Attached files
| file | filename |
|---|---|
| EX-31.A - CERTIFICATION OF JOHN F. YOUNG - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit31a.htm |
| EX-99.B - CONSOLIDATED EBITDA RECONCILIATION TEXAS COMPETITIVE ELECTRIC HOLDINGS COMPANY - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit99b.htm |
| EX-99.A - TWELVE MONTHS ENDED JUNE 30, 2016 STATEMENT OF INCOME - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit99a.htm |
| EX-95.A - MINE SAFETY DISCLOSURES - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit95a.htm |
| EX-32.B - CERTIFICATION OF PAUL M. KEGLEVIC - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit32b.htm |
| EX-32.A - CERTIFICATION OF JOHN F. YOUNG - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit32a.htm |
| EX-31.B - CERTIFICATION OF PAUL M. KEGLEVIC - Energy Future Holdings Corp /TX/ | efh-2016630xexhibit31b.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 JUNE 30, 2016
— 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 August 2, 2016, 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 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.
2015 Form 10-K | EFH Corp.'s Annual Report on Form 10-K for the year ended December 31, 2015 | |
Chapter 11 Cases | Cases being heard in the US Bankruptcy Court for the District of Delaware (Bankruptcy Court) concerning voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code (Bankruptcy Code) filed on April 29, 2014 by the Debtors | |
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 adequate assurance payments, 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 | |
DIP Facilities | Refers, collectively, to the TCEH DIP Facility and the EFIH DIP Facility. See Note 10 to the Financial Statements. | |
Debtors | EFH Corp. and the majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities | |
Disclosure Statement | Disclosure Statement for the Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code filed by the Debtors with the Bankruptcy Court in May 2016 | |
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. and/or its subsidiaries, depending on context, whose major subsidiaries include TCEH and Oncor | |
EFH Debtors | EFH Corp. and its subsidiaries that are Debtors in the Chapter 11 Cases, excluding the TCEH Debtors | |
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 DIP Facility | EFIH's and EFIH Finance's $5.4 billion debtor-in-possession financing facility. See Note 10 to the Financial Statements. | |
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 | EFIH's and EFIH Finance's 6.875% Senior Secured First Lien Notes and 10.000% Senior Secured First Lien Notes exchanged or settled in June 2014 as discussed in Note 10 to the Financial Statements, collectively | |
EFIH PIK Notes | EFIH's and EFIH Finance's $1.530 billion principal amount of 11.25%/12.25% Senior Toggle Notes | |
ii
EFIH Second Lien Notes | EFIH's and EFIH Finance's $322 million principal amount of 11% Senior Secured Second Lien Notes and $1.389 billion principal amount of 11.75% Senior Secured Second Lien Notes, collectively | |
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 | |
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 in May 2012 but effective as of January 2010. EFH Corp., Oncor Holdings, Oncor, Texas Transmission, and Oncor Management Investment LLC are parties to a separate Federal and State Income Tax Allocation Agreement dated November 2008. See Note 6 to the Financial Statements and Management's Discussion and Analysis, under Financial Condition. | |
FERC | US Federal Energy Regulatory Commission | |
Fifth Circuit Court | US Court of Appeals for the Fifth Circuit | |
GAAP | generally accepted accounting principles | |
GHG | greenhouse gas | |
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 | |
LSTC | liabilities subject to compromise | |
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, 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. | |
MATS | the Mercury and Air Toxics Standard established by the EPA | |
Merger | the transaction referred to in the Agreement and Plan of Merger 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 | |
iii
Oncor | Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings and an indirect subsidiary of EFH Corp., 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 | |
Plan of Reorganization | Amended Joint Plan of Reorganization filed by the Debtors with the Bankruptcy Court in May 2016 | |
Plan Support Agreement | Third Amendment to the Amended and Restated Plan Support Agreement, entered into in December 2015, amending and restating the Plan Support Agreement | |
PUCT | Public Utility Commission of Texas | |
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 | |
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 | |
Settlement Agreement | Amended and Restated Settlement Agreement among the Debtors, the Sponsor Group, settling TCEH first lien creditors, settling TCEH second lien creditors, settling TCEH unsecured creditors and the official committee of unsecured creditors of TCEH (collectively, the Settling Parties), approved by the Bankruptcy Court in December 2015. See Note 2 to the Financial Statements. | |
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 DIP Facility | TCEH's $3.375 billion debtor-in-possession financing facility. See Note 10 to the 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 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. | |
iv
TCEH Senior Secured Notes | TCEH's and TCEH Finance's $1.750 billion principal amount of 11.5% First Lien Senior Secured Notes | |
TCEQ | Texas Commission on Environmental Quality | |
Terminated Plan | Sixth Amended Joint Plan of Reorganization filed by the Debtors in November 2015, as amended, confirmed by the Bankruptcy Court in December 2015, which became null and void in May 2016 | |
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 | |
Texas Transmission | 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 | |
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 LOSS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(millions of dollars) | |||||||||||||||
Operating revenues | $ | 1,233 | $ | 1,256 | $ | 2,283 | $ | 2,527 | |||||||
Fuel, purchased power costs and delivery fees | (654 | ) | (646 | ) | (1,208 | ) | (1,259 | ) | |||||||
Net gain (loss) from commodity hedging and trading activities | (118 | ) | 20 | (53 | ) | 123 | |||||||||
Operating costs | (255 | ) | (217 | ) | (474 | ) | (410 | ) | |||||||
Depreciation and amortization | (166 | ) | (222 | ) | (307 | ) | (440 | ) | |||||||
Selling, general and administrative expenses | (161 | ) | (177 | ) | (319 | ) | (355 | ) | |||||||
Impairment of goodwill (Note 5) | — | — | — | (700 | ) | ||||||||||
Impairment of long-lived assets (Note 7) | — | — | — | (676 | ) | ||||||||||
Other income (Note 18) | 16 | 12 | 21 | 19 | |||||||||||
Other deductions (Note 18) | (27 | ) | (2 | ) | (48 | ) | (61 | ) | |||||||
Interest expense and related charges (Note 8) | (402 | ) | (380 | ) | (797 | ) | (988 | ) | |||||||
Reorganization items (Note 9) | (52 | ) | (68 | ) | (122 | ) | (207 | ) | |||||||
Loss before income taxes and equity in earnings of unconsolidated subsidiaries | (586 | ) | (424 | ) | (1,024 | ) | (2,427 | ) | |||||||
Income tax benefit (Note 6) | 171 | 137 | 298 | 537 | |||||||||||
Equity in earnings of unconsolidated subsidiaries (net of tax) (Note 4) | 85 | 75 | 147 | 151 | |||||||||||
Net loss | $ | (330 | ) | $ | (212 | ) | $ | (579 | ) | $ | (1,739 | ) | |||
See Notes to the Financial Statements.
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(millions of dollars) | |||||||||||||||
Net loss | $ | (330 | ) | $ | (212 | ) | $ | (579 | ) | $ | (1,739 | ) | |||
Other comprehensive income (loss), net of tax effects: | |||||||||||||||
Effects related to pension and other retirement benefit obligations (net of tax benefit of $1, $—, $2 and $1) | (2 | ) | — | (3 | ) | (2 | ) | ||||||||
Cash flow hedges derivative value net loss related to hedged transactions recognized during the period (net of tax benefit of $— in all periods) | 1 | — | 1 | 1 | |||||||||||
Net effects related to Oncor — reported in equity in earnings of unconsolidated subsidiaries (net of tax) | 1 | — | 1 | 1 | |||||||||||
Total other comprehensive loss | — | — | (1 | ) | — | ||||||||||
Comprehensive loss | $ | (330 | ) | $ | (212 | ) | $ | (580 | ) | $ | (1,739 | ) | |||
See Notes to the Financial Statements.
1
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) | |||||||
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
(millions of dollars) | |||||||
Cash flows — operating activities: | |||||||
Net loss | $ | (579 | ) | $ | (1,739 | ) | |
Adjustments to reconcile net loss to cash used in operating activities: | |||||||
Depreciation and amortization | 355 | 514 | |||||
Deferred income tax benefit, net | (278 | ) | (410 | ) | |||
Impairment of goodwill (Note 5) | — | 700 | |||||
Impairment of long-lived assets (Note 7) | — | 676 | |||||
Contract claims adjustments (Note 9) | 3 | 28 | |||||
Fees paid on EFIH Second Lien Notes repayment and EFIH DIP Facility (Notes 10 and 11)(reported as financing activities) | 14 | 28 | |||||
Unrealized net (gain) loss from mark-to-market valuations of commodity positions | 253 | (74 | ) | ||||
Equity in earnings of unconsolidated subsidiaries | (147 | ) | (151 | ) | |||
Distributions of earnings from unconsolidated subsidiaries (Note 4) | 86 | 120 | |||||
Write-off of intangible and other assets (Note 18) | 41 | 59 | |||||
Other, net | 32 | 27 | |||||
Changes in operating assets and liabilities: | |||||||
Margin deposits, net | (133 | ) | 46 | ||||
Payables due to unconsolidated subsidiary | (2 | ) | (89 | ) | |||
Other operating assets and liabilities, including liabilities subject to compromise | (157 | ) | (307 | ) | |||
Cash used in operating activities | (512 | ) | (572 | ) | |||
Cash flows — financing activities: | |||||||
Borrowings under TCEH DIP Revolving Credit Facility (Note 10) | 1,115 | — | |||||
Repayments/repurchases of debt (Note 10) | (13 | ) | (456 | ) | |||
Fees paid on EFIH Second Lien Notes repayment and EFIH DIP Facility (Notes 10 and 11) | (14 | ) | (28 | ) | |||
Cash provided by (used in) financing activities | 1,088 | (484 | ) | ||||
Cash flows — investing activities: | |||||||
Capital expenditures | (169 | ) | (194 | ) | |||
Nuclear fuel purchases | (11 | ) | (11 | ) | |||
Lamar and Forney acquisition — net of cash acquired (Note 3) | (1,343 | ) | — | ||||
Changes in restricted cash | (9 | ) | (4 | ) | |||
Proceeds from sales of nuclear decommissioning trust fund securities (Note 18) | 155 | 73 | |||||
Investments in nuclear decommissioning trust fund securities (Note 18) | (163 | ) | (81 | ) | |||
Other, net | 6 | 8 | |||||
Cash used in investing activities | (1,534 | ) | (209 | ) | |||
Net change in cash and cash equivalents | (958 | ) | (1,265 | ) | |||
Cash and cash equivalents — beginning balance | 2,286 | 3,428 | |||||
Cash and cash equivalents — ending balance | $ | 1,328 | $ | 2,163 | |||
See Notes to the Financial Statements.
2
ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||
June 30, 2016 | December 31, 2015 | ||||||
(millions of dollars) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,328 | $ | 2,286 | |||
Restricted cash (Note 18) | 533 | 524 | |||||
Trade accounts receivable — net (Note 18) | 658 | 533 | |||||
Inventories (Note 18) | 420 | 428 | |||||
Commodity and other derivative contractual assets (Note 15) | 363 | 465 | |||||
Margin deposits related to commodity contracts | 23 | 6 | |||||
Other current assets | 85 | 81 | |||||
Total current assets | 3,410 | 4,323 | |||||
Restricted cash (Note 18) | 507 | 507 | |||||
Investment in unconsolidated subsidiary (Note 4) | 6,125 | 6,064 | |||||
Other investments (Note 18) | 1,032 | 984 | |||||
Property, plant and equipment — net (Note 18) | 10,537 | 9,430 | |||||
Goodwill (Note 5) | 152 | 152 | |||||
Identifiable intangible assets — net (Note 5) | 1,151 | 1,166 | |||||
Commodity and other derivative contractual assets (Note 15) | 15 | 10 | |||||
Accumulated deferred income taxes | 891 | 609 | |||||
Other noncurrent assets | 89 | 85 | |||||
Total assets | $ | 23,909 | $ | 23,330 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Borrowings under debtor-in-possession credit facilities (Note 10) | $ | 7,940 | $ | 6,825 | |||
Long-term debt due currently (Note 10) | 34 | 35 | |||||
Trade accounts payable | 417 | 413 | |||||
Net payables due to unconsolidated subsidiary (Note 16) | 202 | 204 | |||||
Commodity and other derivative contractual liabilities (Note 15) | 315 | 203 | |||||
Margin deposits related to commodity contracts | 36 | 152 | |||||
Accrued taxes | 115 | 134 | |||||
Accrued interest | 124 | 121 | |||||
Other current liabilities | 364 | 425 | |||||
Total current liabilities | 9,547 | 8,512 | |||||
Long-term debt, less amounts due currently (Note 10) | 52 | 60 | |||||
Liabilities subject to compromise (Note 11) | 37,788 | 37,786 | |||||
Commodity and other derivative contractual liabilities (Note 15) | 71 | 1 | |||||
Other noncurrent liabilities and deferred credits (Note 18) | 2,092 | 2,032 | |||||
Total liabilities | 49,550 | 48,391 | |||||
Commitments and Contingencies (Note 12) | |||||||
Total equity (Note 13) | (25,641 | ) | (25,061 | ) | |||
Total liabilities and equity | $ | 23,909 | $ | 23,330 | |||
See Notes to the Financial Statements.
3
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 retail electricity operations. 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 4).
Various ring-fencing measures have been taken to enhance the credit quality of Oncor. Such measures include, among other things: the ownership of a 19.75% equity interest in Oncor by Texas Transmission; 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. Oncor's operations are conducted, and its cash flows managed, independently from the Texas Holdings Group.
Consistent with the ring-fencing measures discussed above, the assets and liabilities of the Oncor Ring-Fenced Entities have not been, and are not expected to be, substantively consolidated with the assets and liabilities of the Debtors in the Chapter 11 Cases.
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 17 for further information concerning reportable business segments.
Bankruptcy Proceeding
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 (collectively, 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 2 for further discussion regarding the Chapter 11 Cases.
4
Basis of Presentation, Including Application of Bankruptcy Accounting
The condensed consolidated financial statements have been prepared in accordance with US GAAP. The condensed consolidated financial statements have been prepared as if EFH Corp. is a going concern and contemplate the realization of assets and liabilities in the normal course of business. The condensed consolidated financial statements reflect the application of Financial Accounting Standards Board Accounting Standards Codification 852, Reorganizations (ASC 852). During the pendency of the 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. ASC 852 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. See Notes 9 and 11 for discussion of these accounting and reporting changes.
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 4). 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 2015 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 February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-2 (ASU 2016-02), Leases. The ASU amends previous GAAP to require the recognition of lease assets and liabilities for operating leases. The ASU will be effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Retrospective application to comparative periods presented will be required in the year of adoption. We are currently evaluating the impact of this ASU on our financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-08 (ASU 2016-08), Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance for principal versus agent considerations related to ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provides the core principle and key steps in determining the recognition of revenue. The effective date for these updates has been deferred to fiscal years beginning after December 15, 2017. We are currently assessing the impact of these ASUs on our financial statements.
5
2. CHAPTER 11 CASES
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 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.
Plan of Reorganization
In May 2016, the Debtors filed the Plan of Reorganization and the Disclosure Statement with the Bankruptcy Court. In July 2016, in connection with the Merger Agreement (as described below), each of the EFH Debtors and NextEra Energy, Inc. (NEE) agreed to certain amendments to the Plan of Reorganization with respect to the EFH Debtors (the Amended Plan). Pursuant to the terms of the EFH Debtors Plan Support Agreement (as described below), it is expected that the Debtors will file the Amended Plan with the Bankruptcy Court and seek confirmation of the Amended Plan.
The Plan of Reorganization provides (and the Amended Plan will provide) that the confirmation and effective date of the Plan of Reorganization with respect to the TCEH Debtors may occur separate from, and independent of, the confirmation and effective date of the Plan of Reorganization with respect to the EFH Debtors.
With respect to the TCEH Debtors (and certain EFH Debtors that will become subsidiaries of Reorganized TCEH upon emergence of the TCEH Debtors from the Chapter 11 Cases (the Contributed EFH Debtors)), the Plan of Reorganization, subject to certain conditions, provides for, among other things, a tax-free spin-off from EFH Corp. (the Reorganized TCEH Spin-Off), including a transaction that will result in a step-up in the tax basis of certain TCEH assets contributed to a subsidiary of TCEH (Reorganized TCEH). With respect to the EFH Debtors, the Plan of Reorganization (as will be amended by the Amended Plan), subject to certain conditions and certain regulatory approvals, will provide for, among other things, the acquisition by NEE of the EFH Debtors (as reorganized) after the Reorganized TCEH Spin-Off pursuant to the Merger Agreement (as described below).
Information contained in the Plan of Reorganization (including when amended by the Amended Plan) and the Disclosure Statement is subject to change, whether as a result of amendments to such documents, requirements by the Bankruptcy Court, actions of third parties or otherwise.
Solely as it pertains to the TCEH Debtors and the Contributed EFH Debtors, the Disclosure Statement has been approved by the Bankruptcy Court, and the confirmation hearing for the Plan of Reorganization is scheduled to commence on August 17, 2016. There can be no assurance that the TCEH Debtors' stakeholders will vote to accept the Plan of Reorganization or that the Bankruptcy Court will confirm the Plan of Reorganization, in each case, as it relates to the TCEH Debtors. With respect to the EFH Debtors, no Disclosure Statement has been approved by the Bankruptcy Court, and no date to confirm the Plan of Reorganization has been scheduled. See Scheduling Matters below.
The EFH Debtors and the TCEH Debtors, respectively, will emerge from bankruptcy if and when, in each case, a plan of reorganization receives the requisite approval from the appropriate holders of claims, the Bankruptcy Court enters an order confirming such plan of reorganization and certain conditions to the effectiveness of such plan of reorganization are satisfied.
Plan Support Agreement and EFH Debtors Plan Support Agreement
In August 2015 (as amended in September 2015 and November 2015), in connection with the Terminated Plan, each of the Debtors entered into a Plan Support Agreement (Plan Support Agreement) with, among other parties, various of their respective creditors, the Sponsor Group and the official committee of TCEH unsecured creditors in order to effect an agreed upon restructuring of the Debtors pursuant to the Terminated Plan or, upon certain events, an Alternative Restructuring (as defined in the Plan Support Agreement) pursuant to another plan of reorganization. The Bankruptcy Court approved the Debtors' entry into the Plan Support Agreement in September 2015.
6
In May 2016, certain first lien creditors of TCEH (the Required TCEH First Lien Creditors) delivered a Plan Support Termination Notice to the Debtors and the other parties to the Plan Support Agreement notifying such parties of the occurrence of a Plan Support Termination Event pursuant to the Plan Support Agreement. The delivery of the Plan Support Termination Notice caused the Terminated Plan to become null and void. The delivery of the Plan Support Termination Notice did not, subject to certain conditions, terminate the obligations under the Plan Support Agreement of certain of the parties thereto to support an Alternative Restructuring pursuant to another plan of reorganization such as the Plan of Reorganization (including as to be amended by the Amended Plan).
The parties' obligations with respect to an Alternative Restructuring, which remain in effect (including with respect to the Plan of Reorganization (including as to be amended by the Amended Plan)), may be terminated upon the occurrence of certain events described in the Plan Support Agreement. In addition, under the Plan Support Agreement, the supporting parties have committed to support the inclusion of releases with respect to the claims described in the Settlement Agreement (described below) in the context of an alternative plan (which would become effective when a plan of reorganization contemplating an Alternative Restructuring, such as the Plan of Reorganization (including as to be amended by the Amended Plan), becomes effective).
In July 2016, the EFH Debtors and NEE entered into a plan support agreement (the EFH Debtors Plan Support Agreement) to effect an agreed upon restructuring of the EFH Debtors pursuant to the Amended Plan. The EFH Debtors Plan Support Agreement has not yet been approved by the Bankruptcy Court.
Settlement Agreement
The Settling Parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the Debtors' current and former directors, the Sponsor Group, managers and officers and other related entities. The Bankruptcy Court approved the Settlement Agreement in December 2015. The Settlement Agreement remains effective, notwithstanding the termination of the Terminated Plan.
Merger Agreement
In July 2016, EFH Corp. and EFIH entered into an Agreement and Plan of Merger (Merger Agreement) with NEE and a wholly-owned subsidiary of NEE (Merger Sub). Pursuant to the Merger Agreement, at the effective time of the Amended Plan, NEE will acquire the EFH Debtors (as reorganized) as a result of a merger (EFH Debtor Merger) between EFH Corp. and Merger Sub in which Merger Sub will survive as a wholly owned subsidiary of NEE. The consideration payable by NEE pursuant to the Merger Agreement consists primarily of cash paid to certain creditors. A portion of the consideration to be distributed to certain holders of allowed claims and interests in EFH Corp. and EFIH as set forth in the Amended Plan will consist of common stock of NEE.
The Merger Agreement contains representations and warranties and interim operating covenants that are customary for an agreement of this nature. The Merger Agreement also includes various conditions precedent to consummation of the transactions, including (a) a condition that certain approvals and rulings be obtained, including from the PUCT and the IRS and (b) a condition that the Reorganized TCEH Spin-Off shall have occurred. NEE will not be required to consummate the EFH Debtor Merger if, among other items, the PUCT approval is obtained but with conditions, commitments or requirements that impose a Burdensome Condition (as defined in the Merger Agreement). NEE's and Merger Sub's obligations under the Merger Agreement are not subject to any financing condition.
Prior to approval of the Merger Agreement by the Bankruptcy Court, EFH Corp. and EFIH may continue to solicit acquisition proposals with respect to the EFH Debtors. In addition, following approval of the Merger Agreement by the Bankruptcy Court and until confirmation of the Amended Plan by the Bankruptcy Court, EFH Corp. and EFIH may continue or have discussions or negotiations with respect to acquisition proposals for the EFH Debtors (a) with persons that were in active negotiation at the time of approval of the Merger Agreement by the Bankruptcy Court and (b) with persons that submit an unsolicited acquisition proposal that is, or is reasonably likely to lead to, a Superior Proposal (as defined in the Merger Agreement).
The Merger Agreement may be terminated upon certain events, including, among other things:
• | by either party, if the EFH Debtor Merger is not consummated by March 26, 2017, subject to a 90-day extension under certain conditions, or |
7
• | by EFH Corp. or EFIH, until the entry of the confirmation order of the Amended Plan with respect to the EFH Debtors, if their respective board of directors or managers determines, after consultation with its independent financial advisors and outside legal counsel, and based on advice of such counsel, that the failure to terminate the Merger Agreement is inconsistent with its fiduciary duties; provided that a material breach of EFH Corp.'s or EFIH’s obligations under certain provisions of the Merger Agreement has not provided the basis for such determination. |
Following approval of the Merger Agreement by the Bankruptcy Court, if the Merger Agreement is terminated for certain reasons set forth therein and an alternative transaction is consummated by EFH Corp. or EFIH in which neither NEE nor any of its affiliates obtains direct or indirect ownership of approximately 80% of Oncor, then EFH Corp. and EFIH will pay a termination fee of $275 million to NEE.
EFH Corp.'s and EFIH’s respective obligations under the Merger Agreement are subject in all respects to the prior approval of the Bankruptcy Court. Under the terms of the EFH Debtors Plan Support Agreement, the EFH Debtors will seek Bankruptcy Court approval of the Merger Agreement.
Regulatory Approvals
In May 2016, the TCEH Debtors received approval from the NRC with respect to the change of control application contemplated by the Plan of Reorganization as it relates to the emergence of the TCEH Debtors (and the EFH Contributed Debtors). In July 2016, the TCEH Debtors submitted an application to the RCT to request to substitute and replace the TCEH Debtors' existing mine reclamation performance collateral bond with a similar collateral bond in connection with the refinancing of the TCEH DIP Facility and the TCEH Debtors' proposed exit financing facility. We expect the RCT to complete its review and take action on the application in the third quarter of 2016.
The consummation of the transactions contemplated by the Merger Agreement with respect to the EFH Debtors requires the prior approval of, among others, the PUCT and the FERC.
Scheduling Matters
In May 2016, the Bankruptcy Court entered an order establishing a timeline for approval of a disclosure statement and a hearing to consider confirmation of the Plan of Reorganization as it applies to the TCEH Debtors and the Contributed EFH Debtors, and, separately, establishing a timeline for approval of a disclosure statement and a hearing to consider confirmation of the Plan of Reorganization as it applies to the remaining EFH Debtors. Pursuant to such scheduling order, solely as it pertains to the TCEH Debtors and the Contributed EFH Debtors, the Disclosure Statement has been approved by the Bankruptcy Court, and the confirmation hearing for the Plan of Reorganization is scheduled to commence on August 17, 2016. In June 2016, the Bankruptcy Court entered a supplement to its May 2016 order adjourning the schedule solely with respect to the EFH Debtors' schedule. We expect that the Bankruptcy Court will set a revised schedule relating to the EFH Debtors beginning in the third quarter of 2016.
The timelines set forth in the scheduling order are subject to further revision by the Bankruptcy Court and may change based on subsequent orders entered by the Bankruptcy Court (on its own, upon the motion of a party, or upon the Debtors' request).
Tax Matters
In June 2014, EFH Corp. filed a request with the IRS for a private letter ruling, which request has been supplemented from time to time in response to requests from the IRS for information or as required by changes in the contemplated transactions (as supplemented, the Private Letter Ruling). In July 2016, we received the Private Letter Ruling. It provides, among other things, for certain rulings regarding the qualification of (a) the transfer of certain assets and ordinary course operating liabilities to Reorganized TCEH and (b) the distribution of the equity of Reorganized TCEH, the cash proceeds from Reorganized TCEH debt, if any, the cash proceeds from the sale of preferred stock in a newly-formed entity, and the right to receive payments under a tax receivables agreement (if any), to holders of TCEH first lien claims, as a reorganization qualifying for tax-free treatment to the extent of the Reorganized TCEH stock received. In addition to the Private Letter Ruling, we are pursuing and expect to receive the required tax opinions that will supplement the Private Letter Ruling, as required by the Plan of Reorganization with respect to the TCEH Debtors.
8
The Merger Agreement provides that a closing condition to the EFH Debtor Merger is the receipt of a supplemental private letter ruling (the Supplemental Ruling) from the IRS regarding the impact of the EFH Debtor Merger on certain rulings received in the Private Letter Ruling. We expect to submit a request to the IRS for the Supplemental Ruling during 2016 as the transaction and bankruptcy process progresses. The Supplemental Ruling is only required for the consummation of the transactions contemplated by the EFH Debtor Merger and not for the emergence of the TCEH Debtors (and the Contributed EFH Debtors) as contemplated by the Plan of Reorganization.
Implications of the Chapter 11 Cases
Our ability to continue as a going concern is contingent upon, among other factors, our ability to comply with the financial and other covenants contained in the DIP Facilities described in Note 10, our ability to obtain new debtor in possession financing in the event the DIP Facilities were to expire during the pendency of the Chapter 11 Cases, our ability to complete a Chapter 11 plan of reorganization in a timely manner, including obtaining creditor and Bankruptcy Court approval of such plan, obtaining applicable regulatory approvals required for such plan and our ability to obtain any exit financing needed to implement such plan. These circumstances and uncertainties inherent in the bankruptcy proceedings raise substantial doubt about our ability to continue as a going concern.
Pre-Petition Claims
Holders of the substantial majority of pre-petition claims were 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. The Bankruptcy Court established a bar date of October 27, 2014 for the substantial majority of claims. In addition, in July 2015, the Bankruptcy Court entered an order establishing December 14, 2015 as the bar date for certain asbestos claims that arose or are deemed to have arisen before the Petition Date, except for certain specifically exempt claims.
Since the Petition Date and prior to the applicable bar dates (which have expired), we have received approximately 41,300 filed pre-petition claims, including approximately 30,900 in filed asbestos claims. We have substantially completed the process of reconciling all non-asbestos claims that were filed and have recorded such claims at the expected allowed amount. As of August 2, 2016, approximately 5,700 of those claims have been settled, withdrawn or expunged. We continue to work with creditors regarding certain non-asbestos claims to determine the ultimate amount of the allowed claims. Differences between those final allowed claims and the liabilities recorded in the condensed consolidated balance sheets will be recognized as reorganization items in our condensed statements of consolidated loss as they are resolved. The resolution of such claims could result in material adjustments to our financial statements.
Certain claims filed or reflected in our schedules of assets and liabilities will be resolved on the applicable effective date of the applicable plan of reorganization, including certain claims filed by holders of funded debt and contract counterparties. Claims that remain unresolved or unreconciled through the filing of this report have been estimated based upon management's best estimate of the likely claim amounts that the Bankruptcy Court will ultimately allow.
Separation of the EFH Debtors and the TCEH Debtors
Upon the effective date of the Plan of Reorganization as it relates to the TCEH Debtors (and the EFH Contributed Debtors), the EFH Debtors and the TCEH Debtors (together with the EFH Contributed Debtors) will be separated and no longer be affiliated companies. In addition to the plan of reorganization, the separation will be effectuated by a separation agreement, a transition services agreement and a tax matters agreement. A proposed form of each of these agreements was filed with the Bankruptcy Court by the Debtors in July 2016. These agreements must be approved by the Bankruptcy Court and, as a result, are subject to change.
Unaudited Condensed Combined Debtor Financial Statements
The condensed combined financial statements presented below represent the financial statements of the Debtors. EFH Corp.'s non-Debtor subsidiaries, excluding the Oncor Ring-Fenced Entities, which are substantively comprised of the recently acquired Lamar and Forney generation assets, are accounted for as non-consolidated subsidiaries in these financial statements, and their net income is included in equity in earnings of non-debtor entities (net of tax) in these condensed statements of combined loss and investment in non-debtor entities in these condensed combined balance sheets. Intercompany items and transactions among the Debtors have been eliminated in consolidation in these financial statements.
9
Condensed statements of combined loss of the Debtors for the three and six months ended June 30, 2016 and 2015 are presented below:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating revenues | $ | 1,234 | $ | 1,256 | $ | 2,283 | $ | 2,527 | |||||||
Fuel, purchased power costs and delivery fees | (677 | ) | (646 | ) | (1,230 | ) | (1,259 | ) | |||||||
Net gain (loss) from commodity hedging and trading activities | (117 | ) | 20 | (53 | ) | 123 | |||||||||
Operating costs | (239 | ) | (223 | ) | (462 | ) | (421 | ) | |||||||
Depreciation and amortization | (137 | ) | (219 | ) | (274 | ) | (433 | ) | |||||||
Selling, general and administrative expenses | (156 | ) | (175 | ) | (312 | ) | (352 | ) | |||||||
Impairment of goodwill | — | — | — | (700 | ) | ||||||||||
Impairment of long-lived assets | — | — | — | (676 | ) | ||||||||||
Other income (deductions) and interest income | (13 | ) | 2 | (29 | ) | (52 | ) | ||||||||
Interest expense and related charges | (401 | ) | (379 | ) | (798 | ) | (987 | ) | |||||||
Reorganization items | (52 | ) | (68 | ) | (122 | ) | (207 | ) | |||||||
Loss before income taxes and equity in earnings of non-debtor entities | (558 | ) | (432 | ) | (997 | ) | (2,437 | ) | |||||||
Income tax benefit | 161 | 140 | 289 | 545 | |||||||||||
Equity in earnings of non-debtor entities (net of tax) | 67 | 80 | 129 | 153 | |||||||||||
Net loss | $ | (330 | ) | $ | (212 | ) | $ | (579 | ) | $ | (1,739 | ) | |||
Condensed statements of combined comprehensive loss of the Debtors for the three and six months ended June 30, 2016 and 2015 are presented below:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net loss | $ | (330 | ) | $ | (212 | ) | $ | (579 | ) | $ | (1,739 | ) | |||
Other comprehensive loss (net of tax) | — | — | (1 | ) | — | ||||||||||
Comprehensive loss | $ | (330 | ) | $ | (212 | ) | $ | (580 | ) | $ | (1,739 | ) | |||
10
Condensed statements of combined cash flows of the Debtors for the six months ended June 30, 2016 and 2015 are presented below:
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Cash used in operating activities | $ | (545 | ) | $ | (574 | ) | |
Cash flows — financing activities: | |||||||
Borrowings under TCEH DIP Revolving Credit Facility | 1,115 | — | |||||
Repayments/repurchases of debt | (10 | ) | (451 | ) | |||
Fees paid on EFIH Second Lien Notes repayment and EFIH DIP Facility | (14 | ) | (28 | ) | |||
Cash provided by (used in) financing activities | 1,091 | (479 | ) | ||||
Cash flows — investing activities: | |||||||
Advances to non-debtor affiliates | (12 | ) | (6 | ) | |||
Investment in non-debtor affiliates | (1,338 | ) | — | ||||
Capital expenditures | (136 | ) | (195 | ) | |||
Nuclear fuel purchases | (11 | ) | (11 | ) | |||
Proceeds from sales of nuclear decommissioning trust fund securities | 155 | 73 | |||||
Investments in nuclear decommissioning trust fund securities | (163 | ) | (81 | ) | |||
Other, net | (4 | ) | (5 | ) | |||
Cash used in investing activities | (1,509 | ) | (225 | ) | |||
Net change in cash and cash equivalents | (963 | ) | (1,278 | ) | |||
Cash and cash equivalents — beginning balance | 2,258 | 3,417 | |||||
Cash and cash equivalents — ending balance | $ | 1,295 | $ | 2,139 | |||
Condensed combined balance sheets of the Debtors at June 30, 2016 and December 31, 2015 are presented below:
June 30, 2016 | December 31, 2015 | ||||||
ASSETS | |||||||
Total current assets | $ | 3,491 | $ | 4,443 | |||
Restricted cash | 507 | 507 | |||||
Advances to non-debtor entities | 115 | 115 | |||||
Investment in non-debtor entities | 7,529 | 6,147 | |||||
Other investments | 1,032 | 984 | |||||
Property, plant and equipment — net | 9,080 | 9,287 | |||||
Goodwill | 152 | 152 | |||||
Identifiable intangible assets — net | 1,146 | 1,170 | |||||
Commodity and other derivative contractual assets | 12 | 10 | |||||
Accumulated deferred income taxes | 702 | 424 | |||||
Other noncurrent assets | 48 | 39 | |||||
Total assets | $ | 23,814 | $ | 23,278 | |||
LIABILITIES AND EQUITY | |||||||
Total current liabilities | $ | 9,537 | $ | 8,496 | |||
Long-term debt, less amounts due currently | 19 | 23 | |||||
Liabilities subject to compromise | 37,788 | 37,786 | |||||
Commodity and other derivative contractual liabilities | 20 | 1 | |||||
Other noncurrent liabilities and deferred credits | 2,091 | 2,033 | |||||
Total liabilities | 49,455 | 48,339 | |||||
Total equity | (25,641 | ) | (25,061 | ) | |||
Total liabilities and equity | $ | 23,814 | $ | 23,278 | |||
11
3. | LAMAR AND FORNEY ACQUISITION |
In April 2016, Luminant purchased all of the membership interests in La Frontera Holdings, LLC (La Frontera), the indirect owner of two combined-cycle gas turbine (CCGT) natural gas fueled generation facilities representing nearly 3,000 MW of capacity located in ERCOT, from a subsidiary of NextEra Energy, Inc. (the Lamar and Forney Acquisition). The facility in Forney, Texas has a capacity of 1,912 MW and the facility in Paris, Texas has a capacity of 1,076 MW. The acquisition continues to diversify our fuel mix and increases the dispatch flexibility in our fleet. The aggregate purchase price was approximately $1.313 billion, which included the repayment of approximately $950 million of existing project financing indebtedness of La Frontera at closing, plus approximately $240 million for cash and net working capital subject to final settlement. The purchase price was funded by cash-on-hand and additional borrowings under the TCEH DIP Facility totaling $1.1 billion. After completing the acquisition, we repaid approximately $230 million of borrowings under the TCEH DIP Revolving Credit Facility primarily utilizing cash acquired in the transaction. La Frontera and its subsidiaries are subsidiary guarantors under the TCEH DIP Facility.
Purchase Accounting
The Lamar and Forney Acquisition has been accounted for in accordance with ASC 805, Business Combinations (ASC 805), with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date. The related purchase agreement contains a traditional working capital adjustment that is still being finalized, and as a result our purchase price allocation is not yet complete and is considered to be provisional at this time. The provisional amounts recognized are subject to revision until our valuations are completed, not to exceed one year, and any material adjustments identified that existed as of the acquisition date will be recognized in the current period. We expect the working capital adjustment to be finalized in the third quarter of 2016.
To fair value the acquired property, plant and equipment, we used a discounted cash flow analysis, classified as Level 3 within the fair value hierarchy levels (see Note 14). This discounted cash flow model was created for each generation facility based on its remaining useful life. The discounted cash flow model included gross margin forecasts for each power generation facility determined using forward commodity market prices obtained from long-term forecasts. We also used management's forecasts of generation output, operations and maintenance expense, SG&A and capital expenditures. The resulting cash flows, estimated based upon the age of the assets, efficiency, location and useful life, were then discounted using plant specific discount rates of approximately 9%.
The following table summarizes the consideration paid and the preliminary allocation of the purchase price to the fair value amounts recognized for the assets acquired and liabilities assumed related to the Lamar and Forney Acquisition as of the acquisition date. The purchase price allocation is subject to change based on final working capital adjustments.
Cash paid to seller at close | $ | 603 | ||
Preliminary net working capital adjustments | (8 | ) | ||
Consideration paid to seller | 595 | |||
Cash paid to repay project financing at close | 950 | |||
Total cash paid related to acquisition | $ | 1,545 | ||
Cash and cash equivalents | $ | 210 | ||
Property, plant and equipment — net | 1,316 | |||
Commodity and other derivative contractual assets | 47 | |||
Other assets | 44 | |||
Total assets acquired | 1,617 | |||
Commodity and other derivative contractual liabilities | 53 | |||
Trade accounts payable and other liabilities | 19 | |||
Total liabilities assumed | 72 | |||
Identifiable net assets acquired | $ | 1,545 | ||
The Lamar and Forney Acquisition did not result in the recording of goodwill since the purchase price did not exceed the fair value of the net assets acquired.
12
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information for the six months ended June 30, 2016 and 2015 assumes that the Lamar and Forney Acquisition occurred on January 1, 2015. The unaudited pro forma financial information is provided for information purposes only and is not necessarily indicative of the results of operations that would have occurred had the Lamar and Forney Acquisition been completed on January 1, 2015, nor are they indicative of future results of operations.
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Revenues | $ | 2,425 | $ | 3,044 | |||
Net income (loss) | $ | (594 | ) | $ | (1,651 | ) | |
The unaudited pro forma financial information includes adjustments for incremental depreciation as a result of the fair value determination of the net assets acquired and interest expense on borrowings under the TCEH DIP Facility in lieu of interest expense incurred prior to the acquisition.
13
4. | 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.
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. The maximum exposure to loss from our interests in VIEs does not exceed our carrying value.
Non-Consolidation of Oncor and Oncor Holdings
Our investment in unconsolidated subsidiary as presented in the condensed consolidated balance sheets totaled $6.125 billion and $6.064 billion at June 30, 2016 and December 31, 2015, 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 23% and 24% of Oncor Holdings' consolidated operating revenues for the six months ended June 30, 2016 and 2015, respectively.
See Note 16 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 $86 million and $120 million for the six months ended June 30, 2016 and 2015, respectively. Distributions may not be paid except to the extent Oncor maintains a required regulatory capital structure as discussed below. At June 30, 2016, $98 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 June 30, 2016, Oncor's regulatory capitalization ratio was 59.4% debt to 40.6% 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. 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).
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.
14
Oncor Holdings Financial Statements — Condensed statements of consolidated income of Oncor Holdings and its subsidiaries for the three and six months ended June 30, 2016 and 2015 are presented below:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Operating revenues | $ | 948 | $ | 938 | $ | 1,891 | $ | 1,884 | |||||||
Operation and maintenance expenses | (389 | ) | (367 | ) | (791 | ) | (746 | ) | |||||||
Depreciation and amortization | (193 | ) | (220 | ) | (403 | ) | (437 | ) | |||||||
Taxes other than income taxes | (107 | ) | (108 | ) | (220 | ) | (220 | ) | |||||||
Other income and (deductions) — net | (3 | ) | (6 | ) | (8 | ) | (7 | ) | |||||||
Interest expense and related charges | (84 | ) | (84 | ) | (168 | ) | (165 | ) | |||||||
Income before income taxes | 172 | 153 | 301 | 309 | |||||||||||
Income tax expense | (65 | ) | (58 | ) | (116 | ) | (119 | ) | |||||||
Net income | 107 | 95 | 185 | 190 | |||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (20 | ) | (38 | ) | (39 | ) | |||||||
Net income attributable to Oncor Holdings | $ | 85 | $ | 75 | $ | 147 | $ | 151 | |||||||
Assets and liabilities of Oncor Holdings at June 30, 2016 and December 31, 2015 are presented below:
June 30, 2016 | December 31, 2015 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 2 | $ | 26 | |||
Restricted cash | — | 38 | |||||
Trade accounts receivable — net | 407 | 388 | |||||
Trade accounts and other receivables from affiliates | 124 | 118 | |||||
Income taxes receivable from EFH Corp. | 90 | 107 | |||||
Inventories | 95 | 82 | |||||
Prepayments and other current assets | 98 | 88 | |||||
Total current assets | 816 | 847 | |||||
Other investments | 99 | 97 | |||||
Property, plant and equipment — net | 13,439 | 13,024 | |||||
Goodwill | 4,064 | 4,064 | |||||
Regulatory assets — net | 1,184 | 1,194 | |||||
Other noncurrent assets | 45 | 31 | |||||
Total assets | $ | 19,647 | $ | 19,257 | |||
LIABILITIES | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | 1,133 | $ | 840 | |||
Long-term debt due currently | — | 41 | |||||
Trade accounts payable — nonaffiliates | 213 | 150 | |||||
Income taxes payable to EFH Corp. | 11 | 20 | |||||
Accrued taxes other than income | 106 | 181 | |||||
Accrued interest | 82 | 82 | |||||
Other current liabilities | 117 | 144 | |||||
Total current liabilities | 1,662 | 1,458 | |||||
Accumulated deferred income taxes | 2,039 | 1,985 | |||||
Long-term debt, less amounts due currently | 5,650 | 5,646 | |||||
Other noncurrent liabilities and deferred credits | 2,326 | 2,306 | |||||
Total liabilities | $ | 11,677 | $ | 11,395 | |||
15
5. | 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. None of the goodwill is being deducted for tax purposes.
Goodwill before impairment charges | $ | 18,342 | |
Accumulated noncash impairment charges | (18,190 | ) | |
Balance at June 30, 2016 and December 31, 2015 | 152 | ||
Goodwill Impairments
Goodwill and intangible assets with indefinite useful lives are required to be tested for impairment at least annually (we have selected a December 1 test date) or whenever events or changes in circumstances indicate an impairment may exist.
During the three months ended March 31, 2015, we experienced an impairment indicator related to decreases in forward wholesale electricity prices when compared to those prices reflected in our December 1, 2014 goodwill impairment testing analysis. As a result, the likelihood of a goodwill impairment had increased, and we initiated further testing of goodwill. Our testing of goodwill for impairment as of March 31, 2015 resulted in an impairment charge totaling $700 million, which we reported in the Competitive Electric segment results.
Identifiable Intangible Assets
Identifiable intangible assets, including amounts that arose in connection with accounting for the Merger, are comprised of the following:
June 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
Identifiable Intangible Asset | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Retail customer relationship | $ | 463 | $ | 448 | $ | 15 | $ | 463 | $ | 442 | $ | 21 | ||||||||||||
Capitalized in-service software | 378 | 237 | 141 | 362 | 214 | 148 | ||||||||||||||||||
Other identifiable intangible assets (a) | 53 | 18 | 35 | 72 | 35 | 37 | ||||||||||||||||||
Total identifiable intangible assets subject to amortization | $ | 894 | $ | 703 | 191 | $ | 897 | $ | 691 | 206 | ||||||||||||||
Retail trade name (not subject to amortization) | 955 | 955 | ||||||||||||||||||||||
Mineral interests (not currently subject to amortization) | 5 | 5 | ||||||||||||||||||||||
Total identifiable intangible assets | $ | 1,151 | $ | 1,166 | ||||||||||||||||||||
____________
(a) | Includes favorable purchase and sales contracts, environmental allowances and credits and mining development costs. See discussion below regarding impairment charges recorded in the six months ended June 30, 2015 related to other identifiable intangible assets. |
At June 30, 2016 and December 31, 2015, amounts related to fully amortized assets that are expired, or of no economic value, have been excluded from both the gross carrying and accumulated amortization amounts in the table above.
16
Amortization expense related to finite-lived identifiable intangible assets (including the condensed statements of consolidated loss line item) consisted of:
Identifiable Intangible Asset | Condensed Statements of Consolidated Loss Line | Segment | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||
Retail customer relationship | Depreciation and amortization | Competitive Electric | $ | 3 | $ | 4 | $ | 6 | $ | 9 | ||||||||||
Capitalized in-service software | Depreciation and amortization | Competitive Electric and Corporate and Other | 12 | 11 | 25 | 22 | ||||||||||||||
Other identifiable intangible assets | Operating revenues/fuel, purchased power costs and delivery fees/depreciation and amortization | Competitive Electric | — | 7 | 3 | 12 | ||||||||||||||
Total amortization expense (a) | $ | 15 | $ | 22 | $ | 34 | $ | 43 | ||||||||||||
____________
(a) | Amounts recorded in depreciation and amortization totaled $17 million and $18 million for the three months ended June 30, 2016 and 2015, respectively, and $34 million and $33 million for the six months ended June 30, 2016 and 2015, respectively. |
Intangible Impairments
The impairments of our generation facilities in March 2015 (see Note 7) resulted in the impairment of the SO2 allowances under the Clean Air Act's acid rain cap-and-trade program that are associated with those facilities to the extent they are not projected to be used at other sites. The fair market values of the SO2 allowances were estimated to be de minimis based on Level 3 fair value estimates (see Note 14). Accordingly, in the three months ended March 31, 2015, we recorded noncash impairment charges of $51 million in our Competitive Electric segment (before deferred income tax benefit) in other deductions (see Note 18) related to our existing environmental allowances and credits intangible asset.
During the three months ended March 31, 2015, we determined that certain intangible assets related to favorable power purchase contracts should be evaluated for impairment. That conclusion was based on further declines in wholesale electricity prices in ERCOT experienced during the three months ended March 31, 2015. Our fair value measurement was based on a discounted cash flow analysis of the contracts that compared the contractual price and terms of the contract to forecasted wholesale electricity and renewable energy credit (REC) prices in ERCOT. As a result of the analysis, we recorded a noncash impairment charge of $8 million in our Competitive Electric segment (before deferred income tax benefit) in other deductions (see Note 18).
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 | |||
2016 | $ | 74 | ||
2017 | $ | 53 | ||
2018 | $ | 33 | ||
2019 | $ | 16 | ||
2020 | $ | 9 | ||
17
6. | INCOME TAXES |
EFH Corp. files a US federal income tax return that includes the results of EFCH, EFIH, Oncor Holdings and TCEH. EFH Corp. is the corporate member of the EFH Corp. consolidated group, while each of EFIH, Oncor Holdings, EFCH and TCEH is classified as a disregarded entity for US federal income tax purposes. Oncor is a partnership for US federal income tax purposes and is not a corporate member of the EFH Corp. consolidated group. Pursuant to applicable US Treasury regulations and published guidance of the IRS, corporations that are members of a consolidated group have joint and several liability for the taxes of such group.
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, which provides, among other things, that any corporate member or disregarded entity in the EFH Corp. group is required to make payments to EFH Corp. in an amount calculated to approximate the amount of tax liability such entity would have owed if it filed a separate corporate tax return. The Plan of Reorganization provides that upon the effective date of the plan, as it relates to the TCEH Debtors, that the TCEH Debtors will reject this agreement. Additionally, under the terms of the Settlement Agreement, no further cash payments among the Debtors will be made in respect of federal income taxes. We have elected to continue to allocate federal income taxes among the entities that are parties to the Federal and State Income Tax Allocation Agreement. The Settlement Agreement did not alter the allocation and payment for state income taxes, which will continue to be settled.
EFH Corp., Oncor Holdings, Oncor and Oncor's minority investors are parties to a separate Federal and State Income Tax Allocation Agreement, which governs the computation of federal income tax liability among such parties, and similarly provides, among other things, that each of Oncor Holdings and Oncor will pay EFH Corp. its share of an amount calculated to approximate the amount of tax liability such entity would have owed if it filed a separate corporate tax return. The Settlement Agreement had no impact on the tax sharing agreement among EFH, Oncor Holdings and Oncor.
The calculation of our effective tax rate is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Loss before income taxes and equity in earnings of unconsolidated subsidiaries | $ | (586 | ) | $ | (424 | ) | $ | (1,024 | ) | $ | (2,427 | ) | |||
Income tax benefit | $ | 171 | $ | 137 | $ | 298 | $ | 537 | |||||||
Effective tax rate | 29.2 | % | 32.3 | % | 29.1 | % | 22.1 | % | |||||||
For the three months ended June 30, 2016, the effective tax rate of 29.2% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to nondeductible legal and other professional services costs related to the Chapter 11 Cases. For the three months ended June 30, 2015, the effective tax rate of 32.3% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to nondeductible legal and other professional services costs related to the Chapter 11 Cases, partially offset by the tax benefit recognized due to the Texas margin tax rate reduction in 2015.
For the six months ended June 30, 2016, the effective tax rate of 29.1% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to nondeductible legal and other professional services costs related to the Chapter 11 Cases, partially offset by the difference in the forecasted effective tax rate and the statutory rate applied to unrealized losses from mark-to-market hedging activities. For the six months ended June 30, 2015, the effective tax rate of 22.1% related to our income tax benefit was lower than the US Federal statutory rate of 35% due primarily to the nondeductible goodwill impairment charge (see Note 5) and nondeductible legal and other professional services costs related to the Chapter 11 Cases, partially offset by the difference in the forecasted effective tax rate and the statutory rate applied to long-lived and intangible asset impairment charges (see Notes 5 and 7) and the Texas margin tax rate reduction in 2015.
Liability for Uncertain Tax Positions
In June 2016, we received a final agreed Revenue Agent Report (RAR) from the IRS and associated documentation for the 2010 through 2013 tax years. The RAR was signed in July 2016. As a result of the final RAR, we reduced the liability for uncertain tax positions by $1 million, resulting in a reclassification to the accumulated deferred income tax liability. Total cash payment to be assessed by the IRS for tax years 2010 through 2013, but not expected to be paid during the pendency of the Chapter 11 Cases, is approximately $15 million, plus any interest that may be assessed.
18
In March 2016, we signed a final agreed RAR with the IRS for the 2014 tax year. No material financial statement impacts resulted from the signing of the 2014 RAR.
In June 2015, we signed a final agreed RAR with the IRS and associated documentation for the 2008 and 2009 tax years. The Bankruptcy Court approved our signing of the RAR in July 2015. As a result of the final RAR, we reduced the liability for uncertain tax positions by $23 million, resulting in a $20 million reclassification to the accumulated deferred income tax liability and the recording of a $3 million income tax benefit recorded in the Competitive Electric segment results. Total cash payment to be assessed by the IRS for tax years 2008 and 2009, but not paid during the pendency of the Chapter 11 Cases, is approximately $15 million, plus any interest that may be assessed.
7. | IMPAIRMENT OF LONG-LIVED ASSETS |
Impairment of Lignite/Coal Fueled Generation and Mining Assets
We evaluated our generation assets for impairment during March 2015 as a result of an impairment indicator related to the continued decline in forecasted wholesale electricity prices in ERCOT. Our evaluation concluded that an impairment existed, and the carrying value at our Big Brown generation facility and related mining facility was reduced by $676 million.
Our fair value measurement for these assets was determined based on an income approach that utilized probability-weighted estimates of discounted future cash flows, which were Level 3 fair value measurements (see Note 14). Key inputs into the fair value measurement for these assets included current forecasted wholesale electricity prices in ERCOT, forecasted fuel prices, capital and operating expenditure forecasts and discount rates.
Additional material impairments may occur in the future for our other generation facilities if forward wholesale electricity prices continue to decline or forecasted costs of producing electricity at our generation facilities increase, including increased costs of compliance with proposed environmental regulations.
8. | INTEREST EXPENSE AND RELATED CHARGES |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Interest paid/accrued on debtor-in-possession financing | $ | 80 | $ | 74 | $ | 154 | $ | 146 | |||||||
Adequate protection amounts paid/accrued | 324 | 306 | 646 | 609 | |||||||||||
Interest paid/accrued on pre-petition debt (a) | 1 | 3 | 3 | 239 | |||||||||||
Capitalized interest | (3 | ) | (3 | ) | (6 | ) | (6 | ) | |||||||
Total interest expense and related charges | $ | 402 | $ | 380 | $ | 797 | $ | 988 | |||||||
____________
(a) | For the six months ended June 30, 2015, amount includes $235 million in post-petition interest related to the EFIH Second Lien Notes (see Note 11). For the three and six months ended June 30, 2016 and 2015, includes interest paid/accrued on long-term debt not subject to compromise. |
Interest expense for the three and six months ended June 30, 2016 and 2015 reflects interest paid and accrued on debtor-in-possession financing (see Note 10), 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 $1.243 billion net liability related to the TCEH first lien interest rate swaps and natural gas hedging positions terminated shortly after the Bankruptcy Filing (see Note 15), 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, and interest paid on the EFIH Second Lien Notes as approved by the Bankruptcy Court in March 2015 (see Note 11). The interest rate applicable to the adequate protection amounts paid/accrued for the six months ended June 30, 2016 was 4.93% (one-month LIBOR plus 4.50%). The amount of adequate protection payments may be adjusted to reflect the valuation of the TCEH Debtors determined in connection with confirmation of the Plan of Reorganization with respect to the TCEH Debtors by the Bankruptcy Court. In addition, upon completion of the Plan of Reorganization with respect to the TCEH Debtors, amounts of adequate protection payments may be re-characterized as payments of principal.
19
The Bankruptcy Code generally restricts payment of interest on pre-petition debt, subject to certain exceptions. The Bankruptcy Court approved post-petition interest payments on the EFIH Second Lien Notes in March 2015 as discussed in Note 11. Additional interest payments may also be made upon approval by the Bankruptcy Court (see Note 12). Other than amounts ordered or approved by the Bankruptcy Court, effective on the Petition Date, we discontinued recording interest expense on outstanding pre-petition debt classified as LSTC. The table below shows contractual interest amounts, which are amounts due under the contractual terms of the outstanding debt, including debt subject to compromise during the Chapter 11 Cases. Interest expense reported in the condensed statements of consolidated loss does not include contractual interest on pre-petition debt classified as LSTC totaling $317 million and $328 million for the three months ended June 30, 2016 and 2015, respectively, and $652 million and $616 million for the six months ended June 30, 2016 and 2015, respectively, which has been stayed by the Bankruptcy Court effective on the Petition Date. Adequate protection paid/accrued presented below excludes interest paid/accrued on the TCEH first-lien interest rate and commodity hedge claims (see Note 15) totaling $16 million and $15 million for the three months ended June 30, 2016 and 2015, respectively, and $31 million and $29 million for the six months ended June 30, 2016 and 2015, respectively, as such amounts are not included in contractual interest amounts below.
Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | |||||||||||||||||||||||||||||||
Entity: | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Approved Interest Paid/Accrued | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Approved Interest Paid/Accrued | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | ||||||||||||||||||||||||
EFH Corp. | $ | 11 | $ | — | $ | — | $ | 11 | $ | 31 | $ | — | $ | — | $ | 31 | ||||||||||||||||
EFIH | 101 | — | — | 101 | 101 | — | — | 101 | ||||||||||||||||||||||||
EFCH | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||||||||
TCEH | 513 | 308 | — | 205 | 516 | 291 | — | 225 | ||||||||||||||||||||||||
Eliminations (b) | — | — | — | — | (31 | ) | — | — | (31 | ) | ||||||||||||||||||||||
Total | $ | 625 | $ | 308 | $ | — | $ | 317 | $ | 619 | $ | 291 | $ | — | $ | 328 | ||||||||||||||||
Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 | |||||||||||||||||||||||||||||||
Entity: | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Approved Interest Paid/Accrued | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | Contractual Interest on Debt Classified as LSTC | Adequate Protection Paid/Accrued | Approved Interest Paid/Accrued (a) | Contractual Interest on Debt Classified as LSTC Not Paid/Accrued | ||||||||||||||||||||||||
EFH Corp. | $ | 22 | $ | — | $ | — | $ | 22 | $ | 63 | $ | — | $ | — | $ | 63 | ||||||||||||||||
EFIH | 202 | — | — | 202 | 213 | — | 50 | 163 | ||||||||||||||||||||||||
EFCH | — | — | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||
TCEH | 1,043 | 615 | — | 428 | 1,029 | 580 | — | 449 | ||||||||||||||||||||||||
Eliminations (b) | — | — | — | — | (62 | ) | — | — | (62 | ) | ||||||||||||||||||||||
Total | $ | 1,267 | $ | 615 | $ | — | $ | 652 | $ | 1,246 | $ | 580 | $ | 50 | $ | 616 | ||||||||||||||||
___________
(a) | For the six months ended June 30, 2015 represents portion of interest related to the EFIH Second Lien Notes that was repaid based on the approval of the Bankruptcy Court; however, excludes $185 million of post-petition interest paid in 2015 that contractually related to 2014 and default interest (see Note 11). |
(b) | Represents contractual interest on affiliate debt held by EFH Corp. and EFIH that is classified as LSTC. |
20
9. | REORGANIZATION ITEMS |
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the condensed statements of consolidated loss as reorganization items as required by ASC 852, Reorganizations. Reorganization items also include adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments are determined. The following table presents reorganization items incurred in the three and six months ended June 30, 2016 and 2015 as reported in the condensed statements of consolidated loss:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Expenses related to legal advisory and representation services | $ | 29 | $ | 52 | $ | 60 | $ | 102 | |||||||
Expenses related to other professional consulting and advisory services | 21 | 17 | 44 | 46 | |||||||||||
Contract claims adjustments | 2 | (2 | ) | 3 | 28 | ||||||||||
Fees associated with extension of EFIH DIP Facility | — | — | 14 | — | |||||||||||
Fees associated with repayment of EFIH Second Lien Notes (Note 11) | — | — | — | 28 | |||||||||||
Other | — | 1 | 1 | 3 | |||||||||||
Total reorganization items | $ | 52 | $ | 68 | $ | 122 | $ | 207 | |||||||
10. | DEBTOR-IN-POSSESSION BORROWING FACILITIES AND LONG-TERM DEBT NOT SUBJECT TO COMPROMISE |
TCEH DIP Facility — The Bankruptcy Court approved the TCEH DIP Facility in June 2014. 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 $1.950 billion (TCEH DIP Revolving Credit Facility) and a term loan facility of up to $1.425 billion (TCEH DIP Term Loan Facility). 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 Facility and related available capacity at June 30, 2016 are presented below. In the June 30, 2016 condensed consolidated balance sheet, the borrowings under the TCEH DIP Facility are reported as current liabilities. The maturity date of the TCEH DIP Facility is the earlier of (a) November 2016 or (b) the effective date of any plan of reorganization of TCEH. In June 2016, the TCEH Debtors extended their use of cash collateral to September 30, 2016, provided that the TCEH Debtors do not otherwise cause an event of default under the cash collateral order. The TCEH DIP Facility must be repaid in full prior to the TCEH Debtors' emergence from the Chapter 11 Cases.
June 30, 2016 | ||||||||||||
TCEH DIP Facility | Facility Limit | Available Cash Borrowing Capacity | Available Letter of Credit Capacity | |||||||||
TCEH DIP Revolving Credit Facility (a) | $ | 1,950 | $ | 835 | $ | — | ||||||
TCEH DIP Term Loan Facility (b) | 1,425 | — | 272 | |||||||||
Total TCEH DIP Facility | $ | 3,375 | $ | 835 | $ | 272 | ||||||
___________
(a) | Facility used for general corporate purposes. 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 TCEH committee of unsecured creditors and the ad hoc group of TCEH unsecured noteholders 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. |
21
At June 30, 2016, $1.115 billion of the TCEH DIP Revolving Credit Facility has been borrowed. As discussed in Note 3, the Lamar and Forney Acquisition in April 2016 was funded by cash-on-hand and $1.1 billion in additional cash borrowings under the TCEH DIP Revolving Credit Facility. After completing the acquisition, we repaid approximately $230 million of borrowings under the TCEH DIP Revolving Credit Facility primarily utilizing cash acquired in the transaction. At December 31, 2015, no amounts were borrowed under the TCEH DIP Revolving Credit Facility.
At both June 30, 2016 and December 31, 2015, all $1.425 billion of the TCEH DIP Term Loan Facility has been borrowed. Of this borrowing, $800 million represents amounts that support issuances of letters of credit and have been funded to a collateral account. Of the collateral account amount at June 30, 2016, $272 million is reported as cash and cash equivalents and $528 million is reported as restricted cash, which represents the amount of outstanding letters of credit.
Amounts borrowed under the TCEH DIP Revolving Credit Facility bear interest based on applicable LIBOR rates, plus 2.50%, and the weighted average interest rate on outstanding borrowings was 2.98% at June 30, 2016. Amounts borrowed under the TCEH DIP Term Loan Facility bear interest based on applicable LIBOR rates, subject to a 0.75% floor, plus 3%, and the interest rate on outstanding borrowings was 3.75% at both June 30, 2016 and December 31, 2015. 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 Debtors' obligations under the TCEH DIP Facility are secured by a lien covering substantially all of the TCEH Debtors' assets, rights and properties (including the assets acquired in the Lamar and Forney Acquisition), 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 is a guarantor to the agreement governing the TCEH DIP Facility along with substantially all of TCEH’s subsidiaries, including all subsidiaries that are Debtors in the Chapter 11 Cases.
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.
The RCT agreed to accept a collateral bond from TCEH of up to $1.1 billion 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.
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. As of June 30, 2016, we are in compliance with this financial covenant. 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.
22
EFIH DIP Facility, EFIH First Lien Notes Settlement and EFIH Second Lien Notes Repayment — The Bankruptcy Court approved the EFIH DIP Facility in June 2014. The EFIH DIP Facility provides for a $5.4 billion first-lien debtor-in-possession financing facility. In March 2015, $750 million of cash borrowings were used to repay $445 million principal amount of EFIH Second Lien Notes (including accrued and unpaid pre-petition interest of $55 million and post-petition interest of $235 million) and certain fees (see Note 11).
As of June 30, 2016, remaining cash on hand from borrowings under the EFIH DIP Facility, net of fees, totaled approximately $275 million, which was held as cash and cash equivalents. In the June 30, 2016 condensed consolidated balance sheet, the borrowings under the EFIH DIP Facility are reported as current liabilities. In January 2016, the EFIH Debtors paid a $14 million extension fee to extend the maturity date of the EFIH DIP Facility to December 2016. The terms of the EFIH DIP Facility were otherwise unchanged. The EFIH DIP Facility must be repaid in full prior to the EFIH Debtors emergence from the Chapter 11 Cases.
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 both June 30, 2016 and December 31, 2015, outstanding borrowings under the EFIH DIP Facility totaled $5.4 billion at an annual interest rate of 4.25%. 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 plan of reorganization, (b) upon the event of the sale of substantially all of EFIH's assets or (c) December 2016.
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. As of June 30, 2016, EFIH was in compliance with this minimum liquidity covenant. The Oncor Ring-Fenced Entities are not restricted subsidiaries for purposes of the EFIH DIP Facility.
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.
23
Long-Term Debt Not Subject to Compromise — Amounts presented in the table below represent pre-petition liabilities that are not subject to compromise due to the debt being fully collateralized or specific orders from the Bankruptcy Court approving repayment of the debt.
June 30, 2016 | December 31, 2015 | ||||||
EFH Corp. (parent entity) | |||||||
8.82% Non-Debtor Building Financing due semiannually through February 11, 2022 | $ | 33 | $ | 35 | |||
Unamortized fair value premium (a) | 5 | 6 | |||||
Total EFH Corp. | 38 | 41 | |||||
EFCH | |||||||
9.58% Fixed Notes due in annual installments through December 4, 2019 (b) | 13 | 13 | |||||
8.254% Fixed Notes due in quarterly installments through December 31, 2021 (b) | 21 | 24 | |||||
Unamortized fair value discount (a) | (2 | ) | (2 | ) | |||
Total EFCH | 32 | 35 | |||||
TCEH | |||||||
7.48% Fixed Secured Facility Bonds with amortizing payments through January 2017 (c) | 10 | 13 | |||||
Capital lease obligations | 4 | 5 | |||||
Other | 2 | 2 | |||||
Unamortized discount | — | (1 | ) | ||||
Total TCEH | 16 | 19 | |||||
Total EFH Corp. consolidated | 86 | 95 | |||||
Less amounts due currently | (34 | ) | (35 | ) | |||
Total long-term debt not subject to compromise | $ | 52 | $ | 60 | |||
____________
(a) | Amount represents unamortized fair value adjustments recorded under purchase accounting. |
(b) | Approved by the Bankruptcy Court for repayment. |
(c) | Debt issued by trust and secured by assets held by the trust. |
24
11. | LIABILITIES SUBJECT TO COMPROMISE (LSTC) |
The amounts classified as LSTC reflect the company's estimate of pre-petition liabilities and other expected allowed claims to be addressed in the Chapter 11 Cases and may be subject to future adjustment as the Chapter 11 Cases proceed. Amounts classified to LSTC do not include pre-petition liabilities that are fully collateralized by letters of credit or cash deposits. The following table presents LSTC as reported in the condensed consolidated balance sheets at June 30, 2016 and December 31, 2015:
June 30, 2016 | December 31, 2015 | ||||||
Notes, loans and other debt per the following table | $ | 35,560 | $ | 35,560 | |||
Accrued interest on notes, loans and other debt | 745 | 745 | |||||
Net liability under terminated TCEH interest rate swap and natural gas hedging agreements (Note 15) | 1,243 | 1,243 | |||||
Trade accounts payable and other expected allowed claims | 240 | 238 | |||||
Total liabilities subject to compromise | $ | 37,788 | $ | 37,786 | |||
Pre-Petition Notes, Loans and Other Debt Reported as LSTC
Amounts presented below represent principal amounts of pre-petition notes, loans and other debt reported as LSTC.
June 30, 2016 | December 31, 2015 | ||||||
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 | 89 | 89 | |||||
6.50% Fixed Series Q Senior Notes due November 15, 2024 | 198 | 198 | |||||
6.55% Fixed Series R Senior Notes due November 15, 2034 | 288 | 288 | |||||
Total EFH Corp. | 640 | 640 | |||||
EFIH | |||||||
11% Fixed Senior Secured Second Lien Notes due October 1, 2021 | 322 | 322 | |||||