Energy Future Intermediate Holding Inactive
Filed: 23 Feb 12, 12:00am
Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-174787 and 333-174787-01
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
EFIH FINANCE INC.
SUPPLEMENT NO. 5 TO
MARKET MAKING PROSPECTUS DATED SEPTEMBER 1, 2011
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 23, 2012
On February 21, 2012, Energy Future Intermediate Holding Company LLC filed the attached Current Report on
Form 10-K with the Securities and Exchange Commission.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
— OR —
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-34544
Energy Future Intermediate Holding Company LLC
(Exact name of registrant as specified in its charter)
| Delaware | 26-1191638 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1601 Bryan Street, Dallas, TX 75201 | (214) 812-4600 | |
| (Address of principal executive offices)(Zip Code) | (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
| 9.75% Senior Secured Notes due 2019 | New York Stock Exchange | |
| Guarantees of Energy Future Holdings Corp. 9.75% Senior Secured Notes due 2019 | N/A |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 ¨
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-Accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of February 20, 2012, the outstanding membership interest in Energy Future Intermediate Holding Company LLC was held by Energy Future Holdings Corp.
Energy Future Intermediate Holding Company LLC meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this report with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE—None
TABLE OF CONTENTS
Energy Future Intermediate Holding Company LLC’s (EFIH) 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 Energy Future Holdings Corp. (EFH Corp.) website athttp://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 annual report on Form 10-K. Readers should not rely on or assume the accuracy of any representation or warranty in any agreement that EFIH has filed as an exhibit to this annual report on Form 10-K because such representation or warranty may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties’ risk allocation in the particular transaction, may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes or may no longer continue to be true as of any given date, including the date of this annual report on Form 10-K.
This annual report on Form 10-K and other Securities and Exchange Commission filings of EFIH and its subsidiaries occasionally make references to EFIH (or “we,” “our,” “us” or “the company”), EFH Corp., Oncor Holdings or Oncor when describing actions, rights or obligations of their respective subsidiaries. These references reflect the fact that the subsidiaries are consolidated with, or otherwise reflected in, their respective parent company’s financial statements for financial reporting purposes. However, these references should not be interpreted to imply that the relevant parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or vice versa.
i
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
Adjusted EBITDA | Adjusted EBITDA means EBITDA adjusted to exclude noncash items, unusual items and other adjustments allowable under the EFIH Notes and certain debt arrangements of EFH Corp. (as applicable). See definition of EBITDA below. Adjusted EBITDA and EBITDA are not recognized terms under US GAAP and, thus, are non-GAAP financial measures. We are providing our and EFH Corp.’s Adjusted EBITDA in this Form 10-K (see reconciliations in Exhibits 99(a) and 99(b)) solely because of the important role that Adjusted EBITDA plays in respect of certain covenants contained in the indentures for the EFIH Notes and EFH Corp. debt pushed down to EFIH as discussed in Note 5 to Financial Statements. We do not intend for Adjusted EBITDA (or EBITDA) to be an alternative to net income as a measure of operating performance or an alternative to cash flows from operating activities as a measure of liquidity or an alternative to any other measure of financial performance presented in accordance with US GAAP. Additionally, we do not intend for Adjusted EBITDA (or EBITDA) to be used as a measure of free cash flow available for management’s discretionary use, as the measure excludes certain cash requirements such as interest payments, tax payments and other debt service requirements. Because not all companies use identical calculations, our presentation of Adjusted EBITDA (and EBITDA) may not be comparable to similarly titled measures of other companies. | |
CREZ | Competitive Renewable Energy Zone | |
EBITDA | Refers to earnings (net income) before interest expense, income taxes, depreciation and amortization. See the definition of Adjusted EBITDA above. | |
EFCH | Refers to Energy Future Competitive Holdings Company, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context. | |
EFH Corp. | Refers to Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context. Its major subsidiaries include TCEH and Oncor. | |
EFH Corp. 10.875% Notes | Refers to EFH Corp.’s 10.875% Senior Notes due November 1, 2017, which are guaranteed on a senior unsecured basis by EFIH and EFCH as discussed in Note 5 to Financial Statements. | |
EFH Corp. Secured Notes | Refers collectively to EFH Corp.’s 9.75% Senior Secured Notes due October 15, 2019 (EFH Corp. 9.75% Notes) and EFH Corp.’s 10.000% Senior Secured Notes due January 15, 2020 (EFH Corp. 10% Notes), both of which are guaranteed on a senior secured basis by EFIH and a senior unsecured basis by EFCH as discussed in Note 5 to Financial Statements. | |
EFH Corp. Toggle Notes | Refers to EFH Corp.’s 11.25%/12.00% Senior Toggle Notes due November 1, 2017, which are guaranteed on a senior unsecured basis by EFIH and EFCH as discussed in Note 5 to Financial Statements. | |
EFIH | Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings, and/or its subsidiaries depending on context. | |
EFIH Finance | Refers to EFIH Finance Inc., a direct, wholly-owned subsidiary of EFIH, formed for the sole purpose of serving as co-issuer with EFIH of certain debt securities. | |
EFIH Notes | Refers collectively to EFIH’s and EFIH Finance’s 9.75% Senior Secured Notes due October 15, 2019 (EFIH 9.75% Notes), 10.000% Senior Secured Notes due December 1, 2020 (EFIH 10% Notes) and 11% Senior Secured Second Lien Notes due October 1, 2021 (EFIH 11% Notes). | |
EPA | US Environmental Protection Agency | |
ERCOT | Electric Reliability Council of Texas, the independent system operator and the regional coordinator of various electricity systems within Texas | |
FERC | US Federal Energy Regulatory Commission | |
GAAP | generally accepted accounting principles | |
kV | kilovolts | |
kWh | kilowatt-hours | |
Luminant | Refers to subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas. | |
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Merger | The transaction referred to in the Agreement and Plan of Merger, dated February 25, 2007, under which Texas Holdings agreed to acquire EFH Corp., which was completed on October 10, 2007 | |
MW | megawatts | |
NERC | North American Electric Reliability Corporation | |
Oncor | Refers to Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings, and/or its wholly-owned consolidated bankruptcy-remote financing subsidiary, Oncor Electric Delivery Transition Bond Company LLC, depending on context, that is engaged in regulated electricity transmission and distribution activities. | |
Oncor Holdings | Refers to Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of EFIH and the direct majority owner of Oncor, and/or its subsidiaries, depending on context. | |
Oncor Ring-Fenced Entities | Refers to Oncor Holdings and its direct and indirect subsidiaries, including Oncor. | |
PUCT | Public Utility Commission of Texas | |
PURA | Texas Public Utility Regulatory Act | |
purchase accounting | The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or “purchase price” of a business combination, including the amount paid for the equity and direct transaction costs, are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill. | |
REP | retail electric provider | |
SEC | US Securities and Exchange Commission | |
Sponsor Group | Refers collectively to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Capital, L.P. and GS Capital Partners, an affiliate of Goldman, Sachs & Co. that have an ownership interest in Texas Holdings. | |
TCEH | Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context. Its major subsidiaries include Luminant and TXU Energy. | |
TCEQ | Texas Commission on Environmental Quality | |
Texas Holdings | Refers to Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group that owns substantially all of the common stock of EFH Corp. | |
Texas Holdings Group | Refers to Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring- Fenced Entities. | |
Texas Transmission | Refers to Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor. Texas Transmission is not affiliated with EFH Corp., any of EFH Corp.’s subsidiaries or any member of the Sponsor Group. | |
TRE | Refers to Texas Reliability Entity, Inc., an independent organization that develops reliability standards for the ERCOT region and monitors and enforces compliance with NERC standards and ERCOT protocols. | |
TXU Energy | Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of TCEH engaged in the retail sale of electricity to residential and business customers. TXU Energy is a REP in competitive areas of ERCOT. | |
US | United States of America | |
VIE | variable interest entity | |
iii
Items 1. and 2. BUSINESS AND PROPERTIES
References in this report to “we,” “our,” “us” and “the company” are to EFIH and/or its direct and indirect subsidiaries as apparent in the context. See “Glossary” for defined terms.
Energy Future Intermediate Holding Company LLC Business and Strategy
EFIH is a Dallas, Texas-based holding company whose wholly-owned subsidiary, Oncor Holdings, holds a majority interest (approximately 80%) in Oncor. The business and strategy of Oncor is discussed below as the investment in Oncor represents a substantial portion of the net assets and earnings of EFIH. Oncor is a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell electricity to residential, business and other consumers in the north-central, eastern and western parts of Texas. Revenues from TCEH represented 33% and 36% of Oncor’s total revenues for the years ended December 31, 2011 and 2010, respectively. EFIH is a direct, wholly-owned subsidiary of EFH Corp. EFIH has no reportable business segments. Oncor Holdings and its subsidiaries are not consolidated in EFIH’s financial statements in accordance with consolidation accounting standards related to variable interest entities (VIEs) (see Note 2).
As discussed in Notes 3 and 5 to Financial Statements, our balance sheet as of December 31, 2011 reflects investments in EFH Corp. and TCEH debt securities with a total carrying value of $3.632 billion. Our investments in debt securities and issuances of debt relate to EFH Corp.’s liability management program, under which EFH Corp. is seeking to reduce the amount and extend the maturity of its outstanding debt. Our long-term debt as of December 31, 2011 totaled $2.727 billion principal amount, and was issued in connection with debt exchanges as part of EFH Corp.’s liability management program. Additionally, we and EFCH guarantee $1.810 billion principal amount of EFH Corp. debt held by nonaffiliates as of December 31, 2011, including $709 million that is reflected on our balance sheet (see Note 5).
Oncor’s Business
Oncor’s transmission and distribution assets are located principally in the north-central, eastern and western parts of Texas. This territory comprises 91 counties and over 400 incorporated municipalities, including Dallas/Fort Worth and surrounding suburbs, as well as Waco, Wichita Falls, Odessa, Midland, Tyler and Killeen. Oncor is not a seller of electricity, nor does it purchase electricity for resale. It provides transmission services to other electricity distribution companies, cooperatives, municipalities and REPs. It provides distribution services to REPs, which sell electricity to residential, business and other consumers. Oncor’s transmission and distribution rates are regulated by the PUCT. Oncor is also subject to the requirements of the ERCOT Protocols, including Nodal Protocols and ERCOT reliability standards as adopted and enforced by the TRE and the NERC.
Oncor operates the largest transmission and distribution system in Texas, delivering electricity to more than three million homes and businesses and operating more than 118,000 miles of transmission and distribution lines. Most of Oncor’s power lines have been constructed over lands of others pursuant to easements or along public highways, streets and rights-of-way as permitted by law. As of December 31, 2011, Oncor had approximately 3,700 full-time employees, including approximately 850 employees under collective bargaining agreements.
EFH Corp. and Oncor have implemented certain structural and operational “ring-fencing” measures based on commitments made by Texas Holdings and Oncor to the PUCT that are intended to enhance the credit quality of Oncor. These measures serve to mitigate Oncor’s and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that the assets and liabilities of Oncor or Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in the event of a bankruptcy of one or more of those entities. Accordingly, EFH Corp. and EFIH do not control and do not consolidate Oncor for financial reporting purposes. See Note 1 to Financial Statements for a description of the material features of these “ring-fencing” measures.
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Oncor’s Market (ERCOT statistics below were derived from information published by ERCOT)
Oncor operates within the ERCOT market. This market represents approximately 85% of the electricity consumption in Texas. ERCOT is the regional reliability coordinating organization for member electricity systems in Texas and the Independent System Operator (ISO) of the interconnected transmission grid for those systems. ERCOT is responsible for ensuring reliability, adequacy and security of the electric systems as well as nondiscriminatory access to transmission service by all wholesale market participants in the ERCOT region. ERCOT’s membership consists of approximately 300 corporate and associate members, including electric cooperatives, municipal power agencies, independent generators, independent power marketers, transmission service providers and distribution services providers, independent REPs and consumers.
In 2011, ERCOT’s hourly demand peaked at a record 68,379 MW. The ERCOT market has limited interconnections to other markets in the US and Mexico, which currently limits potential imports into and exports out of the ERCOT market to 1,106 MW of generation capacity (or approximately 2% of peak demand). In addition, wholesale transactions within the ERCOT market are generally not subject to regulation by the FERC.
The ERCOT market operates under the reliability standards set by NERC. The PUCT has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of power supply across Texas’ main interconnected transmission grid. Oncor, along with other owners of transmission and distribution facilities in Texas, assists the ERCOT ISO in its operations. Oncor has planning, design, construction, operation and maintenance responsibility for the portion of the transmission grid and for the load-serving substations it owns, primarily within its certificated distribution service area. Oncor participates with the ERCOT ISO and other ERCOT utilities in obtaining regulatory approvals and planning, designing and constructing new transmission lines in order to remove existing constraints and interconnect generation on the ERCOT transmission grid. The transmission lines are necessary to meet reliability needs, support renewable energy production and increase bulk power transfer capability.
Oncor’s Strategies
Oncor focuses on delivering electricity in a safe and reliable manner, minimizing service interruptions and investing in its transmission and distribution infrastructure to maintain its system, serve its growing customer base with a modernized grid and support renewable energy production.
Oncor believes that building and leveraging upon opportunities to scale its operating advantage and technology programs enables Oncor to create value by eliminating duplicative costs, efficiently managing supply costs, and building and standardizing distinctive process expertise over a larger grid. Scale also allows Oncor to take part in large capital investments in its transmission and distribution system, with a smaller fraction of overall capital at risk and with an enhanced ability to streamline costs. Oncor’s growth strategies are to invest in technology upgrades, including advanced metering systems and energy efficiency initiatives, and to construct new transmission and distribution facilities to meet the needs of the growing Texas market and support renewable energy production. Oncor and other transmission and distribution businesses in ERCOT benefit from regulatory capital recovery mechanisms known as “capital trackers” that Oncor believes enable adequate and timely recovery of transmission, distribution and advanced metering investments through its regulated rates.
Oncor’s Operations
Performance — Oncor achieved or exceeded market performance protocols in 12 out of 14 PUCT market metrics in 2011. These metrics measure the success of transmission and distribution companies in facilitating customer transactions in the competitive Texas electricity market.
Investing in Infrastructure and Technology — In 2011, Oncor invested $1.4 billion in its network to construct, rebuild and upgrade transmission lines and associated facilities, to extend the distribution infrastructure, and to pursue certain initiatives in infrastructure maintenance and information technology. Reflecting its commitment to infrastructure, in September 2008, Oncor and several other ERCOT utilities filed with the PUCT a plan to participate in the construction of transmission improvements designed to interconnect existing and future renewable energy facilities to transmit electricity from Competitive Renewable Energy Zones (CREZs) identified by the PUCT. In 2009, the PUCT awarded CREZ construction projects to Oncor, and Oncor currently estimates the costs of the projects to be approximately $2.0 billion. The projects involve the construction of transmission lines to support the transmission of electricity from renewable energy sources, principally wind generation facilities, in west Texas to population centers in the eastern part of the state. Through 2011, Oncor’s cumulative CREZ-related capital expenditures totaled $899 million, including $583 million invested in 2011. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Matters – Oncor Matters with the PUCT.”
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Oncor’s technology upgrade initiatives include development of a modernized grid through the replacement of existing meters with advanced digital metering equipment and development of advanced digital communication, data management, real-time monitoring and outage detection capabilities. This modernized grid is expected to produce electricity service reliability improvements and provide the potential for additional products and services from REPs that will enable businesses and consumers to better manage their electricity usage and costs. Oncor’s plans provide for the full deployment of over three million advanced meters to all residential and most non-residential retail electricity customers in Oncor’s service area by the end of 2012. The advanced meters can be read remotely, rather than by a meter reader physically visiting the location of each meter. Advanced meters facilitate automated demand side management, which allows consumers to monitor the amount of electricity they are consuming and adjust their electricity consumption habits. As of December 31, 2011, Oncor has installed approximately 2,302,000 advanced digital meters, including 788,000 in 2011. As the new meters are integrated, Oncor reports 15-minute interval, billing-quality electricity consumption data to ERCOT for market settlement purposes. The data makes it possible for REPs to support new programs and pricing options. Cumulative capital expenditures for the deployment of the advanced meter system totaled $518 million as of December 31, 2011, including $158 million invested in 2011.
In addition to the potential energy efficiencies from advanced metering, Oncor expects to spend approximately $340 million ($100 million in excess of regulatory requirements) over the five-year period ending December 31, 2012 in programs designed to improve customer electricity demand efficiencies. As of December 31, 2011, approximately $265 million had been spent by Oncor, including $75 million in 2011, and 75% of the amount in excess of regulatory requirements had been spent.
In a stipulation with several parties that was approved by the PUCT in 2007, Oncor has committed to a variety of actions, including minimum capital spending of $3.6 billion over the five-year period ending December 31, 2012, subject to certain defined conditions. Approximately 94% of this total had been spent as of December 31, 2011. This spending does not include the CREZ facilities.
Electricity Transmission — Oncor’s electricity transmission business is responsible for the safe and reliable operations of its transmission network and substations. These responsibilities consist of the construction and maintenance of transmission facilities and substations and the monitoring, controlling and dispatching of high-voltage electricity over Oncor’s transmission facilities in coordination with ERCOT.
Oncor is a member of ERCOT, and its transmission business actively assists the operations of ERCOT and market participants. Through its transmission business, Oncor participates with ERCOT and other member utilities to plan, design, construct and operate new transmission lines, with regulatory approval, necessary to maintain reliability, interconnect to merchant generation facilities, increase bulk power transfer capability and minimize limitations and constraints on the ERCOT transmission grid.
Transmission revenues are provided under tariffs approved by either the PUCT or, to a small degree related to an interconnection to other markets, the FERC. Network transmission revenues compensate Oncor for delivery of electricity over transmission facilities operating at 60 kV and above. Other services offered by Oncor through its transmission business include, but are not limited to: system impact studies, facilities studies, transformation service and maintenance of transformer equipment, substations and transmission lines owned by other parties.
PURA allows Oncor to update its transmission rates periodically to reflect changes in invested capital. This “capital tracker” provision encourages investment in the transmission system to help ensure reliability and efficiency by allowing for timely recovery of and return on new transmission investments.
As of December 31, 2011, Oncor’s transmission facilities included approximately 5,407 circuit miles of 345-kV transmission lines and approximately 9,935 circuit miles of 138-and 69-kV transmission lines. Sixty-one generation facilities totaling 33,380 MW were directly connected to Oncor’s transmission system as of December 31, 2011, and 288 transmission stations and 707 distribution substations were served from Oncor’s transmission system.
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As of December 31, 2011, Oncor’s transmission facilities have the following connections to other transmission grids in Texas:
| Number of Interconnected Lines | ||||||||||||
Grid Connections | 345kV | 138kV | 69kV | |||||||||
Centerpoint Energy Inc. | 8 | — | — | |||||||||
American Electric Power Company, Inc (a) | 4 | 7 | 11 | |||||||||
Lower Colorado River Authority | 8 | 22 | 3 | |||||||||
Texas Municipal Power Agency | 6 | 6 | — | |||||||||
Texas New Mexico Power | 4 | 9 | 11 | |||||||||
Brazos Electric Power Cooperative, Inc. | 6 | 109 | 22 | |||||||||
Electric Transmission Texas, LLC | 2 | 1 | — | |||||||||
Rayburn Country Electric Cooperative, Inc. | — | 37 | 6 | |||||||||
City of Georgetown | — | 2 | — | |||||||||
Tex-La Electric Cooperative of Texas, Inc. | — | 12 | 1 | |||||||||
Other small systems operating wholly within Texas | — | 4 | 2 | |||||||||
| (a) | One of the 345-kV lines is an asynchronous high-voltage direct current connection with the Southwest Power Pool. |
Electricity Distribution— Oncor’s electricity distribution business is responsible for the overall safe and efficient operation of distribution facilities, including electricity delivery, power quality and system reliability. These responsibilities consist of the ownership, management, construction, maintenance and operation of the distribution system within Oncor’s certificated service area. Oncor’s distribution system receives electricity from the transmission system through substations and distributes electricity to end-users and wholesale customers through approximately 3,147 distribution feeders.
The Oncor distribution system includes 3.2 million points of delivery. Over the past five years, the number of distribution system points of delivery served by Oncor, excluding lighting sites, grew an average of approximately 1.12% per year. Oncor added approximately 34,000 points of delivery in 2011.
The Oncor distribution system consists of approximately 56,466 miles of overhead primary conductors, approximately 21,529 miles of overhead secondary and street light conductors, approximately 15,703 miles of underground primary conductors and approximately 9,738 miles of underground secondary and street light conductors. The majority of the distribution system operates at 25-kV and 12.5-kV.
Oncor’s distribution rates for residential and small commercial users are based on actual monthly consumption (kWh), and rates for large commercial and industrial users are based on the greater of actual monthly demand (kilowatt) or 80% of peak monthly demand during the prior eleven months.
Customers— Oncor’s transmission customers consist of municipalities, electric cooperatives and other distribution companies. Oncor’s distribution customers consist of more than 80 REPs, including TCEH and certain electric cooperatives in Oncor’s certificated service area. Revenues from TCEH represented 33% of Oncor’s total revenues for 2011. Revenues from subsidiaries of Reliant Energy, Inc., each of which is a non-affiliated REP, represented 12% of Oncor’s total revenues for 2011. No other customer represented more than 10% of Oncor’s total operating revenues. The consumers of the electricity delivered by Oncor are free to choose their electricity supplier from REPs who compete for their business.
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Regulation and Rates— As its operations are wholly within Texas, Oncor is not a public utility as defined in the Federal Power Act and, as a result, it is not subject to general regulation under this Act. However, Oncor is subject to reliability standards adopted and enforced by the TRE and the NERC, including NERC critical infrastructure protection standards, under the Federal Power Act.
In January 2011, Oncor filed for a rate review with the PUCT and 203 cities (PUCT Docket No. 38929) based on a test year ended June 30, 2010. In August 2011, the PUCT issued a final order in the rate review. The rate review, as approved, includes an approximate $137 million base rate increase and additional provisions to address certain expenses. Approximately $93 million of the increase became effective July 1, 2011, and the remainder became effective January 1, 2012. The rate review did not change Oncor’s authorized regulatory capital structure of 60% debt to 40% equity or its authorized return on equity of 10.25%. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulatory Matters.”
As directed by Senate Bill 1693, which was passed by the Texas Legislature in 2011, in September 2011, the PUCT approved the periodic rate adjustment rule, which allows utilities to file, under certain circumstances, up to four rate adjustments between rate reviews to recover distribution-related investments on an interim basis.
At the state level, PURA requires owners or operators of transmission facilities to provide open-access wholesale transmission services to third parties at rates and terms that are nondiscriminatory and comparable to the rates and terms of the utility’s own use of its system. The PUCT has adopted rules implementing the state open-access requirements for utilities, including Oncor, that are subject to the PUCT’s jurisdiction over transmission services.
Securitization Bonds— Oncor’s operations include its wholly-owned, bankruptcy-remote financing subsidiary, Oncor Electric Delivery Transition Bond Company LLC. This financing subsidiary was organized for the limited purpose of issuing certain securitization (transition) bonds in 2003 and 2004. Oncor Electric Delivery Transition Bond Company LLC issued $1.3 billion principal amount of transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002. At December 31, 2011, $554 million principal amount of transition bonds were outstanding, which mature in the period from 2012 to 2016. See Note 8 to Financial Statements for discussion of agreements between TCEH and Oncor regarding payment of interest and incremental taxes related to these bonds.
Environmental Regulations and Related Considerations — The TCEQ and the EPA have jurisdiction over water discharges (including storm water) from facilities in Texas. Oncor believes its facilities are presently in material compliance with applicable state and federal requirements relating to discharge of pollutants into the water. Oncor believes it holds all required waste water discharge permits from the TCEQ for facilities in operation and has applied for or obtained necessary permits for facilities under construction. Oncor also believes it can satisfy the requirements necessary to obtain any required permits or renewals. Recent changes to federal rules pertaining to Spill Prevention, Control and Countermeasure (SPCC) plans for oil-filled electrical equipment and bulk storage facilities for oil required updating of certain facilities. Oncor has developed and implemented SPCC plans as required for those substations, work centers and distribution systems, and believes it is currently in compliance with the new rules that became effective in November 2011.
Treatment, storage and disposal of solid waste and hazardous waste are regulated at the state level under the Texas Solid Waste Disposal Act and at the federal level under the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act. The EPA has issued regulations under the Resource Conservation and Recovery Act of 1976 and the Toxic Substances Control Act, and the TCEQ has issued regulations under the Texas Solid Waste Disposal Act applicable to Oncor’s facilities. Oncor is in compliance with applicable solid and hazardous waste regulations.
Oncor’s capital expenditures for environmental matters totaled approximately $22 million in 2011 and are expected to total approximately $23 million in 2012.
5
| Item 1A. | RISK FACTORS |
Some important factors, in addition to others specifically addressed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that could have a material impact on our operations, liquidity, financial results and financial condition, or could cause our actual results or outcomes to differ materially from any projected outcome contained in any forward-looking statement in this report, include:
Risks Related to Substantial Indebtedness and Debt Agreements
Our substantial indebtedness could adversely affect our ability to fund our operations, limit our ability to react to changes in the economy or our industry and limit our ability to raise additional capital and adversely impact our ability to meet obligations under the various debt agreements governing our debt.
We are highly leveraged. As of December 31, 2011, our consolidated principal amount of debt, including pushed down debt, totaled $3.433 billion (see Note 5 to Financial Statements). Our substantial indebtedness could have significant consequences, including:
| • | making it more difficult for us to make payments on our debt; |
| • | requiring a substantial portion of cash flow to be dedicated to the payment of principal and interest on debt, thereby reducing our ability to use our cash flow to fund future business opportunities and execution of our strategy; |
| • | increasing our vulnerability to adverse economic, industry or competitive developments; |
| • | limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures; |
| • | limiting our ability to obtain additional financing for working capital, debt service requirements, acquisitions and general corporate or other purposes, or to refinance existing debt, and |
| • | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who, therefore, may be able to operate at a lower overall cost (including debt service) and take advantage of opportunities that we cannot. |
Despite our current high debt level, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial debt.
We may be able to incur additional debt in the future. Although our debt agreements and certain debt agreements of EFH Corp. contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions. Under certain circumstances, the amount of debt, including secured debt that could be incurred in compliance with these restrictions, could be substantial. The indentures for the EFIH Notes will allow us and EFH Corp. to incur up to an aggregate of $4.0 billion of debt, including the EFH Corp. Secured Notes and the EFIH Notes, secured by a first priority interest in 100% of our membership interests and other investments we own in Oncor Holdings (such membership interests and other investments, the Collateral), and a substantial amount of additional indebtedness, which additional indebtedness may be secured by a junior-priority security interest in the Collateral or by assets of ours or EFH Corp. other than the Collateral. The indentures governing the EFIH Notes also permit us and EFH Corp. to incur additional debt in various other circumstances. If new debt is added to our existing debt levels, the related risks that we and holders of our existing debt now face would intensify.
We may pursue transactions and initiatives that are unsuccessful or do not produce the desired outcome.
Future transactions and initiatives that we may pursue may have significant effects on our business, capital structure, liquidity and/or results of operations. For example, in addition to the exchanges and repurchases of debt that are described in Note 5 to Financial Statements, we have and may continue to pursue, from time to time, transactions and initiatives of various types, including, without limitation, debt exchange transactions, debt repurchases, equity or debt issuances, debt refinancing transactions (including extensions of maturity dates of our debt), asset sales, joint ventures, recapitalizations, business combinations and other strategic transactions. There can be no guarantee that any of such transactions or initiatives would be successful or produce the desired outcome, which could ultimately affect us in a material manner. Moreover, the effects of any of these transactions or initiatives could be material to holders of our debt and could be disproportionate, and directionally different, with respect to one class or type of debt than with respect to others.
6
Our assets include an investment in debt securities of EFH Corp. We depend on receiving interest payments on these debt securities to fund, at least in part, payments on our debt obligations. If EFH Corp. is unable to service its debt securities because TCEH is unable to distribute or loan funds to EFH Corp. or for other reasons, we may be unable to make payments on our obligations, primarily the EFIH Notes. Consequently, we have significant exposure to EFH Corp. credit risk and to the business and financial condition of TCEH.
As of December 31, 2011, approximately 38% of reported assets on our balance sheet consist of debt securities of EFH Corp. that we also guarantee. Our December 31, 2011 balance sheet reflects an investment in debt securities of EFH Corp. and TCEH with a carrying value of approximately $3.6 billion and principal amount totaling approximately $4.4 billion and receivable from affiliates in the amount of $86 million, representing our claims for accrued interest on these debt securities. We depend on receiving cash interest payments on these debt securities to fund, at least in part, payments on our debt obligations. The indentures governing our debt do not limit our ability to dividend these EFH Corp. debt securities to EFH Corp. so long as we received such securities in exchange for the issuance of EFIH debt. If EFH Corp. is unable to service its debt securities because TCEH is unable to distribute or loan funds to EFH Corp. or for other reasons, or if we dividend these debt securities to EFH Corp. and EFH Corp. does not make capital contributions or loans to us, we may be unable to make payments on our debt obligations. We may acquire additional debt securities of EFH Corp. or TCEH in the future in connection with exchange offers, debt repurchases or other transactions, in which case our exposure to EFH Corp. and TCEH credit risk and to the business and financial condition of TCEH would be increased.
We are highly dependent upon cash flows from EFH Corp. via cash interest payments on EFH Corp. debt securities we hold as an investment or contributions or loans in order to meet our debt obligations, including interest payments on our debt. EFH Corp. is a holding company with no business operations and no significant assets other than its equity investments in EFIH and EFCH, which owns TCEH. TCEH comprises a significant amount of EFH Corp.’s assets and cash flows. Consequently, EFH Corp. receives a significant amount of funds from TCEH for the purpose of EFH Corp. and EFIH making interest payments on their debt obligations. The liabilities of TCEH exceeded its assets as shown on its balance sheet prepared in accordance with US GAAP as of December 31, 2011. Further, third-party analyses of TCEH’s business performed in connection with asset value impairment testing for GAAP purposes have indicated that the principal amount of TCEH’s outstanding debt exceeds its enterprise value. If TCEH was deemed not to have net assets, it would not be permitted to pay dividends under applicable state law and/or could be significantly less likely to obtain or access the capital markets and/or liquidity facilities in order to meet its obligations and also loan funds to EFH Corp.
Further, the ability of EFH Corp. to receive funds from TCEH is subject to risks related to TCEH’s business, operations and financial condition, including, among others, general economic conditions, ERCOT market structure, oversight and competition and wholesale electricity prices in ERCOT (which are generally a function of forward natural gas prices and ERCOT market heat rates). A substantial amount of EFH Corp.’s consolidated debt is comprised of debt incurred under the TCEH senior secured credit facilities. As of December 31, 2011, a substantial amount of EFH Corp.’s and TCEH’s long-term debt matures in the next few years, including approximately $120 million principal amount of debt maturing in 2012-2013, approximately $4.3 billion principal amount of debt maturing in 2014 and approximately $3.3 billion principal amount of debt maturing in 2015. A substantial amount of TCEH’s debt is comprised of debt incurred under the TCEH senior secured credit facilities. In April 2011, TCEH was able to secure an extension of a significant portion of the commitments and loans under the TCEH senior secured credit facilities. However, even after taking the extension into account, TCEH still has a significant amount of commitments and loans under the TCEH senior secured credit facilities that will mature in 2013 and 2014 because a significant portion of the commitments (approximately $645 million maturing in 2013) and loans (approximately $3.85 billion principal amount maturing in 2014) were not extended. In addition, notwithstanding the extension, the extended commitments and loans could mature earlier as described in the next paragraph. Moreover, while TCEH was able to extend a significant portion of the commitments and loans under the TCEH senior secured credit facilities, the extensions were only for two years. As a result, TCEH has a substantial principal amount of debt that matures in 2016 (approximately $1.7 billion) and 2017 (approximately $16.4 billion, including $947 million under the TCEH letter of credit facility that is held in restricted cash).
7
The extended loans under the TCEH senior secured credit facilities include a “springing maturity” provision pursuant to which in the event that (a) more than $500 million aggregate principal amount of the TCEH 10.25% senior notes due 2015 (TCEH 10.25% Notes) or more than $150 million aggregate principal amount of the TCEH 10.50%/11.25% senior toggle notes due 2016 (TCEH Toggle Notes) (in each case, other than notes held by EFH Corp. or its controlled affiliates as of March 31, 2011 to the extent held as of the determination date), as applicable, remain outstanding as of 91 days prior to the maturity date of the applicable notes and (b) TCEH’s consolidated total debt to consolidated EBITDA ratio (as defined in the TCEH senior secured credit facilities) is greater than 6.00 to 1.00 at such applicable determination date, then the maturity date of the extended loans will automatically change to 90 days prior to the maturity date of the applicable notes. As a result of this “springing maturity” provision, TCEH may lose the benefit of the extension of the commitments and loans under the TCEH senior secured credit facilities if it is unable to refinance the requisite portion of the TCEH 10.25% Notes and TCEH Toggle Notes (collectively, the TCEH Senior Notes) by the applicable deadline. The TCEH 10.25% Notes mature on November 1, 2015, and the TCEH Toggle Notes mature on November 1, 2016. If holders of the TCEH Senior Notes are unwilling to extend the maturities of their notes, then, to avoid the “springing maturity” of the extended loans, TCEH may be required to repay a substantial portion of the TCEH Senior Notes at prices above market or at par. There is no assurance that TCEH will be able to make such payments, whether through cash on hand or additional financings. As of December 31, 2011, $3.125 billion and $1.568 billion aggregate principal amount of the TCEH 10.25% Notes and the TCEH Toggle Notes, respectively, were outstanding, excluding amounts held by EFH Corp. and EFIH.
Wholesale electricity prices in the ERCOT market have generally moved with the price of natural gas. Accordingly, the contribution to earnings and the value of TCEH’s nuclear and lignite/coal-fueled generation assets are dependent in significant part upon the price of natural gas. Forward natural gas prices have generally trended downward since mid-2008 (from $10.90 per MMBtu in mid-2008 to $3.94 per MMBtu at December 31, 2011 for calendar year 2013). In recent years natural gas supply has outpaced demand as a result of increased drilling of shale gas deposits combined with lingering demand weakness associated with the economic recession. Many industry experts expect this supply/demand imbalance to continue for a number of years, thereby depressing natural gas prices for a long-term period. These market conditions are challenging to the long-term profitability of TCEH’s generation assets. Specifically, low natural gas prices and their effect in ERCOT on wholesale electricity prices could have a material impact on the overall profitability of TCEH’s generation assets for periods in which TCEH does not have significant hedge positions. As of December 31, 2011, TCEH has hedged only approximately 58% and 31% of its wholesale natural gas price exposure related to expected generation output for 2013 and 2014, respectively, based on the EPA’s currently governing Clean Air Interstate Rule, and TCEH does not have any significant amounts of hedges in place for periods after 2014. Consequently, a continuation, or further decline, of current forward natural gas prices could result in further declines in the values of TCEH’s nuclear and lignite/coal-fueled generation assets and limit or hinder TCEH’s ability to hedge its wholesale electricity revenues at sufficient price levels to support its significant interest payments and debt maturities, which could adversely impact TCEH’s ability to obtain additional liquidity and refinance and/or extend the maturities of its outstanding debt.
In July 2011, the EPA issued the Cross-State Air Pollution Rule (CSAPR). In February 2012, the EPA released a final rule (Final Revisions) and a direct-to-final rule (Direct Final Rule) revising certain aspects of the CSAPR, including emissions budgets for the State of Texas. If the EPA receives significant adverse comments on the Direct Final Rule, it will be withdrawn and its provisions considered in a proposed rule subject to normal notice-and-comment rulemaking procedures. The CSAPR is currently stayed pending judicial review of the rule. However, the emissions budgets established by the Final Revision along with the Direct Final Rule would require significant additional reductions of sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from TCEH’s fossil-fueled generation units. Material capital expenditures and operating costs would be required to comply with CSAPR, as revised in February 2012, as well as with other recently issued or pending environmental regulations. This increase in expenditures could impact TCEH’s ability to make interest payments on its debt and to loan funds to EFH Corp., which may affect EFH Corp.’s ability to make interest payments on EFH Corp.’s debt and loan funds to EFIH to service its debt.
Consequently, EFIH’s ability to meets its debt obligations is highly dependent upon EFH Corp.’s liquidity, which is dependent upon the ability of TCEH to make loans to EFH Corp. Thus, while EFIH does not generally have direct exposure to natural gas prices, environmental regulations and other factors affecting TCEH’s business, EFIH indirectly has significant exposure to those risks.
Moreover, TCEH’s intercompany notes receivable from EFH Corp., which are guaranteed by EFIH and EFCH on a senior unsecured basis, are demand notes, which means that TCEH can require payment of all or a portion of these notes at any time. As of February 15, 2012, the aggregate principal amount of these intercompany notes was approximately $960 million. Additionally, a lender under TCEH’s credit agreement has alleged as recently as the first quarter of 2012, and other TCEH creditors may allege in the future, that the intercompany notes are fraudulent transfers or that authorizing intercompany loans to be made thereunder violates the fiduciary duties of TCEH’s or EFCH’s directors. If a TCEH creditor were to prevail on this type of claim in a court of competent jurisdiction, EFH Corp. may be required immediately to repay the principal amount of the intercompany notes and interest thereon and may be unable thereafter to obtain future funding under such notes. EFH Corp. does not currently have sufficient cash to repay the entire balance of the intercompany notes.
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A failure by EFH Corp. to repay the intercompany notes when required could result in defaults under EFH Corp.’s other debt, including debt that EFIH guarantees. It could also result in EFIH’s guarantee of the intercompany notes being called, which could cause defaults under EFIH’s other debt.
Our debt agreements, certain of the debt agreements of EFH Corp. and the Oncor “ring-fencing” measures contain restrictions that limit flexibility in operating our businesses.
Our debt agreements and certain of the debt agreements of EFH Corp. contain various covenants and other restrictions that limit our ability to engage in specified types of transactions and may adversely affect our ability to operating activities. These covenants and other restrictions limit our ability to, among other things:
| • | incur additional debt or issue preferred shares; |
| • | pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments; |
| • | make investments; |
| • | sell or transfer assets; |
| • | create liens on assets to secure debt; |
| • | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
| • | enter into transactions with our affiliates, and |
| • | designate subsidiaries as unrestricted subsidiaries. |
There are a number of important limitations and exceptions to these covenants and other restrictions. See Note 5 to Financial Statements for a description of these covenants and other restrictions.
In addition, as described in Note 1 to Financial Statements, EFH Corp. and Oncor have implemented a number of “ring-fencing” measures to enhance the credit quality of Oncor Holdings and its subsidiaries, including Oncor. Those measures, many of which were agreed to and required by the PUCT’s Order on Rehearing in Docket No. 34077, include, among other things:
| • | Oncor Holdings’ and Oncor’s board of directors being comprised of a majority of directors that are independent from the Texas Holdings Group, EFH Corp. and its other subsidiaries, including EFIH; |
| • | Oncor being treated as an unrestricted subsidiary with respect to EFIH’s and EFH Corp.’s debt; |
| • | Oncor not being restricted from incurring its own debt; |
| • | Oncor not guaranteeing or pledging any of its assets to secure the debt of any member of the Texas Holdings Group, including EFIH; |
| • | restrictions on distributions by Oncor, and the right of the independent members of Oncor’s board of directors and the largest non-majority member of Oncor to block the payment of distributions to Oncor Holdings (i.e. such distributions not being available to us or EFH Corp. under certain circumstances), and |
| • | restrictions on the ability to sell a majority interest in Oncor until October 2012. |
We may not be able to generate or receive sufficient cash to service our debt and may be forced to take other actions to satisfy the obligations under our debt agreements, which may not be successful.
Our ability to make scheduled payments on debt obligations depends on i) receiving dividends from Oncor Holdings, ii) receipt of interest payments from EFH Corp. and TCEH on EFH Corp. and TCEH debt we hold as an investment and iii) capital contributions or loans from EFH Corp. In each case, our receipt of funds is subject to factors beyond our control, including prevailing economic and competitive conditions and to certain financial, operational and other factors affecting the business of Oncor, EFH Corp. or TCEH (as applicable). We may not be able to maintain a level of cash flows sufficient to pay the principal, premium, if any, and interest on our debt.
If cash flows and capital resources are insufficient to fund our debt obligations, we could face substantial liquidity problems and might be forced to reduce or delay investments, or to dispose of assets or operations, seek additional capital or restructure or refinance debt. These alternative measures may not be successful, may not be completed on economically attractive terms or may not be adequate for us to meet our debt obligations when due. Additionally, our debt agreements limit the use of the proceeds from many dispositions of assets or operations. As a result, we may not be permitted to use the proceeds from these dispositions to satisfy our debt obligations.
9
EFH Corp. and TCEH are not obligated to provide funds to us to pay principal, premium and interest on the EFIH Notes or other obligations.
None of EFH Corp., EFCH or TCEH and its subsidiaries are obligated to make any loans or payments to us, including to make payments on the EFIH Notes. However, EFH Corp. may choose to, but is not obligated to, loan or contribute cash to us to make such payments. EFH Corp. is a holding company and substantially all of its consolidated assets are held by its subsidiaries. Therefore, to the extent EFH Corp. chooses to loan or contribute cash to make payments on our debt or other obligations, EFH Corp. will likely depend on cash generated by or loans from EFCH, TCEH and TCEH’s subsidiaries to make such loans or contributions. Pursuant to the indentures governing certain TCEH notes due in 2015, 2016, 2020 and 2021 and TCEH’s senior secured credit facilities, as long as TCEH is a subsidiary of EFH Corp., TCEH may provide EFH Corp. with intercompany loans on arm’s length terms to allow EFH Corp. to pay principal, premium and interest on certain debt of EFH Corp. However, such indentures limit TCEH’s ability to provide such loans for payment of principal, premium and interest on debt of EFH Corp.’s subsidiaries, including the EFIH Notes. Further, under the terms of TCEH’s debt agreements and state law, TCEH is restricted from paying distributions, except in limited circumstances. As a result, if EFH Corp. does not make capital contributions or loans to EFIH or if TCEH does not or is not permitted to make loans to EFH Corp. for EFH Corp. to service its debt, then we may not be able to make payments on the EFIH Notes or its other obligations.
EFIH has a very limited ability to control activities at Oncor due to structural and operational “ring-fencing” measures.
EFIH depends upon Oncor for a significant amount of its cash flows and relies on such cash flows in order to satisfy its obligations. However, EFIH has a very limited ability to control the activities of Oncor. As part of the “ring-fencing” measures implemented by EFH Corp. and Oncor, a majority of the members of Oncor’s board of directors are required to meet the New York Stock Exchange requirements for independence in all material respects, and the unanimous, or majority, consent of such directors is required for Oncor to take certain material actions. In addition, any new independent directors are required to be appointed by the nominating committee of Oncor Holdings’ board of directors, a majority of whose members are independent directors. No member of EFIH’s or EFH Corp.’s management is a member of Oncor’s board of directors. Under Oncor Holdings’ and Oncor’s organizational documents, EFH Corp. has limited indirect consent rights with respect to the activities of Oncor, including (i) new issuances of equity securities by Oncor, (ii) material transactions with third parties involving Oncor outside of the ordinary course of business, (iii) actions that cause Oncor’s assets to be subject to an increased level of jurisdiction of the FERC, (iv) any changes to the state of formation of Oncor, (v) material changes to accounting methods not required by US GAAP and (vi) actions that fail to enforce certain tax sharing obligations between Oncor and EFH Corp. In addition, the Sponsor Group has committed with the PUCT to hold a majority interest in Oncor through October 2012.
10
Risks Related to Our Structure
EFIH is a holding company and its obligations are structurally subordinated to existing and future liabilities and preferred stock of its subsidiaries.
EFIH’s cash flows and ability to meet its obligations are largely dependent upon the earnings of its subsidiaries, in particular, Oncor, and the payment of such earnings to EFIH in the form of dividends or distributions. These subsidiaries are separate and distinct legal entities and have no obligation (other than any existing contractual obligations) to provide EFIH with funds for its payment obligations. Any decision by a subsidiary to provide EFIH with funds for its payment obligations, whether by dividends or distributions, will depend on, among other things, the subsidiary’s results of operations, financial condition, cash requirements, contractual restrictions and other factors. In addition, a subsidiary’s ability to pay dividends may be limited by covenants in its existing and future debt agreements or applicable law. Further, the distributions that may be paid by Oncor are limited as discussed below.
Because EFIH is a holding company, its obligations to its creditors are structurally subordinated to all existing and future liabilities and existing and future preferred stock of its subsidiaries that do not guarantee such obligations. Therefore, EFIH’s rights and the rights of its creditors to participate in the assets of any subsidiary in the event that such a subsidiary is liquidated or reorganized are subject to the prior claims of such subsidiary’s creditors and holders of such subsidiary’s preferred stock. To the extent that EFIH may be a creditor with recognized claims against any such subsidiary, EFIH’s claims would still be subject to the prior claims of such subsidiary’s creditors to the extent that they are secured or senior to those held by EFIH. Subject to restrictions contained in financing arrangements, EFIH’s subsidiaries may incur additional debt and other liabilities.
Oncor may or may not make any distributions to EFIH.
Upon the consummation of the Merger, EFH Corp. and Oncor implemented certain structural and operational “ring-fencing” measures, including certain measures required by the PUCT’s Order on Rehearing in Docket No. 34077, that were based on principles articulated by rating agencies and commitments made by Texas Holdings and Oncor to the PUCT and the FERC to further enhance Oncor’s credit quality. These measures were put in place to mitigate Oncor’s credit exposure to the Texas Holdings Group and to reduce the risk that the assets and liabilities of Oncor would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in the event of a bankruptcy of one or more of those entities.
As part of the ring-fencing measures, a majority of the members of the board of directors of Oncor are required to be, and are, independent from EFH Corp. Any new independent directors of Oncor are required to be appointed by the nominating committee of Oncor Holdings, which is required to be, and is, comprised of a majority of directors that are independent from EFH Corp. The organizational documents of Oncor give these independent directors, acting by majority vote, and, during certain periods, any director designated by Texas Transmission, the express right to prevent distributions from Oncor if they determine that it is in the best interests of Oncor to retain such amounts to meet expected future requirements. Accordingly, there can be no assurance that Oncor will make any distributions to EFIH.
In addition, Oncor’s organizational documents limit Oncor’s distributions to its owners, including EFH Corp., through December 31, 2012 to an amount not to exceed Oncor’s net income (determined in accordance with US GAAP, subject to certain defined adjustments, including goodwill impairments) and prohibit Oncor from making any distribution to EFIH so long as and to the extent that such distribution would cause Oncor’s regulatory capital structure to exceed the debt-to-equity ratio established from time to time by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.
In 2009, the PUCT awarded Oncor the right to construct transmission lines and facilities associated with its CREZ Transmission Plan, the cost of which is estimated by Oncor to be approximately $2.0 billion (see discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Matters”). With the award, Oncor has incurred additional debt. In addition, Oncor may incur additional debt in connection with other investments in infrastructure or technology. Accordingly, while Oncor is required to maintain a specified debt-to-equity ratio, there can be no assurance that Oncor’s equity balance will be sufficient to maintain the required debt-to-equity ratio established from time to time by the PUCT for ratemaking purposes, thereby restricting Oncor from making any distributions to EFIH. In addition, any increase in Oncor’s interest expense may reduce the amounts available to be distributed to EFIH.
11
Risks Related to Our Investment in Oncor
We are a holding company conducting our operations principally through our subsidiary Oncor (in which we indirectly hold an approximate 80% ownership interest). As such, the risks described below relating to Oncor’s business will apply to us. Given the “ring-fencing” measures that have been implemented by EFH Corp. and Oncor described in Note 1 to Financial Statements, we will have limited ability to mitigate any of the risks described below.
Oncor’s business is subject to ongoing complex governmental regulations and legislation that have impacted, and may in the future impact, its business and/or results of operations.
Oncor’s business operates in a changing market environment influenced by various state and federal legislative and regulatory initiatives regarding the restructuring of the energy industry. Oncor will need to continually adapt to these changes.
Oncor’s business is subject to changes in state and federal laws (including PURA, the Federal Power Act, the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 2005), changing governmental policy and regulatory actions (including those of the PUCT, the NERC, the TRE, the TCEQ, the FERC and the EPA) and the rules, guidelines and protocols of ERCOT with respect to matters including, but not limited to, market structure and design, construction and operation of transmission facilities, acquisition, disposal, depreciation and amortization of regulated assets and facilities, recovery of costs and investments, return on invested capital and environmental matters. Changes in, revisions to, or reinterpretations of existing laws and regulations may have a material effect on Oncor’s business and it could be exposed to increased costs to comply with the more stringent requirements or new interpretations and to potential liability for customer refunds, penalties or other amounts. If it is determined that Oncor did not comply with applicable statutes, regulations, rules, tariffs or orders and it is ordered to pay a material amount in customer refunds, penalties or other amounts, its results of operations, liquidity and financial conditions would be materially affected.
For example, under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches. In addition, the PUCT may impose penalties on Oncor if it finds that it violated any law, regulation, PUCT orders or other rules or requirements. The PUCT has the authority to impose penalties of up to $25,000 per day, per violation
The Texas Legislature meets every two years. The last regular session ended on May 30, 2011. The next regular legislative session is scheduled to begin in January 2013; however, at any time the governor of Texas may convene a special session of the Legislature. During any regular or special session bills may be introduced that, if adopted, could materially affect Oncor’s business and its business prospects.
The rates of Oncor’s electricity delivery business are subject to regulatory review, and may be reduced below current levels, which could adversely impact Oncor’s financial condition and results of operations.
The rates charged by Oncor are regulated by the PUCT and certain cities and are subject to cost-of-service regulation and annual earnings oversight. This regulatory treatment does not provide any assurance as to achievement of earnings levels. Oncor’s rates are regulated based on an analysis of Oncor’s costs and capital structure, as reviewed and approved in a regulatory proceeding. While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCT will judge all of Oncor’s costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that Oncor’s rates are based upon, or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of Oncor’s costs, including regulatory assets reported in Oncor’s balance sheet, and the return on invested capital allowed by the PUCT. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Matters” for discussion of recent and pending rate-related filings with the PUCT.
In addition, in connection with the Merger, Oncor has made several commitments to the PUCT regarding its rates. For example, Oncor committed that it will, in rate cases after its 2008 general rate case through proceedings initiated prior to December 31, 2012, support a cost of debt that will be no greater than the then-current cost of debt of electric utilities with credit ratings equal to Oncor’s ratings as of October 1, 2007. As a result, Oncor may not be able to recover all of its debt costs if they are above those levels.
12
Attacks on Oncor’s infrastructure or other events that disrupt or breach its cyber/data security measures could have an adverse impact on its reputation, disrupt business operations and expose it to significant liabilities including penalties for failure to comply with federal, state or local statutes and regulations, which could have a material effect on Oncor’s results of operations, liquidity and financial condition.
A breach of cyber/data security measures that impairs Oncor’s information technology infrastructure could disrupt normal business operations and affect its ability to control its transmission and distribution assets, access customer information and limit communication with third parties. Much of Oncor’s information technology infrastructure is connected (directly or indirectly) to the Internet. Recently there have been numerous attacks on government and industry information technology systems through the Internet that have resulted in material operational, reputation and/or financial costs. While Oncor has controls in place designed to protect its infrastructure and has not had any significant breaches, any loss of confidential or proprietary data through a breach could adversely affect Oncor’s reputation, expose it to material legal/regulatory claims, impair its ability to execute on business strategies and/or materially affect its results of operations, liquidity and financial condition.
As part of the continuing development of new and modified reliability standards, the FERC has approved changes to its Critical Infrastructure Protection reliability standards and has established standards for assets that a utility has identified as “critical cyber assets.” Under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches.
Oncor participates in industry groups and discussions with regulators to remain current on emerging threats and mitigating techniques. These groups include, but are not limited to: the US Cyber Emergency Response Team, the National Electric Sector Cyber Security Organization, the Department of Homeland Security, the US Nuclear Regulatory Commission and NERC. Oncor also applies the knowledge gained by continuing to invest in technology, processes and services to detect, mitigate and protect its cyber assets. These investments include upgrades to network architecture, regular intrusion detection monitoring and compliance with emerging industry regulation.
Oncor’s capital deployment program may not be executed as planned, which could adversely impact Oncor’s financial condition and results of operations.
There can be no guarantee that the execution of Oncor’s capital deployment program for its electricity delivery facilities will be successful, and there can be no assurance that the capital investments Oncor intends to make in connection with its electricity delivery business will produce the desired reductions in cost and improvements to service and reliability. Furthermore, there can be no guarantee that Oncor’s capital investments, including its investments associated with projects to construct CREZ-related transmission lines and facilities and additional voltage support projects will ultimately be recoverable through rates or, if recovered, that they will be recovered on a timely basis. For more information regarding the limitation on recovering the value of investments using rates and the CREZ project, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Key Risks and Challenges” and “— Regulatory Matters.” There can also be no assurance that the PUCT’s award of CREZ construction projects will not be delayed, modified or otherwise vacated through judicial or administrative actions, or that CREZ-related costs will not be materially increased as a result of administrative actions of the finalization of voltage support facilities and final detailed designs of subsequent project routes.
Market volatility may impact Oncor’s business and financial condition in ways that Oncor currently cannot predict.
Because its operations are capital intensive, Oncor expects to rely over the long-term upon access to financial markets as a significant source of liquidity for capital requirements not satisfied by cash-on-hand, operating cash flows or its revolving credit facility. With the construction of Oncor’s CREZ-related transmission lines and facilities and its other planned projects, it is likely Oncor will incur additional debt. In addition, Oncor may incur additional debt in connection with other investments in infrastructure or technology, such as our advanced metering systems. Oncor’s ability to access the capital or credit markets may be severely restricted at a time when Oncor would like, or need, to access those markets, which could have an impact on Oncor’s flexibility to react to changing economic and business conditions. In addition, the cost of debt financing may be materially and adversely impacted by these market conditions. Even if Oncor is able to obtain debt financing, it may be unable to recover in rates some or all of the costs of such debt financing as a result of its agreement with the PUCT that it will, in rate cases initiated prior to December 31, 2012, support a cost of debt that will be no greater than the then-current cost of debt of electric utilities with investment grade credit ratings equal to Oncor’s ratings as of October 1, 2007. Accordingly, there can be no assurance that the capital and credit markets will continue to be a reliable or acceptable source of short-term or long-term financing for Oncor. Additionally, disruptions in the capital and credit markets could have a broader impact on the economy in general in ways that could lead to reduced electricity usage, which could have a negative impact on Oncor’s revenues, or could have an impact on Oncor’s customers, counterparties and/or lenders, causing them to fail to meet their obligations to Oncor.
13
Adverse actions with respect to Oncor’s credit ratings could negatively affect Oncor’s ability to access capital.
Oncor’s access to capital markets and its cost of debt are directly affected by its credit ratings. Any adverse action with respect to Oncor’s credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease. Oncor’s credit ratings are substantially higher than those of EFH Corp. and EFIH. Despite the ring-fencing measures, rating agencies could take an adverse action with respect to Oncor’s credit ratings in response to financing and liability management activities by EFH Corp. or its subsidiaries, in particular debt incurred by EFH Corp. and/or EFIH that is secured by EFIH’s equity interests in Oncor Holdings. In the event any such adverse action takes place and causes Oncor’s borrowing costs to increase, Oncor may not be able to recover such increased costs if they exceed the PUCT-approved cost of debt determined in its most recent rate case or subsequent rate cases.
Most of Oncor’s large customers, suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with Oncor. If its credit ratings decline, the costs to operate Oncor’s business would likely increase because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with Oncor.
Oncor’s revenues are concentrated in a small number of customers, and any delay or default in payment could adversely affect its cash flows, financial condition and results of operations.
Oncor’s revenues from the distribution of electricity are collected from more than 80 REPs, including TXU Energy (a subsidiary of TCEH), that sell the electricity Oncor distributes to their customers. Revenues from TCEH represented 33% of Oncor’s total revenues for the year ended December 31, 2011. Revenues from subsidiaries of Reliant Energy, Inc., each of which is a non-affiliated REP, represented 12% of Oncor’s total revenues for the year ended December 31, 2011. Adverse economic conditions, structural problems in the market served by ERCOT or financial difficulties of one or more REPs could impair the ability of these retail providers to pay for Oncor’s services or could cause them to delay such payments. Oncor depends on these REPs to timely remit these revenues to Oncor. Oncor could experience delays or defaults in payment from these REPs, which could adversely affect Oncor’s cash flows, financial condition and results of operations. Due to commitments made to the PUCT in connection with the Merger, Oncor may not recover bad debt expense, or certain other costs and expenses, from rate payers in the event of a default or bankruptcy by an affiliate REP.
In the future, Oncor could have liquidity needs that could be difficult to satisfy under some circumstances, especially in uncertain financial market conditions.
Oncor’s operations are capital intensive. Oncor relies on access to financial markets and its credit facility as a significant source of liquidity for capital requirements, including maturities of long-term debt, not satisfied by cash-on-hand or operating cash flows. The inability to raise capital on favorable terms or access liquidity facilities, particularly during times of uncertainty similar to those experienced in the financial markets in 2008 and 2009, could adversely impact Oncor’s ability to sustain and grow its businesses and would likely increase capital costs that may not be recoverable through rates. Oncor’s access to the financial markets and its credit facility, and the pricing and terms Oncor receives in the financial markets, could be adversely impacted by various factors, such as:
| • | changes in financial markets that reduce available credit or the ability to obtain or renew liquidity facilities on acceptable terms; |
| • | economic weakness in the ERCOT market; |
| • | changes in interest rates; |
| • | a deterioration of Oncor’s credit or a reduction in its credit ratings; |
| • | a deterioration of the credit or bankruptcy of one or more lenders under Oncor’s credit facility that affects the ability of such lender(s) to make loans to Oncor; |
| • | a deterioration of the credit of EFH Corp. or EFH Corp.’s other subsidiaries or a reduction in the credit ratings of EFH Corp. or EFH Corp.’s other subsidiaries that is perceived to potentially have an adverse impact on Oncor despite the ring-fencing of the Oncor Ring-Fenced Entities from the Texas Holdings Group; |
| • | a material breakdown in Oncor’s risk management procedures, and |
| • | the occurrence of changes that restrict Oncor’s ability to access its credit facility or the capital markets. |
14
Oncor’s primary source of liquidity aside from operating cash flows is its ability to borrow under its credit facility. The revolving facility contains a debt-to-capital ratio covenant that effectively limits Oncor’s ability to incur indebtedness in the future. As of December 31, 2011, Oncor was in compliance with such covenant. The revolving credit facility and the senior notes and debentures issued by Oncor are secured by a deed of trust, which permits Oncor to secure other indebtedness with the lien of the deed of trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions (whichever is less) that could be certified to the deed of trust collateral agent. As of December 31, 2011, the available bond credits were approximately $1.635 billion and the amount of future debt Oncor could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $708 million. In connection with the Merger, Oncor committed to the PUCT that it would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. As of December 31, 2011, Oncor’s regulatory capitalization ratio was 59.7% debt and 40.3% equity. Oncor’s ability to incur additional long-term debt will be limited by its regulatory capital structure.
The costs of providing pension and other postretirement employee benefits (OPEB) and related funding requirements may have a material adverse effect on Oncor’s results of operations and financial condition.
Oncor is a participating employer in the pension plan sponsored by EFH Corp. and offers pension benefits based on either a traditional defined benefit formula or a cash balance formula. Oncor also participates in health care and life insurance benefit plans offered by EFH Corp. to eligible employees and their eligible dependents upon the retirement of such employees from Oncor. Oncor’s share of the costs of providing such benefits and related funding requirements are dependent upon numerous factors, assumptions and estimates and are subject to changes in these factors, assumptions and estimates, including the market value of the assets funding EFH Corp.’s pension and OPEB plans. Benefits costs and related funding requirements are also subject to changing employee demographics (including but not limited to age, compensation levels and years of accredited service), the level of contributions made to retiree plans, expected and actual earnings on plan assets and the discount rates used in determining the projected benefit obligation. Changes made to the provisions of the plans may also impact current and future benefit costs. Fluctuations in actual market returns as well as changes in general interest rates may result in increased or decreased benefit costs in future periods.
If EFH Corp was unable to make required contributions to the pension plan while it was a member of Oncor’s controlled group within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), Oncor could be liable under ERISA for such contributions as well as for any unfunded pension plan liability that EFH Corp. is unable to pay. Oncor’s funding for EFH Corp.’s pension and OPEB plans and Oncor’s supplemental retirement plan in 2012 is expected to total $122 million, $18 million and $3 million, respectively. Based on the funded status of the pension plan at December 31, 2011, funding for EFH Corp.’s pension plan is expected to total approximately $800 million (excluding amounts contributed to nonqualified plans) for the 2012 to 2016 period. Oncor is expected to fund approximately 73% of this amount consistent with its share of the pension liability. In 2011, Oncor made cash contributions to EFH Corp.’s pension and OPEB plans and Oncor’s supplemental retirement plan of $172 million, $18 million and $3 million, respectively.
Oncor’s ring-fencing measures may not work as planned.
As discussed above, to enhance Oncor’s credit quality, various legal, financial and contractual provisions were implemented. These enhancements are intended to minimize the risk that a court would order any of the Oncor Ring-Fenced Entities’ assets and liabilities to be substantively consolidated with those of any member of the Texas Holdings Group in the event that a member of the Texas Holdings Group were to become a debtor in a bankruptcy case. Nevertheless, bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict. Accordingly, if any member of the Texas Holdings Group were to become a debtor in a bankruptcy case, there can be no assurance (however remote in consideration of the ring-fencing measures) that a court would not order an Oncor Ring-Fenced Entity’s assets and liabilities to be substantively consolidated with those of such member of the Texas Holdings Group or that a proceeding would not result in a disruption of services Oncor receives from, or jointly with, our affiliates. See Note 1 to Financial Statements for additional information on ring-fencing measures.
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Goodwill that Oncor has recorded in connection with the Merger is subject to at least annual impairment evaluations, and as a result, Oncor could be required to write off some or all of this goodwill, which may cause adverse impacts on Oncor’s financial condition and results of operations.
In accordance with accounting standards, recorded goodwill is not amortized but is reviewed annually or more frequently for impairment, if certain conditions exist, and may be impaired. Any reduction in or impairment of the value of goodwill will result in a charge against earnings, which could cause a material adverse impact on Oncor’s reported results of operations and financial condition.
Oncor’s results of operations and financial condition could be negatively impacted by any development or event beyond Oncor’s control that causes economic weakness in the ERCOT market.
Oncor derives substantially all of its revenues from operations in the ERCOT market, which covers approximately 75% of the geographical area in the State of Texas. As a result, regardless of the state of the economy in areas outside the ERCOT market, economic weakness in the ERCOT market could lead to reduced demand for electricity in the ERCOT market. Such a reduction could have a material negative impact on Oncor’s results of operations and financial condition.
The PUCT and ERCOT are subject to regular “sunset” review by the Texas Sunset Advisory Commission. If either the PUCT or ERCOT is not renewed by the Texas Legislature pursuant to Sunset review, it could have a material effect on Oncor’s business.
Sunset review is the regular assessment of the continuing need for a state agency to exist, and is grounded in the premise that an agency will be abolished unless legislation is passed to continue its functions. The Texas Sunset Advisory Commission (Sunset Commission) closely reviews each agency and recommends action on each agency to the Texas Legislature, which action may include modifying or even abolishing the agency. Of the agencies scheduled for Sunset review by the Sunset Commission, the PUCT and ERCOT are the most significant to Oncor’s business. The PUCT is scheduled for a limited purpose sunset review in 2013 (with the next review in 2023) and ERCOT is scheduled for review after 2013. These agencies are also subject to focused, limited scope, or special purpose reviews. These agencies, for the most part, participate in, govern or operate the electricity markets in Texas upon which Oncor’s business model is based. If the Texas Legislature fails to renew either of these agencies, it could result in a significant restructuring of the Texas electricity market or regulatory regime that could have a material impact on Oncor’s business. There can be no assurance that future action of the Sunset Commission will not result in legislation that could have a material effect on Oncor and its financial prospects.
Disruptions at power generation facilities owned by third parties could interrupt Oncor’s sales of transmission and distribution services.
The electricity Oncor transmits and distributes to customers of REPs is obtained by the REPs from electricity generation facilities. Oncor does not own or operate any generation facilities. If generation is disrupted or if generation capacity is inadequate, Oncor’s sales of transmission and distribution services may be diminished or interrupted, and its results of operations, financial condition and cash flows may be adversely affected.
The operation and maintenance of electricity delivery facilities involves significant risks that could adversely affect Oncor’s results of operations and financial condition.
The operation and maintenance of delivery facilities involves many risks, including equipment breakdown or failure of facilities, lack of sufficient capital to maintain the facilities, impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of efficiency or reliability, the occurrence of any of which could result in lost revenues and/or increased expenses that may not be recoverable through rates. A significant number of Oncor’s facilities were constructed many years ago. In particular, older transmission and distribution equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep operating at peak efficiency or reliability. The risk of increased maintenance and capital expenditures arises from damage to facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events. Further, Oncor’s ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, Oncor could be subject to additional costs that may not be recoverable through rates and/ or the write-off of its investment in the project or improvement.
Insurance, warranties or performance guarantees may not cover all or any of the lost revenues or increased expenses that could result from the risks discussed above. Likewise, Oncor’s ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by events outside Oncor’s control.
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Changes in technology or increased conservation efforts may reduce the value of Oncor’s electricity delivery facilities and may significantly impact Oncor’s business in other ways as well.
Research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices. It is possible that advances in these or other technologies will reduce the costs of electricity production from these technologies to a level that will enable these technologies to compete effectively with traditional generation plants. Changes in technology could also alter the channels through which retail customers buy electricity. To the extent self-generation facilities become a more cost-effective option for certain customers, Oncor’s revenues could be materially reduced.
Also, electricity demand could be reduced by increased conservation efforts and advances in technology, which could likewise significantly reduce the value of Oncor’s electricity delivery facilities. Certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date. Effective energy conservation by Oncor’s customers could result in reduced energy demand, or significantly slow the growth in demand. Such reduction in demand could materially reduce Oncor’s revenues. Furthermore, Oncor may incur increased capital expenditures if it is required to invest in conservation measures.
Oncor’s revenues and results of operations are seasonal.
A significant portion of Oncor’s revenues is derived from rates that Oncor collects from REPs based on the amount of electricity Oncor distributes on behalf of such REPs. Sales of electricity to residential and commercial customers are influenced by temperature fluctuations. Thus, Oncor’s revenues and results of operations are subject to seasonality, weather conditions and other electricity usage drivers, with revenues being highest in the summer.
The litigation environment in which Oncor operates poses a significant risk to its business.
Oncor is involved in the ordinary course of business in a number of lawsuits involving employment, commercial and environmental issues, and other claims for injuries and damages, among other matters. Judges and juries in the State of Texas have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and business tort cases. Oncor uses appropriate means to contest litigation threatened or filed against it, but the litigation environment in the State of Texas poses a significant business risk.
The loss of the services of Oncor’s key management and personnel could adversely affect Oncor’s ability to operate its businesses.
Oncor’s future success will depend on its ability to continue to attract and retain highly qualified personnel. Oncor competes for such personnel with many other companies, in and outside Oncor’s industry, government entities and other organizations. Oncor may not be successful in retaining its current personnel or in hiring or retaining qualified personnel in the future. Failure to attract new personnel or retain existing personnel could have a material effect on Oncor’s business.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
| Item 3. | LEGAL PROCEEDINGS |
From time to time, we may be involved in various legal and administrative proceedings in the normal course of business the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial condition, results of operations or liquidity.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED EQUITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Not applicable. EFIH’s outstanding membership interest is held by EFH Corp.
See Note 7 to Financial Statements for a description of cash distributions EFIH paid to EFH Corp. and the restrictions on EFIH’s ability to pay such distributions.
| Item 6. | SELECTED FINANCIAL DATA |
| As of December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (millions of dollars, except ratios) | ||||||||||||||||||||
Total assets | $ | 9,517 | $ | 8,547 | $ | 5,577 | $ | 5,363 | $ | 7,732 | ||||||||||
Capitalization | ||||||||||||||||||||
Long-term debt (a) | $ | 3,436 | $ | 3,172 | $ | 2,513 | $ | 2,250 | $ | 2,250 | ||||||||||
Membership interests | 5,805 | 5,193 | 3,010 | 3,069 | 5,439 | |||||||||||||||
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Total | $ | 9,241 | $ | 8,365 | $ | 5,523 | $ | 5,319 | $ | 7,689 | ||||||||||
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Capitalization ratios | ||||||||||||||||||||
Long-term debt (a) | 37.2 | % | 37.9 | % | 45.5 | % | 42.3 | % | 29.3 | % | ||||||||||
Membership interests | 62.8 | % | 62.1 | % | 54.5 | % | 57.7 | % | 70.7 | % | ||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
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| Successor | Predecessor (b) | |||||||||||||||||||||||
| Period from | Period from | |||||||||||||||||||||||
| October 11, | January 1, | |||||||||||||||||||||||
| 2007 through | 2007 through | |||||||||||||||||||||||
| Year Ended December 31, | December 31, | October 10, | ||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | 2007 | |||||||||||||||||||
| (millions of dollars, except ratios) | ||||||||||||||||||||||||
Income (loss) before income taxes and equity in earnings of unconsolidated subsidiary | $ | 204 | $ | (106 | ) | $ | (275 | ) | $ | (260 | ) | $ | (68 | ) | $ | — | ||||||||
Equity in earnings (losses) of unconsolidated subsidiary (net of tax) (c) | $ | 286 | $ | 277 | $ | 256 | $ | (323 | ) | $ | 64 | $ | 263 | |||||||||||
Net income (loss) | $ | 417 | $ | 213 | $ | 74 | $ | (495 | ) | $ | 19 | $ | 263 | |||||||||||
Ratio of earnings to fixed charges (d) | 1.92 | 1.20 | — | 1.27 | — | — | ||||||||||||||||||
| (a) | Includes push down of EFH Corp. (parent) debt due to EFIH’s guarantee of the debt (see Note 5 to Financial Statements). |
| (b) | The Predecessor reflects Oncor accounted for under the equity method; EFIH and Oncor Holdings were formed as of the time of the Merger. The consolidated financial statements of the Successor reflect the application of purchase accounting. |
| (c) | Amount in 2008 includes the effect of Oncor’s $860 million goodwill impairment charge. |
| (d) | Fixed charges exceeded earnings by $59 million and $68 million for the year ended December 31, 2009 and the period from October 11, 2007 through December 31, 2007, respectively. There were no fixed charges for the predecessor periods. |
See Notes to Financial Statements.
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Quarterly Information (unaudited)
Results of operations by quarter are summarized below. In the opinion of EFIH, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of such amounts have been made. Quarterly results are not necessarily indicative of a full year’s operations because of seasonal and other factors.
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (millions of dollars) | ||||||||||||||||
2011: | ||||||||||||||||
Income (loss) before income taxes and equity in earnings of unconsolidated subsidiary | $ | 63 | $ | 71 | $ | 72 | $ | (2 | ) | |||||||
Equity in earnings of unconsolidated subsidiary (net of tax) | $ | 50 | $ | 72 | $ | 113 | $ | 51 | ||||||||
Net income | $ | 90 | $ | 118 | $ | 160 | $ | 49 | ||||||||
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter (a) | Quarter | |||||||||||||
| (millions of dollars) | ||||||||||||||||
2010: | ||||||||||||||||
Income (loss) before income taxes and equity in earnings of unconsolidated subsidiary | $ | (72 | ) | $ | (73 | ) | $ | (10 | ) | $ | 49 | |||||
Equity in earnings of unconsolidated subsidiary (net of tax) | $ | 63 | $ | 59 | $ | 118 | $ | 37 | ||||||||
Net income | $ | 15 | $ | 11 | $ | 117 | $ | 70 | ||||||||
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2011, 2010 and 2009 should be read in conjunction with Selected Financial Data and our audited consolidated financial statements and the notes to those statements.
All dollar amounts in the tables in the following discussion and analysis are stated in millions of US dollars unless otherwise indicated.
BUSINESS
EFIH is a Dallas, Texas-based holding company whose wholly-owned subsidiary, Oncor Holdings, holds a majority interest (approximately 80%) in Oncor. Oncor is a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell electricity to residential, business and other consumers in the north-central, eastern and western parts of Texas. Revenues from TCEH represented 33% and 36% of total revenues for the years ended December 31, 2011 and 2010, respectively. EFIH is a direct, wholly-owned subsidiary of EFH Corp. EFIH has no reportable business segments. Various “ring-fencing” measures have been taken to enhance the credit quality of Oncor Holdings and Oncor. See Note 1 to Financial Statements for a description of the material features of these “ring-fencing” measures and Notes 1 and 2 to Financial Statements for discussion of the reporting of our investment in Oncor Holdings as an equity method investment.
Significant Activities and Events
Issuance of EFIH 11.750% Senior Secured Second Lien Notes — See Note 5 to Financial Statements for details of EFIH’s and EFIH Finance’s February 2012 issuance of $800 million principal amount of 11.750% Senior Secured Second Lien Notes due 2022.
Oncor Technology Initiatives — Oncor continues to invest in technology initiatives that include development of a modernized grid through the replacement of existing meters with advanced digital metering equipment and development of advanced digital communication, data management, real-time monitoring and outage detection capabilities. This modernized grid is producing electricity service reliability improvements and providing the potential for additional products and services from REPs that enable businesses and consumers to better manage their electricity usage and costs. Oncor’s plans provide for the full deployment of over three million advanced meters to all residential and most non-residential retail electricity customers in Oncor’s service area. The advanced meters can be read remotely, rather than by a meter reader physically visiting the location of each meter. Advanced meters facilitate automated demand side management, which allows consumers to monitor the amount of electricity they are consuming and adjust their electricity consumption habits.
As of December 31, 2011, Oncor had installed 2,302,000 advanced digital meters, including 788,000 in 2011. As the new meters are integrated, Oncor reports 15-minute interval, billing-quality electricity consumption data to ERCOT for market settlement purposes. The data makes it possible for REPs to support new programs and pricing options. Cumulative capital expenditures for the deployment of the advanced meter system totaled $518 million as of December 31, 2011, including $158 million in 2011. Oncor expects to complete installations of the remaining approximately 700,000 advanced meters by the end of 2012.
Oncor Rate Review Filed with the PUCT — In January 2011, Oncor filed for a rate review with the PUCT and 203 cities based on a test year ended June 30, 2010. In August 2011 the PUCT issued a final order in the rate review. The rate review as approved includes an approximate $137 million base rate increase and additional provisions to address certain expenses. Approximately $93 million of the increase became effective July 1, 2011, and the remainder became effective January 1, 2012. The rate review did not change Oncor’s authorized regulatory capital structure of 60% debt and 40% equity or its authorized return on equity of 10.25%. See “Regulatory Matters” below for further discussion.
Other Oncor Matters with the PUCT — See discussion of these matters, including the construction of CREZ-related transmission lines, below under “Regulatory Matters.”
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KEY RISKS AND CHALLENGES
Following is a discussion of key risks and challenges facing management and the initiatives currently underway to manage such challenges. These matters involve risks that could have a material effect on our results of operations, liquidity or financial condition. Also see Item 1A “Risk Factors.”
Substantial Debt and Liquidity Risk
Our substantial debt, resulting in large part from debt issued in exchange for outstanding EFH Corp. and TCEH debt, and the covenants contained in our debt agreements require significant cash flows to be dedicated to interest and principal payments. Principal amounts of long-term debt, including $706 million of EFH Corp. debt guaranteed by us and pushed down to our balance sheet (see Note 5 to Financial Statements), totaled $3.433 billion principal amount as of December 31, 2011. Cash interest payments on long-term debt in 2012 are expected to total approximately $330 million. We believe our cash on hand, interest payments on EFH Corp. and TCEH debt we hold, distributions from Oncor and potential borrowings or capital contributions from EFH Corp. will provide sufficient liquidity to fund debt service requirements for 2012 (see “Financial Condition – Liquidity and Capital Resources” section below). While we have experienced no delinquent interest payments on EFH Corp. and TCEH debt securities we hold as an investment and do not anticipate any in 2012, EFH Corp. and TCEH are highly leveraged and any failure on their part to remit interest payments could have a material affect on our liquidity. See discussion of credit risk in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” discussion of EFH Corp. and TCEH debt we hold in Note 3 to Financial Statements and discussion of restrictions on distributions from Oncor below in “Financial Condition – Liquidity and Capital Resources” and in Note 2 to Financial Statements.
Oncor Rates and Cost Recovery
Oncor’s rates are regulated by the PUCT and certain cities and are subject to regulatory rate-setting processes and annual earnings oversight. This regulatory treatment does not provide any assurance as to achievement of earnings levels. Oncor’s rates are regulated based on an analysis of their costs and capital structure, as reviewed and approved in a regulatory proceeding. While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there is no assurance that the PUCT will judge all of Oncor’s costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that Oncor’s rates are based upon, that the regulatory process in which rates are determined will always result in rates that produce full recovery of Oncor’s costs or that Oncor’s authorized return on equity will not be reduced. In January 2011, Oncor filed for a rate review with the PUCT and 203 cities based on a test year ended June 30, 2010. In August 2011, the PUCT issued a final order with respect to the rate review. See “Regulatory Matters” below.
Oncor Advanced Meter Deployment
Under a PUCT order approving Oncor’s proposed advanced meter deployment plan and rate surcharge to recover its investment, Oncor began billing the advanced metering surcharge in the January 2009 billing month cycle. Oncor may, through subsequent reconciliation proceedings, request recovery of additional costs that are reasonable and necessary. While there is a presumption that costs spent in accordance with a plan approved by the PUCT are reasonable and necessary, recovery of any costs that are found not to have been spent or properly allocated, or not to be reasonable or necessary, must be refunded. See “Regulatory Matters” below.
Oncor Technology Initiatives
Risks to Oncor’s technology initiative programs discussed above under “Significant Activities and Events” include nonperformance by equipment and service providers, failure of the technology to meet performance expectations and inadequate cost recovery allowances by regulatory authorities. Oncor is implementing measures to mitigate these risks, but there can be no assurance that these technology initiatives will achieve the operational and financial objectives.
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Oncor’s Ring-Fencing and Credit Risk
Our investment in Oncor, which represents approximately 80% of its membership interests, is a significant value driver of our overall business. Oncor’s access to capital markets and cost of debt could be directly affected by its credit ratings. Any adverse action with respect to Oncor’s credit ratings would generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease. Oncor’s credit ratings are currently substantially higher than those of the Texas Holdings Group. If credit rating agencies were to change their views of Oncor’s independence from any member of the Texas Holdings Group, Oncor’s credit ratings would likely decline. We believe these risks are substantially mitigated by the significant ring-fencing measures implemented by EFH Corp. and Oncor as described in Note 1 to Financial Statements.
Cyber Security and Infrastructure Protection Risk
A breach of cyber/data security measures that impairs EFH Corp.’s and its affiliates’ information technology infrastructure could disrupt normal business operations and affect EFH Corp.’s and its affiliates’ ability to control their generation and transmission assets, access retail customer information and limit communication with third parties. Any loss of confidential or proprietary data through a breach could materially affect EFH Corp.’s and its affiliates’ (including our) reputation, expose it to legal claims or impair its ability to execute on business strategies.
EFH Corp. and its affiliates participate in industry groups and with regulators to remain current on emerging threats and mitigating techniques. These groups include, but are not limited to: the US Cyber Emergency Response Team, the National Electric Sector Cyber Security Organization, the US Nuclear Regulatory Commission and NERC. EFH Corp. and its affiliates also apply the knowledge gained by continuing to invest in technology, processes and services to detect, mitigate and protect their cyber assets. These investments include upgrades to network architecture, regular intrusion detection monitoring and compliance with emerging industry regulation.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are discussed in Note 1 to Financial Statements. We follow accounting principles generally accepted in the US. Application of these accounting policies in the preparation of our consolidated financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and income and expenses during the periods covered. The following is a summary of certain critical accounting policies that are impacted by judgments and uncertainties and under which different amounts might be reported using different assumptions or estimation methodologies.
Investment in Long-Term Debt of Affiliates
EFIH holds investments in long-term debt securities of EFH Corp. and TCEH that it acquired through debt exchanges and payment-in-kind interest payments it received on EFH Corp. Toggles Notes as discussed in Note 3 to Financial Statements. These debt securities are classified as available-for-sale securities in the balance sheet as of December 31, 2011 and are recorded at fair value with unrealized gains or losses recorded in other comprehensive income. We evaluate investments in long-term debt of affiliates for impairment and record an impairment if declines in fair value are deemed to be other than temporary. Impairments are accounted for as a reduction of interest income if related to the issuer’s credit. If they are not related to the issuers credit, the impairments are recorded in other comprehensive income. See Note 3 to Financial Statements for discussion of investment in long-term debt of affiliates and impairments totaling $77 million and $17 million recorded in the years ended December 31, 2011 and 2010, respectively.
Push Down of Merger-Related Debt
Merger-related debt of EFH Corp. and its subsidiaries consists of debt issued or existing as of the time of the Merger. Debt issued in exchange for Merger-related debt is considered Merger-related. Debt issuances are considered Merger-related debt to the extent the proceeds are used to repurchase Merger-related debt. Merger-related debt that is fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH is subject to push down in accordance with SEC Staff Accounting Bulletin Topic 5-J, and as a result, a portion of such debt and related interest expense is reflected in our financial statements. The amount reflected on our balance sheet represents 50% of the EFH Corp. Merger-related debt EFIH has guaranteed. This percentage reflects the fact that as of the time of the Merger, the equity investments of EFCH and EFIH in their respective operating subsidiaries were essentially equal amounts. Because payment of principal and interest on the notes is the responsibility of EFH Corp., we record the settlement of such amounts as noncash capital contributions from EFH Corp. See Note 5 to Financial Statements.
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Investment in Oncor Holdings
Our balance sheet reflects our investment in Oncor Holdings, which holds an approximate 80% interest in Oncor, as an equity method investment. See Note 2 to Financial Statements for additional information regarding our investment in Oncor Holdings.
Impairment of Equity Method Investment
We would evaluate our investment in Oncor Holdings for impairment whenever factors indicate that a decrease in value has occurred that is not temporary. Factors indicating such a loss in value might be a series of operating losses of Oncor Holdings or a fair value of the investment that is less than its carrying amount. An impairment loss would be recognized if the carrying value of the investment is greater than the fair value of the investment, and the loss was not deemed temporary. Fair value is based on analyses that reflect discounted cash flows and values of comparable companies. The determination of fair value involves judgments that are subjective in nature and require the use of estimates in forecasting future results and cash flows.
Accounting for Income Taxes
Our income tax expense and related balance sheet amounts involve significant management estimates and judgments. Amounts of deferred income tax assets and liabilities, as well as current and noncurrent accruals, involve judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities. In assessing the likelihood of realization of deferred tax assets, management considers estimates of the amount and character of future taxable income. Actual income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, our forecasted results of operations and financial condition in future periods, as well as final review of filed tax returns by taxing authorities. EFH Corp.’s income tax returns (which are filed on a consolidated basis, including us) are regularly subject to examination by applicable tax authorities. In management’s opinion, pursuant to income tax accounting guidance related to uncertain tax positions, there is no material liability for future taxes that may be owed as a result of any examination. See Notes 1 and 4 to Financial Statements for discussion of income tax matters.
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RESULTS OF OPERATIONS
Financial Results — Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Interest income totaled $552 million in 2011 compared to $209 million in 2010. The increase reflected additional investments in long-term debt of affiliates as a result of debt exchange transactions in 2010 and 2011 (see Note 3 to Financial Statements).
Interest expense and related charges increased $33 million, or 10%, to $348 million in 2011. The increase reflected the issuance of $406 million and $2.180 billion aggregate principal amount of EFIH Notes in April 2011 and August 2010, respectively, partially offset by a $142 million net reduction in debt pushed down from EFH Corp. reflecting EFH Corp. and EFIH debt exchanges and repurchases in 2011 and 2010.
Income tax expense totaled $73 million in 2011 and income tax benefit totaled $42 million in 2010. The effective rate on pretax income was 35.8% in 2011 compared to an effective rate on a pretax loss of 39.6% in 2010. The 2010 effective rate reflects the recognition of interest expense previously treated as nondeductible, which resulted from the acquisition of pushed down Merger-related debt in August 2010.
Equity in earnings of our Oncor Holdings unconsolidated subsidiary (net of tax) increased $9 million to $286 million in 2011 reflecting improved results at Oncor due to higher revenue rates and the effects of warmer weather, partially offset by higher depreciation and operation and maintenance expense.
Net income increased $204 million to $417 million in 2011 driven by the increase in interest income.
Financial Results — Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Interest income was $209 million in 2010 compared to $4 million in 2009. The increase reflected interest on investments in long-term debt of affiliates (see Note 3 to Financial Statements).
Interest expense and related charges increased $36 million, or 13%, to $315 million in 2010. The increase reflected the issuance of $2.321 billion aggregate principal amount of EFIH Notes in August 2010 and November 2009 partially offset by a $1.399 billion net reduction in debt pushed down from EFH Corp. reflecting the EFH Corp. and EFIH debt exchanges and repurchases (see Note 5 to Financial Statements).
Income tax benefit totaled $42 million in 2010 compared to $93 million in 2009. The effective rate on pretax losses was 39.6% and 33.8% in 2010 and 2009, respectively. The 2010 effective rate reflects the recognition of interest expense previously treated as nondeductible, which resulted from the acquisition of pushed down Merger-related debt in August 2010.
Equity in earnings of of our Oncor Holdings unconsolidated subsidiary (net of tax) increased $21 million to $277 million in 2010 reflecting improved results at Oncor due to higher revenues, primarily due to weather effects and rate increases, and the effect of a $25 million write off of regulatory assets in 2009, partially offset by increased noncash expenses recognized as a result of the PUCT’s final order in the June 2008 rate review.
Net income increased $139 million to $213 million in 2010 reflecting increases in interest income and equity in earnings of Oncor Holdings, partially offset by increased interest expense.
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FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows —Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 — Cash provided by operating activities totaled $3 million and $133 million in 2011 and 2010, respectively. The decline reflected a $181 million increase in cash interest paid, a $53 million decrease in dividends received from Oncor Holdings and payment of $30 million in income taxes to EFH Corp. in 2011, partially offset by higher interest payments received on investments in long-term debt of affiliates.
There were no cash flows related to financing or investing activities in 2011.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 — Cash provided by operating activities totaled $133 million and $216 million for the years ended December 31, 2010 and 2009, respectively, and primarily consisted of dividends received from Oncor Holdings.
Cash provided by financing activities totaled $407 million in 2010, primarily reflecting a $440 million cash capital contribution from EFH Corp. to support our acquisition of $3.594 billion principal amount of EFH Corp. debt securities for $500 million in cash and issuance of $2.180 billion of debt (see Note 5 to Financial Statements), partially offset by $31 million in fees primarily associated with the issuance of EFIH 10% Notes in exchange for long-term debt of EFH Corp. (see Note 3 to Financial Statements) and $2 million in distributions to EFH Corp. Cash used in financing activities of $216 million in 2009 reflected distributions to EFH Corp.
Cash used in investing activities totaled $497 million in 2010, reflecting investment in long-term debt of EFH Corp. and EFH Corp.’s repayment of $3 million in advances to parent.
Amortization of debt issuance costs reported in the statement of consolidated cash flows represents the expenses related to debt pushed down from EFH Corp. and debt we issued (see Note 5 to Financial Statements) and is reported in interest expense and related charges in the statement of consolidated income.
Long-Term Debt Activity — In 2011, we issued $406 billion principal amount of debt in exchange for $428 million principal amount of outstanding EFH Corp. debt. Debt pushed down to us decreased $142 million in 2011 reflecting declines in outstanding EFH Corp. debt due to debt exchanges and repurchases. In February 2012, EFIH and EFIH Finance issued $800 million principal amount of 11.750% Senior Secured Second Lien Notes due 2022. The net proceeds will be used for general corporate purposes, including the payment of a $650 million dividend to EFH Corp., which was used to repay a portion of the demand notes payable by EFH Corp. to TCEH. See Note 5 to Financial Statements.
EFH Corp. and EFIH regularly monitor the capital and bank credit markets for liability management opportunities that we believe will improve our balance sheets, including capturing debt discount and extending debt maturities. As a result, EFH Corp. or EFIH may engage, from time to time, in liability management transactions. Future activities under the liability management program may include the purchase of outstanding debt of EFH Corp. or its affiliates for cash in open market purchases or privately negotiated transactions (including pursuant to a Section 10b-5(1) plan) or via public or private exchange or tender offers. In evaluating whether to undertake any liability management transaction, including any refinancing, EFH Corp. and/or EFIH will take into account liquidity requirements, prospects for future access to capital, contractual restrictions, the market price of our outstanding debt and other factors. Any liability management transaction, including any refinancing, may occur on a stand-alone basis or in connection with, or immediately following, other liability management transactions.
Liquidity Needs —Our liquidity needs represent interest and principal payments on the EFIH Notes, which are sourced from interest and principal payments on the investments in EFH Corp. or TCEH debt securities (see Note 3 to Financial Statements), distributions from Oncor Holdings, and as necessary, additional liquidity sources including borrowings from EFH Corp. (See “Distributions from Oncor” below and Note 2 to Financial Statements.)
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Secured Debt Capacity—As of February 15, 2012, EFIH believes that it and EFH Corp. collectively are permitted under its and EFH Corp.’s applicable debt agreements to issue (subject to certain exceptions and conditions set forth in their applicable debt documents) up to approximately $2.15 billion of additional aggregate principal amount of debt secured by EFIH’s equity interest in Oncor Holdings (of which approximately $500 million can be on a first-priority basis and the remainder on a second-priority basis).
These amounts are estimates based on EFIH’s and EFH Corp.’s current interpretation of the covenants set forth in their and their subsidiaries’ applicable debt agreements and do not take into account exceptions in the agreements that may allow for the incurrence of additional secured debt, including, but not limited to, acquisition debt, coverage ratio debt, refinancing debt, capital leases and hedging obligations. Moreover, such amounts could change from time to time as a result of, among other things, the termination of any debt agreement (or specific terms therein) or a change in the debt agreement that results from negotiations with new or existing lenders. In addition, covenants included in agreements governing additional, future debt may impose greater restrictions on the incurrence of secured debt by EFIH and EFH Corp. Consequently, the actual amount of senior secured debt that EFIH and EFH Corp. are permitted to incur under their respective debt agreements could be materially different than the amounts provided above. Also see “Risk Factors—Risks Related to Substantial Indebtedness and Debt Agreements.”
Toggle Note Interest Election Related to EFH Corp. Debt Held as an Investment and Pushed Down EFH Corp. Debt — EFH Corp. has the option every six months at its discretion, ending with the payment due November 2012, to use the payment-in-kind (PIK) feature of its EFH Corp. Toggle Notes in lieu of making cash interest payments. EFH Corp. elected to do so beginning with the May 2009 interest payment as an efficient and cost-effective method to further enhance liquidity. Once EFH Corp. makes a PIK election, the election is valid for each succeeding interest payment period until EFH Corp. revokes the election. Use of the PIK feature will be evaluated at each election period, taking into account market conditions and other relevant factors at such time.
EFH Corp. made its 2011, 2010 and 2009 interest payments and will make its May 2012 interest payment on the EFH Corp. Toggle Notes by using the PIK feature of those notes. During the applicable interest periods, the interest rate on these notes is increased from 11.25% to 12.00%. Accordingly, we received aggregate principal amount of EFH Corp. notes totaling $312 million and $130 million in 2011 and 2010, respectively, and expect to receive an additional $167 million in May 2012 in in lieu of cash interest on our investment in EFH Corp. Toggle Notes. Also as a result of the PIK feature, EFH Corp. issued an aggregate principal amount of the notes to nonaffiliates totaling $43 million, $194 million, and $309 million in 2011, 2010 and 2009, respectively, and is expected to further increase the aggregate principal amount of the notes by $27 million in May 2012, all of which are subject to push down to our balance sheet. See Notes 3 and 5 to Financial Statements.
Income Tax Payments — See Note 8 to Financial Statements for discussion of income tax payments to EFH Corp.
Distributions from Oncor— Oncor’s distributions to us totaled $116 million, $169 million and $216 million in the years ended December 31, 2011, 2010 and 2009, respectively. We expect to receive a distribution of between $33 million and $39 million from Oncor in late February 2012. Until December 31, 2012, distributions paid by Oncor to its members are limited to an amount not to exceed Oncor’s net income determined in accordance with US GAAP, subject to certain defined adjustments. Distributions are further limited by an agreement that Oncor’s regulatory capital structure, as determined by the PUCT, will be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. (See Note 7 to Financial Statements.)
In 2009, the PUCT awarded certain CREZ construction projects to Oncor. See discussion below under “Regulatory Matters — Oncor Matters with the PUCT.” As a result of the increased capital expenditures for CREZ and the debt-to-equity ratio cap, we expect our distributions from Oncor will be substantially reduced or temporarily discontinued during the CREZ construction period, which is expected to be completed by the end of 2013.
Capitalization — Our capitalization ratios consisted of 62.8% and 62.1% membership interests and 32.7% and 37.9% long-term debt as of December 31, 2011 and 2010, respectively.
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Financial Covenants, Credit Rating Provisions and Cross Default Provisions—Covenants and Restrictions Related to EFIH Notes and Pushed Down Debt— The indentures governing the EFIH Notes, EFH Corp. 10.875% Notes, EFH Corp. Toggle Notes and EFH Corp. Secured Notes contain covenants that could have a material impact on our liquidity and operations. See Note 5 to Financial Statements for discussion of our long-term debt, including EFH Corp. debt pushed down to us as a result of our guarantee of the debt.
Adjusted EBITDA (as used in the restricted payments covenants contained in the indentures governing the EFIH Notes and the EFH Corp. Secured Notes) for the year ended December 31, 2011 totaled $1.639 billion and $5.036 billion, respectively. See Exhibits 99(a) and 99(b) for a reconciliation of net income (loss) to Adjusted EBITDA for us and EFH Corp., respectively, for the years ended December 31, 2011 and 2010.
The table below summarizes various financial ratios of EFIH and EFH Corp. that are applicable under certain threshold covenants in the indentures governing the EFIH Notes, EFH Corp. 10.875% Notes, EFH Corp. Toggle Notes and EFH Corp. Secured Notes as of December 31, 2011 and 2010 and the corresponding covenant threshold levels as of December 31, 2011. The debt incurrence and restricted payments/limitations on investments covenants thresholds described below represent levels that must be met in order for EFH Corp. and us to incur certain permitted debt or make certain restricted payments and/or investments. Our debt agreements do not contain maintenance covenants.
| December 31, | December 31, | Threshold Level as of | ||||||||||
| 2011 | 2010 | December 31, 2011 | ||||||||||
Debt Incurrence Covenants: | ||||||||||||
EFH Corp. Secured Notes: | ||||||||||||
EFH Corp. fixed charge coverage ratio | 1.1 to 1.0 | 1.3 to 1.0 | At least 2.0 to 1.0 | |||||||||
TCEH fixed charge coverage ratio | 1.3 to 1.0 | 1.5 to 1.0 | At least 2.0 to 1.0 | |||||||||
EFIH Notes: | ||||||||||||
EFIH fixed charge coverage ratio (a) | (b | ) | (b | ) | At least 2.0 to 1.0 | |||||||
Restricted Payments/Limitations on Investments Covenants: | ||||||||||||
EFH Corp. 10.875% Notes and Toggle Notes: | ||||||||||||
General restrictions (Sponsor Group payments): | ||||||||||||
EFH Corp. leverage ratio | 9.7 to 1.0 | 8.5 to 1.0 | Equal to or less than 7.0 to 1.0 | |||||||||
EFH Corp. Secured Notes: | ||||||||||||
General restrictions (non-Sponsor Group payments): | ||||||||||||
EFH Corp. fixed charge coverage ratio (c) | 1.4 to 1.0 | 1.6 to 1.0 | At least 2.0 to 1.0 | |||||||||
General restrictions (Sponsor Group payments): | ||||||||||||
EFH Corp. fixed charge coverage ratio (c) | 1.1 to 1.0 | 1.3 to 1.0 | At least 2.0 to 1.0 | |||||||||
EFH Corp. leverage ratio | 9.7 to 1.0 | 8.5 to 1.0 | Equal to or less than 7.0 to 1.0 | |||||||||
EFIH Notes: | ||||||||||||
General restrictions (non-EFH Corp. payments): | ||||||||||||
EFIH fixed charge coverage ratio (a)(d) | 81.7 to 1.0 | 23.9 to 1.0 | At least 2.0 to 1.0 | |||||||||
General restrictions (EFH Corp. payments): | ||||||||||||
EFIH fixed charge coverage ratio (a)(d) | (b | ) | (b | ) | At least 2.0 to 1.0 | |||||||
EFIH leverage ratio | 5.3 to 1.0 | 5.3 to 1.0 | Equal to or less than 6.0 to 1.0 | |||||||||
| (a) | Although we currently meet the fixed charge coverage ratio threshold applicable to certain covenants contained in the indentures governing the EFIH Notes, our ability to use such thresholds to incur debt or make restricted payments/investments is currently limited by the covenants under the EFH Corp. 10.875% Notes, EFH Corp. Toggle Notes and EFH Corp. Secured Notes. |
| (b) | We meet the ratio threshold. Because our interest income exceeds interest expense, the result of the ratio calculation is not meaningful. |
| (c) | The EFH Corp. fixed charge coverage ratio for non-Sponsor Group payments includes the results of Oncor Holdings and its subsidiaries. The EFH Corp. fixed charge coverage ratio for Sponsor Group payments excludes the results of Oncor Holdings and its subsidiaries. |
| (d) | The EFIH fixed charge coverage ratio for non-EFH Corp. payments includes the results of Oncor Holdings and its subsidiaries. The EFIH fixed charge coverage ratio for EFH Corp. payments excludes the results of Oncor Holdings and its subsidiaries. |
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Material Cross Default/Acceleration Provisions — Certain of our financing arrangements contain provisions that could result in an event of default if there were a failure under other financing arrangements to meet payment terms or to observe other covenants that could or does result in an acceleration of payments due. Such provisions are referred to as “cross default” or “cross acceleration” provisions.
The indentures governing the EFIH Notes contain a cross acceleration provision whereby a payment default at maturity or on acceleration of principal indebtedness under any instrument or instruments of EFIH or any of its restricted subsidiaries in an aggregate amount equal to or greater than $250 million may cause the acceleration of the EFIH Notes.
The indentures governing the EFH Corp. Secured Notes contain a cross acceleration provision whereby a payment default at maturity or on acceleration of principal indebtedness under any instrument or instruments of EFH Corp. or any of its restricted subsidiaries, including EFIH, in an aggregate amount equal to or greater than $250 million may cause the acceleration of the EFH Corp. Secured Notes.
Long-Term Contractual Obligations and Commitments— The following table summarizes our contractual cash obligations as of December 31, 2011 (see Note 5 to Financial Statements for additional disclosures regarding these long-term debt obligations).
| One to | Three to | More | ||||||||||||||||||||
| Less Than | Three | Five | Than Five | |||||||||||||||||||
Contractual Cash Obligations (a) | One Year | Years | Years | Years | Total | |||||||||||||||||
Long-term debt – principal | $ | — | $ | — | $ | — | $ | 3,433 | $ | 3,433 | ||||||||||||
Long-term debt – interest | 340 | 704 | 704 | 1,250 | 2,998 | |||||||||||||||||
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Total contractual cash obligations | $ | 340 | $ | 704 | $ | 704 | $ | 4,683 | $ | 6,431 | ||||||||||||
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| (a) | Excludes unamortized premiums and $27 million of additional principal amount of EFH Corp. Toggle Notes subject to push down (at 50%) to EFIH expected to be issued in May 2012 and due in 2017, reflecting the election of the PIK feature on the EFH Corp. Toggle Notes as discussed above under “Toggle Notes Interest Election Related to Pushed Down EFH Corp. Debt.” Includes $706 million principal amount and related interest of EFH Corp. notes pushed down to EFIH (see Note 5 to Financial Statements.) |
Guarantees — See Note 5 to Financial Statements for details of guarantees.
OFF-BALANCE SHEET ARRANGEMENTS
See Notes 2 and 5 to Financial Statements regarding VIEs and guarantees, respectively.
COMMITMENTS AND CONTINGENCIES
See Note 6 to Financial Statements for discussion of commitments and contingencies.
CHANGES IN ACCOUNTING STANDARDS
There have been no recently issued accounting standards effective after December 31, 2011 that are expected to materially impact our financial statements.
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REGULATORY MATTERS
Sunset Review and Other State Legislation
PURA, the PUCT, ERCOT, the TCEQ and the Texas Office of Public Utility Counsel (OPUC) were subject to “sunset” review by the Texas Legislature in the 2011 legislative session. Sunset review includes, generally, a comprehensive review of the need for and effectiveness of an administrative agency (the PUCT, ERCOT, the TCEQ or the OPUC), along with an evaluation of the advisability of any changes to that agency’s authorizing legislation (e.g., PURA). During the 2011 legislative session, the Texas Legislature extended the life of the PUCT until 2013, at which time the PUCT will undergo a limited purpose sunset review. The Texas Legislature also continued ERCOT until the subsequent PUCT sunset review and the OPUC and the TCEQ for 12 years.
During the 2011 legislative session, the Texas Legislature passed Senate Bill 1693, which directs the PUCT to adopt a rule that will allow utilities to recover distribution-related investments on an interim basis without the need for a full rate case. In September 2011, the PUCT approved the periodic rate adjustment rule, which allows utilities to file, under certain circumstances, up to four periodic rate adjustments for these distribution investments between rate cases. No other legislation passed during the 2011 legislative session is expected to have a material impact on Oncor’s or our operations, results of operations, liquidity or financial condition.
Oncor Matters with the PUCT
2011 Rate Review Filing (PUCT Docket No. 38929) — In January 2011, Oncor filed for a rate review with the PUCT and 203 original jurisdiction cities based on a test year ended June 30, 2010. If approved as requested, this review would have resulted in an aggregate annual rate increase of approximately $353 million over the test year period adjusted for the impact of weather. Oncor also requested a revised regulatory capital structure of 55% debt to 45% equity. In April 2011, Oncor filed, and the administrative law judges in the rate review granted, a motion requesting abatement of the procedural schedule on the grounds that Oncor and the other parties had reached a Memorandum of Settlement that would settle and resolve all issues in the rate review. Oncor filed a stipulation (including a proposed order and proposed tariffs) in May 2011 that incorporated the Memorandum of Settlement along with other documentation (stipulation) for the purpose of obtaining final approval of the settlement. The terms of the stipulation include an approximate $137 million base rate increase and additional provisions to address franchise fees (discussed below) and other expenses. The stipulation resulted in an impact of less than 1% on an average retail residential monthly bill of 1,300 kWh. Approximately $93 million of the increase became effective in July 2011, and the remainder became effective January 1, 2012. Under the stipulation, amortization of Oncor’s regulatory assets increased by approximately $24 million ($14 million of which will be recognized as tax expense) annually beginning January 1, 2012. The stipulation did not change Oncor’s authorized regulatory capital structure of 60% debt and 40% equity or its authorized return on equity of 10.25%. Under the terms of the stipulation, Oncor cannot file another general base rate review prior to July 1, 2013, but is not restricted from filing wholesale transmission rate, transmission cost recovery factor, distribution-related investment and other rate updates and adjustments permitted by Texas state law and PUCT rules. In August 2011, the PUCT issued a final order approving the rate review settlement terms contained in a “modified” stipulation, which removed a payment to certain cities of franchise fees as discussed immediately below.
In response to concerns raised by PUCT Commissioners at a July 2011 PUCT open meeting regarding the stipulation, Oncor filed a modified stipulation that removed from the stipulation a one-time payment to certain cities served by Oncor for retrospective franchise fees. Instead, pursuant to the terms of a separate agreement with certain cities served by Oncor, Oncor will make retrospective franchise fee payments to cities that accept the terms of the separate agreement. If all cities accept, the payments will total approximately $22 million. Through December 31, 2011, Oncor had made substantially all of the franchise fee payments. The payments are subject to refund from the cities or recovery from customers after final resolution of proceedings related to the appeals from Oncor’s June 2008 rate review filing discussed below. No other significant terms of the stipulation were revised.
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2008 Rate Review Filing (PUCT Docket No. 35717) — In August 2009, the PUCT issued a final order with respect to Oncor’s June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007, and new rates were implemented in September 2009. The final order approved a total annual revenue requirement for Oncor of $2.64 billion, based on a 2007 test year cost of service and customer characteristics. New rates were calculated for all customer classes using 2007 test year billing metrics and the approved class cost allocation and rate design. The PUCT staff estimated that the final order resulted in an approximate $115 million increase in base rate revenues over Oncor’s 2007 adjusted test year revenues, before recovery of rate case expenses. Prior to implementing the new rates in September 2009, Oncor had already begun recovering $45 million of the $115 million increase as a result of approved transmission cost recovery factor and energy efficiency cost recovery factor filings, such as those discussed below.
Key findings by the PUCT in the rate review included:
| • | recognizing and affirming Oncor’s corporate ring-fence from EFH Corp. and its unregulated affiliates by rejecting a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset Oncor’s taxable income against losses of EFH Corp’s unregulated affiliates; |
| • | approving the recovery of all of Oncor’s capital investment in its transmission and distribution system, including investment in certain automated meters that will be replaced pursuant to Oncor’s advanced meter deployment plan; |
| • | denying recovery of $25 million of regulatory assets, which resulted in a $16 million after-tax loss being recognized in the third quarter 2009, and |
| • | setting Oncor’s return on equity at 10.25%. |
In November 2009, Oncor and four other parties appealed various portions of the rate case final order to a state district court. In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities. Oncor filed an appeal with the Austin Court of Appeals in February 2011 with respect to the issues it appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities. All briefing has been completed and the parties are waiting for the Court of Appeals to set a date for oral argument. Oncor is unable to predict the outcome of the appeal.
Competitive Renewable Energy Zones (CREZs) — In 2009, the PUCT awarded Oncor CREZ construction projects (PUCT Docket Nos. 35665 and 37902) requiring 14 related Certificate of Convenience and Necessity (CCN) amendment proceedings before the PUCT for 17 projects. All 17 projects and 14 CCN amendments have been approved by the PUCT. The projects involve the construction of transmission lines and stations to support the transmission of electricity from renewable energy sources, principally wind generation facilities, in west Texas to population centers in the eastern part of Texas. In addition to these projects, ERCOT completed a study in December 2010 that will result in Oncor and other transmission service providers building additional facilities to provide further voltage support to the transmission grid as a result of CREZ. Oncor currently estimates, based on these additional voltage support facilities and the approved routes and stations for its awarded CREZ projects, that CREZ construction costs will total approximately $2.0 billion. CREZ-related costs could change based on finalization of costs for the additional voltage support facilities and final detailed designs of subsequent project routes. As of December 31, 2011, Oncor’s cumulative CREZ-related capital expenditures totaled $899 million, including $583 million in 2011. Oncor expects that all necessary permitting actions and other requirements and all line and station construction activities for Oncor’s CREZ construction projects will be completed by the end of 2013 with additional voltage support projects completed by early 2014.
Transmission Cost Recovery and Rates (PUCT Docket Nos. 39940, 39456, 38938, 38460, 37882, 40142, 39644 and 38495) — In order to recover its wholesale transmission costs, including fees paid to other transmission service providers, Oncor updates the transmission cost recovery factor (TCRF) component of its retail delivery rates charged to REPs twice a year. In November 2011, Oncor filed an application to update the TCRF, which has been approved and will become effective March 1, 2012. This application is designed to lower Oncor’s revenues for the period from March 2012 through August 2012 by $41 million, reflecting over-recoveries due to hot weather in the summer of 2011. In June 2011, Oncor filed an application to increase the TCRF, which became effective in September 2011. This application was designed to increase Oncor’s revenues for the period from September 2011 through February 2012 by $24 million.
In December 2010, Oncor filed an application to increase the TCRF, which was administratively approved in January 2011 and became effective March 1, 2011. This application was designed to increase Oncor’s revenues for the period from March 2011 through August 2011 by $17 million. In July 2010, an application was filed to increase the TCRF, which was administratively approved in August 2010 and became effective September 1, 2010. This application was designed to increase Oncor’s revenues for the period September 2010 through February 2011 by $7 million. In January 2010, an application was filed to increase the TCRF, which was administratively approved in February 2010 and became effective March 1, 2010. This application was designed to increase Oncor’s revenues for the period May 2010 through August 2010 by $6 million.
30.
In January 2012, Oncor filed an application for an interim update of its wholesale transmission rate. Oncor expects PUCT approval of the new rate by the end of March 2012. The effect on Oncor’s annualized revenues is expected to be immaterial.
In August 2011, Oncor filed an application for an interim update of its wholesale transmission rate, and the PUCT approved the new rate effective October 27, 2011. Oncor’s annualized revenues increased by an estimated $35 million with $22 million of this increase recoverable through transmission rates charged to wholesale customers and the remaining $13 million recoverable from REPs through the TCRF component of Oncor’s delivery rates.
In July 2010, Oncor filed an application for an interim update of its wholesale transmission rate, and the PUCT approved the new rate effective September 29, 2010. Oncor’s annualized revenues increased by an estimated $43 million with $27 million of this increase recoverable through transmission rates charged to wholesale customers and the remaining $16 million recoverable from REPs through the TCRF component of Oncor’s delivery rates.
Application for Reconciliation of Advanced Meter Surcharge (PUCT Docket No. 39552) — In July 2011, Oncor filed an application with the PUCT for reconciliation of all costs incurred and investments made through December 31, 2010, in the deployment of its advanced meter system (AMS) pursuant to its AMS Deployment Plan that was approved in Docket No. 35718. The order in Docket No. 35718 included a requirement that Oncor file a reconciliation proceeding two years after the implementation of the AMS surcharge. Through the end of 2010, Oncor spent approximately $357 million in executing the approved AMS Deployment Plan and billed customers approximately $171 million through the AMS surcharge. Oncor did not seek a change in the AMS surcharge or the AMS Deployment Plan in this proceeding. In October 2011, Oncor and other parties to the case filed a proposed order and stipulation, which would resolve all issues in the case. In November 2011, the PUCT issued a final order in the proceeding approving the stipulation and finding that costs expended and investments made in the deployment of Oncor’s AMS through December 31, 2010 were properly allocated, reasonable and necessary.
As of December 31, 2011, Oncor had installed 2,302,000 advanced digital meters, including 788,000 in 2011. As the new meters are integrated, Oncor reports 15-minute interval, billing-quality electricity consumption data to ERCOT for market settlement purposes. The data makes it possible for REPs to support new programs and pricing options. Cumulative capital expenditures for the deployment of the advanced meter system totaled $518 million as of December 31, 2011, including $158 million in 2011. Oncor expects to complete installations of the advanced meters by the end of 2012.
Oncor may, through subsequent reconciliation proceedings, request recovery of additional costs that are reasonable and necessary. While there is a presumption that costs spent in accordance with a plan approved by the PUCT are reasonable and necessary, recovery of any costs that are found not to have been spent or properly allocated, or not to be reasonable or necessary, must be refunded.
Application for 2012 and 2011 Energy Efficiency Cost Recovery Factors (PUCT Docket Nos. 39375 and 38217) — In May 2011, Oncor filed an application with the PUCT to request approval of an energy efficiency cost recovery factor (EECRF) for 2012. PUCT rules require Oncor to make an annual EECRF filing by May 1 (or the first business day in May) for implementation at the beginning of the next calendar year. The requested 2012 EECRF is $54 million, as compared to $51 million established for 2011, and would result in a $0.99 per month charge for residential customers, as compared to the 2011 residential charge of $0.91 per month. In September 2011, Oncor and the other parties to the case filed a proposed order and stipulation, which would resolve all issues in the case. As agreed in the stipulation, the 2012 EECRF is designed to recover $49 million of Oncor’s costs for the 2012 programs and an $8 million performance bonus based on 2010 results, partially offset by a $3 million reduction for over-recovery of 2010 costs. In November 2011, The PUCT approved the proposed order and stipulation.
In April 2010, Oncor filed an application with the PUCT to request approval of an EECRF for 2011. In September 2010, the PUCT ruled that Oncor would be allowed to recover $51 million through its 2011 EECRF, including $45 million for 2011 program costs and an $11 million performance bonus based on 2009 results partially offset by a $5 million reduction for over-recovery of 2009 costs, as compared to $54 million recovered through its 2010 EECRF. The resulting monthly charge for residential customers was $0.91, as compared to the 2010 residential charge of $0.89 per month.
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Remand of 1999 Wholesale Transmission Matrix Case (PUCT Docket No. 38780)— In October 2010, the PUCT established Docket No. 38780 for the remand of Docket No. 20381, the 1999 wholesale transmission charge matrix case. A joint settlement agreement was entered into effective October 6, 2003. This settlement resolved disputes regarding wholesale transmission pricing and charges for the period January 1997 through August 1999, the period prior to the September 1, 1999 effective date of the legislation that authorized 100% postage stamp pricing for ERCOT wholesale transmission. Since a series of appeals has become final, the 1999 matrix docket has been remanded to the PUCT to address additional issues.
The first issue is the wholesale transmission transition mechanism for the period of September 1999 through December 1999. The appealing parties (Texas Municipal Power Agency, the City of Denton, the City of Garland and GEUS (formerly known as Greenville Electric Utility System)) argued that the transition mechanism was not authorized in the September 1, 1999 100% postage stamp pricing legislation and should not have continued it for the last four months of 1999. In October 2011, certain parties filed a proposed settlement of this issue, subject to PUCT approval, in which Oncor would pay approximately $9 million including interest through October 9, 2003. The PUCT approved the settlement at its January 12, 2012 open meeting. Oncor anticipates making the payment in accordance with the settlement in the first quarter of 2012. Oncor believes the settlement payment is probable for future recovery through rates.
Regarding the second issue, the San Antonio City Public Service Board (CPSB) made a filing in January 2011 with the PUCT (PUCT Docket No. 39068) seeking an additional $22 million of Transmission Cost of Service (TCOS) revenue, including interest, for the period of September 1999 through December 2000, based upon CPSB’s claim that the PUCT did not have the authority to reduce CPSB’s requested TCOS revenue requirement for that period. Oncor would be responsible for approximately $11 million of the requested revenue. In January 2012, the PUCT upheld an administrative law judge’s earlier decision to dismiss CPSB’s request.
Stipulation Approved by the PUCT— In April 2008, the PUCT entered an order (PUCT Docket No. 34077), which became final in June 2008, approving the terms of a stipulation relating to the filing in 2007 by Oncor and Texas Holdings with the PUCT pursuant to Section 14.101(b) of PURA and PUCT Substantive Rule 25.75. The filing reported an ownership change involving Texas Holdings’ purchase of EFH Corp. Among other things, the stipulation required the filing of a rate case by Oncor no later than July 1, 2008 based on a test year ended December 31, 2007, which Oncor filed in June 2008 as discussed above. In July 2008, Nucor Steel filed an appeal of the PUCT’s order in the 200th District Court of Travis County, Texas. A hearing on the appeal was held in June 2010, and the District Court affirmed the PUCT order in its entirety. Nucor Steel appealed that ruling to the Third District Court of Appeals in Austin, Texas in July 2010. Oral argument was held before the court in March 2011. There is no deadline for the court to act. While Oncor is unable to predict the outcome of the appeal, it does not expect the appeal to affect the major provisions of the stipulation.
Summary
We cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions. Such actions or changes could significantly affect our results of operations, liquidity or financial condition.
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| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
Market risk is the risk that we may experience a loss in value as a result of changes in market conditions such as interest rates that may be experienced in the ordinary course of business. We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place. All of our long-term debt as of December 31, 2011 and 2010 carried fixed interest rates. The effects of unamortized premiums are excluded from the table.
| Expected Maturity Date | ||||||||||||||||||||||||||||||||||||||||
| (millions of dollars, except percentages) | ||||||||||||||||||||||||||||||||||||||||
| 2011 | 2011 | 2010 | 2010 | |||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | |||||||||||||||||||||||||||||||||||||
| There- | Carrying | Fair | Carrying | Fair | ||||||||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | after | Amount | Value | Amount | Value | |||||||||||||||||||||||||||||||
Long-term debt (including current maturities): | ||||||||||||||||||||||||||||||||||||||||
Fixed rate debt amount (a) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,433 | $ | 3,433 | $ | 3,494 | $ | 3,172 | $ | 3,079 | ||||||||||||||||||||
Average interest rate (b) | — | % | — | % | — | % | — | % | — | % | 10.21 | % | 10.21 | % | 10.21 | % | ||||||||||||||||||||||||
| (a) | Includes pushed down debt. See Note 5 to Financial Statements. |
| (b) | Uses 11.25% cash rate for EFH Corp. Toggle Notes. |
Credit Risk
We are exposed to affiliate credit risk associated with the $4.429 billion principal amount of EFH Corp. debt securities and $79 million principal amount of TCEH debt securities we hold as investments (see Note 3 to Financial Statements). The credit rating of each of these securities is below investment grade. The carrying value of these securities was $3.632 billion as of December 31, 2011.
Oncor’s Credit Risk— Credit risk relates to the risk of loss associated with nonperformance by counterparties. Oncor’s customers consist primarily of REPs. As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the PUCT. Meeting these standards does not guarantee that a REP will be able to perform its obligations. REP certificates granted by the PUCT are subject to suspension and revocation for significant violation of PURA and PUCT rules. Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the PUCT. PUCT rules allow for the recovery of uncollectible amounts from nonaffiliated REPs, reducing the credit risk of such receivables.
Oncor’s exposure to credit risk associated with accounts receivable totaled $138 million from affiliates, substantially all of which consisted of trade accounts receivable from TCEH, and $305 million from nonaffiliated customers as of December 31, 2011. The nonaffiliated customer receivable amount is before the allowance for uncollectible accounts, which totaled $2 million as of December 31, 2011. The nonaffiliated exposure consists almost entirely of noninvestment grade trade accounts receivable, of which $225 million represented trade accounts receivable from REPs. As of December 31, 2011, subsidiaries of one nonaffiliated REP collectively represented approximately 10% of the nonaffiliated trade receivable amount. No other nonaffiliated parties represented 10% or more of the total exposure.
As of December 31, 2011, Oncor was exposed to credit risk associated with a note receivable from TCEH totaling $179 million ($41 million reported as current). See Note 8 to Financial Statements for discussion of this and other transactions between Oncor and TCEH and EFH Corp.
33
FORWARD-LOOKING STATEMENTS
This report and other presentations made by us contain “forward-looking statements.” All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that we expect or anticipate to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of our business and operations (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “should,” “projection,” “target,” “goal,” “objective” and “outlook”), are forward-looking statements. Although we believe that in making any such forward-looking statement our expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors under Item 1A, “Risk Factors” and the discussion under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the following important factors, among others, that could cause our actual results to differ materially from those projected in such forward-looking statements:
| • | prevailing governmental policies and regulatory actions, including those of the Texas Legislature, the Governor of Texas, the US Congress, the FERC, the NERC, the TRE, the PUCT, the EPA, and the TCEQ, with respect to: |
| • | allowed rate of return; |
| • | permitted capital structure; |
| • | industry, market and rate structure; |
| • | recovery of investments; |
| • | acquisition and disposal of assets and facilities; |
| • | operation and construction of facilities; |
| • | changes in tax laws and policies, and |
| • | changes in and compliance with environmental and safety laws and policies; |
| • | legal and administrative proceedings and settlements; |
| • | general industry trends; |
| • | economic conditions, including the impact of a recessionary environment; |
| • | weather conditions and other natural phenomena, and acts of sabotage, wars or terrorist or cybersecurity threats or activities; |
| • | unanticipated population growth or decline, or changes in market demand and demographic patterns, particularly in ERCOT; |
| • | changes in business strategy, development plans or vendor relationships; |
| • | unanticipated changes in interest rates or rates of inflation; |
| • | unanticipated changes in operating expenses, liquidity needs and capital expenditures; |
| • | commercial bank and financial market conditions, access to capital, the cost of such capital, and the results of financing and refinancing efforts by EFIH and/or its subsidiaries and affiliates, including availability of funds in the capital markets and the potential impact of disruptions in US credit markets; |
| • | the willingness of EFH Corp.’s and TCEH’s lenders to extend the maturities of their debt instruments and the terms and conditions of any such extensions; |
| • | activity in the credit default swap market related to our debt securities or debt securities of EFH Corp. that we guarantee; |
| • | inability of various counterparties to meet their financial obligations to EFIH and/or its subsidiaries, including failure of counterparties to perform under agreements; |
| • | changes in technology used by and services offered by EFIH and/or its subsidiaries; |
| • | significant changes in the relationship of EFIH and/or its subsidiaries with their employees, including the availability of qualified personnel, and the potential adverse effects if labor disputes or grievances were to occur; |
| • | changes in assumptions used to estimate costs of providing employee benefits, including medical and dental benefits, pension and other postretirement employee benefits, and future funding requirements related thereto; |
| • | significant changes in critical accounting policies material to EFIH and/or its subsidiaries; |
| • | circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets; |
| • | financial restrictions imposed by the agreements governing EFIH’s, Oncor’s and certain of EFH Corp.’s debt instruments; |
| • | our ability to generate sufficient cash flow to make interest payments on our debt instruments; |
| • | EFH Corp.’s or its subsidiaries’, including, in particular, TCEH’s, ability to make principal and interest payments on their debt we hold as an investment or to provide sufficient capital contributions or loans to us to make interest payments on our debt instruments; |
| • | hazards customary to the industry and the possibility that EFIH and/or its subsidiaries may not have adequate insurance to cover losses resulting from such hazards; |
| • | actions by credit rating agencies; |
| • | adverse claims by our creditors or holders of our debt securities, and |
| • | the ability of EFIH and/or its subsidiaries to effectively execute their operational strategy. |
34
Any forward-looking statement speaks only as of the date on which it is made, and except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of them; nor can we assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. As such, you should not unduly rely on such forward-looking statements.
35
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of Energy Future Intermediate Holding Company LLC
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Energy Future Intermediate Holding Company LLC (a subsidiary of Energy Future Holdings Corp.) and subsidiaries (“EFIH”) as of December 31, 2011 and 2010, and the related statements of consolidated income, comprehensive income, cash flows and membership interests for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of EFIH’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Energy Future Intermediate Holding Company LLC and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The financial statements include investments in related party debt securities with carrying values of $3.6 billion (38% of total assets) and $2.8 billion (33% of total assets) as of December 31, 2011 and 2010, respectively. EFIH has provided guarantees for debt issued by Energy Future Holdings Corp. (“EFH Corp.”). EFIH’s primary liquidity needs are sourced from interest and principal payments on EFIH’s investments in EFH Corp. and Texas Competitive Electric Holdings Company LLC debt securities and distributions from Oncor Electric Delivery Holdings Company LLC, all of which are related party transactions. See Notes 2, 3, 5 and 8.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EFIH’s internal control over financial reporting as of December 31, 2011, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2012 expressed an unqualified opinion on EFIH’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 20, 2012
36
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Interest income (Note 3) | $ | 552 | $ | 209 | $ | 4 | ||||||
Interest expense and related charges (Note 9) | (348 | ) | (315 | ) | (279 | ) | ||||||
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Income (loss) before income taxes and equity in earnings of unconsolidated subsidiary | 204 | (106 | ) | (275 | ) | |||||||
Income tax (expense) benefit (Note 4) | (73 | ) | 42 | 93 | ||||||||
Equity in earnings (losses) of unconsolidated subsidiary (net of tax) (Note 2) | 286 | 277 | 256 | |||||||||
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Net income | $ | 417 | $ | 213 | $ | 74 | ||||||
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See Notes to Financial Statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net income | $ | 417 | $ | 213 | $ | 74 | ||||||
Other comprehensive income — net of tax effects: | ||||||||||||
Investments in long-term debt of affiliates — net increase in fair value of securities — available for sale (net of tax expense of $21, $— and $ —) (Note 3) | 40 | — | — | |||||||||
Cash flow hedges — net decrease in fair value of derivatives held by unconsolidated subsidiary (net of tax benefit of $13, $— and $—) (Note 7) | (23 | ) | — | — | ||||||||
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Total other comprehensive income | $ | 17 | $ | — | $ | — | ||||||
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Comprehensive income | $ | 434 | $ | 213 | $ | 74 | ||||||
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See Notes to Financial Statements.
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ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
STATEMENTS OF CONSOLIDATED CASH FLOWS
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash flows — operating activities: | ||||||||||||
Net income | $ | 417 | $ | 213 | $ | 74 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
Equity in earnings of unconsolidated subsidiary | (286 | ) | (277 | ) | (256 | ) | ||||||
Distributions of earnings from unconsolidated subsidiary | 116 | 169 | 216 | |||||||||
Deferred income taxes — net (Note 4) | (2 | ) | 144 | (56 | ) | |||||||
PIK interest income on EFH Toggle Notes held as an investment (Note 3) | (309 | ) | (55 | ) | — | |||||||
Noncash interest expense related to pushed down debt of parent (Note 5) | 81 | 231 | 265 | |||||||||
Noncash impairment of investment in long-term debt of affiliates (Note 3) | 77 | 17 | — | |||||||||
Accretion of purchase discount on investment in long-term debt of affiliates (Note 3) | (140 | ) | (61 | ) | — | |||||||
Amortization of debt issuance costs | 6 | 9 | 10 | |||||||||
Gain on retirement of EFH Corp. debt acquired in debt exchange (Note 5) | (3 | ) | — | — | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Assets | (12 | ) | (69 | ) | (4 | ) | ||||||
Liabilities (primarily accrued taxes) | 58 | (188 | ) | (33 | ) | |||||||
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Cash provided by operating activities | 3 | 133 | 216 | |||||||||
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Cash flows — financing activities: | ||||||||||||
Equity contribution from EFH Corp. (Note 7) | — | 440 | — | |||||||||
Distributions to EFH Corp. (Note 7) | — | (2 | ) | (216 | ) | |||||||
Debt exchange and issuance costs | — | (31 | ) | — | ||||||||
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Cash provided by (used in) financing activities | — | 407 | (216 | ) | ||||||||
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Cash flows — investing activities: | ||||||||||||
Advances to EFH Corp. | — | 3 | — | |||||||||
Investment in long-term debt of affiliates | — | (500 | ) | — | ||||||||
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Cash used in investing activities | — | (497 | ) | — | ||||||||
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Net change in cash and cash equivalents | 3 | 43 | — | |||||||||
Cash and cash equivalents — beginning balance | 43 | — | — | |||||||||
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Cash and cash equivalents — ending balance | $ | 46 | $ | 43 | $ | — | ||||||
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See Notes to Financial Statements.
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ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 46 | $ | 43 | ||||
Receivables from affiliates | 86 | 73 | ||||||
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Total current assets | 132 | 116 | ||||||
Investment in Oncor Holdings (Note 2) | 5,720 | 5,544 | ||||||
Investment in long-term debt of affiliates (includes available-for-sale securities totaling $3.632 billion and $44 million) (Note 3) | 3,632 | 2,845 | ||||||
Other noncurrent assets | 33 | 42 | ||||||
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Total assets | $ | 9,517 | $ | 8,547 | ||||
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LIABILITIES AND MEMBERSHIP INTERESTS | ||||||||
Current liabilities: | ||||||||
Trade accounts and other payables to affiliates | $ | — | $ | 1 | ||||
Income taxes payable to EFH Corp. (Note 8) | — | 46 | ||||||
Accrued interest | 49 | 46 | ||||||
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Total current liabilities | 49 | 93 | ||||||
Accumulated deferred income taxes (Note 4) | 108 | 89 | ||||||
Income taxes payable to EFH Corp. | 119 | — | ||||||
Long-term debt (Note 5) | 3,436 | 3,172 | ||||||
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Total liabilities | 3,712 | 3,354 | ||||||
Commitments and Contingencies (Note 6) | ||||||||
Membership interests (Note 7): | ||||||||
Capital account | 5,790 | 5,195 | ||||||
Accumulated other comprehensive income (loss) | 15 | (2 | ) | |||||
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Total membership interests | 5,805 | 5,193 | ||||||
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Total liabilities and membership interests | $ | 9,517 | $ | 8,547 | ||||
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See Notes to Financial Statements.
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ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
STATEMENTS OF CONSOLIDATED MEMBERSHIP INTERESTS
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Capital account: | ||||||||||||
Balance as of beginning of period | $ | 5,195 | $ | 3,012 | $ | 3,071 | ||||||
Net income | 417 | 213 | 74 | |||||||||
Contribution from parent | — | 440 | — | |||||||||
Distributions to EFH Corp. | — | (2 | ) | (216 | ) | |||||||
Effect of debt push-down from EFH Corp. (a) | 194 | 1,492 | 107 | |||||||||
Capital contributions (b) | 29 | 40 | 50 | |||||||||
Effect of retirement of EFH Corp. debt acquired in debt exchange (Note 7) | (45 | ) | — | (74 | ) | |||||||
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Balance as of end of period | 5,790 | 5,195 | 3,012 | |||||||||
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|
|
|
| |||||||
Accumulated other comprehensive income (loss), net of tax effects: | ||||||||||||
Balance as of beginning of period | (2 | ) | (2 | ) | (2 | ) | ||||||
Net effects of investment in long-term debt of affiliates | 40 | — | — | |||||||||
Net effects of cash flow hedges | (23 | ) | — | — | ||||||||
|
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|
|
|
| |||||||
Balance as of end of period | 15 | (2 | ) | (2 | ) | |||||||
|
|
|
|
|
| |||||||
Total membership interests as of end of period | $ | 5,805 | $ | 5,193 | $ | 3,010 | ||||||
|
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|
|
|
| |||||||
| (a) | Represents the effect of a net reduction of $142 million and $1.521 billion and a net increase of $122 million in 2011, 2010 and 2009, respectively, of debt pushed down from EFH Corp. (Note 5) and related interest and income tax effects. |
| (b) | Reflects noncash settlement of certain income taxes payable arising as a result of the sale of equity interests in Oncor. |
See Notes to Financial Statements.
40
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
References in this report to “we,” “our,” “us” and “the company” are to EFIH and/or its direct and indirect subsidiaries as apparent in the context. See “Glossary” for defined terms.
EFIH is a Dallas, Texas-based holding company whose wholly-owned subsidiary, Oncor Holdings, holds a majority interest (approximately 80%) in Oncor. Oncor is a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power to residential, business and other consumers in the north-central, eastern and western parts of Texas. EFIH is a direct, wholly-owned subsidiary of EFH Corp. EFIH has no reportable business segments. See Note 2 regarding the deconsolidation of Oncor Holdings and its subsidiaries as a result of amended consolidation accounting standards related to variable interest entities (VIEs) effective January 1, 2010.
Various “ring-fencing” measures have been taken to enhance the credit quality of Oncor Holdings and Oncor. These measures serve to mitigate Oncor’s and Oncor Holdings’ credit exposure to the Texas Holdings Group, which includes EFIH, and to reduce the risk that the assets and liabilities of Oncor or Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in the event of a bankruptcy of one or more of Texas Holding Group’s subsidiaries. Such measures include, among other things: Oncor’s sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; the board of directors of Oncor Holdings and Oncor 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, including TXU Energy and Luminant, 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 and Oncor Holdings do not bear any liability for debt or contractual obligations of the Texas Holdings Group (including, but not limited to, our debt obligations), and vice versa. Accordingly, Oncor Holdings’ operations are conducted, and its cash flows managed, independently from the Texas Holdings Group.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as the audited financial statements included in EFIH’s Annual Report on Form 10-K for the year ended December 31, 2010. Our investment in Oncor Holdings does not meet accounting standards criteria for consolidation and is accounted for under the equity method effective January 1, 2010 (see Note 2). All intercompany items and transactions have been eliminated in consolidation. 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 as of the balance sheet dates and the reported amounts of income and expense, including fair value measurements. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.
Income Taxes
EFH Corp. files a consolidated federal income tax return and allocates income tax liabilities to us substantially as if we were filing our own corporate income tax returns, except that amounts due from Oncor Holdings under a tax sharing agreement are settled directly with EFH Corp. in accordance with that agreement. Deferred income taxes are provided for temporary differences between the book and tax basis of assets and liabilities.
41
Investment in Long-Term Debt of Affiliates
Investments in long-term debt are classified as available-for-sale securities in the balance sheet and are recorded at fair value with unrealized gains or losses recorded in other comprehensive income. We evaluate investments in long-term debt of affiliates for impairment and record an impairment loss if declines in fair value are deemed to be other than temporary, which occurs if we determine we will be unable to recover the carrying value of the investment. Impairments are accounted for as a reduction of interest income if related to the issuer’s credit. If they are not related to the issuers credit, the impairments are recorded in other comprehensive income. See Note 3 for a discussion of investments in long-term debt of affiliates.
Impairment of Equity Method Investments
We evaluate our investment in Oncor Holdings whenever factors indicate that a decrease in the value of the investment has occurred that is not temporary. Indicators that should be evaluated for possible impairment of the investment include recurring operating losses of the investee or fair value measures that are less than carrying value. An impairment loss is recognized if the carrying value of the investment is greater than the fair value of the investment, and the loss is not deemed temporary. Fair value is determined by discounted cash flows, supported by available market valuations, if applicable.
Fair Value of Nonderivative Financial Instruments
The carrying amounts for financial assets classified as current assets and the carrying amounts for financial liabilities classified as current liabilities approximate fair value due to the short maturity of such instruments.
Cash and Cash Equivalents
For purposes of reporting cash and cash equivalents, temporary cash investments purchased with a remaining maturity of three months or less are considered to be cash equivalents.
Push-Down of EFH Corp. Debt
In accordance with SEC Staff Accounting Bulletin (SAB) Topic 5-J, we reflect amounts of certain EFH Corp. 10.875% Notes, EFH Corp. Toggle Notes and EFH Corp. Secured Notes on our balance sheet and the related interest expense in our income statement. The amount reflected on our balance sheet was calculated based upon the relative equity investment of EFCH and EFIH in their respective operating subsidiaries as of the time of the Merger (see Note 5).
42
2. INVESTMENT IN ONCOR HOLDINGS
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 (primary beneficiary). As discussed below, our balance sheet reflects the deconsolidation (on a retrospective basis as of January 1, 2010) of Oncor Holdings, which holds an approximate 80% interest in Oncor, and the reporting of our investment in Oncor Holdings under the equity method.
Our VIE consists of an equity investment in Oncor Holdings. 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.
In reaching the conclusion to deconsolidate, we conducted an extensive analysis of Oncor Holdings’ underlying governing documents and management structure. Oncor Holdings’ unique governance structure was adopted in conjunction with the Merger, when the Sponsor Group, EFH Corp. and Oncor agreed to implement structural and operational measures to “ring-fence” (the Ring-Fencing Measures) Oncor Holdings and Oncor as discussed in Note 1. The Ring-Fencing Measures were designed to prevent, among other things, (i) increased borrowing costs at Oncor due to the attribution to Oncor of debt from any of EFH Corp.’s other subsidiaries, (ii) the activities of EFH Corp.’s unregulated operations following the Merger resulting in the deterioration of Oncor’s business, financial condition and/or investment in infrastructure, and (iii) Oncor becoming substantively consolidated into a bankruptcy proceeding involving any member of the Texas Holdings Group. The Ring-Fencing Measures effectively separated the daily operational and management control of Oncor Holdings and Oncor from EFH Corp. and its other subsidiaries. By implementing the Ring-Fencing Measures, Oncor maintained its investment grade credit rating following the Merger, and EFH Corp. reaffirmed Oncor’s independence from its unregulated businesses to the PUCT.
We determined the most significant activities affecting the economic performance of Oncor Holdings (and Oncor) are the operation, maintenance and growth of Oncor’s electric transmission and distribution assets and the preservation of its investment grade credit profile. The boards of directors of Oncor Holdings and Oncor have ultimate responsibility for the management of the day-to-day operations of their respective businesses, including the approval of Oncor’s capital expenditure and operating budgets and the timing and prosecution of Oncor’s rate cases. While both boards include members appointed by EFH Corp., a majority of the board members are independent in accordance with rules established by the New York Stock Exchange, and therefore, we concluded for purposes of applying the amended accounting standards that EFH Corp. and EFIH does not have the power to control the activities deemed most significant to Oncor Holdings’ (and Oncor’s) economic performance.
In assessing EFIH’s ability to exercise control over Oncor Holdings and Oncor, we considered whether we could take actions to circumvent the purpose and intent of the Ring-Fencing Measures (including changing the composition of Oncor Holdings’ or Oncor’s board) in order to gain control over the day-to-day operations of either Oncor Holdings or Oncor. We also considered whether (i) we have the unilateral power to dissolve, liquidate or force into bankruptcy either Oncor Holdings or Oncor, (ii) we could unilaterally amend the Ring-Fencing Measures contained in the underlying governing documents of Oncor Holdings or Oncor, and (iii) we could control Oncor’s ability to pay distributions and thereby enhance its own cash flow. We concluded that, in each case, no such opportunity exists.
We account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, because, while we do not have the power to direct Oncor’s significant activities, we do have the ability to exercise significant influence (as defined by US GAAP) over its activities.
The carrying value of our variable interest in Oncor Holdings that we do not consolidate totaled $5.720 billion and $5.544 billion as of December 31, 2011 and 2010, respectively, and is reported as investment in Oncor Holdings in the balance sheet. Our maximum exposure to loss from these interests does not exceed our carrying value.
43
Distributions from Oncor Holdings— A substantial portion of our net income has been derived from Oncor. The boards of directors of each of Oncor and Oncor Holdings can withhold distributions to the extent the boards determine that it is necessary to retain such amounts to meet expected future requirements of Oncor and/or Oncor Holdings. Oncor’s distributions to us totaled $116 million, $169 million and $216 million in the years ended December 31, 2011, 2010 and 2009, respectively. Until December 31, 2012, distributions paid by Oncor to its members are limited to an amount not to exceed Oncor’s cumulative net income determined in accordance with US GAAP, subject to certain defined adjustments. Such adjustments include deducting a $46 million after-tax refund to customers in 2008, net accretion of fair value adjustments resulting from purchase accounting and funds spent as part of a $100 million commitment for additional demand-side management or other energy efficiency initiatives, which totaled $48 million after tax through December 31, 2011, and removing the effects of the $860 million goodwill impairment charge in 2008. As of December 31, 2011, $327 million was available for distribution to Oncor’s members under the cumulative net income restriction, of which approximately 80% relates to our ownership interest in Oncor.
Oncor’s distributions are further limited by an agreement with the PUCT that its regulatory capital structure, as determined by the PUCT, will be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. As of December 31, 2011, Oncor’s regulatory capitalization ratio was 59.7% debt and 40.3% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes bonds issued by Oncor Electric Delivery Transition Bond Company, which were issued in 2003 and 2004 to recover specific generation-related regulatory asset stranded and other qualified costs. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of accounting for the Merger (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). As of December 31, 2011, $45 million was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest in Oncor.
Oncor Holdings Financial Statements— Condensed statements of consolidated income of Oncor Holdings and its subsidiaries for the years ended December 31, 2011, 2010 and 2009 are presented below:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Operating revenues | $ | 3,118 | $ | 2,914 | $ | 2,690 | ||||||
Operation and maintenance expenses | (1,097 | ) | (1,009 | ) | (962 | ) | ||||||
Write off of regulatory assets | — | — | (25 | ) | ||||||||
Depreciation and amortization | (719 | ) | (673 | ) | (557 | ) | ||||||
Taxes other than income taxes | (400 | ) | (384 | ) | (385 | ) | ||||||
Other income | 30 | 36 | 49 | |||||||||
Other deductions | (9 | ) | (8 | ) | (14 | ) | ||||||
Interest income | 32 | 38 | 43 | |||||||||
Interest expense and related charges | (359 | ) | (347 | ) | (346 | ) | ||||||
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|
|
|
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| |||||||
Income before income taxes | 596 | 567 | 493 | |||||||||
Income tax expense | (236 | ) | (220 | ) | (173 | ) | ||||||
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|
|
| |||||||
Net income | 360 | 347 | 320 | |||||||||
Net income attributable to noncontrolling interests | (74 | ) | (70 | ) | (64 | ) | ||||||
|
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|
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| |||||||
Net income attributable to Oncor Holdings | $ | 286 | $ | 277 | $ | 256 | ||||||
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44
Assets and liabilities of Oncor Holdings as of December 31, 2011 and 2010 are presented below:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12 | $ | 33 | ||||
Restricted cash | 57 | 53 | ||||||
Trade accounts receivable — net | 303 | 254 | ||||||
Trade accounts and other receivables from affiliates | 179 | 182 | ||||||
Income taxes receivable from EFH Corp. | — | 72 | ||||||
Inventories | 71 | 96 | ||||||
Accumulated deferred income taxes | 73 | 10 | ||||||
Prepayments and other current assets | 74 | 80 | ||||||
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| |||||
Total current assets | 769 | 780 | ||||||
Restricted cash | 16 | 16 | ||||||
Receivable from TCEH related to nuclear plant decommissioning | 225 | 206 | ||||||
Other investments | 73 | 78 | ||||||
Property, plant and equipment — net | 10,569 | 9,676 | ||||||
Goodwill | 4,064 | 4,064 | ||||||
Note receivable due from TCEH | 138 | 178 | ||||||
Regulatory assets — net | 1,505 | 1,782 | ||||||
Other noncurrent assets | 73 | 58 | ||||||
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| |||||
Total assets | $ | 17,432 | $ | 16,838 | ||||
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LIABILITIES | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 392 | $ | 377 | ||||
Long-term debt due currently | 494 | 113 | ||||||
Trade accounts payable — nonaffiliates | 197 | 125 | ||||||
Income taxes payable to EFH Corp. | 2 | — | ||||||
Accrued taxes other than income | 151 | 133 | ||||||
Accrued interest | 108 | 108 | ||||||
Other current liabilities | 112 | 109 | ||||||
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| |||||
Total current liabilities | 1,456 | 965 | ||||||
Accumulated deferred income taxes | 1,688 | 1,516 | ||||||
Investment tax credits | 28 | 32 | ||||||
Long-term debt, less amounts due currently | 5,144 | 5,333 | ||||||
Other noncurrent liabilities and deferred credits | 1,832 | 1,996 | ||||||
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| |||||
Total liabilities | $ | 10,148 | $ | 9,842 | ||||
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45
3. INVESTMENTS IN LONG-TERM DEBT OF AFFILIATES
As a result of debt exchanges in November 2009, August 2010 and April 2011, we hold debt securities of EFH Corp. and TCEH with carrying values totaling $3.632 billion and $2.845 billion as of December 31, 2011 and 2010, respectively, reported as investment in long-term debt of affiliates.
As of December 31, 2011, all of these debt securities are classified as available-for-sale. In the third quarter 2011, we changed the classification of the EFH Corp. securities to available-for-sale from held-to-maturity because management determined it would sell or exchange those securities under certain conditions. The TCEH securities were reclassified to available-for-sale in the fourth quarter 2010. EFIH’s ability to sell or exchange these securities with nonaffiliates is limited as it would require EFH Corp. to facilitate the sale or exchange. In accordance with accounting guidance for investments classified as available-for-sale, as of December 31, 2011 the securities are recorded at fair value and unrealized gains or losses are recorded in other comprehensive income unless such losses are other than temporary, in which case they are reported as impairments. The change in classification of the EFH Corp. securities in 2011 resulted in an increase in carrying value totaling $61 million on the EFH Corp. Toggle Notes, representing an unrealized gain reported as other comprehensive income. Prior to the respective changes in classification, the securities were reported at our cost to acquire the securities, including cash and principal amount of debt issued, plus accretion of purchase discount and payment-in-kind (PIK) interest income on EFH Corp. Toggle Notes, representing EFH Corp.’s settlement of interest with additional notes in lieu of cash. The principal amounts, coupon rates, maturities and carrying value are as follows:
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| Principal Amount | Carrying Value (a) | Principal Amount | Carrying Value | |||||||||||||
Held-to-maturity securities: | ||||||||||||||||
EFH Corp. 10.875% Fixed Senior Notes due November 1, 2017 | $ | — | $ | — | $ | 1,428 | $ | 1,138 | ||||||||
EFH Corp. 11.25/12.00% Senior Toggle Notes due November 1, 2017 | — | — | 2,296 | 1,651 | ||||||||||||
EFH Corp. 5.550% Fixed Senior Notes Series P due November 15, 2014 | — | — | 9 | 7 | ||||||||||||
EFH Corp. 6.500% Fixed Senior Notes Series Q due November 15, 2024 | — | — | 6 | 3 | ||||||||||||
EFH Corp. 6.550% Fixed Senior Notes Series R due November 15, 2034 | — | — | 3 | 2 | ||||||||||||
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| |||||||||
Total held-to-maturity securities | — | — | 3,742 | 2,801 | ||||||||||||
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| |||||||||
Available-for-sale securities: | ||||||||||||||||
EFH Corp. 10.875% Fixed Senior Notes due November 1, 2017 | 1,591 | 1,288 | — | — | ||||||||||||
EFH Corp. 11.25/12.00% Senior Toggle Notes due November 1, 2017 | 2,784 | 2,283 | — | — | ||||||||||||
EFH Corp. 5.550% Fixed Senior Notes Series P due November 15, 2014 | 45 | 30 | — | — | ||||||||||||
EFH Corp. 6.500% Fixed Senior Notes Series Q due November 15, 2024 | 6 | 2 | — | — | ||||||||||||
EFH Corp. 6.550% Fixed Senior Notes Series R due November 15, 2034 | 3 | 2 | — | — | ||||||||||||
TCEH 10.25% Fixed Senior Notes due November 1, 2015 (both periods include $48 million of Series B Notes) | 79 | 27 | 79 | 44 | ||||||||||||
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| |||||||||
Total available-for-sale securities | 4,508 | 3,632 | 79 | 44 | ||||||||||||
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Total | $ | 4,508 | $ | 3,632 | $ | 3,821 | $ | 2,845 | ||||||||
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Available-for-sale securities: | ||||||||||||||||
Carrying (fair) value | 3,632 | 44 | ||||||||||||||
Cumulative unrealized gains (recorded as other comprehensive income) (b) | (61 | ) | — | |||||||||||||
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Amortized cost basis | 3,571 | 44 | ||||||||||||||
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| (a) | Carrying value equals fair value. |
| (b) | 2011 amount reflects unrealized gain on EFH Corp. Toggle Notes. |
The fair value of held-to-maturity securities as of December 31, 2010 totaled $2.362 billion, reflecting an unrealized loss of $439 million compared to carrying value recorded in other comprehensive income.
46
Impairments— In 2011, we deemed the declines in values of EFH Corp. and TCEH securities were other than temporary and recorded a $77 million impairment recorded as a reduction of interest income. We considered that the securities were in a loss position for more than 12 months and the effect of low wholesale power prices on the profitability and cash flows of EFH Corp. and TCEH (both of which have below investment grade credit ratings) were unlikely to reverse in the near term. In 2010, we recorded a $17 million impairment of TCEH securities. As a result of the impairments, no cumulative unrealized losses were recorded in accumulated other comprehensive income as of December 31, 2011 and 2010.
Interest income recorded on these investments was as follows:
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
Held-to-maturity securities: | ||||||||
Interest received/accrued | $ | — | $ | 58 | ||||
Accretion of purchase discount | — | 57 | ||||||
PIK interest received/accrued related to EFH Corp. Toggle Notes | — | 99 | ||||||
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| |||||
Total interest income related to held-to-maturity securities | — | 214 | ||||||
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| |||||
Available-for-sale securities: | ||||||||
Interest received/accrued | 178 | 8 | ||||||
Accretion of purchase discount | 140 | 4 | ||||||
PIK interest received/accrued related to EFH Corp. Toggle Notes | 308 | — | ||||||
Gain on retirement of EFH Corp. Toggle Notes (Note 5) | 3 | — | ||||||
Impairments related to issuer credit | (77 | ) | (17 | ) | ||||
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| |||||
Total interest income related to available-for-sale securities | 552 | (5 | ) | |||||
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| |||||
Total interest income | $ | 552 | $ | 209 | ||||
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| |||||
We determine value under the fair value hierarchy established in accounting standards. Under the fair value hierarchy, Level 2 valuations are based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences. The fair value of our investment in long-term debt of affiliates is estimated at the lesser of either the call price or the market value as determined by broker quotes and quoted market prices for similar securities in active markets. For the periods presented, the fair values of our investment in long-term debt of affiliates represent Level 2 valuations.
See Note 5 for discussion of $428 million principal amount of EFH Corp. debt we acquired in an April 2011 debt exchange, $53 million principal amount of EFH Corp. debt we distributed to EFH Corp. and EFH Corp. retired in October 2011 and $3.594 billion principal amount of EFH Corp. debt we acquired in an August 2010 debt exchange. We also received an additional $312 million and $130 million of EFH Corp. Toggle Notes in 2011 and 2010, respectively, in payment of accrued interest on the notes we hold as an investment. Our liquidity needs represent interest and principal payments on the EFIH Notes, which are sourced from interest and principal payments on the investments in TCEH and EFH Corp. debt securities, distributions from Oncor Holdings and as necessary, additional liquidity sources including borrowings from EFH Corp.
47
4. INCOME TAXES
The components of our income tax expense are as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Current: | ||||||||||||
US federal | $ | 72 | $ | (187 | ) | $ | (36 | ) | ||||
State | 3 | 1 | — | |||||||||
Deferred: | ||||||||||||
US federal | (2 | ) | 144 | (57 | ) | |||||||
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| |||||||
Total income tax benefit | $ | 73 | $ | (42 | ) | $ | (93 | ) | ||||
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| |||||||
Reconciliation of income taxes computed at the US federal statutory rate to income tax expense:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Income (loss) before income taxes | $ | 204 | $ | (106 | ) | $ | (275 | ) | ||||
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| |||||||
Income taxes at the US federal statutory rate of 35% | 72 | (37 | ) | (96 | ) | |||||||
Disallowed interest on pushed down debt | 1 | (5 | ) | 3 | ||||||||
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| |||||||
Income tax (expense) benefit | $ | 73 | $ | (42 | ) | $ | (93 | ) | ||||
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| |||||||
Effective rate | 35.8 | % | 39.6 | % | 33.8 | % | ||||||
Deferred income taxes provided for temporary differences based on tax laws in effect as of the December 31, 2011 and 2010 balance sheet dates are as follows:
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Total | Current | Noncurrent | Total | Current | Noncurrent | |||||||||||||||||||
Deferred Income Tax Assets: | ||||||||||||||||||||||||
Accrued interest | $ | 9 | $ | — | $ | 9 | $ | 11 | $ | — | $ | 11 | ||||||||||||
Debt fair value | 6 | — | 6 | 6 | — | 6 | ||||||||||||||||||
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| |||||||||||||
Total | 15 | — | 15 | 17 | — | 17 | ||||||||||||||||||
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| |||||||||||||
Deferred Income Tax Liabilities: | ||||||||||||||||||||||||
Debt extinguishment gains related to pushed down debt of EFH Corp. (Note 5) | 104 | — | 104 | 106 | — | 106 | ||||||||||||||||||
Debt fair value discount | 19 | — | 19 | — | — | — | ||||||||||||||||||
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| |||||||||||||
Total | 123 | — | 123 | 106 | — | 106 | ||||||||||||||||||
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| |||||||||||||
Net Deferred Income Tax (Asset) Liability | $ | 108 | $ | — | $ | 108 | $ | 89 | $ | — | $ | 89 | ||||||||||||
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48
5. LONG-TERM DEBT
As of December 31, 2011 and 2010, long-term debt consisted of the following (principal amount):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Debt issued by EFIH: | ||||||||
9.75% Fixed Senior Secured First Lien Notes due October 15, 2019 | 141 | 141 | ||||||
10.000% Fixed Senior Secured First Lien Notes due December 1, 2020 | 2,180 | 2,180 | ||||||
11.00% Senior Secured Second Lien Notes due October 1, 2021 | 406 | — | ||||||
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| |||||
Total debt issued by EFIH | 2,727 | 2,321 | ||||||
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| |||||
Pushed down debt (a): | ||||||||
9.75% EFH Corp. Fixed Senior Secured Notes due October 15, 2019 | 57 | 57 | ||||||
10.000% EFH Corp. Fixed Senior Secured Notes due January 15, 2020 | 331 | 328 | ||||||
10.875% EFH Corp. Fixed Senior Notes due November 1, 2017 | 98 | 180 | ||||||
11.25/12.00% EFH Corp. Senior Toggle Notes due November 1, 2017 | 220 | 286 | ||||||
Unamortized premium | 3 | — | ||||||
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| |||||
Total pushed down debt | 709 | 851 | ||||||
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Total long-term debt (b) | $ | 3,436 | $ | 3,172 | ||||
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| (a) | Represents 50% of the principal amount of these EFH Corp. securities guaranteed by EFIH and pushed down per the discussion below under “Guarantees and Push Down of EFH Corp. Debt.” |
| (b) | EFIH had no long-term debt due currently as of December 31, 2011 and 2010. |
Debt-Related Activity in 2012
Issuance of EFIH 11.750% Senior Secured Second Lien Notes — In February 2012, EFIH and EFIH Finance issued $800 million principal amount of 11.750% Senior Secured Second Lien Notes due 2022. A discount of $12 million was recorded on the issuance and will be amortized over the life of the notes. The net proceeds will be used for general corporate purposes, including the payment of a $650 million dividend to EFH Corp., which was used to repay a portion of the demand notes payable by EFH Corp. to TCEH. The balance of the demand notes payable, which are guaranteed by EFIH as discussed below, totaled approximately $960 million as of February 15, 2012, reflecting the payment.
The EFIH 11.75% Notes mature in March 2022, with interest payable in cash semiannually in arrears on March 1 and September 1, beginning September 1, 2012, at a fixed rate of 11.75% per annum. The EFIH 11.75% Notes are secured on a second-priority basis by the EFIH Collateral, essentially EFIH’s interest in Oncor Holdings, described in the discussion of the EFIH 10% Senior Secured Notes below and have substantially the same covenants as the EFIH 11% Notes. The holders of the EFIH 11.75% Notes will generally vote as a single class with the holders of the EFIH 11% Notes.
Until March 1, 2015, EFIH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 11.75% Notes from time to time at a redemption price of 111.750% of the aggregate principal amount of the notes being redeemed, plus accrued interest. EFIH may redeem the notes at any time prior to March 1, 2017 at a price equal to 100% of their principal amount, plus accrued interest and the applicable premium as defined in the indenture. EFIH may also redeem the notes, in whole or in part, at any time on or after March 1, 2017, at specified redemption prices, plus accrued interest. Upon the occurrence of a change of control (as described in the indenture), EFIH must offer to repurchase the notes at 101% of their principal amount, plus accrued interest.
The EFIH 11.75% Notes were issued in private placements and are not registered under the Securities Act. EFIH has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 11.75% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the EFIH 11.75% Notes. If the registration statement has not been filed and declared effective within 365 days after the original issue date (a Registration Default), the annual interest rate on the notes will increase by 25 basis points for the first 90-day period during which a Registration Default continues, and thereafter, the annual interest rate on the notes will increase by 50 basis points for the remaining period during which the Registration Default continues. If the Registration Default is cured, the interest rate on the notes will revert to the original level.
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Debt-Related Activity in 2011
Issuance of EFIH 11% Senior Secured Second Lien Notes in Exchange for EFH Corp. Debt — In April 2011, EFIH and EFIH Finance issued $406 million principal amount of 11% Senior Secured Second Lien Notes due 2021 (EFIH 11% Notes) in exchange for $428 million of EFH Corp. debt consisting of $163 million principal amount of EFH Corp. 10.875% Notes due 2017, $229 million principal amount of EFH Corp. Toggle Notes due 2017 and $36 million principal amount of EFH Corp. 5.55% Series P Senior Notes due 2014. As of the date of the exchange, 50% of the outstanding EFH Corp. 10.875% Notes and Toggle Notes had been pushed down to EFIH for reporting purposes. EFIH intends to hold the exchanged securities as an investment (see Note 3).
The EFIH 11% Notes mature in October 2021, with interest payable in cash semiannually in arrears on May 15 and November 15 at a fixed rate of 11% per annum. The EFIH 11% Notes are secured on a second-priority basis by the EFIH Collateral described in the discussion of the EFIH 10% Notes below.
The EFIH 11% Notes were issued in private placements and are not registered under the Securities Act of 1933, as amended. The notes are a senior obligation of EFIH and EFIH Finance and rank equally in right of payment with all senior indebtedness of EFIH and are effectively senior in right of payment to all existing or future unsecured debt of EFIH to the extent of the value of the EFIH Collateral. The notes are effectively subordinated to all debt of EFIH that is either (i) secured by a lien on the EFIH Collateral that is senior to the second-priority liens securing the EFIH 11% Notes or (ii) secured by assets other than the EFIH Collateral, to the extent of the value of the collateral securing that debt. Furthermore, the EFIH 11% Notes are (i) structurally subordinated to all indebtedness and other liabilities of EFIH’s subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries, any of EFIH’s future foreign subsidiaries and any other unrestricted subsidiaries and (ii) senior in right of payment to any future subordinated indebtedness of EFIH.
The indenture governing the EFIH 11% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, EFIH’s and its restricted subsidiaries’ ability to:
| • | make restricted payments, including certain investments; |
| • | incur debt and issue preferred stock; |
| • | create liens; |
| • | enter into mergers or consolidations; |
| • | sell or otherwise dispose of certain assets, and |
| • | engage in certain transactions with affiliates. |
The indenture also contains customary events of default, including, among others, failure to pay principal or interest on the notes when due. If certain events of default occur under the indenture, the trustee or the holders of at least 30% of the aggregate principal amount of all outstanding EFIH 11% Notes may declare the principal amount on all such notes to be due and payable immediately. The holders of the EFIH 11% Notes will generally vote as a single class with the holders of the EFIH 11.75% Notes under the terms of the indenture.
Until May 15, 2014, EFIH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 11% Notes from time to time at a redemption price of 111% of the aggregate principal amount of the notes being redeemed, plus accrued interest. EFIH may redeem the notes at any time prior to May 15, 2016 at a price equal to 100% of their principal amount, plus accrued interest and the applicable premium as defined in the indenture. EFIH may also redeem the notes, in whole or in part, at any time on or after May 15, 2016, at specified redemption prices, plus accrued interest. Upon the occurrence of a change of control (as described in the indenture), EFIH must offer to repurchase the notes at 101% of their principal amount, plus accrued interest.
EFIH has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 11% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the EFIH 11% Notes, unless such notes meet certain transferability conditions (as described in the related registration rights agreement). If the registration statement has not been filed and declared effective within 365 days after the original issue date (a Registration Default), the annual interest rate on the notes will increase by 25 basis points for the first 90-day period during which a Registration Default continues, and thereafter, the annual interest rate on the notes will increase by 50 basis points for the remaining period during which the Registration Default continues. If the Registration Default is cured, the interest rate on the notes will revert to the original level.
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2011 EFH Corp. Debt Exchange— In a private exchange in October 2011, EFH Corp. issued $53 million principal amount of new EFH Corp. Toggle Notes due 2017 in exchange for $65 million principal amount of EFH Corp. 5.55% Series P Senior Notes due 2014. The new EFH Corp. Toggle Notes, which are subject to push down to our balance sheet, have substantially the same terms and conditions and are subject to the same indenture as the existing EFH Corp. Toggle Notes. Concurrent with the exchange, we issued a dividend to EFH Corp. of $53 million principal amount of EFH Corp. Toggle Notes with a carrying value of $45 million and recognized $3 million of gain in interest income that was previously recorded in other comprehensive income. EFH Corp. retired these notes.
Debt-Related Activity in 2010
2010 EFIH and EFH Corp. Debt Exchanges, Repurchases and Issuances — In 2010, EFIH issued $2.180 billion principal amount of 10% Notes due 2020 and paid $500 million in cash in exchange for $3.594 billion principal amount of outstanding EFH Corp. debt due 2017. Activity related to pushed down debt consisted of the issuance of $561 million principal amount of EFH Corp. 10% Notes due 2020 and payment of $252 million in cash by EFH Corp. in exchange for $1.137 billion principal amount of outstanding EFH Corp. and TCEH debt. EFH Corp. also issued $500 million principal amount of EFH Corp. 10% Notes for cash, of which $95 million was used to repurchase Merger-related debt as of December 31, 2010 and $100 million as of December 31, 2011. A discussion of these transactions and a description of the EFIH 10% Notes are presented below. Debt issued in exchange for or to repurchase Merger-related debt is considered Merger-related and subject to pushdown (see discussion below under “Guarantees and Push Down of EFH Corp. Debt”). Of the $4.731 billion aggregate principal amount of debt acquired in debt exchanges, $3.892 billion represented EFH Corp. debt that had been pushed down to EFIH (at 50%).
Transactions completed in the year ended December 31, 2010 related to debt issued by EFIH and pushed down debt were as follows:
| • | In a debt exchange transaction in August, EFIH and EFIH Finance issued $2.180 billion aggregate principal amount of EFIH 10% Notes due 2020 and paid $500 million in cash, plus accrued interest, in exchange for $2.166 billion aggregate principal amount of EFH Corp. Toggle Notes and $1.428 billion aggregate principal amount of EFH Corp. 10.875% Notes due 2017. EFIH has reported the acquired EFH Corp. 10.875% Notes and Toggle Notes as investment in long-term debt of affiliates (Note 3). |
| • | Between April and July, EFH Corp. issued $527 million principal amount of EFH Corp. 10% Notes due 2020 in exchange for $549 million principal amount of EFH Corp. 5.55% Series P Senior Notes (not pushed down to EFIH), $110 million principal amount of EFH Corp. Toggle Notes, $25 million principal amount of EFH Corp. 10.875% Notes and $30 million principal amount of TCEH Merger-related debt. |
| • | In March, EFH Corp. issued $34 million principal amount of EFH Corp. 10% Notes due 2020 in exchange for $20 million principal amount of EFH Corp. Toggle Notes and $27 million principal amount of TCEH Merger-related debt securities. |
| • | In January, EFH Corp. issued $500 million aggregate principal amount of EFH Corp. 10% Notes due 2020, with the proceeds intended to be used for general corporate purposes including debt exchanges and repurchases. Of the proceeds, $95 million was used in 2010 to repurchase Merger-related debt. |
| • | In addition, from time to time in 2010, EFH Corp. repurchased $124 million principal amount of EFH Corp. Toggle Notes, $19 million principal amount of EFH Corp. 10.875% Notes and $233 million principal amount of TCEH Merger-related debt for $252 million in cash plus accrued interest. |
| • | In May and November 2010, EFH Corp. elected the PIK feature, which increased the principal amount of the EFH Corp. Toggle Notes by $194 million. |
The EFH Corp. 10.875% Notes and EFH Corp. Toggle Notes acquired in the transactions summarized above, except amounts acquired in the EFIH transaction, were cancelled by EFH Corp. See “Guarantees and Push Down of EFH Corp. Debt” below.
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Guarantees and Push Down of EFH Corp. Debt
Merger-related debt of EFH Corp. and its subsidiaries consists of debt issued or existing at the time of the Merger. Debt issued in exchange for Merger-related debt is considered Merger-related. Debt issuances are considered Merger-related debt to the extent the proceeds are used to repurchase Merger-related debt. Merger-related debt of EFH Corp. (parent) that is fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH is subject to push down in accordance with SEC Staff Accounting Bulletin Topic 5-J, and as a result, a portion of such debt and related interest expense is reflected in our financial statements. Merger-related debt of EFH Corp. held as an investment by its subsidiaries is not subject to push down.
The amount reflected on our balance sheet as pushed down debt ($709 million and $851 million as of December 31, 2011 and 2010, respectively, as shown in the long-term debt table above) represents 50% of the EFH Corp. Merger-related debt guaranteed by EFIH. This percentage reflects the fact that at the time of the Merger, the equity investments of EFCH and EFIH in their respective operating subsidiaries were essentially equal amounts. Because payment of principal and interest on the debt is the responsibility of EFH Corp., we record the settlement of such amounts as noncash capital contributions from EFH Corp.
The tables below present, as of December 31, 2011 and 2010, an analysis of the total outstanding principal amount of EFH Corp. debt that EFIH and EFCH have guaranteed (fully and unconditionally on a joint and several basis), as (i) amounts that we held as an investment, (ii) amounts held by nonaffiliates and subject to push down to our balance sheet and (iii) amounts held by nonaffiliates that are not Merger-related. The EFCH guarantee of the EFH Corp. debt is not secured. EFIH’s guarantee of the EFH Corp. Secured Notes is secured by the EFIH Collateral as described in the discussion of the EFIH 10% Notes below.
| December 31, 2011 | ||||||||||||||||
Securities guaranteed (principal amounts) | Held by EFIH | Subject to Push Down | Not Merger- Related | Total Guaranteed | ||||||||||||
EFH Corp. 10% Senior Secured Notes | $ | — | $ | 661 | $ | 400 | $ | 1,061 | ||||||||
EFH Corp. 9.75% Senior Secured Notes | — | 115 | — | 115 | ||||||||||||
EFH Corp. 10.875% Senior Notes | 1,591 | 196 | — | 1,787 | ||||||||||||
EFH Corp. 11.25/12.00% Senior Toggle Notes | 2,784 | 438 | — | 3,222 | ||||||||||||
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Subtotal | $ | 4,375 | $ | 1,410 | $ | 400 | 6,185 | |||||||||
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EFH Corp. P&I and SG&A demand notes payable to TCEH (Note 8) | 1,592 | |||||||||||||||
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Total | $ | 7,777 | ||||||||||||||
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| December 31, 2010 | ||||||||||||||||
Securities guaranteed (principal amounts) | Held by EFIH | Subject to Push Down | Not Merger- Related | Total Guaranteed | ||||||||||||
EFH Corp. 10% Senior Secured Notes | $ | — | $ | 656 | $ | 405 | $ | 1,061 | ||||||||
EFH Corp. 9.75% Senior Secured Notes | — | 115 | — | 115 | ||||||||||||
EFH Corp. 10.875% Senior Notes | 1,428 | 359 | — | 1,787 | ||||||||||||
EFH Corp. 11.25/12.00% Senior Toggle Notes | 2,296 | 571 | — | 2,867 | ||||||||||||
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Subtotal | $ | 3,724 | $ | 1,701 | $ | 405 | 5,830 | |||||||||
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EFH Corp. P&I demand note payable to TCEH (Note 8) | 916 | |||||||||||||||
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Total | $ | 6,746 | ||||||||||||||
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Maturities
As shown above, all of EFIH’s debt matures between 2017 and 2021.
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EFIH 10% Senior Secured Notes
The EFIH 10% Notes mature in December 2020, with interest payable in cash semi-annually in arrears on June 1 and December 1 at a fixed rate of 10% per annum. The EFIH 10% Notes are secured by EFIH’s pledge of 100% of the membership interests and other investments it owns in Oncor Holdings (such membership interests and other investments, the EFIH Collateral) on an equal and ratable basis with the EFIH 9.75% Notes and EFIH’s guarantee of the EFH Corp. Secured Notes.
As of December 31, 2011, there were $2.180 billion total principal amount of EFIH 10% Notes. The EFIH 10% Notes are senior obligations of EFIH and rank equally in right of payment with all existing and future senior indebtedness of EFIH (including the EFIH 9.75% Notes and EFIH’s guarantees of the EFH Corp. Secured Notes). The EFIH 10% Notes are effectively senior to all unsecured indebtedness of EFIH, to the extent of the value of the EFIH Collateral, and are effectively subordinated to any indebtedness of EFIH secured by assets of EFIH other than the EFIH Collateral, to the extent of the value of the assets securing such indebtedness. Furthermore, the EFIH 10% Notes are (i) structurally subordinated to all indebtedness and other liabilities of EFIH’s subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries, any of EFIH’s future foreign subsidiaries and any other unrestricted subsidiaries and (ii) senior in right of payment to any future subordinated indebtedness of EFIH.
The indenture for the EFIH 10% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, EFIH’s and its restricted subsidiaries’ ability to:
| • | make restricted payments, including certain investments; |
| • | incur debt and issue preferred stock; |
| • | create liens; |
| • | enter into mergers or consolidations; |
| • | sell or otherwise dispose of certain assets, and |
| • | engage in certain transactions with affiliates. |
The indenture also contains customary events of default, including, among others, failure to pay principal or interest on the notes or the guarantees when due. If certain events of default occur and are continuing under the notes and the indenture, the trustee or the holders of at least 30% in principal amount outstanding of the notes may declare the principal amount of the notes to be due and payable immediately. Currently, there are no restricted subsidiaries under the indenture (other than EFIH Finance, which has no assets). Oncor Holdings, Oncor and their respective subsidiaries are unrestricted subsidiaries under the EFIH 10% Notes and the indenture and, accordingly, are not subject to any of the restrictive covenants in the notes and the related indenture.
Until December 1, 2013, EFIH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 10% Notes from time to time at a redemption price of 110% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest, if any. EFIH may redeem the EFIH 10% Notes, in whole or in part, at any time prior to December 1, 2015 at a price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, and the applicable premium as defined in the indenture. EFIH may redeem any of the EFIH 10% Notes, in whole or in part, at any time on or after December 1, 2015, at specified redemption prices, plus accrued and unpaid interest, if any. Upon the occurrence of a change of control (as defined in the indenture), EFIH may be required to offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest, if any.
EFIH 9.75% Senior Secured Notes
The EFIH 9.75% Notes mature in October 2019 with interest payable in cash semi-annually in arrears on April 15 and October 15 at a fixed rate of 9.75% per annum. The EFIH 9.75% Notes are secured by the EFIH Collateral on an equitable and ratable basis with the EFIH 10% Notes and EFIH’s guarantee of the EFH Corp. Secured Notes.
As of December 31, 2011, there were $141 million total principal amount of EFIH 9.75% Notes. The EFIH 9.75% Notes are senior obligations of EFIH and rank equally in right of payment with all senior indebtedness of EFIH and are senior in right of payment to any future subordinated indebtedness of EFIH. The notes are effectively senior to all unsecured indebtedness of EFIH, to the extent of the value of the EFIH Collateral, and are effectively subordinated to any indebtedness of EFIH secured by assets of EFIH other than the EFIH Collateral, to the extent of the value of the assets securing such indebtedness. Furthermore, the notes will be structurally subordinated to all indebtedness and other liabilities of EFIH’s subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries.
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The indenture for the EFIH 9.75% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, EFIH and its restricted subsidiaries’ ability to:
| • | make restricted payments; |
| • | incur debt and issue preferred stock; |
| • | create liens; |
| • | enter into mergers or consolidations; |
| • | sell or otherwise dispose of certain assets, and |
| • | engage in certain transactions with affiliates. |
The indenture also contains customary events of default, including, among others, failure to pay principal or interest on the notes or the guarantees when due. If certain events of default occur and are continuing under the indenture, the trustee or the holders of at least 30% in principal amount outstanding of the notes may declare the principal amount of the notes to be due and payable immediately.
There are currently no restricted subsidiaries under the indenture (other than EFIH Finance, which has no assets). Oncor Holdings, the immediate parent of Oncor, and its subsidiaries are unrestricted subsidiaries under the indenture and, accordingly, are not subject to any of the restrictive covenants in the indenture.
EFIH may redeem the EFIH 9.75% Notes, in whole or in part, at any time on or after October 15, 2014, at specified redemption prices, plus accrued and unpaid interest, if any. In addition, before October 15, 2012, EFIH may redeem up to 35% of the aggregate principal amount of the notes from time to time at a redemption price of 109.750% of the aggregate principal amount of the notes, plus accrued and unpaid interest, if any, with the net cash proceeds of certain equity offerings. EFIH may also redeem the notes at any time prior to October 15, 2014 at a price equal to 100% of the principal amount, plus accrued and unpaid interest and the applicable premium as defined in the indenture. Upon the occurrence of a change of control (as described in the indenture), EFIH must offer to repurchase the notes at 101% of the principal amount, plus accrued and unpaid interest, if any.
Fair Value of Long-Term Debt
The estimated fair value of our long-term debt (including the pushed down debt) totaled $3.494 billion and $3.079 billion as of December 31, 2011 and 2010, respectively, and the carrying amount totaled $3.436 billion and $3.172 billion, respectively. The fair value is estimated at the lesser of either the call price or the market value as determined by quoted market prices.
6. COMMITMENTS AND CONTINGENCIES
Guarantees
See Notes 5 and 8 for discussion of our guarantees of certain EFH Corp. debt.
Legal Proceedings
From time to time, we may be involved in various legal and administrative proceedings in the normal course of business the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial condition, results of operations or liquidity.
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7. MEMBERSHIP INTERESTS
Cash Distributions
EFIH did not declare or pay any cash distributions in the year ended December 31, 2011; EFIH’s board of directors declared and EFIH paid cash distributions of $2 million in the year ended December 31, 2010.
During 2009, EFIH’s board of directors declared, and EFIH paid, the following cash distributions totaling $216 million to EFH Corp.:
Declaration Date | Payment Date | Amount Paid | ||
November 12, 2009 | November 13, 2009 | $99 | ||
August 18, 2009 | August 19, 2009 | $59 | ||
May 19, 2009 | May 20, 2009 | $40 | ||
February 18, 2009 | March 3, 2009 | $18 |
The indentures governing the EFIH Notes include covenants that, among other things and subject to certain exceptions, restrict our ability to pay dividends or make other distributions with respect to our membership interests. Accordingly, essentially all of our net income is restricted from being used to make distributions with respect to our membership interests unless such distributions are expressly permitted under the indenture. The indentures further restrict us from making any distribution to EFH Corp. for the ultimate purpose of making a dividend on EFH Corp.’s common stock unless at the time, and after giving effect to such distribution, our consolidated leverage ratio is equal to or less than 6.0 to 1.0. Under the indentures governing the EFIH Notes, the term “consolidated leverage ratio” is defined as the ratio of EFIH’s consolidated total debt (as defined in the indentures) to EFIH’s Adjusted EBITDA on a consolidated basis, including Oncor Holdings and its subsidiaries. EFIH’s consolidated leverage ratio was 5.3 to 1.0 as of December 31, 2011.
In addition, under applicable law, we are prohibited from paying any distribution to the extent that immediately following payment of such distribution, we would be insolvent.
Equity Interests in Oncor
As of December 31, 2011, ownership of Oncor’s membership interests was as follows: 80.03% held indirectly by EFH Corp., 0.22% held indirectly by Oncor’s management and board of directors and 19.75% held by Texas Transmission.
Distributions to EFH Corp.
In October 2011, we distributed to EFH Corp. $53 million aggregate principal amount of EFH Corp. Toggle Notes, which were retired by EFH Corp. as discussed in Note 5. The distribution was recorded as a reduction of membership interests in the amount of the carrying value of the notes ($45 million). The indentures governing our debt do not limit our ability to dividend these EFH Corp. debt securities to EFH Corp. so long as we received such securities in exchange for the issuance of EFIH debt.
In November 2009, we distributed to EFH Corp. $99 million aggregate principal amount of EFH Corp. 10.875% and Toggle Notes acquired in the debt exchanges and retired by EFH Corp., as discussed in Note 5. The distribution was recorded as a reduction of membership interests in the amount of the cost of the notes ($74 million).
Capital Contributions
In August 2010, EFH Corp. made a capital contribution to EFIH of $440 million in cash to support EFIH’s debt exchange transaction for EFH Corp. 10.875% Notes and Toggle Notes as discussed in Note 5.
See Notes 1 and 5 for discussion of noncash contributions from EFH Corp. related to debt pushed down to EFIH in accordance with SEC Staff Accounting Bulletin Topic 5-J.
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8. RELATED-PARTY TRANSACTIONS
The following represent our significant related-party transactions in addition to the investment in EFH Corp. and TCEH debt securities discussed in Note 3:
| • | Short-term advances from parent totaled less than one million as of December 31, 2010, and short-term advances to parent totaled $3 million as of December 31, 2009. Interest expense/income related to the advances were immaterial in 2010 and 2009. |
| • | EFH Corp. files a consolidated federal income tax return and allocates income tax liabilities to us substantially as if we were filing our own corporate income tax returns, except that amounts due from Oncor Holdings under a tax sharing agreement are settled directly with EFH Corp. in accordance with that agreement. Our results are included in the consolidated Texas state margin tax return filed by EFH Corp. Our amount payable to EFH Corp. related to income taxes totaled $119 million and $46 million as of December 31, 2011 and 2010, respectively. The income tax payable as of December 31, 2011 was reported as noncurrent because we do not expect to pay it until 2013. Our income tax payments to EFH Corp. totaled $30 million in the year ended December 31, 2011, and we made no income tax payments to EFH Corp. in the year ended December 31, 2010. |
| • | As of December 31, 2011 and 2010, EFH Corp. had demand notes payable to TCEH totaling $1.592 billion and $1.921 billion, respectively, arising from borrowings used to fund EFH Corp. debt principal and interest payments (P&I Note) and net borrowings for general corporate purposes (SG&A Note). As discussed in Note 5, the balance of these notes as of February 15, 2012 was approximately $960 million. The notes are guaranteed by EFCH and us on a pari passu basis with the EFH Corp. 10.875% Notes and Toggle Notes. In connection with debt-related transactions entered into by EFH Corp. in April 2011, EFH Corp. agreed (i) to not make any additional borrowings under the SG&A Note, which totaled $233 million as of December 31, 2011 and became guaranteed (on the same basis as the P&I Note) by EFCH and us in connection with these transactions, (ii) to cap borrowings under the P&I Note to no more than $2 billion and (iii) that the sum of (a) the outstanding debt (including guarantees) of EFH Corp. or any of its subsidiaries (including EFIH) that is secured by a second-priority lien on the equity interest that EFIH owns in Oncor Holdings (the EFIH Second-Priority Debt) and (b) the aggregate outstanding amount of the intercompany notes will not exceed, at any time, the maximum amount of EFIH Second-Priority Debt permitted by the indenture governing the EFH Corp. 10% Senior Secured Notes due 2020. |
| • | In February 2012, Goldman, Sachs & Co. (Goldman), an affiliate of GS Capital Partners, acted as a joint book-running manager and initial purchaser in the issuance of $800 million principal amount of EFIH 11.750% Senior Secured Second Lien Notes (see Note 5) for which it received fees totaling $4 million. An affiliate of KKR served as a co-manager and initial purchaser and an affiliate of TPG Capital, L.P. served as an advisor in the transaction for which they each received $1 million. |
In the year ended December 31, 2010, Goldman acted as a dealer manager and solicitation agent in EFH Corp. and EFIH debt exchange offers completed in August 2010 for which it received fees totaling $7 million.
In the year ended December 31, 2009, fees paid to affiliates of the Sponsor Group participating in debt exchange offers completed in November 2009 by EFH Corp., EFIH and EFIH Finance to exchange new senior secured notes for certain EFH Corp. and TCEH notes totaled $1 million. Goldman and KKR Capital Markets LLC, an affiliate of KKR, acted as dealer managers and TPG Capital, L.P. served as an adviser in the exchange offers.
| • | Affiliates of the Sponsor Group have, and in the future may, sell or acquire debt or debt securities issued by us in open market transactions or through loan syndications. |
See Note 4 for information regarding income taxes, Note 5 regarding guarantees and push-down of certain EFH Corp. debt and Note 7 regarding distributions to, and contributions from, EFH Corp. and noncash settlement of certain income taxes payable.
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Significant related-party transactions between Oncor Holdings (including its consolidated subsidiary Oncor) and EFH Corp., other affiliates of EFH Corp. and the Sponsor Group are as follows:
| • | Oncor receives payments from TCEH for electricity delivery fees. Amounts recorded as revenue for these fees totaled $1.0 billion, $1.1 billion and $1.0 billion for the years ended December 31, 2011, 2010 and 2009, respectively. These fees are based on rates regulated by the PUCT that apply to all REPs. These revenues from TCEH represented 33%, 36% and 38% of Oncor Holdings’ operating revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Oncor Holdings’ balance sheets as of December 31, 2011 and 2010 reflect receivables from TCEH totaling $138 million and $143 million, respectively, primarily related to these electricity delivery fees. |
| • | Oncor recognizes interest income from TCEH with respect to Oncor’s generation-related regulatory assets, which have been securitized through the issuance of transition bonds by Oncor’s bankruptcy-remote financing subsidiary. The interest income, which is received on a monthly basis, serves to offset Oncor’s interest expense on the transition bonds. This interest income totaled $32 million, $37 million and $42 million for the years ended December 31, 2011, 2010 and 2009, respectively. |
| • | Incremental amounts payable by Oncor related to income taxes as a result of delivery fee surcharges to its customers related to transition bonds are reimbursed by TCEH. Oncor Holdings’ consolidated financial statements reflect a note receivable that matures in 2016 from TCEH of $179 million ($41 million reported as current in trade accounts and other receivables from affiliates) and $217 million ($39 million reported as current in trade accounts and other receivables from affiliates) related to these income taxes as of December 31, 2011 and 2010, respectively. Oncor reviews economic conditions, TCEH’s credit ratings and historical payment activity to assess the overall collectability of these affiliated receivables. As of December 31, 2011, there were no credit loss allowances related to the note receivable from TCEH. |
| • | Oncor pays EFH Corp. subsidiaries for certain administrative services and shared facilities at cost. These costs, which are primarily reported in Oncor Holdings’ operation and maintenance expenses, totaled $38 million, $40 million and $26 million for the years ended December 31, 2011, 2010 and 2009, respectively. |
| • | Under Texas regulatory provisions, the trust fund for decommissioning the Comanche Peak nuclear generation facility (reported on TCEH’s balance sheet) is funded by a delivery fee surcharge collected from REPs by Oncor and remitted monthly to TCEH, with the intent that the trust fund assets will be sufficient to fund the decommissioning liability (also reported on TCEH’s balance sheet). The delivery fee surcharges remitted to TCEH totaled $17 million in the year ended December 31, 2011 and $16 million in each of the years ended December 31, 2010 and 2009. Income and expenses associated with the trust fund and the decommissioning liability recorded by TCEH are offset by a net change in the intercompany receivable/payable between Oncor and TCEH, which in turn results in a change in Oncor’s reported net regulatory asset/liability. The regulatory liability and a receivable from TCEH in the same amount totaled $225 million and $206 million as of December 31, 2011 and 2010, respectively, represents the excess of the trust fund balance over the net decommissioning liability. |
| • | EFH Corp. files a consolidated federal income tax return and allocates income tax liabilities to Oncor Holdings under a tax sharing agreement substantially as if Oncor Holdings was filing its own corporate income tax returns. Oncor Holdings’ results are included in the consolidated Texas state margin tax return filed by EFH Corp. Oncor Holdings’ consolidated financial statements as of December 31, 2011 reflect a current amount payable to EFH Corp. related to income taxes totaling $2 million and as of December 31, 2010 a current amount receivable from EFH Corp. totaling $72 million, primarily due to timing of payments. Oncor Holdings received net income tax refunds from EFH Corp. totaling $89 million (net of $20 million in tax payments to EFH Corp.) in the year ended December 31, 2011 and made income tax payments to EFH Corp. totaling $107 million in the year ended December 31, 2010. |
| • | Oncor has PUCT-approved tariffs in place to assure adequate credit worthiness of any REP to support the REP’s obligation to collect transition bond-related charges on behalf of Oncor Electric Delivery Transition Bond Company LLC. Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated transition charges over specified time periods. Accordingly, as of December 31, 2011 and 2010, TCEH had posted letters of credit in the amount of $12 million and $14 million, respectively, for Oncor’s benefit. |
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| • | Oncor and Texas Holdings agreed to the terms of a stipulation with major interested parties to resolve all outstanding issues in the PUCT review related to the Merger. As part of this stipulation, TCEH would be required to post a letter of credit in an amount equal to $170 million to secure its payment obligations to Oncor in the event, which has not occurred, two or more rating agencies downgrade Oncor’s credit ratings below investment grade. |
| • | As of December 31, 2010, Oncor had a $2 billion revolving credit facility with a syndicate of financial institutions and other lenders. The syndicate included affiliates of GS Capital Partners (a member of the Sponsor Group). Affiliates of GS Capital Partners have from time-to-time engaged in commercial banking transactions with Oncor in the normal course of business. In October 2011, Oncor amended and restated the facility, and neither GS Capital Partners nor its affiliates were members of the syndicate. |
| • | Affiliates of the Sponsor Group have, and from time-to-time in the future, may (1) sell, acquire or participate in the offerings of Oncor’s debt or debt securities in open market transactions or through loan syndications, and (2) perform various financial advisory, dealer, commercial banking and investment banking services for Oncor and certain of its affiliates for which they have received or will receive customary fees and expenses. |
| • | Oncor participates in plans sponsored by EFH Corp. that provide pension, health care and other retiree benefits. Accordingly, Oncor Holdings’ financial statements reflect allocations to Oncor of amounts related to these retiree benefit plans. Certain regulatory provisions allow for the recovery by Oncor of retiree benefit costs for all applicable former employees of EFH Corp.’s regulated predecessor integrated electric utility, which in addition to Oncor’s active and retired employees consists largely of active and retired personnel engaged in TCEH’s activities, related to service of those additional personnel prior to the deregulation and disaggregation of EFH Corp.’s businesses effective January 1, 2002. Accordingly, Oncor and TCEH entered into an agreement whereby Oncor assumed responsibility for applicable retiree benefit costs related to those personnel. |
9. SUPPLEMENTARY FINANCIAL INFORMATION
Interest Expense and Related Charges
| $00000.00 | $00000.00 | $00000.00 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Interest expense paid/accrued | $ | 342 | $ | 306 | $ | 269 | ||||||
Amortization of debt exchange and issuance costs | 6 | 9 | 10 | |||||||||
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Total interest expense and related charges | $ | 348 | $ | 315 | $ | 279 | ||||||
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Supplemental Cash Flow Information
| $0000.00 | $0000.00 | $0000.00 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash payments (receipts) related to: | ||||||||||||
Interest paid | $ | 257 | $ | 76 | $ | — | ||||||
Interest received | (184 | ) | (87 | ) | — | |||||||
Income taxes paid | 30 | — | — | |||||||||
Noncash investing and financing activities: | ||||||||||||
Effect of Parent’s payment of interest and issuance of toggle notes as consideration for cash interest, net of tax, on pushed-down debt | 33 | (99 | ) | 227 | ||||||||
Capital contribution related to settlement of certain income taxes payable (a) | 30 | 40 | 50 | |||||||||
Effect of push down of debt from EFH Corp. | (167 | ) | (1,618 | ) | (33 | ) | ||||||
Debt exchange transactions | 22 | 989 | 55 | |||||||||
Effect of retirement of EFH Corp. debt acquired in debt exchange (Note 5) | 45 | — | 74 | |||||||||
| (a) | Reflects noncash settlement of certain income taxes payable arising as a result of the sale of noncontrolling interests in Oncor. |
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| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| Item 9A. | CONTROLS AND PROCEDURES |
An evaluation was performed under the supervision and with the participation of EFIH’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures in effect as of December 31, 2011. Based on the evaluation performed, EFIH’s management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective.
There have been no changes in EFIH’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, EFIH’s internal control over financial reporting.
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
MANAGEMENT’S ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Energy Future Intermediate Holding Company LLC is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) for the company. Energy Future Intermediate Holding Company LLC’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition or the deterioration of compliance with procedures or policies.
The management of Energy Future Intermediate Holding Company LLC performed an evaluation as of December 31, 2011 of the effectiveness of the company’s internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s)Internal Control—Integrated Framework.Based on the review performed, management believes that as of December 31, 2011 Energy Future Intermediate Holding Company LLC’s internal control over financial reporting was effective.
The independent registered public accounting firm of Deloitte & Touche LLP as auditors of the consolidated financial statements of Energy Future Intermediate Holding Company LLC has issued an attestation report on Energy Future Intermediate Holding Company LLC’s internal control over financial reporting.
/s/ JOHN F. YOUNG | /s/ PAUL M. KEGLEVIC | |
John F. Young, Chair, President and | Paul M. Keglevic, Executive Vice President | |
Chief Executive | and Chief Financial Officer |
February 20, 2012
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of Energy Future Intermediate Holding Company LLC
Dallas, Texas
We have audited the internal control over financial reporting of Energy Future Intermediate Holding Company LLC (a subsidiary of Energy Future Holdings Corp.) and subsidiaries (“EFIH”) as of December 31, 2011 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. EFIH’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on EFIH’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, EFIH maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of December 31, 2011 and for the year ended December 31, 2011 of EFIH and our report dated February 20, 2012 expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to EFIH’s investments in debt securities of related parties, guarantees of Energy Future Holdings Corp. (“EFH Corp.”) debt securities, and primary liquidity needs being sourced from interest and principal payments on EFIH’s investments in EFH Corp. and Texas Competitive Electric Holdings Company LLC debt securities and distributions from Oncor Electric Delivery Holdings Company LLC, all of which are related party transactions.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 20, 2012
| Item 9B. | OTHER INFORMATION |
None.
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| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Item 10 is not presented herein as EFIH meets the conditions set forth in General Instruction (I)(1)(a) and (b).
| Item 11. | EXECUTIVE COMPENSATION |
Item 11 is not presented herein as EFIH meets the conditions set forth in General Instruction (I)(1)(a) and (b).
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED EQUITY HOLDER MATTERS |
Item 12 is not presented herein as EFIH meets the conditions set forth in General Instruction (I)(1)(a) and (b).
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Item 13 is not presented herein as EFIH meets the conditions set forth in General Instruction (I)(1)(a) and (b).
| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The Audit Committee of the board of directors of EFH Corp. (Committee) has adopted a policy relating to the engagement of EFH Corp.’s independent auditor that applies to EFH Corp. and its consolidated subsidiaries, including EFIH. The policy provides that in addition to the audit of the financial statements, related quarterly reviews and other audit services, and providing services necessary to complete SEC filings, Deloitte & Touche LLP may be engaged to provide nonaudit services as described herein. Prior to engagement, all services to be rendered by the independent auditor must be authorized by the Committee in accordance with preapproval procedures which are defined in the policy. The preapproval procedures require: (i) the annual review and preapproval by the Committee of all anticipated audit and nonaudit services; and (ii) the quarterly preapproval by the Committee of services, if any, not previously approved and the review of the status of previously approved services. The Committee may also approve certain ongoing nonaudit services not previously approved in the limited circumstances provided for in the SEC rules. All services performed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates (“Deloitte & Touche”) for EFIH in 2011 were pre-approved by the Committee.
The policy defines those nonaudit services which Deloitte & Touche may also be engaged to provide as follows:
| 1. | Audit related services, including: |
| a. | due diligence accounting consultations and audits related to mergers, acquisitions and divestitures; |
| b. | employee benefit plan audits; |
| c. | accounting and financial reporting standards consultation, |
| d. | internal control reviews, and |
| e. | attest services, including agreed upon procedures reports that are not required by statute or regulation. |
| 2. | Tax related services, including: |
| a. | tax compliance; |
| b. | general tax consultation and planning, |
| c. | tax advice related to mergers, acquisitions, and divestitures, and |
| d. | communications with and request for rulings from tax authorities. |
| 3. | Other services, including: |
| a. | process improvement, review and assurance; |
| b. | litigation and rate case assistance; |
| c. | forensic and investigative services, and |
| d. | training services. |
61
The policy prohibits EFIH from engaging its independent auditor to provide:
| 1. | Bookkeeping or other services related to EFIH’s accounting records or financial statements; |
| 2. | Financial information systems design and implementation services; |
| 3. | Appraisal or valuation services, fairness opinions, or contribution-in-kind reports; |
| 4. | Actuarial services; |
| 5. | Internal audit outsourcing services; |
| 6. | Management or human resource functions; |
| 7. | Broker-dealer, investment advisor, or investment banking services; |
| 8. | Legal and expert services unrelated to the audit, and |
| 9. | Any other service that the Public Company Accounting Oversight Board determines, by regulation, to be impermissible. |
In addition, the policy prohibits EFIH’s independent auditor from providing tax or financial planning advice to any officer of EFIH.
Compliance with the Committee’s policy relating to the engagement of Deloitte & Touche is monitored on behalf of the Committee by EFIH’s chief accounting officer. Reports describing the services provided by the firm and fees for such services are provided to the Committee no less often than quarterly.
For the years ended December 31, 2011 and 2010, fees billed to EFIH by Deloitte & Touche were as follows:
| 2011 | 2010 | |||||||
| Audit Fees. Fees for services necessary to perform the annual audit, review SEC filings, fulfill statutory and other attest service requirements and provide comfort letters and consents. | $ | 192,500 | $ | 190,000 | ||||
| Audit-Related Fees. Fees for services including employee benefit plan audits, due diligence related to mergers, acquisitions and divestitures, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation, and consultation concerning financial accounting and reporting standards | — | 9,900 | ||||||
| Tax Fees.Fees for tax compliance, tax planning, and tax advice related to mergers and acquisitions, divestitures, and communications with and requests for rulings from taxing authorities. | — | — | ||||||
| All Other Fees. Fees for services including process improvement reviews, forensic accounting reviews, litigation and rate case assistance and training services | — | — | ||||||
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Total | $ | 192,500 | $ | 199,900 | ||||
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| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | Oncor Holdings Financial Statements are presented pursuant to Rules 3-09 and 3-16 of Regulation S-X as Exhibit 99(d). |
| (b) | Exhibits. |
EFIH Exhibits to Form 10-K for the Fiscal Year Ended December 31, 2011
Exhibits | Previously Filed* With File Number | As Exhibit | ||||||||
(3(i)) | Articles of Incorporation | |||||||||
3(a) | 333-153529 Form S-4 (filed September 17, 2008) | 3(c) | — | Certificate of Formation of Energy Future Intermediate Holding Company LLC, as amended | ||||||
(3(ii)) | By-laws | |||||||||
3(b) | — | Second Amended and Restated Limited Liability Company Agreement of Energy Future Intermediate Holding Company LLC | ||||||||
(4) | Instruments Defining the Rights of Security Holders, Including Indentures. | |||||||||
| Energy Future Intermediate Holding Company LLC | ||||||||||
4(a) | 1-12833 Form 8-K (filed November 20, 2009) | 4.2 | — | Indenture, dated as of November 16, 2009, among Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee | ||||||
4(b) | 1-12833 Form 8-K (filed August 18, 2010) | 4.1 | — | Indenture, dated August 17, 2010, among Energy Future Intermediate Holding Company LLC, EFIH Finance Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to 10.000% Senior Secured Notes due 2020 | ||||||
4(c) | 1-12833 Form 10-Q (Quarter ended March 31, 2011) (filed April 29, 2011) | 4(e) | — | Indenture, dated as of April 25, 2011, among Energy Future Intermediate Holding Company LLC, EFIH Finance, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to 11% Senior Secured Second Lien Notes due 2021 | ||||||
4(d) | 1-12833 Form 8-K (filed February 6, 2012) | 4.1 | — | First Supplemental Indenture, dated February 6, 2012, to the Indenture dated April 25, 2011 | ||||||
4(e) | 1-12833 Form 10-Q (Quarter ended March 31, 2011) (filed April 29, 2011) | 4(f) | — | Junior Lien Pledge Agreement, dated as of April 25, 2011, from Energy Future Intermediate Holding Company LLC, as pledgor, to The Bank of New York Mellon Trust Company, N.A., as collateral trustee | ||||||
4(f) | 1-12833 Form 8-K (filed February 6, 2012) | 4.2 | — | Registration Rights Agreement, dated February 6, 2012, among Energy Future Intermediate Holding Company LLC, EFIH Finance, Inc., the initial purchasers and the guarantors named therein, relating to 11.75% Senior Secured Second Lien Notes due 2022 | ||||||
| Energy Future Holdings Corp. (Merger-related push down debt) | ||||||||||
4(g) | 1-12833 Form 8-K (filed October 31, 2007) | 4.1 | — | Indenture, dated October 31, 2007, among Energy Future Holdings Corp., the guarantors named therein and The Bank of New York Mellon, as trustee, relating to Senior Notes due 2017 and Senior Toggle Notes due 2017 | ||||||
4(h) | 1-12833 Form 10-K (2009) (filed February 19, 2010) | 4(f) | — | Supplemental Indenture, dated as of July 8, 2008, to Indenture, dated as of October 31, 2007, relating to Energy Future Holdings Corp.’s 10.875% Senior Notes due 2017 and 11.25%/12.00% Senior Toggle Notes due 2017 | ||||||
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Exhibits | Previously Filed* With File Number | As Exhibit | ||||||||
4(i) | 1-12833 Form 10-Q (Quarter ended June 30, 2009) (filed August 4, 2009) | 4(a) | — | Second Supplemental Indenture, dated as of August 3, 2009, to Indenture, dated as of October 31, 2007, relating to Energy Future Holdings Corp.’s 10.875% Senior Notes due 2017 and 11.25%/12.00% Senior Toggle Notes due 2017 | ||||||
4(j) | 1-12833 Form 8-K (filed July 30, 2010) | 99.1 | — | Third Supplemental Indenture, dated as of July 29, 2010, to Indenture dated as of October 31, 2007, relating to EFH Corp.’s 10.875% Senior Notes due 2017 and 11.250%/12.000% Senior Toggle Notes due 2017 | ||||||
4(k) | 1-12833 Form 10-Q (Quarter ended September 30, 2011) (filed October 28, 2011) | 4(b) | — | Fourth Supplemental Indenture, dated October 18, 2011, to Indenture dated October 31, 2007. | ||||||
4(l) | 1-12833 Form 8-K (filed November 20, 2009) | 4.1 | — | Indenture, dated November 16, 2009, among Energy Future Holdings Corp., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to 9.75% Senior Secured Notes due 2019 | ||||||
4(m) | 333-171253 Form S-4 (filed January 24, 2011) | 4(k) | — | Indenture, dated January 12, 2010, among Energy Future Holdings Corp., the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to 10.000% Senior Secured Notes due 2020 | ||||||
4(n) | 333-165860 Form S-3 (filed April 1, 2010) | 4(j) | — | First Supplemental Indenture, dated as of March 16, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(o) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(a) | — | Second Supplemental Indenture, dated as of April 13, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(p) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(b) | — | Third Supplemental Indenture, dated as of April 14, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(q) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(c) | — | Fourth Supplemental Indenture, dated as of May 21, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(r) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(d) | — | Fifth Supplemental Indenture, dated as of July 2, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(s) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(e) | — | Sixth Supplemental Indenture, dated as of July 6, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
4(t) | 1-12833 Form 10-Q (Quarter ended June 30, 2010) (filed August 2, 2010) | 4(f) | — | Seventh Supplemental Indenture, dated as of July 7, 2010, to Indenture, dated as of January 12, 2010, relating to Energy Future Holdings Corp.’s 10.000% Senior Secured Notes due 2020 | ||||||
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Exhibits | Previously Filed* With File Number | As Exhibit | ||||||||
| Oncor Electric Delivery Company LLC | ||||||||||
4(u) | 333-100240 Form S-4 (filed October 2, 2002) | 4(a) | — | Indenture and Deed of Trust, dated as of May 1, 2002, between Oncor Electric Delivery Company LLC and The Bank of New York Mellon, as Trustee | ||||||
4(v) | 1-12833 Form 8-K (filed October 31, 2005) | 10.1 | — | Supplemental Indenture No. 1, dated October 25, 2005, to Indenture and Deed of Trust, dated as of May 1, 2002, between Oncor Electric Delivery Company LLC and The Bank of New York Mellon | ||||||
4(w) | 333-100240 Form 10-Q (Quarter ended March 31, 2008) (filed May 15, 2008) | 4(b) | — | Supplemental Indenture No. 2, dated May 15, 2008, to Indenture and Deed of Trust, dated as of May 1, 2002, between Oncor Electric Delivery Company LLC and The Bank of New York. | ||||||
4(x) | 333-100240 Form S-4 (filed October 2, 2002) | 4(b) | — | Officer’s Certificate, dated May 6, 2002, establishing the terms of Oncor Electric Delivery Company LLC’s 6.375% Senior Notes due 2012 and 7.000% Senior Notes due 2032 | ||||||
4(y) | 333-100242 Form S-4 (filed October 2, 2002) | 4(a) | — | Indenture (for Unsecured Debt Securities), dated as of August 1, 2002, between Oncor Electric Delivery Company LLC and The Bank of New York Mellon, as Trustee | ||||||
4(z) | 333-100240 Form 10-Q (Quarter ended March 31, 2008) (filed May 15, 2008) | 4(c) | — | Supplemental Indenture No. 1, dated May 15, 2008, to Indenture and Deed of Trust, dated as of August 1, 2002, between Oncor Electric Delivery Company LLC and The Bank of New York. | ||||||
4(aa) | 333-100242 Form S-4 (filed October 2, 2002) | 4(b) | — | Officer’s Certificate, dated August 30, 2002, establishing the terms of Oncor Electric Delivery Company LLC’s 5.00% debentures due 2007 and 7.00% Debentures due 2022 | ||||||
4(bb) | 333-106894 Form S-4 (filed July 9, 2003) | 4(c) | — | Officer’s Certificate, dated December 20, 2002, establishing the terms of Oncor Electric Delivery Company LLC’s 6.375% Senior Notes due 2015 and 7.250% Senior Notes due 2033 | ||||||
4(cc) | 333-100240 Form 10-Q (Quarter ended March 31, 2008) (filed May 15, 2008) | 4(a) | — | Deed of Trust, Security Agreement and Fixture Filing, dated May 15, 2008, by Oncor Electric Delivery Company LLC, as Grantor, to and for the benefit of The Bank of New York, as Collateral Agent. | ||||||
4(dd) | 333-100240 Form 10-Q (Quarter ended September 30, 2008) (filed November 6, 2008) | 4(c) | — | Investor Rights Agreement, dated as of November 5, 2008, by and among Oncor Electric Delivery Company LLC, Oncor Electric Delivery Holdings Company LLC, Texas Transmission Investment LLC and Energy Future Holdings Corp. | ||||||
4(ee) | 333-100240 Form 10-K (2008) (filed March 3, 2009) | 4(n) | — | First Amendment, dated as of March 2, 2009, to Deed of Trust, Security Agreement and Fixture Filing, by and between Oncor Electric Delivery Company LLC and The Bank of New York Mellon (formerly The Bank of New York) as Trustee and Collateral Agent, dated May 15, 2008 | ||||||
4(ff) | 333-100240 Form 8-K (filed September 3, 2010) | 10.1 | — | Second Amendment, dated September 3, 2010, to Deed of Trust, Security Agreement and Fixture Filing, by and between Oncor Electric Delivery Company LLC, as grantor, to and for the benefit of The Bank of New York Mellon, as collateral agent, dated May 15, 2008 | ||||||
4(gg) | 333-100240 Form 8-K (filed November 15, 2011) | 10.1 | — | Third Amendment, dated November 10, 2011, to Deed of Trust, Security Agreement and Fixture Filing, by and between Oncor Electric Delivery Company LLC, as grantor, to and for the benefit of The Bank of New York Mellon, as collateral agent, dated May 15, 2008 | ||||||
65
Exhibits | Previously Filed* With File Number | As Exhibit | ||||||||
4(hh) | 333-100242 Form 8-K (filed September 9, 2008) | 4.1 | — | Officer’s Certificate, dated September 8, 2008, establishing the terms of Oncor Electric Delivery Company LLC’s 5.95% Senior Secured Notes due 2013, 6.80% Senior Secured Notes due 2018 and 7.50% Senior Secured Notes due 2038 | ||||||
4(ii) | 333-100240 Form 8-K (filed September 16, 2010) | 4.1 | — | Officer’s Certificate, dated September 13, 2010, establishing the terms of Oncor Electric Delivery Company LLC’s 5.25% Senior Secured Notes due 2040 | ||||||
4(jj) | 333-100240 Form 8-K (filed October 12, 2010) | 4.1 | — | Officer’s Certificate, dated October 8, 2010, establishing the terms of Oncor Electric Delivery Company LLC’s 5.00% Senior Secured Notes due 2017 and 5.75% Senior Secured Notes due 2020 | ||||||
4(kk) | 333-100240 Form 8-K (filed November 23, 2011) | 4.1 | — | Officer’s Certificate, dated November 23, 2011, establishing the terms of Oncor Electric Delivery Company LLC’s 4.55% Senior Secured Notes due 2041 | ||||||
4(ll) | 333-100240 Form 8-K (filed October 12, 2010) | 4.2 | — | Registration Rights Agreement, dated November 23, 2011, among Oncor Electric Delivery Company LLC and the dealer managers named therein | ||||||
(10) | Material Contracts. | |||||||||
| Credit Agreements | ||||||||||
10(a) | 333-100240 Form 10-Q (Quarter ended September 30, 2007) (filed November 14, 2007) | 10(a) | — | $2,000,000,000 Revolving Credit Agreement, dated as of October 10, 2007, among Oncor Electric Delivery Company LLC, as the borrower, the several lenders from time-to-time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent, fronting bank and swingline lender, Citibank, N.A., as syndication agent and fronting bank, Credit Suisse, Cayman Islands Branch, Goldman Sachs Credit Partners L.P., Lehman Commercial Paper Inc., Morgan Stanley Senior Funding, Inc. as co-documentation agents, J.P. Morgan Securities Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs Credit Partners L.P., Lehman Brothers Inc. and Morgan Stanley Senior Funding, Inc. as joint lead arrangers and bookrunners | ||||||
10(b) | 333-176464 Form S-1 (filed August 24, 2011) | 10(cc) | — | Amendment No. 1, dated as of August 4, 2011, to the $2,000,000,000 Revolving Credit Agreement | ||||||
10(c) | 333-100240 Form 8-K (filed October 11, 2011) | 10.1 | — | Amended and Restated Revolving Credit Agreement, dated as of October 11, 2011, among Oncor Electric Delivery Company LLC, as borrower, the lenders listed therein, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, JPMorgan Chase Bank, N.A., as swingline lender, and JPMorgan Chase Bank, N.A., Barclays Bank PLC, The Royal Bank of Scotland plc, Bank of America, N.A. and Citibank N.A., as fronting banks for letters of credit issued thereunder | ||||||
10(d) | 1-12833 Form 8-K (filed November 20, 2009) | 4.3 | — | Pledge Agreement, dated November 16, 2009, made by Energy Future Intermediate Holding Company LLC and the additional pledgers to The Bank of New York Mellon Trust Company, N.A., as collateral trustee for the holders of parity lien obligations | ||||||
10(e) | 1-12833 Form 8-K (filed November 20, 2009) | 4.4 | — | Collateral Trust Agreement, dated November 16, 2009, among Energy Future Intermediate Holding Company LLC, The Bank of New York Mellon Trust Company, N.A., as first lien trustee and as collateral trustee, and the other secured debt representatives party thereto | ||||||
66
Exhibits | Previously Filed* With File | As Exhibit | ||||||||
| Other Material Contracts | ||||||||||
10(f) | 333-100240 Form 10-K (2004) (filed March 23, 2005) | 10(i) | — | Agreement, dated as of March 10, 2005, by and between Oncor Electric Delivery Company LLC and TXU Energy Company LLC allocating to Oncor Electric Delivery Company LLC the pension and post-retirement benefit costs for all Oncor Electric Delivery Company LLC employees who had retired or had terminated employment as vested employees prior to January 1, 2002 | ||||||
10(g) | 333-100240 Form 10-Q (Quarter ended September 30, 2008) (filed November 6, 2008) | 3(a) | — | Second Amended and Restated Limited Liability Company Agreement of Oncor Electric Delivery Holdings Company LLC, dated as of November 5, 2008, by and among Oncor Electric Delivery Holdings Company LLC, Texas Transmission Investment LLC and Oncor Management Investment LLC | ||||||
10(h) | 333-100240 Form 10-K (2008) (filed March 3, 2009) | 3(c) | — | First Amendment to Second Amended and Restated Limited Liability Company Agreement of Oncor Electric Delivery Company LLC, entered into as of February 18, 2009, by and among Oncor Electric Delivery Holdings Company LLC, Texas Transmission Investment LLC and Oncor Management Investment LLC | ||||||
10(i) | 333-100240 Form 10-Q (Quarter ended September 30, 2008) (filed November 6, 2008) | 10(b) | — | Amended and Restated Tax Sharing Agreement, dated as of November 5, 2008, by and among Oncor Electric Delivery Company LLC, Oncor Electric Delivery Holdings Company LLC, Oncor Management Investment LLC, Texas Transmission Investment LLC, Energy Future Intermediate Holding Company LLC and Energy Future Holdings Corp. | ||||||
10(j) | 1-12833 Form 10-K (2007) (filed March 31, 2008) | 10(eee) | — | Stipulation as approved by the PUCT in Docket No. 34077 | ||||||
10(k) | 1-12833 Form 10-K (2007) (filed March 31, 2008) | 10(fff) | — | Amendment to Stipulation Regarding Section 1, Paragraph 35 and Exhibit B in Docket No. 34077 | ||||||
10(l) | 333-100240 Form 10-K (2010) (filed February 18, 2011) | 10(ae) | — | PUCT Order on Rehearing in Docket No. 34077 | ||||||
(12) | Statement Regarding Computation of Ratios. | |||||||||
12(a) | — | Computation of Ratio of Earnings to Fixed Charges, and Ratio of Earnings to Combined Fixed Charges and Preference Dividends. | ||||||||
(31) | Rule 13a - 14(a)/15d - 14(a) Certifications. | |||||||||
31(a) | — | Certification of John F. Young, chair, president and chief executive of Energy Future Intermediate Holding Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
31(b) | — | Certification of Paul M. Keglevic, executive vice president and chief financial officer of Energy Future Intermediate Holding Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
(32) | Section 1350 Certifications. | |||||||||
32(a) | — | Certification of John F. Young, chair, president and chief executive of Energy Future Intermediate Holding Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
32(b) | — | Certification of Paul M. Keglevic, executive vice president and chief financial officer of Energy Future Intermediate Holding Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
67
Exhibits | Previously Filed* With File Number | As Exhibit | ||||||||||
| (99) | Additional Exhibits | |||||||||||
| 99(a) | — | Energy Future Intermediate Holding Company LLC Consolidated Adjusted EBITDA reconciliation for the years ended December 31, 2011 and 2010. | ||||||||||
| 99(b) | — | Energy Future Holdings Corp. Consolidated Adjusted EBITDA reconciliation for the years ended December 31, 2011 and 2010. | ||||||||||
| 99(c) | 333-91935 Form S-3 (filed July 1, 2003) | 99 | (a) | — | Financing Order. | |||||||
| 99(d) | — | Oncor Electric Delivery Holdings Company LLC financial statements presented pursuant to Rules 3–09 and 3–16 of Regulation S–X. | ||||||||||
| XBRL Data Files | ||||||||||||
| 101.INS | — | XBRL Instance Document | ||||||||||
| 101.SCH | — | XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | — | XBRL Taxonomy Extension Calculation Document | ||||||||||
| 101.DEF | — | XBRL Taxonomy Extension Definition Document | ||||||||||
| 101.LAB | — | XBRL Taxonomy Extension Labels Document | ||||||||||
| 101.PRE | — | XBRL Taxonomy Extension Presentation Document | ||||||||||
| * | Incorporated herein by reference |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Energy Future Intermediate Holding Company LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC | ||||||
| Date: February 20, 2012 | By | /s/ JOHN F. YOUNG | ||||
| (John F. Young, Chair, President and Chief Executive) | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Energy Future Intermediate Holding Company LLC and in the capacities and on the date indicated.
Signature | Title | Date | ||
/s/ JOHN F. YOUNG | Principal Executive Officer | February 20, 2012 | ||
(John F. Young, Chair, President and Chief Executive) | and Manager | |||
/s/ PAUL M. KEGLEVIC | Principal Financial Officer | February 20, 2012 | ||
(Paul M. Keglevic, Executive Vice President and Chief Financial Officer) | and Manager | |||
/s/ STANLEY J. SZLAUDERBACH | Principal Accounting Officer | February 20, 2012 | ||
(Stanley J. Szlauderbach, Senior Vice President and Controller) | ||||
/s/ THOMAS D. FERGUSON | Manager | February 20, 2012 | ||
(Thomas D. Ferguson) | ||||
/s/ JAMES R. HUFFINES | Manager | February 20, 2012 | ||
(James R. Huffines) | ||||
/s/ JEFFREY LIAW | Manager | February 20, 2012 | ||
(Jeffrey Liaw) | ||||
/s/ KENNETH PONTARELLI | Manager | February 20, 2012 | ||
(Kenneth Pontarelli) | ||||
69
Exhibit 3(b)
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
This Second Amended and Restated Limited Liability Company Agreement (this “Agreement”) of Energy Future Intermediate Holding Company LLC (the “Company”), dated this 15th day of September, 2011, is entered into by Energy Future Holdings Corp., a Texas corporation, as the sole member of the Company (the “Member”), for the purpose of governing the affairs of the Company.
WHEREAS, the Member entered into the Amended and Restated Limited Liability Company Agreement for the Company on July 8, 2008 (the “First Amended and Restated Agreement”); and
WHEREAS, this Agreement amends and restates the First Amended and Restated Agreement in all respects, and constitutes the governing instrument of the Company.
ARTICLE I
LIMITED LIABILITY COMPANY
Section 1.1Name. The name of the limited liability company is Energy Future Intermediate Holding Company LLC.
Section 1.2Principal Business Office. The principal business office of the Company shall be located at 1601 Bryan Street, Dallas, Texas 75201, or such other location as may hereafter be determined by the Company.
Section 1.3Registered Office. The address of the registered office of the Company in the State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
Section 1.4Registered Agent. The name of the registered agent of the Company for service of process on the Company in the State of Delaware is The Corporation Trust Company.
Section 1.5Foreign Qualifications. An officer of the Company shall execute, deliver and file any certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in any foreign jurisdiction in which the Company may wish to conduct business.
Section 1.6Purpose. The purpose of the Company is to engage in any lawful business or activity for which a limited liability company may be organized under the Delaware Limited Liability Company Act, as amended from time to time (the “Act”).
Section 1.7Powers. The Company (i) shall have and exercise all powers necessary, convenient or incidental to accomplish its purposes as set forth in Section 1.6 and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act.
Section 1.8Capital Contributions. The Member has made certain capital contributions to the Company, and may make such other capital contributions to the Company as it may determine appropriate in its sole discretion. The provisions of this Agreement, including this Section 1.8, are intended solely to benefit the Member and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (and no such creditor of the Company shall be a third-party beneficiary of this Agreement) and the Member shall have no duty or obligation to any creditor of the Company to make any contribution to the Company or to issue any call for capital pursuant to this Agreement.
Section 1.9Allocation of Profits and Losses. The Company’s profits and losses shall be allocated to the Member; provided, however, that no allocation of any loss to the Member shall create any obligation on the Member to make any capital contribution to the Company to offset such loss (or otherwise), the Member having no obligation to make any such capital contribution, as provided in Section 1.8 above.
Section 1.10Distributions. Distributions in any form, including cash or other assets, shall be made to the Member at the times and in the aggregate amounts determined by the Board of Managers. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not be required to make a distribution to any Member on account of its interest in the Company if such distribution would violate the Act or any other applicable law.
Section 1.11Other Business. The Member and any Affiliate of the Member may engage in or possess an interest in other business ventures (unconnected with the Company) of every kind and description, independently or with others. The Company shall not have any rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement.
When used in this Agreement, “Affiliate” means, with respect to any individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association joint-stock company, trust, unincorporated organization, or other organization, whether or not a legal entity, or any governmental authority (“Person”), any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such Person, and “Control” means the possession, directly or indirectly, or the power to direct or cause the direction, of the management or policies of a Person, whether through the ownership of voting securities or general partnership or managing member interests, by contract or otherwise, “Controlling” and “Controlled” have correlative meanings. Without limiting the generality of the foregoing, a Person shall be deemed to Control any other Person in which it owns, directly or indirectly, a majority of the ownership interests.
ARTICLE II
MANAGEMENT
Section 2.1Board of Managers.
(a) Management of the Company shall be vested in a Board of Managers. The Board of Managers shall have the power to do any and all acts necessary, convenient or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise, possessed by managers of a limited liability company under the laws of the State of Delaware. The number of managers shall be determined from time to time by the Member or the resolution of the Board of Managers. The Member hereby designates John F. Young, Paul M. Keglevic, James R. Huffines, Jeffrey Liaw, Thomas D. Ferguson, and Kenneth Pontarelli as the Managers.
(b) Vacancies on the Board of Managers from whatever cause shall be filled by the remaining managers or, if there be none, by the Member. Managers shall serve until they resign or are removed. Managers may be removed with or without cause by the Member.
(c) The Board of Managers of the Company may hold meetings, both regular and special, within or outside the State of Delaware. Regular meetings of the Board of Managers may be held without notice at such times and at such places as shall from time to time be determined by the Board of Managers. Special meetings of the Board of Managers may be called by the Chairman of the Board, if any, or by the President on not less than twenty-four (24) hours notice to each Manager by telephone, facsimile, mail, telegram or any other means of communication, and special meetings shall be called by the President or the Secretary in like manner and with like notice upon the written request of any one or more of the Managers.
(d) At all meetings of the Board of Managers, a majority of the Managers shall constitute a quorum for the transaction of business and, except as otherwise provided in any other provision of this Agreement, the act of a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Board of Managers. If a quorum shall not be present at any meeting of the Board of Managers, the Managers present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board of Managers or of any committee thereof may be taken without a meeting if at least a majority of the members of the Board of Managers or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Managers or such committee and a copy of such writing or writings is promptly furnished to any member of the Board of Managers or such committee, as the case may be, who did not sign such writing or writings.
(e) No contract or transaction between the Company (or its subsidiaries) and one or more of its Managers or officers, or between the Company (or its subsidiaries) and any other company, corporation, partnership, association, or other organization in which one or more of its Managers or officers, are directors, managers, partners or officers (or serve in a similar capacity), or have a financial interest, shall be void or voidable solely for this reason, or solely because the Manager or officer is present at or participates in the meeting of the Board of Managers or committee which authorizes the contract or transaction, or solely because any such Manager’s or officer’s votes are counted for such purpose, if:
(i) The material facts as to the Manager’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Managers or the committee, and the Board of Managers or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Managers, even though the disinterested Managers be less than a quorum; or
(ii) The material facts as to the Manager’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Member, and the contract or transaction is specifically approved in good faith by the Member; or
(iii) The contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified, by the Board of Managers, a committee or the Member.
(f) Interested Managers may be counted in determining the presence of a quorum at a meeting of the Board of Managers or of a committee which authorizes the contract or transaction.
(g) The Managers, or any committee designated by the Board of Managers, may participate in a meeting of the Board of Managers, or of such committee, by means of telephone conference or similar communications equipment, and such participation in a meeting shall constitute presence in person at such meeting. If all the participants are participating by telephone conference or similar communications equipment, the meeting shall be deemed to be held at the principal place of business of the Company.
(h) The Board of Managers may designate one or more committees, with each committee to consist of one or more of the Managers of the Company. The Board of Managers may designate one or more Managers as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. Any such committee, to the extent provided in the resolution of the Board of Managers, shall have and may exercise all of the powers and authority of the Board of Managers in the management of the business and affairs of the Company. Each committee shall have such name as may be determined from time to time by resolution adopted by the Board of Managers. Each committee shall keep regular minutes of its meetings and report the same to the Board of Managers when required by the Board of Managers.
Section 2.2Officers; Delegation. The Company shall have such officers and employees as are designed within this Agreement or as subsequently designed by the Board of Managers. The Board of Managers may, from time to time as they deem advisable, appoint officers and assign titles (including, without limitation, President, Vice President, Secretary, and Treasurer) to any such person. Unless the Board of Managers decides otherwise, if the title is one commonly used for officers of a business corporation formed under the Delaware General Corporation Law, the assignment of such title shall constitute the delegation to such person of the authorities and duties that are normally associated with that office. Any delegation pursuant to this Section 2.2 may be revoked at any time by the Member or Board of Managers.
Section 2.3Limitation of Liability. Except as otherwise expressly provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be the debts, obligations and liabilities solely of the Company, and no (a) Member or Affiliate of a Member or their respective members, officers, directors, employees, agents, stockholders or partners, (b) Manager, officer, employee or agent of the Company or (c) Person who serves on behalf of the Company as a partner, manager, member, officer, director, employee or agent of any other entity (collectively, with all such Persons that are or have been, at any time from and after the date of formation of the Company, among the Persons listed in subsections (a), (b) or (c), the “Covered Persons”) shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person.
(a) The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of the Company or its affairs under this Agreement or the Act shall not be grounds for imposing personal liability on any Covered Person for liabilities of the Company.
(b) Such protections from personal liability shall apply to the fullest extent permitted by applicable law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide greater or broader indemnification rights than such law permitted the Company to provide prior to such amendment).
(c) To the extent that, at law or in equity, a Covered Person or any other person has duties (including fiduciary duties) to the Company or to another Member or Manager or to another person that is a party to or is otherwise bound by this Agreement, those duties are hereby eliminated to the fullest extent allowed under Delaware law and the Act, including §18-1101 of the Act. All liabilities for breach of contract and breach of duties (including fiduciary duties) of a Covered Person or any other person to the Company or
to another Member or Manager or any other person that is a party to or is otherwise bound by this Agreement are hereby eliminated to the fullest extent allowed under Delaware law and the Act, including §18-1101 of the Act. The elimination of duties and liabilities set forth in this Section 2.3(c) shall be deemed to apply from and after the formation of the Company.
ARTICLE III
MEMBERS
Section 3.1Sole Member. The Member is the sole member of the Company. The mailing address of the Member is: 1601 Bryan Street, Dallas, Texas 75201. The Company has issued all of the limited liability company interests in the Company to the Member. Additional members may be admitted only by written amendment of this Agreement, executed by the Member.
Section 3.2 Assignments. The Member may assign in whole or in part its limited liability company interests in the Company. If the Member transfers all of its interests pursuant to this Section 3.2 the transferee shall be admitted to the Company as a member of the Company upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the transfer, and, immediately following such admission, the transferor Member shall cease to be a member of the Company.
Section 3.3Admission of Additional Members. One or more additional members of the Company may be admitted to the Company with the written consent of the Member.
Section 3.4Resignation. A Member may resign from the Company with the written consent of all of the Members. If a Member is permitted to resign pursuant to this Section 3.4, an additional member of the Company shall be admitted to the Company, subject to Section 3.3, upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the resignation, and, immediately following such admission, the resigning Member shall cease to be a member of the Company.
ARTICLE IV
DISSOLUTION
Section 4.1Events of Dissolution.
(a) The Company shall be dissolved, and its affairs shall be wound up upon the first to occur of the following: (i) the retirement, resignation or dissolution of the last remaining Member or the occurrence of any other event which terminates the continued membership of the last remaining Member, in the Company unless the business of the Company is continued in a manner permitted by the Act or (ii) the entry of a decree of judicial dissolution under the Act.
(b) Except to the extent set forth in Section 4.1(a) of this Agreement, the occurrence of any event that terminates the continued membership of a Member in the Company shall not cause the dissolution of the Company, and, upon the occurrence of such an event, the business of the Company shall continue without dissolution.
(c) The bankruptcy (as defined in the Act) of the Member shall not cause the Member to cease to be a member of the Company and upon the occurrence of such an event, the business of the Company shall continue without dissolution.
(d) In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in the Act.
ARTICLE V
INDEMNIFICATION
Section 5.1Right to Indemnification. Subject to the limitations and conditions as provided in this Article V, each Covered Person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action or other proceeding, whether civil, criminal, administrative, arbitrative or investigative, or any appeal in such a proceeding or any inquiry or investigation that could lead to such a proceeding (hereafter a “Proceeding”), by reason of any actions or omissions or alleged acts or omissions of such Covered Person relating to the Company, shall be indemnified by the Company to the fullest extent permitted by applicable law, as the same exists or may hereafter be amended against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including, without limitation, attorneys’ fees) (all collectively the “Indemnification Amounts”) actually incurred by such Covered Person at the time any such Indemnification Amounts are incurred in connection with such Proceeding. Indemnification under this Article V shall continue as to a Covered Person who has ceased to serve in the capacity which initially entitled such Covered Person to indemnity hereunder. Without limiting the generality of the foregoing, it is expressly acknowledged that the indemnification provided in this Article V could involve indemnification for negligence or under theories of strict liability.
Section 5.2Limitation on Indemnification. Subject to applicable law, notwithstanding any language in this Article V to the contrary, in no event shall any Person be entitled to indemnification pursuant to this Article V if it is established or admitted either (a) in a final judgment of a court of competent jurisdiction or (b) by such Person in any affidavit, sworn statement, plea arrangement or other cooperation with any government or regulatory authority that the Person’s acts or omissions that would otherwise be subject to indemnification under this Article V constituted fraud.
Section 5.3Advancement of Expenses. The right to indemnification conferred in this Article V shall include the right to be paid or reimbursed by the Company the reasonable expenses incurred by a Covered Person of the type entitled to be indemnified above who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding, without any determination as to such Covered Person’s ultimate entitlement to indemnification under, upon receipt of a written affirmation by such Covered Person of such Covered Person’s good faith belief that such Covered Person has met the standard of conduct necessary for indemnification under applicable law and this Article V and a written undertaking by or on behalf of such Covered Person to repay all amounts so advanced if it shall ultimately be determined that such Covered Person is not entitled to be indemnified by the Company under this Article V or if such indemnification is prohibited by applicable law.
Section 5.4Appearance as a Witness. Notwithstanding any other provision of this Article V, the Company may pay or reimburse expenses incurred by a Covered Person in connection with his or her appearance as a witness or other participation in a Proceeding at a time when such Covered Person is not a named defendant or respondent in the Proceeding.
Section 5.5Non-exclusivity of Rights. The indemnification and advancement and payment of expenses provided by this Article V shall not be deemed exclusive of any other rights to which a Covered Person indemnified pursuant to this Article V may have or hereafter acquire under any law (common or statutory), provision of this Agreement, any agreement or otherwise.
Section 5.6Contract Rights. The rights granted pursuant to this Article V shall be deemed to be contract rights, and no amendment, modification or repeal of this Article V shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any such amendment, modification or repeal.
Section 5.7Insurance. The Company may purchase and maintain insurance or another arrangement, at its expense, on behalf of itself, any Covered Person, any Manager, officer, employee or agent of the Company, or any Person who serves on behalf of the Company as a partner, manager, member, officer, director, employee or agent of any other entity against any liability, expense or loss, whether or not the Company would have the power to indemnify such Person against such liability, expense or loss under the provisions of this Article V.
Section 5.8Savings Clause. If this Article V or any portion of this Agreement shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless each Covered Person indemnified pursuant to this Article V as to costs, charges and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, to the fullest extent permitted by any applicable portion of this Article V that shall not have been invalidated and to the fullest extent permitted by applicable law.
Section 5.9Consultation with Counsel. The right to indemnification conferred in this Article V on any Covered Person shall include the right to consult with legal counsel, financial advisors and accountants selected by such Covered Person, and any act or omission suffered or taken by such Covered Person on behalf of the Company or in furtherance of the interests of the Company in good faith in reliance upon and in accordance with the advice of such counsel, financial advisors or accountants will be full justification for any such act or omission, and each such Covered Person will be fully protected in so acting or omitting to act;provided that such counsel, financial advisors or accountants were selected with reasonable care.
Section 5.10Other Indemnities.
(a) The Company acknowledges and agrees that the obligation of the Company under this Agreement to indemnify or advance expenses to any Covered Person for the matters covered thereby shall be the primary source of indemnification and advancement of such Covered Person in connection therewith and any obligation on the part of any Covered Person under any Other Indemnification Agreement to indemnify or advance expenses to such Covered Person shall be secondary to the Company’s obligation and shall be reduced by any amount that the Covered Person may collect as indemnification or advancement from the Company. If the Company fails to indemnify or advance expenses to a Covered Person as required or contemplated by this Agreement, and any Person makes any payment to such Covered Person in respect of indemnification or advancement of expenses under any Other Indemnification Agreement on account of such Unpaid Indemnity Amounts, such other Person shall be subrogated to the rights of such Covered Person under this Agreement in respect of such Unpaid Indemnity Amounts.
(b) The Company, as an indemnifying party from time to time, agrees that, to the fullest extent permitted by applicable law, its obligation to indemnify Covered Persons under this Agreement shall include any amounts expended by any other Person under any Other Indemnification Agreement in respect of indemnification or advancement of expenses to any Covered Person in connection with any Proceedings to the extent such amounts expended by such other Person are on account of any Unpaid Indemnity Amounts.
“Other Indemnification Agreement” means one or more certificate or articles of incorporation, by laws, limited liability company operating agreement, limited partnership agreement and any other organizational document, and insurance policies maintained by any Member or Manager or Affiliate thereof providing for, among other things, indemnification of and advancement of expenses for any Covered Person for, among other things, the same matters that are subject to indemnification and advancement of expenses under this Agreement.
“Unpaid Indemnity Amounts” means any amount that the Company fails to indemnify or advance to a Covered Person as required by Article V of this Agreement.
For purposes of this Article V, the term “Company” shall include any predecessor of the Company and any constituent entity (including any constituent of a constituent) absorbed by the Company in a consolidation or merger; the term service “on behalf of the Company” shall include service as an officer, Manager, Member or employee of the Company which imposes duties on, or involves services by, such officer, Manager, Member or employee with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a Person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a Person with respect to an employee benefit plan which such Person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Company.
ARTICLE VI
EXCULPATION
Section 6.1Exculpation. To the fullest extent permitted by applicable law, no Covered Person shall be liable or accountable in damages or otherwise to the Company or to any Member for any loss or liability arising from any act or omission of such Covered Person relating to the Company unless, and only to the extent that, such act or omission constituted fraud.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1Amendment. This Agreement may not be modified, altered, supplemented or amended except by written instrument signed by the Member.
Section 7.2Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware.
Section 7.3Benefits of Agreement; No Third-Party Rights. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company or by any creditor of any Member. Nothing in this Agreement shall be deemed to create any right in any Person (other than Covered Persons) not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third person.
Section 7.4Severability of Provisions. Each provision of this Agreement shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair the operation of or affect those portions of this Agreement which are valid, enforceable and legal.
Section 7.5Entire Agreement. This Agreement constitutes the entire agreement of the Member with respect to subject matter hereof.
[Remainder of Page Intentionally Left Blank; Signature Page to Follow]
IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, has duly executed this Agreement effective as of the 15th day of September, 2011.
| MEMBER: | ||
| ENERGY FUTURE HOLDINGS CORP. | ||
| By: | /s/ Brock M. Degeyter | |
Brock M. Degeyter Assistant Secretary | ||
Signature Page to
Amended and Restated Limited Liability Company Agreement of
Energy Future Intermediate Holding Company LLC
Exhibit 12(a)
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
| 2011 | 2010 | 2009 | ||||||||||
EARNINGS: | ||||||||||||
Net income (loss) before income taxes and equity earnings of unconsolidated subsidiary | $ | 204 | $ | (106 | ) | $ | (275 | ) | ||||
Add: Distributed income of equity investees | 116 | 169 | 216 | |||||||||
Fixed charges (see detail below) | 348 | 315 | 279 | |||||||||
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Total earnings | $ | 668 | $ | 378 | $ | 220 | ||||||
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FIXED CHARGES: | ||||||||||||
Interest expense | $ | 348 | $ | 315 | $ | 279 | ||||||
Rentals representative of the interest factor | — | $ | — | — | ||||||||
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Total fixed charges | $ | 348 | $ | 315 | $ | 279 | ||||||
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RATIO OF EARNINGS TO FIXED CHARGES (a) | 1.92 | 1.20 | 0.79 | |||||||||
| (a) | Fixed charges exceeded earnings by $59 million for the year ended December 31, 2009. |
Exhibit 31(a)
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
Certificate Pursuant to Section 302
of Sarbanes—Oxley Act of 2002
I, John F. Young, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Energy Future Intermediate Holding Company LLC; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 20, 2012 | /s/ JOHN F. YOUNG | |||||
| Name: | John F. Young | |||||
| Title: | Chair, President and Chief Executive | |||||
Exhibit 31(b)
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
Certificate Pursuant to Section 302
of Sarbanes—Oxley Act of 2002
I, Paul M. Keglevic, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Energy Future Intermediate Holding Company LLC; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 20, 2012 | /s/ Paul M. Keglevic | |||||
| Name: | Paul M. Keglevic | |||||
| Title: | Executive Vice President and Chief Financial Officer | |||||
Exhibit 32(a)
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
Certificate Pursuant to Section 906
of Sarbanes—Oxley Act of 2002
CERTIFICATION OF CEO
The undersigned, John F. Young, Chair, President and Chief Executive of Energy Future Intermediate Holding Company LLC (the “Company”), DOES HEREBY CERTIFY that, to his knowledge:
| 1. | The Company’s Annual Report on Form 10-K for the period ended December 31, 2011 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 20th day of February, 2012.
| /s/ JOHN F. YOUNG | ||
| Name: | John F. Young | |
| Title: | Chair, President and Chief Executive | |
A signed original of this written statement required by Section 906 has been provided to Energy Future Intermediate Holding Company LLC and will be retained by Energy Future Intermediate Holding Company LLC and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32(b)
ENERGY FUTURE INTERMEDIATE HOLDING COMPANY LLC
Certificate Pursuant to Section 906
of Sarbanes—Oxley Act of 2002
CERTIFICATION OF CFO
The undersigned, Paul M. Keglevic, Executive Vice President and Chief Financial Officer of Energy Future Intermediate Holding Company LLC (the “Company”), DOES HEREBY CERTIFY that, to his knowledge:
| 1. | The Company’s Annual Report on Form 10-K for the period ended December 31, 2011 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 20th day of February, 2012.
| /s/ Paul M. Keglevic | ||
| Name: | Paul M. Keglevic | |
| Title: | Executive Vice President and Chief Financial Officer | |
A signed original of this written statement required by Section 906 has been provided to Energy Future Intermediate Holding Company LLC and will be retained by Energy Future Intermediate Holding Company LLC and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99(a)
Energy Future Intermediate Holding Company LLC
Adjusted EBITDA Reconciliation
(millions of dollars)
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
Net income | $ | 417 | $ | 213 | ||||
Income tax expense (benefit) | 73 | (42 | ) | |||||
Interest expense and related charges | 348 | 315 | ||||||
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EBITDA | $ | 838 | $ | 486 | ||||
Oncor Holdings distributions | 116 | 169 | ||||||
Interest income | (552 | ) | (209 | ) | ||||
Equity in earnings of unconsolidated subsidiary (net of tax) | (286 | ) | (277 | ) | ||||
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Adjusted EBITDA per Incurrence Covenant | $ | 116 | $ | 169 | ||||
Add Oncor Adjusted EBITDA (reduced by Oncor Holdings distributions) | 1,523 | 1,354 | ||||||
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Adjusted EBITDA per Restricted Payments Covenant | $ | 1,639 | $ | 1,523 | ||||
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Exhibit 99(b)
Energy Future Holdings Corp. Consolidated
Adjusted EBITDA Reconciliation
(millions of dollars)
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
Net loss | $ | (1,913 | ) | $ | (2,812 | ) | ||
Income tax expense (benefit) | (1,134 | ) | 389 | |||||
Interest expense and related charges | 4,294 | 3,554 | ||||||
Depreciation and amortization | 1,499 | 1,407 | ||||||
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EBITDA | $ | 2,746 | $ | 2,538 | ||||
Oncor distributions/dividends | 116 | 169 | ||||||
Interest income | (2 | ) | (10 | ) | ||||
Amortization of nuclear fuel | 142 | 140 | ||||||
Purchase accounting adjustments (a) | 204 | 210 | ||||||
Impairment of goodwill | — | 4,100 | ||||||
Impairment and write-down of other assets (b) | 433 | 15 | ||||||
Debt extinguishment gains | (51 | ) | (1,814 | ) | ||||
Equity in earnings of unconsolidated subsidiary | (286 | ) | (277 | ) | ||||
Unrealized net gain resulting from hedging and trading transactions | (58 | ) | (1,221 | ) | ||||
EBITDA amount attributable to consolidated unrestricted subsidiaries | — | 1 | ||||||
Amortization of “day one” net loss on Sandow 5 power purchase agreement | — | (22 | ) | |||||
Noncash compensation expense (c) | 13 | 18 | ||||||
Severance expense | 7 | 4 | ||||||
Transition and business optimization costs (d) | 39 | 4 | ||||||
Transaction and merger expenses (e) | 37 | 48 | ||||||
Restructuring and other (f) | 73 | (117 | ) | |||||
Expenses incurred to upgrade or expand a generation station (g) | 100 | 100 | ||||||
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Adjusted EBITDA per Incurrence Covenant | $ | 3,513 | $ | 3,886 | ||||
Add Oncor Adjusted EBITDA (reduced by Oncor Holdings distributions) | 1,523 | 1,354 | ||||||
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Adjusted EBITDA per Restricted Payments Covenant | $ | 5,036 | $ | 5,240 | ||||
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| (a) | Purchase accounting adjustments include amortization of the intangible net asset value of retail and wholesale power sales agreements, environmental credits, coal purchase contracts, nuclear fuel contracts and power purchase agreements and the stepped up value of nuclear fuel. Also include certain credits and gains on asset sales not recognized in net income due to purchase accounting. 2011 includes $46 million related to an asset sale. |
| (b) | Impairment of assets in 2011 includes impairment of emission allowances and certain mining assets due to EPA rule issued in July 2011. |
| (c) | Noncash compensation expenses represent amounts recorded under stock-based compensation accounting standards and exclude capitalized amounts. |
| (d) | Transition and business optimization costs include certain incentive compensation expenses, as well as professional fees and other costs related to generation plant reliability and supply chain efficiency initiatives. |
| (e) | Transaction and merger expenses primarily represent Sponsor Group management fees. |
| (f) | Restructuring and other includes gains on termination of a long-term power sales contract and settlement of amounts due from hedging/ trading counterparty, fees related to the April 2011 amendment and extension of the TCEH Senior Secured Facilities, and reversal of certain liabilities accrued in purchase accounting. |
| (g) | Expenses incurred to upgrade or expand a generation station reflect noncapital outage costs. |
Exhibit 99(d)
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
AN ENERGY FUTURE HOLDINGS CORP. ENTERPRISE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
AND
INDEPENDENT AUDITOR’S REPORT
1
GLOSSARY
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
| Bondco | Refers to Oncor Electric Delivery Transition Bond Company LLC, a wholly-owned consolidated bankruptcy-remote financing subsidiary of Oncor that has issued securitization (transition) bonds to recover certain regulatory assets and other costs. | |
| Capgemini | Capgemini Energy LP, a provider of business support services to Oncor | |
| CREZ | Competitive Renewable Energy Zone | |
| Deed of Trust | Deed of Trust, Security Agreement and Fixture Filing, dated as of May 15, 2008, made by Oncor to and for the benefit of The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York Mellon, formerly The Bank of New York), as collateral agent, as amended | |
| EBITDA | Refers to earnings (net income) before interest expense, income taxes, depreciation and amortization. | |
| EFH Corp. | Refers to Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context. Its major subsidiaries include Oncor and TCEH. | |
| EFH Retirement Plan | Refers to the defined benefit pension plan sponsored by EFH Corp., in which Oncor is a participating subsidiary. | |
| EFIH | Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings. | |
| ERCOT | Electric Reliability Council of Texas, the independent system operator and the regional coordinator of various electricity systems within Texas | |
| ERISA | Employee Retirement Income Security Act of 1974, as amended | |
| FASB | Financial Accounting Standards Board, the designated organization in the private sector for establishing standards for financial accounting and reporting | |
| FERC | US Federal Energy Regulatory Commission | |
| Fitch | Fitch Ratings, Ltd. (a credit rating agency) | |
| GAAP | generally accepted accounting principles | |
| Investment LLC | Refers to Oncor Management Investment LLC, a limited liability company and minority membership interest owner (approximately 0.22%) of Oncor, whose managing member is Oncor and whose Class B Interests are owned by certain members of the management team and independent directors of Oncor. | |
| IRS | US Internal Revenue Service | |
| kWh | kilowatt-hours | |
| 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. | |
| Limited Liability Company Agreement | The Second Amended and Restated Limited Liability Company Agreement of Oncor, dated as of November 5, 2008, by and among Oncor Holdings, Texas Transmission and Investment LLC, as amended | |
| Luminant | Refers to subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas. | |
| Moody’s | Moody’s Investors Services, Inc. (a credit rating agency) | |
| Oncor | Refers to Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings, and/or its wholly-owned consolidated bankruptcy-remote financing subsidiary, Bondco, depending on context. | |
| Oncor Holdings | Refers to Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of EFIH and the direct majority owner (approximately 80.03%) of Oncor, and/ or its subsidiaries, depending on context. | |
| Oncor Plan | Refers to the Oncor Supplemental Retirement Plan, also referred to herein as the “Supplemental Retirement Plan.” | |
| Oncor Ring-Fenced Entities | Refers to Oncor Holdings and its direct and indirect subsidiaries, including Oncor. | |
| OPEB | other postretirement employee benefits | |
2
| OPEB plan | Refers to an EFH Corp.-sponsored plan, in which Oncor is a participating subsidiary, that offers certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees from the company. | |
| PUCT | Public Utility Commission of Texas | |
| PURA | Texas Public Utility Regulatory Act | |
| purchase accounting | The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or “purchase price” of a business combination, including the amount paid for the equity and direct transaction costs, are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill. | |
| REP | retail electric provider | |
| S&P | Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc. (a credit rating agency) | |
| SARs | Stock Appreciation Rights | |
| SARs Plan | Refers to the Oncor Electric Delivery Company LLC Stock Appreciation Rights Plan. | |
| SEC | US Securities and Exchange Commission | |
| Securities Act | Securities Act of 1933, as amended | |
| Sponsor Group | Refers collectively to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (KKR), TPG Capital, L.P. and GS Capital Partners, an affiliate of Goldman Sachs & Co., that have an ownership interest in Texas Holdings. | |
| TCEH | Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of Energy Future Competitive Holdings Company and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context. | |
| TCRF | transmission cost recovery factor | |
| Texas Holdings | Refers to Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group that owns substantially all of the common stock of EFH Corp. | |
| Texas Holdings Group | Refers to Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring- Fenced Entities. | |
| Texas Transmission | Refers to Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor. Texas Transmission is an entity indirectly owned by a private investment group led by OMERS Administration Corporation, acting through its infrastructure investment entity, Borealis Infrastructure Management Inc., and the Government of Singapore Investment Corporation, acting through its private equity and infrastructure arm, GIC Special Investments Pte Ltd. Texas Transmission is not affiliated with EFH Corp., any of EFH Corp.’s subsidiaries or any member of the Sponsor Group. | |
| TXU Energy | Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of TCEH engaged in the retail sale of electricity to residential and business customers. TXU Energy is a REP in competitive areas of ERCOT. | |
| US | United States of America | |
| VIE | variable interest entity | |
This Annual Report occasionally makes references to Oncor Holdings or Oncor when describing actions, rights or obligations of their respective subsidiaries. References to “we,” “our,” “us” and “the company” are to Oncor Holdings and/or its direct or indirect subsidiaries as apparent in the context. These references reflect the fact that the subsidiaries are consolidated with their respective parent companies for financial reporting purposes. However, these references should not be interpreted to imply that the parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or that the subsidiary company is undertaking an action or has the rights or obligations of its parent company or any other affiliate.
3
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Member of
Oncor Electric Delivery Holdings Company LLC
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Oncor Electric Delivery Holdings Company LLC and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related statements of consolidated income, comprehensive income, cash flows and membership interests for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oncor Electric Delivery Holdings Company LLC and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 20, 2012
4
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
STATEMENTS OF CONSOLIDATED INCOME
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Operating revenues: | ||||||||||||
Affiliated | $ | 1,026 | $ | 1,061 | $ | 1,018 | ||||||
Nonaffiliated | 2,092 | 1,853 | 1,672 | |||||||||
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Total operating revenues | 3,118 | 2,914 | 2,690 | |||||||||
Operating expenses: | ||||||||||||
Wholesale transmission service | 439 | 393 | 384 | |||||||||
Operation and maintenance | 658 | 616 | 578 | |||||||||
Depreciation and amortization | 719 | 673 | 557 | |||||||||
Write off of regulatory assets (Note 5) | — | — | 25 | |||||||||
Income taxes | 209 | 193 | 145 | |||||||||
Taxes other than income taxes | 400 | 384 | 385 | |||||||||
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Total operating expenses | 2,425 | 2,259 | 2,074 | |||||||||
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Operating income | 693 | 655 | 616 | |||||||||
Other income and deductions: | ||||||||||||
Other income (Note 16) | 30 | 36 | 49 | |||||||||
Other deductions (Note 16) | 9 | 8 | 14 | |||||||||
Nonoperating income taxes | 27 | 27 | 28 | |||||||||
Interest income | 32 | 38 | 43 | |||||||||
Interest expense and related charges (Note 16) | 359 | 347 | 346 | |||||||||
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Net income | 360 | 347 | �� | 320 | ||||||||
Net income attributable to noncontrolling interests | (74 | ) | (70 | ) | (64 | ) | ||||||
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Net income attributable to Oncor Holdings | $ | 286 | $ | 277 | $ | 256 | ||||||
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See Notes to Financial Statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net income | $ | 360 | $ | 347 | $ | 320 | ||||||
Other comprehensive income, net of tax effects: | ||||||||||||
Cash flow hedges — net decrease in fair value of derivatives (net of taxbenefit of $17, — and —) | (29 | ) | — | — | ||||||||
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Comprehensive income | 331 | 347 | 320 | |||||||||
Comprehensive income attributable to noncontrolling interests | (68 | ) | (70 | ) | (64 | ) | ||||||
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Comprehensive income attributable to Oncor Holdings | $ | 263 | $ | 277 | $ | 256 | ||||||
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See Notes to Financial Statements.
5
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
STATEMENTS OF CONSOLIDATED CASH FLOWS
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash flows — operating activities: | ||||||||||||
Net income | $ | 360 | $ | 347 | $ | 320 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 732 | 682 | 522 | |||||||||
Write off of regulatory assets (Note 5) | — | — | 25 | |||||||||
Deferred income taxes — net | 229 | 155 | 78 | |||||||||
Amortization of investment tax credits | (5 | ) | (5 | ) | (5 | ) | ||||||
Reversal of reserve recorded in purchase accounting | — | — | (10 | ) | ||||||||
Other, net | 2 | — | (1 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable—trade (including affiliates) | (36 | ) | (1 | ) | (29 | ) | ||||||
Inventories | 25 | (4 | ) | (29 | ) | |||||||
Accounts payable — trade (including affiliates) | 17 | (17 | ) | 7 | ||||||||
Deferred advanced metering system revenues (Note 5) | (16 | ) | 11 | 57 | ||||||||
Other — assets | 147 | 3 | (40 | ) | ||||||||
Other — liabilities | (160 | ) | (74 | ) | 55 | |||||||
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Cash provided by operating activities | 1,295 | 1,097 | 950 | |||||||||
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Cash flows — financing activities: | ||||||||||||
Issuance of long-term debt (Note 7) | 300 | 475 | — | |||||||||
Repayments of long-term debt (Note 7) | (113 | ) | (108 | ) | (104 | ) | ||||||
Net increase (decrease) in short term borrowings (Note 6) | 15 | (239 | ) | 279 | ||||||||
Distributions to parent (Note 9) | (116 | ) | (169 | ) | (216 | ) | ||||||
Distributions to noncontrolling interests | (29 | ) | (42 | ) | (56 | ) | ||||||
Decrease in income tax-related note receivable from TCEH | 40 | 37 | 35 | |||||||||
Debt discount, financing and reacquisition expenses — net | (17 | ) | (15 | ) | (3 | ) | ||||||
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Cash provided by (used in) financing activities | 80 | (61 | ) | (65 | ) | |||||||
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Cash flows — investing activities: | ||||||||||||
Capital expenditures | (1,362 | ) | (1,020 | ) | (998 | ) | ||||||
Other | (34 | ) | (12 | ) | 16 | |||||||
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Cash used in investing activities | (1,396 | ) | (1,032 | ) | (982 | ) | ||||||
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Net change in cash and cash equivalents | (21 | ) | 4 | (97 | ) | |||||||
Cash and cash equivalents — beginning balance | 33 | 29 | 126 | |||||||||
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Cash and cash equivalents — ending balance | $ | 12 | $ | 33 | $ | 29 | ||||||
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See Notes to Financial Statements.
6
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12 | $ | 33 | ||||
Restricted cash — Bondco (Note 11) | 57 | 53 | ||||||
Trade accounts receivable from nonaffiliates — net (Note 16) | 303 | 254 | ||||||
Trade accounts and other receivables from affiliates (Note 15) | 179 | 182 | ||||||
Income taxes receivable from EFH Corp. (Note 15) | — | 72 | ||||||
Materials and supplies inventories — at average cost | 71 | 96 | ||||||
Accumulated deferred income taxes (Note 4) | 73 | 10 | ||||||
Prepayments and other current assets | 74 | 80 | ||||||
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| |||||
Total current assets | 769 | 780 | ||||||
Restricted cash — Bondco (Note 11) | 16 | 16 | ||||||
Receivable from TCEH related to nuclear plant decommissioning (Note 15) | 225 | 206 | ||||||
Investments and other property (Note 11) | 73 | 78 | ||||||
Property, plant and equipment — net (Note 16) | 10,569 | 9,676 | ||||||
Goodwill (Notes 2 and 16) | 4,064 | 4,064 | ||||||
Note receivable due from TCEH (Note 15) | 138 | 178 | ||||||
Regulatory assets — net — Oncor (Note 5) | 1,078 | 1,266 | ||||||
Regulatory assets — net — Bondco (Note 5) | 427 | 516 | ||||||
Other noncurrent assets | 73 | 58 | ||||||
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Total assets | $ | 17,432 | $ | 16,838 | ||||
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LIABILITIES AND MEMBERSHIP INTERESTS | ||||||||
Current liabilities: | ||||||||
Short-term borrowings (Note 6) | $ | 392 | $ | 377 | ||||
Long-term debt due currently — Oncor (Note 7) | 376 | — | ||||||
Long-term debt due currently — Bondco (Note 7) | 118 | 113 | ||||||
Trade accounts payable | 197 | 125 | ||||||
Income taxes payable to EFH Corp. (Note 15) | 2 | — | ||||||
Accrued taxes other than income taxes | 151 | 133 | ||||||
Accrued interest | 108 | 108 | ||||||
Other current liabilities | 112 | 109 | ||||||
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| |||||
Total current liabilities | 1,456 | 965 | ||||||
Long-term debt, less amounts due currently — Oncor (Note 7) | 4,711 | 4,783 | ||||||
Long-term debt, less amounts due currently — Bondco (Note 7) | 433 | 550 | ||||||
Accumulated deferred income taxes (Notes 1 and 4) | 1,688 | 1,516 | ||||||
Investment tax credits | 28 | 32 | ||||||
Other noncurrent liabilities and deferred credits (Note 16) | 1,832 | 1,996 | ||||||
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Total liabilities | 10,148 | 9,842 | ||||||
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Commitments and contingencies (Note 8) | ||||||||
Membership interests (Note 9): | ||||||||
Capital account | 5,745 | 5,546 | ||||||
Accumulated other comprehensive loss, net of tax effects | (25 | ) | (2 | ) | ||||
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Oncor Holdings membership interest | 5,720 | 5,544 | ||||||
Noncontrolling interests in subsidiary | 1,564 | 1,452 | ||||||
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Total membership interests | 7,284 | 6,996 | ||||||
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Total liabilities and membership interests | $ | 17,432 | $ | 16,838 | ||||
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See Notes to Financial Statements.
7
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
STATEMENTS OF CONSOLIDATED MEMBERSHIP INTERESTS
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Capital account: | ||||||||||||
Balance at beginning of period | $ | 5,546 | $ | 5,397 | $ | 5,307 | ||||||
Net income attributable to Oncor Holdings | 286 | 277 | 256 | |||||||||
Distributions paid to parent | (116 | ) | (169 | ) | (216 | ) | ||||||
Capital contributions (a) | 29 | 40 | 50 | |||||||||
Other | — | 1 | — | |||||||||
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Balance at end of period | 5,745 | 5,546 | 5,397 | |||||||||
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Accumulated other comprehensive income (loss), net of tax effects: | ||||||||||||
Balance at beginning of period | (2 | ) | (2 | ) | (2 | ) | ||||||
Net effects of cash flow hedges (net of tax benefit of $13, — and —) | (23 | ) | — | — | ||||||||
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Balance at end of period | (25 | ) | (2 | ) | (2 | ) | ||||||
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Oncor Holdings membership interest at end of period | 5,720 | 5,544 | 5,395 | |||||||||
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Noncontrolling interests in subsidiary (Note 10): | ||||||||||||
Balance at beginning of period | 1,452 | 1,363 | 1,355 | |||||||||
Net income attributable to noncontrolling interests | 74 | 70 | 64 | |||||||||
Distributions to noncontrolling interests | (29 | ) | (42 | ) | (56 | ) | ||||||
Change related to future tax distributions from Oncor | 73 | 61 | — | |||||||||
Net effects of cash flow hedges (net of tax benefit of $4, — and —) | (6 | ) | — | — | ||||||||
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Noncontrolling interests in subsidiary at end of period | 1,564 | 1,452 | 1,363 | |||||||||
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Total membership interests at end of period | $ | 7,284 | $ | 6,996 | $ | 6,758 | ||||||
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| (a) | Reflects noncash settlement of certain income taxes payable arising as a result of the sale of noncontrolling interests in Oncor. |
See Notes to Financial Statements.
8
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
References in this report to “we,” “our,” “us” and “the company” are to Oncor Holdings and/or its direct or indirect subsidiaries as apparent in the context. The financial statements reflect almost entirely the operations of Oncor; consequently, there are no separate reportable business segments. See “Glossary” for definition of terms and abbreviations.
We are a Dallas, Texas-based holding company whose financial statements reflect almost entirely the operations of our direct, majority (approximately 80%) owned subsidiary, Oncor. Oncor is a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas. Revenues from TCEH represented 33%, 36% and 38% of total revenues for the years ended December 31, 2011, 2010 and 2009, respectively. We are a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp. EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group.
Our consolidated financial statements include the indirect, bankruptcy-remote financing subsidiary, Bondco, A VIE (see Note 16). This financing subsidiary was organized for the limited purpose of issuing certain transition bonds in 2003 and 2004. Bondco issued $1.3 billion principal amount of transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.
Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality. These measures serve to mitigate our and Oncor’s credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in the event of a bankruptcy of one or more of those entities. Such measures include, among other things: Oncor’s sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors and 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, including TXU Energy and Luminant, 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. We and Oncor do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa. Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.
See Note 10 for discussion of noncontrolling interests.
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as our audited financial statements for the year ended December 31, 2010 included in EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on February 18, 2011 (Commission File No. 001-12833). All intercompany items and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated. Subsequent events have been evaluated through the date these consolidated financial statements were issued.
Consolidation of Variable Interest Entities
A VIE is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us. We adopted amended accounting standards on January 1, 2010 that require consolidation of a VIE if we have: a) the power to direct the significant activities of the VIE and b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary). The previous standards did not require power to direct significant activities of the VIE in order to consolidate. No additional VIEs were consolidated as a result of the adoption of these accounting standards.
9
Income Taxes
EFH Corp. files a consolidated federal income tax return. Effective with the November 2008 sale of equity interests in Oncor, Oncor became a partnership for US federal income tax purposes, and subsequently only EFH Corp.’s share of partnership income is included in its consolidated federal income tax return. Our tax sharing agreement with Oncor and EFH Corp. was amended in November 2008 to include Texas Transmission and Investment LLC. The tax sharing agreement provides for the calculation of tax liability substantially as if we and Oncor file our own income tax returns, and requires tax payments to members determined on that basis (without duplication for any income taxes paid by our subsidiaries). Deferred income taxes are provided for temporary differences between our book and tax bases of assets and liabilities.
Amounts of deferred income tax assets and liabilities, as well as current and noncurrent accruals, are determined in accordance with the provisions of accounting guidance for income taxes and for uncertainty in income taxes. The accounting guidance for rate-regulated enterprises requires the recognition of regulatory assets or liabilities if it is probable such deferred tax amounts will be recovered from, or returned to customers in future rates. Investment tax credits are amortized to income over the estimated lives of the related properties.
We classify interest and penalties expense related to uncertain tax positions as current accumulated deferred income taxes as discussed in Note 4.
Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. No material adjustments, other than those disclosed elsewhere herein, were made to previous estimates or assumptions during the current year.
Derivative Instruments and Mark-to-Market Accounting
Oncor has from time-to-time entered into derivative instruments to hedge interest rate risk. If the instrument meets the definition of a derivative under accounting standards related to derivative instruments and hedging activities, the fair value of each derivative is required to be recognized on the balance sheet as a derivative asset or liability and changes in the fair value are recognized in net income, unless criteria for certain exceptions are met. This recognition is referred to as “mark-to-market” accounting.
Because derivative instruments are frequently used as economic hedges, accounting standards related to derivative instruments and hedging activities allow for “hedge accounting,” which provides for the designation of such instruments as cash flow or fair value hedges if certain conditions are met. A cash flow hedge mitigates the risk associated with the variability of the future cash flows related to an asset or liability (e.g., debt with variable interest rate payments), while a fair value hedge mitigates risk associated with fixed future cash flows (e.g., debt with fixed interest rate payments). In accounting for cash flow hedges, derivative assets and liabilities are recorded on the balance sheet at fair value with an offset to other comprehensive income to the extent the hedges are effective. Amounts remain in accumulated other comprehensive income and are reclassified into net income as the related transactions (hedged items) settle and affect net income. If the hedged transaction becomes probable of not occurring, hedge accounting is discontinued and the amount recorded in other comprehensive income is immediately reclassified into net income. Fair value hedges are recorded as derivative assets or liabilities with an offset to net income, and the carrying value of the related asset or liability (hedged item) is adjusted for changes in fair value with an offset to net income. If the fair value hedge is settled prior to the maturity of the hedged item, the cumulative fair value gain or loss associated with the hedge is amortized into income over the remaining life of the hedged item. To qualify for hedge accounting, a hedge must be considered highly effective in offsetting changes in fair value of the hedged item. Assessment of the hedge’s effectiveness is tested at least quarterly throughout its term to continue to qualify for hedge accounting. Hedge ineffectiveness, even if the hedge continues to be assessed as effective, is immediately recognized in net income. Ineffectiveness is generally measured as the cumulative excess, if any, of the change in value of the hedging instrument over the change in value of the hedged item.
Reconcilable Tariffs
The PUCT has designated certain tariffs (TCRF, energy efficiency and advanced meter surcharges and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred expenses are deferred as either regulatory assets or regulatory liabilities. Accordingly, at prescribed intervals, future tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.
10
Revenue Recognition
Revenue from delivery services are recorded under the accrual method of accounting. Revenues are recognized when delivery services are provided to customers on the basis of periodic cycle meter readings and include an estimate for revenues earned from the meter reading date to the end of the period adjusted for the impact of weather (unbilled revenue).
Impairment of Goodwill and Other Intangible Assets
We evaluate goodwill for impairment at least annually. The impairment tests performed in 2010 and 2009 were based on determinations of enterprise value using discounted cash flow analyses, comparable company equity values and any relevant transactions indicative of enterprise values.
In September 2011, the FASB issued new guidance related to testing goodwill for impairment that provides the option to first assess qualitative factors to determine if the annual two-step test of goodwill for impairment must be performed. If, based on the qualitative assessment of events or circumstances, an entity determines it is more likely than not that its fair value exceeds its carrying amount, it is not necessary to perform the two-step impairment test. However, if an entity concludes otherwise, then the two-step impairment test must be performed to identify potential impairment and to measure the amount of goodwill impairment, if any. Oncor adopted this accounting guidance at December 1, 2011, including the qualitative assessment described in Note 2. The adoption of this new accounting guidance did not affect reported results of operations, financial condition or cash flows.
See Note 2 for discussion of a goodwill impairment charge recorded in 2008 and Note 16 for details of goodwill and other intangible assets.
System of Accounts
Our accounting records have been maintained in accordance with the FERC Uniform System of Accounts as adopted by the PUCT.
Defined Benefit Pension Plans and Other Postretirement Employee Benefit (OPEB) Plans
Oncor participates in the EFH Retirement Plan that offers benefits based on either a traditional defined benefit formula or a cash balance formula and the OPEB Plan that offers certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees from Oncor. Oncor also offers its own supplemental retirement plan (Oncor Plan) to qualified employees. Costs of pension and OPEB plans are dependent upon numerous factors, assumptions and estimates. See Note 13 for additional information regarding pension and OPEB plans.
Stock-Based Incentive Compensation
In 2008, Oncor implemented the SARs Plan for certain management that purchased equity interests in the company indirectly by investing in Investment LLC. SARs have been awarded under the SARs Plan and are being accounted for based upon the provisions of guidance for share-based payment. See Note 14 for information regarding stock-based compensation, including SARs granted to certain members of Oncor’s board of directors.
11
Fair Value of Nonderivative Financial Instruments
The carrying amounts for financial assets classified as current assets and the carrying amounts for financial liabilities classified as current liabilities approximate fair value due to the short maturity of such instruments. The fair values of other financial instruments, for which carrying amounts and fair values have not been presented, are not materially different than their related carrying amounts. The following discussion of fair value accounting standards applies primarily to our determination of the fair value of assets in the pension and OPEB plan trusts as presented in Note 13.
Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use a “mid-market” valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities subject to fair value measurement on a recurring basis. We primarily use the market approach for recurring fair value measurements and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs.
We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:
| • | Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| • | Level 2 valuations use inputs, in the absence of actively quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. Our Level 2 valuations utilize over-the-counter broker quotes, quoted prices for similar assets or liabilities that are corroborated by correlations or other mathematical means and other valuation inputs. |
| • | Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. We use the most meaningful information available from the market combined with internally developed valuation methodologies to develop our best estimate of fair value. |
We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis.
Franchise Taxes
Franchise taxes are assessed to Oncor by local governmental bodies, based on kWh delivered and are the principal component of “taxes other than income taxes” as reported in the income statement. Franchise taxes are not a “pass through” item. Rates charged to customers by Oncor are intended to recover the franchise taxes, but Oncor is not acting as an agent to collect the taxes from customers.
Cash and Cash Equivalents
For purposes of reporting cash and cash equivalents, temporary cash investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. See Note 11 for details regarding restricted cash.
12
Property, Plant and Equipment
Properties are stated at original cost. The cost of self-constructed property additions includes materials and both direct and indirect labor and applicable overhead and an allowance for funds used during construction.
Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated service lives of the properties based on depreciation rates approved by the PUCT. As is common in the industry, depreciation expense is recorded using composite depreciation rates that reflect blended estimates of the lives of major asset groups as compared to depreciation expense calculated on a component asset-by-asset basis. Depreciation rates include plant removal costs as a component of depreciation expense, consistent with regulatory treatment. Actual removal costs incurred are charged to accumulated depreciation. When accrued removal costs exceed incurred removal costs, the difference is reclassified as a regulatory obligation to retire assets in the future.
Allowance For Funds Used During Construction (AFUDC)
AFUDC is a regulatory cost accounting procedure whereby both interest charges on borrowed funds and a return on equity capital used to finance construction are included in the recorded cost of utility plant and equipment being constructed. AFUDC is capitalized on all projects involving construction periods lasting greater than thirty days. The equity portion of capitalized AFUDC is accounted for as other income. There was no equity AFUDC for the periods presented. See Note 16 for detail of amounts charged to interest expense.
Regulatory Assets and Liabilities
Our financial statements reflect regulatory assets and liabilities under cost-based rate regulation in accordance with accounting standards related to the effect of certain types of regulation. Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates. See Note 5 for details of regulatory assets and liabilities.
Sale of Noncontrolling Interests
See Note 10 for discussion of noncontrolling interests.
2. GOODWILL IMPAIRMENT
Effective with the December 1, 2011 test, we adopted new accounting guidance (see Note 1) that allows for a qualitative assessment in which we considered macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. Based on the results of the 2011 assessment, we concluded that no further testing for impairment was required. Testing for impairment performed for 2010 and 2009 resulted in no additional testing and no impairment.
In the fourth quarter of 2008, we recorded a goodwill impairment charge totaling $860 million, which was not deductible for income tax-related purposes. The impairment primarily arose from the 2008 dislocation in the capital markets that increased interest rate spreads and the resulting discount rates used in estimating fair values and the effect of declines in market values of debt and equity securities of comparable companies.
The 2008 impairment determination involved significant assumptions and judgments in estimating enterprise values and the fair values of assets and liabilities. The calculations supporting the impairment determination utilized models that took into consideration multiple inputs, including debt yields, equity prices of comparable companies and other inputs. Those models were generally used in developing long-term forward discount rates for determining enterprise value and fair values of certain individual assets and liabilities. The fair value measurements resulting from such models are classified as Level 3 non-recurring fair value measurements consistent with accounting standards related to the determination of fair value.
13
3. REGULATORY MATTERS
2011 Rate Review
In January 2011, Oncor filed a rate review with the PUCT and 203 original jurisdiction cities based on a test year ended June 30, 2010 (PUCT Docket No. 38929). In April 2011, Oncor filed, and the administrative law judges in the rate review granted, a motion requesting abatement of the procedural schedule on the grounds that Oncor and the other parties had reached a Memorandum of Settlement that would settle and resolve all issues in the rate review. Oncor filed a stipulation (including a proposed order and proposed tariffs) in May 2011 that incorporated the Memorandum of Settlement along with pleadings and other documentation (Stipulation) for the purpose of obtaining final approval of the settlement. The terms of the Stipulation include an approximate $137 million base rate increase and additional provisions to address franchise fees (discussed below) and other expenses. Approximately $93 million of the increase became effective July 1, 2011, and the remainder became effective January 1, 2012. Under the Stipulation, amortization of regulatory assets increased by approximately $24 million ($14 million of which will be recognized as tax expense) annually beginning January 1, 2012. The Stipulation did not change Oncor’s authorized regulatory capital structure of 60% debt and 40% equity or its authorized return on equity of 10.25%. Under the terms of the Stipulation, Oncor cannot file another general base rate review prior to July 1, 2013, but is not restricted from filing wholesale transmission rate, TCRF, distribution-related investment and other rate updates and adjustments permitted by Texas state law and PUCT rules.
In response to concerns raised by PUCT Commissioners at a July 2011 PUCT open meeting regarding the Stipulation, Oncor filed a modified stipulation that removed from the Stipulation a one-time payment to certain cities it serves for retrospective franchise fees (Modified Stipulation). Instead, pursuant to the terms of a separate agreement with certain cities it serves, Oncor will make retrospective franchise fee payments to cities that accept the terms of the separate agreement. If all cities accept, the payments will total approximately $22 million. Through December 31, 2011, Oncor had made franchise fee payments to cities under the separate agreement totaling 99% of the potential payments. The payments are subject to refund from the cities or recovery from customers after final resolution of proceedings related to the appeals from Oncor’s June 2008 rate review filing (discussed below). No other significant terms of the Stipulation were revised. In August 2011, the PUCT issued a final order approving the settlement terms contained in the Modified Stipulation.
Effective July 1, 2011, pursuant to the PUCT’s final order, Oncor no longer recovers the cost of wholesale transmission service through base rates, and all wholesale transmission service expenses incurred are reconcilable to revenues billed under the TCRF rider. For this purpose, all wholesale transmission service expenses consist of amounts charged under a PUCT-approved transmission tariff including Oncor’s own wholesale transmission tariff. Oncor accounts for the difference between amounts charged under the TCRF rate and wholesale transmission service expense as a regulatory asset or regulatory liability (under- or over-recovered wholesale transmission service expense (see Note 1)). At December 31, 2011, approximately $20 million ($13 million after tax) was deferred as over-recovered wholesale transmission service expense (see Note 5).
2008 Rate Review
In August 2009, the PUCT issued a final order with respect to Oncor’s June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (PUCT Docket No. 35717), and new rates were implemented in September 2009. In November 2009, the PUCT issued an order on Rehearing that established a new rate class but did not change the revenue requirements. Oncor and four other parties appealed various portions of the rate review final order to a state district court, and oral argument was held in October 2010. In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities. Oncor filed an appeal with the Austin Court of Appeals in February 2011 with respect to the issues it appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities. All briefing has been completed and the parties are waiting for the Court of Appeals to set a date for oral argument. Oncor is unable to predict the outcome of the appeal.
14
Stipulation Approved by the PUCT
In April 2008, the PUCT entered an order, which became final in June 2008, approving the terms of a stipulation relating to a filing in 2007 by Oncor and Texas Holdings with the PUCT pursuant to Section 14.101(b) of PURA and PUCT Substantive Rule 25.75. Among other things, the stipulation required Oncor to file a rate review no later than July 1, 2008 based on a test year ended December 31, 2007, which it filed in June 2008. The PUCT issued a final order with respect to the rate review in August 2009. In July 2008, Nucor Steel filed an appeal of the PUCT’s order in the 200th District Court of Travis County, Texas. A hearing on the appeal was held in June 2010, and the District Court affirmed the PUCT order in its entirety. Nucor Steel appealed that ruling to the Third Court of Appeals in Austin, Texas in July 2010. Oral argument was held before the court in March 2011. There is no deadline for the court to act. While Oncor is unable to predict the outcome of the appeal, it does not expect the appeal to affect the major provisions of the stipulation.
In addition to commitments Oncor made in its filings in the PUCT review, the stipulation included the following provisions, among others:
| • | Oncor provided a one-time $72 million refund to its REP customers in the September 2008 billing cycle. The refund was in the form of a credit on distribution fee billings. The liability for the refund was previously recorded as part of purchase accounting. |
| • | Consistent with a 2006 cities rate settlement, Oncor filed a system-wide rate review in June 2008 based on a test-year ended December 31, 2007. In August 2009, the PUCT issued a final order in this rate review. See Note 5. |
| • | The distributions paid by Oncor will be limited through December 31, 2012, to an amount not to exceed Oncor’s net income (determined in accordance with US GAAP, subject to certain defined adjustments) for the period beginning October 11, 2007 and ending December 31, 2012, and are further limited by an agreement that Oncor’s regulatory capital structure, as determined by the PUCT, will be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity (see Note 9). |
| • | Oncor committed to minimum capital spending of $3.6 billion over the five-year period ending December 31, 2012, subject to certain defined conditions. Approximately 94% of this total was spent as of December 31, 2011. This spending does not include the capital spending on CREZ facilities. |
| • | Oncor committed to an additional $100 million in spending over the five-year period ending December 31, 2012 on demand-side management or other energy efficiency initiatives. Approximately 75% of this total was spent at December 31, 2011. These additional expenditures will not be recoverable in rates, and this amount was recorded as a regulatory liability as part of purchase accounting and consistent with accounting standards related to the effect of certain types of regulation. |
| • | If Oncor’s credit rating is below investment grade with two or more rating agencies, TCEH will post a letter of credit in an amount of $170 million to secure TXU Energy’s payment obligations to Oncor. |
| • | Oncor agreed not to request recovery of goodwill or any future impairment of the goodwill in its rates. |
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4. INCOME TAXES
The components of our income taxes are as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Reported in operating expenses: | ||||||||||||
Current: | ||||||||||||
US federal | $ | (55 | ) | $ | (6 | ) | $ | 69 | ||||
State | 21 | 21 | 17 | |||||||||
Deferred: | ||||||||||||
US federal | 248 | 183 | 67 | |||||||||
State | — | — | (3 | ) | ||||||||
Amortization of investment tax credits | (5 | ) | (5 | ) | (5 | ) | ||||||
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Total | 209 | 193 | 145 | |||||||||
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Reported in other income and deductions: | ||||||||||||
Current: | ||||||||||||
US federal | 45 | 55 | 13 | |||||||||
State | 1 | 1 | 1 | |||||||||
Deferred federal | (19 | ) | (29 | ) | 14 | |||||||
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Total | 27 | 27 | 28 | |||||||||
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Total income tax expense | $ | 236 | $ | 220 | $ | 173 | ||||||
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Reconciliation of income taxes computed at the US federal statutory rate to income taxes:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Income before income taxes | $ | 596 | $ | 567 | $ | 493 | ||||||
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Income taxes at the US federal statutory rate of 35% | $ | 209 | $ | 198 | $ | 173 | ||||||
Amortization of investment tax credits — net of deferred tax effect | (5 | ) | (5 | ) | (5 | ) | ||||||
Amortization (under regulatory accounting) of statutory tax rate changes | (3 | ) | (3 | ) | (2 | ) | ||||||
Texas margin tax, net of federal tax benefit | 14 | 13 | 12 | |||||||||
Medicare subsidy | — | (1 | ) | (6 | ) | |||||||
Nondeductible losses (gains) on benefit plan investments | (1 | ) | (1 | ) | (1 | ) | ||||||
Other, including audit settlements | 22 | 19 | 2 | |||||||||
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Income tax expense | $ | 236 | $ | 220 | $ | 173 | ||||||
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Effective rate | 39.6 | % | 38.8 | % | 35.1 | % | ||||||
At December 31, 2011 and 2010, net amounts of $1.615 billion and $1.506 billion, respectively, were reported in the balance sheets as accumulated deferred income taxes. These amounts include $1.605 billion and $1.459 billion, respectively, related to our investment in the Oncor partnership.
We also have AMT credit carryforwards and NOL carryforwards related to our investment in the Oncor partnership. At December 31, 2011 and 2010, we had $49 million and $13 million of alternative minimum tax (AMT) credit carryforwards, respectively, available to offset future tax sharing payments. The AMT credit carryforwards have no expiration date. At December 31, 2011, we had net operating loss (NOL) carryforwards for federal income tax purposes of $199 million that expire in 2032. The NOL carryforwards can be used to offset future taxable income. We expect to use all of our NOL carryforwards prior to their expiration date.
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Accounting For Uncertainty in Income Taxes
EFH Corp. and its subsidiaries file income tax returns in US federal, state and foreign jurisdictions and are subject to examinations by the IRS and other taxing authorities. Examinations of EFH Corp. and its subsidiaries’ income tax returns for the years ending prior to January 1, 2007 are complete, but the tax years 1997 through 2006 remain in appeals with the IRS. Texas franchise and margin tax returns are under examination or still open for examination for tax years beginning after 2002.
The IRS audit for the years 2003 through 2006 was concluded in June 2011. A significant number of proposed adjustments are in appeals with the IRS. The results of the audit did not affect management’s assessment of issues for purposes of determining the liability for uncertain tax positions.
The following table summarizes the changes to the uncertain tax positions, reported in other noncurrent liabilities in our consolidated balance sheet, during the years ended December 31, 2011, 2010 and 2009:
| 2011 | 2010 | 2009 | ||||||||||
Balance at January 1, excluding interest and penalties | $ | 82 | $ | 71 | $ | 122 | ||||||
Additions based on tax positions related to prior years | 44 | 31 | 22 | |||||||||
Reductions based on tax positions related to prior years | — | (20 | ) | (73 | ) | |||||||
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Balance at December 31, excluding interest and penalties | $ | 126 | $ | 82 | $ | 71 | ||||||
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Of the balances at December 31, 2011 and 2010, $115 million and $71 million, respectively represent tax positions for which the uncertainty relates to the timing of recognition for tax purposes. The disallowance of such positions would not affect the effective tax rate, but would accelerate the payment of cash under the tax sharing agreement to an earlier period.
Noncurrent liabilities included a total of $21 million and $18 million in accrued interest at December 31, 2011 and 2010, respectively. Amounts recorded related to interest and penalties totaled an expense of $2 million in the year ended December 31, 2011 and a benefit of $1 million and $5 million in the years ended December 31, 2010 and 2009, respectively, as a result of reversals of previously accrued amounts (all amounts after tax). The federal income tax benefit on the interest accrued on uncertain tax positions is recorded as accumulated deferred income taxes. With respect to tax positions for which the ultimate deductibility is uncertain (permanent items), should EFH Corp. or we sustain such positions on income tax returns previously filed, our liabilities recorded would be reduced by $11 million, resulting in increased net income and a favorable impact on the effective tax rate.
We do not expect the total amount of liabilities recorded related to uncertain tax positions will significantly increase or decrease within the next 12 months.
17
5. REGULATORY ASSETS AND LIABILITIES
Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT. Components of the regulatory assets and liabilities are provided in the table below. Amounts not earning a return through rate regulation are noted.
| Remaining Rate Recovery/ Amortization Period at December 31, 2011 | Carrying Amount | |||||||||
| December 31, 2011 | December 31, 2010 | |||||||||
Regulatory assets: | ||||||||||
Generation-related regulatory assets securitized by transitionbonds (a)(f) | 5 years | $ | 531 | $ | 647 | |||||
Employee retirement costs (g) | 8 years | 103 | 63 | |||||||
Employee retirement costs to be reviewed (b)(c) | To be determined | 74 | 75 | |||||||
Employee retirement liability (a)(c)(d) | To be determined | 707 | 910 | |||||||
Self-insurance reserve (primarily storm recovery costs) — net (g) | 8 years | 221 | 117 | |||||||
Self-insurance reserve to be reviewed (b)(c) | To be determined | 71 | 135 | |||||||
Securities reacquisition costs (pre-industry restructure) | 6 years | 48 | 55 | |||||||
Securities reacquisition costs (post-industry restructure) — net | Terms of related debt | 2 | 1 | |||||||
Recoverable amounts in lieu of deferred income taxes — net | Life of related asset or | 104 | 117 | |||||||
| liability | ||||||||||
Rate review expenses (a) | Largely 3 years | 11 | 6 | |||||||
Rate review expenses to be reviewed (b)(c) | To be determined | 1 | 4 | |||||||
Advanced meter customer education costs (c) | 9 years | 9 | 8 | |||||||
Deferred conventional meter depreciation | 9 years | 107 | 60 | |||||||
Energy efficiency performance bonus (a) | 1 year | 8 | 11 | |||||||
Under-recovered wholesale transmission service expense (a)(c) | 1 year | — | 8 | |||||||
Wholesale transmission settlement costs | Not applicable | 9 | — | |||||||
Other regulatory assets | Not applicable | 1 | — | |||||||
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Total regulatory assets | 2,007 | 2,217 | ||||||||
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Regulatory liabilities: | ||||||||||
Nuclear decommissioning cost over-recovery (a)(c)(e) | Not applicable | 225 | 206 | |||||||
Estimated net removal costs | Life of utility plant | 115 | 28 | |||||||
Committed spending for demand-side management initiatives (a) | 2 years | 25 | 53 | |||||||
Deferred advanced metering system revenues | 9 years | 52 | 68 | |||||||
Investment tax credit and protected excess deferred taxes | Various | 33 | 39 | |||||||
Over-collection of transition bond revenues (a)(f) | 5 years | 37 | 33 | |||||||
Over-recovered wholesale transmission service expense (a)(c) | 1 year | 13 | — | |||||||
Energy efficiency programs (a) | Not applicable | 2 | 8 | |||||||
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Total regulatory liabilities | 502 | 435 | ||||||||
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Net regulatory asset | $ | 1,505 | $ | 1,782 | ||||||
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| (a) | Not earning a return in the regulatory rate-setting process. |
| (b) | Costs incurred since the period covered under the last rate review. |
| (c) | Recovery is specifically authorized by statute or by the PUCT, subject to reasonableness review. |
| (d) | Represents unfunded liabilities recorded in accordance with pension and OPEB accounting standards. |
| (e) | Offset by an intercompany receivable from TCEH. See Note 15. |
| (f) | Bondco net regulatory assets of $427 million at December 31, 2011 consist of $464 million included in generation-related regulatory assets net of the regulatory liability for over-collection of transition bond revenues of $37 million. Bondco net regulatory assets of $516 million at December 31, 2010 consist of $549 million included in generation-related regulatory assets net of the regulatory liability for over-collection of transition bond revenues of $33 million. |
| (g) | Amortization period effective January 1, 2012. |
18
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act enacted in March 2010 reduce, effective 2013, the amount of OPEB costs deductible for federal income tax purposes by the amount of the Medicare Part D subsidy received by the EFH Corp. OPEB plans in which we participate. Under income tax accounting rules, deferred tax assets related to accrued OPEB liabilities must be reduced immediately for the future effect of the legislation. Accordingly, in the first quarter of 2010, our deferred tax assets were reduced by $42 million. All of this amount was recorded as a regulatory asset (before gross-up for liability in lieu of deferred income taxes) as the additional amounts due related to income taxes are expected to be recoverable in our future rates.
As a result of purchase accounting, in 2007 the carrying value of certain generation-related regulatory assets securitized by transition bonds, which have been reviewed and approved by the PUCT for recovery but without earning a rate of return, was reduced by $213 million. This amount will be accreted to other income over the recovery period remaining at October 10, 2007 (approximately nine years). On August 31, 2009, the PUCT issued a final order in Oncor’s rate review filed in June 2008. The rate review included a determination of the recoverability of regulatory assets at December 31, 2007, including the recoverability period of those assets deemed allowable by the PUCT. The PUCT’s findings included denial of recovery of certain regulatory assets primarily related to business restructuring costs and rate review expenses, which resulted in a $25 million charge ($16 million after tax) in the third quarter of 2009 reported as write off of regulatory assets.
In September 2008, the PUCT approved a settlement for Oncor to recover its estimated future investment for advanced metering deployment. Oncor began billing the advanced metering surcharge in the January 2009 billing month cycle. The surcharge is expected to total $1.023 billion over the 11-year recovery period and includes a cost recovery factor of $2.19 per month per residential retail customer and $2.39 to $5.15 per month for non-residential retail customers. Oncor accounts for the difference between the surcharge billings for advanced metering facilities and the allowed revenues under the surcharge provisions, which are based on expenditures and an allowed return, as a regulatory asset or liability. Such differences arise principally as a result of timing of expenditures. As indicated in the table above, the regulatory liability at December 31, 2011 and 2010 totaled $52 million and $68 million, respectively.
In accordance with the PUCT’s August 2009 order in Oncor’s rate review, the remaining net book value and anticipated removal cost of existing conventional meters that are being replaced by advanced meters are being charged to depreciation and amortization expense over an 11-year cost recovery period.
See Note 15 for additional information regarding nuclear decommissioning cost recovery.
6. BORROWINGS UNDER CREDIT FACILITIES
In August 2011, Oncor amended its $2.0 billion secured revolving credit facility to terminate the commitment of a subsidiary of Lehman Brothers Holdings Inc., a lender under the revolving credit facility, which had filed for bankruptcy and had an approximately $122 million unfunded commitment (net of approximately $10 million of its commitment funded under the revolving credit facility). In October 2011, Oncor amended and restated its secured revolving credit facility (revolving credit facility). The revolving credit facility provides for up to $2.0 billion aggregate principal amount of borrowings. Oncor may request increases of up to $500 million, in $100 million increments, provided certain conditions are met, including lender approval. The revolving credit facility has a five-year term expiring in October 2016. Oncor has the option of requesting up to two additional one-year extensions, with such extensions subject to certain conditions and lender approval.
The revolving credit facility may be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances. At December 31, 2011, Oncor had outstanding borrowings under the revolving credit facility totaling $392 million with an interest rate of 1.40% and outstanding letters of credit totaling $6 million. At December 31, 2010, Oncor had outstanding borrowings under the revolving credit facility totaling $377 million with an interest rate of 0.53% and outstanding letters of credit totaling $6 million. All outstanding borrowings at December 31, 2011, bore interest at LIBOR plus 1.125%, letters of credit bore interest at 1.125%, and a facility fee was payable on the unfunded commitments under the facility, each based on Oncor’s current credit ratings. Amounts borrowed under the facility, once repaid, can be borrowed again from time to time. Borrowings are classified as short-term on the balance sheet.
Subject to the limitations described below, borrowing capacity available under the revolving credit facility at December 31, 2011 and December 31, 2010 was $1.602 billion and $1.495 billion, respectively. The availability at December 31, 2010 excluded $122 million of unfunded commitments from a subsidiary of Lehman Brothers Holdings Inc. that filed for bankruptcy under Chapter 11 of the US Bankruptcy Code.
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Borrowings under the revolving credit facility are secured equally and ratably with all of Oncor’s other secured indebtedness by a first priority lien on property it acquired or constructed for the transmission and distribution of electricity, which property is mortgaged under the Deed of Trust. Generally, Oncor’s indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions. As described further in Note 7, the Deed of Trust permits Oncor to secure indebtedness (including borrowings under its revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent. At December 31, 2011, the revolving credit facility could be fully drawn.
Loans under the revolving credit facility bear interest at per annum rates equal to, at Oncor’s option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on certain credit ratings assigned to Oncor’s senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%) plus a spread ranging from 0.00% to 0.75%, depending on certain credit ratings assigned to its senior secured non-credit enhanced long-term debt. Based on Oncor’s ratings as of December 31, 2011, its LIBOR-based borrowings bear interest at LIBOR plus 1.125%.
An unused commitment fee is payable quarterly in arrears and upon termination or commitment reduction at a rate per annum equal to 0.100% to 0.275% (such spread depending on certain credit ratings assigned to Oncor’s senior secured debt) of the daily unused commitments under the revolving credit facility. Based on Oncor’s ratings as of December 31, 2011, its unused commitment fee is 0.125%. Letter of credit fees on the stated amount of letters of credit issued under the revolving credit facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to the spread over adjusted LIBOR. Customary fronting and administrative fees are also payable to letter of credit fronting banks.
The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, Oncor and its subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets. In addition, the revolving credit facility requires that Oncor maintain a consolidated senior debt to capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants. At December 31, 2011, Oncor was in compliance with these covenants.
The revolving credit facility also contains customary events of default for facilities of this type, the occurrence of which would allow the lenders to accelerate all outstanding loans and terminate their commitments, including certain changes in control that are not permitted transactions, cross-default provisions in the event Oncor or any of its subsidiaries (other than Bondco) defaults on indebtedness in a principal amount in excess of $100 million or receives judgments for the payment of money in excess of $50 million that are not discharged within 60 days.
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7. LONG-TERM DEBT
At December 31, 2011 and 2010, our long-term debt consisted of the following:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Oncor (a): | ||||||||
6.375% Fixed Senior Notes due May 1, 2012 | $ | 376 | $ | 376 | ||||
5.950% Fixed Senior Notes due September 1, 2013 | 524 | 524 | ||||||
6.375% Fixed Senior Notes due January 15, 2015 | 500 | 500 | ||||||
5.000% Fixed Senior Notes due September 30, 2017 | 324 | 324 | ||||||
6.800% Fixed Senior Notes due September 1, 2018 | 550 | 550 | ||||||
5.750% Fixed Senior Notes due September 30, 2020 | 126 | 126 | ||||||
7.000% Fixed Debentures due September 1, 2022 | 800 | 800 | ||||||
7.000% Fixed Senior Notes due May 1, 2032 | 500 | 500 | ||||||
7.250% Fixed Senior Notes due January 15, 2033 | 350 | 350 | ||||||
7.500% Fixed Senior Notes due September 1, 2038 | 300 | 300 | ||||||
5.250% Fixed Senior Notes due September 30, 2040 | 475 | 475 | ||||||
4.550% Fixed Senior Notes due December 1, 2041 | 300 | — | ||||||
Unamortized discount | (38 | ) | (42 | ) | ||||
Less amounts due currently | (376 | ) | — | |||||
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Total Oncor | 4,711 | 4,783 | ||||||
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Oncor Electric Delivery Transition Bond Company LLC (b): | ||||||||
4.950% Fixed Series 2003 Bonds due in semiannual installments through February 15, 2013 | 56 | 101 | ||||||
5.420% Fixed Series 2003 Bonds due in semiannual installments through August 15, 2015 (c) | 145 | 145 | ||||||
4.810% Fixed Series 2004 Bonds due in semiannual installments through November 15, 2012 | 63 | 131 | ||||||
5.290% Fixed Series 2004 Bonds due in semiannual installments through May 15, 2016 (c) | 290 | 290 | ||||||
Unamortized fair value discount related to transition bonds | (3 | ) | (4 | ) | ||||
Less amounts due currently | (118 | ) | (113 | ) | ||||
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Total Oncor Electric Delivery Transition Bond Company LLC | 433 | 550 | ||||||
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Total long-term debt (d) | $ | 5,144 | $ | 5,333 | ||||
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| (a) | Secured by first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness. See “Deed of Trust Amendment” below for additional information. |
| (b) | The transition bonds are nonrecourse to Oncor and were issued to securitize a regulatory asset. |
| (c) | Principal installments will commence in August 2012 and May 2012, respectively. |
| (d) | According to our organizational documents, Oncor Holdings (parent) is prohibited from directly incurring indebtedness for borrowed money. |
Debt-Related Activity in 2011
Debt Repayments
Repayments of long-term debt in 2011 totaled $113 million and represent transition bond principal payments at scheduled maturity dates.
21
Interest Rate Hedge Transaction
In August 2011, Oncor entered into an interest rate hedge transaction hedging the variability of treasury bond rates used to determine interest rates on an anticipated issuance of its senior secured notes (see below for information regarding the debt issuance). The hedges were terminated in November 2011 upon the issuance of the senior secured notes. Oncor recognized the loss related to the fair value of the hedge transaction in accumulated other comprehensive income. Approximately $1 million of the amount reported in accumulated other comprehensive income at December 31, 2011, is expected to be reclassified into net income within twelve months.
Issuance of New Senior Secured Notes
In November 2011, Oncor issued $300 million aggregate principal amount of 4.550% senior secured notes maturing in December 2041 (2041 Notes). Oncor used the net proceeds of approximately $297 million from the sale of the notes to repay borrowings under its revolving credit facility, including loans under the revolving credit facility and for general corporate purposes. The notes are secured by the first priority lien described below, and are secured equally and ratably with all of Oncor’s other secured indebtedness.
Interest on the 2041 Notes is payable in cash semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2012. Oncor may at its option redeem the notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. The notes also contain customary events of default, including failure to pay principal or interest on the notes when due.
The 2041 Notes were issued in a private placement and have not been registered under the Securities Act. Oncor has agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the 2041 Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the 2041 Notes. Oncor has agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the 2041 Notes, or if required, to use commercially reasonable efforts to have one or more shelf registration statements declared effective within the later of 180 days after such shelf registration statement filing obligation arises and 270 days after the issue date of the 2041 Notes. If Oncor does not comply with this obligation (a registration default), the annual interest rate on the notes will increase 50 basis points per annum until the earlier of the expiration of the registration default or the second anniversary of the issue date of the 2041 Notes.
Deed of Trust
Oncor’s secured indebtedness, including the 2041 Notes described above and the revolving credit facility described in Note 6, are secured equally and ratably by a first priority lien on property it acquired or constructed for the transmission and distribution of electricity. The property is mortgaged under the Deed of Trust. The Deed of Trust permits Oncor to secure indebtedness (including borrowings under the revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent. At December 31, 2011, the amount of available bond credits was approximately $1.635 billion and the amount of future debt Oncor could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $708 million.
Debt-Related Activity in 2010
Debt Repayments
Repayments of long-term debt in 2010 totaled $108 million and represent transition bond principal payments at scheduled maturity dates.
Issuance of New Senior Secured Notes
In September 2010, Oncor issued $475 million aggregate principal amount of 5.250% senior secured notes maturing in September 2040 (2040 Notes). Oncor used the net proceeds of approximately $465 million from the sale of the notes to repay borrowings under the revolving credit facility, including loans under the revolving credit facility and for general corporate purposes. The notes are secured by the first priority lien described below, and are secured equally and ratably with all of Oncor’s other secured indebtedness.
22
Interest on the 2040 Notes is payable in cash semiannually in arrears on March 30 and September 30 of each year, and began on March 30, 2011. Oncor may redeem the notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. The notes also contain customary events of default, including failure to pay principal or interest on the notes when due
Debt Exchange
In September 2010, Oncor announced an offer to exchange up to $350 million of its outstanding 6.375% senior secured notes due 2012 and up to $325 million of its outstanding 5.950% senior secured notes due 2013 (collectively, the Original Notes) for newly issued 5.000% senior secured notes due 2017 (2017 Notes) and newly issued 5.750% senior secured notes due 2020 (2020 Notes, and together with the 2017 Notes, New Notes), respectively. In October 2010, Oncor issued approximately $324 million aggregate principal amount of the 2017 Notes and approximately $126 million aggregate principal amount of the 2020 Notes in exchange for an equivalent principal amount of the respective Original Notes validly tendered. Oncor did not receive any cash proceeds from the exchange. Under accounting guidelines, we recorded the exchange transaction related to the $324 million aggregate principal amount of 6.375% senior secured notes due 2012 as a debt retirement, which resulted in a fair value discount totaling $25 million and a gain deferred as a regulatory liability totaling $25 million. We recorded the exchange transaction related to the $126 million aggregate principal amount of the 5.950% senior secured notes due 2013 as a debt modification.
Deed of Trust Amendment
In September 2010, Oncor amended the Deed of Trust. Prior to the amendment, the Deed of Trust provided that Oncor could release the lien upon the satisfaction and discharge of all of its obligations under the revolving credit facility. The amendment to the Deed of Trust eliminated this ability to release the lien prior to the payment and performance in full of all obligations secured by the lien of the Deed of Trust. At December 31, 2010, the amount of available bond credits was approximately $1.386 billion and the amount of future debt Oncor could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.161 billion.
Maturities
Long-term debt maturities at December 31, 2011 are as follows:
Year: | Amount | |||
2012 | $ | 494 | ||
2013 | 648 | |||
2014 | 131 | |||
2015 | 639 | |||
2016 | 41 | |||
Thereafter | 3,726 | |||
Unamortized fair value discount | (3 | ) | ||
Unamortized discount | (38 | ) | ||
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Total | $ | 5,638 | ||
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Fair Value of Long-Term Debt
The estimated fair value of our long-term debt (including current maturities) totaled $6.705 billion and $6.136 billion at December 31, 2011 and 2010, respectively, and the carrying amount totaled $5.638 billion and $5.446 billion, respectively. The fair value is estimated at the lesser of either the call price or the market value as determined by quoted market prices.
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8. COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 2011, future minimum lease payments under operating leases (with initial or remaining noncancelable lease terms in excess of one year) were as follows:
Year | Amount | |||
2012 | $ | 12 | ||
2013 | 5 | |||
2014 | 5 | |||
2015 | 3 | |||
2016 | 3 | |||
Thereafter | 1 | |||
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Total future minimum lease payments | $ | 29 | ||
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Rent charged to operation and maintenance expense totaled $15 million for each of the years ended December 31, 2011 and 2010 and $11 million for the year ended December 31, 2009.
Capital Expenditures
Oncor and Texas Holdings agreed to the terms of a stipulation with major interested parties that was approved by the PUCT in 2008 as discussed in Note 3. As one of the provisions of this stipulation, Oncor committed to minimum capital spending of $3.6 billion over the five-year period ending December 31, 2012, subject to certain defined conditions. At December 31, 2011, approximately 94% of this total had been spent. These expenditures do not include the CREZ facilities.
Efficiency Spending
Oncor is required to annually invest in programs designed to improve customer electricity demand efficiencies to satisfy ongoing regulatory requirements. The 2012 requirement (excluding the amount in excess of regulatory requirements) is approximately $50 million.
Guarantees
Oncor has entered into contracts that contain guarantees to unaffiliated parties that could require performance or payment under certain conditions as discussed below.
Oncor is the lessee under various operating leases that obligate it to guarantee the residual values of the leased assets. At December 31, 2011, both the aggregate maximum amount of residual values guaranteed and the estimated residual recoveries totaled approximately $7 million. These leased assets consist primarily of vehicles used in distribution activities. The average life of the residual value guarantees under the lease portfolio is approximately 1.5 years.
In June 2010, for the purpose of obtaining greater access to materials, Oncor guaranteed the repayment of borrowings under a nonaffiliated party’s $20 million credit facility maturing on June 7, 2011. In June 2011, Oncor extended the maturity of the guarantee to December 31, 2011. In December 2011, the credit facility was reduced to $5 million and the maturity extended to December 31, 2012. The nonaffiliated party’s borrowings under the credit facility are limited to inventory produced solely to satisfy the terms of a contract with Oncor. Oncor would be entitled to the related inventory upon repayment of the credit facility (or payment to nonaffiliated party). At December 31, 2011, the nonaffiliated party had no outstanding borrowings under the facility.
24
Legal/Regulatory Proceedings
In October 2010, the PUCT established Docket No. 38780 for the remand of Docket No. 20381, the 1999 wholesale transmission charge matrix case. A joint settlement agreement was entered into effective October 6, 2003. This settlement resolves disputes regarding wholesale transmission pricing and charges for the period of January 1997 through August 1999, the period prior to the September 1, 1999 effective date of the legislation that authorized 100% postage stamp pricing for ERCOT wholesale transmission. Since a series of appeals has become final, the 1999 matrix docket has been remanded to the PUCT to address two additional issues.
The first issue is the wholesale transmission transition mechanism for the period of September 1999 through December 1999. The disputed issue is whether the PUCT should have allowed the transition mechanism to continue for the last four months of 1999. The appealing parties (Texas Municipal Power Agency, the City of Denton, the City of Garland and GEUS (formerly known as Greenville Electric Utility System)) argued that the transition mechanism was not authorized in the September 1, 1999 100% postage stamp pricing legislation. Oncor’s transmission deficit position was mitigated by approximately $8 million in the last four months of 1999 through the transition mechanism. In October 2011, certain parties filed a proposed settlement of this issue, subject to PUCT approval, in which Oncor would pay approximately $9 million including interest through October 9, 2003. The PUCT approved the settlement at its January 12, 2012 open meeting. Oncor anticipates making the payment in accordance with the settlement in the first quarter of 2012. Oncor believes recovery of the settlement payment through future rates is probable.
The second issue is the San Antonio City Public Service Board’s (CPSB) claim that the PUCT did not have the authority to reduce CPSB’s requested Transmission Cost of Service (TCOS) revenue requirement. CPSB’s initial TCOS rate was in effect from 1997 through 2000. Since the period of January 1997 through August 1999 is incorporated in the joint settlement, CPSB’s remaining claim is for the period of September 1999 through December 2000. In January 2011, CPSB made a filing with the PUCT (PUCT Docket No. 39068), seeking an additional $22 million of TCOS revenue, including interest, for the 16-month period, of which Oncor would be responsible for approximately $11 million. In late 2011, Oncor intervened in the proceeding and, along with several other parties, filed motions to dismiss CPSB’s request. In January 2012, the PUCT upheld an administrative law judge’s earlier decision to dismiss CPSB’s request.
We are involved in other various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.
Labor Contracts
Certain Oncor employees are represented by a labor union and covered by a collective bargaining agreement with an expiration date of October 25, 2012.
Environmental Contingencies
Oncor must comply with environmental laws and regulations applicable to the handling and disposal of hazardous waste. Oncor is in compliance with all current laws and regulations; however, the impact, if any, of changes to existing regulations or the implementation of new regulations is not determinable. The costs to comply with environmental regulations can be significantly affected by the following external events or conditions:
| • | changes to existing state or federal regulation by governmental authorities having jurisdiction over control of toxic substances and hazardous and solid wastes, and other environmental matters, and |
| • | the identification of additional sites requiring clean-up or the filing of other complaints in which Oncor may be asserted to be a potential responsible party. |
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9. MEMBERSHIP INTERESTS
On February 14, 2012, our board of directors declared a cash distribution of between $33 million and $39 million to be paid to EFIH on February 21, 2012.
During 2011, our board of directors declared, and we paid, the following cash distributions to EFIH:
Declaration Date | Payment Date | Amount | ||
October 25, 2011 | October 26, 2011 | $52 | ||
July 27, 2011 | July 28, 2011 | 32 | ||
April 27, 2011 | April 28, 2011 | 16 | ||
February 15, 2011 | February 16, 2011 | 16 |
During 2010, our board of directors declared, and we paid, the following cash distributions to EFIH:
Declaration Date | Payment Date | Amount | ||
October 27, 2010 | November 1, 2010 | $28 | ||
July 28, 2010 | August 3, 2010 | 54 | ||
May 5, 2010 | May 6, 2010 | 57 | ||
February 11, 2010 | February 19, 2010 | 30 |
While there are no direct restrictions on our ability to distribute our net income that are currently material, substantially all of our net income is derived from Oncor. Our board of directors and Oncor’s board of directors, which are composed of a majority of independent directors, can withhold distributions to the extent the boards determine that it is necessary to retain such amounts to meet our expected future requirements.
Oncor’s distributions are limited to its cumulative net income and may not be paid except to the extent Oncor maintains a required regulatory capital structure, as discussed below. At December 31, 2011, $45 million was eligible to be distributed to Oncor’s members after taking into account these restrictions, of which approximately 80% relates to our ownership interest.
For the period beginning October 11, 2007 and ending December 31, 2012, Oncor’s cash distributions (other than distributions of the proceeds of any issuance of limited liability company units) are limited by the Limited Liability Company Agreement and a stipulation agreement with the PUCT (see Note 3) to an amount not to exceed its cumulative net income determined in accordance with US GAAP, as adjusted by applicable orders of the PUCT. Such adjustments include the removal of noncash impacts of purchase accounting and deducting two specific cash commitments. To date, the noncash impact consists of removing the effect of the 2008 $860 million goodwill impairment charge and the cumulative amount of net accretion of fair value adjustments. The two specific cash commitments are the $72 million ($46 million after tax) one-time refund to customers in September 2008 and the funds spent as part of the $100 million commitment for additional energy efficiency initiatives of which $75 million ($48 million after tax) has been spent through December 31, 2011. The goodwill impairment charge and refund are described in Notes 2 and 3. At December 31, 2011, $327 million of membership interests was available for distribution under the cumulative net income restriction, of which approximately 80% relates to our ownership interest.
Distributions are further limited by Oncor’s required regulatory capital structure 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 December 31, 2011, Oncor’s regulatory capitalization ratio was 59.7% debt and 40.3% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes transition bonds issued by Bondco. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). At December 31, 2011, $45 million of membership interests was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest.
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10. NONCONTROLLING INTERESTS
At December 31, 2011, Oncor’s ownership was as follows: 80.03% held by us, 19.75% held by Texas Transmission and 0.22% held indirectly by certain members of Oncor’s management team and board of directors.
11. INVESTMENTS
Our investments balance consisted of the following:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
Assets related to employee benefit plans, including employee savings programs, net of distributions | $ | 70 | $ | 74 | ||||
Investment in unconsolidated affiliates | — | 1 | ||||||
Land | 3 | 3 | ||||||
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Total investments | $ | 73 | $ | 78 | ||||
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Assets Related to Employee Benefit Plans
The majority of these assets represent cash surrender values of life insurance policies that are purchased to fund liabilities under deferred compensation plans. At December 31, 2009, Oncor began paying the premiums and became the beneficiary of these life insurance policies. EFH Corp. was the previous beneficiary. At December 31, 2011 and 2010, the face amount of these policies totaled $137 million, and the net cash surrender values (determined using a Level 2 valuation technique) totaled $46 million and $53 million, respectively. Changes in cash surrender value are netted against premiums paid. Other investment assets held to satisfy deferred compensation liabilities are recorded at market value.
Restricted Cash
| At December 31, 2011 | At December 31, 2010 | |||||||||||||||
| Current Assets | Noncurrent Assets | Current Assets | Noncurrent Assets | |||||||||||||
Customer collections related to transition bonds used only to service debt and pay expenses | $ | 57 | $ | — | $ | 53 | $ | — | ||||||||
Reserve for fees associated with transition bonds | — | 10 | — | 10 | ||||||||||||
Reserve for shortfalls of transition bond charges | — | 6 | — | 6 | ||||||||||||
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Total restricted cash | $ | 57 | $ | 16 | $ | 53 | $ | 16 | ||||||||
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12. TERMINATION OF OUTSOURCING ARRANGEMENTS
In 2008, Oncor commenced a review of certain outsourcing arrangements with Capgemini, Capgemini America, Inc. and Capgemini North America, Inc. (collectively, CgE), and executed a Separation Agreement with CgE. Simultaneous with the execution of that Separation Agreement, EFH Corp. and TCEH entered into a substantially similar agreement with CgE. The Separation Agreements principally provide for (i) notice of termination of the Master Framework Agreements, dated as of May 17, 2004, as amended, between Capgemini and TCEH and Oncor, respectively, and the related service agreements under the Master Framework Agreements and (ii) termination of the joint venture arrangements between EFH Corp. (and its applicable subsidiaries, including Oncor) and CgE. Under the Master Framework Agreements and related services agreements, Capgemini provided to Oncor and EFH Corp.’s and its other subsidiaries outsourced support services, including information technology, customer care and billing, human resources, procurement and certain finance and accounting activities.
The effects of the termination of the outsourcing arrangements, including an accrued liability of $16 million for incremental costs to exit and transition the services, were included in goodwill under purchase accounting. Oncor incurred $4 million of these exit liabilities during the year ended December 31, 2009. In December 2009, Oncor recorded a $10 million reversal of a portion of these exit liabilities due primarily to a shorter than expected outsourcing services transition period, and this reversal is reflected in other income (see Note 16). The remaining accrual totaling $2 million was settled in 2010.
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13. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS (OPEB) PLANS
Pension Plan
Oncor is a participating employer in the EFH Retirement Plan , a defined benefit pension plan sponsored by EFH Corp. The EFH Retirement Plan is a qualified pension plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and is subject to the provisions of ERISA. All benefits are funded by the participating employers. The EFH Retirement Plan provides benefits to participants under one of two formulas: (i) a Cash Balance Formula under which participants earn monthly contribution credits based on their compensation and a combination of their age and years of service, plus monthly interest credits or (ii) a Traditional Retirement Plan Formula based on years of service and the average earnings of the three years of highest earnings. The interest component of the Cash Balance Formula is variable and is determined using the yield on 30-year Treasury bonds. Under the Cash Balance Formula, future increases in earnings will not apply to prior service costs.
All eligible employees hired after January 1, 2001 participate under the Cash Balance Formula. Certain employees, who, prior to January 1, 2002, participated under the Traditional Retirement Plan Formula, continue their participation under that formula. It is the participating employers’ policy to fund the plans on a current basis to the extent deductible under existing federal tax regulations.
Oncor also participated in an EFH Corp. supplemental retirement plan for certain employees, whose retirement benefits cannot be fully earned under the qualified Retirement Plan, the information for which is included below. Oncor ceased participation in the EFH Corp. supplemental plan and implemented its own supplemental retirement plan effective January 1, 2010 (Oncor Plan). The Oncor Plan covers certain employees whose retirement benefits cannot be fully earned under the qualified EFH Retirement Plan and is substantially similar to the EFH Corp. supplemental retirement plan, except that Oncor acts as sponsor of the plan. At inception, the projected benefit obligation of the Oncor Plan was $32 million, which was 100% funded. Oncor recognized $5 million, $1 million and $3 million in net pension costs related to the Oncor Plan, primarily composed of interest costs, for the years ended December 31, 2011, 2010 and 2009, respectively.
OPEB Plan
Oncor participates with EFH Corp. and other subsidiaries of EFH Corp. to offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees (OPEB Plan). For employees retiring on or after January 1, 2002, the retiree contributions required for such coverage vary based on a formula depending on the retiree’s age and years of service.
Regulatory Recovery of Pension and OPEB Costs
PURA provides for Oncor’s recovery of pension and OPEB costs for all applicable former employees of the regulated predecessor integrated electric utility, which in addition to Oncor’s active and retired employees consists largely of active and retired personnel engaged in TCEH’s activities, related to service of those additional personnel prior to the deregulation and disaggregation of EFH Corp.’s businesses effective January 1, 2002. Accordingly, Oncor entered into an agreement with TCEH whereby it assumed responsibility for applicable pension and OPEB costs related to those personnel.
Oncor is authorized to establish a regulatory asset or liability for the difference between the amounts of pension and OPEB costs approved in current billing rates and the actual amounts that would otherwise have been recorded as charges or credits to earnings. Amounts deferred are ultimately subject to regulatory approval. At December 31, 2011 and 2010, Oncor had recorded regulatory assets totaling $884 million and $1.048 billion, respectively, related to pension and OPEB costs, including amounts related to deferred expenses as well as amounts related to unfunded liabilities that otherwise would be recorded as other comprehensive income.
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Pension and OPEB Costs Recognized as Expense
The pension and OPEB amounts provided herein represent Oncor’s allocated amounts related to EFH Corp.’s plans based on actuarial computations and reflect Oncor’s employee and retiree demographics as described above. Oncor recognized the following net pension and OPEB costs as expense:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Pension cost | $ | 95 | $ | 67 | $ | 35 | ||||||
OPEB cost | 74 | 63 | 55 | |||||||||
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Total benefit cost | 169 | 130 | 90 | |||||||||
Less amounts deferred as a regulatory asset or property | (132 | ) | (93 | ) | (66 | ) | ||||||
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Net amounts recognized as expense | $ | 37 | $ | 37 | $ | 24 | ||||||
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EFH Corp. and participating employers use the calculated value method to determine the market-related value of the assets held in the trust. Oncor includes the realized and unrealized gains or losses in the market-related value of assets over a rolling four-year period. Each year, 25% of such gains and losses for the current year and for each of the preceding three years is included in the market-related value. Each year, the market-related value of assets is increased for contributions to the plan and investment income and is decreased for benefit payments and expenses for that year.
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Detailed Information Regarding Pension and OPEB Benefits
The following pension and OPEB information is based on December 31, 2011, 2010 and 2009 measurement dates:
| Pension Plan | OPEB Plan | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Assumptions Used to Determine Net Periodic Pension and Benefit Cost: | ||||||||||||||||||||||||
Discount rate | 5.50 | % | 5.90 | % | 6.90 | % | 5.55 | % | 5.90 | % | 6.85 | % | ||||||||||||
Expected return on plan assets | 7.70 | % | 8.00 | % | 8.25 | % | 7.10 | % | 7.60 | % | 7.64 | % | ||||||||||||
Rate of compensation increase | 3.74 | % | 3.71 | % | 3.75 | % | — | — | — | |||||||||||||||
Components of Net Pension and Benefit Cost: | ||||||||||||||||||||||||
Service cost | $ | 20 | $ | 19 | $ | 16 | $ | 7 | $ | 6 | $ | 4 | ||||||||||||
Interest cost | 110 | 106 | 107 | 54 | 52 | 52 | ||||||||||||||||||
Expected return on assets | (99 | ) | (97 | ) | (100 | ) | (14 | ) | (15 | ) | (13 | ) | ||||||||||||
Amortization of net transition obligation | — | — | — | 1 | 1 | 1 | ||||||||||||||||||
Amortization of prior service cost (credit) | 1 | 1 | 1 | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
Amortization of net loss | 63 | 38 | 11 | 27 | 20 | 12 | ||||||||||||||||||
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Net periodic pension and benefit cost | 95 | 67 | 35 | 74 | 63 | 55 | ||||||||||||||||||
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Other Changes in Plan Assets and Benefit Obligations Recognized as Regulatory Assets: | ||||||||||||||||||||||||
Net loss (gain) | 106 | 124 | 154 | (91 | ) | 75 | 76 | |||||||||||||||||
Prior service cost (credit) | — | — | — | (127 | ) | 1 | — | |||||||||||||||||
Amortization of net loss | (63 | ) | (38 | ) | (11 | ) | (27 | ) | (20 | ) | (12 | ) | ||||||||||||
Amortization of transition obligation (asset) | — | — | — | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
Amortization of prior service (cost) credit | (1 | ) | (1 | ) | (1 | ) | 1 | — | 1 | |||||||||||||||
Purchase accounting adjustment | — | — | — | — | — | 4 | ||||||||||||||||||
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Total recognized as regulatory assets | 42 | 85 | 142 | (245 | ) | 55 | 68 | |||||||||||||||||
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Total recognized in net periodic pension and benefit costs and as regulatory assets | $ | 137 | $ | 152 | $ | 177 | $ | (171 | ) | $ | 118 | $ | 123 | |||||||||||
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| Pension Plan | OPEB Plan | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Assumptions Used to Determine Benefit Obligations at Period End: | ||||||||||||||||||||||||
Discount rate | 5.00 | % | 5.50 | % | 5.90 | % | 4.95 | % | 5.55 | % | 5.90 | % | ||||||||||||
Rate of compensation increase | 3.81 | % | 3.74 | % | 3.71 | % | — | — | — | |||||||||||||||
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| Pension Plan | OPEB Plan | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Change in Projected Benefit Obligation: | ||||||||||||||||
Projected benefit obligation at beginning of year | $ | 2,052 | $ | 1,821 | $ | 1,004 | $ | 899 | ||||||||
Service cost | 20 | 19 | 7 | 6 | ||||||||||||
Interest cost | 110 | 106 | 54 | 52 | ||||||||||||
Participant contributions | — | — | 14 | 14 | ||||||||||||
Medicare Part D reimbursement | — | — | 5 | 3 | ||||||||||||
Plan amendments | — | — | (127 | ) | — | |||||||||||
Actuarial (gain) loss | 119 | 187 | (97 | ) | 83 | |||||||||||
Benefits paid | (86 | ) | (81 | ) | (51 | ) | (53 | ) | ||||||||
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Projected benefit obligation at end of year | $ | 2,215 | $ | 2,052 | $ | 809 | $ | 1,004 | ||||||||
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Accumulated benefit obligation at end of year | $ | 2,063 | $ | 1,894 | $ | — | $ | — | ||||||||
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Change in Plan Assets: | ||||||||||||||||
Fair value of assets at beginning of year | $ | 1,341 | $ | 1,219 | $ | 208 | $ | 206 | ||||||||
Actual return (loss) on assets | 112 | 160 | 8 | 23 | ||||||||||||
Employer contributions | 175 | 43 | 18 | 18 | ||||||||||||
Participant contributions | — | — | 14 | 14 | ||||||||||||
Benefits paid | (86 | ) | (81 | ) | (51 | ) | (53 | ) | ||||||||
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Fair value of assets at end of year | 1,542 | 1,341 | 197 | 208 | ||||||||||||
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Funded Status: | ||||||||||||||||
Projected benefit obligation at end of year | $ | (2,215 | ) | $ | (2,052 | ) | $ | (809 | ) | $ | (1,004 | ) | ||||
Fair value of assets at end of year | 1,542 | 1,341 | 197 | 208 | ||||||||||||
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Funded status at end of year | $ | (673 | ) | $ | (711 | ) | $ | (612 | ) | $ | (796 | ) | ||||
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| Pension Plan | OPEB Plan | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
Amounts Recognized in the Balance Sheet Consist of: | ||||||||||||||||
Other current liabilities | $ | (3 | ) | $ | (3 | ) | $ | — | $ | — | ||||||
Other noncurrent liabilities | (670 | ) | (708 | ) | (612 | ) | (796 | ) | ||||||||
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Net liability recognized | $ | (673 | ) | $ | (711 | ) | $ | (612 | ) | $ | (796 | ) | ||||
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Amounts Recognized as Regulatory Assets Consist of: | ||||||||||||||||
Net loss | $ | 659 | $ | 616 | $ | 178 | $ | 296 | ||||||||
Prior service cost (credit) | — | — | (131 | ) | (5 | ) | ||||||||||
Net transition obligation | — | — | 1 | 3 | ||||||||||||
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Net amount recognized | 659 | 616 | 48 | 294 | ||||||||||||
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The following tables provide information regarding the assumed health care cost trend rates
| Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
Assumed Health Care Cost Trend Rates—Not Medicare Eligible: | ||||||||
Health care cost trend rate assumed for next year | 9.00 | % | 9.00 | % | ||||
Rate to which the cost trend is expected to decline (the ultimate trend rate) | 5.00 | % | 5.00 | % | ||||
Year that the rate reaches the ultimate trend rate | 2022 | 2021 | ||||||
Assumed Health Care Cost Trend Rates—Medicare Eligible: | ||||||||
Health care cost trend rate assumed for next year | 8.00 | % | 8.00 | % | ||||
Rate to which the cost trend is expected to decline (the ultimate trend rate) | 5.00 | % | 5.00 | % | ||||
Year that the rate reaches the ultimate trend rate | 2022 | 2021 | ||||||
| 1-Percentage Point Increase | 1-Percentage Point Decrease | |||||||||
Sensitivity Analysis of Assumed Health Care Cost Trend Rates: | ||||||||||
Effect on accumulated postretirement obligation | $ | 100 | $ | (83 | ) | |||||
Effect on postretirement benefits cost | 6 | (5 | ) | |||||||
The following table provides information regarding pension plans with projected benefit obligations (PBO) and accumulated benefit obligations (ABO) in excess of the fair value of plan assets.
| At December 31, | ||||||||
| 2011 | 2010 | |||||||
Pension Plans with PBO and ABO in Excess of Plan Assets: | ||||||||
Projected benefit obligations | $ | 2,215 | $ | 2,052 | ||||
Accumulated benefit obligations | 2,063 | 1,894 | ||||||
Plan assets | 1,542 | 1,341 | ||||||
Pension Plan and OPEB Plan Investment Strategy and Asset Allocations
The investment objective for the Retirement Plan is to invest in a suitable mix of assets to meet the future benefit obligations at an acceptable level of risk, while minimizing the volatility of contributions. Equity securities are held to achieve returns in excess of passive indexes by participating in a wide range of investment opportunities. International equity securities are used to further diversify the equity portfolio and may include investments in both developed and emerging international markets. Fixed income securities include primarily corporate bonds from a diversified range of companies, US Treasuries and agency securities and money market instruments. The investment strategy for fixed income investments is to maintain a high grade portfolio of securities, which assist in managing the volatility and magnitude of plan contributions and expense.
The target asset allocation ranges of pension plan investments by asset category are as follows:
Asset Category | Target Allocation Ranges | |||
US equities | 12 | %-34% | ||
International equities | 10 | %-26% | ||
Fixed income | 40 | %-70% | ||
Other | 0 | %-10% | ||
The investment objective for the OPEB Plan primarily follows the objectives of the Retirement Plan discussed above, while maintaining sufficient cash and short-term investments to pay near-term benefits and expenses. The actual amounts at December 31, 2011 provided below are consistent with our asset allocation targets.
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Fair Value Measurement of Pension Plan Assets
At December 31, 2011 and 2010, pension plan assets measured at fair value on a recurring basis consisted of the following:
| At December 31, 2011 | At December 31, 2010 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Asset Category | ||||||||||||||||||||||||||||||||
Interest-bearing cash | $ | — | $ | 60 | $ | — | $ | 60 | $ | — | $ | 42 | $ | — | $ | 42 | ||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
US | 263 | 54 | — | 317 | 259 | 58 | — | 317 | ||||||||||||||||||||||||
International | 152 | 50 | — | 202 | 152 | 52 | — | 204 | ||||||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||||||||||||||
Corporate bonds (a) | — | 859 | — | 859 | — | 698 | — | 698 | ||||||||||||||||||||||||
US Treasuries | — | 34 | — | 34 | — | 13 | — | 13 | ||||||||||||||||||||||||
Other (b) | — | 61 | — | 61 | — | 58 | — | 58 | ||||||||||||||||||||||||
Preferred securities | — | — | 9 | 9 | — | — | 9 | 9 | ||||||||||||||||||||||||
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Total assets | $ | 415 | $ | 1,118 | $ | 9 | $ | 1,542 | $ | 411 | $ | 921 | $ | 9 | $ | 1,341 | ||||||||||||||||
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| (a) | Substantially all corporate bonds are rated investment grade by a major ratings agency such as Moody’s. |
| (b) | Other consists primarily of US agency securities. |
There was no change in the fair value of Level 3 assets in the periods presented.
Fair Value Measurement of OPEB Plan Assets
At December 31, 2011 and 2010, OPEB plan assets measured at fair value on a recurring basis consisted of the following:
| At December 31, 2011 | At December 31, 2010 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Asset Category | ||||||||||||||||||||||||||||||||
Interest-bearing cash | $ | — | $ | 10 | $ | — | $ | 10 | $ | — | $ | 11 | $ | — | $ | 11 | ||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
US | 52 | 3 | — | 55 | 61 | 4 | — | 65 | ||||||||||||||||||||||||
International | 23 | 3 | — | 26 | 27 | 4 | — | 31 | ||||||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||||||||||||||
Corporate bonds (a) | — | 54 | — | 54 | — | 54 | — | 54 | ||||||||||||||||||||||||
US Treasuries | — | 2 | — | 2 | — | 1 | — | 1 | ||||||||||||||||||||||||
Other (b) | 46 | 3 | — | 49 | 41 | 4 | — | 45 | ||||||||||||||||||||||||
Preferred securities | — | — | 1 | 1 | — | — | 1 | 1 | ||||||||||||||||||||||||
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Total assets | $ | 121 | $ | 75 | $ | 1 | $ | 197 | $ | 129 | $ | 78 | $ | 1 | $ | 208 | ||||||||||||||||
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| (a) | Substantially all corporate bonds are rated investment grade by a major ratings agency such as Moody’s. |
| (b) | Other consists primarily of US agency securities. |
There was no significant change in the fair value of Level 3 assets in the periods presented.
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Expected Long-Term Rate of Return on Assets Assumption
The retirement plan strategic asset allocation is determined in conjunction with the plan’s advisors and utilizes a comprehensive Asset-Liability modeling approach to evaluate potential long-term outcomes of various investment strategies. The modeling incorporates long-term rate of return assumptions for each asset class based on historical and future expected asset class returns, current market conditions, rate of inflation, current prospects for economic growth, and taking into account the diversification benefits of investing in multiple asset classes and potential benefits of employing active investment management.
EFH Retirement Plan | OPEB Plan | |||||
Asset Class | Expected Long-Term Rate of Return | Plan Type | Expected Long-Term Returns | |||
US equity securities | 8.2% | 401(h) accounts | 7.4% | |||
International equity securities | 9.7% | Life Insurance VEBA | 6.8% | |||
Fixed income securities | 4.4% | Union VEBA | 6.8% | |||
Preferred securities | 0.0% | Non-Union VEBA | 3.1% | |||
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Weighted average | 7.4% | Weighted average | 6.8% | |||
Significant Concentrations of Risk
The plans’ investments are exposed to risks such as interest rate, capital market and credit risks. EFH Corp. and Oncor seek to optimize return on investment consistent with levels of liquidity and investment risk which are prudent and reasonable, given prevailing capital market conditions and other factors specific to participating employers. While EFH Corp. and Oncor recognize the importance of return, investments will be diversified in order to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to do so. There are also various restrictions and guidelines in place including limitations on types of investments allowed and portfolio weightings for certain investment securities to assist in the mitigation of the risk of large losses.
Assumed Discount Rate
EFH Corp. and Oncor selected the assumed discount rate using the Aon Hewitt AA Above Median yield curve, which is based on actual corporate bond yields and at December 31, 2011 consisted of 261 corporate bonds with an average rating of AA using Moody’s, S&P and Fitch ratings.
Amortization in 2012
In 2012, amortization of the net actuarial loss and prior service cost for the defined benefit pension plan from regulatory assets into net periodic benefit cost is expected to be $74 million and less than $1 million, respectively. Amortization of the net actuarial loss, prior service credit, and transition obligation for the OPEB Plan from regulatory assets into net periodic benefit cost is expected to be $14 million, a $20 million credit and $1 million, respectively.
Pension and OPEB Plan Cash Contributions
Oncor’s contributions to the benefit plans were as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
EFH Retirement Plan contributions | $ | 172 | $ | 40 | $ | 66 | ||||||
OPEB Plan contributions | 18 | 18 | 18 | |||||||||
Oncor Plan contributions | 3 | 3 | — | |||||||||
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Total contributions | $ | 193 | $ | 61 | $ | 84 | ||||||
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Oncor’s estimated funding in 2012 of the EFH Retirement Plan, the OPEB Plan and the Oncor Plan is $122 million, $18 million and $3 million, respectively.
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Future Benefit Payments
Estimated future benefit payments to (receipts from) beneficiaries are as follows:
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017-21 | |||||||||||||||||||
Pension benefits | $ | 100 | $ | 105 | $ | 111 | $ | 116 | $ | 123 | $ | 721 | ||||||||||||
OPEB | $ | 48 | $ | 43 | $ | 45 | $ | 48 | $ | 51 | $ | 278 | ||||||||||||
Medicare Part D subsidies | $ | (5 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Thrift Plan
Employees of Oncor may participate in a qualified savings plan, the EFH Corp. Thrift Plan (Thrift Plan). This plan is a participant-directed defined contribution plan intended to qualify under Section 401(a) of the Code, and is subject to the provisions of ERISA. Under the terms of the Thrift Plan, employees who do not earn more than the IRS threshold compensation limit used to determine highly compensated employees may contribute, through pre-tax salary deferrals and/or after-tax applicable payroll deductions, the lesser of 75% of their regular salary or wages or the maximum amount permitted under law. Employees who earn more than such threshold may contribute from 1% to 16% of their regular salary or wages. Employer matching contributions are also made in an amount equal to 100% of the first 6% of employee contributions for employees who are covered under the Cash Balance Formula of the EFH Retirement Plan, and 75% of the first 6% of employee contributions for employees who are covered under the Traditional Retirement Plan Formula of the EFH Retirement Plan. Employer matching contributions are made in cash and may be allocated by participants to any of the plan’s investment options. Oncor’s contributions to the Thrift Plan totaled $12 million, $11 million and $11 million for the years ended December 31, 2011, 2010 and 2009, respectively.
14. STOCK-BASED COMPENSATION
In 2008, Oncor established the SARs Plan under which certain of its executive officers and key employees may be granted stock appreciation rights payable in cash, or in some circumstances, Oncor membership interests. Two types of SARs may be granted under the SARs Plan. Time-based SARs (Time SARs) vest solely based upon continued employment ratably on an annual basis on each of the first five anniversaries of the grant date. Performance-based SARs (Performance SARs) vest based upon both continued employment and the achievement of a predetermined level of Oncor EBITDA over time, generally ratably over five years based upon annual Oncor EBITDA levels, with provisions for vesting if the annual levels are not achieved but cumulative two- or three-year total Oncor EBITDA levels are achieved. Time and Performance SARs may also vest in part or in full upon the occurrence of certain specified liquidity events and are exercisable only upon the occurrence of certain specified liquidity events. Since the exercisability of the Time and Performance SARs is conditioned upon the occurrence of a liquidity event, compensation expense, other than as indicated below with respect to dividends, will not be recorded until it is probable that a liquidity event will occur.
In February 2009, Oncor also established the Oncor Electric Delivery Company LLC Director Stock Appreciation Rights Plan (the Director SARs Plan) under which certain non-employee members of its board of directors and other persons having a relationship with Oncor may be granted SARs payable in cash, or in some circumstances, Oncor units. SARs granted under the Director SARs Plan vest in eight equal quarterly installments over a two-year period and are exercisable only upon the occurrence of certain specified liquidity events. Since the exercisability of these SARs is conditioned upon the occurrence of a liquidity event, expense will not be recorded until it is probable a liquidity event will occur.
Under both SARs plans, dividends that are paid in respect of Oncor membership interests while the SARs are outstanding are credited to the SARs holder’s account as if the SARs were units of Oncor payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency, a change in control, or the exercise of the SARs. Prior to September 30, 2011, Oncor had not accrued the liability under the SARs plans related to the declared dividends. Oncor has concluded that the liability related to the declared dividends should be accrued rather than recognized at a future liquidity event. As a result, in the third quarter of 2011, Oncor recorded compensation expense of approximately $6 million relating to dividends since the inception of the SARs Plan ($5 million related to periods prior to January 1, 2011), which management determined was not material. For accounting purposes, the liability is discounted based on an employee’s or director’s expected retirement date.
SARs under the SARs Plan and the Director SARs Plan are generally payable in cash based on the fair market value of the SAR on the date of exercise. During the year ended December 31, 2011, we granted 227,000 Time SARs and 227,000 Performance SARS under the SARs Plan. At December 31, 2011, vested Time SARs totaled 5.7 million and vested Performance SARs totaled 5.7 million, which includes 1.4 million of Performance SARs eligible to vest in 2009 that did not vest in 2009 or 2010 but vested in 2011 upon our achievement of a three- year cumulative performance target. During the year ended December 31, 2010, Oncor
35
granted 80,000 Time SARs and 80,000 Performance SARS under the SARs Plan. At December 31, 2010, vested Time SARs totaled 4.2 million and vested Performance SARs totaled 2.8 million. No SARs were granted under the SARs Plan during the year ended December 31, 2009. Oncor granted 55,000 SARs under the Director SARs Plan during the year ended December 31, 2009, and all such SARs were vested at December 31, 2010. No SARs were granted under the Director’s SARs Plan during the years ended December 31, 2011 and 2010. There were no SARs under either plan eligible for exercise at December 31, 2011.
15. RELATED-PARTY TRANSACTIONS
The following represent our significant related-party transactions:
| • | Oncor records revenue from TCEH, principally for electricity delivery fees, which totaled $1.0 billion, $1.1 billion and $1.0 billion for the years ended December 31, 2011, 2010 and 2009, respectively. The fees are based on rates regulated by the PUCT that apply to all REPs. The balance sheets at December 31, 2011 and 2010 reflect receivables from TCEH totaling $138 million and $143 million, respectively, primarily related to these electricity delivery fees. These revenues included approximately $2 million for each of the years ended December 31, 2011, 2010 and 2009 pursuant to a transformer maintenance agreement with TCEH. |
| • | Oncor recognizes interest income from TCEH with respect to its generation-related regulatory assets, which have been securitized through the issuance of transition bonds by Bondco. The interest income, which is received on a monthly basis, serves to offset Oncor’s interest expense on the transition bonds. This interest income totaled $32 million, $37 million and $42 million for the years ended December 31, 2011, 2010 and 2009, respectively. |
| • | Incremental amounts payable by Oncor related to income taxes as a result of delivery fee surcharges to customers related to transition bonds are reimbursed by TCEH. Our financial statements reflect a note receivable from TCEH to Oncor of $179 million ($41 million reported as current in trade accounts and other receivables from affiliates) at December 31, 2011 and $217 million ($39 million reported as current in trade accounts and other receivables from affiliates) at December 31, 2010 related to these income taxes. We review economic conditions, TCEH’s credit ratings and historical payment activity to assess the overall collectability of these affiliated receivables. At December 31, 2011, there were no credit loss allowances related to the note receivable from TCEH. |
| • | EFH Corp. subsidiaries charge Oncor for certain administrative services and shared facilities at cost. These costs, which are primarily reported in operation and maintenance expenses, totaled $38 million, $40 million and $26 million for the years ended December 31, 2011, 2010 and 2009, respectively. |
| • | Under Texas regulatory provisions, the trust fund for decommissioning the Comanche Peak nuclear generation facility (reported on TCEH’s balance sheet) is funded by a delivery fee surcharge Oncor collects from REPs and remits monthly to TCEH. Delivery fee surcharges totaled $17 million for the year ended December 31, 2011 and $16 million for each of the years ended December 31, 2010 and 2009. These trust fund assets are established with the intent to be sufficient to fund the estimated decommissioning liability (also reported on TCEH’s balance sheet). Income and expenses associated with the trust fund and the decommissioning liability (also reported on TCEH’s balance sheet) are offset by a net change in Oncor’s intercompany receivable/payable, which in turn results in a change in Oncor’s reported net regulatory asset/ liability. The regulatory liability of $225 million and $206 million at December 31, 2011 and 2010, respectively, represents the excess of the trust fund balance over the net decommissioning liability (see Note 5). |
| • | Oncor has a 19.5% limited partnership interest, with a carrying value of less than $1 million at December 31, 2011 and 2010, in an EFH Corp. subsidiary holding principally software-related assets. Equity losses related to this interest are reported in other deductions and totaled less than $1 million for the year ended December 31, 2011 and $2 million for each of the years ended December 31, 2010 and 2009. These losses primarily represent amortization of software assets held by the subsidiary. |
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| • | Under the terms of a tax sharing agreement, we are obligated to make payments to EFH Corp. in an aggregate amount that is substantially equal to the amount of federal income taxes that we would have been required to pay if we were filing our own corporate income tax return. Also under the terms of the tax sharing agreement, Oncor makes similar payments to Texas Transmission and Investment LLC, pro rata in accordance with their respective membership interests in Oncor, in an aggregate amount that is substantially equal to the amount of federal income taxes that Oncor would have been required to pay if it were filing its own corporate income tax return. In addition, consistent with the tax sharing agreement, we remit to EFH Corp. Texas margin tax payments, which are accounted for as income taxes and calculated as if we were filing our own return. Our results are included in the consolidated Texas state margin tax return filed by EFH Corp. See discussion in Note 1 to Financial Statements under “Income Taxes.” At December 31, 2011, we had amounts due to EFH Corp. under the agreement totaling $2 million. At December 31, 2010, we had amounts due from EFH Corp. under the agreement totaling $72 million. We had amounts due to EFH Corp. related to income taxes totaling $5 million at December 31, 2009. Income tax refunds from EFH Corp. in the year ended December 31, 2011 totaled $89 million and Oncor received federal income tax refunds of $109 million from EFH Corp. and $25 million from noncontrolling interests. Income tax payments to EFH Corp. in the years ended December 31, 2010 and 2009 totaled $107 million and $20 million, respectively, and Oncor paid $21 million and $9 million, respectively, in federal income tax-related payments to noncontrolling interests. |
| • | At December 31, 2010, Oncor held cash collateral of $4 million from TCEH related to interconnection agreements for generation units being developed by TCEH. The collateral is reported on our balance sheet in other current liabilities. In April 2011, Oncor returned $4 million representing the balance of the collateral and paid approximately $1 million in interest pursuant to PUCT rules related to these interconnection agreements. |
| • | Certain transmission and distribution utilities in Texas have tariffs in place to assure adequate credit worthiness of any REP to support the REP’s obligation to collect transition bond-related charges on behalf of the utility. Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated transition charges over specified time periods. Accordingly, at December 31, 2011 and 2010, TCEH had posted letters of credit in the amount of $12 million and $14 million, respectively, for Oncor’s benefit. |
| • | Oncor maintains a revolving credit facility with a syndicate of financial institutions and other lenders. At September 30, 2011, the syndicate included affiliates of GS Capital Partners (a member of the Sponsor Group). In October 2011, Oncor amended and restated the revolving credit facility (see Note 6 for information regarding the amendment and restatement) and neither GS Capital Partners nor its affiliates were members of the syndicate. Accordingly, at December 31, 2011, the syndicate does not include affiliates of GS Capital Partners. Affiliates of GS Capital Partners have from time-to-time engaged in commercial banking transactions with us in the normal course of business. |
| • | Goldman, Sachs & Co. (Goldman), an affiliate of the Sponsor Group, received $285,000 in fees for serving as a senior co-dealer manager in Oncor’s offer to exchange up to an aggregate of $675 million of senior secured notes for New Notes in a private placement exchange that closed in October 2010 and was subsequently registered pursuant to the terms of a registration rights agreement in April 2011. See Note 7 for additional information regarding the debt exchange. |
| • | In September 2010, Oncor completed a $475 million senior secured notes private placement offering. In conjunction with the offering, Oncor entered into a registration rights agreement with various investment banks as representatives of the initial purchasers in the private placement. KKR Capital Markets LLC, an affiliate of KKR (a member of the Sponsor Group), received $125,000 in fees for serving as a co-manager in the offering. See Note 7 for information regarding the debt offering. |
| • | Affiliates of the Sponsor Group have, and from time-to-time may in the future (1) sell, acquire or participate in the offerings of our debt or debt securities in open market transactions or through loan syndications, and (2) perform various financial advisory, dealer, commercial banking and investment banking services for Oncor and certain of our affiliates for which they have received or will receive customary fees and expenses. |
See Notes 4, 9 and 13 for information regarding the tax sharing agreement, distributions to EFIH and the allocation of EFH Corp.’s pension and OPEB costs, respectively.
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| 16. | SUPPLEMENTARY FINANCIAL INFORMATION |
Variable Interest Entities
Oncor is the primary beneficiary and consolidates a wholly-owned VIE, Bondco, which was organized for the limited purpose of issuing specific transition bonds and purchasing and owning transition property acquired from Oncor that is pledged as collateral to secure the bonds. Oncor acts as the servicer for this entity to collect transition charges authorized by the PUCT. These funds are remitted to the trustee and used for interest and principal payments on the transition bonds and related costs.
The material assets and liabilities of Bondco are presented separately on the face of our Consolidated Balance Sheet because the assets are restricted and can only be used to settle the obligations of Bondco, and Bondco’s creditors do not have recourse to our general credit or assets.
Our maximum exposure does not exceed our equity investment in Bondco, which was $16 million at both December 31, 2011 and 2010. We did not provide any financial support to Bondco during the years ended December 31, 2011 and 2010.
Other Income and Deductions
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Other income: | ||||||||||||
Accretion of adjustment (discount) to regulatory assets due to purchase accounting | $ | 29 | $ | 34 | $ | 39 | ||||||
Reversal of exit liabilities recorded in connection with the termination of outsourcing arrangements (Note 11) | — | — | 10 | |||||||||
Net gain on sale of other properties and investments | 1 | 2 | — | |||||||||
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Total other income | $ | 30 | $ | 36 | $ | 49 | ||||||
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Other deductions: | ||||||||||||
Costs related to 2006 cities rate settlement | $ | — | $ | — | $ | 2 | ||||||
Professional fees | 4 | 4 | 5 | |||||||||
Equity losses in unconsolidated affiliate (Note 14) | — | 2 | 2 | |||||||||
Other | 5 | 2 | 5 | |||||||||
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Total other deductions | $ | 9 | $ | 8 | $ | 14 | ||||||
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Major Customers
Revenues from TCEH represented 33%, 36% and 38% of total operating revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from subsidiaries of Reliant, a nonaffiliated REP, collectively represented 12% of total operating revenues for each of the years ended December 31, 2011 and 2010 and 14% of total operating revenues for the year ended December 31, 2009. No other customer represented 10% or more of total operating revenues.
Interest Expense and Related Charges
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Interest expense | $ | 359 | $ | 342 | $ | 338 | ||||||
Amortization of fair value debt discounts resulting from purchase accounting | — | 2 | 3 | |||||||||
Amortization of debt issuance costs and discounts | 3 | 5 | 7 | |||||||||
Allowance for funds used during construction -capitalized interest portion | (3 | ) | (2 | ) | (2 | ) | ||||||
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Total interest expense and related charges | $ | 359 | $ | 347 | $ | 346 | ||||||
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Trade Accounts Receivable
| At December 31, | ||||||||
| 2011 | 2010 | |||||||
Gross trade accounts receivable | $ | 436 | $ | 389 | ||||
Trade accounts receivable from TCEH | (131 | ) | (133 | ) | ||||
Allowance for uncollectible accounts | (2 | ) | (2 | ) | ||||
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Trade accounts receivable from nonaffiliates—net | $ | 303 | $ | 254 | ||||
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Gross trade accounts receivable at December 31, 2011 and 2010 included unbilled revenues of $127 million and $126 million, respectively.
In April 2009, the PUCT finalized a new rule relating to the Certification of Retail Electric Providers. Under the new rule, write-offs of uncollectible amounts owed by REPs are deferred as a regulatory asset. Due to the commitments made to the PUCT in 2007, Oncor may not recover bad debt expense, or certain other costs and expenses, from ratepayers in the event of a default or bankruptcy by an affiliate REP.
Property, Plant and Equipment
| Composite Depreciation Rate/ Avg. Life at December 31, 2011 | At December 31, | |||||||||||
| 2011 | 2010 | |||||||||||
Assets in service: | ||||||||||||
Distribution | 4.5 | % / 22.3 years | $ | 9,486 | $ | 9,112 | ||||||
Transmission | 2.9 | % / 35.0 years | 4,919 | 4,372 | ||||||||
Other assets | 8.6 | % / 11.6 years | 822 | 728 | ||||||||
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Total | 15,227 | 14,212 | ||||||||||
Less accumulated depreciation | 5,203 | 4,810 | ||||||||||
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Net of accumulated depreciation | 10,024 | 9,402 | ||||||||||
Construction work in progress | 530 | 253 | ||||||||||
Held for future use | 15 | 21 | ||||||||||
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Property, plant and equipment—net | $ | 10,569 | $ | 9,676 | ||||||||
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Depreciation expense as a percent of average depreciable property approximated 4.0% for 2011, 4.0% for 2010 and 3.1% for 2009.
Intangible Assets
Intangible assets other than goodwill reported on our balance sheet are comprised of the following:
| At December 31, 2011 | At December 31, 2010 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
Identifiable intangible assets subject to amortization included in property, plant andequipment: | ||||||||||||||||||||||||
Land easements | $ | 248 | $ | 77 | $ | 171 | $ | 201 | $ | 73 | $ | 128 | ||||||||||||
Capitalized software | 378 | 181 | 197 | 338 | 142 | 196 | ||||||||||||||||||
Total | $ | 626 | $ | 258 | $ | 368 | $ | 539 | $ | 215 | $ | 324 | ||||||||||||
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Aggregate amortization expense for intangible assets totaled $48 million, $39 million and $27 million for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, the weighted average remaining useful lives of capitalized land easements and software were 80 years and 4 years, respectively. The estimated aggregate amortization expense for each of the next five fiscal years is as follows:
Year | Amortization Expense | |||
2012 | $ | 39 | ||
2013 | 39 | |||
2014 | 39 | |||
2015 | 39 | |||
2016 | 35 | |||
At both December 31, 2011 and 2010, goodwill totaling $4.1 billion was reported on the balance sheet. None of this goodwill is being deducted for tax purposes. See Note 2 for discussion of the goodwill impairment.
Other Noncurrent Liabilities and Deferred Credits
| At December 31, | ||||||||
| 2011 | 2010 | |||||||
Retirement plan and other employee benefits | $ | 1,340 | $ | 1,560 | ||||
Liabilities related to subsidiary tax sharing agreement | 286 | 295 | ||||||
Uncertain tax positions (including accrued interest) | 147 | 100 | ||||||
Other | 59 | 41 | ||||||
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Total | $ | 1,832 | $ | 1,996 | ||||
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Supplemental Cash Flow Information
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash payments (receipts) related to: | ||||||||||||
Interest | 360 | 339 | 337 | |||||||||
Capitalized interest | (3 | ) | (2 | ) | (2 | ) | ||||||
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Interest paid (net of amounts capitalized). | 357 | 337 | 335 | |||||||||
Income taxes | (114 | ) | 128 | 28 | ||||||||
Noncash investing and financing activities: | ||||||||||||
Construction expenditures (a) | 140 | 78 | 61 | |||||||||
Capital contribution related to settlement of certain income taxes payable (b) | 30 | 40 | 50 | |||||||||
Debt exchange transactions—Oncor (Note 7) | — | 324 | — | |||||||||
| (a) | Represents end-of-period accruals. |
| (b) | Reflects noncash settlement of certain income taxes payable arising as a result of the sale of noncontrolling interests in Oncor. |
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17. CONDENSED FINANCIAL INFORMATION
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
CONDENSED FINANCIAL INFORMATION
CONDENSED STATEMENTS OF INCOME
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Income tax expense | $ | (7 | ) | $ | (5 | ) | $ | — | ||||
Equity in earnings of subsidiary | 293 | 282 | 256 | |||||||||
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Net income | $ | 286 | $ | 277 | $ | 256 | ||||||
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See Notes to Financial Statements.
CONDENSED STATEMENTS OF CASH FLOWS
(millions of dollars)
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash provided by operating activities | $ | 116 | $ | 169 | $ | 216 | ||||||
Cash used in financing activities | (116 | ) | (169 | ) | (216 | ) | ||||||
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Net change in cash and cash equivalents | — | — | — | |||||||||
Cash and cash equivalents—beginning balance | $ | 1 | $ | 1 | $ | 1 | ||||||
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Cash and cash equivalents—ending balance | $ | 1 | 1 | 1 | ||||||||
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See Notes to Financial Statements.
CONDENSED BALANCE SHEETS
(millions of dollars)
| At December 31, | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1 | $ | 1 | ||||
Other current assets | — | 2 | ||||||
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Total current assets | 1 | 3 | ||||||
Investments | 6,028 | 5,889 | ||||||
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Total assets | $ | 6,029 | $ | 5,892 | ||||
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LIABILITIES AND MEMBERSHIP INTEREST | ||||||||
Accumulated deferred income taxes | 23 | 53 | ||||||
Other noncurrent liabilities and deferred credits | 286 | 295 | ||||||
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Total liabilities | 309 | 348 | ||||||
Membership interest | 5,720 | 5,544 | ||||||
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Total liabilities and membership interest | $ | 6,029 | $ | 5,892 | ||||
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See Notes to Financial Statements.
41
ONCOR ELECTRIC DELIVERY HOLDINGS COMPANY LLC
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
References herein to “we,” “our,” “us” and “the company” are to Oncor Holdings and/or its direct or indirect subsidiaries as apparent in the context.
The accompanying unconsolidated condensed balance sheets are presented at December 31, 2011 and 2010, and the accompanying statements of income and cash flows are presented for the years ended December 31, 2011, 2010 and 2009. We are a Delaware limited liability company wholly-owned by EFIH, which is a wholly owned subsidiary of EFH Corp. As of December 31, 2011, we own approximately 80% of the membership interests in Oncor. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules of the SEC. Because the unconsolidated condensed financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the consolidated financial statements and Notes 1 through 16. Our subsidiary has been accounted for under the equity method. All dollar amounts in the financial statements are stated in millions of US dollars unless otherwise indicated.
Distribution Restrictions
While there are no direct restrictions on our ability to distribute our net income that are currently material, substantially all of our net income is derived from Oncor. Our board of directors and Oncor’s board of directors, which are composed of a majority of independent directors, can withhold distributions to the extent the boards determine that it is necessary to retain such amounts to meet our expected future requirements.
Oncor’s distributions are limited to its cumulative net income and may not be paid except to the extent Oncor maintains a required regulatory capital structure, as discussed below. At December 31, 2011, $45 million was eligible to be distributed to Oncor’s members after taking into account these restrictions, of which approximately 80% relates to our ownership interest.
For the period beginning October 11, 2007 and ending December 31, 2012, Oncor’s cash distributions (other than distributions of the proceeds of any issuance of limited liability company units) are limited by the Limited Liability Company Agreement and a stipulation agreement with the PUCT (see Note 3) to an amount not to exceed its cumulative net income determined in accordance with US GAAP, as adjusted by applicable orders of the PUCT. Such adjustments include the removal of noncash impacts of purchase accounting and deducting two specific cash commitments. To date, the noncash impact consists of removing the effect of the 2008 $860 million goodwill impairment charge and the cumulative amount of net accretion of fair value adjustments. The two specific cash commitments are the $72 million ($46 million after tax) one-time refund to customers in September 2008 and the funds spent as part of the $100 million commitment for additional energy efficiency initiatives of which $75 million ($48 million after tax) has been spent through December 31, 2011. The goodwill impairment charge and refund are described in Notes 2 and 3. At December 31, 2011, $327 million of membership interests was available for distribution under the cumulative net income restriction, of which approximately 80% relates to our ownership interest.
Distributions are further limited by Oncor’s required regulatory capital structure 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 December 31, 2011, Oncor’s regulatory capitalization ratio was 59.7% debt and 40.3% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes transition bonds issued by Bondco. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). At December 31, 2011, $45 million of membership interests was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest.
On February 14, 2012, Oncor’s board of directors declared a cash distribution of between $33 million and $39 million to be paid to us on February 21, 2012. During 2011, 2010 and 2009, Oncor’s board of directors declared, and Oncor paid to us cash distributions totaling $116 million, $169 million and $216 million, respectively.
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