INVESTMENT IN ONCOR HOLDINGS

EFIH has a wholly owned subsidiary, Oncor Holdings, which holds an approximate 80% equity interest in Oncor. Oncor Holdings is considered a variable interest entity (VIE). A VIE is an entity with which EFIH has a relationship or arrangement that indicates some level of control over the entity or results in economic risks to it. Accounting standards require consolidation of a VIE if EFIH has (a) the power to direct the significant activities of the VIE and (b) the right or obligation to absorb profit and loss from the VIE (i.e., EFIH is the primary beneficiary of the VIE). In determining the appropriateness of consolidation of a VIE, EFIH evaluates its purpose, governance structure, decision making processes and risks that are passed on to its interest holders. EFIH also examines 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.

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

The carrying value of EFIH's variable interest in Oncor Holdings totaled $6.098 billion and $5.950 billion at September 30, 2014 and December 31, 2013, respectively, and is reported as investment in Oncor Holdings in EFIH's condensed consolidated balance sheets. EFIH's maximum exposure to loss from this investment does not exceed its carrying value.

See Note 11 for discussion of Oncor Holdings' and Oncor's transactions with EFH Corp. and its other subsidiaries.

Distributions from Oncor Holdings and Related Considerations — Oncor Holdings' distributions of earnings to EFIH totaled $128 million and $148 million for the nine months ended September 30, 2014 and 2013, respectively. Distributions may not be paid except to the extent Oncor maintains a required regulatory capital structure as discussed below. At September 30, 2014, $193 million was eligible to be distributed to Oncor's members after taking into account the regulatory capital structure limit, of which approximately 80% relates to EFIH's ownership interest in Oncor. The boards of directors of each of Oncor and Oncor Holdings can withhold distributions to the extent the applicable board determines in good faith that it is necessary to retain such amounts to meet expected future requirements of Oncor and/or Oncor Holdings.

Oncor's distributions are limited by its regulatory capital structure, which is required to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. At September 30, 2014, Oncor's regulatory capitalization ratio was 58.7% debt and 41.3% equity. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes bonds issued by Oncor Electric Delivery Transition Bond Company LLC, which were issued in 2003 and 2004 to recover specific generation-related regulatory assets and other qualified costs. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of accounting for the Merger (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization).

As a result of the Bankruptcy Filing, Oncor had credit risk exposure to trade accounts receivable from subsidiaries of TCEH, which related to delivery services provided by Oncor to TCEH's retail electricity operations. At the Petition Date, these accounts receivable totaled $109 million. In June 2014, the Bankruptcy Court authorized the Debtors to pay all pre-petition delivery charges due Oncor, and such amounts were paid in full.

Oncor Holdings Financial Statements — Condensed statements of consolidated income of Oncor Holdings and its subsidiaries for the three and nine months ended September 30, 2014 and 2013 are presented below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Operating revenues	$	1,054		$	966		$	2,883		$	2,640
Operation and maintenance expenses	(376		)	(315		)	(1,074		)	(919		)
Depreciation and amortization	(218		)	(207		)	(638		)	(608		)
Taxes other than income taxes	(115		)	(112		)	(330		)	(315		)
Other income	3			4			10			14
Other deductions	(4		)	(2		)	(11		)	(11		)
Interest income	1			—			3			2
Interest expense and related charges	(89		)	(94		)	(266		)	(283		)
Income before income taxes	256			240			577			520
Income tax expense	(101		)	(97		)	(230		)	(199		)
Net income	155			143			347			321
Net income attributable to noncontrolling interests	(32		)	(29		)	(71		)	(66		)
Net income attributable to Oncor Holdings	$	123		$	114		$	276		$	255

Assets and liabilities of Oncor Holdings at September 30, 2014 and December 31, 2013 are presented below:



	September 30, 2014		December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	17	$	28
Restricted cash	67		52
Trade accounts receivable — net	469		385
Trade accounts and other receivables from affiliates	152		135
Income taxes receivable from EFH Corp.	—		16
Inventories	76		65
Accumulated deferred income taxes	11		32
Prepayments and other current assets	89		82
Total current assets	881		795
Restricted cash	16		16
Other investments	96		91
Property, plant and equipment — net	12,270		11,902
Goodwill	4,064		4,064
Regulatory assets — net	1,111		1,324
Other noncurrent assets	69		71
Total assets	$	18,507	$	18,263
LIABILITIES
Current liabilities:
Short-term borrowings	$	720	$	745
Long-term debt due currently	636		131
Trade accounts payable — nonaffiliates	133		178
Income taxes payable to EFH Corp.	56		23
Accrued taxes other than income	145		169
Accrued interest	65		95
Other current liabilities	150		135
Total current liabilities	1,905		1,476
Accumulated deferred income taxes	1,839		1,905
Long-term debt, less amounts due currently	5,041		5,381
Other noncurrent liabilities and deferred credits	1,837		1,822
Total liabilities	$	10,622	$	10,584