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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 JUNE 30, 2003
- OR -
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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, TEXAS 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 __ No _X_
Common Stock outstanding at August 8, 2003: Oncor Electric Delivery Company -
64,174,500 shares, without par value
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TABLE OF CONTENTS
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Page
Glossary...................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income -
Three and Six Months Ended June 30, 2003 and 2002............ 1
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2003 and 2002...................... 2
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002.......................... 3
Notes to Financial Statements................................ 4
Independent Accountants' Report.............................. 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures.............................. 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................... 22
SIGNATURE...................................................... 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
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........Legislation that restructured the
electric utility industry in Texas to
provide for competition
2002 Form 10-K........................Oncor Electric Delivery Company's Annual
Report on Form 10-K for the year ended
December 31, 2002
Commission............................Public Utility Commission of Texas
EITF..................................Emerging Issues Task Force
EITF 01-8.............................EITF Issue No. 01-8, "Determining Whether
an Arrangement Contains a Lease"
EITF 02-3 ............................EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held
for Trading Purposes and Contracts
Involved in Energy Trading and Risk
Management Activities"
ERCOT.................................Electric Reliability Council of Texas
FIN...................................Financial Accounting Standards Board
Interpretation
FIN 45................................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"
FIN 46................................FIN No. 46, "Consolidation of Variable
Interest Entities"
Fitch.................................Fitch Ratings, Ltd.
Moody's...............................Moody's Investors Services, Inc.
Oncor.................................Oncor Electric Delivery Company or Oncor
Electric Delivery Company and its
consolidated subsidiaries, depending on
the context
POLR..................................provider of last resort
REPs..................................retail electric providers
S&P...................................Standard & Poor's, a division of the
McGraw Hill Companies
SEC...................................United States Securities and Exchange
Commission
Settlement............................regulatory settlement agreed to by the
Commission in 2002
Settlement Plan.......................regulatory settlement plan filed with the
Commission in December 2001
SFAS..................................Statement of Financial Accounting
Standards
SFAS 145..............................SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of
FASB Statement 13, and Technical
Corrections"
SFAS 146..............................SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal
Activities"
SFAS 149..............................SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging
Activities"
SFAS 150..............................SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics
of both Liabilities and Equity"
T&D...................................transmission and distribution
TXU Energy............................TXU Energy Company LLC
ii
TXU Gas...............................TXU Gas Company
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................TXU US Holdings Company
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
(millions of dollars)
Operating revenues:
Affiliated................................... $349 $397 $ 726 $ 813
Nonaffiliated................................ 137 103 266 181
--- --- --- ---
Total operating revenues ................... 486 500 992 994
--- --- --- ---
Operating expenses:
Operation and maintenance ................... 190 189 378 367
Depreciation and amortization ............... 68 67 137 131
Income taxes................................. 18 29 43 62
Taxes, other than income..................... 93 92 185 187
--- --- --- ---
Total operating expenses.................... 369 377 743 747
--- --- --- ---
Operating income................................ 117 123 249 247
Other income and deductions:
Other income................................. 2 1 4 2
Other deductions......... ................... 2 1 3 3
Nonoperating income taxes.................... 5 4 11 6
Interest income - affiliates.................... 14 11 29 23
Interest expense and other charges 74 65 155 127
--- --- --- ---
Net income...................................... $ 52 $ 65 $ 113 $ 136
--- --- --- ---
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
(millions of dollars)
Net income..................................... $ 52 $ 65 $ 113 $ 136
Other comprehensive income, net of tax effects:
Cash flow hedge activity -
Net change in fair value of derivatives (net of tax -- (26) -- (25)
benefit of $14 and $14)......................
Amounts realized in earnings during the period..... 1 -- 1 --
--- --- --- ---
Total............................................. 1 (26) 1 (25)
--- --- --- ---
Comprehensive income................................. $ 53 $ 39 $ 114 $ 111
--- --- --- ---
See Notes to Financial Statements.
1
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------
2003 2002
---- ----
(millions of dollars)
Cash flows -- operating activities:
Net income................................................................. $113 $136
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization ........................................... 142 143
Deferred income taxes and investment tax credits-- net .................. 75 67
Changes in operating assets and liabilities ................................. (213) (415)
----- -----
Cash provided by (used in) operating activities............................ 117 (69)
----- -----
Cash flows -- financing activities:
Issuances of long-term debt.................................................... -- 1,200
Retirements/repurchases of debt................................................ (321) (352)
Capital contribution from parent.............................................. 250 --
Repurchase of common stock..................................................... (100) (50)
Net issuances of commercial paper.............................................. -- 295
Net change in advances from affiliates......................................... (47) (780)
Decrease in note receivable from TXU Energy related to a regulatory liability.. 99 46
Redemption deposit applied to debt retirement.................................. 210 --
Debt premium, discount, financing, and reacquisition expenses.................. (4) (20)
----- -----
Cash provided by financing activities...................................... 87 339
----- -----
Cash flows -- investing activities:
Capital expenditures........................................................... (245) (265)
Other.......................................................................... 6 (39)
----- -----
Cash used in investing activities.......................................... (239) (304)
----- -----
Net change in cash and cash equivalents........................................... (35) (34)
Cash and cash equivalents-- beginning balance...................................... 77 35
----- -----
Cash and cash equivalents-- ending balance........................................ $ 42 $ 1
----- -----
See Notes to Financial Statements.
2
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
------- -----------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 42 $ 77
Restricted cash............................................................ -- 210
Accounts receivable:
Affiliates (principally TXU Energy)..................................... 262 213
Trade................................................................... 92 62
Inventories................................................................ 38 40
Note receivable from TXU Energy............................................ 71 170
Other current assets....................................................... 57 35
----- -----
Total current assets.................................................... 562 807
Investments................................................................... 27 29
Property, plant and equipment - net........................................... 6,162 6,056
Due from TXU Energy........................................................... 437 437
Regulatory assets - net....................................................... 1,770 1,630
Other noncurrent assets....................................................... 65 63
----- -----
Total assets............................................................ $ 9,023 $ 9,022
----- -----
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates................................................... $ 13 $ 60
Long-term debt due currently............................................... 100 319
Accounts payable - trade................................................... 53 30
Accrued taxes.............................................................. 70 142
Accrued interest........................................................... 92 70
Other current liabilities.................................................. 99 92
----- -----
Total current liabilities .............................................. 427 713
Accumulated deferred income taxes and investment tax credits.................. 1,433 1,370
Other noncurrent liabilities and deferred credits............................. 269 210
Long-term debt, less amounts due currently.................................... 3,981 4,080
Contingencies (Note 4)
Shareholder's equity (Note 3)................................................. 2,913 2,649
----- -----
Total liabilities and shareholder's equity.............................. $ 9,023 $ 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 is a wholly-owned subsidiary of US
Holdings, which is a wholly-owned subsidiary of TXU Corp.
Oncor is a regulated electricity T&D company principally engaged in
providing delivery services to REPs that sell power in the north-central,
eastern and western parts of Texas. A majority of Oncor's revenues represent
fees for delivery services provided to TXU Energy, a wholly-owned subsidiary of
US Holdings. For the six months ended June 30, 2003, such affiliated revenues
represented 73% 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 have been prepared in accordance with US GAAP and on the
same basis as the audited financial statements included in its 2002 Form 10-K.
In the opinion of management, all 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 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 145, regarding classification
of items as extraordinary, 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 145 did not result
in a reclassification for the six months ended June 30, 2002.
SFAS 146, regarding exit costs, became effective on January 1, 2003.
SFAS 146 requires that a liability for costs associated with an exit or disposal
activity be recognized only when the liability is incurred and measured
initially at fair value. The adoption of SFAS 146 did not impact results of
operations for the six months ended June 30, 2003.
FIN 45 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 45 did not materially impact results
of operations for the six months ended June 30, 2003.
FIN 46 was issued in January 2003. FIN 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 in the quarter ending September 30, 2003 and immediately for
any new variable interest entities. The adoption of FIN 46 did not and is not
expected to impact financial position or results of operations.
SFAS 149 was issued in April 2003 and became effective for contracts
entered into or modified after June 30, 2003. SFAS 149 clarifies what contracts
may be eligible for the normal purchase and sale exception, the definition of a
derivative and the treatment in the statement of cash flows when a derivative
contains a financing component. The adoption of SFAS 149 is not expected to
impact financial position or results of operations.
4
SFAS 150 was issued in May 2003 and became effective June 1, 2003 for
new financial instruments and July 1, 2003 for existing financial instruments.
SFAS 150 requires that certain mandatorily redeemable preferred securities be
classified as liabilities beginning July 1, 2003. SFAS 150 is not expected to
impact financial position.
EITF 01-8 was issued in May 2003 and is effective prospectively for
arrangements that are new, modified or committed to beginning July 1, 2003. This
guidance may require that certain types of arrangements be accounted for as
leases, including tolling and power supply contracts, take-or-pay contracts and
service contracts involving the use of specific property and equipment. The
adoption of EITF 01-8 is not expected to impact financial position or results of
operations.
2. FINANCING ARRANGEMENTS
Credit Facilities -- At June 30, 2003, Oncor and TXU Energy had a $450
million revolving credit facility that matures on February 25, 2005. This
facility is used for working capital and other general corporate purposes,
including letters of credit, and replaced 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 this facility. As of June 30, 2003, there were $21
million of outstanding letters of credit issued by TXU Energy, but no cash
borrowings under this facility.
This facility, as well as others available to US Holdings, will
provide back-up for any future issuance of commercial paper by Oncor and TXU
Energy. At June 30, 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 $13 million and $60
million outstanding as of June 30, 2003 and December 31, 2002, respectively. The
weighted average interest rates on short-term borrowings at June 30, 2003 and
December 31, 2002, were 3.07% and 2.45%, respectively.
Long-term Debt -- At June 30, 2003 and December 31, 2002, Oncor's
long-term debt consisted of the following:
June 30, 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
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 Oncor..................................................................... 4,081 4,399
----- -----
Less amount due currently........................................................ 100 319
----- -----
Total long-term debt............................................................. $ 3,981 $ 4,080
----- -----
5
In April 2003, Oncor repaid all ($70 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 $72 million was utilized to fund
the maturity.
In March 2003, Oncor repaid 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 maturity.
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.
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 June 30, 2003, TXU Energy (through
certain subsidiaries), Oncor and 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. The June 30, 2003 financial statements
reflect the sale of $64 million face amount of Oncor's receivables to TXU
Receivables Company under the program in exchange for cash of $30 million and
$34 million in subordinated notes, with $0.3 million of losses on sales for the
six months ended June 30, 2003 that principally represents 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 increased $12 million in the six month period ended
June 30, 2003 primarily due to reserve requirements that were reduced through a
temporary amendment in recognition of improving collection trends. Funding
increases or decreases under the program are reflected as cash provided by or
used in operating activities.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, 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 TXU Corp.'s subsidiaries' 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 consolidated
balance sheet.
In August 2003, the program was amended to extend the term to July
2004, as well as to extend the period providing temporarily higher delinquency
and default compliance ratios through December 31, 2003. The program was also
amended to coincide with the credit facilities' covenants by removing investment
grade credit ratings as a requirement of an eligible originator and substituting
maintenance of fixed charge coverage ratios and debt to capital ratios as
requirements of an eligible originator. In June 2003, the program was amended to
provide temporarily higher delinquency and default compliance ratios and
temporary relief from the loss reserve formula. The June amendment reflected the
billing and collection delays previously experienced as a result of new systems
and processes in TXU Energy and ERCOT for clearing customers' switching and
billing data upon the transition to competition.
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) each of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
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 thresholds apply to the entire portfolio of
sold receivables, not separately to the receivables of each originator.
6
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months 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 customers' 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 POLR rules by the Commission and strengthened credit and collection policies
and practices are expected to bring the ratios into consistent compliance with
the program.
Under the receivables sale program, all the originators are required
to maintain specified fixed charge coverage and leverage ratios (or supply a
parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate. Prior to the August 2003 amendment
extending the program, originator eligibility was predicated on the maintenance
of an investment grade credit rating.
Financial Covenants, Credit Rating Provisions and Cross Default
Provisions -- The terms of certain financing arrangements of Oncor 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 June 30, 2003, Oncor and its
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of Oncor contain provisions
that are specifically affected by changes in credit ratings and also include
cross default provisions. The material cross default provisions are described
below.
Other agreements of Oncor, including some of 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 Oncor or
its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of 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.
A default by TXU Energy or Oncor or any subsidiary thereof in respect
of indebtedness in a principal amount in excess of $50 milllion or more would
result in a cross default for such party under the TXU Energy/Oncor $450 million
revolving credit facility, a default by TXU Energy or any subsidiary therof
would cause the maturity of outstanding balances to be accelerated under such
facility as to Oncor, but not as to TXU Energy.
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
June 30, December 31,
2003 2002
------- -----------
Common stock without par value:
Authorized shares - 100,000,000................................. $2,701 $2,551
Outstanding shares: June 30, 2003 - 65,112,000 and
December 31, 2002 - 67,612,000
Retained earnings.................................................. 235 122
Accumulated other comprehensive loss............................... (23) (24)
----- -----
Total shareholder's equity.................................... $2,913 $2,649
----- -----
7
In January and April 2003, Oncor repurchased a total of 2,500,000
shares of its common stock from US Holdings for $100 million. In May 2003, Oncor
received a capital contribution from US Holdings of $250 million. The Board of
Directors passed resolutions to repurchase an additional 937,500 shares from US
Holdings for $37.5 million in both July and October 2003.
An Oncor mortgage restricts its payment of dividends to the
amount of its retained earnings. Certain other debt instruments and preferred
securities of TXU Corp.'s subsidiaries contain provisions that restrict payment
of dividends during any interest or distribution payment deferral period or
while any payment default exists. At June 30, 2003, there were no restrictions
on the payment of dividends under these provisions.
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 June 30, 2003, the aggregate maximum amount of
residual values guaranteed was approximately $63 million with an estimated
residual recovery of approximately $62 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.
5. SUPPLEMENTARY FINANCIAL INFORMATION
Interest Expense and Other Charges --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Interest............................................................. $ 74 $ 65 $ 153 $ 125
Amortization of debt discounts and issuance costs.................... 1 2 4 5
Allowance for borrowed funds used during construction and capitalized (1) (2) (2) (3)
interest............................................................. --- --- --- ---
Total interest expense and Other charges.................... $ 74 $ 65 $ 155 $ 127
--- --- --- ---
Other Income and Other Deductions -- Other income and other
deductions consist of several individually immaterial items.
8
Regulatory Assets and Liabilities --
June 30, December 31,
2003 2002
------- -----------
Regulatory Assets
Generation-related regulatory assets subject to securitization.............. $ 1,652 $ 1,652
Securities reacquisition costs.............................................. 124 124
Recoverable deferred income taxes-- net..................................... 78 76
Other regulatory assets..................................................... 99 46
------ -------
Total regulatory assets................................................ 1,953 1,898
------ -------
Regulatory Liabilities
Liability related to excess mitigation...................................... 91 170
Investment tax credit related and protected excess deferred taxes........... 92 98
------ ------
Total regulatory liabilities........................................... 183 268
------ ------
Net regulatory assets.................................................. $ 1,770 $ 1,630
------ ------
Included above are assets of $1.8 billion at June 30, 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 the third quarter of 2003
and the first half of 2004 pursuant to the regulatory Settlement Plan. All other
regulatory assets have a remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of June 30, 2003 was $41
million related to nuclear decommissioning liabilities.
Restricted Cash -- As of June 30, 2003, all $210 million of the net
proceeds from Oncor's issuance of senior secured notes in December 2002, held
in trust at December 31, 2002, had been used to repay interest and principal of
First Mortgage Bonds of Oncor due March and April 2003.
Accounts Receivable --Accounts receivable at June 30, 2003 and
December 31, 2002 of $354 million and $275 million (including amounts due from
affiliates) included unbilled revenues of $98 million and $97 million,
respectively. At June 30, 2003 and December 31, 2002, accounts receivable are
stated net of allowance for uncollectible accounts of $2 million and $1 million,
respectively.
Intangible Assets -- SFAS 142, "Goodwill and Other Intangible
Assets," became effective for Oncor on January 1, 2002. SFAS 142 requires the
discontinuance of goodwill amortization and additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
As of June 30, 2003 As of December 31, 2002
------------------------------ -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------- ---
Amortized intangible assets
(included in property, plant
and equipment):
Capitalized software.............. $148 $ 62 $ 86 $148 $ 53 $ 95
Land easements.................... 160 55 105 168 52 116
--- --- --- --- --- ---
Total....................... $308 $117 $191 $316 $105 $211
--- --- --- --- --- ---
Amortization expense for intangible assets was $12 million and $10
million for the six months ended June 30, 2003 and 2002, respectively.
Oncor's unamortized intangible assets consist of goodwill of $25
million, reported in investments on the balance sheet.
9
Property, Plant and Equipment -- At June 30, 2003 and December 31,
2002, property, plant and equipment of $6.2 billion and $6.1 billion is stated
net of accumulated depreciation and amortization of $3.2 billion and $3.0
billion, respectively.
As of June 30, 2003, substantially all of Oncor's property, plant and
equipment was pledged as collateral for Oncor's first mortgage bonds and senior
secured notes.
Derivative Financial Instruments and Hedging Activities -- During
2003, Oncor has not utilized hedging instruments, although Oncor may enter into
hedges in the future. During 2002, Oncor's hedges matched the terms of the
underlying financing transaction. As a result, Oncor experienced no hedge
ineffectiveness during the six months ended June 30, 2003 or 2002.
As of June 30, 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 amortization
of the value of terminated interest payment hedges over the next twelve months.
Affiliate Transactions -- The following represent significant
affiliate transactions of Oncor:
o Oncor records revenue from TXU Energy for electricity delivery fees.
For the three months ended June 30, 2003 and 2002, these revenues were
$349 million and $397 million, respectively. For the six months ended
June 30, 2003 and 2002, these revenue were $726 million and $813
million, respectively.
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 June 30, 2003 and 2002, this interest income totaled $12
million and $5 million, respectively. For the six months ended June 30,
2003 and 2002, this interest income totaled $24 million and $11
million, respectively.
o Under terms of the 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 receivable from TXU Energy that will be
extinguished as Oncor pays the related income taxes.
o Oncor has a note receivable from TXU Energy related to the excess
mitigation credit established in accordance with the Settlement
Plan. Oncor has implemented the $350 million credit, plus interest,
as a credit applied to delivery fees billed to REPs,including TXU
Energy, for a two-year period ending December 31, 2003. At June 30,
2003, the note receivable balance was $71 million. The principal and
interest payments on the note receivable from TXU Energy reimburse
Oncor for the credit applied to receivables from REPs. For the three
months ended June 30, 2003 and 2002, the principal payments received
on the note receivable totaled $47 million and $33 million,
respectively and the interest income totaled $2 million and $6 million,
respectively. For the six months ended June 30, 2003 and 2002, the
principal payments received on the note receivable
totaled $99 million and $46 million, respectively and the interest
income totaled $5 million and $12 million, respectively.
o Oncor charges TXU Gas Company, a subsidiary of TXU Corp., for customer
and administrative services. For the three months ended June 30, 2003
and 2002, these charges totaled $7 million each quarter. For the six
months ended June 30, 2003 and 2002, these charges totaled $15 million
and $14 million, respectively, and are largely reported as a reduction
in operation and maintenance expenses.
o Average daily short-term advances from affiliates for the three months
ended June 30, 2003 and 2002, were $142 million and $1.2 billion,
respectively. Interest expense incurred on the advances was $1 million
and $9 million, respectively, and the weighted average interest rates
for the respective periods were 3.07% and 2.33%. Average daily
short-term advances from affiliates for the six months ended June 30,
2003 and 2002 were $136 million and $1.4 billion, respectively.
Interest expense incurred on the advances was $2 million and $21
million, respectively, and the weighted average interest rates for the
respective periods were 2.7% and 3.04%.
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 June 30,
2003 and 2002, these costs totaled $27 million and $37 million,
respectively. For the six months ended June 30, 2003 and 2002, these
costs totaled $55 million and $71 million, respectively and are
included in operation and maintenance expense.
10
INDEPENDENT ACCOUNTANTS' REPORT
Oncor Electric Delivery Company:
We have reviewed the accompanying condensed consolidated balance sheet of Oncor
Electric Delivery Company and subsidiaries (Oncor) as of June 30, 2003, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and six-month periods ended June 30, 2003 and 2002, and the
condensed statements of consolidated cash flows for the six-month periods ended
June 30, 2003 and 2002. These financial statements are the responsibility of
Oncor's management.
We conducted our reviews 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 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 reviews, 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
August 12, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Oncor is a wholly-owned subsidiary of US Holdings, which is a
wholly-owned subsidiary of TXU Corp.
Oncor is a regulated electricity T&D company principally engaged in
providing delivery services to REPs that sell power in the north-central,
eastern and western parts of Texas. A majority of Oncor's revenues represent
fees for delivery services provided to TXU Energy, a wholly-owned subsidiary of
US Holdings. For the six months ended June 30, 2003, such affiliated revenues
represented 73% of Oncor's revenues.
Oncor is managed as an integrated business; consequently, there are no
separate reportable business segments.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Operating statistics
Delivered electricity volumes (gigawatt hours)............ 24,378 26,232 48,286 49,818
Electric points of delivery (end of period and in thousands) 2,909 2,887
Operating revenues (million of dollars):
Affiliated - TXU Energy.............................. $ 349 $ 397 $ 726 $ 813
Non-affiliated....................................... 137 103 266 181
------ ------ ------ ------
Total ............................................... $ 486 $ 500 $ 992 $ 994
------ ------ ------ ------
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
Operating revenues decreased $14 million, or 3%, to $486 million in
2003. The decrease reflected higher unbilled revenues in 2002 resulting from
billing issues associated with the transition to competition, as previously
disclosed. Delivered electricity volumes for the year 2003 are expected to grow
2% over 2002 levels. The revenue decline was partially offset by $8 million in
increased disconnect/reconnect fees due to new POLR rules in 2003 and greater
competition-related customer switching activities and $2 million in higher
transmission revenues due to increased tariffs. Increased wholesale transmission
rates approved by the Commission and effective in May 2003 and a related
increase in distribution tariffs, expected to be approved by the Commission in
the third quarter of 2003, are expected to result in an estimated $44 million in
incremental revenues on an annualized basis.
Operation and maintenance expenses increased by $1 million, or 1%, to
$190 million in 2003. The increase reflected higher transmission costs paid to
other utilities, partially offset by lower employee-related and outside
consulting expenses arising from cost savings initiatives implemented in late
2002.
Depreciation and amortization increased $1 million, or 2%, to $68
million. The increase reflects investments in delivery facilities to support
growth and normal replacements of equipment.
Taxes other than income rose $1 million, or 1%, to $93 million in 2003
primarily due to an increase in state franchise taxes and ad valorem taxes,
partially offset by a decline in local gross receipts taxes due to lower
revenues on which such taxes are based.
Interest income increased $3 million in 2003 reflecting a $7 million
increase in the reimbursement from TXU Energy for higher carrying costs on
regulatory assets, partially offset by $4 million in lower interest from TXU
Energy on the excess mitigation credit note receivable due to principal
repayments. See discussion below regarding higher average interest rates.
12
Interest expense and other charges increased by $9 million, or 14%, to
$74 million in 2003. Of the change, $7 million was due to higher average
interest rates on borrowings and $6 million was due to higher average
borrowings, partially offset by $4 million less interest passed to REPs related
to the excess mitigation credit. The increase in average interest rates
reflected the refinancing of affiliate borrowings with higher rate long-term
debt issuances.
Income tax expense was $23 million in 2003 (including $18 million
related to operating income and $5 million related to nonoperating income). The
effective tax rate decreased 3 points to 30.7% in 2003 from 33.7% in 2002, due
primarily to comparable amortization of investment tax credits and other items
for tax purposes on lower pre-tax earnings.
Net income decreased $13 million, or 20%, to $52 million primarily due
to lower revenues and higher interest expense. Net pension and postretirement
benefit costs reduced net income by $8 million in 2003 and $6 million in 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
Oncor's operating revenues decreased $2 million to $992 million in
2003. The decrease reflected higher unbilled revenues in 2002 resulting from
billing issues associated with the transition to competition, as previously
disclosed. Delivered electricity volumes for the year 2003 are expected to grow
2% over 2002 levels. The revenue decline was partially offset by $14 million in
increased disconnect/reconnect fees due to the new POLR rules and greater
competition-related customer switching activities, $3 million in nonrecurring
billing settlements for tower space leases with telecommunications companies and
pole contract rentals from cable and telecommunication companies, and $2 million
in higher transmission revenues due to increased tariffs effective in May 2003.
Increased wholesale transmission rates approved by the Commission and effective
in May 2003 and a related increase in distribution tariffs, expected to be
approved by the Commission in the third quarter of 2003, are expected to result
in an estimated $44 million in incremental revenues on an annualized basis.
Operation and maintenance expenses increased by $11 million, or 3%,
to $378 million in 2003, driven by higher transmission costs paid to other
utilities and higher pension and other postretirement benefit costs, partially
offset by the lower employee-related and outside consulting expenses from cost
savings initiatives in late 2002.
Depreciation and amortization increased $6 million, or 5%, to $137
million. The increase reflects investments in delivery facilities to support
growth and normal replacements of equipment.
Taxes other than income decreased $2 million, or 1%, to $185 million
in 2003 due primarily to lower local gross receipts taxes, partially offset by
increases in state franchise taxes and ad valorem taxes.
Interest income increased $6 million in 2003 reflecting a $13 million
increase in the reimbursement from the TXU Energy segment for higher carrying
costs on regulatory assets, partially offset by $7 million less interest on the
excess mitigation credit note receivable. See discussion below regarding higher
average interest rates.
Interest expense and other charges increased by $28 million, or 22%,
to $155 million in 2003. Of the change, $24 million was due to higher average
interest rates on borrowings and $11 million was due to higher average
borrowings, partially offset by $7 million less interest passed to REPs related
to the excess mitigation credit. The change in average interest rates reflected
the refinancing of affiliate borrowings with higher rate long-term debt
issuances.
Income tax expense was $54 million in 2003 (including $43 million
related to operating income and $11 million related to nonoperating income). The
effective tax rate decreased 1 point to 32.3% in 2003 from 33.3% in 2002, due to
comparable amortization of investment tax credits and other items for tax
purposes on lower pre-tax earnings.
Net income decreased $23 million, or 17%, to $113 million in 2003,
primarily due to higher interest expense and operating and maintenance costs.
Net pension and postretirement benefit costs reduced net income by $16 million
in 2003 and $9 million in 2002.
COMPREHENSIVE INCOME
For the six months ended June 30, 2003, Oncor has not utilized cash
flow hedges, although Oncor may enter into such hedges in the future. As a
result, there were no changes in fair value of derivatives effective as cash
flow hedges in 2003. For the three and six months ended June 30, 2002, changes
in the fair value of derivatives effective as cash flow hedges reflected losses
of $40 million ($26 million after-tax) and $39 million ($25 million after-tax),
respectively. Losses in 2002 were due to cash flow hedges of certain future
forecasted interest payments, and such amounts will be realized in income as the
interest payments occur over a period of up to thirty years. Although the hedges
were terminated in 2002, the interest payments are expected to be made as
forecasted.
13
FINANCIAL CONDITION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in the 2002 Form 10-K. No significant changes or events that might
affect the financial condition of Oncor have occurred subsequent to year-end
other than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities for the six
months ended June 30, 2003 were $117 million, compared to $69 million used by
operating activities for the six months ended June 30, 2002. The improved cash
flow performance of $186 million was driven by favorable working capital
(accounts receivable, inventory, and accounts payable) changes of $243 million,
reflecting the unfavorable effect in the prior year of the start-up of billing
REPs for T&D charges effective January 1, 2002. This improvement was partially
offset by $53 million in higher excess mitigation credits passed to REPs in
2003, the effect of which was offset in financing costs through collections on
the related note receivable from TXU Energy.
Cash flows provided by financing activities were $87 million in 2003,
compared to $339 million in 2002. There were no issuances of debt in 2003. In
2002, Oncor issued $1.2 billion in long-term debt and had net issuances of $295
million in commercial paper. Debt retirements totaled $321 million in 2003
compared to $352 million in 2002. Repayment of advances from affiliates required
$47 million in 2003 compared to $780 million in 2002. In 2003, an equity
contribution from US Holdings provided $250 million in cash, and a redemption
deposit (restricted cash) of $210 million was used to fund debt retirements.
Oncor collected $99 million in 2003 from TXU Energy on the note receivable
related to the excess mitigation credit compared to $46 million in 2002. Also in
2003, Oncor repurchased $100 million of common stock held by TXU US Holdings
compared to $50 million in 2002.
Cash flows used in investing activities, which consisted primarily of
capital expenditures, totaled $239 million and $304 million for the six months
ended June 30, 2003 and 2002, respectively. Other investing activities in 2003
included a cash source of $6 million, primarily reflecting net proceeds from
retirements of property, plant and equipment. Other investing activities in 2002
of $39 million in cash used reflected termination of out-of-the-money cash flow
hedges related to financing activities. The decline in value of the hedges was
due to lower interest rates.
Credit Facilities -- At June 30, 2003, Oncor and TXU Energy had
a $450 million revolving credit facility that matures on February 25, 2005. This
facility is used for working capital and other general corporate purposes,
including letters of credit, and replaced 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 this facility. As of June 30, 2003, there were $21
million of outstanding letters of credit issued by TXU Energy, but no cash
borrowings under this facility.
14
This facility, as well as others available to US Holdings, will
provide back-up for any future issuance of commercial paper by Oncor and TXU
Energy. At June 30, 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 $13
million and $60 million outstanding as of June 30, 2003 and December 31, 2002,
respectively. The weighted average interest rates on short-term borrowings at
June 30, 2003 and December 31, 2002, were 3.07% and 2.45%, respectively.
Long-Term Debt -- During the six months ended June 30, 2003, Oncor
redeemed or made scheduled principal payments on long-term debt as follows:
First mortgage bonds........................... $ 306
Medium term notes.............................. 15
---
Total......................................... $ 321
---
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 June 30, 2003, TXU Energy (through
certain subsidiaries), Oncor and 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. The June 30, 2003 financial statements
reflect the sale of $64 million face amount of Oncor's receivables to TXU
Receivables Company under the program in exchange for cash of $30 million and
$34 million in subordinated notes, with $0.3 million of losses on sales for the
six months ended June 30, 2003 that principally represents 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 increased $12 million in the six month period ended
June 30, 2003 primarily due to reserve requirements that were reduced through a
temporary amendment in recognition of improving collection trends. Funding
increases or decreases under the program are reflected as cash provided by or
used in operating activities.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, 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 TXU Corp.'s subsidiaries' 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 consolidated
balance sheet.
In August 2003, the program was amended to extend the term to July
2004, as well as to extend the period providing temporarily higher delinquency
and default compliance ratios through December 31, 2003. The program was also
amended to coincide with the credit facilities' covenants by removing investment
grade credit ratings as a requirement of an eligible originator and substituting
maintenance of fixed charge coverage ratios and debt to capital ratios as
requirements of an eligible originator. In June 2003, the program was amended to
provide temporarily higher delinquency and default compliance ratios and
temporary relief from the loss reserve formula. The June amendment reflected the
billing and collection delays previously experienced as a result of new systems
and processes in TXU Energy and ERCOT for clearing customers' switching and
billing data upon the transition to competition.
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
15
be sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) each of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
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 thresholds apply to the entire portfolio of
sold receivables, not separately to the receivables of each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months 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 customers' 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 POLR rules by the Commission and strengthened credit and collection policies
and practices are expected to bring the ratios into consistent compliance with
the program.
Under the receivables sale program, all the originators are required
to maintain specified fixed charge coverage and leverage ratios (or supply a
parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate. Prior to the August 2003 amendment
extending the program, originator eligibility was predicated on the maintenance
of an investment grade credit rating.
Credit Ratings of TXU Corp. and certain US Subsidiaries -- The
current credit ratings for TXU Corp., US Holdings, Oncor and TXU Energy are
presented below:
TXU Corp. US Holdings Oncor TXU Energy
----------------- ----------------- --------- ----------------
(Senior Unsecured) (Senior Unsecured) (Secured) (Senior Unsecured)
S&P BBB- BBB- BBB BBB
Moody's Ba1 Baa3 Baa1 Baa2
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 currently maintains
a stable outlook for each such entity. 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 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 Oncor 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 June 30, 2003, Oncor and its
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of Oncor contain provisions
that are specifically affected by changes in credit ratings and also include
cross default provisions. The material cross default provisions are described
below.
Other agreements of Oncor, including some of 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 Oncor or
its subsidiaries.
16
Cross Default Provisions
------------------------
Certain financing arrangements of 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.
A default by TXU Energy or Oncor or any subsidiary thereof in respect
of indebtedness in a principal amount in excess of $50 million or more would
result in a cross default for such party under the TXU Energy/Oncor $450
million revolving credit facility, a default by TXU Energy or any subsidiary
thereof would cause the maturity of outstanding balances to be accelerated under
such facility as to Oncor, but not as to Energy.
A default by TXU Corp. on indebtedness of $50 million or more would
result in a cross default under the new $500 million five-year revolving credit
facility.
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.
Capitalization -- The capitalization ratios of Oncor at June 30,
2003, consisted of 58% ($3,981 million) long-term debt, less amounts due
currently and 42% ($2,913 million) common stock equity.
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 as discussed above. The
Settlement provides that there can be an initial issuance of securitization
bonds in the amount of up to $500 million, expected to be completed in the third
quarter of 2003, followed by a second issuance of the remainder expected in the
first half of 2004. The Settlement resolves all issues related to regulatory
assets and liabilities.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables.
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
Settlement Plan -- On December 31, 2001, US Holdings filed the
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 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, credit (reduction) applied to delivery fees billed
to REPs applied over a two-year period ending December 31, 2003. The actual
amount of this credit is expected to exceed $350 million as delivery volumes are
anticipated to be higher than initially estimated. Oncor's earnings and cash
flows are 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 as discussed above. The
Settlement provides that there can be an initial issuance of securitization
bonds in the amount of up to $500 million, expected to be completed in the third
quarter of 2003, followed by a second issuance of the remainder expected in the
first half of 2004. The Settlement resolves all issues related to regulatory
assets and liabilities.
Retail Clawback -- If 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
17
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 delivery fees billed 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 1, 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. Oncor's earnings and cash flows will
be unaffected by the retail clawback as it is funded by TXU Energy.
T&D utilities in Texas are required to file a progress report with
the Commission when over 35% of the residential or small commercial
price-to-beat customer load that existed in the T&D utility's service territory
prior to the January 1, 2002 onset of customer choice is being served by REPs
other than the T&D utility's affiliated REP.
Accordingly, on June 30, 2003, Oncor reported to the Commission
that, as of May 31, 2003, approximately 37%, of the total historical small
commercial customer load, as adjusted pursuant to Commission rules, in its
service territory was being served by REPs other than TXU Energy.
For purposes of these reports, the Commission rules adjust the
total historical load to remove load for those individual small commercial
customers who now use more than 1,000 kilowatts, and for those customers in
which the aggregate use of all their affiliates under common control is more
than 1,000 kilowatts and have contracted with Oncor's affiliated REP, TXU
Energy. The calculations do not take into account the small commercial load that
TXU Energy has gained outside of the Oncor service territory. Also the report
filed by Oncor does not address the residential category where a significantly
smaller percentage of the load is served by REPs other than TXU Energy.
If the 40% threshold related to the small commercial load is met,
TXU Energy would reassess, and adjust accordingly, the estimated $185 million
accrual it previously recorded, which included amounts related to this customer
category. In addition, TXU Energy would be able to price competitively to this
class of customer.
Transmission rates -- In May 2003, the Commission approved wholesale
transmission rates that are estimated to result in an annual $44 million
increase in Oncor's T&D revenues. Approximately 60% of the increase is
recoverable from Oncor's non-affiliated wholesale transmission customers. The
remaining 40% of the increase will be recoverable from REPs upon an increase
in Oncor's distribution tariffs expected to be approved by the Commission in
the third quarter of 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 2002 Form 10-K and this Form 10-Q, which might significantly alter Oncor's
financial position, results of operations or cash flows.
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:
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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,
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's rates are regulated by the Commission, and 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
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.
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:
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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 US Holdings and Oncor long-term debt
are 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 the 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.
A portion of Oncor's revenues is derived from rates that Oncor
collects from each REP based on the amount of electricity Oncor distributes on
behalf of each such REP. Thus, Oncor's revenues and results of operations are
subject to seasonality, weather conditions and other changes in electricity
usage. In addition, the operation of electricity T&D 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.
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
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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 AFFECT 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 the 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 actual
results to differ materially from those contained in any forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly
different from the information set forth in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk included in the 2002 Form 10-K and is
therefore not presented herein.
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 as of the end of
the current period included in 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. During the most recent fiscal quarter covered by this
quarterly report, there has been no change in Oncor's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, Oncor's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits provided as a part of Part II are:
31(a) Section 302 Certification of Chief Executive Officer.
31(b) Section 302 Certification of Chief Financial Officer.
32(a)* Section 906 Certification of Chief Executive Officer.
32(b)* Section 906 Certification of Chief Financial Officer.
99 Condensed Statements of Consolidated Income - Twelve Months
Ended June 30, 2003.
* Pursuant to Item 601(b)(32)(ii)of Regulation S-K, this certificate is
not being "filed" for purposes of Section 18 of the Securities Act of
1934.
(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)
July 31, 2003 Item 5. Other Events and Regulation
FD Disclosure
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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/ David H. Anderson
-------------------------------
David H. Anderson
Vice President and
Principal Accounting Officer
Date: August 13, 2003
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