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Energy Future Holdings Reports Second Quarter 2010 Results

08-02-2010

DALLAS –

Energy Future Holdings Corp. (EFH) today reported consolidated financial results for the second quarter and year-to-date periods ended June 30, 2010 in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (SEC) this morning.

“EFH had good operational performance in the second quarter of 2010, and our three new generation units are performing consistent with our expectations,” said John F. Young, CEO, Energy Future Holdings Corp. “We continue to see some signs of economic recovery in our large commercial and industrial segment.”

Second Quarter GAAP Results

For the second quarter 2010, EFH reported a consolidated net loss attributable to EFH Corp. (in accordance with GAAP) of $426 million compared to a reported net loss of $155 million for the second quarter 2009. The second quarter 2010 reported net loss included (all after tax) $93 million in unrealized commodity-related mark-to-market net losses largely related to positions in EFH’s long-term hedging program (discussed further below) and $165 million in unrealized mark-to-market net losses on interest rate swaps, partially offset by an $83 million debt extinguishment gain resulting from second quarter 2010 debt exchanges and repurchases.

The second quarter 2009 reported consolidated net loss included (all after tax) $206 million in unrealized commodity-related mark-to-market net losses related to commodity positions and $299 million in unrealized mark-to-market net gains on interest rate swaps.

As previously announced, effective with reporting of first quarter 2010 results, EFH adopted an accounting standard that amends prior accounting with respect to consolidation of equity investees. As a result, in consideration of the Oncor ring-fencing measures that restrict the operating control that can be exercised by EFH and after consultation with the SEC, Oncor has been deconsolidated from EFH’s consolidated financial statements. The results of Oncor and the Oncor ring-fenced entities are now presented in EFH’s income statement in a single line item. To provide a meaningful comparison of consolidated operating results in consideration of this change, reconciliations of the previously reported GAAP results to pro forma GAAP results on a deconsolidated basis for the three and six months ended June 30, 2009 are presented in Tables A1 and A4, respectively.

Second Quarter Adjusted (Non-GAAP) Operating Results

Adjusted (non-GAAP) operating resultsfor the second quarter 2010 totaled a net loss of $251 million compared to a net loss of $248 million for the second quarter 2009. For a reconciliation of reported GAAP results to adjusted (non-GAAP) operating results for the second quarter 2010 and 2009, see Tables A2 and A3.

Second quarter 2010 adjusted (non-GAAP) operating results from the competitive business improved $4 million (after tax) as compared to second quarter 2009. The increase reflected (all after tax) a $45 million improvement in contribution margin driven by the output from the three new lignite-fueled generation units at Sandow and Oak Grove, lower amortization of intangible assets arising from purchase accounting and favorable results from asset management and the retail business. These items were partially offset by higher fuel expense at the legacy coal-fueled generation facilities primarily due to increased transportation costs and lower production from the nuclear-fueled generation units due to the timing of a refueling outage in 2010. Other contributing factors to operating results included $48 million in gains on asset sales, which are reported in other income, and a $19 million decrease in costs primarily related to the information technology outsourcing transition and the new customer care system. Offsetting factors reflecting the placement in service of the three new lignite-fueled generation units and related mining facilities included a $41 million increase in interest expense due to lower capitalized interest, a $29 million increase in depreciation and a $16 million increase in operating costs. Other offsetting factors included an $11 million increase in nuclear plant maintenance costs due to the timing of the refueling outage in 2010 and a $9 million increase in depreciation reflecting ongoing investment in the generation fleet.

Second quarter 2010 adjusted (non-GAAP) operating results related to the regulated business declined $7 million (after tax) as compared to second quarter 2009. The results reflected (all after tax) $21 million in higher depreciation reflecting higher depreciation rates and infrastructure investment and $14 million in higher costs reflecting amortization of regulatory assets (primarily costs related to storm recovery and retirement benefits) and expenses associated with advanced meters and higher transmission fees. The regulatory asset amortization and higher depreciation rates resulted from a September 2009 final rate order from the Public Utility Commission of Texas (PUC). The increase in expenses was partially offset by $16 million in rate increases resulting from tariffs approved in the September 2009 final rate order and a $10 million increase in revenues from an advanced metering deployment surcharge as a result of ongoing meter installation and systems development.

Year-To-Date GAAP Results

For the six months ended (year-to-date) June 30, 2010, EFH reported a consolidated net loss attributable to EFH Corp. (in accordance with GAAP) of $71 million compared to reported consolidated net income of $287 million for year-to-date 2009. The year-to-date 2010 reported net loss included (all after tax) $546 million in unrealized commodity-related mark-to-market net gains largely related to positions in EFH’s long-term hedging program (discussed further below) and a $93 million debt extinguishment gain resulting from year-to-date 2010 debt exchanges and repurchases. These items were partially offset by $235 million in unrealized mark-to-market net losses on interest rate swaps and $8 million of increased net cost recorded as a result of the health care legislation enacted by Congress in March 2010. This legislation resulted in a $50 million cost increase related to EFH’s retiree health care liability, $42 million of which was offset by a regulatory asset recorded by Oncor Electric Delivery Company LLC (Oncor).

Year-to-date 2009 reported consolidated net income included (all after tax) $457 million in unrealized commodity-related mark-to-market net gains related to commodity positions and $432 million in unrealized mark-to-market net gains on interest rate swaps, partially offset by a noncash impairment charge of $90 million to finalize the estimated goodwill charge recorded in the fourth quarter of 2008.

Year-To-Date Adjusted (Non-GAAP) Operating Results

Adjusted (non-GAAP) operating results for year-to-date 2010 totaled a net loss of $467 million compared to a net loss of $512 million for year-to-date 2009. For a reconciliation of reported GAAP results to adjusted (non-GAAP) operating results for year-to-date 2010 and 2009, see Tables A5 and A6.

Year-to-date 2010 adjusted (non-GAAP) operating results from the competitive business improved $35 million (after tax) as compared to year-to-date 2009. The increase reflected (all after tax) a $141 million improvement in contribution margin driven by the output from the three new lignite-fueled generation units, lower amortization of intangible assets arising from purchase accounting, favorable results from asset management and the retail business and higher retail volumes primarily due to colder winter weather. These items were partially offset by higher fuel expense at the legacy coal-fueled generation facilities primarily due to increased transportation costs and lower production from the nuclear-fueled generation units due to the timing of a refueling outage in 2010 and a main transformer replacement. Other contributing factors to operating results included $52 million in gains on asset sales, a $29 million decrease in costs primarily related to the information technology outsourcing transition and the new customer care system and a $13 million decrease in interest expense reflecting lower amortization of interest rate hedge losses. Offsetting factors reflecting the placement in service of the three new lignite-fueled generation units and related mining facilities included an $82 million increase in interest expense due to lower capitalized interest, a $52 million increase in depreciation and a $29 million increase in operating costs. Other offsetting factors included a $25 million increase in depreciation reflecting ongoing investment in the generation fleet and a $10 million increase in retail bad debt expense.

Year-to-date 2010 adjusted (non-GAAP) operating results related to the regulated business increased $10 million (after tax) as compared to year-to-date 2009. The improved performance reflected (all after tax) $32 million in rate increases resulting from tariffs approved in the September 2009 final rate order from the PUC, $27 million in higher revenues driven by the effect of colder than normal winter weather in 2010 as compared to warmer than normal winter weather in 2009 and a $19 million increase in revenues from the advanced metering deployment surcharge as a result of ongoing meter installation and systems development. The increase in revenues was partially offset by $47 million in higher depreciation reflecting higher depreciation rates and infrastructure investment and $29 million in higher costs reflecting amortization of regulatory assets (primarily costs related to storm recovery and retirement benefits) and expenses associated with advanced meters and higher transmission fees. The regulatory asset amortization and higher depreciation rates resulted from the September 2009 final rate order.

Long-Term Hedging Program

The EFH long-term hedging program is designed to reduce exposure to changes in future electricity prices due to changes in the price of natural gas. Under the program, subsidiaries of EFH have entered into market transactions involving natural gas-related financial instruments. As of June 30, 2010, these subsidiaries have sold forward approximately 1.4 billion MMBtu of natural gas (equivalent to the natural gas exposure of approximately 175,000 GWh at an assumed 8.0 market heat rate) for the period July 1, 2010 through December 31, 2014 at weighted average annual hedge prices ranging from $7.80 per MMBtu to $7.18 per MMBtu. These forward natural gas sales include related put and call transactions (referred to as collars), primarily for year 2014 of the program, that effectively hedge natural gas prices within a range. Collars represented 8% of the positions in the long-term hedging program at June 30, 2010, with the approximate weighted average strike prices under the collars being a floor of $7.80 per MMBtu and a ceiling of $11.75 per MMBtu. For the period beginning July 1, 2010 and ending December 31, 2014, and taking into consideration the estimated portfolio impacts of forward retail and wholesale power sales, the hedging transactions result in EFH having effectively hedged an estimated 65% of the natural gas price exposure related to its expected generation output for such period (on an average basis for such period and assuming an 8.0 market heat rate).

Based on the size of the long-term hedging program as of June 30, 2010, a $1.00/MMBtu change in natural gas prices across the hedged period would result in the recognition by EFH of up to approximately $1.4 billion in pretax unrealized mark-to-market gains or losses. The effects of changes in forward natural gas prices on the values of positions in the program are reflected in net income (GAAP) as discussed above. Reported unrealized mark-to-market net gains and losses (pretax) associated with the long-term hedging program totaled a net loss of $167 million for second quarter 2010 reflecting reversals of previously recorded unrealized net gains on positions settled and a net gain of $890 million for year-to-date 2010 due primarily to the effect of declines in forward natural gas prices on the value of positions in the program. Given the volatility of natural gas prices, it is not possible to predict future reported unrealized mark-to-market net gains or losses and the actual net gains or losses that will ultimately be realized upon settlement of the hedge positions in future years. If natural gas prices at settlement are lower than the prices of the hedge positions, the hedges are expected to mitigate the otherwise negative effect on earnings of lower wholesale electricity prices. However, if natural gas prices at settlement are higher than the prices of the hedge positions, the hedges are expected to dampen the otherwise positive effect on earnings of higher wholesale electricity prices and will in this context be viewed as having resulted in an opportunity cost. The cumulative unrealized mark-to-market net gains (pretax) related to positions in the long-term hedging program totaled $2.9 billion at June 30, 2010 and $2.0 billion at December 31, 2009.

Additional Information

Additional information, including the calculation of Adjusted EBITDA, one of the key metrics used for purposes of certain covenants contained in the EFH senior and senior secured notes indentures, is available in the EFH Form 10-Q on the EFH website at http://www.energyfutureholdings.com/.

Investor Call

EFH will host a conference call to discuss its second quarter 2010 results with its investors on Tuesday, August 3, 2010 at 10:00 a.m. Central (11:00 a.m. Eastern). The telephone number to participate in the conference call is (888) 825-4458 in the United States and Canada and (973) 638-3323 internationally, with conference code 85306820. The teleconference also will be webcast live in the Investor Relations section on EFH’s website.

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About Energy Future Holdings

EFH is a Dallas-based holding company engaged in competitive and regulated energy market activities, primarily in Texas. Its portfolio of competitive businesses consists primarily of TXU Energy, a retail electricity provider with more than 2 million customers in Texas, and Luminant, which is engaged largely in power generation and related mining activities, wholesale power marketing and energy trading. Luminant has 18,300 MW of generation in Texas, including 2,300 MW fueled by nuclear power and 8,000 MW fueled by coal. Luminant is also the largest purchaser of wind-generated electricity in Texas and fifth largest in the United States. EFH’s regulated operations consist of Oncor, which operates the largest electricity distribution and transmission system in Texas with more than three million delivery points, 102,000 miles of distribution conductors and 15,000 miles of transmission lines. While EFH indirectly owns approximately 80 percent of Oncor, the management of Oncor reports to a separate board with a majority of directors that are independent from EFH.

Forward Looking Statements

This release contains forward-looking statements, which are subject to various risks and uncertainties. Discussion of risks and uncertainties that could cause actual results to differ materially from management’s current projections, forecasts, estimates and expectations is contained in EFH’s filings with the SEC. In addition to the risks and uncertainties set forth in EFH’s SEC filings, the forward-looking statements in this release regarding EFH’s long-term hedging program could be affected by, among other things: any change in the ERCOT electricity market, including a regulatory or legislative change, that results in wholesale electricity prices not being largely correlated to natural gas prices; any decrease in market heat rates as EFH’s long-term hedging program generally does not mitigate exposure to changes in market heat rates; the unwillingness or failure of any hedge counterparty or the lenders under the company’s collateral revolving credit facility to perform its obligations; or any other unforeseen event that results in the inability to continue to use a first lien to secure a substantial portion of the hedges under EFH’s long-term hedging program.

Related Links
Click here for the complete news release with tables. (PDF)

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