10-Q 1 efch-9302013x10q.htm 10-Q EFCH-9.30.2013-10Q
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
— OR —
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34543
Energy Future Competitive Holdings Company LLC
(formerly Energy Future Competitive Holdings Company)
(Exact name of registrant as specified in its charter)
 
 
Delaware
75-1837355
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1601 Bryan Street, Dallas, TX 75201-3411
(214) 812-4600
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-Accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No x
At October 31, 2013, the outstanding membership interest in Energy Future Competitive Holdings Company LLC was directly held by Energy Future Holdings Corp.
Energy Future Competitive Holdings Company LLC meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this report with the reduced disclosure format.


 



TABLE OF CONTENTS

 
 
PAGE
 
PART I.
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 4.
Item 6.

Energy Future Competitive Holdings Company LLC's (EFCH) (formerly known as Energy Future Holdings Company) 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 at http://www.energyfutureholdings.com, as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission. EFCH also from time to time makes available to the public, free of charge, on the EFH Corp. website certain financial statements of its wholly owned subsidiary, Texas Competitive Electric Holdings Company LLC. The information on EFH Corp.'s website shall not be deemed a part of, or incorporated by reference into, this quarterly report on Form 10-Q. The representations and warranties contained in any agreement that EFCH has filed as an exhibit to this quarterly report on Form 10-Q or that EFCH has or may publicly file in the future may contain representations and warranties made by and to the parties thereto at specific dates. Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties' risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.

This quarterly report on Form 10-Q and other Securities and Exchange Commission filings of EFCH and its subsidiaries occasionally make references to EFH Corp., EFCH (or "we," "our," "us" or "the company"), TCEH, TXU Energy or Luminant 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


GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
 
 
 
2012 Form 10-K
  
EFCH's Annual Report on Form 10-K for the year ended December 31, 2012
 
 
 
Adjusted EBITDA
  
Adjusted EBITDA means EBITDA adjusted to exclude noncash items, unusual items and other adjustments allowable under certain debt arrangements of TCEH and EFH Corp. See the 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 TCEH's and EFH Corp.'s Adjusted EBITDA in this Form 10-Q (see reconciliations in Exhibits 99(b) and 99(c)) solely because of the important role that Adjusted EBITDA plays in respect of certain covenants contained in the debt arrangements. We do not intend for Adjusted EBITDA (or EBITDA) to be an alternative to net income as a measure of operating performance or an alternative to cash flows from operating activities as a measure of liquidity or an alternative to any other measure of financial performance presented in accordance with US GAAP. Additionally, we do not intend for Adjusted EBITDA (or EBITDA) to be used as a measure of free cash flow available for management's discretionary use, as the measure excludes certain cash requirements such as interest payments, tax payments and other debt service requirements. Because not all companies use identical calculations, our presentation of Adjusted EBITDA (and EBITDA) may not be comparable to similarly titled measures of other companies.
 
 
 
CAIR
  
Clean Air Interstate Rule
 
 
 
CFTC
 
US Commodity Futures Trading Commission
 
 
 
CSAPR
  
the final Cross-State Air Pollution Rule issued by the EPA in July 2011, vacated by the US Court of Appeals for the District of Columbia Circuit in August 2012 and accepted for review by the US Supreme Court in June 2013 (see Note 6 to Financial Statements)
 
 
 
D.C. Circuit Court
 
US Court of Appeals for the District of Columbia Circuit
 
 
 
EBITDA
  
earnings (net income) before interest expense, income taxes, depreciation and amortization
 
 
 
EFCH
  
Energy Future Competitive Holdings Company LLC, a direct, wholly owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context
 
 
 
EFH Corp.
 
Energy Future Holdings Corp., a holding company, and/or its subsidiaries depending on context, whose major subsidiaries include TCEH and Oncor
 
 
 
EFIH
  
Energy Future Intermediate Holding Company LLC, a direct, wholly owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings
 
 
 
EFIH Finance
 
EFIH Finance Inc., a direct, wholly owned subsidiary of EFIH, formed for the sole purpose of serving as co-issuer with EFIH of certain debt securities
 
 
 
EPA
  
US Environmental Protection Agency
 
 
 
ERCOT
  
Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas
 
 
 
Fifth Circuit Court
 
US Court of Appeals for the Fifth Circuit
 
 
 
GAAP
  
generally accepted accounting principles
 
 
 
GWh
  
gigawatt-hours
 
 
 
ICE
 
the IntercontinentalExchange, a commodity exchange
 
 
 
IRS
 
US Internal Revenue Service
 
 
 
LIBOR
  
London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market
 
 
 

ii


Luminant
  
subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas
 
 
 
market heat rate
  
Heat rate is a measure of the efficiency of converting a fuel source to electricity. Market heat rate is the implied relationship between wholesale electricity prices and natural gas prices and is calculated by dividing the wholesale market price of electricity, which is based on the price offer of the marginal supplier in ERCOT (generally natural gas plants), by the market price of natural gas. Forward wholesale electricity market price quotes in ERCOT are generally limited to two or three years; accordingly, forward market heat rates are generally limited to the same time period. Forecasted market heat rates for time periods for which market price quotes are not available are based on fundamental economic factors and forecasts, including electricity supply, demand growth, capital costs associated with new construction of generation supply, transmission development and other factors.
 
 
 
MATS
 
the Mercury and Air Toxics Standard established by the EPA
 
 
 
Merger
  
The transaction referred to in the Agreement and Plan of Merger, dated February 25, 2007, under which Texas Holdings agreed to acquire EFH Corp., which was completed on October 10, 2007.
 
 
 
MMBtu
  
million British thermal units
 
 
 
MW
  
megawatts
 
 
 
MWh
  
megawatt-hours
 
 
 
NERC
  
North American Electric Reliability Corporation
 
 
 
NOx
  
nitrogen oxides
 
 
 
NRC
  
US Nuclear Regulatory Commission
 
 
 
NYMEX
  
the New York Mercantile Exchange, a physical commodity futures exchange
 
 
 
Oncor
  
Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings and an indirect subsidiary of EFH Corp., and/or its consolidated bankruptcy-remote financing subsidiary, Oncor Electric Delivery Transition Bond Company LLC, depending on context, that is engaged in regulated electricity transmission and distribution activities
 
 
 
Oncor Holdings
  
Oncor Electric Delivery Holdings Company LLC, a direct, wholly owned subsidiary of EFIH and the direct majority owner of Oncor, and/or its subsidiaries, depending on context
 
 
 
OPEB
  
other postretirement employee benefits
 
 
 
PUCT
  
Public Utility Commission of Texas
 
 
 
purchase accounting
  
The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or "purchase price" of a business combination, including the amount paid for the equity and direct transaction costs are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill.
 
 
 
REP
  
retail electric provider
 
 
 
RCT
  
Railroad Commission of Texas, which among other things, has oversight of lignite mining activity in Texas
 
 
 
S&P
  
Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies Inc. (a credit rating agency)
 
 
 
SEC
  
US Securities and Exchange Commission
 
 
 
SG&A
  
selling, general and administrative
 
 
 
SO2
  
sulfur dioxide
 
 
 

iii


Sponsor Group
  
Refers, collectively, to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Global, LLC (together with its affiliates, TPG) and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Holdings.
 
 
 
TCEH
  
Texas Competitive Electric Holdings Company LLC, a direct, wholly owned subsidiary of EFCH and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context, that are engaged in electricity generation and wholesale and retail energy markets activities, and whose major subsidiaries include Luminant and TXU Energy
 
 
 
TCEH Demand Notes
 
Refers to certain loans from TCEH to EFH Corp. in the form of demand notes to finance EFH Corp. debt principal and interest payments and, until April 2011, other general corporate purposes of EFH Corp., that were guaranteed on a senior unsecured basis by EFCH and EFIH and were settled by EFH Corp. in January 2013.
 
 
 
TCEH Finance
 
TCEH Finance, Inc., a direct, wholly owned subsidiary of TCEH, formed for the sole purpose of serving as co-issuer with TCEH of certain debt securities
 
 
 
TCEH Senior Notes
  
Refers, collectively, to TCEH's and TCEH Finance's 10.25% Senior Notes due November 1, 2015 and 10.25% Senior Notes due November 1, 2015, Series B (collectively, TCEH 10.25% Notes) and TCEH's and TCEH Finance's 10.50%/11.25% Senior Toggle Notes due November 1, 2016 (TCEH Toggle Notes).
 
 
 
TCEH Senior Secured Facilities
  
Refers, collectively, to the TCEH Term Loan Facilities, TCEH Revolving Credit Facility and TCEH Letter of Credit Facility. See Note 5 to Financial Statements for details of these facilities.
 
 
 
TCEH Senior Secured Notes
  
TCEH's and TCEH Finance's 11.5% Senior Secured Notes due October 1, 2020
 
 
 
TCEH Senior Secured Second Lien Notes
  
Refers, collectively, to TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes due April 1, 2021 and TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes due April 1, 2021, Series B.
 
 
 
TCEQ
  
Texas Commission on Environmental Quality
 
 
 
Texas Holdings
  
Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group, that owns substantially all of the common stock of EFH Corp.
 
 
 
TXU Energy
  
TXU Energy Retail Company LLC, a direct, wholly owned subsidiary of TCEH that is a REP in competitive areas of ERCOT and is engaged in the retail sale of electricity to residential and business customers
 
 
 
US
  
United States of America
 
 
 
VIE
  
variable interest entity

iv


PART I. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

ENERGY FUTURE COMPETITIVE HOLDINGS COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(millions of dollars)
Operating revenues
$
1,893

 
$
1,752

 
$
4,572

 
$
4,358

Fuel, purchased power costs and delivery fees
(852
)
 
(850
)
 
(2,175
)
 
(2,153
)
Net gain (loss) from commodity hedging and trading activities
58

 
(3
)
 
29

 
229

Operating costs
(189
)
 
(201
)
 
(685
)
 
(636
)
Depreciation and amortization
(331
)
 
(328
)
 
(1,012
)
 
(992
)
Selling, general and administrative expenses
(175
)
 
(174
)
 
(502
)
 
(484
)
Franchise and revenue-based taxes
(18
)
 
(19
)
 
(51
)
 
(55
)
Other income (Note 12)
1

 
2

 
7

 
12

Other deductions (Note 12)
(8
)
 
(30
)
 
(12
)
 
(37
)
Interest income
1

 
10

 
5

 
36

Interest expense and related charges (Note 12)
(340
)
 
(772
)
 
(1,338
)
 
(2,268
)
Income (loss) before income taxes
40

 
(613
)
 
(1,162
)
 
(1,990
)
Income tax benefit
17

 
228

 
476

 
692

Net income (loss)
$
57

 
$
(385
)
 
$
(686
)
 
$
(1,298
)

See Notes to Financial Statements.



CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(millions of dollars)
Net income (loss)
$
57

 
$
(385
)
 
$
(686
)
 
$
(1,298
)
Other comprehensive income, net of tax effects – cash flow hedges derivative value net loss related to hedged transactions recognized during the period and reported in interest expense and related charges (net of tax benefit of $1, $1, $3 and $3)
1

 
1

 
5

 
5

Comprehensive income (loss)
$
58

 
$
(384
)
 
$
(681
)
 
$
(1,293
)

See Notes to Financial Statements.



1



ENERGY FUTURE COMPETITIVE HOLDINGS COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

 
Nine Months Ended September 30,
 
2013
 
2012
 
(millions of dollars)
Cash flows — operating activities:
 
 
 
Net loss
$
(686
)
 
$
(1,298
)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
1,142

 
1,137

Deferred income tax benefit, net
(401
)
 
(716
)
Income tax benefit due to audit resolutions (Note 12)
(80
)
 

Unrealized net loss from mark-to-market valuations of commodity positions
693

 
1,290

Unrealized net (gain) loss from mark-to-market valuations of interest rate swaps (Note 5)
(899
)
 
16

Interest expense on toggle notes payable in additional principal (Notes 5 and 12)

 
136

Amortization of debt related costs, discounts, fair value discounts and losses on dedesignated cash flow hedges (Note 12)
209

 
152

Interest expense related to pushed-down debt of parent (Notes 5 and 12)
5

 
57

Asset impairments (Note 12)
3

 
24

Bad debt expense (Note 4)
23

 
20

Accretion expense related primarily to mining reclamation obligations (Note 12)
24

 
27

Stock-based incentive compensation expense
1

 
5

Other, net
2

 
10

Changes in operating assets and liabilities:
 
 
 
Margin deposits, net
(197
)
 
(321
)
Other operating assets and liabilities
40

 
(210
)
Cash provided by (used in) operating activities
(121
)
 
329

Cash flows — financing activities:
 
 
 
Repayments/repurchases of long-term debt (Note 5)
(94
)
 
(30
)
Net short-term borrowings under accounts receivable securitization program (Note 4)
90

 
80

Decrease in other short-term borrowings (Note 5)

 
(385
)
Notes/advances due to affiliates
4

 

Decrease in income tax-related note payable to Oncor (Note 11)

 
(20
)
Settlement of reimbursement agreements with Oncor (Note 11)

 
(159
)
Contributions from noncontrolling interests (Note 7)
3

 
6

Sale/leaseback of equipment

 
15

Other, net
(10
)
 

Cash used in financing activities
(7
)
 
(493
)
Cash flows — investing activities:
 
 
 
Capital expenditures
(353
)
 
(498
)
Nuclear fuel purchases
(59
)
 
(155
)
Settlements of notes due from affiliates
698

 
922

Purchase of right to use certain computer-related assets from parent (Note 11)
(6
)
 

Proceeds from sales of assets
3

 
1

Acquisition of combustion turbine trust interest (Note 5)
(40
)
 

Changes in restricted cash

 
112

Purchases of environmental allowances and credits
(13
)
 
(19
)
Proceeds from sales of nuclear decommissioning trust fund securities
128

 
56

Investments in nuclear decommissioning trust fund securities
(140
)
 
(68
)
Other, net
(3
)
 
2

Cash provided by investing activities
215

 
353

Net change in cash and cash equivalents
87

 
189

Cash and cash equivalents — beginning balance
1,175

 
120

Cash and cash equivalents — ending balance
$
1,262

 
$
309

See Notes to Financial Statements.

2


ENERGY FUTURE COMPETITIVE HOLDINGS COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2013
 
December 31,
2012
 
(millions of dollars)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,262

 
$
1,175

Trade accounts receivable — net (includes $573 and $445 in pledged amounts related to a VIE (Notes 2 and 4))
796

 
710

Notes receivable from parent (Note 11)

 
698

Income taxes receivable from parent
7

 

Inventories (Note 12)
400

 
393

Commodity and other derivative contractual assets (Note 9)
973

 
1,463

Margin deposits related to commodity positions
21

 
71

Other current assets
34

 
120

Total current assets
3,493

 
4,630

Restricted cash (Note 12)
947

 
947

Investments (Note 12)
787

 
710

Property, plant and equipment — net (Note 12)
17,961

 
18,556

Goodwill (Note 3)
4,952

 
4,952

Identifiable intangible assets — net (Note 3)
1,736

 
1,781

Commodity and other derivative contractual assets (Note 9)
159

 
586

Other noncurrent assets, primarily unamortized debt amendment and issuance costs
859

 
811

Total assets
$
30,894

 
$
32,973

LIABILITIES AND MEMBERSHIP INTERESTS/EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings (includes $172 and $82 related to a VIE (Notes 2 and 5))
$
2,226

 
$
2,136

Long-term debt due currently (Note 5)
32

 
96

Trade accounts payable
354

 
389

Trade accounts and other payables to affiliates
205

 
139

Notes payable to parent (Note 11)
92

 
81

Commodity and other derivative contractual liabilities (Note 9)
594

 
894

Margin deposits related to commodity positions
353

 
600

Accumulated deferred income taxes
36

 
49

Accrued income taxes payable to parent (Note 11)

 
31

Accrued taxes other than income
95

 
17

Accrued interest
532

 
407

Other current liabilities
219

 
255

Total current liabilities
4,738

 
5,094

Accumulated deferred income taxes
3,347

 
3,759

Commodity and other derivative contractual liabilities (Note 9)
782

 
1,556

Notes or other liabilities due to affiliates
2

 
5

Long-term debt held by affiliates (Note 11)
382

 
382

Long-term debt, less amounts due currently (Note 5)
29,770

 
29,928

Affiliate tax sharing liability (Note 12)
723

 

Other noncurrent liabilities and deferred credits (Note 12)
1,793

 
2,643

Total liabilities
41,537

 
43,367

 
 
 
 
Commitments and Contingencies (Note 6)

 

 
 
 
 
Membership interests/equity (Note 7):
 
 
 
EFCH shareholder's equity

 
(10,506
)
EFCH membership interests
(10,748
)
 

Noncontrolling interests in subsidiaries
105

 
112

Total membership interests/equity
(10,643
)
 
(10,394
)
Total liabilities and membership interests/equity
$
30,894

 
$
32,973


See Notes to Financial Statements.

3


ENERGY FUTURE COMPETITIVE HOLDINGS COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

References in this report to "we," "our," "us" and "the company" are to EFCH and/or its subsidiaries, as apparent in the context. See "Glossary" for defined terms.

EFCH, a wholly owned subsidiary of EFH Corp., is a Dallas, Texas-based holding company. In April 2013, EFCH was converted from a Texas corporation to a Delaware limited liability company. The conversion did not result in a change in the management, assets, businesses or operations of EFCH. We conduct our operations almost entirely through our wholly owned subsidiary, TCEH. TCEH is a holding company for subsidiaries engaged in competitive electricity market activities largely in Texas, including electricity generation, wholesale energy sales and purchases, commodity risk management and trading activities and retail electricity sales. Key management activities, including commodity risk management and electricity sourcing for our retail and wholesale customers, are performed on an integrated basis; consequently, there are no reportable business segments.

TCEH operates largely in the ERCOT market, and wholesale electricity prices in that market have generally moved with the price of natural gas. Wholesale electricity prices have significant implications to TCEH's profitability and cash flows and, accordingly, the value of its business.

Liquidity Considerations

EFCH has been and is expected to continue to be adversely affected by the sustained decline in natural gas prices and its effect on wholesale and retail electricity prices in ERCOT. Further, the remaining natural gas hedges that TCEH entered into when forward market prices of natural gas were significantly higher than current prices will mature in 2013 and 2014. These market conditions challenge the long-term profitability and operating cash flows of EFCH's and its subsidiaries' business and the ability to support their significant interest payments and debt maturities, and could adversely impact their ability to obtain additional liquidity and service, refinance and/or extend the maturities of their outstanding debt.

Note 5 provides the details of debt activity in 2013 and the principal amounts and maturity dates of EFCH's and its consolidated subsidiaries' short-term borrowings and long-term debt, which includes the maturity of $3.8 billion of the TCEH Term Loan Facilities in October 2014. At September 30, 2013, TCEH has $1.3 billion of cash and cash equivalents and $171 million of available capacity under its letter of credit facility. Based on forward wholesale power prices in ERCOT, which are subject to the effects of changing market conditions, TCEH may not have sufficient liquidity, absent any financing transactions, to meet its obligations within the next twelve months.

EFH Corp. Discussions with Creditors

EFH Corp. and its subsidiaries, other than Oncor Holdings and its subsidiaries (the Oncor Ring-Fenced Entities) continue to consider and evaluate possible transactions and initiatives to address their highly leveraged balance sheets and significant cash interest requirements and have entered into discussions with their lenders and bondholders with respect to such transactions and initiatives. These transactions and initiatives may include, among others, debt for debt exchanges, recapitalizations, amendments to and extensions of debt obligations and exchanges or conversions of debt for preferred or common equity or warrants, including exchanges or conversions of debt of EFH Corp., EFIH, EFCH and TCEH into preferred or common equity or warrants of EFH Corp., EFIH, EFCH, TCEH and/or any of their subsidiaries. These actions could result in holders of EFH Corp., EFIH, EFCH and TCEH debt instruments not recovering the full principal amount of those obligations.


4


In March and April 2013, EFH Corp. engaged in discussions with certain unaffiliated holders of first lien senior secured claims against EFCH, TCEH and certain of TCEH's subsidiaries (the TCEH Creditors) with respect to proposed changes to its capital structure. No agreement was reached as part of those discussions, and in September and October 2013, EFH Corp. engaged in further discussions with the TCEH Creditors, certain unaffiliated holders of unsecured claims against EFIH and a significant creditor with claims against TCEH, EFCH, EFIH and EFH Corp. (collectively, the Creditors) with respect to its capital structure, including the possibility of a consensual, prepackaged restructuring transaction. EFH Corp.'s objectives in these discussions were to promote a sustainable capital structure and maximize enterprise value of EFH Corp. and its subsidiaries by, among other things, encouraging agreement on a restructuring plan that would minimize time spent in a restructuring through a proactive and organized solution; minimizing any potential adverse tax impacts of a restructuring; maintaining EFH Corp. in one consolidated group; maintaining focus on operating its businesses, and maintaining EFH Corp.'s high-performing work force.

EFH Corp. and the Creditors discussed a number of proposed changes to EFH Corp.'s capital structure. Certain proposals contemplated that some combination of EFH Corp. and certain of its subsidiaries (including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities) would implement a plan of reorganization by commencing one or more voluntary cases under Chapter 11 of the United States Bankruptcy Code (the Code). Such proposals would have resulted in a prenegotiated restructuring of EFCH’s approximately $32.2 billion principal amount of debt, EFH Corp.’s approximately $650 million principal amount of debt and EFIH’s approximately $7.6 billion principal amount of debt (each as of September 30, 2013 and excluding debt held by affiliates) and contemplated that after the restructuring EFH Corp. would continue to hold all of the equity interests in EFCH and EFIH; EFCH would continue to hold all of the equity interests in TCEH; and EFIH would continue to hold all of the equity interests in Oncor Holdings. Another proposal contemplated that EFIH (excluding Oncor Holdings and its subsidiaries) would implement a plan of reorganization by commencing a stand-alone voluntary case under the Code. Such proposal contemplated that after the restructuring certain creditors of EFIH would own a substantial majority of, and certain creditors of EFH Corp. and the equity holders of EFH Corp. would collectively own a minority of, the equity interests in EFIH. The confirmation of any plans of reorganization in such cases would be subject to applicable regulatory approvals. EFH Corp. and the Creditors have not reached agreement on the terms of any change in our capital structure.

EFH Corp. is not currently engaged in ongoing negotiations with the principals of any of the Creditors. Although the Creditors are not currently engaged in ongoing negotiations with EFH Corp., certain of the Creditors have directed their advisors to continue to work with EFH Corp. and its advisors to explore further whether the parties can reach an agreement on the terms of a consensual restructuring. EFH Corp. will continue to consider and evaluate a range of future changes to its capital structure, in addition to the proposed changes described above, which may include filing a voluntary case under Chapter 11 of the Code for some or all of EFH Corp. and its subsidiaries (excluding the Oncor Ring-Fenced Entities).

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as the audited financial statements included in our 2012 Form 10-K. Adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Any acquisitions of outstanding debt for cash, including notes that had been issued in lieu of cash interest, are presented in the financing activities section of the statement of cash flows. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes included in our 2012 Form 10-K. The results of operations for an interim period may not give a true indication of results for a full year. All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated.

Use of Estimates

Preparation of financial statements requires estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements. 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.



5


2. VARIABLE INTEREST ENTITIES

A variable interest entity (VIE) is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us. Accounting standards require consolidation of a VIE if we have (a) the power to direct the significant activities of the VIE and (b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary). 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. There are no material investments accounted for under the equity or cost method.

As discussed below, our balance sheet includes assets and liabilities of VIEs that meet the consolidation standards. The maximum exposure to loss from our interests in VIEs does not exceed our carrying value.

Consolidated VIEs

See discussion in Note 4 regarding the VIE related to our accounts receivable securitization program that is consolidated under the accounting standards. We also consolidate Comanche Peak Nuclear Power Company LLC (CPNPC), which was formed by subsidiaries of TCEH and Mitsubishi Heavy Industries Ltd. (MHI) for the purpose of developing two new nuclear generation units at our existing Comanche Peak nuclear-fueled generation facility using MHI's US-Advanced Pressurized Water Reactor technology and to obtain a combined operating license from the NRC. CPNPC is currently financed through capital contributions from the subsidiaries of TCEH and MHI that hold 88% and 12% of CPNPC's equity interests, respectively (see Note 7).

The carrying amounts and classifications of the assets and liabilities related to our consolidated VIEs are as follows:
Assets:
September 30,
2013
 
December 31, 2012
 
Liabilities:
September 30,
2013
 
December 31, 2012
Cash and cash equivalents
$
37

 
$
43

 
Short-term borrowings
$
172

 
$
82

Accounts receivable
573

 
445

 
Trade accounts payable
1

 
1

Property, plant and equipment
138

 
134

 
Other current liabilities
13

 
7

Other assets, including $3 million and $12 million of current assets
12

 
16

 
 
 
 
 
Total assets
$
760

 
$
638

 
Total liabilities
$
186

 
$
90


The assets of our consolidated VIEs can only be used to settle the obligations of the VIE, and the creditors of our consolidated VIEs do not have recourse to our assets to settle the obligations of the VIE.

6


3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

The following table provides information regarding our goodwill balance, which arose in connection with accounting for the Merger. There were no changes to the goodwill balance for the three and nine months ended September 30, 2013. None of the goodwill is being deducted for tax purposes.
Goodwill before impairment charges
$
18,322

Accumulated impairment charges
(13,370
)
Balance at September 30, 2013 and December 31, 2012
$
4,952


In the first quarter 2013, we finalized the fair value calculations supporting the $1.2 billion noncash goodwill impairment charge that was recorded in the fourth quarter 2012. No additional impairment was recorded.

We have determined that in consideration of our most recent forecasts of wholesale power prices in ERCOT, the likelihood of a goodwill impairment has increased. We have initiated an evaluation of goodwill as of September 30, 2013, which will be completed in the fourth quarter 2013 and could result in a noncash goodwill impairment charge in that period.

Identifiable Intangible Assets

Identifiable intangible assets, including amounts that arose in connection with accounting for the Merger, are comprised of the following:
 
 
September 30, 2013
 
December 31, 2012
Identifiable Intangible Asset
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Retail customer relationship
 
$
463

 
$
396

 
$
67

 
$
463

 
$
378

 
$
85

Favorable purchase and sales contracts
 
551

 
333

 
218

 
552

 
314

 
238

Software and other computer-related assets
 
348

 
145

 
203

 
320

 
112

 
208

Environmental allowances and credits
 
598

 
407

 
191

 
594

 
393

 
201

Mining development costs
 
196

 
105

 
91

 
163

 
82

 
81

Total identifiable intangible assets subject to amortization
 
$
2,156

 
$
1,386

 
770

 
$
2,092

 
$
1,279

 
813

Retail trade name (not subject to amortization)
 
 
 
 
 
955

 
 
 
 
 
955

Mineral interests (not currently subject to amortization)
 
 
 
 
 
11

 
 
 
 
 
13

Total identifiable intangible assets
 
 
 
 
 
$
1,736

 
 
 
 
 
$
1,781


Amortization expense related to identifiable intangible assets (including income statement line item) consisted of:
Identifiable Intangible Asset
 
Income Statement Line
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Retail customer relationship
 
Depreciation and amortization
 
$
6

 
$
8

 
$
18

 
$
25

Favorable purchase and sales contracts
 
Operating revenues/fuel, purchased power costs and delivery fees
 
6

 
5

 
19

 
20

Software and other computer-related assets
 
Depreciation and amortization
 
14

 
9

 
33

 
24

Environmental allowances and credits
 
Fuel, purchased power costs and delivery fees
 
5

 
6

 
11

 
15

Mining development costs
 
Depreciation and amortization
 
8

 
7

 
23

 
20

Total amortization expense
 
 
 
$
39

 
$
35

 
$
104

 
$
104



7


Estimated Amortization of Identifiable Intangible Assets — The estimated aggregate amortization expense of identifiable intangible assets for each of the next five fiscal years is as follows:
Year
 
Estimated Amortization Expense
2013
 
$
143

2014
 
$
138

2015
 
$
126

2016
 
$
101

2017
 
$
78




8


4. TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

On October 29, 2013, we terminated the Accounts Receivable Securitization Program, described in the following paragraphs, and repaid all outstanding obligations under the program. In connection with the termination of the program, TXU Energy repurchased $491 million in accounts receivable from TXU Energy Receivables Company LLC (TXU Energy Receivables Company) for an aggregate purchase price of $474 million, TXU Energy Receivables Company paid TXU Energy $11 million, constituting repayment in full of its outstanding obligations under its subordinated note with TXU Energy, and TXU Energy Receivables Company repaid all of its borrowings from a financial institution providing the financing for the program totaling $126 million.

Under the Accounts Receivable Securitization Program, TXU Energy (originator) sold all of its trade accounts receivable to TXU Energy Receivables Company, which was an entity created for the special purpose of purchasing receivables from the originator and is a consolidated, wholly owned, bankruptcy-remote subsidiary of TCEH. TXU Energy Receivables Company borrowed funds from a financial institution using the accounts receivable as collateral.

The trade accounts receivable amounts under the program are reported in the financial statements as pledged balances, and the related funding amounts are reported as short-term borrowings.

The maximum funding amount available under the program at September 30, 2013 was $200 million, which approximated the expected usage and applied only to receivables related to non-executory retail sales contracts. Program funding increased to $172 million at September 30, 2013 from $82 million at December 31, 2012. Because TCEH's credit ratings were lower than Ba3/BB-, under the terms of the program available funding was reduced by the amount of customer deposits held by the originator, which totaled $33 million at September 30, 2013.

TXU Energy Receivables Company issued a subordinated note payable to the originator in an amount equal to the difference between the face amount of the accounts receivable purchased, less a discount, and cash paid to the originator. Because the subordinated note was limited to 25% of the uncollected accounts receivable purchased, and the amount of borrowings was limited by terms of the financing agreement, any additional funding to purchase the receivables was sourced from cash on hand, which totaled $37 million at September 30, 2013, and/or capital contributions from TCEH. Under the program, the subordinated note issued by TXU Energy Receivables Company was subordinated to the security interests of the financial institution. The balance of the subordinated note payable, which was eliminated in consolidation, totaled $93 million and $97 million at September 30, 2013 and December 31, 2012, respectively.

All new trade receivables under the program generated by the originator were continuously purchased by TXU Energy Receivables Company with the proceeds from collections of receivables previously purchased and, as necessary, increased borrowings or funding sources as described immediately above. Changes in the amount of borrowings by TXU Energy Receivables Company reflected seasonal variations in the level of accounts receivable, changes in collection trends and other factors such as changes in sales prices and volumes.

The discount from face amount on the purchase of receivables from the originator principally funded program fees paid to the financial institution. The program fees consisted primarily of interest costs on the underlying financing and are reported as interest expense and related charges. The discount also funded a servicing fee, which is reported as SG&A expense, paid by TXU Energy Receivables Company to TXU Energy, which provided recordkeeping services and was the collection agent under the program.

Program fee amounts were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Program fees
$
3

 
$
2

 
$
6

 
$
6

Program fees as a percentage of average funding (annualized)
5.1
%
 
4.9
%
 
5.8
%
 
6.2
%


9


Activities of TXU Energy Receivables Company and its predecessor, TXU Receivables Company, were as follows:
 
Nine Months Ended September 30,
 
2013
 
2012
Cash collections on accounts receivable
$
3,200

 
$
3,501

Face amount of new receivables purchased (a)
(3,328
)
 
(3,571
)
Discount from face amount of purchased receivables
29

 
8

Program fees paid to financial institution
(6
)
 
(6
)
Servicing fees paid for recordkeeping and collection services

 
(2
)
Decrease in subordinated notes payable
(4
)
 
(10
)
Increase in cash held
17

 

Other — net
2

 

Cash flows provided to originator under the program
$
(90
)
 
$
(80
)
_______________
(a)
Net of allowance for uncollectible accounts.

Trade Accounts Receivable
 
September 30, 2013
 
December 31, 2012
Wholesale and retail trade accounts receivable
$
813

 
$
719

Allowance for uncollectible accounts
(17
)
 
(9
)
Trade accounts receivable — reported in balance sheet, including $573 and $445 in pledged retail receivables
$
796

 
$
710


Gross trade accounts receivable at September 30, 2013 and December 31, 2012 included unbilled revenues of $272 million and $260 million, respectively.

Allowance for Uncollectible Accounts Receivable
 
Nine Months Ended September 30,
 
2013
 
2012
Allowance for uncollectible accounts receivable at beginning of period
$
9

 
$
27

Increase for bad debt expense
23

 
20

Decrease for account write-offs
(15
)
 
(32
)
Allowance for uncollectible accounts receivable at end of period
$
17

 
$
15


10


5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

At September 30, 2013, outstanding short-term borrowings totaled $2.226 billion, which included $2.054 billion under the TCEH Revolving Credit Facility at a weighted average interest rate of 4.68%, excluding customary fees, and $172 million under the accounts receivable securitization program. On October 29, 2013, we terminated the accounts receivable securitization program and repaid all outstanding obligations under the program (see Note 4).

At December 31, 2012, outstanding short-term borrowings totaled $2.136 billion, which included $2.054 billion under the TCEH Revolving Credit Facility at a weighted average interest rate of 4.40%, excluding customary fees, and $82 million under the accounts receivable securitization program.

Credit Facilities

Credit facilities and related cash borrowings at September 30, 2013 are presented below. Available letter of credit capacity totaled $171 million at September 30, 2013 as discussed below. The facilities are all senior secured facilities of TCEH.
 
 
 
September 30, 2013
Facility
Maturity Date
 
Facility Limit
 
Letters of Credit
 
Cash Borrowings
 
Availability
TCEH Revolving Credit Facility (a)
October 2016
 
$
2,054

 
$

 
$
2,054

 
$

TCEH Letter of Credit Facility (b)
October 2017 (b)
 
1,062

 

 
1,062

 

Total TCEH
 
 
$
3,116

 
$

 
$
3,116

 
$

___________
(a)
Facility used for borrowings for general corporate purposes. Borrowings are classified as short-term borrowings. At September 30, 2013, borrowings under the facility bear interest at LIBOR plus 4.50%, and a commitment fee is payable quarterly in arrears at a rate per annum equal to 1.00% of the average daily unused portion of the facility. In January 2013, commitments previously maturing in 2013 were extended to 2016 as discussed below.
(b)
Facility, $42 million of which matures in October 2014, used for issuing letters of credit for general corporate purposes, including, but not limited to, providing collateral support under hedging arrangements and other commodity transactions that are not secured by a first-lien interest in the assets of TCEH. The borrowings under this facility have been recorded by TCEH as restricted cash that supports issuances of letters of credit and are classified as long-term debt. At September 30, 2013, the restricted cash totaled $947 million, after reduction for a $115 million letter of credit drawn in 2009 related to an office building financing. At September 30, 2013, the restricted cash supports $776 million in letters of credit outstanding, leaving $171 million in available letter of credit capacity.

Amendment and Extension of TCEH Revolving Credit Facility — In January 2013, the Credit Agreement governing the TCEH Senior Secured Facilities was amended to extend the maturity date of the $645 million of commitments maturing in October 2013 to October 2016, bringing the maturity date of all commitments under the TCEH Revolving Credit Facility totaling $2.054 billion to October 2016. The extended commitments have the same terms and conditions as the existing commitments expiring in October 2016 under the Credit Agreement. Fees in consideration for the extension were settled through the incurrence of $340 million principal amount of incremental term loans under the TCEH Term Loan Facilities maturing in October 2017. In connection with the extension request, TCEH eliminated its ability to draw letters of credit under the TCEH Revolving Credit Facility. At the date of the extension, there were no outstanding letters of credit under the TCEH Revolving Credit Facility.


11


Long-Term Debt

At September 30, 2013 and December 31, 2012, long-term debt consisted of the following:
 
September 30, 2013
 
December 31, 2012
TCEH
 
 
 
Senior Secured Facilities:
 
 
 
3.710% TCEH Term Loan Facilities maturing October 10, 2014 (a)(b)
$
3,809

 
$
3,809

3.679% TCEH Letter of Credit Facility maturing October 10, 2014 (b)
42

 
42

4.709% TCEH Term Loan Facilities maturing October 10, 2017 (a)(b)(c)
15,710

 
15,370

4.679% TCEH Letter of Credit Facility maturing October 10, 2017 (b)
1,020

 
1,020

11.5% Fixed Senior Secured Notes due October 1, 2020
1,750

 
1,750

15% Fixed Senior Secured Second Lien Notes due April 1, 2021
336

 
336

15% Fixed Senior Secured Second Lien Notes due April 1, 2021, Series B
1,235

 
1,235

10.25% Fixed Senior Notes due November 1, 2015 (c)
2,046

 
2,046

10.25% Fixed Senior Notes due November 1, 2015, Series B (c)
1,442

 
1,442

10.50 / 11.25% Senior Toggle Notes due November 1, 2016
1,749

 
1,749

Pollution Control Revenue Bonds:

 

Brazos River Authority:

 

5.40% Fixed Series 1994A due May 1, 2029
39

 
39

7.70% Fixed Series 1999A due April 1, 2033
111

 
111

6.75% Fixed Series 1999B due September 1, 2034, remarketing date April 1, 2013 (d)

 
16

7.70% Fixed Series 1999C due March 1, 2032
50

 
50

8.25% Fixed Series 2001A due October 1, 2030
71

 
71

8.25% Fixed Series 2001D-1 due May 1, 2033
171

 
171

0.089% Floating Series 2001D-2 due May 1, 2033 (e)
97

 
97

0.210% Floating Taxable Series 2001I due December 1, 2036 (f)
62

 
62

0.089% Floating Series 2002A due May 1, 2037 (e)
45

 
45

6.75% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013 (d)

 
44

6.30% Fixed Series 2003B due July 1, 2032
39

 
39

6.75% Fixed Series 2003C due October 1, 2038
52

 
52

5.40% Fixed Series 2003D due October 1, 2029, remarketing date October 1, 2014 (d)
31

 
31

5.00% Fixed Series 2006 due March 1, 2041
100

 
100

Sabine River Authority of Texas:

 

6.45% Fixed Series 2000A due June 1, 2021
51

 
51

5.20% Fixed Series 2001C due May 1, 2028
70

 
70

5.80% Fixed Series 2003A due July 1, 2022
12

 
12

6.15% Fixed Series 2003B due August 1, 2022
45

 
45

Trinity River Authority of Texas:

 

6.25% Fixed Series 2000A due May 1, 2028
14

 
14

Unamortized fair value discount related to pollution control revenue bonds (g)
(107
)
 
(112
)
Other:

 

7.48% Fixed Secured Facility Bonds with amortizing payments through January 2017
36

 

7.46% Fixed Secured Facility Bonds with amortizing payments through January 2015
4

 
12

7% Fixed Senior Notes due March 15, 2013

 
5

Capital leases
56

 
64

Other
3

 
3

Unamortized discount
(110
)
 
(10
)
Unamortized fair value discount (g)

 
(1
)
Total TCEH
30,081

 
29,880


12


 
September 30, 2013
 
December 31, 2012
EFCH (parent entity)
 
 
 
9.58% Fixed Notes due in annual installments through December 4, 2019 (h)
$
35

 
$
35

8.254% Fixed Notes due in quarterly installments through December 31, 2021 (h)
35

 
39

1.065% Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037 (b)
1

 
1

8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037
8

 
8

Unamortized fair value discount (g)
(6
)
 
(7
)
Subtotal
73

 
76

EFH Corp. debt pushed down (i)
 
 
 
10% Fixed Senior Notes due January 15, 2020

 
330

9.75% Fixed Senior Notes due October 15, 2019

 
58

10.875% Fixed Senior Notes due November 1, 2017
16

 
32

11.25 / 12.00% Senior Toggle Notes due November 1, 2017
14

 
30

Subtotal — EFH Corp. debt pushed down
30

 
450

Total EFCH (parent entity)
103

 
526

Total EFCH consolidated
30,184

 
30,406

Less amount due currently
(32
)
 
(96
)
Less amount held by affiliates (Note 11)
(382
)
 
(382
)
Total long-term debt
$
29,770

 
$
29,928

____________
(a)
Interest rate swapped to fixed on $18.140 billion principal amount of maturities through October 2014 and up to an aggregate $12.6 billion principal amount from October 2014 through October 2017.
(b)
Interest rates in effect at September 30, 2013.
(c)
As discussed below and in Note 11, principal amounts of notes/term loans totaling $382 million at both September 30, 2013 and December 31, 2012 were held by EFH Corp. and EFIH.
(d)
These series are in the multiannual interest rate mode and are subject to mandatory tender prior to maturity on the mandatory remarketing date. On such date, the interest rate and interest rate period will be reset for the bonds.
(e)
Interest rates in effect at September 30, 2013. These series are in a daily interest rate mode and are classified as long-term as they are supported by long-term irrevocable letters of credit.
(f)
Interest rate in effect at September 30, 2013. This series is in a weekly interest rate mode and is classified as long-term as it is supported by long-term irrevocable letters of credit.
(g)
Amount represents unamortized fair value adjustments recorded under purchase accounting.
(h)
EFCH's obligations with respect to these financings are guaranteed by EFH Corp. and secured on a first-priority basis by, among other things, an undivided interest in the Comanche Peak nuclear generation facility.
(i)
Represents 50% of the amount of these EFH Corp. securities guaranteed by, and pushed down to (pushed-down debt), EFCH (parent entity) per the discussion below under "Guarantees and Push Down of EFH Corp. Debt."

Debt Amounts Due Currently

Amounts due currently (within twelve months) at September 30, 2013 total $32 million and consist of scheduled installment payments on capital leases and debt securities.

Debt Related Activity in 2013

Principal amounts of long-term debt issued in the nine months ended September 30, 2013 consisted of $340 million principal amount of incremental term loans under the TCEH Term Loan Facilities discussed in "Amendment and Extension of TCEH Revolving Credit Facility" above.

Repayments of long-term debt in the nine months ended September 30, 2013 totaled $94 million and consisted of $86 million of payments of principal at scheduled maturity or mandatory tender and remarketing dates (including $60 million of pollution control revenue bond and $17 million of fixed secured facility bond payments) and $8 million of contractual payments under capital leases.


13


In April 2013, TCEH acquired for $40 million in cash the owner participant interest in a trust established to lease six natural gas-fueled combustion turbines to TCEH. The interest in the trust was held by an unaffiliated party. The trust was consolidated in the second quarter 2013. No gain or loss was recognized on the transaction. The estimated fair value of the combustion turbine assets of $83 million approximated the total of the estimated fair value of the debt assumed and cash paid. In recording the combustion turbine assets, the fair value was reduced by the remaining deferred lease liability and the unamortized lease valuation reserve established in accounting for the Merger, which were reversed and totaled $18 million. At June 30, 2013, the principal amount of the trust's debt totaled $45 million and is payable in semiannual installments through January 1, 2017.

EFIH Debt Exchanges and Distributions Involving EFH Corp. Debt Guaranteed by EFCH (see discussion of debt guarantee below) In exchanges in January 2013, EFIH and EFIH Finance issued $1.302 billion principal amount of EFIH 10% Senior Secured Notes due 2020 (EFIH 10% Notes) in exchange for $1.310 billion total principal amount of EFH Corp. and EFIH senior secured notes consisting of: (i) $113 million principal amount of EFH Corp. 9.75% Senior Secured Notes due 2019 (EFH Corp. 9.75% Notes), (ii) $1.058 billion principal amount of EFH Corp. 10% Senior Secured Notes due 2020 (EFH Corp. 10% Notes), and (iii) $139 million principal amount of EFIH senior secured notes.

In connection with these debt exchange transactions, EFH Corp. received the requisite consents from holders of the EFH Corp. 9.75% Notes and EFH Corp. 10% Notes to certain amendments to the respective indentures governing these notes. These amendments, among other things, made EFCH and EFIH unrestricted subsidiaries under the EFH Corp. 9.75% Notes and EFH Corp. 10% Notes, thereby eliminating EFCH's and EFIH's guarantees of the notes.

In additional exchanges in January 2013, EFIH and EFIH Finance issued $89 million principal amount of 11.25/12.25% Toggle Notes due 2018 (EFIH Toggle Notes) in exchange for $95 million total principal amount of EFH Corp. senior notes consisting of: (i) $31 million principal amount of EFH Corp. 10.875% Senior Notes due 2017 (EFH Corp. 10.875% Notes), (ii) $33 million principal amount of EFH Corp. 11.25%/12.00% Senior Toggle Notes due 2017 (EFH Corp. Toggle Notes) and (iii) $31 million principal amount of other EFH Corp. unsecured debt.

EFIH received a total of $1.266 billion principal amount of EFH Corp. debt in these exchanges.

In the first quarter 2013, EFIH distributed $6.360 billion principal amount of EFH Corp. debt guaranteed by EFCH that EFIH previously received in debt exchanges, including $1.235 billion (of the $1.266 billion) received in January 2013, as a dividend to EFH Corp., which cancelled the notes. The dividend included $1.715 billion principal amount of EFH Corp. 10.875% Notes, $3.474 billion principal amount of EFH Corp. Toggle Notes, $1.058 billion principal amount of EFH Corp. 10% Notes and $113 million principal amount of EFH Corp. 9.75% Notes.

Guarantee 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 for cash are considered Merger-related debt to the extent the proceeds are used to repurchase Merger-related debt. EFCH and EFIH (excluding their subsidiaries) fully and unconditionally guarantee on a joint and several basis the Merger-related debt of EFH Corp. (parent). Such debt 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 by its subsidiaries is not subject to push down.

As a result of transactions in the first quarter 2013 discussed above, debt guaranteed and subject to push down at September 30, 2013 totals $60 million and consists of $33 million principal amount of EFH Corp. 10.875% Senior Notes and $27 million principal amount of EFH Corp. 11.25%/12.00% Senior Toggle Notes. The amount reflected in our balance sheet as pushed down debt ($30 million and $450 million at September 30, 2013 and December 31, 2012, respectively, as shown in the long-term debt table above) represents 50% of the principal amount of the EFH Corp. Merger-related debt guaranteed. 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.


14


The following table presents an analysis of the total outstanding principal amount of EFH Corp. debt guaranteed by EFCH and EFIH at December 31, 2012 and September 30, 2013, respectively.
 
 
December 31, 2012
 
 
 
 
Securities Guaranteed (principal amounts)
 
Held by EFIH
 
Subject to Push Down
 
Not Merger-Related
 
Total Guaranteed
 
Debt Cancelled in 2013
 
Total Guaranteed September 30, 2013 (c)
EFH Corp. 9.75% Senior Notes (a)
 
$

 
$
115

 
$

 
$
115

 
113

 
$

EFH Corp. 10% Senior Notes (a)
 

 
661

 
400

 
1,061

 
1,058

 

EFH Corp. 10.875% Senior Notes
 
1,685

 
64

 

 
1,749

 
1,715

 
33

EFH Corp. 11.25/12.00% Senior Toggle Notes
 
3,441

 
60

 

 
3,501

 
3,474

 
27

Subtotal
 
$
5,126

 
$
900

 
$
400

 
6,426

 
$
6,360

 
60

TCEH Demand Notes (b)
 
 
 
 
 
 
 
698

 
 
 

Total
 
 
 
 
 
 
 
$
7,124

 
 
 
$
60

____________

(a)
As a result of transactions completed in the first quarter 2013, as discussed above, the guarantees of the EFH Corp. 9.75% Notes and EFH Corp. 10% Notes were eliminated.
(b)
The TCEH Demand Notes were settled in January 2013. See Note 11.
(c)
These amounts are subject to push down.

Information Regarding Other Significant Outstanding Debt

TCEH Senior Secured Facilities Borrowings under the TCEH Senior Secured Facilities totaled $22.635 billion at September 30, 2013 and consisted of:

$3.809 billion of TCEH Term Loan Facilities maturing in October 2014 with interest payable at LIBOR plus 3.50%;
$15.710 billion of TCEH Term Loan Facilities maturing in October 2017 with interest payable at LIBOR plus 4.50%;
$42 million of cash borrowed under the TCEH Letter of Credit Facility maturing in October 2014 with interest payable at LIBOR plus 3.50% (see discussion under "Credit Facilities" above);
$1.020 billion of cash borrowed under the TCEH Letter of Credit Facility maturing in October 2017 with interest payable at LIBOR plus 4.50% (see discussion under "Credit Facilities" above), and
Amounts borrowed under the TCEH Revolving Credit Facility, which may be reborrowed from time to time until October 2016 and represent the entire amount of commitments under the facility totaling $2.054 billion at September 30, 2013. See "Credit Facilities" above for discussion regarding the maturity date extension of $645 million in commitments from 2013 to 2016.

Each of the loans described above that matures in 2016 or 2017 includes a "springing maturity" provision pursuant to which (i) in the event that more than $500 million aggregate principal amount of the TCEH 10.25% Notes due in 2015 (other than notes held by EFH Corp. or its controlled affiliates at March 31, 2011 to the extent held at the determination date as defined in the Credit Agreement) or more than $150 million aggregate principal amount of the TCEH Toggle Notes due in 2016 (other than notes held by EFH Corp. or its controlled affiliates at March 31, 2011 to the extent held at the determination date as defined in the Credit Agreement), as applicable, remain outstanding as of 91 days prior to the maturity date of the applicable notes and (ii) TCEH's total debt to Adjusted EBITDA ratio (as defined in the TCEH Senior Secured Facilities) is greater than 6.00 to 1.00 at the applicable determination date, then the maturity date of the extended loans will automatically change to 90 days prior to the maturity date of the applicable notes.

Under the terms of the TCEH Senior Secured Facilities, the commitments of the lenders to make loans to TCEH are several and not joint. Accordingly, if any lender fails to make loans to TCEH, TCEH's available liquidity could be reduced by an amount up to the aggregate amount of such lender's commitments under the TCEH Senior Secured Facilities.

The TCEH Senior Secured Facilities are fully and unconditionally guaranteed jointly and severally on a senior secured basis by EFCH, and subject to certain exceptions, each existing and future direct or indirect wholly owned US subsidiary of TCEH. The TCEH Senior Secured Facilities, along with the TCEH Senior Secured Notes and certain commodity hedging transactions and the interest rate swaps described under "TCEH Interest Rate Swap Transactions" below, are secured on a first-priority basis by (i) substantially all of the current and future assets of TCEH and TCEH's subsidiaries who are guarantors of such facilities and (ii) pledges of the capital stock of TCEH and certain current and future direct or indirect subsidiaries of TCEH.

15



TCEH 11.5% Senior Secured Notes At September 30, 2013, the principal amount of the TCEH 11.5% Senior Secured Notes totaled $1.750 billion. The notes mature in October 2020, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1, at a fixed rate of 11.5% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and each subsidiary of TCEH that guarantees the TCEH Senior Secured Facilities (collectively, the Guarantors). The notes are secured, on a first-priority basis, by security interests in all of the assets of TCEH, and the guarantees are secured on a first-priority basis by all of the assets and equity interests held by the Guarantors, in each case, to the extent such assets and equity interests secure obligations under the TCEH Senior Secured Facilities (the TCEH Collateral), subject to certain exceptions and permitted liens.

The notes are (i) senior obligations and rank equally in right of payment with all senior indebtedness of TCEH, (ii) senior in right of payment to all existing or future unsecured and second-priority secured debt of TCEH to the extent of the value of the TCEH Collateral and (iii) senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated to all secured obligations of TCEH that are secured by assets other than the TCEH Collateral, to the extent of the value of the assets securing such obligations.

TCEH 15% Senior Secured Second Lien Notes (including Series B) At September 30, 2013, the principal amount of the TCEH 15% Senior Secured Second Lien Notes totaled $1.571 billion. These notes mature in April 2021, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1 at a fixed rate of 15% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and, subject to certain exceptions, each subsidiary of TCEH that guarantees the TCEH Senior Secured Facilities. The notes are secured, on a second-priority basis, by security interests in all of the assets of TCEH, and the guarantees (other than the guarantee of EFCH) are secured on a second-priority basis by all of the assets and equity interests of all of the Guarantors other than EFCH (collectively, the Subsidiary Guarantors), in each case, to the extent such assets and security interests secure obligations under the TCEH Senior Secured Facilities on a first-priority basis, subject to certain exceptions (including the elimination of the pledge of equity interests of any Subsidiary Guarantor to the extent that separate financial statements would be required to be filed with the SEC for such Subsidiary Guarantor under Rule 3-16 of Regulation S-X) and permitted liens. The guarantee from EFCH is not secured.

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

TCEH 10.25% Senior Notes (including Series B) and 10.50/11.25% Senior Toggle Notes (collectively, the TCEH Senior Notes) At September 30, 2013, the principal amount of the TCEH Senior Notes totaled $5.237 billion, including $363 million aggregate principal amount held by EFH Corp. and EFIH, and the notes are fully and unconditionally guaranteed on a joint and several unsecured basis by TCEH's direct parent, EFCH (which owns 100% of TCEH), and by each subsidiary that guarantees the TCEH Senior Secured Facilities. The TCEH 10.25% Notes mature in November 2015, with interest payable in cash semi-annually in arrears on May 1 and November 1 at a fixed rate of 10.25% per annum. The TCEH Toggle Notes mature in November 2016, with interest payable semi-annually in arrears on May 1 and November 1 at a fixed rate of 10.50% per annum.

Fair Value of Long-Term Debt

At September 30, 2013 and December 31, 2012, the estimated fair value of our long-term debt (excluding capital leases) totaled $15.873 billion and $17.858 billion, respectively, and the carrying amount totaled $30.128 billion and $30.342 billion, respectively. At September 30, 2013 and December 31, 2012, the estimated fair value of our short-term borrowings under the TCEH Revolving Credit Facilities totaled $1.371 billion and $1.500 billion, respectively, and the carrying amount totaled $2.054 billion. We determine fair value in accordance with accounting standards as discussed in Note 8, and at September 30, 2013, our debt fair value represents Level 2 valuations. We obtain security pricing from a vendor who uses broker quotes and third-party pricing services to determine fair values. Where relevant, these prices are validated through subscription services such as Bloomberg.


16


TCEH Interest Rate Swap Transactions

TCEH employs interest rate swaps to hedge exposure to its variable rate debt. As reflected in the table below, at September 30, 2013, TCEH has entered into the following series of interest rate swap transactions that effectively fix the interest rates at between 5.5% and 9.3%.
Fixed Rates
 
Expiration Dates
 
Notional Amount
5.5
%
-
9.3%
 
October 2013 through October 2014
 
 
$
18.140

billion (a)
 
6.8
%
-
9.0%
 
October 2015 through October 2017
 
 
$
12.600

billion (b)
 
___________
(a)
Swaps related to an aggregate $1.6 billion principal amount of debt expired in 2013. Per the terms of the transactions, the notional amount of swaps entered into in 2011 grew by $1.280 billion in 2013, substantially offsetting the expired swaps.
(b)
These swaps are effective from October 2014 through October 2017. The $12.6 billion notional amount of swaps includes $3 billion that expires in October 2015 with the remainder expiring in October 2017.

TCEH has also entered into interest rate basis swap transactions that further reduce the fixed borrowing costs achieved through the interest rate swaps. Basis swaps in effect at September 30, 2013 totaled $11.967 billion notional amount. The basis swaps relate to debt outstanding through 2014.

The interest rate swap counterparties are secured on an equal and ratable basis by the same collateral pledged to the lenders under the TCEH Senior Secured Facilities and the TCEH Senior Secured Notes.

The interest rate swaps have resulted in net gains (losses) reported in interest expense and related charges as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Realized net loss
$
(160
)
 
$
(168
)
 
$
(466
)
 
$
(505
)
Unrealized net gain (loss)
413

 
(20
)
 
899

 
(16
)
Total
$
253

 
$
(188
)
 
$
433

 
$
(521
)

The cumulative unrealized mark-to-market net liability related to all TCEH interest rate swaps totaled $1.167 billion and $2.065 billion at September 30, 2013 and December 31, 2012, respectively, of which $57 million and $65 million (both pretax), respectively, were reported in accumulated other comprehensive income. See Note 8.

17


6. COMMITMENTS AND CONTINGENCIES

Guarantees

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

See Note 5 for discussion of guarantees and security for certain of our debt and EFCH guarantees of certain EFH Corp. debt.

Letters of Credit

At September 30, 2013, TCEH had outstanding letters of credit under its credit facilities totaling $776 million as follows:
$353 million to support risk management and trading margin requirements in the normal course of business, including over-the-counter hedging transactions and collateral postings with ERCOT;
$208 million to support floating rate pollution control revenue bond debt with an aggregate principal amount of $204 million (the letters of credit are available to fund the payment of such debt obligations and expire in 2014);
$65 million to support TCEH's REP financial requirements with the PUCT, and
$150 million for miscellaneous credit support requirements.

Litigation

Aurelius Capital Master, Ltd. and ACP Master, Ltd. (Aurelius) filed a lawsuit in March 2013, amended in May 2013, in the United States District Court for the Northern District of Texas (Dallas Division) against EFCH as a nominal defendant and each of the current directors and a former director of EFCH. In the lawsuit, Aurelius, as a creditor under the TCEH Senior Secured Facilities and certain TCEH secured bonds, both of which are guaranteed by EFCH, filed a derivative claim against EFCH and its directors. Aurelius alleges that the directors of EFCH breached their fiduciary duties to EFCH and its creditors, including Aurelius, by permitting TCEH to make certain loans "without collecting fair and reasonably equivalent value." The lawsuit seeks recovery for the benefit of EFCH. EFCH and the directors have filed a motion to dismiss this lawsuit, which has been fully briefed and is pending before the district court. We cannot predict the outcome of this proceeding, including the financial effects, if any.

Litigation Related to Generation Facilities In November 2010, an administrative appeal challenging the decision of the TCEQ to renew and amend Oak Grove Management Company LLC's (Oak Grove) (a wholly owned subsidiary of TCEH) Texas Pollutant Discharge Elimination System (TPDES) permit related to water discharges was filed by Robertson County: Our Land, Our Lives and Roy Henrichson in the Travis County, Texas District Court. Plaintiffs sought a reversal of the TCEQ's order and a remand back to the TCEQ for further proceedings. The district court affirmed the TCEQ's issuance of the TPDES permit to Oak Grove. In December 2012, plaintiffs appealed the district court's decision to the Third Court of Appeals in Austin, Texas. The case has been fully briefed, but the Court has not issued a decision and no date for oral argument has been scheduled. While we cannot predict the timing or outcome of this proceeding, we believe the renewal and amendment of the Oak Grove TPDES permit are protective of the environment and were in accordance with applicable law.

In September 2010, the Sierra Club filed a lawsuit in the United States District Court for the Eastern District of Texas (Texarkana Division) against EFH Corp. and Luminant Generation Company LLC (a wholly owned subsidiary of TCEH) for alleged violations of the Clean Air Act (CAA) at Luminant's Martin Lake generation facility. In May 2012, the Sierra Club filed a lawsuit in the US District Court for the Western District of Texas (Waco Division) against EFH Corp. and Luminant Generation Company LLC for alleged violations of the CAA at Luminant's Big Brown generation facility. The Big Brown case is currently scheduled for trial in February 2014. The Martin Lake case does not have a trial date. While we are unable to estimate any possible loss or predict the outcome, we believe that the Sierra Club's claims are without merit, and we intend to vigorously defend these lawsuits. In addition, in December 2010 and again in October 2011, the Sierra Club informed Luminant that it may sue Luminant for allegedly violating CAA provisions in connection with Luminant's Monticello generation facility. In May 2012, the Sierra Club informed us that it may sue us for allegedly violating CAA provisions in connection with Luminant's Sandow 4 generation facility. While we cannot predict whether the Sierra Club will actually file suit regarding Monticello or Sandow 4 or the outcome of any resulting proceedings, we believe we have complied with the requirements of the CAA at all of our generation facilities.


18


Litigation Related to EPA Reviews In June 2008, the EPA issued an initial request for information to TCEH under the EPA's authority under Section 114 of the CAA. The stated purpose of the request is to obtain information necessary to determine compliance with the CAA, including New Source Review Standards and air permits issued by the TCEQ for the Big Brown, Monticello and Martin Lake generation facilities. In April 2013, we received an additional information request from the EPA under Section 114 related to the Big Brown, Martin Lake and Monticello facilities as well as an initial information request related to the Sandow 4 generation facility. Historically, as the EPA has pursued its New Source Review enforcement initiative, companies that have received a large and broad request under Section 114, such as the request received by TCEH, have in many instances subsequently received a notice of violation from the EPA, which has in some cases progressed to litigation or settlement.

In July 2012, the EPA sent us a notice of violation alleging noncompliance with the CAA's New Source Review Standards and the air permits at our Martin Lake and Big Brown generation facilities. In September 2012, we filed a petition for review in the United States Court of Appeals for the Fifth Circuit (Fifth Circuit Court) seeking judicial review of the EPA's notice of violation. Given recent legal precedent subjecting agency orders like the notice of violation to judicial review, we filed the petition for review to preserve our ability to challenge the EPA's issuance of the notice and its defects. In October 2012, the EPA filed a motion to dismiss our petition. In December 2012, the Fifth Circuit Court issued an order that will delay a ruling on the EPA's motion to dismiss until after the case has been fully briefed and oral argument, if any, is held.

In July 2013, the EPA sent us a second notice of violation alleging noncompliance with the CAA's New Source Review Standards at our Martin Lake and Big Brown generation facilities. In July 2013, we filed a petition for review in the Fifth Circuit Court seeking judicial review of the EPA's July 2013 notice of violation. In September 2013, the Fifth Circuit Court consolidated the petitions for review of the July 2012 and July 2013 notices of violation and established a briefing schedule for the consolidated cases.

In August 2013, the United States Department of Justice, acting as the attorneys for the EPA, filed a civil enforcement lawsuit against Luminant Generation Company LLC and Big Brown Power Company LLC in federal district court in Dallas, alleging violations of the CAA at our Big Brown and Martin Lake generation facilities. In September 2013, we filed a motion to stay this lawsuit pending the outcome of the Fifth Circuit Court's review of the July 2012 and July 2013 notices of violation. We believe that we have complied with all requirements of the CAA and intend to vigorously defend these allegations. We cannot predict the outcome of these proceedings, including the financial effects, if any.

Cross-State Air Pollution Rule (CSAPR)

In July 2011, the EPA issued the CSAPR, compliance with which would have required significant additional reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions from our fossil-fueled generation units. In September 2011, we filed a petition for review in the US Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) challenging the CSAPR as it applies to Texas. If the CSAPR had taken effect, it would have caused us to, among other actions, idle two lignite/coal-fueled generation units and cease certain lignite mining operations by the end of 2011.

In February 2012, the EPA released a final rule (Final Revisions) and a proposed rule revising certain aspects of the CSAPR, including increases in the emissions budgets for Texas and our generation assets as compared to the July 2011 version of the rule. In April 2012, we filed in the D.C. Circuit Court a petition for review of the Final Revisions on the ground, among others, that the rules do not include all of the budget corrections we requested from the EPA. The parties to the case agreed that the case should be held in abeyance pending the conclusion of the CSAPR rehearing proceeding discussed below. In June 2012, the EPA finalized the proposed rule (Second Revised Rule). As compared to the proposed revisions to the CSAPR issued by the EPA in October 2011, the Final Revisions and the Second Revised Rule finalize emissions budgets for our generation assets that are approximately 6% lower for SO2, 3% higher for annual NOx and 2% higher for seasonal NOx.

In August 2012, the D.C. Circuit Court vacated the CSAPR, remanding it to the EPA for further proceedings. As a result, the CSAPR, the Final Revisions and the Second Revised Rule do not impose any immediate requirements on us, the State of Texas, or other affected parties. The D.C. Circuit Court's order stated that the EPA was expected to continue administering the CAIR (the predecessor rule to the CSAPR) pending the EPA's further consideration of the rule. In October 2012, the EPA and certain other parties that supported the CSAPR filed petitions with the D.C. Circuit Court seeking review by the full court of the panel's decision to vacate and remand the CSAPR. In January 2013, the D.C. Circuit Court denied these requests for rehearing, concluding the CSAPR rehearing proceeding. In March 2013, the EPA and certain other parties that supported the CSAPR submitted petitions to the US Supreme Court seeking its review of the D.C. Circuit Court decision. In June 2013, the US Supreme Court granted review of the D.C. Circuit Court's decision. The court is scheduled to hear oral arguments in the case in December 2013. We cannot predict the outcome of the review by the US Supreme Court.


19


State Implementation Plan (SIP)

In September 2010, the EPA disapproved a portion of the SIP pursuant to which the TCEQ implements its program to achieve the requirements of the CAA. The EPA disapproved the Texas standard permit for pollution control projects (PCP). We hold several permits issued pursuant to the TCEQ standard permit conditions for pollution control projects. We challenged the EPA's disapproval by filing a lawsuit in the Fifth Circuit Court arguing that the TCEQ's adoption of the standard permit conditions for pollution control projects was consistent with the CAA. In March 2012, the Fifth Circuit Court vacated the EPA's disapproval of the Texas standard permit for pollution control projects and remanded the matter to the EPA for expedited reconsideration. In September 2013, the State of Texas filed a motion with the Fifth Circuit Court requesting that the Court amend and enforce its judgment in this case by requiring the EPA to satisfy the Court's judgment by taking action on the pending SIP revision regarding Texas' PCP standard permit no later than December 31, 2013. We cannot predict the timing or outcome of the EPA's reconsideration, including the financial effects, if any.

In November 2010, the EPA disapproved a different portion of the SIP under which the TCEQ had been phasing out a long-standing exemption for certain emissions that unavoidably occur during startup, shutdown and maintenance activities and replacing that exemption with a more limited affirmative defense that will itself be phased out and replaced by TCEQ-issued generation facility-specific permit conditions. We, like many other electricity generation facility operators in Texas, have asserted applicability of the exemption or affirmative defense, and the TCEQ has not objected to that assertion. We have also applied for and received the generation facility-specific permit amendments. We challenged the EPA's disapproval of Texas' affirmative defense for planned maintenance, startup and shutdown by filing a lawsuit in the Fifth Circuit Court arguing that the TCEQ's adoption of the affirmative defense and phase-out of that affirmative defense as permits are issued is consistent with the CAA. In July 2012, the Fifth Circuit Court denied our challenge and ruled that the EPA's actions were in accordance with the CAA. In October 2012, the Fifth Circuit Court panel withdrew its opinion and issued a second, expanded opinion that again upheld the EPA's disapproval. In November 2012, we filed a petition with the Fifth Circuit Court asking for review by the full Fifth Circuit Court of the panel's second opinion. Other parties to the proceedings also filed a petition with the Fifth Circuit Court asking the panel to reconsider its decision. In March 2013, the Fifth Circuit Court panel withdrew its second opinion and issued a third opinion that again upheld the EPA's actions. In April 2013, the Fifth Circuit Court also denied our November 2012 petition for rehearing of the panel's second opinion and denied the request by other parties for the panel to reconsider its second decision. Following the issuance of the mandate, we filed a motion to recall the mandate, which was denied in a single-judge order. In June 2013, we submitted a petition to the US Supreme Court seeking its review of the Fifth Circuit Court's decision to uphold EPA's disapproval of Texas' affirmative defense for planned maintenance, startup and shutdown. In October 2013, the US Supreme Court denied our petition for review of that portion of the Fifth Circuit Court's decision. The decision is not anticipated to have a material effect on our results of operations, liquidity or financial condition.

Other Matters

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolutions of which, in the opinion of management, are not anticipated to have a material effect on our results of operations, liquidity or financial condition.



20


7. MEMBERSHIP INTERESTS/EQUITY

Dividend Restrictions

While EFCH has no contractual dividend restrictions, the TCEH Senior Secured Facilities generally restrict TCEH from making any cash distribution to any of its parent companies for the ultimate purpose of making a cash distribution on their ownership interests unless at the time, and after giving effect to such distribution, TCEH's consolidated total debt (as defined in the TCEH Senior Secured Facilities) to Adjusted EBITDA would be equal to or less than 6.5 to 1.0. At September 30, 2013, the ratio was 10.6 to 1.0.

In addition, the TCEH Senior Secured Facilities and indentures governing the TCEH Senior Notes, TCEH Senior Secured Notes and TCEH Senior Secured Second Lien Notes generally restrict TCEH's ability to make distributions or loans to any of its parent companies, EFCH and EFH Corp., unless such distributions or loans are expressly permitted under the TCEH Senior Secured Facilities and the indentures governing such notes.

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.

Noncontrolling Interests

As discussed in Note 2, we consolidate a joint venture formed in 2009 for the purpose of developing two new nuclear generation units, which results in a noncontrolling interests component of equity. Net loss attributable to the noncontrolling interests was immaterial for the nine months ended September 30, 2013 and 2012.

Membership Interests/Equity

In April 2013, EFCH was converted from a Texas corporation to a Delaware limited liability company. The following tables present the changes to membership interests/equity for the nine months ended September 30, 2013 and 2012.
Nine Months Ended September 30, 2013
 
EFCH Shareholder's Equity/Membership Interests 
 
 
 
 
 
Common
Stock
 
Retained
Earnings
(Deficit)
 
Membership
Interests
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2012
$
7,665

 
$
(18,129
)
 
$

 
$
(42
)
 
$
112

 
$
(10,394
)
Net loss

 
(526
)
 
(160
)
 

 

 
(686
)
Net effect of cash flow hedges

 

 

 
5

 

 
5

Investment by noncontrolling interests

 

 

 

 
3

 
3

Effect of debt push-down from EFH Corp. (a)
434

 

 
3

 

 

 
437

Dissolution of TXU Receivables Company

 

 

 

 
(10
)
 
(10
)
Capital structure conversion
(8,099
)
 
18,655

 
(10,556
)
 

 

 

Other


 

 
2

 

 

 
2

Balance at September 30, 2013
$

 
$

 
$
(10,711
)
 
$
(37
)
 
$
105

 
$
(10,643
)

21



Nine Months Ended September 30, 2012
 
EFCH Shareholder's Equity
 
 
 
 
 
Common
Stock
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2011
$
7,351

 
$
(15,121
)
 
$
(49
)
 
$
103

 
$
(7,716
)
Net loss

 
(1,298
)
 

 

 
(1,298
)
Gain on settlement of reimbursement agreement with Oncor (Note 11)
2

 

 

 

 
2

Effect of stock-based incentive compensation plans
6

 

 

 

 
6

Net effect of cash flow hedges

 

 
5

 

 
5

Investment by noncontrolling interests

 

 

 
6

 
6

Effect of debt push-down from EFH Corp. (a)
30

 

 

 

 
30

Other
(1
)
 

 

 
1

 

Balance at September 30, 2012
$
7,388

 
$
(16,419
)
 
$
(44
)
 
$
110

 
$
(8,965
)
 _______________
(a)
Represents the interest and income tax effects of debt pushed down from EFH Corp. (Note 5).




22


8. FAIR VALUE MEASUREMENTS

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

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

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

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

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

Our valuation policies and procedures are developed, maintained and validated by an EFH Corp. centralized risk management group that reports to the EFH Corp. Chief Financial Officer, who also functions as the Chief Risk Officer. Risk management functions include commodity price reporting and validation, valuation model validation, risk analytics, risk control, credit risk management and risk reporting.

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

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

Probable loss of default by either us or our counterparties is considered in determining the fair value of derivative assets and liabilities. These non-performance risk adjustments take into consideration credit enhancements and the credit risks associated with our credit standing and the credit standing of our counterparties (see Note 9 for additional information regarding credit risk associated with our derivatives). We utilize published credit ratings, default rate factors and bond trading values in calculating these fair value measurement adjustments.


23


Certain derivatives and financial instruments are valued utilizing option pricing models that take into consideration multiple inputs including, but not limited to, commodity prices, volatility factors, discount rates and other market based factors. Additionally, when there is not a sufficient amount of observable market data, valuation models are developed that incorporate proprietary views of market factors. Significant unobservable inputs used to develop the valuation models include volatility curves, correlation curves, illiquid pricing locations and credit/non-performance risk assumptions. Those valuation models are generally used in developing long-term forward price curves for certain commodities. We believe the development of such curves is consistent with industry practice; however, the fair value measurements resulting from such curves are classified as Level 3.

The significant unobservable inputs and valuation models are developed by employees trained and experienced in market operations and fair value measurement and validated by the company's risk management group, which also further analyzes any significant changes in Level 3 measurements. Significant changes in the unobservable inputs could result in significant upward or downward changes in the fair value measurement.

With respect to amounts presented in the following fair value hierarchy tables, the fair value measurement of an asset or liability (e.g., a contract) is required to fall in its entirety in one level, based on the lowest level input that is significant to the fair value measurement. Certain assets and liabilities would be classified in Level 2 instead of Level 3 of the hierarchy except for the effects of credit reserves and non-performance risk adjustments, respectively. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability being measured.

Assets and liabilities measured at fair value consisted of the following:
September 30, 2013
 
Level 1
 
Level 2
 
Level 3 (a)
 
Reclassification (b)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
140

 
$
941

 
$
48

 
$
2

 
$
1,131

Interest rate swaps

 
1

 

 

 
1

Nuclear decommissioning trust – equity securities (c)
299

 
172

 

 

 
471

Nuclear decommissioning trust – debt securities (c)

 
266

 

 

 
266

Total assets
$
439

 
$
1,380

 
$
48

 
$
2

 
$
1,869

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
129

 
$
26

 
$
52

 
$
2

 
$
209

Interest rate swaps

 

 
1,167

 

 
1,167

Total liabilities
$
129

 
$
26

 
$
1,219

 
$
2

 
$
1,376


December 31, 2012
 
Level 1
 
Level 2
 
Level 3 (a)
 
Total
Assets:
 
 
 
 
 
 
 
Commodity contracts
$
180

 
$
1,784

 
$
83

 
$
2,047

Interest rate swaps

 
2

 

 
2

Nuclear decommissioning trust – equity securities (c)
249

 
144

 

 
393

Nuclear decommissioning trust – debt securities (c)

 
261

 

 
261

Total assets
$
429

 
$
2,191

 
$
83

 
$
2,703

Liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
208

 
$
121

 
$
54

 
$
383

Interest rate swaps

 
2,067

 

 
2,067

Total liabilities
$
208

 
$
2,188

 
$
54

 
$
2,450

_______________
(a)
See table below for description of Level 3 assets and liabilities.
(b)
Fair values are determined on a contract basis, but certain contracts result in a current asset and a noncurrent liability, or vice versa, as presented in the balance sheet.
(c)
The nuclear decommissioning trust investment is included in the investments line in the balance sheet. See Note 12.

Commodity contracts consist primarily of natural gas, electricity, fuel oil, uranium and coal derivative instruments entered into for hedging purposes and include physical contracts that have not been designated "normal" purchases or sales. See Note 9 for further discussion regarding the company's use of derivative instruments.

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Interest rate swaps include variable-to-fixed rate swap instruments that are economic hedges of interest on long-term debt as well as interest rate basis swaps designed to effectively reduce the hedged borrowing costs. See Note 5 for discussion of interest rate swaps.

Nuclear decommissioning trust assets represent securities held for the purpose of funding the future retirement and decommissioning of the nuclear generation units. These investments include equity, debt and other fixed-income securities consistent with investment rules established by the NRC and the PUCT.

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the three and nine months ended September 30, 2013 and 2012. See the table of changes in fair values of Level 3 assets and liabilities below for discussion of transfers between Level 2 and Level 3.

The following tables present the fair value of the Level 3 assets and liabilities by major contract type and the significant unobservable inputs used in the valuations at September 30, 2013 and December 31, 2012:
September 30, 2013
 
 
Fair Value
 
 
 
 
 
 
Contract Type (a)
 
Assets
 
Liabilities
 
Total
 
Valuation Technique
 
Significant Unobservable Input
 
Range (b)
Electricity purchases and sales
 
$
5

 
$
(2
)
 
$
3

 
Valuation Model
 
Illiquid pricing locations (c)
 
$30 to $45/MWh
 
 
 
 
 
 
 
 
 
 
Hourly price curve shape (d)
 
$20 to $70/MWh
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity spread options
 

 
(19
)
 
(19
)
 
Option Pricing Model
 
Gas to power correlation (e)
 
45% to 100%
 
 
 
 
 
 
 
 
 
 
Power volatility (f)
 
10% to 30%
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity congestion revenue rights
 
37

 
(5
)
 
32

 
Market Approach (g)
 
Illiquid price differences between settlement points (h)
 
$0.00 to $30.00
 
 
 
 
 
 
 
 
 
 
 
 
 
Coal purchases
 
1

 
(12
)
 
(11
)
 
Market Approach (g)
 
Illiquid price variances between mines (i)
 
$0.00 to $1.00
 
 
 
 
 
 
 
 
 
 
Probability of default (j)
 
0% to 40%
 
 
 
 
 
 
 
 
 
 
Recovery rate (k)
 
0% to 40%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 

 
(1,167
)
 
(1,167
)
 
Valuation Model
 
Nonperformance risk adjustment (l)
 
30% to 35%
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
5

 
(14
)
 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
48

 
$
(1,219
)
 
$
(1,171
)
 
 
 
 
 
 


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December 31, 2012
 
 
Fair Value
 
 
 
 
 
 
Contract Type (a)
 
Assets
 
Liabilities
 
Total
 
Valuation Technique
 
Significant Unobservable Input
 
Range (b)
Electricity purchases and sales
 
$
5

 
$
(9
)
 
$
(4
)
 
Valuation Model
 
Illiquid pricing locations (c)
 
$20 to $40/MWh
 
 
 
 
 
 
 
 
 
 
Hourly price curve shape (d)
 
$20 to $50/MWh
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity spread options
 
34

 
(10
)
 
24

 
Option Pricing Model
 
Gas to power correlation (e)
 
20% to 90%
 
 
 
 
 
 
 
 
 
 
Power volatility (f)
 
20% to 40%
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity congestion revenue rights
 
41

 
(2
)
 
39

 
Market Approach (g)
 
Illiquid price differences between settlement points (h)
 
$0.00 to $0.50
 
 
 
 
 
 
 
 
 
 
 
 
 
Coal purchases
 

 
(32
)
 
(32
)
 
Market Approach (g)
 
Illiquid price variances between mines (i)
 
$0.00 to $1.00