INVESTMENT IN ONCOR HOLDINGS

We have an equity investment in Oncor Holdings, which holds an approximate 80% interest in Oncor. Oncor Holdings is considered a variable interest entity (VIE). A VIE is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us. Accounting standards require consolidation of a VIE if we have (a) the power to direct the significant activities of the VIE and (b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary). 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.

We do not consolidate Oncor Holdings and instead account for it as an equity method investment because the structural and operational "ring-fencing" measures discussed in Note 1 prevent us from having power to direct the significant activities of Oncor Holdings or Oncor. In accordance with accounting standards, we account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, based on our level of influence over its activities.

The carrying value of our variable interest in Oncor Holdings totaled $5.870 billion and $5.720 billion at September 30, 2012 and December 31, 2011, respectively, and is reported as investment in Oncor Holdings in the balance sheet. Our maximum exposure to loss from this investment does not exceed our carrying value.

See Note 7 for discussion of Oncor Holdings' and Oncor's transactions with EFH Corp. and its other subsidiaries.

Distributions from Oncor Holdings — Oncor Holdings' distributions of earnings to us totaled $100 million and $64 million in the nine months ended September 30, 2012 and 2011, respectively. Distributions are limited to Oncor's cumulative net income and may not be paid except to the extent Oncor maintains a required regulatory capital structure, as discussed below. At September 30, 2012, $218 million was eligible to be distributed to Oncor's members after taking into account these restrictions, of which approximately 80% relates to our ownership interest in Oncor. The boards of directors of each of Oncor and Oncor Holdings can withhold distributions to the extent the applicable board determines in good faith that it is necessary to retain such amounts to meet expected future requirements of Oncor and/or Oncor Holdings.

For the period beginning October 11, 2007 and ending December 31, 2012, distributions (other than distributions of the proceeds of any equity issuance) paid by Oncor to its members are limited by a PUCT order to an amount not to exceed Oncor's cumulative net income determined in accordance with US GAAP, as adjusted. Adjustments consist of the removal of noncash impacts of purchase accounting and deducting two specific cash commitments. To date, the noncash impacts consist of removing the effect of an $860 million goodwill impairment charge in 2008 and the cumulative amount of net accretion of fair value adjustments. The two specific cash commitments are the $72 million ($46 million after tax) one-time refund to customers in September 2008 and the funds spent as part of the $100 million commitment for additional energy efficiency initiatives of which $94 million ($61 million after tax) has been spent through September 30, 2012. At September 30, 2012, $468 million was available for distribution under the cumulative net income restriction, of which approximately 80% relates to our ownership interest in Oncor.

Oncor's distributions are further limited by its regulatory capital structure, which is required to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. At September 30, 2012, Oncor's regulatory capitalization ratio was 58.5% debt and 41.5% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility's debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes bonds issued by Oncor Electric Delivery Transition Bond Company, which were issued in 2003 and 2004 to recover specific generation-related regulatory asset stranded and other qualified costs. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of accounting for the Merger (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). At September 30, 2012, $218 million was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest in Oncor.

Oncor Holdings Financial Statements— Condensed statements of consolidated income of Oncor Holdings and its subsidiaries in the three and nine months ended September 30, 2012 and 2011 are presented below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating revenues	$	925		$	897		$	2,536		$	2,359
Operation and maintenance expenses	(292		)	(281		)	(873		)	(799		)
Depreciation and amortization	(201		)	(190		)	(577		)	(540		)
Taxes other than income taxes	(113		)	(107		)	(313		)	(297		)
Other income	6			8			20			23
Other deductions	(1		)	(2		)	(4		)	(7		)
Interest income	3			7			24			25
Interest expense and related charges	(96		)	(89		)	(279		)	(265		)
Income before income taxes	231			243			534			499
Income tax expense	(95		)	(101		)	(221		)	(204		)
Net income	136			142			313			295
Net income attributable to noncontrolling interests	(27		)	(29		)	(64		)	(60		)
Net income attributable to Oncor Holdings	$	109		$	113		$	249		$	235

Assets and liabilities of Oncor Holdings at September 30, 2012 and December 31, 2011 are presented below:



	September 30, 2012		December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	9	$	12
Restricted cash	64		57
Trade accounts receivable — net	375		303
Trade accounts and other receivables from affiliates	154		179
Inventories	72		71
Accumulated deferred income taxes	39		73
Prepayments and other current assets	74		74
Total current assets	787		769
Restricted cash	16		16
Receivable from TCEH related to nuclear plant decommissioning	286		225
Other investments	78		73
Property, plant and equipment — net	11,191		10,569
Goodwill	4,064		4,064
Note receivable due from TCEH	—		138
Regulatory assets — net	1,542		1,505
Other noncurrent assets	77		73
Total assets	$	18,041	$	17,432
LIABILITIES
Current liabilities:
Short-term borrowings	$	784	$	392
Long-term debt due currently	123		494
Trade accounts payable — nonaffiliates	111		197
Income taxes payable to EFH Corp.	17		2
Accrued taxes other than income	130		151
Accrued interest	91		108
Other current liabilities	110		112
Total current liabilities	1,366		1,456
Accumulated deferred income taxes	1,750		1,688
Investment tax credits	25		28
Long-term debt, less amounts due currently	5,440		5,144
Other noncurrent liabilities and deferred credits	1,944		1,832
Total liabilities	$	10,525	$	10,148