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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 2003
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------------
Commission File Number 333-100240
Oncor Electric Delivery Company
A Texas Corporation I.R.S. Employer Identification
No. 75-2967830
500 N. AKARD STREET, DALLAS, TX 75201
(214) 486-2000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
-- --
Common Stock outstanding at May 12, 2003: Oncor Electric Delivery Company -
65,112,000 shares, without par value
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income--
Three Months Ended March 31, 2003 and 2002............................ 1
Condensed Statements of Consolidated Cash Flows --
Three Months Ended March 31, 2003 and 2002............................ 2
Condensed Consolidated Balance Sheets --
March 31, 2003 and December 31, 2002.................................. 3
Notes to Financial Statements......................................... 4
Independent Accountants' Report....................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 20
Item 4. Controls and Procedures................................................ 21
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................................... 21
SIGNATURE....................................................................... 22
CERTIFICATIONS.................................................................. 23
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of Oncor Electric Delivery Company are made
available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. Oncor will provide copies of current reports not posted
on the website upon request.
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
(millions of dollars)
Operating revenues:
Affiliated.................................................. $ 377 $ 416
Nonaffiliated .............................................. 129 78
------ ------
Total operating revenues................................ 506 494
------ ------
Operating expenses:
Operation and maintenance................................... 188 178
Depreciation and amortization............................... 69 64
Income taxes................................................ 25 33
Taxes, other than income.................................... 92 95
------ ------
Total operating expenses................................ 374 370
------ ------
Operating income .............................................. 132 124
Other income and deductions:
Other income................................................ 2 1
Other deductions............................................ 1 2
Nonoperating income taxes .................................. 6 2
Interest income-- affiliates................................... 15 12
Interest expense and other charges............................. 81 62
------ ------
Net income..................................................... $ 61 $ 71
====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
---------------------------
2003 2002
------ -----
(millions of dollars)
Net income..................................................... $ 61 $ 71
Other comprehensive income --
Cash flow hedge activity, net of tax effect:
Net change in fair value of derivatives ............. -- 1
---- -----
Total................................................ -- 1
---- -----
Comprehensive income........................................... $ 61 $ 72
===== =====
See Notes to Financial Statements.
1
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------
2003 2002
------ ------
(millions of dollars)
Cash flows -- operating activities:
Net income..................................................................... $ 61 $ 71
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ............................................... 71 71
Deferred income taxes and investment tax credits-- net ...................... 44 34
Changes in operating assets and liabilities ................................... (180) (318)
------- --------
Cash used in operating activities.......................................... (4) (142)
------- --------
Cash flows -- financing activities:
Retirements/repurchases of debt................................................ (250) (205)
Repurchase of common stock..................................................... (50) --
Net change in advances from affiliates......................................... 158 440
Decrease in note receivable from TXU Energy related to a regulatory liability.. 52 14
Redemption deposit applied to debt retirement.................................. 138 --
Debt premium, discount, financing, and reacquisition expenses.................. (5) --
-------- -------
Cash provided by financing activities...................................... 43 249
-------- -------
Cash flows -- investing activities:
Capital expenditures........................................................... (124) (141)
Other.......................................................................... 9 --
------- --------
Cash used in investing activities.......................................... (115) (141)
------- --------
Net change in cash and cash equivalents........................................... (76) (34)
Cash and cash equivalents-- beginning balance...................................... 77 35
------- --------
Cash and cash equivalents-- ending balance........................................ $ 1 $ 1
======= =======
See Notes to Financial Statements.
2
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
----------- --------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 1 $ 77
Restricted cash............................................................ 72 210
Accounts receivable:
Affiliates (principally TXU Energy)..................................... 222 213
Trade................................................................... 101 62
Inventories................................................................ 39 40
Note receivable from TXU Energy............................................ 118 170
Other current assets....................................................... 63 35
--------- ---------
Total current assets.................................................... 616 807
Investments................................................................... 26 29
Property, plant and equipment - net........................................... 6,106 6,056
Due from TXU Energy........................................................... 437 437
Regulatory assets - net....................................................... 1,749 1,630
Other noncurrent assets....................................................... 62 63
--------- ---------
Total assets............................................................ $ 8,996 $ 9,022
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates................................................... $ 217 $ 60
Long-term debt due currently............................................... 70 319
Accounts payable - trade................................................... 39 30
Accrued taxes.............................................................. 59 142
Accrued interest........................................................... 84 70
Other current liabilities.................................................. 89 92
--------- ---------
Total current liabilities .............................................. 558 713
Accumulated deferred income taxes and investment tax credits.................. 1,416 1,370
Other noncurrent liabilities and deferred credits............................. 281 210
Long-term debt, less amounts due currently.................................... 4,081 4,080
Contingencies (Note 4)
Shareholder's equity (Note 3)................................................. 2,660 2,649
--------- ---------
Total liabilities and shareholder's equity.............................. $ 8,996 $ 9,022
========= =========
See Notes to Financial Statements.
3
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Oncor Electric Delivery Company (Oncor) is a
wholly-owned subsidiary of TXU US Holdings Company (US Holdings) which is a
wholly-owned subsidiary of TXU Corp.
Oncor is a regulated electricity transmission and distribution (T&D)
company principally engaged in providing delivery services to retail electric
providers (REPs) that sell power in the north-central, eastern and western parts
of Texas. A majority of Oncor's revenues represented fees for delivery services
provided to TXU Energy Company LLC (TXU Energy), a wholly-owned subsidiary of
TXU US Holdings Company (US Holdings). For the three months ended March 31,
2003, such affiliated revenues represented 75% of Oncor's revenues.
Oncor is managed as an integrated business; consequently there are no
separate reportable business segments.
Basis of Presentation - The condensed consolidated financial statements
of Oncor and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 143, "Accounting for Asset Retirement Obligations", on the same basis as the
audited financial statements included in its Annual Report on Form 10-K for the
year ended December 31, 2002 (2002 Form 10-K). In the opinion of management, all
other 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. 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 Securities
Exchange Commission (SEC). Because the 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 the 2002 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. Certain previously reported
amounts have been reclassified to conform to current classifications.
Changes in Accounting Standards -- SFAS No. 143 became effective on
January 1, 2003. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period of its
inception. Although Oncor has no such asset retirement obligations, Oncor
recovers regulated nuclear decommissioning fees from REPs on behalf of TXU
Energy. As a result of the recognition by TXU Energy of nuclear decommissioning
asset retirement obligations, Oncor recognized a regulatory asset of $48 million
at January 1, 2003, with an offsetting noncurrent liability due to TXU Energy.
During the first quarter of 2003, these respective account balances were
increased $9 million related to changes in TXU Energy's asset retirement
obligation and the related decommissioning trust fund. Over the remaining life
of the nuclear facility, the regulatory asset and the liability to TXU Energy
will be reversed as decommissioning fees are adjusted under the regulatory
process to provide sufficient funds to TXU Energy for the decommissioning. The
adoption of SFAS No. 143 does not affect Oncor's earnings or financial
condition.
SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," became effective on
January 1, 2003. One of the provisions of this statement is the rescission of
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." The
adoption of SFAS No. 145 did not result in a reclassification of Oncor's results
of operations for the three months ended March 31, 2002.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," became effective on January 1, 2003. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
4
only when the liability is incurred and measured initially at fair value. The
adoption of SFAS No. 146 did not materially impact Oncor's results of operations
for the three months ended March 31, 2003.
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" requires recording
the fair value of guarantees upon issuance or modification after December 31,
2002. The interpretation also requires expanded disclosures of guarantees (see
Note 4 under Residual Value Guarantees in Operating Leases). The adoption of FIN
No. 45 did not materially impact Oncor's results of operations for the three
months ended March 31, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for existing variable interest entities for the
quarter ending September 30, 2003 and immediately for any new variable interest
entities.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," was issued in April 2003 and becomes effective on June 30,
2003. SFAS No. 149 clarifies the definition of a derivative and the treatment in
the statement of cash flows when a derivative contains a financing component.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
2. FINANCING ARRANGEMENTS
Credit Facilities -- At March 31, 2003, Oncor had a $150 million 364-day senior
secured credit facility, expiring in December 2003, that was undrawn. The
facility was cancelled in April 2003.
In April 2003, a new $450 million revolving credit facility was
established for TXU Energy and Oncor that matures on February 25, 2005. The new
facility will be used for working capital and other general corporate purposes,
including commercial paper backup and letters of credit, and replaces the $1
billion 364-day revolving credit facility that expired in April 2003. Up to $450
million of letters of credit may be issued under the new facility.
This new facility, as well as others available to US Holdings, will
provide back-up for any future issuance of Oncor commercial paper. At March 31,
2003, Oncor had no outstanding commercial paper.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $217 million and $60
million outstanding as of March 31, 2003 and December 31, 2002, respectively.
The weighted average interest rates on short-term borrowings at March 31, 2003
and December 31, 2002, were 2.39% and 2.45%, respectively.
5
Long-term Debt -- At March 31, 2003 and December 31, 2002, Oncor's
long-term debt consisted of the following:
March 31, December 31,
2003 2002
-------- ---------
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... $ -- $ 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... -- 11
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. -- 133
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 70 70
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized premium and discount................................................. (32) (35)
----------- -------------
Total ....................................................................... 4,151 4,399
----------- -------------
Less amount due currently......................................................... 70 319
----------- -------------
Total Long-Term Debt............................................................. $4,081 $4,080
=========== =============
In March 2003, Oncor redeemed all ($103 million principal amount) of its
First Mortgage and Collateral Trust Bonds, 8.75% Series due November 1, 2023, at
104.01% of the principal amount thereof, plus accrued interest to the redemption
date.
In March 2003, Oncor redeemed all ($133 million principal amount) of its
First Mortgage Bonds, 6.75% Series, at the maturity date for par value plus
accrued interest. A restricted cash deposit of $138 million was utilized to fund
the redemption.
In April 2003, Oncor redeemed all ($70 million principal amount) of its
First Mortgage Bonds, 6.75% series, at the maturity date for par value plus
accrued interest. The remaining restricted cash deposit of $72 million was
utilized to fund the redemption.
Cross Default Provisions
- ------------------------
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default if there is a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions.
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million.
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount of $50 million or more would result in a
cross default for such party under the TXU Energy/Oncor $450 million revolving
credit facility. Under this revolving credit facility, a default by TXU Energy
or any subsidiary thereof would cause the maturity of outstanding balances under
such facility to be accelerated as to TXU Energy, but not as to Oncor. Also,
under this credit facility, a default by Oncor or any subsidiary thereof would
cause the maturity of outstanding balances to be accelerated under such facility
as to Oncor, but not as to TXU Energy.
6
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of March 31, 2003, Oncor, TXU Energy
(through certain subsidiaries), and TXU Gas Company (TXU Gas) are qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of March 31,
2003, Oncor had sold $52 million face amount of receivables to TXU Receivables
Company under the program in exchange for cash of $13 million and $39 million in
subordinated notes, with $0.1 million of losses on sales for the three months
ended March 31, 2003, that principally represent the interest costs on the
underlying financing. These losses approximated 6% of the cash proceeds from the
sale of undivided interests in accounts receivable on an annualized basis.
Funding under the program decreased from $16 million at December 31, 2002 to $13
million at March 31, 2003 primarily due to reserve requirements which apply
factors from the prior 12-month period in determining the current period
reserve. This period reflects the billing and collection delays previously
experienced as a result of new systems and processes in TXU Energy and the
Electric Reliability Council of Texas (ERCOT) for clearing customers switching
and billing data upon the transition to competition.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent Oncor's retained interests in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB-
by Standard & Poor's (S&P)Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do
not waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds during
the first quarter of 2003, but waivers were granted. These ratios were affected
by issues related to the transition to deregulation. Certain billing and
collection delays arose due to implementation of new systems and processes
within TXU Energy and ERCOT for clearing customer switching and billing data.
The billing delays have been resolved, but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios in consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
7
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
3. SHAREHOLDER'S EQUITY
March 31, December 31,
2003 2002
------------- ---------
Common stock without par value:
Authorized shares - 100,000,000................................. $ 2,501 $ 2,551
Outstanding shares: March 31, 2003 - 66,362,000 and
December 31, 2002 - 67,612,000
Retained earnings.................................................. 183 122
Accumulated other comprehensive loss............................... (24) (24)
-------- -------
Total shareholder's equity.................................... $ 2,660 $ 2,649
======== =======
In both January and April 2003, Oncor repurchased 1,250,000 shares of its
common stock from US Holdings for $50 million. On May 5, 2003, the Board of
Directors passed resolutions to repurchase an additional 937,500 shares from US
Holdings for $37.5 million in July 2003.
4. CONTINGENCIES
Residual Value Guarantees in Operating Leases -- Oncor is the lessee under
various operating leases that obligate it to guarantee the residual values of
the leased facilities. At March 31, 2003, the aggregate maximum amount of
residual values guaranteed was approximately $64 million with an estimated
residual recovery of approximately $63 million. The average life of the lease
portfolio is approximately four years.
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas, District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997, through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO Company are named defendants in both suits. Oncor is
unable to predict the outcome of any litigation related to this matter.
Oncor is involved in various legal and administrative proceedings, the
ultimate resolution of which, in the opinion of management, should not have a
material effect upon its financial position, results of operations or cash
flows.
8
5. SUPPLEMENTARY FINANCIAL INFORMATION
Interest Expense and Related Charges --
Three Months Ended March 31,
----------------------------
2003 2002
------ -----
Interest .............................................................. $ 79 $ 60
Amortization of debt discounts and issuance costs...................... 3 3
Allowance for borrowed funds used during construction and capitalized interest (1) (1)
------ ------
Total interest expense and other related charges ............ $ 81 $ 62
===== =====
Other Income and Other Deductions -- Other income and other deductions
consist of several individually immaterial items.
Regulatory Assets and Liabilities --
March 31, December 31,
2003 2002
--------- ------------
Regulatory Assets
Generation-related regulatory assets subject to securitization.............. $ 1,652 $ 1,652
Securities reacquisition costs.............................................. 125 124
Recoverable deferred income taxes-- net..................................... 77 76
Other regulatory assets..................................................... 115 46
------- -------
Total regulatory assets................................................ 1,969 1,898
------- -------
Regulatory Liabilities
Liability related to excess mitigation...................................... 125 170
Investment tax credit related and protected excess deferred taxes........... 95 98
------- ------
Total regulatory liabilities........................................... 220 268
------- ------
Net regulatory assets.................................................. $ 1,749 $1,630
======= ======
Included above are assets of $1.8 billion at March 31, 2003 and December
31, 2002, that were not earning a return. Of the assets not earning a return,
$1.652 billion is expected to be recovered over the term of the securitization
bonds expected to be issued by Oncor in 2003 and 2004 pursuant to the regulatory
settlement plan approved by the Commission. All other regulatory assets have a
remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of March 31, 2003 was $57 million
related to nuclear decommissioning liabilities. (See Note 1 for a discussion of
the accounting impact of recovering certain asset retirement obligations for
TXU Energy.)
Restricted Cash -- At March 31, 2003, approximately $72 million of the net
proceeds from Oncor's issuance of senior secured notes in December 2002 remained
in a trust to pay interest and principal of First Mortgage Bonds of Oncor due in
April 2003.
Accounts Receivable -- At March 31, 2003 and December 31, 2002, accounts
receivable are stated net of allowance for uncollectible accounts of $1 million.
Accounts receivable at March 31, 2003 and December 31, 2002 included unbilled
revenues of $94 million and $97 million, respectively.
9
Intangible Assets -- SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for Oncor on January 1, 2002. SFAS No. 142 requires the
discontinuance of goodwill amortization and additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
As of March 31, 2003 As of December 31, 2002
------------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------ ----
Amortized intangible assets
Capitalized software.............. $ 148 $ 58 $ 90 $ 148 $ 53 $ 95
Land easements.................... 168 53 115 168 52 116
------ ------- ------ ------ ------- -----
Total....................... $ 316 $ 111 $ 205 $ 316 $ 105 $ 211
===== ======= ===== ===== ===== =====
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Oncor has no intangible assets that are not
amortized.
Aggregate amortization expense for intangible assets for the three months
ended March 31, 2003 and 2002 was $6 million and $5 million, respectively.
Property, Plant and Equipment -- At March 31, 2003 and December 31,
2002, property, plant and equipment was stated net of accumulated depreciation
and amortization of $3.1 billion and $3.0 billion, respectively.
Derivative Financial Instruments and Hedging Activities -- Oncor's
derivative financial instruments that have been designated as cash flow hedges
match the terms of the underlying hedged items. As a result, Oncor experienced
no hedge ineffectiveness during the three months ended March 31, 2003 or 2002.
These hedges relate to financing transactions.
As of March 31, 2003, it is expected that $1 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which the volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
Affiliate Transactions -- The following represent significant affiliate
transactions of Oncor:
o Oncor records interest income receivable from TXU Energy with respect
to Oncor's generation-related regulatory assets that are subject to
securitization. The interest income reimburses Oncor for the interest
expense Oncor incurs on that portion of its debt deemed to be
associated with the generation-related regulatory assets. For the three
months ended March 31, 2003 and 2002, this interest income totaled $12
million and $6 million, respectively.
o Under terms of the regulatory settlement plan, Oncor expects to issue
securitization bonds in the principal amount of $1.3 billion. The
incremental income taxes Oncor will pay on the increased delivery fees
to be charged to Oncor's customers related to the bonds will be
reimbursed by TXU Energy. Therefore, Oncor's financial statements
reflect a $437 million non-interest bearing receivable from TXU Energy
that will be extinguished as Oncor pays the related income taxes.
o In addition, Oncor has a note receivable from TXU Energy related to
the excess mitigation credit established in accordance with
the regulatory settlement plan. Oncor has implemented the $350 million
credit, plus interest,as a reduction of its fees charged to REPs,
including TXU Energy, for a two year period beginning January 1,
2002. At March 31, 2003, the remaining regulatory liability of
$125 million related to the credit reflected an increase of
$7 million in the first quarter of 2003, due to an increase in
expected energy volumes on which the fee reduction is based, with an
offset recorded to accounts receivable from TXU Energy. The remaining
$118 million is recorded as a note receivable. The principal and
10
interest payments on the note receivable from TXU Energy reimburse
Oncor for the credit applied to the delivery fees billed to REPs.
For the three months ended March 31, 2003 and 2002, the respective
principal payments received on the note receivable totaled $52 million
and $14 million, as well as interest income of $3 million and
$6 million.
o Average daily short-term advances from affiliates for the three months
ended March 31, 2003 and 2002 were $130 million and $1.6 billion,
respectively, interest expense incurred on the advances was $1 million
and $12 million, respectively, and the weighted average interest rate
for the respective periods was 2.33% and 3.04%.
o Oncor also records revenues from TXU Energy for electricity delivery
fees. For the three months ended March 31, 2003 and 2002, these
revenues were $377 million and $416 million, respectively.
o TXU Business Services Company, a subsidiary of TXU Corp., charges Oncor
for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For the three months ended March 31,
2003 and 2002, these costs totaled $28 million and $34 million,
respectively, and are reported in operation and maintenance expenses.
o Oncor charges TXU Gas for customer and administrative services. For the
three months ended March 31, 2003 and 2002, these charges totaled $8
million and $7 million, respectively, and are largely reported as a
reduction in operation and maintenance expenses.
11
INDEPENDENT AUDITORS' REPORT
Oncor Electric Delivery Company:
We have reviewed the accompanying condensed consolidated balance sheet of Oncor
Electric Delivery Company and subsidiaries (Oncor) as of March 31, 2003, and the
related condensed statements of consolidated income, comprehensive income, and
cash flows for the three-month periods ended March 31, 2003 and 2002. These
financial statements are the responsibility of Oncor's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Oncor as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholder's equity for the year
then ended (not presented herein); and in our report dated February 14, 2003, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 2003
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Oncor is managed as an integrated business; consequently there are no
separate reportable business segments.
Three Months Ended March 31,
---------------------------
2003 2002
-------- -------
Operating statistics:
Electric energy delivered volumes (gigawatt hours)................. 23,908 23,586
Electric points of delivery (end of period and in thousands)....... 2,914 2,868
Operating revenues (million of dollars):
Affiliated - TXU Energy....................................... $ 377 $ 416
Non-affiliated................................................ 129 78
-------- --------
Total ..................................................... $ 506 $ 494
======== ========
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Operating revenues increased $12 million, or 2%, to $506 million in 2003.
The growth reflected $6 million in increased disconnect/reconnect fees due to
greater competition-related customer switching activities. Additional points of
delivery of approximately 1.6% contributed $2 million to revenue growth. The
revenue increase also reflected $3 million in nonrecurring billing settlements
for tower space leases with telecommunications companies and pole contract
rentals from cable and telecommunication companies.
Operation and maintenance expenses increased by $10 million, or 6%, to
$188 million in 2003. The increase reflected higher transmission costs paid to
other utilities, increased pension and other postretirement benefit costs, and
higher overhead feeder maintenance and tree trimming costs, partially offset by
lower employee-related and outside consulting expenses arising from cost savings
initiatives implemented in late 2002.
Depreciation and amortization increased $5 million, or 8%, to $69 million.
The increase reflects investments to support growth and normal replacements of
delivery facilities.
Taxes other than income declined $3 million, or 3%, to $92 million in 2003
primarily due to a decline in local gross receipts taxes. This decline reflects
the lagging effects of the change in revenue base on which the tax is calculated
due to deregulation.
Interest income increased $3 million to $15 million in 2003 reflecting an
increase in the reimbursement from TXU Energy for higher carrying costs on
regulatory assets.
Interest expense and other charges increased by $19 million, or 31%, to
$81 million in 2003 principally due to higher average interest rates. The higher
average interest rates reflected issuances of higher rate long-term debt to
replace lower rate advances from affiliates.
Income tax expense was $31 million in 2003 (including $25 million related
to operating income and $6 million related to nonoperating income), representing
an effective tax rate of 33.7% in 2003, which was comparable to the 33.0%
effective rate in 2002, with no significant offsetting items.
Net income decreased $10 million, or 14%, to $61 million primarily due to
higher interest expense. Net pension and postretirement benefit costs reduced
net income by $8 million in 2003 and $3 million in 2002.
13
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows -- Cash flows used by operating activities for the three months
ended March 31, 2003 were $4 million, compared to $142 million for the three
months ended March 31, 2002. The improved cash flow performance of $138 million
was driven by favorable working capital (accounts receivable, inventory, and
accounts payable) changes of $192 million, reflecting the unfavorable effect in
the prior year of the start-up of billing REPs for transmission and distribution
charges effective January 1, 2002. Operating cash flow comparisons were
negatively impacted by the higher excess mitigation credit passed to retail
electric providers (REPs) in 2003, the effect of which is primarily offset in
financing costs as the related note receivable from TXU Energy is collected.
Cash flows provided by financing activities were $43 million in 2003,
compared to $249 million in 2002. Debt retirements totaled $250 million in 2003,
including $235 million of first mortgage bonds and $15 million of medium term
notes. Also in 2003, Oncor repurchased $50 million of common stock held by TXU
US Holdings Company (US Holdings). A redemption deposit (restricted cash) of
$138 million was used to fund a debt retirement. Advances from affiliates
provided $158 million in 2003 compared to $440 million in 2002.
Cash flows used in investing activities, which consisted primarily of
capital expenditures, totaled $115 million and $141 million for the three months
ended March 31, 2003 and 2002, respectively. Other investing activities in 2003
included a cash source of $9 million, primarily reflecting net proceeds from
retirements of property, plant and equipment.
Credit Facilities -- As of March 31, 2003, Oncor had a $150 million
364-day senior secured credit facility, expiring in December 2003, that was
undrawn. The facility was cancelled in April 2003.
In April 2003, a new $450 million revolving credit facility was
established for TXU Energy Company LLC (TXU Energy) and Oncor that matures on
February 25, 2005. The new facility will be used for working capital and other
general corporate purposes, including commercial paper backup and letters of
credit, and replaces the $1 billion 364-day revolving credit facility that
expired in April 2003. Up to $450 million of letters of credit may be issued
under the new facility.
This new facility, as well as others available to US Holdings, will
provide back-up for any future issuance of Oncor commercial paper. At March 31,
2003, Oncor had no outstanding commercial paper.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $217 million and $60
million outstanding as of March 31, 2003 and December 31, 2002, respectively.
The weighted average interest rates on short-term borrowings at March 31, 2003
and December 31, 2002, were 2.39% and 2.45%, respectively.
See Note 2 to Financial Statements for further detail of debt issuance and
retirements.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of March 31, 2003, Oncor, TXU Energy
(through certain subsidiaries), and TXU Gas Company (TXU Gas) are qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of March 31,
2003, Oncor had sold $52 million face amount of receivables to TXU Receivables
Company under the program in exchange for cash of $13 million and $39 million in
subordinated notes, with $0.1 million of losses on sales for the three months
ended March 31, 2003, that principally represent the interest costs on the
underlying financing. These losses approximated 6% of the cash proceeds from the
sale of undivided interests in accounts receivable on an annualized basis.
Funding under the program decreased from $16 million at December 31, 2002 to $13
million at March 31, 2003 primarily due to reserve requirements which apply
factors from the prior 12-month period in determining the current period
reserve. This period reflects the billing and collection delays previously
experienced as a result of new systems and processes in TXU Energy and the
Electric Reliability Council of Texas (ERCOT) for clearing customers switching
and billing data upon the transition to competition.
14
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent Oncor's retained interests in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB-
by Standard & Poor's (S&P) or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do
not waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds during
the first quarter of 2003, but waivers were granted. These ratios were affected
by issues related to the transition to deregulation. Certain billing and
collection delays arose due to implementation of new systems and processes
within TXU Energy and ERCOT for clearing customer switching and billing data.
The billing delays have been resolved, but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios in consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
The accounts receivable program also contains a cross default provision -
see discussion below.
15
Credit Ratings of TXU Corp., US Holdings, TXU Energy and Oncor
The current credit ratings for TXU Corp., US Holdings, TXU Energy and
Oncor are presented below:
TXU Corp. US Holdings TXU Energy Oncor
(Senior (Senior (Senior
Unsecured) Unsecured) Unsecured) (Secured)
S&P ................. BBB- BBB- BBB BBB
Moody's................ Ba1 Baa3 Baa2 Baa1
Fitch ................. BBB- BBB- BBB BBB+
Moody's currently maintains a negative outlook for TXU Corp. and a stable
outlook for US Holdings, TXU Energy and Oncor. Fitch Rating (Fitch) currently
maintains a stable outlook for each such entity. Standard and Poor's (S&P)
currently maintains a negative outlook for each such entity.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders' equity to total capitalization
ratios and leverage ratios and/or contain minimum net worth covenants. As of
March 31, 2003, TXU Corp., US Holdings, Oncor and TXU Energy were in compliance
with all such applicable covenants.
Certain financing and other arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material
provisions are described below.
Other agreements of TXU Corp., US Holdings, Oncor and TXU Energy,
including the credit facilities discussed above, contain terms pursuant to which
the interest rates charged under the agreements may be adjusted depending on the
credit ratings of such entities.
Cross Default Provisions
- ------------------------
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default if there is a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions.
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million.
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount of $50 million or more would result in a
cross default for such party under the $450 million joint TXU Energy/Oncor
revolving credit facility. Under this revolving credit facility, a default by
TXU Energy or any subsidiary thereof would cause the maturity of outstanding
balances under such facility to be accelerated as to TXU Energy, but not as to
Oncor. Also, under this facility, a default by Oncor or any subsidiary thereof
would cause the maturity of outstanding balances to be accelerated under such
facility as to Oncor, but not as to TXU Energy.
16
The accounts receivable program, described above, contains a cross default
provision with a threshold of $50 million applicable to each of the originators
under the program. TXU Receivables Company and TXU Business Services Company
each have a cross default threshold of $50,000. If either an originator, TXU
Business Services Company or TXU Receivables Company defaults on indebtedness of
the applicable threshold, the facility could terminate.
Other arrangements, including leases, have cross default provisions, the
triggering of which would not result in a significant effect on Oncor's
liquidity.
Capitalization -- In both January and April 2003, Oncor repurchased
1,250,000 shares of its common stock from US Holdings for $50 million.
Resolutions have been passed to repurchase an additional 937,500 shares from US
Holdings for $37.5 million in July 2003.
COMMITMENTS AND CONTINGENCIES
See Note 4 to Financial Statements for discussion of contingencies. There
were no material changes in cash commitments from those disclosed in the 2002
Form 10-K.
REGULATION AND RATES
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement was approved by the Commission in June 2002 and has become final.
Excess Mitigation Credit -- Beginning in 2002, Oncor began implementing an
excess stranded cost mitigation credit designed to result in a $350 million,
plus interest, reduction to transmission and distribution (T&D) rates charged to
REPs applied over a two-year period. The actual amount of this credit is
expected to be somewhat higher as delivery volumes are anticipated to be higher
than initially estimated; however, Oncor's earnings will be unaffected by the
increase as TXU Energy will fund the increased credit.
Regulatory Asset Securitization -- In accordance with the Settlement,
Oncor received a financing order authorizing it to issue securitization bonds in
the aggregate principal amount of $1.3 billion to recover regulatory assets and
other qualified costs. The Settlement provides that there can be an initial
issuance of securitization bonds in the amount of up to $500 million, followed
by a second issuance of the remainder after 2003. The Settlement resolves all
issues related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial power consumption after
the first two years of competition, the amount of the retail clawback credit
will be equal to the number of residential and small commercial customers
retained by TXU Energy in its historical service territory on January 1, 2004,
less the number of new customers TXU Energy has added outside of its historical
service territory as of January 1, 2004, multiplied by $90. This determination
will be made separately for the residential and small commercial classes. The
credit, if any, will be applied to T&D rates charged by Oncor to REPs, including
TXU Energy, over a two-year period beginning January 1, 2004. Under the
settlement agreement, TXU Energy will make a compliance filing with the
Commission reflecting customer count as of January 2004. In the fourth quarter
of 2002, TXU Energy recorded a $185 million ($120 million after-tax) charge for
the retail clawback, which represents the current best estimate of the amount to
be funded to Oncor over the two-year period.
Transmission Rates -- Under Commission rules, transmission service
providers are allowed to update transmission rates on an annual basis to reflect
changes in invested capital. On March 27, 2003, Oncor filed with the Commission
a request for an interim update of its previously approved wholesale
transmission rates. The increased annual revenue related to this request is
approximately $28.4 million. The Commission approved Oncor's request as filed
and the new rates were effective May 9, 2003.
Summary -- Although Oncor cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments other than those discussed in the Oncor
2002 Form 10-K and this Form 10-Q, which might significantly alter Oncor's
financial position, results of operations or cash flows.
17
CHANGES IN ACCOUNTING STANDARDS
See Note 1 to Financial Statements for a discussion of changes in
accounting standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of industry
practice with respect to disclosure of such information in filings under the
Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed in
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a significant impact on Oncor's operations,
financial results and financial condition, and could cause Oncor's actual
results or outcomes to differ materially from any projected outcomes contained
in any forward-looking statements in this report, include:
Oncor's businesses operate in changing market environments influenced by
various legislative and regulatory initiatives regarding deregulation,
regulation or restructuring of the energy industry, including deregulation of
the production and sale of electricity. Oncor will need to adapt to these
changes and may face increasing competitive pressure.
Oncor is subject to changes in laws or regulations, including the Federal
Power Act, as amended, and the Public Utility Holding Company Act of 1935, as
amended, changing governmental policies and regulatory actions, including those
of the Commission and the Federal Energy Regulatory Commission (FERC), with
respect to matters including, but not limited to, construction and operation of
transmission facilities, acquisition, disposal, depreciation and amortization of
regulated assets and facilities and return on invested capital.
Existing laws and regulations governing the market structure in Texas,
including the provisions of the 1999 Restructuring Legislation, could be
reconsidered, revised or reinterpreted, or new laws or regulations could be
adopted.
Oncor is subject to the effects of new or changes in, income tax rates or
policies and increases in taxes related to property, plant and equipment and
gross receipts and other taxes. Further, Oncor is subject to audit and reversal
of its tax positions by the Internal Revenue Service and other taxing
authorities.
Oncor is subject to extensive federal, state and local environmental
statutes, rules and regulations. There are capital, operating and other costs
associated with compliance with these environmental statutes, rules and
regulations, and those costs could increase in the future.
Oncor has recorded a receivable due from TXU Energy for incremental income
taxes Oncor will pay as it collects from customers amounts equivalent to the
$1.3 billion principal amount of the securitization bonds. TXU Energy continues
to reimburse Oncor for the excess mitigation credit passed to REP customers by
Oncor and for carrying costs on regulatory assets. Oncor is subject to risks of
nonperformance of TXU Energy regarding these matters.
Oncor is subject to cost-of-service regulation and annual earnings
oversight. This regulatory treatment does not provide any assurance as to
achievement of earnings levels. Oncor's rates are regulated by the Commission
based on an analysis of Oncor's costs, as reviewed and approved in a regulatory
proceeding. As part of the regulatory settlement plan, Oncor has agreed not to
seek to increase its distribution rates prior to 2004. Thus, the rates Oncor is
allowed to charge may or may not match Oncor's costs and allowed return on
invested capital at any given time. While rate regulation is premised on the
full recovery of prudently incurred costs and a reasonable rate of return on
invested capital, there can be no assurance that the Commission will judge all
of Oncor's costs to have been prudently incurred or that the regulatory process
in which rates are determined will always result in rates that will produce full
recovery of Oncor's costs and the return on invested capital allowed by the
Commission.
18
Oncor's revenues from the distribution of electricity are collected from
REPs that sell the electricity Oncor distributes to such REPs' customers. Oncor
depends on these REPs to timely remit these revenues to Oncor. Oncor could
experience delays or defaults in payment from these REPs, adversely affecting
Oncor's cash flows and financial condition. Revenues from TXU Energy represent
the substantial majority of Oncor's revenues.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through Oncor's distribution facilities. While not
generally competitive now, manufacturers of self-generation facilities continue
to develop smaller-scale, more fuel-efficient generating units that can be
cost-effective options for certain customers.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact Oncor's ability to
sustain and grow its businesses, which are capital intensive, and would likely
increase its capital costs. Oncor relies on access to financial markets as a
significant source of liquidity for capital requirements not satisfied by cash
on hand or operating cash flows. Oncor's access to the financial markets could
be adversely impacted by various factors, such as:
o changes in credit markets that reduce available credit or the ability to
renew existing liquidity facilities on acceptable terms;
o inability to access commercial paper markets;
o a deterioration of Oncor's credit or a reduction in Oncor's credit ratings or
the credit ratings of its subsidiaries;
o a material breakdown in Oncor's risk management procedures; and
o the occurrence of material adverse changes in Oncor's business that restrict
Oncor's ability to access its liquidity facilities.
The current credit ratings for TXU Corp.'s and its subsidiaries' long-term
debt are investment grade, except for Moody's credit rating for long-term debt
of TXU Corp. (the holding company), which is one notch below investment grade. A
rating reflects only the view of a rating agency, and it is not a recommendation
to buy, sell or hold securities. Any rating can be revised upward or downward at
any time by a rating agency if such rating agency decides that circumstances
warrant such a change. If S&P, Moody's or Fitch were to downgrade TXU Corp.'s
and/or its subsidiaries' long-term ratings, particularly below investment grade,
borrowing costs would increase and the potential pool of investors and funding
sources would likely decrease.
In addition, as discussed elsewhere in this Quarterly Report on Form 10-Q
and in Oncor's 2002 Form 10-K, the terms of certain financing and other
arrangements contain provisions that are specifically affected by changes in
credit ratings and could require the posting of collateral, the repayment of
indebtedness or the payment of other amounts.
The operation of electricity transmission and distribution facilities
involves many risks, including breakdown or failure of equipment and
transmission lines, lack of sufficient capital to maintain the facilities, the
impact of unusual or adverse weather conditions or other natural events, as well
as the risk of performance below expected levels of efficiency. This could
result in lost revenues and/or increased expenses. Insurance, warranties or
performance guarantees may not cover any or all of the lost revenues or
increased expenses.
Oncor's ability to successfully and timely complete capital improvements
to existing facilities or other capital projects is contingent upon many
variables. Should any such efforts be unsuccessful, Oncor could be subject to
additional costs and/or the write-off of its investment in the project or
improvement.
Natural disasters, war, terrorist acts and other catastrophic events may
impact Oncor's operations in adverse ways, including disruption of power
production and energy delivery activities, declines in customer demand, cost
increases and instability in the financial markets.
Oncor's ability to obtain insurance, and the cost of and coverage provided
by such insurance, could be affected by events outside its control.
19
Oncor is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
TXU Corp. and US Holdings are not obligated to provide any loans, further
equity contributions or other funding to Oncor or any of its subsidiaries. Oncor
must compete with all of TXU Corp.'s other subsidiaries for capital and other
resources. While, as a member of the TXU corporate group, Oncor operates within
policies, including dividend policies, established by TXU Corp. that impact the
liquidity of Oncor, rate regulation of Oncor provides economic disincentives to
any significant reduction of Oncor's equity capitalization and prohibits
cross-subsidization of other TXU Corp. group members by Oncor.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the bankruptcy
filing by Enron, accounting irregularities of public companies, and
investigations by governmental authorities into energy trading activities,
companies in the regulated and non-regulated utility businesses have been under
a generally increased amount of public and regulatory scrutiny. Accounting
irregularities at certain companies in the industry have caused regulators and
legislators to review current accounting practices and financial disclosures.
The capital markets and rating agencies also have increased their level of
scrutiny. Oncor believes that it is complying with all applicable laws, but it
is difficult or impossible to predict or control what effect these events may
have on Oncor's financial condition or access to the capital markets.
Additionally, it is unclear what laws and regulations may develop, and Oncor
cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies, the energy
industry or its operations specifically.
The issues and associated risks and uncertainties described above are not
the only ones Oncor may face. Additional issues may arise or become material as
the energy industry evolves. The risks and uncertainties associated with these
additional issues could impair Oncor's businesses in the future.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Oncor contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although Oncor believes that in making any such statement its
expectations are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to the risks
discussed above under RISK FACTORS THAT MAY EFFECT FUTURE RESULTS and factors
contained in the Forward-Looking Statements section of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Oncor's 2002 Form 10-K, that could cause the actual results of Oncor to differ
materially from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Oncor undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for Oncor
to predict all of such factors, nor can it assess the impact of each such factor
or the extent to which any factor, or combination of factors, may cause the
actual results of Oncor to differ materially from those projected in any
forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required hereunder is not significantly different from
the information set forth in Item 7A. Quantitative and Qualitative Disclosure
About Market Risk included in Oncor's 2002 Form 10-K and is, therefore, not
presented herein.
20
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of Oncor's management, including the principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this quarterly report. Based on the evaluation performed,
Oncor's management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective. There were no significant changes in Oncor's internal controls or in
other factors that could significantly affect internal controls subsequent to
their evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
99(a) Condensed Statements of Consolidated Income - Twelve Months Ended
March 31, 2003.
99(b) Section 906 Certification of Chief Executive Officer.
99(c) Section 906 Certification of Chief Financial Officer.
(b) Reports on Form 8-K filed since December 31, 2002:
April 30, 2003 Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
May 1, 2003 Item 7. Exhibits
(Form 8-K/A)
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ONCOR ELECTRIC DELIVERY COMPANY
By /s/ Biggs C. Porter
------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: May 15, 2003
22
ONCOR ELECTRIC DELIVERY COMPANY
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of Oncor Electric
Delivery Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oncor Electric
Delivery Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Erle Nye
--------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
23
ONCOR ELECTRIC DELIVERY COMPANY
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF PFO
I, Scott Longhurst, Principal Financial Officer of Oncor Electric Delivery
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oncor Electric
Delivery Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Scott Longhurst
---------------------------------------------------
Signature: Scott Longhurst
Title: Principal Financial Officer
24