11 Cases | |
TCEH Demand Notes | Refers to certain loans from TCEH to EFH Corp. in the form of demand notes to finance EFH Corp. debt principal and interest payments and, until April 2011, other general corporate purposes of EFH Corp. that were guaranteed on a senior unsecured basis by EFCH and EFIH and were settled by EFH Corp. in January 2013. | |
TCEH DIP Facility | TCEH's $3.375 billion debtor-in-possession financing facility approved by the Bankruptcy Court in June 2014 (see Note 5 to Financial Statements) | |
TCEH Finance | 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 and TCEH Finance's 10.25% Senior Notes and 10.25% Senior Notes, Series B (collectively, TCEH 10.25% Notes) and TCEH's and TCEH Finance's 10.50%/11.25% Senior Toggle Notes (TCEH Toggle Notes) with a total principal amount of $4.874 billion. | |
TCEH Senior Secured Facilities | Refers, collectively, to the TCEH First Lien Term Loan Facilities, TCEH First Lien Revolving Credit Facility and TCEH First Lien Letter of Credit Facility with a total principal amount of $22.616 billion. | |
TCEH Senior Secured Notes | TCEH's and TCEH Finance's $1.750 billion principal amount of 11.5% First Lien Senior Secured Notes | |
TCEH Senior Secured Second Lien Notes | Refers, collectively, to TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes and TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes, Series B with a total principal amount of $1.571 billion. | |
TCEQ | Texas Commission on Environmental Quality | |
Texas Holdings | 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 | Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring-Fenced Entities | |
iv
TXU Energy | TXU Energy Retail Company LLC, a direct, wholly owned subsidiary of TCEH that is a REP in competitive areas of ERCOT and is engaged in the retail sale of electricity to residential and business customers | |
US | United States of America | |
VIE | variable interest entity | |
v
PART I. FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(millions of dollars) | |||||||||||||||
Operating revenues | $ | 1,807 | $ | 1,893 | $ | 4,731 | $ | 4,572 | |||||||
Fuel, purchased power costs and delivery fees | (868 | ) | (852 | ) | (2,256 | ) | (2,175 | ) | |||||||
Net gain (loss) from commodity hedging and trading activities | 75 | 58 | (118 | ) | 29 | ||||||||||
Operating costs | (204 | ) | (189 | ) | (660 | ) | (685 | ) | |||||||
Depreciation and amortization | (330 | ) | (335 | ) | (993 | ) | (1,030 | ) | |||||||
Selling, general and administrative expenses | (165 | ) | (202 | ) | (540 | ) | (540 | ) | |||||||
Franchise and revenue-based taxes | (18 | ) | (18 | ) | (54 | ) | (51 | ) | |||||||
Other income (Note 15) | 8 | 5 | 22 | 19 | |||||||||||
Other deductions (Note 15) | (14 | ) | (36 | ) | (37 | ) | (40 | ) | |||||||
Interest income | — | — | 1 | 1 | |||||||||||
Interest expense and related charges (Note 8) | (382 | ) | (533 | ) | (1,816 | ) | (1,915 | ) | |||||||
Reorganization items (Note 6) | (55 | ) | — | (720 | ) | — | |||||||||
Loss before income taxes and equity in earnings of unconsolidated subsidiaries | (146 | ) | (209 | ) | (2,440 | ) | (1,815 | ) | |||||||
Income tax benefit | 72 | 100 | 830 | 925 | |||||||||||
Equity in earnings of unconsolidated subsidiaries (net of tax) (Note 3) | 123 | 114 | 276 | 255 | |||||||||||
Net income (loss) | $ | 49 | $ | 5 | $ | (1,334 | ) | $ | (635 | ) | |||||
See Notes to Financial Statements.
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(millions of dollars) | |||||||||||||||
Net income (loss) | $ | 49 | $ | 5 | $ | (1,334 | ) | $ | (635 | ) | |||||
Other comprehensive income (loss), net of tax effects: | |||||||||||||||
Effects related to pension and other retirement benefit obligations (net of tax benefit of $6, $1, $7 and $2) | (11 | ) | (1 | ) | (14 | ) | (4 | ) | |||||||
Cash flow hedges derivative value net loss related to hedged transactions recognized during the period (net of tax benefit of $—, $1, $— and $3) | — | 1 | 1 | 5 | |||||||||||
Net effects related to Oncor — reported in equity in earnings of unconsolidated subsidiaries (net of tax benefit of $— in all periods) | (1 | ) | 1 | — | 1 | ||||||||||
Total other comprehensive income (loss) | (12 | ) | 1 | (13 | ) | 2 | |||||||||
Comprehensive income (loss) | $ | 37 | $ | 6 | $ | (1,347 | ) | $ | (633 | ) | |||||
See Notes to Financial Statements.
1
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
(millions of dollars) | |||||||
Cash flows — operating activities: | |||||||
Net loss | $ | (1,334 | ) | $ | (635 | ) | |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | 1,118 | 1,160 | |||||
Deferred income tax benefit, net | (604 | ) | (612 | ) | |||
Income tax benefit due to IRS audit resolution | — | (305 | ) | ||||
Fees paid for DIP Facilities (Note 6) (reported as financing activities) | 180 | — | |||||
Unrealized net loss from mark-to-market valuations of commodity positions | 502 | 693 | |||||
Unrealized net gain from mark-to-market valuations of interest rate swaps (Note 8) | (1,303 | ) | (903 | ) | |||
Liability adjustment arising from termination of interest rate swaps (Note 12) | 278 | — | |||||
Noncash realized loss on termination of interest rate swaps (Note 8) | 1,237 | — | |||||
Noncash realized gain on termination of natural gas hedging positions (Note 12) | (117 | ) | — | ||||
Loss on exchange and settlement of EFIH First Lien Notes (Note 5) | 108 | — | |||||
Interest expense on toggle notes payable in additional principal (Note 8) | 65 | 130 | |||||
Amortization of debt related costs, discounts, fair value discounts and losses on dedesignated cash flow hedges (Note 8) | 72 | 175 | |||||
Equity in earnings of unconsolidated subsidiaries | (276 | ) | (255 | ) | |||
Distributions of earnings from unconsolidated subsidiaries | 128 | 148 | |||||
Asset write-downs (Note 15) | 30 | 30 | |||||
Bad debt expense (Note 15) | 30 | 23 | |||||
Accretion expense related primarily to mining reclamation obligations (Note 15) | 19 | 24 | |||||
Other, net | 3 | 7 | |||||
Changes in operating assets and liabilities: | |||||||
Margin deposits, net | (270 | ) | (197 | ) | |||
Accrued interest | 512 | 144 | |||||
Other operating assets and liabilities, including liabilities subject to compromise | (111 | ) | 104 | ||||
Cash provided by (used in) operating activities | 267 | (269 | ) | ||||
Cash flows — financing activities: | |||||||
Proceeds from DIP Facilities before fees paid (Note 5) | 4,989 | — | |||||
Fees paid for DIP Facilities (Note 6) | (180 | ) | — | ||||
Repayments/repurchases of debt | (2,536 | ) | (94 | ) | |||
Net borrowings under accounts receivable securitization program | — | 90 | |||||
Contributions from noncontrolling interests | 1 | 3 | |||||
Debt amendment, exchange and issuance costs and discounts, including third-party fees expensed | — | (9 | ) | ||||
Other, net | — | (5 | ) | ||||
Cash provided by (used in) financing activities | 2,274 | (15 | ) | ||||
2
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
(millions of dollars) | |||||||
Cash flows — investing activities: | |||||||
Capital expenditures | $ | (249 | ) | $ | (372 | ) | |
Nuclear fuel purchases | (76 | ) | (59 | ) | |||
Proceeds from sales of assets | 3 | 3 | |||||
Acquisition of combustion turbine trust interest | — | (40 | ) | ||||
Restricted cash used to settle TCEH Demand Notes (Note 13) | — | 680 | |||||
Increase in restricted cash related to TCEH DIP Facility (Note 5) | (184 | ) | — | ||||
Reduction of restricted cash related to TCEH Letter of Credit Facility (Note 7) | 378 | — | |||||
Other changes in restricted cash | — | (4 | ) | ||||
Proceeds from sales of environmental allowances and credits | 3 | — | |||||
Purchases of environmental allowances and credits | (13 | ) | (13 | ) | |||
Proceeds from sales of nuclear decommissioning trust fund securities | 250 | 128 | |||||
Investments in nuclear decommissioning trust fund securities | (263 | ) | (140 | ) | |||
Other, net | (1 | ) | 4 | ||||
Cash provided by (used in) investing activities | (152 | ) | 187 | ||||
Net change in cash and cash equivalents | 2,389 | (97 | ) | ||||
Cash and cash equivalents — beginning balance | 1,217 | 1,913 | |||||
Cash and cash equivalents — ending balance | $ | 3,606 | $ | 1,816 | |||
See Notes to Financial Statements.
3
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||
September 30, 2014 | December 31, 2013 | ||||||
(millions of dollars) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 3,606 | $ | 1,217 | |||
Restricted cash (Note 15) | 4 | 949 | |||||
Trade accounts receivable — net (Note 15) | 923 | 718 | |||||
Inventories (Note 15) | 370 | 399 | |||||
Commodity and other derivative contractual assets (Note 12) | 131 | 851 | |||||
Accumulated deferred income taxes | 102 | 105 | |||||
Margin deposits related to commodity positions | 64 | 93 | |||||
Other current assets | 90 | 135 | |||||
Total current assets | 5,290 | 4,467 | |||||
Restricted cash (Note 15) | 751 | — | |||||
Receivable from unconsolidated subsidiary (Note 13) | 94 | 838 | |||||
Investment in unconsolidated subsidiary (Note 3) | 6,107 | 5,959 | |||||
Other investments (Note 15) | 959 | 891 | |||||
Property, plant and equipment — net (Note 15) | 17,061 | 17,791 | |||||
Goodwill (Note 4) | 3,952 | 3,952 | |||||
Identifiable intangible assets — net (Note 4) | 1,589 | 1,679 | |||||
Commodity and other derivative contractual assets (Note 12) | 10 | 4 | |||||
Other noncurrent assets | 71 | 865 | |||||
Total assets | $ | 35,884 | $ | 36,446 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Notes, loans and other debt, including $2,054 of borrowings under revolving credit facility (Note 7) | $ | — | $ | 40,252 | |||
Trade accounts payable | 446 | 401 | |||||
Net payables due to unconsolidated subsidiary (Note 13) | 95 | 128 | |||||
Commodity and other derivative contractual liabilities (Note 12) | 112 | 1,355 | |||||
Margin deposits related to commodity positions | 3 | 302 | |||||
Accrued income taxes | 132 | 178 | |||||
Accrued interest (Notes 7 and 8) | 112 | 564 | |||||
Other current liabilities (a) | 374 | 326 | |||||
Total current liabilities | 1,274 | 43,506 | |||||
Borrowings under debtor-in-possession credit facilities (Note 5) | 6,825 | — | |||||
Long-term debt, less amounts due currently (b) | 137 | — | |||||
Liabilities subject to compromise (Note 7) | 37,437 | — | |||||
Commodity and other derivative contractual liabilities (Note 12) | 4 | — | |||||
Accumulated deferred income taxes | 2,835 | 3,433 | |||||
Other noncurrent liabilities and deferred credits (Note 15) | 1,968 | 2,762 | |||||
Total liabilities | 50,480 | 49,701 | |||||
Commitments and Contingencies (Note 9) | |||||||
4
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||
September 30, 2014 | December 31, 2013 | ||||||
(millions of dollars) | |||||||
Equity (Note 10): | |||||||
EFH Corp. shareholders' equity | $ | (14,596 | ) | $ | (13,256 | ) | |
Noncontrolling interests in subsidiaries | — | 1 | |||||
Total equity | (14,596 | ) | (13,255 | ) | |||
Total liabilities and equity | $ | 35,884 | $ | 36,446 | |||
_______________
(a) | Balance at September 30, 2014 includes $37 million of current portion of debt described in (b) below. |
(b) | Consists of a non-Debtor debt of $36 million related to a building financing (plus $7 million of unamortized fair value premium), $46 million of debt approved by the Bankruptcy Court for repayment (less $3 million of unamortized fair value discount), $13 million of debt issued by a trust and secured by assets held by the trust (less $2 million of unamortized discount) and $40 million of capitalized lease obligations. |
See Notes to Financial Statements.
5
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES |
Description of Business
References in this report to "we," "our," "us" and "the company" are to EFH Corp. and/or its subsidiaries, as apparent in the context. See "Glossary" for defined terms.
EFH Corp., a Texas corporation, is a Dallas-based holding company that conducts its operations principally through its TCEH and Oncor subsidiaries. EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group. 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. TCEH is a wholly owned subsidiary of EFCH, which is a holding company and a wholly owned subsidiary of EFH Corp. Oncor is engaged in regulated electricity transmission and distribution operations in Texas. Oncor provides distribution services to REPs, including subsidiaries of TCEH, which sell electricity to residential, business and other consumers. Oncor Holdings, a holding company that holds an approximate 80% equity interest in Oncor, is a wholly owned subsidiary of EFIH, which is a holding company and a wholly owned subsidiary of EFH Corp. Oncor Holdings and its subsidiaries (the Oncor Ring-Fenced Entities) are not consolidated in EFH Corp.'s financial statements in accordance with consolidation accounting standards related to variable interest entities (VIEs) (see Note 3).
Various "ring-fencing" measures have been taken to enhance the credit quality of Oncor. Such measures include, among other things: the sale in November 2008 of a 19.75% equity interest in Oncor to Texas Transmission Investment LLC (a limited liability company that owns a 19.75% equity interest in Oncor and is not affiliated with EFH Corp., any of EFH Corp.'s subsidiaries or any member of the Sponsor Group); 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, consisting largely of TCEH, and the Regulated Delivery segment, consisting largely of our investment in Oncor. See Note 14 for further information concerning reportable business segments.
Bankruptcy Filing
As discussed further in Note 2, on April 29, 2014 (the Petition Date), EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities, (the Debtors), filed voluntary petitions for relief (the Bankruptcy Filing) under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). See Note 5 for discussion of debtor-in-possession financing.
Basis of Presentation, Including Application of Bankruptcy Accounting
The condensed consolidated financial statements have been prepared as if EFH Corp. is a going concern and reflect the application of ASC 852-10, Reorganizations. During the pendency of the Bankruptcy Filing, the Debtors will operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. ASC 852-10 applies to entities that have filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. The guidance requires that transactions and events directly associated with the reorganization be distinguished from the ongoing operations of the business. In addition, the guidance provides for changes in the accounting and presentation of liabilities, as well as expenses and income directly associated with the Chapter 11 Cases. See Notes 6 and 7 for discussion of these accounting and reporting changes.
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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 Note 3). Adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes included in our 2013 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.
Use of Estimates
Preparation of financial statements requires estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements and estimates of expected allowed claims. 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.
Changes in Accounting Standards
In May 2014, the FASB and IASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016 for public entities. Early application is not permitted. The amendments in ASU 2014-09 create a new Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which supersedes revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires that an entity recognize revenues as performance obligations embedded in sales agreements with customers are satisfied by the entity. The rule is intended to eliminate inconsistencies in revenue recognition and thereby improve comparability across entities, industries and capital markets. We are in the process of assessing the effects of the application of the new guidance on our financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going Concern. ASU 2014-15 is effective for annual reporting periods (including interim periods within those periods) ending after December 15, 2016. Early application is permitted. The amendments in ASU 2014-15 create a new ASC Sub-topic 205-40, Presentation of Financial Statements – Going Concern and requires management to assess for each annual and interim reporting period if conditions exist that raise substantial doubt about an entity's ability to continue as a going concern. The rule requires various disclosures depending on the facts and circumstances surrounding an entity's ability to continue as a going concern. We are in the process of assessing the effects of the application of the new guidance on our financial statements.
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2. BANKRUPTCY FILING
On the Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. During the pendency of the Bankruptcy Filing (Chapter 11 Cases), the Debtors will operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
The Bankruptcy Filing resulted primarily from the adverse effects on EFH Corp.'s competitive businesses of lower wholesale electricity prices in ERCOT driven by the sustained decline in natural gas prices since mid-2008. Further, the natural gas hedges that TCEH entered into when forward market prices of natural gas were significantly higher than current prices had largely matured before the remaining positions were terminated shortly after the Bankruptcy Filing (see Note 12). These market conditions challenged the profitability and operating cash flows of EFH Corp.'s competitive businesses and resulted in the inability to support their significant interest payments and debt maturities, including the remaining debt obligations due in 2014, and the inability to refinance and/or extend the maturities of their outstanding debt.
As previously disclosed, after a series of discussions with certain creditors that began in 2013 and in anticipation of the Bankruptcy Filing, on April 29, 2014, the Debtors entered into a Restructuring Support and Lock-Up Agreement (RSA) with various stakeholders (Consenting Parties) in order to effect an agreed upon restructuring of the Debtors through a pre-arranged Chapter 11 plan of reorganization.
On July 24, 2014, pursuant to the RSA, each of EFH Corp., EFIH, EFCH, TCEH, EFIH Finance, Inc. and TCEH Finance, Inc. provided a notice of termination of the RSA in accordance with its terms to the Consenting Parties. The RSA termination became effective on July 31, 2014.
In cooperation with various stakeholders, the Debtors are focused on formulating and implementing an effective and efficient plan of reorganization for each of the Debtors under Chapter 11 of the Bankruptcy Code that maximizes enterprise value.
Proposed Sale of Economic Interest in Oncor
In September 2014, with input and support from several key stakeholders, the Debtors filed a motion with the Bankruptcy Court seeking the entry of an order approving bidding procedures with respect to the potential sale of EFH Corp.'s/EFIH's economic interest in Oncor. During October 2014, the bankruptcy court held hearings regarding the motion. On November 3, 2014, the Bankruptcy Court conditionally approved the motion. In conditionally approving the motion, the Bankruptcy Court required that, among other things, the Debtors modify the proposed bidding procedures and order to (a) allow up to five advisors for each of the official unsecured creditor committees at TCEH and EFH Corp./EFIH to access information regarding the bidding process on terms to be negotiated with these advisors, (b) allow additional time for bidders to evaluate potential transactions and submit bids and (c) prohibit material modifications to the bid procedures without the consent of the committees or further order of the Bankruptcy Court. In addition, the Bankruptcy Court required that prior to a modified order becoming effective, the respective boards of directors of EFH Corp., EFCH, TCEH and EFIH must vote to approve the proposed modified bidding procedures (along with an affirmative vote of the respective disinterested directors at EFIH and TCEH). The Debtors intend to continue to work closely with each of their respective stakeholders to formulate a bidding process that will maximize enterprise value for each of the Debtors.
Tax Matters
In June 2014, EFH Corp. filed a request with the IRS for a private letter ruling (Private Letter Ruling) that, among other things, will provide (a) that (i) the transfer by TCEH of all of its assets and its ordinary course operating liabilities to reorganized TCEH consummated through a tax-free spin (in accordance with the Private Letter Ruling) in connection with TCEH's emergence from bankruptcy (Reorganized TCEH), (ii) the transfer by the Debtors to Reorganized TCEH of certain operating assets and liabilities that are reasonably necessary to the operation of Reorganized TCEH and (iii) the distribution by TCEH of (A) the equity it holds in Reorganized TCEH and (B) the cash proceeds TCEH receives from Reorganized TCEH to the holders of TCEH first lien claims, will qualify as a "reorganization" within the meaning of Sections 368(a)(1)(G), 355 and 356 of the Code and (b) for certain other rulings under Sections 368(a)(1)(G) and 355 of the Code. The Debtors intend to continue to pursue the Private Letter Ruling in connection with any Chapter 11 plan of reorganization that is ultimately proposed. In October 2014, the Debtors filed a memorandum with the Bankruptcy Court that described tax related matters regarding restructuring alternatives.
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Operation and Implications of the Chapter 11 Cases
The accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to comply with the financial and other covenants contained in the debtor-in-possession financing (DIP Facilities, described in Note 5), the Bankruptcy Court's approval of the Chapter 11 plan of reorganization ultimately proposed by the Debtors and our ability to successfully implement such Chapter 11 plan and obtain new financing, among other factors. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Facilities), for amounts other than those reflected in the accompanying consolidated financial statements.
In general, the Debtors have received final bankruptcy court orders with respect to "first day motions" and other "operating motions" that allow the Debtors to operate their businesses in the ordinary course, including, among others, providing for the payment of certain pre-petition employee and retiree expenses and benefits, the use of the Debtors' existing cash management system, the continuation of customer contracts and programs at our retail electricity operations, the payment of certain pre-petition amounts to certain critical vendors, the ability to perform under certain pre-petition hedging and trading arrangements and the ability to pay certain pre-petition taxes and regulatory fees. In addition, the Bankruptcy Court has issued orders approving the DIP Facilities discussed in Note 5.
Pre-Petition Claims
Holders of pre-petition claims will be required to file proofs of claims by the "bar date" established by the Bankruptcy Court. A bar date is the date by which certain claims against the Debtors must be filed if the claimants wish to receive any distribution in the Chapter 11 Cases. In August 2014, the Bankruptcy Court established a bar date of October 27, 2014 for most claims. We have received numerous proofs of claim since the Petition Date. We are early in the process of reconciling those claims to the amounts listed in our schedules of assets and liabilities. We may ask the Bankruptcy Court to disallow claims that we believe are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. Given the substantial number of claims filed, the claims resolution process will take considerable time to complete. Differences between liability amounts recorded by the company as liabilities subject to compromise and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the allowable claim. Differences between those final allowed claims and the liabilities recorded in the condensed consolidated balance sheet will be recognized as reorganization items in our condensed statement of consolidated income (loss) as they are resolved. The determination of how liabilities will ultimately be resolved cannot be made until the Bankruptcy Court approves a plan of reorganization or approves orders related to settlement of specific liabilities. Accordingly, the ultimate amount or resolution of such liabilities is not determinable at this time. The resolution of such claims could result in material adjustments to the company's financial statements.
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3. | VARIABLE INTEREST ENTITIES |
A variable interest entity (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 (i.e., we are the primary beneficiary of the VIE). 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.
Our balance sheet includes assets and liabilities of VIEs that meet the consolidation standards. The maximum exposure to loss from our interests in VIEs does not exceed our carrying value.
Oncor Holdings, an indirect wholly owned subsidiary of EFH Corp. that holds an approximate 80% interest in Oncor, is not consolidated in EFH Corp.'s financial statements, and instead is accounted for as an equity method investment, 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. In accordance with accounting standards, we account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, based on our level of influence over its activities. See below for additional information about our equity method investment in Oncor Holdings. There are no other material investments accounted for under the equity or cost method.
Assets and liabilities of other consolidated VIEs are immaterial. 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 assets to settle the obligations of the VIE.
Non-Consolidation of Oncor and Oncor Holdings
Our investment in unconsolidated subsidiary as presented in the condensed consolidated balance sheets totaled $6.107 billion and $5.959 billion at September 30, 2014 and December 31, 2013, respectively, and consists almost entirely of our interest in Oncor Holdings, which we account for under the equity method as described above. Oncor provides services, principally electricity distribution, to TCEH's retail operations, and the related revenues represented 26% and 28% of Oncor Holdings' consolidated operating revenues for the nine months ended September 30, 2014 and 2013, respectively.
See Note 13 for discussion of Oncor Holdings' and Oncor's transactions with EFH Corp. and its other subsidiaries.
Distributions from Oncor Holdings and Related Considerations — Oncor Holdings' distributions of earnings to us totaled $128 million and $148 million for the nine months ended September 30, 2014 and 2013, respectively. Distributions may not be paid except to the extent Oncor maintains a required regulatory capital structure as discussed below. At September 30, 2014, $193 million was eligible to be distributed to Oncor's members after taking into account the regulatory capital structure limit, of which approximately 80% relates to our ownership interest in Oncor. The boards of directors of each of Oncor and Oncor Holdings can withhold distributions to the extent the applicable board determines in good faith that it is necessary to retain such amounts to meet expected future requirements of Oncor and/or Oncor Holdings.
Oncor's distributions are limited by its regulatory capital structure, which is required to 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. At September 30, 2014, Oncor's regulatory capitalization ratio was 58.7% debt and 41.3% equity. 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 bonds issued by Oncor Electric Delivery Transition Bond Company LLC, which were issued in 2003 and 2004 to recover specific generation-related regulatory assets and other qualified costs. 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 a result of the Bankruptcy Filing, Oncor had credit risk exposure to trade accounts receivable from subsidiaries of TCEH, which related to delivery services provided by Oncor to TCEH's retail electricity operations. At the Petition Date, these accounts receivable totaled $109 million. In June 2014, the Bankruptcy Court authorized the Debtors to pay all pre-petition delivery charges due Oncor, and such amounts were paid in full.
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EFH Corp., Oncor Holdings, Oncor and Oncor's minority investor are parties to a Federal and State Income Tax Allocation Agreement. Additional income tax amounts receivable or payable may arise in the normal course under that agreement.
Oncor Holdings Financial Statements — Condensed statements of consolidated income of Oncor Holdings and its subsidiaries for the three and nine months ended September 30, 2014 and 2013 are presented below:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Operating revenues | $ | 1,054 | $ | 966 | $ | 2,883 | $ | 2,640 | |||||||
Operation and maintenance expenses | (376 | ) | (315 | ) | (1,074 | ) | (919 | ) | |||||||
Depreciation and amortization | (218 | ) | (207 | ) | (638 | ) | (608 | ) | |||||||
Taxes other than income taxes | (115 | ) | (112 | ) | (330 | ) | (315 | ) | |||||||
Other income | 3 | 4 | 10 | 14 | |||||||||||
Other deductions | (4 | ) | (2 | ) | (11 | ) | (11 | ) | |||||||
Interest income | 1 | — | 3 | 2 | |||||||||||
Interest expense and related charges | (89 | ) | (94 | ) | (266 | ) | (283 | ) | |||||||
Income before income taxes | 256 | 240 | 577 | 520 | |||||||||||
Income tax expense | (101 | ) | (97 | ) | (230 | ) | (199 | ) | |||||||
Net income | 155 | 143 | 347 | 321 | |||||||||||
Net income attributable to noncontrolling interests | (32 | ) | (29 | ) | (71 | ) | (66 | ) | |||||||
Net income attributable to Oncor Holdings | $ | 123 | $ | 114 | $ | 276 | $ | 255 | |||||||
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Assets and liabilities of Oncor Holdings at September 30, 2014 and December 31, 2013 are presented below:
September 30, 2014 | December 31, 2013 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 17 | $ | 28 | |||
Restricted cash | 67 | 52 | |||||
Trade accounts receivable — net | 469 | 385 | |||||
Trade accounts and other receivables from affiliates | 152 | 135 | |||||
Income taxes receivable from EFH Corp. | — | 16 | |||||
Inventories | 76 | 65 | |||||
Accumulated deferred income taxes | 11 | 32 | |||||
Prepayments and other current assets | 89 | 82 | |||||
Total current assets | 881 | 795 | |||||
Restricted cash | 16 | 16 | |||||
Other investments | 96 | 91 | |||||
Property, plant and equipment — net | 12,270 | 11,902 | |||||
Goodwill | 4,064 | 4,064 | |||||
Regulatory assets — net | 1,111 | 1,324 | |||||
Other noncurrent assets | 69 | 71 | |||||
Total assets | $ | 18,507 | $ | 18,263 | |||
LIABILITIES | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | 720 | $ | 745 | |||
Long-term debt due currently | 636 | 131 | |||||
Trade accounts payable — nonaffiliates | 133 | 178 | |||||
Income taxes payable to EFH Corp. | 56 | 23 | |||||
Accrued taxes other than income | 145 | 169 | |||||
Accrued interest | 65 | 95 | |||||
Other current liabilities | 150 | 135 | |||||
Total current liabilities | 1,905 | 1,476 | |||||
Accumulated deferred income taxes | 1,839 | 1,905 | |||||
Long-term debt, less amounts due currently | 5,041 | 5,381 | |||||
Other noncurrent liabilities and deferred credits | 1,837 | 1,822 | |||||
Total liabilities | $ | 10,622 | $ | 10,584 | |||
4. | GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS |
Goodwill
The following table provides information regarding our goodwill balance, all of which relates to the Competitive Electric segment and arose in connection with accounting for the Merger. There were no changes to the goodwill balance for the three and nine months ended September 30, 2014 and 2013. None of the goodwill is being deducted for tax purposes.
Goodwill before impairment charges | $ | 18,342 | |
Accumulated noncash impairment charges | (14,390 | ) | |
Balance at September 30, 2014 and December 31, 2013 | $ | 3,952 | |
We have determined that in consideration of our most recent forecasts of wholesale power prices in ERCOT, the likelihood of a goodwill impairment has increased. We have initiated an evaluation of goodwill as of September 30, 2014, which will be completed in the fourth quarter 2014 and could result in a material, noncash goodwill impairment charge in that period.
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Identifiable Intangible Assets
Identifiable intangible assets, including amounts that arose in connection with accounting for the Merger, are comprised of the following:
September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Identifiable Intangible Asset | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Retail customer relationship | $ | 463 | $ | 419 | $ | 44 | $ | 463 | $ | 402 | $ | 61 | ||||||||||||
Favorable purchase and sales contracts | 352 | 157 | 195 | 352 | 139 | 213 | ||||||||||||||||||
Capitalized in-service software | 354 | 215 | 139 | 355 | 192 | 163 | ||||||||||||||||||
Environmental allowances and credits | 205 | 32 | 173 | 209 | 20 | 189 | ||||||||||||||||||
Mining development costs | 167 | 91 | 76 | 156 | 69 | 87 | ||||||||||||||||||
Total identifiable intangible assets subject to amortization | $ | 1,541 | $ | 914 | 627 | $ | 1,535 | $ | 822 | 713 | ||||||||||||||
Retail trade name (not subject to amortization) | 955 | 955 | ||||||||||||||||||||||
Mineral interests (not currently subject to amortization) | 7 | 11 | ||||||||||||||||||||||
Total identifiable intangible assets | $ | 1,589 | $ | 1,679 | ||||||||||||||||||||
Amortization expense related to identifiable intangible assets (including income statement line item) consisted of:
Identifiable Intangible Asset | Income Statement Line | Segment | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Retail customer relationship | Depreciation and amortization | Competitive Electric | $ | 6 | $ | 6 | $ | 17 | $ | 18 | ||||||||||
Favorable purchase and sales contracts | Operating revenues/fuel, purchased power costs and delivery fees | Competitive Electric | 6 | 6 | 18 | 19 | ||||||||||||||
Capitalized in-service software | Depreciation and amortization | Competitive Electric and Corporate and Other | 11 | 10 | 34 | 31 | ||||||||||||||
Environmental allowances and credits | Fuel, purchased power costs and delivery fees | Competitive Electric | 5 | 5 | 13 | 11 | ||||||||||||||
Mining development costs | Depreciation and amortization | Competitive Electric | 8 | 8 | 25 | 23 | ||||||||||||||
Total amortization expense (a) | $ | 36 | $ | 35 | $ | 107 | $ | 102 | ||||||||||||
____________
(a) | Amounts recorded in depreciation and amortization totaled $25 million and $24 million for the three months ended September 30, 2014 and 2013, respectively, and $76 million and $72 million for the nine months ended September 30, 2014 and 2013, respectively. |
Estimated Amortization of Identifiable Intangible Assets — The estimated aggregate amortization expense of identifiable intangible assets for each of the next five fiscal years is as follows:
Year | Estimated Amortization Expense | |||
2014 | $ | 137 | ||
2015 | $ | 127 | ||
2016 | $ | 105 | ||
2017 | $ | 82 | ||
2018 | $ | 62 | ||
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5. | DEBTOR-IN-POSSESSION BORROWING FACILITIES |
TCEH DIP Facility — The TCEH DIP Facility currently provides for up to $3.375 billion in senior secured, super-priority financing consisting of a revolving credit facility of up to $1.95 billion and a term loan facility of up to $1.425 billion. The facility initially provided for an additional $1.1 billion RCT Delayed Draw Letter of Credit commitment that has since been terminated as described below. The TCEH DIP Facility is a Senior Secured, Super-Priority Credit Agreement by and among the TCEH Debtors, the lenders that are party thereto from time to time and an administrative and collateral agent.
The TCEH DIP Facilities and related available capacity at September 30, 2014 are presented below. Borrowings are reported in the condensed consolidated balance sheet as borrowings under debtor-in-possession credit facilities.
September 30, 2014 | ||||||||||||
TCEH DIP Facility | Facility Limit | Available Cash Borrowing Capacity | Available Letter of Credit Capacity | |||||||||
TCEH DIP Revolving Credit Facility (a) | $ | 1,950 | $ | 1,950 | $ | — | ||||||
TCEH DIP Term Loan Facility (b) | 1,425 | — | 616 | |||||||||
Total TCEH DIP Facility | $ | 3,375 | $ | 1,950 | $ | 616 | ||||||
___________
(a) | Facility used for general corporate purposes. No amounts were borrowed at September 30 or November 4, 2014. Pursuant to an order of the Bankruptcy Court, the TCEH Debtors may not have more than $1.650 billion of TCEH DIP Revolving Credit Facility cash borrowings outstanding without written consent of the committee of unsecured creditors and the ad hoc group of TCEH unsecured note holders or further order of the Bankruptcy Court. |
(b) | Facility used for general corporate purposes, including but not limited to, $800 million for issuing letters of credit. |
At September 30, 2014, all $1.425 billion of the TCEH DIP Term Loan Facility has been borrowed. Of this borrowing, $800 million represents amounts that are intended to support issuances of letters of credit and have been funded to a collateral account. Of the collateral account amount, $616 million is reported as cash and cash equivalents and $184 million is reported as restricted cash, which represents outstanding letters of credit at September 30, 2014.
Amounts borrowed under the TCEH DIP Term Loan Facility bear interest based on applicable LIBOR rates, subject to a 0.75% floor, plus 3%. At September 30, 2014, the interest rate on outstanding borrowings was 3.75%. The timing of interest payments on the term loans is flexible and can be paid on a one, two, three or six month basis or as otherwise agreed upon with the relevant lenders. The TCEH DIP Facility also provides for certain additional fees payable to the agents and lenders, as well as availability fees payable with respect to any unused portions of the available TCEH DIP Facility.
The TCEH DIP Facility will mature on the earlier of (a) the effective date of any reorganization plan, (b) upon the event of the sale of substantially all of TCEH's assets or (c) May 2016. The maturity date may be extended to no later than November 2016 subject to the satisfaction of certain conditions, including the payment of a 25 basis point extension fee, a requirement that an acceptable plan of reorganization has been filed on or prior to such extension and the availability of certain metrics of liquidity applicable to the TCEH Debtors.
The TCEH Debtors' obligations under the TCEH DIP Facility are secured by a lien covering substantially all of the TCEH Debtors' assets, rights and properties, subject to certain exceptions set forth in the TCEH DIP Facility. The TCEH DIP Facility provides that all obligations thereunder constitute administrative expenses in the Chapter 11 Cases, with administrative priority and senior secured status under the Bankruptcy Code and, subject to certain exceptions set forth in the TCEH DIP Facility, have priority over any and all administrative expense claims, unsecured claims and costs and expenses in the Chapter 11 Cases. EFCH and substantially all of TCEH’s subsidiaries, including all subsidiaries that are debtors in the Chapter 11 Cases are guarantors under the TCEH DIP Facility.
The TCEH DIP Facility also permits certain hedging agreements to be secured on a pari-passu basis with the TCEH DIP Facility in the event those hedging agreements meet certain criteria set forth in the TCEH DIP Facility.
In June 2014, the RCT agreed to accept a collateral bond from TCEH of up to $1.1 billion, as a substitute for its self-bond, to secure mining land reclamation obligations. The collateral bond is a $1.1 billion carve-out from the super-priority liens under the TCEH DIP Facility that will enable the RCT to be paid before the TCEH DIP Facility lenders in the event of a liquidation of TCEH's assets. As a result, in July 2014, TCEH terminated a $1.1 billion RCT Delayed Draw Letter of Credit commitment included in the original DIP facility.
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The TCEH DIP Facility provides for affirmative and negative covenants applicable to the TCEH Debtors, including affirmative covenants requiring the TCEH Debtors to provide financial information, budgets and other information to the agents under the TCEH DIP Facility, and negative covenants restricting the TCEH Debtors' ability to incur additional indebtedness, grant liens, dispose of assets, make investments, pay dividends or take certain other actions, in each case except as permitted in the TCEH DIP Facility. The TCEH Debtors' ability to borrow under the TCEH DIP Facility is subject to the satisfaction of certain customary conditions precedent set forth therein.
The TCEH DIP Facility provides for certain customary events of default, including events of default resulting from non-payment of principal, interest or other amounts when due, material breaches of representations and warranties, material breaches of covenants in the TCEH DIP Facility or ancillary loan documents, cross-defaults under other agreements or instruments and the entry of material judgments against the TCEH Debtors. The agreement governing the TCEH DIP Facility includes a covenant that requires the Consolidated Superpriority Secured Net Debt to Consolidated EBITDA ratio not exceed 3.50 to 1.00. Consolidated Superpriority Secured Net Debt consists of outstanding term loans and revolving credit exposure under the TCEH DIP Facility less unrestricted cash. Upon the existence of an event of default, the TCEH DIP Facility provides that all principal, interest and other amounts due thereunder will become immediately due and payable, either automatically or at the election of specified lenders.
EFIH DIP Facility and EFIH First Lien Notes Settlement — The EFIH DIP Facility provides for a $5.4 billion first-lien debtor-in-possession financing facility, all of which was utilized as of September 30, 2014 as follows:
• | $1.836 billion of loans issued under the facility were issued as an exchange to holders of $1.673 billion principal amount of EFIH First Lien Notes plus accrued and unpaid interest totaling $78 million. Holders of substantially all of the principal amount exchanged received as payment in full a principal amount of loans under the EFIH DIP Facility equal to 105% of the principal amount of the notes held plus 101% of the accrued and unpaid interest at the non-default rate on such principal; |
• | $2.438 billion of cash borrowings were used to repay all remaining $2.312 billion principal amount of EFIH First Lien Notes (plus accrued and unpaid interest totaling $128 million), and |
• | Remaining borrowings under the facility, net of fees, of $1.038 billion are held as cash and cash equivalents. |
The exchange and settlement of the EFIH First Lien Notes resulted in a loss of $108 million, reported in reorganization items, which represents the excess of the principal amounts of debt issued, cash repayments and deferred financing costs associated with the exchanged and settled debt over the carrying value of the exchanged and settled debt and related accrued interest.
The principal amounts outstanding under the EFIH DIP Facility bear interest based on applicable LIBOR rates, subject to a 1% floor, plus 3.25%. At September 30, 2014, outstanding borrowings under the EFIH DIP Facility totaled $5.4 billion at an annual interest rate of 4.25%. The timing of interest payments on the EFIH DIP Facility is flexible and can be paid on a one week or a one, two, three or six month basis or as otherwise agreed upon with the relevant lenders. The EFIH DIP Facility is a non-amortizing loan that may, subject to certain limitations, be voluntarily prepaid by the EFIH Debtors, in whole or in part, without any premium or penalty.
The EFIH DIP Facility will mature on the earlier of (a) the effective date of any reorganization plan, (b) upon the sale of substantially all of EFIH's assets or (c) June 2016. The maturity date may be extended to no later than December 2016 subject to the satisfaction of certain conditions, including the payment of a 25 basis point extension fee, a requirement that an acceptable plan of reorganization has been filed on or prior to such extension and the availability of certain metrics of liquidity applicable to EFIH and EFIH Finance.
EFIH's obligations under the EFIH DIP Facility are secured by a first lien covering substantially all of EFIH's assets, rights and properties, subject to certain exceptions set forth in the EFIH DIP Facility. The EFIH DIP Facility provides that all obligations thereunder constitute administrative expenses in the Chapter 11 Cases, with administrative priority and senior secured status under the Bankruptcy Code and, subject to certain exceptions set forth in the EFIH DIP Facility, will have priority over any and all administrative expense claims, unsecured claims and costs and expenses in the Chapter 11 Cases.
The EFIH DIP Facility provides for affirmative and negative covenants applicable to EFIH and EFIH Finance, including affirmative covenants requiring EFIH and EFIH Finance to provide financial information, budgets and other information to the agents under the EFIH DIP Facility, and negative covenants restricting EFIH's and EFIH Finance's ability to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions, in each case except as permitted in the EFIH DIP Facility. The EFIH DIP Facility also includes a minimum liquidity covenant pursuant to which EFIH cannot allow the amount of its unrestricted cash (as defined in the EFIH DIP Facility) to be less than $150 million. The Oncor Ring-Fenced Entities are not restricted subsidiaries for purposes of the EFIH DIP Facility.
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The EFIH DIP Facility provides for certain customary events of default, including events of default resulting from non-payment of principal, interest or other amounts when due, material breaches of representations and warranties, material breaches of covenants in the EFIH DIP Facility or ancillary loan documents, cross-defaults under other agreements or instruments and the entry of material judgments against EFIH. Upon the existence of an event of default, the EFIH DIP Facility provides that all principal, interest and other amounts due thereunder will become immediately due and payable, either automatically or at the election of specified lenders.
The EFIH DIP Facility permits, subject to certain terms, conditions and limitations set forth in the EFIH DIP Facility, EFIH to incur incremental junior lien subordinated debt in an aggregate amount not to exceed $3 billion.
6. | REORGANIZATION ITEMS |
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the condensed statements of consolidated income (loss) as reorganization items as required by ASC 852-10, Reorganizations. Reorganization items also include adjustments to reflect the carrying value of liabilities subject to compromise (LSTC) at their estimated allowed claim amounts, as such adjustments are determined. The following table presents reorganization items incurred since the Petition Date as reported in the condensed statements of consolidated income (loss):
Three Months Ended September 30, 2014 | Post-Petition Period Through September 30, 2014 | ||||||
Liability adjustment arising from termination of interest rate swaps (Note 12) | $ | — | $ | 278 | |||
Fees associated with completion of TCEH and EFIH DIP Facilities (a) | (5 | ) | 180 | ||||
Loss on exchange and settlement of EFIH First Lien Notes (Note 5) | — | 108 | |||||
Expenses related to legal advisory and representation services | 38 | 79 | |||||
Expenses related to other professional consulting and advisory services | 22 | 72 | |||||
Other | — | 3 | |||||
Total reorganization items | $ | 55 | $ | 720 | |||
___________
(a) | Amounts for the three months ended September 30, 2014 represent a refund of fees due to the termination of the RCT Delayed Draw Letter of Credit commitment under the TCEH DIP Facility as discussed in Note 5. |
7. | LIABILITIES SUBJECT TO COMPROMISE |
The amounts classified as liabilities subject to compromise (LSTC) reflect the company's estimate of pre-petition liabilities to be addressed in the Chapter 11 Cases and may be subject to future adjustment as the Chapter 11 Cases proceed. Debt amounts include related unamortized deferred financing costs, discounts or premiums. Amounts classified to LSTC do not include pre-petition liabilities that are fully secured by letters of credit or cash deposits. The following table presents LSTC as reported in the condensed consolidated balance sheets at September 30, 2014:
September 30, 2014 | |||
Notes, loans and other debt per the following table | $ | 35,126 | |
Accrued interest on notes, loans and other debt | 804 | ||
Net liability under terminated TCEH interest rate swap and natural gas hedging agreements (Note 12) | 1,235 | ||
Trade accounts payable and accrued liabilities | 272 | ||
Total liabilities subject to compromise | $ | 37,437 | |
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Pre-Petition Notes, Loans and Other Debt Reported as Liabilities Subject to Compromise
All amounts of pre-petition notes, loans and other debt reported as liabilities subject to compromise represent principal amounts.
September 30, 2014 | December 31, 2013 | ||||||
EFH Corp. (parent entity) | |||||||
9.75% Fixed Senior Notes due October 15, 2019 | $ | 2 | $ | 2 | |||
10% Fixed Senior Notes due January 15, 2020 | 3 | 3 | |||||
10.875% Fixed Senior Notes due November 1, 2017 | 33 | 33 | |||||
11.25% / 12.00% Senior Toggle Notes due November 1, 2017 | 27 | 27 | |||||
5.55% Fixed Series P Senior Notes due November 15, 2014 (a) | 90 | 90 | |||||
6.50% Fixed Series Q Senior Notes due November 15, 2024 (a) | 201 | 201 | |||||
6.55% Fixed Series R Senior Notes due November 15, 2034 (a) | 291 | 291 | |||||
8.82% Building Financing due semiannually through February 11, 2022 (b) | — | 46 | |||||
Unamortized fair value premium related to Building Financing (b)(c) | — | 9 | |||||
Unamortized fair value discount (c) | (118 | ) | (121 | ) | |||
Total EFH Corp. | 529 | 581 | |||||
EFIH | |||||||
6.875% Fixed Senior Secured First Lien Notes due August 15, 2017 (d) | — | 503 | |||||
10% Fixed Senior Secured First Lien Notes due December 1, 2020 (d) | — | 3,482 | |||||
11% Fixed Senior Secured Second Lien Notes due October 1, 2021 | 406 | 406 | |||||
11.75% Fixed Senior Secured Second Lien Notes due March 1, 2022 | 1,750 | 1,750 | |||||
11.25% / 12.25% Senior Toggle Notes due December 1, 2018 | 1,566 | 1,566 | |||||
9.75% Fixed Senior Notes due October 15, 2019 | 2 | 2 | |||||
Unamortized premium | 243 | 284 | |||||
Unamortized discount | (121 | ) | (146 | ) | |||
Total EFIH | 3,846 | 7,847 | |||||
EFCH | |||||||
9.58% Fixed Notes due in annual installments through December 4, 2019 (b) | — | 29 | |||||
8.254% Fixed Notes due in quarterly installments through December 31, 2021 (b) | — | 34 | |||||
Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037 | 1 | 1 | |||||
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037 | 8 | 8 | |||||
Unamortized fair value discount (c) | (1 | ) | (6 | ) | |||
Total EFCH | 8 | 66 | |||||
TCEH | |||||||
Senior Secured Facilities: | |||||||
TCEH Floating Rate Term Loan Facilities due October 10, 2014 | 3,809 | 3,809 | |||||
TCEH Floating Rate Letter of Credit Facility due October 10, 2014 | 42 | 42 | |||||
TCEH Floating Rate Revolving Credit Facility due October 10, 2016 | 2,054 | 2,054 | |||||
TCEH Floating Rate Term Loan Facilities due October 10, 2017 (a) | 15,691 | 15,691 | |||||
TCEH Floating Rate Letter of Credit Facility due October 10, 2017 | 1,020 | 1,020 | |||||
11.5% Fixed Senior Secured Notes due October 1, 2020 | 1,750 | 1,750 | |||||
15% Fixed Senior Secured Second Lien Notes due April 1, 2021 | 336 | 336 | |||||
15% Fixed Senior Secured Second Lien Notes due April 1, 2021, Series B | 1,235 | 1,235 | |||||
10.25% Fixed Senior Notes due November 1, 2015 (a) | 1,833 | 1,833 | |||||
10.25% Fixed Senior Notes due November 1, 2015, Series B (a) | 1,292 | 1,292 | |||||
10.50% / 11.25% Senior Toggle Notes due November 1, 2016 | 1,749 | 1,749 | |||||
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September 30, 2014 | December 31, 2013 | ||||||
Pollution Control Revenue Bonds: | |||||||
Brazos River Authority: | |||||||
5.40% Fixed Series 1994A due May 1, 2029 | $ | 39 | $ | 39 | |||
7.70% Fixed Series 1999A due April 1, 2033 | 111 | 111 | |||||
7.70% Fixed Series 1999C due March 1, 2032 | 50 | 50 | |||||
8.25% Fixed Series 2001A due October 1, 2030 | 71 | 71 | |||||
8.25% Fixed Series 2001D-1 due May 1, 2033 | 171 | 171 | |||||
Floating Rate Series 2001D-2 due May 1, 2033 (e) | — | 97 | |||||
Floating Rate Taxable Series 2001I due December 1, 2036 (e) | — | 62 | |||||
Floating Rate Series 2002A due May 1, 2037 (e) | — | 45 | |||||
6.30% Fixed Series 2003B due July 1, 2032 | 39 | 39 | |||||
6.75% Fixed Series 2003C due October 1, 2038 | 52 | 52 | |||||
5.40% Fixed Series 2003D due October 1, 2029 | 31 | 31 | |||||
5.00% Fixed Series 2006 due March 1, 2041 | 100 | 100 | |||||
Sabine River Authority of Texas: | |||||||
6.45% Fixed Series 2000A due June 1, 2021 | 51 | 51 | |||||
5.20% Fixed Series 2001C due May 1, 2028 | 70 | 70 | |||||
5.80% Fixed Series 2003A due July 1, 2022 | 12 | 12 | |||||
6.15% Fixed Series 2003B due August 1, 2022 | 45 | 45 | |||||
Trinity River Authority of Texas: | |||||||
6.25% Fixed Series 2000A due May 1, 2028 | 14 | 14 | |||||
Unamortized fair value discount related to pollution control revenue bonds (c) | (103 | ) | (105 | ) | |||
Other: | |||||||
7.48% Fixed Secured Facility Bonds with amortizing payments through January 2017 (b) | — | 36 | |||||
7.46% Fixed Secured Facility Bonds with amortizing payments through January 2015 (b) | — | 4 | |||||
Capitalized lease obligations (b) | — | 52 | |||||
Other | 3 | 3 | |||||
Unamortized discount | (91 | ) | (103 | ) | |||
Total TCEH | 31,476 | 31,758 | |||||
Deferred debt issuance and extension costs (f) | (733 | ) | — | ||||
Total EFH Corp. consolidated notes, loans and other debt | $ | 35,126 | $ | 40,252 | |||
___________
(a) | Excludes the following principal amounts of debt held by EFIH or EFH Corp. (parent entity) and eliminated in consolidation. |
September 30, 2014 | December 31, 2013 | ||||||
EFH Corp. 5.55% Fixed Series P Senior Notes due November 15, 2014 | $ | 281 | $ | 281 | |||
EFH Corp. 6.50% Fixed Series Q Senior Notes due November 15, 2024 | 545 | 545 | |||||
EFH Corp. 6.55% Fixed Series R Senior Notes due November 15, 2034 | 456 | 456 | |||||
TCEH Floating Rate Term Loan Facilities due October 10, 2017 | 19 | 19 | |||||
TCEH 10.25% Fixed Senior Notes due November 1, 2015 | 213 | 213 | |||||
TCEH 10.25% Fixed Senior Notes due November 1, 2015, Series B | 150 | 150 | |||||
Total | $ | 1,664 | $ | 1,664 | |||
(b) | Amounts classified as debt in the condensed consolidated balance sheet at September 30, 2014. See notes (a) and (b) to the condensed consolidated balance sheets. |
(c) | Amount represents unamortized fair value adjustments recorded under purchase accounting. |
(d) | The EFIH First Lien Notes were exchanged or settled in June 2014 (see Note 5). |
(e) | These bonds were tendered and settled through letter of credit draws. |
(f) | Deferred debt issuance and extension costs were reported in other noncurrent assets at December 31, 2013. |
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Information Regarding Significant Pre-Petition Debt
TCEH elected not to make interest payments due in April 2014 totaling $123 million on certain debt obligations.
The TCEH pre-petition debt described below is junior in right of priority and payment to the TCEH DIP Facility, and the EFIH pre-petition debt described below is junior in right of priority and payment to the EFIH DIP Facility.
TCEH Senior Secured Facilities — Borrowings under the TCEH Senior Secured Facilities total $22.616 billion and consist of:
• | $3.809 billion of TCEH Term Loan Facilities with interest at LIBOR plus 3.50%; |
• | $15.691 billion of TCEH Term Loan Facilities with interest at LIBOR plus 4.50%, excluding $19 million aggregate principal amount held by EFH Corp.; |
• | $42 million of cash borrowed under the TCEH Letter of Credit Facility with interest at LIBOR plus 3.50%; |
• | $1.020 billion of cash borrowed under the TCEH Letter of Credit Facility with interest at LIBOR plus 4.50%, and |
• | Amounts borrowed under the TCEH Revolving Credit Facility, which represent the entire amount of commitments under the facility totaling $2.054 billion. |
The TCEH Senior Secured Facilities are fully and 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 subsidiary of TCEH. The TCEH Senior Secured Facilities, the TCEH Senior Secured Notes and the TCEH first lien hedges (or any termination amounts related thereto), 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.
Borrowings under the TCEH Letter of Credit Facility have been recorded by TCEH as restricted cash that supports issuances of letters of credit. At September 30, 2014, the restricted cash related to the TCEH Letter of Credit Facility totaled $567 million and supports $354 million in letters of credit outstanding. Due to the default under the TCEH Senior Secured Facilities, the remaining $213 million letter of credit capacity is no longer available. In the first quarter 2014, TCEH issued a $157 million letter of credit to a subsidiary of EFH Corp. to secure its current and future amounts payable to the subsidiary arising from recurring transactions in the normal course of business, and through the third quarter 2014, the subsidiary drew on the letter of credit in the amount of $150 million to settle amounts due from TCEH. The remaining $7 million under the letter of credit expired in July 2014. Year to date September 30, 2014, $228 million of letters of credit have been drawn upon by unaffiliated counterparties to settle amounts receivable from TCEH, including $204 million related to pollution control revenue bonds that were tendered as noted in the table above.
TCEH 11.5% Senior Secured Notes — The principal amount of the TCEH 11.5% Senior Secured Notes totals $1.750 billion, with interest at a fixed rate of 11.5% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and each subsidiary of TCEH that guarantees the TCEH Senior Secured Facilities (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 notes are (i) senior obligations and rank equally in right of payment with all senior indebtedness of TCEH, (ii) senior in right of payment to all existing or future unsecured and second-priority secured debt of TCEH to the extent of the value of the TCEH Collateral and (iii) 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.
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TCEH 15% Senior Secured Second Lien Notes (including Series B) — The principal amount of the TCEH 15% Senior Secured Second Lien Notes totals $1.571 billion with interest at a fixed rate of 15% per annum. The notes are fully and 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. 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 on a first-priority basis, 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 notes are senior obligations of the issuer and rank equally in right of payment with all senior indebtedness of TCEH, are senior in right of payment to all existing or future unsecured debt of TCEH to the extent of the value of the TCEH Collateral (after taking into account any first-priority liens on the TCEH Collateral) and are senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated to TCEH's obligations under the TCEH Senior Secured Facilities, the TCEH Senior Secured Notes and TCEH's commodity and interest rate hedges that are secured by a first-priority lien on the TCEH Collateral and any future obligations subject to first-priority liens on the TCEH Collateral, to the extent of the value of the TCEH Collateral, and to all secured obligations of TCEH that are secured by assets other than the TCEH Collateral, to the extent of the value of the assets securing such obligations.
The guarantees of the TCEH Senior Secured Second Lien Notes by the Subsidiary Guarantors are effectively senior to any unsecured debt of the Subsidiary Guarantors to the extent of the value of the TCEH Collateral (after taking into account any first-priority liens on the TCEH Collateral). These guarantees are effectively subordinated to all debt of the Subsidiary Guarantors secured by the TCEH Collateral on a first-priority basis or that is secured by assets that are not part of the TCEH Collateral, to the extent of the value of the collateral securing that debt. EFCH's guarantee ranks equally with its unsecured debt (including debt it guarantees on an unsecured basis) and is effectively subordinated to any of its secured debt to the extent of the value of the collateral securing that debt.
TCEH 10.25% Senior Notes (including Series B) and 10.50%/11.25% Senior Toggle Notes (collectively, the TCEH Senior Notes) — The principal amount of the TCEH Senior Notes totals $4.874 billion, excluding $363 million aggregate principal amount held by EFH Corp. and EFIH, and the notes are fully and unconditionally guaranteed on a joint and several unsecured basis by TCEH's direct parent, EFCH, and by each subsidiary that guarantees the TCEH Senior Secured Facilities. The TCEH 10.25% Notes bore interest at a fixed rate of 10.25% per annum. The TCEH Toggle Notes bore interest at a fixed rate of 10.50% per annum.
EFIH 6.875% Senior Secured First Lien Notes — There were no principal amounts of the EFIH 6.875% Notes outstanding at September 30, 2014 as the notes were exchanged or settled in June 2014 as discussed in Note 5. These notes bore interest at a fixed rate of 6.875% per annum. The EFIH 6.875% Notes were secured on a first-priority basis by EFIH's pledge of its 100% ownership of the membership interests in Oncor Holdings (the EFIH Collateral) on an equal and ratable basis with the EFIH 10% Notes (discussed below).
The EFIH 6.875% Notes were senior obligations of EFIH and ranked equally in right of payment with all senior indebtedness of EFIH and were senior in right of payment to any future subordinated indebtedness of EFIH. The EFIH 6.875% Notes were effectively senior to all second lien and unsecured indebtedness of EFIH, to the extent of the value of the EFIH Collateral, and were effectively subordinated to any indebtedness of EFIH secured by assets of EFIH other than the EFIH Collateral, to the extent of the value of such assets. Furthermore, the EFIH 6.875% Notes were structurally subordinated to all indebtedness and other liabilities of EFIH's subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries. The holders of the EFIH 6.875% Notes voted as a separate class from the holders of the EFIH 10% Notes.
The EFIH 6.875% Notes were issued in private placements and are not registered under the Securities Act. EFIH had agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 6.875% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 6.875% Notes. Because the exchange offer was not completed, the annual interest rate on the EFIH 6.875% Notes increased by 25 basis points (to 7.125%) on August 15, 2013 and by an additional 25 basis points (to 7.375%) on November 15, 2013.
20
EFIH 10% Senior Secured First Lien Notes — There were no principal amounts of the EFIH 10% Notes outstanding at September 30, 2014 as the notes were exchanged or settled in June 2014 as discussed in Note 5. The notes bore interest at a fixed rate of 10% per annum. The notes were secured by the EFIH Collateral on an equal and ratable basis with the EFIH 6.875% Notes.
The EFIH 10% Notes were senior obligations of EFIH and ranked equally in right of payment with all existing and future senior indebtedness of EFIH, including the EFIH 6.875% Notes. The EFIH 10% Notes had substantially the same terms as the EFIH 6.875% Notes. The holders of the EFIH 10% Notes voted as a separate class from the holders of the EFIH 6.875% Notes.
The $1.302 billion of EFIH 10% Notes issued in January 2013 were issued in private placements and are not registered under the Securities Act. EFIH had agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 10% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 10% Notes. Because the exchange offer was not completed, the annual interest rate on the EFIH 10% Notes increased by 25 basis points (to 10.25%) on January 30, 2014 and by an additional 25 basis points (to 10.50%) on April 30, 2014.
EFIH 11% Senior Secured Second Lien Notes — The principal amount of the EFIH 11% Notes totals $406 million, with interest at a fixed rate of 11% per annum. The EFIH 11% Notes are secured on a second-priority basis by the EFIH Collateral on an equal and ratable basis with the EFIH 11.75% Notes.
The EFIH 11% Notes are senior obligations of EFIH and EFIH Finance and rank equally in right of payment with all senior indebtedness of EFIH and are effectively senior in right of payment to all existing or future unsecured debt of EFIH to the extent of the value of the EFIH Collateral. The notes have substantially the same terms as the EFIH 11.75% Notes discussed below, and the holders of the EFIH 11% Notes will generally vote as a single class with the holders of the EFIH 11.75% Notes.
EFIH 11.75% Senior Secured Second Lien Notes — The principal amount of the EFIH 11.75% Notes totals $1.750 billion, with interest at a fixed rate of 11.75% per annum. The EFIH 11.75% Notes are secured on a second-priority basis by the EFIH Collateral on an equal and ratable basis with the EFIH 11% Notes. The EFIH 11.75% Notes have substantially the same covenants as the EFIH 11% Notes, and the holders of the EFIH 11.75% Notes will generally vote as a single class with the holders of the EFIH 11% Notes.
The EFIH 11.75% Notes were issued in private placements and are not registered under the Securities Act. EFIH had agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 11.75% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 11.75% Notes. Because the exchange offer was not completed, the annual interest rate on the EFIH 11.75% Notes increased by 25 basis points (to 12.00%) on February 6, 2013 and by an additional 25 basis points (to 12.25%) on May 6, 2013.
EFIH 11.25%/12.25% Senior Toggle Notes — The principal amount of the EFIH Toggle Notes totals $1.566 billion, with interest at a fixed rate of 11.25% per annum for cash interest and 12.25% per annum for PIK Interest. The terms of the Toggle Notes include an election by EFIH, for any interest period until June 1, 2016, to pay interest on the Toggle Notes (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new EFIH Toggle Notes (PIK Interest); or (iii) 50% in cash and 50% in PIK Interest. EFIH made its pre-petition interest payments on the EFIH Toggle Notes by using the PIK feature of those notes.
The EFIH Toggle Notes were issued in private placements and are not registered under the Securities Act. EFIH had agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH Toggle Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH Toggle Notes. Because the exchange offer was not completed, the annual interest rate on the EFIH Toggle Notes increased by 25 basis points (to 11.50%) on December 6, 2013 and by an additional 25 basis points (to 11.75%) on March 6, 2014.
EFH Corp. 10.875% Senior Notes and 11.25%/12.00% Senior Toggle Notes — The collective principal amount of these notes totals $60 million. The notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by EFCH and EFIH. The notes bore interest at a fixed rate for the 10.875% Notes of 10.875% per annum and at a fixed rate for the Toggle Notes of 11.25% per annum.
21
Material Cross Default/Acceleration Provisions — Certain of our financing arrangements contain provisions that result in an event of default if there were a failure under other financing arrangements to meet payment terms or to observe other covenants that could or does result in an acceleration of payments due. Such provisions are referred to as "cross default" or "cross acceleration" provisions. The Bankruptcy Filing triggered defaults on our debt obligations, but pursuant to the Bankruptcy Code, the creditors are stayed from taking any actions against the Debtors as a result of such defaults.
8. | INTEREST EXPENSE AND RELATED CHARGES |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Interest paid/accrued on debtor-in-possession financing | $ | 74 | $ | — | $ | 88 | $ | — | |||||||
Adequate protection amounts paid/accrued (a) | 308 | — | 519 | — | |||||||||||
Interest paid/accrued on pre-petition debt (including net amounts paid/accrued under interest rate swaps) (b) | 3 | 851 | 1,152 | 2,532 | |||||||||||
Interest expense on pre-petition toggle notes payable in additional principal (Note 7) | — | 45 | 65 | 130 | |||||||||||
Noncash realized net loss on termination of interest rate swaps (offset in unrealized net gain) (c) | — | — | 1,237 | — | |||||||||||
Unrealized mark-to-market net gain on interest rate swaps | — | (414 | ) | (1,303 | ) | (903 | ) | ||||||||
Amortization of interest rate swap losses at dedesignation of hedge accounting | — | 2 | (1 | ) | 6 | ||||||||||
Amortization of fair value debt discounts resulting from purchase accounting | — | 5 | 6 | 15 | |||||||||||
Amortization of debt issuance, amendment and extension costs and discounts | — | 49 | 67 | 154 | |||||||||||
Capitalized interest | (3 | ) | (5 | ) | (14 | ) | (19 | ) | |||||||
Total interest expense and related charges | $ | 382 | $ | 533 | $ | 1,816 | $ | 1,915 | |||||||
____________
(a) | Post-petition period only. |
(b) | Includes amounts related to interest rate swaps totaling zero and $161 million for the three months ended September 30, 2014 and 2013, respectively, and $194 million and $470 million for the nine months ended September 30, 2014 and 2013, respectively. Of the $194 million for the nine months ended September 30, 2014, $129 million represents matured positions that have not been settled in cash. Of the $129 million, $127 million is included in the liability arising from the termination of TCEH interest rate swaps discussed in Note 12. |
(c) | Includes $1.225 billion related to terminated TCEH interest rate swaps (see Note 12) and $12 million related to other interest rate swaps. |
Interest expense for the three and nine months ended September 30, 2014 includes interest paid and accrued on debtor-in-possession financing (see Note 5), as well as adequate protection amounts paid and accrued, as approved by the Bankruptcy Court in June 2014 for the benefit of secured creditors of (a) $22.616 billion principal amount of outstanding borrowings from the TCEH Senior Secured Facilities, (b) $1.750 billion principal amount of outstanding TCEH Senior Secured Notes and (c) the $1.235 billion net liability related to the terminated TCEH interest rate swaps and natural gas hedging positions (see Note 12), in exchange for their consent to the senior secured, super-priority liens contained in the TCEH DIP Facility and any diminution in value of their interests in the pre-petition collateral from the Petition Date. Additionally, interest expense for the nine months ended September 30, 2014 includes interest paid and accrued on all pre-petition debt for the period prior to the Petition Date. The weighted average interest rate applicable to the adequate protection amounts paid/accrued at September 30, 2014 is 4.65% (one-month LIBOR plus 4.50%). In connection with the completion of a plan of reorganization of the Debtors, the amount of adequate protection payments will be "trued-up" to reflect the valuation of the TCEH Debtors determined in connection with confirmation of the plan of reorganization by the Bankruptcy Court.
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The Bankruptcy Code generally restricts payment of interest on pre-petition debt, subject to certain exceptions. However, the Bankruptcy Court ordered the payment of adequate protection amounts as discussed above and post-petition interest payments on EFIH First Lien Notes in connection with the settlement discussed in Note 5. Other than these amounts ordered by the Bankruptcy Court, effective April 29, 2014, the company discontinued recording interest expense on outstanding pre-petition debt classified as liabilities subject to compromise (LSTC). Contractual interest represents amounts due under the contractual terms of the outstanding debt (or upon approval by the Bankruptcy Court, at the federal judgment rate), including debt subject to compromise during the Chapter 11 Cases. Interest expense reported in the condensed statements of consolidated income (loss) for the three month and post-petition periods ended September 30, 2014 does not include $337 million and $574 million, respectively, in contractual interest on pre-petition debt classified as LSTC, which has been stayed by the Bankruptcy Court effective on the Petition Date. For the three and nine months ended September 30, 2014, adequate protection paid/accrued presented below excludes $15 million and $25 million, respectively, related to the TCEH first-lien interest rate and commodity hedge claims (see Note 12), as such amounts are not included in contractual interest amounts presented below.
Three Months Ended September 30, 2014 | ||||||||||||||||
Entity: | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Ordered Interest Paid/Accrued | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | ||||||||||||
EFH Corp. | $ | 31 | $ | — | $ | — | $ | 31 | ||||||||
EFIH | 114 | — | — | 114 | ||||||||||||
EFCH | 2 | — | — | 2 | ||||||||||||
TCEH | 514 | 293 | — | 221 | ||||||||||||
Eliminations (b) | (31 | ) | — | — | (31 | ) | ||||||||||
Total | $ | 630 | $ | 293 | $ | — | $ | 337 | ||||||||
Post-Petition Period Through September 30, 2014 | ||||||||||||||||
Entity: | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Ordered Interest Paid/Accrued (a) | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | ||||||||||||
EFH Corp. | $ | 53 | $ | — | $ | — | $ | 53 | ||||||||
EFIH | 248 | — | 54 | 194 | ||||||||||||
EFCH | 3 | — | — | 3 | ||||||||||||
TCEH | 871 | 494 | — | 377 | ||||||||||||
Eliminations (b) | (53 | ) | — | — | (53 | ) | ||||||||||
Total | $ | 1,122 | $ | 494 | $ | 54 | $ | 574 | ||||||||
___________
(a) | Represents interest on EFIH First Lien Notes exchanged and settled in June 2014 (see Note 5). |
(b) | Represents contractual interest on affiliate debt held by EFH Corp. and EFIH that is classified as LSTC. |
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9. | 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 Company operations — In connection with the sale of the assets of TXU Gas Company to Atmos Energy Corporation (Atmos) in October 2004, EFH Corp. agreed to indemnify Atmos, through October 1, 2014, for up to $500 million for any liability related to assets retained by TXU Gas Company, 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. As of October 1, 2014, no indemnity claims have been made or asserted by Atmos and no payments have been made. No such claims are expected to be made or asserted with respect to these indemnity obligations.
See Notes 5 and 7 for discussion of guarantees and security for certain of our post-petition and pre-petition debt.
Letters of Credit
At September 30, 2014, TCEH had outstanding letters of credit under its post-petition and pre-petition credit facilities totaling $538 million as follows:
• | $334 million to support commodity risk management and trading margin requirements in the normal course of business, including over-the-counter hedging transactions and collateral postings with ERCOT; |
• | $62 million to support TCEH's REP financial requirements with the PUCT, and |
• | $142 million for other credit support requirements. |
The automatic stay under the Bankruptcy Code does not apply to letters of credit issued under the pre-petition credit facility and third parties may draw if the terms of a particular letter of credit so provide. See Note 7 for discussion of letter of credit draws in 2014.
Litigation
Aurelius Capital Master, Ltd. and ACP Master, Ltd. (Aurelius) filed a lawsuit in March 2013, amended in May 2013, in the US District Court for the Northern District of Texas (Dallas Division) against EFCH as a nominal defendant and each of the current directors and a former director of EFCH. In the lawsuit, Aurelius, as a creditor under the TCEH Senior Secured Facilities and certain TCEH secured bonds, both of which are guaranteed by EFCH, filed a derivative claim against EFCH and its directors. Aurelius alleged that the directors of EFCH breached their fiduciary duties to EFCH and its creditors, including Aurelius, by permitting TCEH to make certain loans "without collecting fair and reasonably equivalent value." The lawsuit sought recovery for the benefit of EFCH. EFCH and the directors filed a motion to dismiss this lawsuit in June 2013. In January 2014, the district court granted the motion to dismiss and in February 2014 entered final judgment dismissing the lawsuit. Aurelius has appealed the district court's judgment to the US Court of Appeals for the Fifth Circuit (Fifth Circuit Court). We cannot predict the outcome of this proceeding, including the financial effects, if any.
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 sought a reversal of the TCEQ's order and a remand back to the TCEQ for further proceedings. The district court affirmed the TCEQ's issuance of the TPDES permit to Oak Grove. In December 2012, plaintiffs appealed the district court's decision to the Third Court of Appeals in Austin, Texas. Oral argument was held in April 2014. In June 2014, the Third Court of Appeals issued its opinion affirming the district court's judgment and the TCEQ's decision. Plaintiffs sought rehearing by the Third Court of Appeals, which was denied in July 2014. In July 2014, the Third Court of Appeals issued a replacement opinion again affirming TCEQ's issuance of the permit. The plaintiffs' deadline to seek further review of the decision expired on September 30, 2014, thus, the case has been resolved in favor of Oak Grove.
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In May 2012, the Sierra Club filed a lawsuit in the US District Court for the Western District of Texas (Waco Division) against EFH Corp. and Luminant Generation Company LLC (a wholly owned subsidiary of TCEH) for alleged violations of the Clean Air Act (CAA) at Luminant's Big Brown generation facility. The Big Brown trial was held in February 2014. In pre-trial filings submitted in January 2014, the Sierra Club stated it was seeking over $337 million in civil penalties for the alleged violations and injunctive relief. In March 2014, the district court entered final judgment denying all of the Sierra Club's claims and all relief requested by the Sierra Club. The Sierra Club has appealed the district court's decision to the Fifth Circuit Court. In August 2014, the district court ordered the Sierra Club to pay $6.4 million in Luminant's attorney and expert witness fees. The Sierra Club has appealed to the Fifth Circuit Court the district court's final order granting Luminant's motion for the fees.
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 for alleged violations of the CAA at Luminant's Martin Lake generation facility. In April 2014, the Martin Lake trial setting of May 2014 was vacated by the district court so that the district court could consider the effects of the decision in the Big Brown case. The Sierra Club has stated that it intends to ask the district court in this case to impose civil penalties of approximately $147 million. The Sierra Club has also stated that the district court can impose the maximum civil penalties available under the CAA to the government of up to $32,500 to $37,500 per day for each alleged violation depending on the date of the alleged violation. In addition, the Sierra Club has requested injunctive relief, including the installation of new emissions control equipment at the plant. An adverse outcome could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. While we are unable to estimate any possible loss or predict the outcome of the Martin Lake case, we believe that, as the judge ruled in the Big Brown case, the Sierra Club's claims are without merit, and we intend to vigorously defend the lawsuit.
In addition, in December 2010 and again in October 2011, the Sierra Club informed Luminant that it may sue Luminant for allegedly violating CAA provisions in connection with Luminant's Monticello generation facility. In May 2012, the Sierra Club informed us that it may sue us for allegedly violating CAA provisions in connection with Luminant's Sandow 4 generation facility. While we cannot predict whether the Sierra Club will actually file suit regarding Monticello or Sandow 4 or the outcome of any resulting proceedings, we believe we have complied with the requirements of the CAA at all of our generation facilities.
The affirmative claims asserted against EFH Corp. and Luminant Generation Company LLC described above were automatically stayed as a result of the Bankruptcy Filing. The matters will be subject to resolution in accordance with the Bankruptcy Code and the orders of the Bankruptcy Court.
Makewhole Claims — In May 2014, the indenture trustee for the EFIH 10% First Lien Notes initiated litigation in the Bankruptcy Court seeking, among other things, a declaratory judgment that EFIH is obligated to pay a redemption premium in connection with the cash repayment of the EFIH First Lien Notes discussed in Note 5 and that such redemption premium is an allowed secured claim (EFIH First Lien Makewhole Claims). In the EFIH First Lien Makewhole Claims, the amount of such claims is alleged to be equal to approximately $432 million plus reimbursement of expenses. In June 2014, the indenture trustee for the EFIH Second Lien Notes initiated litigation in the Bankruptcy Court seeking similar relief with respect to the EFIH Second Lien Notes, including among other things, that EFIH is obligated to pay a redemption premium in connection with any repayment of the EFIH Second Lien Notes and that such redemption premium would be an allowed secured claim (the EFIH Second Lien Makewhole Claims and, together with the EFIH First Lien Makewhole Claims, the Makewhole Claims). In the EFIH Second Lien Makewhole Claims, as of September 30, 2014, the amount of such claims alleged would have been equal to approximately $652 million plus reimbursement of expenses. If the EFIH Second Lien Notes are repaid, the EFIH Debtors expect they will be required to pay accrued interest on such notes. The EFIH Debtors expect to seek to obtain entry of orders from the Bankruptcy Court disallowing each of the Makewhole Claims.
In addition, creditors may make additional claims in the Chapter 11 Cases for redemption premiums in connection with repayments or settlement of other pre-petition debt. There can be no assurance regarding the outcome of this litigation or the Bankruptcy Court's determination regarding the validity or the amounts payable in respect of each of the Makewhole Claims or other claims for redemption premiums.
Litigation Related to EPA Reviews — In June 2008, the EPA issued an initial request for information to TCEH under the EPA's authority under Section 114 of the CAA. The stated purpose of the request is to obtain information necessary to determine compliance with the CAA, including New Source Review Standards and air permits issued by the TCEQ for the Big Brown, Monticello and Martin Lake generation facilities. In April 2013, we received an additional information request from the EPA under Section 114 related to the Big Brown, Martin Lake and Monticello facilities as well as an initial information request related to the Sandow 4 generation facility. 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.
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In July 2012, the EPA sent us a notice of violation alleging noncompliance with the CAA's New Source Review Standards and the air permits at our Martin Lake and Big Brown generation facilities. In September 2012, we filed a petition for review in the Fifth Circuit Court seeking judicial review of the EPA's notice of violation. Given recent legal precedent subjecting agency orders like the notice of violation to judicial review, we filed the petition for review to preserve our ability to challenge the EPA's issuance of the notice and its defects. In October 2012, the EPA filed a motion to dismiss our petition. In December 2012, the Fifth Circuit Court issued an order that delayed a ruling on the EPA's motion to dismiss until after the case was fully briefed and oral argument held.
In July 2013, the EPA sent us a second notice of violation alleging noncompliance with the CAA's New Source Review Standards at our Martin Lake and Big Brown generation facilities, which the EPA said "superseded" its July 2012 notice. In July 2013, we filed a petition for review in the Fifth Circuit Court seeking judicial review of the EPA's July 2013 notice of violation. In September 2013, the Fifth Circuit Court consolidated the petitions for review of the July 2012 and July 2013 notices of violation. Oral argument was heard in June 2014. In July 2014, the Fifth Circuit Court ruled that our challenges to the notices of violation must first be heard by the district court and may be presented as defenses to the EPA's civil enforcement lawsuit discussed below.
In August 2013, the US Department of Justice, acting as the attorneys for the EPA, filed a civil enforcement lawsuit against Luminant Generation Company LLC and Big Brown Power Company LLC in federal district court in Dallas, alleging violations of the CAA at our Big Brown and Martin Lake generation facilities. In September 2013, we filed a motion to stay this lawsuit pending the outcome of the Fifth Circuit Court's review of the July 2012 and July 2013 notices of violation. In January 2014, the district court granted our motion to stay the lawsuit until the Fifth Circuit Court resolved our petitions for review of the July 2012 and July 2013 notices of violation. In July 2014, the district court lifted the stay of the lawsuit. We believe that we have complied with all requirements of the CAA and intend to vigorously defend against these allegations. The lawsuit requests the maximum civil penalties available under the CAA to the government of up to $32,500 to $37,500 per day for each alleged violation, depending on the date of the alleged violation, and injunctive relief, including an order requiring the installation of best available control technology at the affected units. An adverse outcome could require substantial capital expenditures that cannot be determined at this time and could possibly require the payment of substantial penalties. We cannot predict the outcome of these proceedings, including the financial effects, if any.
Cross-State Air Pollution Rule (CSAPR)
In July 2011, the EPA issued the CSAPR, compliance with which would have required significant additional reductions of sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from our fossil fueled generation units. In September 2011, we filed a petition for review in the US Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) challenging the CSAPR as it applies to Texas. If the CSAPR had taken effect at that time, it would have caused us to, among other actions, idle two lignite/coal fueled generation units and cease certain lignite mining operations by the end of 2011.
In February 2012, the EPA released a final rule (Final Revisions) and a proposed rule revising certain aspects of the CSAPR, including increases in the emissions budgets for Texas and our generation assets as compared to the July 2011 version of the rule. In April 2012, we filed in the D.C. Circuit Court a petition for review of the Final Revisions on the ground, among others, that the rules do not include all of the budget corrections we requested from the EPA. The parties to the case agreed that the case should be stayed pending the conclusion of the CSAPR rehearing proceeding discussed below. In June 2012, the EPA finalized the proposed rule (Second Revised Rule). As compared to the proposed revisions to the CSAPR issued by the EPA in October 2011, the Final Revisions and the Second Revised Rule finalize emissions budgets for our generation assets that are approximately 6% lower for SO2, 3% higher for annual NOx and 2% higher for seasonal NOx.
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In August 2012, the D.C. Circuit Court vacated the CSAPR, remanding it to the EPA for further proceedings. The D.C. Circuit Court's order stated that the EPA was expected to continue administering the CAIR (the predecessor rule to the CSAPR) pending the EPA's further consideration of the rule. In March 2013, the EPA and certain other parties that supported the CSAPR submitted petitions to the US Supreme Court seeking its review of the D.C. Circuit Court's decision. The US Supreme Court granted review of the D.C. Circuit Court's decision in June 2013 and heard oral arguments in December 2013. In April 2014, the US Supreme Court issued its opinion in the CSAPR litigation, reversing the D.C. Circuit Court's decision in which that court vacated the CSAPR, but clarifying that the EPA may not "over-control" upwind states by requiring those states to make emission reductions in excess of what is necessary for downwind states to attain applicable air quality standards. The US Supreme Court remanded the case to the D.C. Circuit Court for further proceedings consistent with its opinion. Additionally, there are several issues that the parties challenging the CSAPR had previously raised but that the D.C. Circuit did not resolve in its first opinion and that may now be decided on remand. In June 2014, the D.C. Circuit Court directed that the parties file motions to govern further proceedings. While the US Supreme Court's ruling did not disturb the stay entered by the D.C. Circuit Court in December 2011, in June 2014 the EPA filed a motion in the D.C. Circuit Court seeking to lift the stay. In July 2014, we filed a motion for summary vacatur of the CSAPR budgets for Texas, requesting that the D.C. Circuit Court remand Texas's CSAPR emission budgets to the EPA to develop a valid budget that does not require Texas to reduce emissions in excess of what is necessary for downwind areas to comply with air quality standards and that Texas's emissions should continue to be governed by CAIR in the interim. In July 2014, we along with other petitioners filed an opposition to the EPA's motion to lift the stay. In October 2014, the D.C. Circuit Court entered an order granting the EPA's motion to lift the stay, denying Luminant's and Texas's motions for summary vacatur, establishing a briefing format and schedule for further proceedings in the case, and scheduling the case for oral argument in March 2015. Based on the D.C. Circuit Court's order, we believe that the CSAPR will go into effect on January 1, 2015 as the rule would have been implemented on January 1, 2012 had the D.C. Circuit Court not granted the stay in December 2011, but including changes to the budgets and the program that were implemented in rulemakings finalized by the EPA in February and June 2012. While we cannot predict the outcome of future proceedings related to the CSAPR, based upon our current operating plans, including Mercury and Air Toxics Standard (MATS) compliance efforts, we do not believe that the D.C. Circuit Court's decision to lift the stay for the CSAPR will cause any material operational, financial or compliance issues for us.
State Implementation Plan (SIP)
In September 2010, the EPA disapproved a portion of the SIP pursuant to which the TCEQ implements its program to achieve the requirements of the CAA. The EPA disapproved the Texas standard permit for pollution control projects (PCP). We hold several permits issued pursuant to the TCEQ standard permit conditions for pollution control projects. We challenged the EPA's disapproval by filing a lawsuit in the Fifth Circuit Court arguing that the TCEQ's adoption of the standard permit conditions for pollution control projects was consistent with the CAA. In March 2012, the Fifth Circuit Court vacated the EPA's disapproval of the Texas standard permit for pollution control projects and remanded the matter to the EPA for expedited reconsideration. In September 2013, the State of Texas filed a motion with the Fifth Circuit Court requesting that the Court amend and enforce its judgment in this case by requiring the EPA to satisfy the Court's judgment by taking action on the pending SIP revision regarding Texas's PCP standard permit. In February 2014, the Fifth Circuit Court ordered the EPA to issue a final rule on the standard permit for pollution control projects by May 2014. In May 2014, the EPA filed a notice in the Fifth Circuit Court that they complied with the Court's mandate and issued the final approval of Texas' PCP standard permit.
In November 2010, the EPA partially approved and partially disapproved a portion of the SIP under which the TCEQ had been phasing out a long-standing exemption for certain emissions that unavoidably occur during upsets and startup, shutdown and maintenance activities and replacing that exemption with a more limited affirmative defense that was phased out and replaced by TCEQ-issued generation facility-specific permit conditions. We, like many other electricity generation facility operators in Texas, have asserted applicability of the exemption or affirmative defense, and the TCEQ has concurred with that assertion. We have also applied for and received the generation facility-specific permit amendments. The EPA's partial approval and partial disapproval were challenged in the Fifth Circuit Court. We challenged the EPA's disapproval of Texas' affirmative defense for planned maintenance, startup and shutdown. The Fifth Circuit Court denied the challenge and ruled that the EPA's actions were in accordance with the Clean Air Act, including affirming the EPA's approval of Texas' SIP affirmative defense against civil penalties in the EPA enforcement actions and citizen suits for upsets and unplanned startup, shutdown and maintenance events.
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In February 2013, the EPA proposed a rule requiring certain states to replace SIP exemptions for excess emissions during malfunctions with an affirmative defense. Texas was not included in that original proposal since it already had an EPA-approved affirmative defense provision in its SIP. The 2013 EPA proposal was in response to a petition for rulemaking filed by the Sierra Club. In April 2014, the DC Circuit Court struck down an EPA regulation that contained an affirmative defense protecting Portland cement manufacturers from civil penalties during malfunctions. In its opinion, the DC Circuit Court acknowledged the Fifth Circuit's decision upholding the Texas SIP affirmative defenses and stated that it was not addressing whether an affirmative defense is appropriate in a SIP. However, the EPA has revised its 2013 proposal to extend the EPA's proposed findings of inadequacy to states that have affirmative defense provisions, including Texas. The EPA's revised proposal would require Texas to remove or replace its EPA-approved affirmative defense provisions for excess emissions during startup, shutdown and maintenance events. Comments on the EPA proposal are due in November 2014, and the EPA is expected to finalize the proposal in May 2015. We cannot predict the timing or outcome of future proceedings related to this rulemaking, including the requirements of any ultimately implemented rule, any compliance timeframe, or the financial effects, if any.
In June 2014, the Sierra Club filed a petition in the DC Circuit Court seeking review of several EPA regulations containing affirmative defenses for malfunctions, including the Mercury and Air Toxics Standards rule for power plants. In the petition, the Sierra Club contends this affirmative defense is no longer permissible in light of the DC Circuit Court's decision in the Portland cement case. Luminant filed a motion to intervene in this case. In July 2014, the DC Circuit Court ordered the case stayed pending the EPA's consideration of a petition for administrative reconsideration of the regulations at issue. We cannot predict the timing or outcome of future proceedings related to this petition, the petition for administrative reconsideration that is pending before the EPA or the financial effects of these proceedings, if any.
Other Matters
We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolutions of which, in the opinion of management, are not anticipated to have a material effect on our results of operations, liquidity or financial condition.
10. | EQUITY |
EFH Corp. has not declared or paid any dividends since the Merger.
The agreement governing the TCEH DIP Facility generally restricts TCEH's ability to make distributions or loans to any of its parent companies or their subsidiaries unless such distributions or loans are expressly permitted under the agreement governing such facility.
The agreement governing the EFIH DIP Facility generally restricts EFIH's ability to make distributions or loans to any of its parent companies or their subsidiaries unless such distributions or loans are expressly permitted under the agreement governing such facility.
Under applicable law, we are 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. In addition, due to the Bankruptcy Filing, no dividends are eligible to be paid without the approval of the Bankruptcy Court.
Noncontrolling Interests
As discussed in Note 3, we consolidate certain VIEs, which results in a noncontrolling interests component of equity. Net loss attributable to the noncontrolling interests was immaterial for the nine months ended September 30, 2014 and 2013.
28
Equity
The following table presents the changes to equity for the nine months ended September 30, 2014:
EFH Corp. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock (a) | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Equity | ||||||||||||||||||
Balance at December 31, 2013 | $ | 2 | $ | 7,962 | $ | (21,157 | ) | $ | (63 | ) | $ | 1 | $ | (13,255 | ) | ||||||||
Net loss | — | — | (1,334 | ) | — | — | (1,334 | ) | |||||||||||||||
Effects of stock-based incentive compensation plans | — | 6 | — | — | — | 6 | |||||||||||||||||
Change in unrecognized losses related to pension and OPEB plans | — | — | — | (14 | ) | — | (14 | ) | |||||||||||||||
Net effects of cash flow hedges | — | — | — | 1 | — | 1 | |||||||||||||||||
Investment by noncontrolling interests | — | — | — | — | 1 | 1 | |||||||||||||||||
Other | — | 1 | — | — | (2 | ) | (1 | ) | |||||||||||||||
Balance at September 30, 2014 | $ | 2 | $ | 7,969 | $ | (22,491 | ) | $ | (76 | ) | $ | — | $ | (14,596 | ) | ||||||||
____________
(a) | Authorized shares totaled 2,000,000,000 at September 30, 2014. Outstanding shares totaled 1,669,861,379 and 1,669,861,383 at September 30, 2014 and December 31, 2013, respectively. |
The following table presents the changes to equity for the nine months ended September 30, 2013:
EFH Corp. Shareholders’ Equity | |||||||||||||||||||||||
Common Stock (a) | |||||||||||||||||||||||