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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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, 2004
--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
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2967830
(State of Incorporation) (I.R.S. Employer Identification No.)
500 N. Akard Street, Dallas, TX 75201 (214) 486-2000
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
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 May 10, 2004: 58,237,000 shares, without par value
Oncor Electric Delivery Company meets the conditions set forth in General
Instructions (I) (1) (a) and (b) of Form 10-K and is therefore filing this
report with the reduced disclosure format.
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TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
----
Glossary........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income--
Three Months Ended March 31, 2004 and 2003.......................................... 1
Condensed Statements of Consolidated Cash Flows --
Three Months Ended March 31, 2004 and 2003.......................................... 2
Condensed Consolidated Balance Sheets --
March 31, 2004 and December 31, 2003................................................ 3
Notes to Condensed Financial Statements............................................. 4
Independent Accountants' Report..................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 18
Item 4. Controls and Procedures.................................................................... 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 19
SIGNATURE........................................................................................... 20
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
2003 Form 10-K................................. Oncor Electric Delivery Company's Annual Report on Form 10-K
for the year ended December 31, 2003
Commission..................................... Public Utility Commission of Texas
ERCOT.......................................... Electric Reliability Council
of Texas, the Independent
System Operator and the
regional reliability
coordinator of the various
electricity systems within
Texas
FASB........................................... Financial Accounting
Standards Board, the
designated organization in
the private sector for
establishing standards for
financial accounting and
reporting
FERC........................................... Federal Energy Regulatory Commission
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ Gigawatt-hours
historical service territory................... US Holdings' historical service territory, largely in north
Texas, at the time of entering competition on January 1, 2002
IRS............................................ Internal Revenue Service
Moody's........................................ Moody's Investors Services, Inc.
Oncor.......................................... refers to Oncor Electric Delivery Company, a subsidiary of
US Holdings, or Oncor and its consolidated bankruptcy remote
financing subsidiary, TXU Electric Delivery Transition Bond
Company LLC (formerly Oncor Electric Delivery Transition
Bond Company LLC), depending on context
REP............................................ retail electric provider
S&P............................................ Standard & Poor's, a division of The McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
ii
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Energy..................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on context
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
------- -------
(millions of dollars)
Operating revenues:
Affiliated.................................................. $ 349 $ 377
Nonaffiliated .............................................. 174 129
------ ------
Total operating revenues................................ 523 506
Operating expenses:
Operation and maintenance................................... 189 188
Depreciation and amortization............................... 87 69
Income taxes................................................ 28 25
Taxes, other than income.................................... 92 92
------ ------
Total operating expenses................................ 396 374
------ ------
Operating income .............................................. 127 132
Other income and deductions:
Other income................................................ 2 2
Other deductions............................................ 1 1
Nonoperating income taxes................................... 3 6
Interest income-- affiliates................................... 12 15
Interest expense and related charges........................... 71 81
------ ------
Net income..................................................... $ 66 $ 61
====== ======
CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
------ ------
(millions of dollars)
Net income..................................................... $ 66 $ 61
Other comprehensive income--
Cash flow hedge activity, net of tax effect:
Net change in fair value of derivatives ............. 1 -
------ -------
Total................................................ 1 -
------ -------
Comprehensive income........................................... $ 67 $ 61
====== =======
See Notes to Condensed Financial Statements.
1
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---------- -------
(millions of dollars)
Cash flows -- operating activities:
Net income................................................................... $ 66 $ 61
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 87 71
Deferred income taxes and investment tax credits-- net .................. 39 44
Changes in operating assets and liabilities.................................. (183) (180)
------- -------
Cash provided by (used in) in operating activities......................... 9 (4)
Cash flows -- financing activities:
Retirements/repurchases of debt................................................ (8) (250)
Repurchase of common stock..................................................... (38) (50)
Net change in advances from affiliates......................................... (5) 158
Decrease in note receivable from TXU Energy related to a regulatory liability.. - 52
Redemption deposit applied to debt retirement.................................. - 138
Debt premium, discount, financing and reacquisition expenses................... - (5)
------- -------
Cash provided by (used in) financing activities............................ (51) 43
Cash flows -- investing activities:
Capital expenditures........................................................... (110) (124)
Other.......................................................................... 1 9
------- -------
Cash used in investing activities.......................................... (109) (115)
------- -------
Net change in cash and cash equivalents........................................... (151) (76)
Cash and cash equivalents-- beginning balance...................................... 245 77
------- -------
Cash and cash equivalents-- ending balance........................................ $ 94 $ 1
======= =======
See Notes to Condensed Financial Statements.
2
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 94 $ 245
Restricted cash............................................................ 9 12
Accounts receivable:
Affiliates (principally TXU Energy)..................................... 197 189
All other .............................................................. 61 58
Notes or other receivables due from TXU Energy currently................... 13 13
Materials and supplies inventories-- at average cost ...................... 29 29
Other current assets....................................................... 60 33
--------- ---------
Total current assets.................................................... 463 579
Investments................................................................... 42 44
Property, plant and equipment - net........................................... 6,375 6,333
Notes or other receivables due from TXU Energy................................ 423 423
Regulatory assets - net....................................................... 1,863 1,872
Other noncurrent assets....................................................... 68 65
--------- ---------
Total assets............................................................ $ 9,234 $ 9,316
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates................................................... $ 20 $ 25
Long-term debt due currently............................................... 256 243
Accounts payable - trade................................................... 49 43
Accrued taxes.............................................................. 67 147
Accrued interest........................................................... 73 88
Other current liabilities.................................................. 115 146
--------- ---------
Total current liabilities .............................................. 580 692
Investment tax credits........................................................ 67 68
Accumulated deferred income taxes............................................. 1,449 1,438
Other noncurrent liabilities and deferred credits............................. 287 279
Long-term debt, less amounts due currently.................................... 3,966 3,983
--------- ---------
Total liabilities....................................................... 6,349 6,460
Contingencies (Note 4)
Shareholder's equity (Note 3): Common stock without par value:
Authorized shares - 100,000,000 shares;
Outstanding shares: 59,174,500 shares and
60,112,000 shares..................................................... 2,463 2,501
Retained earnings.......................................................... 446 380
Accumulated other comprehensive loss....................................... (24) (25)
--------- ---------
Total shareholder's equity.............................................. 2,885 2,856
--------- ---------
Total liabilities and shareholder's equity.............................. $ 9,234 $ 9,316
========= =========
See Notes to Condensed Financial Statements.
3
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
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 transmission and distribution 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 represented
fees for delivery services provided to TXU Energy. For the three months ended
March 31, 2004, such affiliated revenues represented 67% 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 2003 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 SEC. Because the condensed 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 2003 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 dollars unless otherwise indicated.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first quarter of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. FASB Staff Position 106-1,
issued in January 2004, allowed for, but did not require, deferral of the
accounting for the effects of the Medicare Act. TXU Corp. elected not to defer
accounting for the federal subsidy under the Medicare Act and recognized a $1.9
million net reduction in postretirement benefit expense in the 2003 financial
statements. For the three months ended March 31, 2004, the effect of adoption of
the Medicare Act was a reduction of approximately $3 million in Oncor's
allocated postretirement benefit costs.
2. FINANCING ARRANGEMENTS
Credit Facilities-- At March 31, 2004, TXU Corp. and its US subsidiaries
had credit facilities (some of which provide for long-term borrowings) as
follows:
At March 31, 2004
-----------------
Letters
Expiration Authorized Facility of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
-------- ---- --------- ----- ------ ---------- ------------
Five-Year Revolving Credit February 2005 US Holdings $ 1,400 $ -- $ -- $1,400
Facility
Revolving Credit Facility February 2005 TXU Energy, 450 -- 75 375
Oncor
Three-Year Revolving Credit May 2005 US Holdings 400 -- 100 300
Facility
Five-Year Revolving Credit August 2008 TXU Corp. 500 462 -- 38
Facility ------- ------ ------ ------
Total US $ 2,750 $ 462 $ 175 $2,113
======= ====== ====== ======
4
TXU Corp.'s $500 million 5-year revolving credit facility provides for up
to $500 million in letters of credit or up to $250 million of loans ($500
million in the aggregate). To the extent that capacity is available under this
facility, it may be made available to US Holdings, TXU Energy or Oncor for
borrowings, letters of credit or other purposes.
The US Holdings, TXU Energy and Oncor facilities provide back-up for any
future issuance of commercial paper by TXU Energy or Oncor. At March 31, 2004,
there was no such outstanding commercial paper.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of March 31, 2004, the maximum
amount of undivided interests that could be sold by TXU Receivables Company was
$600 million.
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities. The
program fees (losses on sale), which consist primarily of interest costs on the
underlying financing, were less than $1 million for each of the three-month
periods ending March 31, 2004 and 2003 and approximated 2.1% and 3.6% for the
first quarter of 2004 and 2003, respectively, of the average funding under the
program on an annualized basis; these fees represent the net incremental costs
of the program to Oncor and are reported in operation and maintenance expenses.
The March 31, 2004 balance sheet reflects $84 million face amount of trade
accounts receivable reduced by $46 million of undivided interests sold by TXU
Receivables Company. Funding under the program increased $2 million for the
three months ended March 31, 2004. Funding under the program for the three
months ended March 31, 2003 decreased $3 million. Funding increases or decreases
under the program are reflected as operating cash flow activity in the statement
of cash flows. The carrying amount of the retained interests in the accounts
receivable approximated fair value due to the short-term nature of the
collection period.
Activities of TXU Receivables Company related to Oncor for the three
months ended March 31, 2004 and 2003 were as follows:
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
(millions of dollars)
Cash collections on accounts receivable...................................... $ 134 $ 80
Face amount of new receivables purchased..................................... (137) (78)
Increase (decrease) in subordinated notes payable............................ 1 1
------- ------
Oncor's operating cash flows (provided) used under the program.......... $ (2) $ 3
======= ======
Upon termination of the program, cash flows to Oncor would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of 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
5
undivided interests of the funding entities 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) all 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 funding entities 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 competition. 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 largely resolved. Strengthened credit
and collection policies and practices have brought the ratios into consistent
compliance with the program requirement.
Under terms of 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.
Long-Term Debt -- At March 31, 2004 and December 31, 2003, the long-term
debt of Oncor and its consolidated subsidiary consisted of the following:
March 31, December 31,
2004 2003
---- ----
Oncor
- -----
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
7.625% 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 discount............................................................. (26) (30)
TXU Electric Delivery Transition Bond Company LLC (a)
- -------------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through February
15, 2007......................................................................... 95 103
4.030% Fixed Series 2003 Bonds due in bi-annual installments through February
15, 2010......................................................................... 122 122
4.950% Fixed Series 2003 Bonds due in bi-annual installments through February
15, 2013......................................................................... 130 130
5.420% Fixed Series 2003 Bonds due in bi-annual installments through August 15,
2015............................................................................. 145 145
------- -------
Total Oncor.................................................................. 4,222 4,226
Less amount due currently........................................................... 256 243
------- -------
Total long-term debt................................................................ $ 3,966 $ 3,983
======= =======
(a) These bonds are nonrecourse to Oncor.
6
3. SHAREHOLDER'S EQUITY
In January 2004, Oncor repurchased 937,500 shares of its common stock from
US Holdings for $37.5 million. In April 2004, Oncor repurchased an additional
937,500 shares of its common stock from US Holdings for $37.5 million.
The legal form of cash distributions to US Holdings has been common stock
repurchases; however, for accounting purposes, these cash distributions are
recorded as a return of capital.
The Oncor mortgage restricts its payment of dividends to the amount of its
retained earnings. Certain debt instruments of Oncor contain provisions that
restrict payment of dividends during any interest payment deferral period or
while any payment default exists. At March 31, 2004, there were no restrictions
on the payment of dividends under these provisions.
4. CONTINGENCIES
Guarantees -- Oncor has entered into contracts that contain guarantees to
outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Residual value guarantees in operating leases -- Oncor is the lessee under
various operating leases, entered into prior to January 1, 2003, that obligate
it to guarantee the residual values of the leased facilities. At March 31, 2004,
the aggregate maximum amount of residual values guaranteed was approximately $54
million with an estimated residual recovery of approximately $54 million. The
average life of the lease portfolio is approximately four years.
Surety bonds -- Oncor has outstanding surety bonds of approximately $22
million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
General -- Oncor is involved in various other legal and administrative
proceedings in the normal course of business 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.
5. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Other Deductions -- Other income and other deductions
consist of several individually immaterial items.
Interest Expense and Related Charges --
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Interest .............................................................. $ 70 $ 79
Amortization of debt discounts and issuance costs...................... 2 3
Allowance for borrowed funds used during construction and capitalized
interest ............................................................ (1) (1)
----- -----
Total interest expense and related charges .................. $ 71 $ 81
===== =====
Retirement Plan And Other Postretirement Benefits - Oncor is a
participating employer in the TXU Retirement Plan, a defined benefit pension
plan sponsored by TXU Corp. Oncor also participates with TXU Corp. and other
affiliated subsidiaries of TXU Corp. to offer health care and life insurance
benefits to eligible employees and their eligible dependents upon the retirement
of such employees. The allocated net periodic pension cost and net periodic
postretirement benefits cost other than pensions applicable to Oncor were $13
million and $12 million for the three months ended March 31, 2004 and 2003,
respectively.
7
At March 31, 2004, Oncor estimates that its total contributions to the
pension plan and other postretirement benefit plans for the remainder of 2004
will not be materially different than previously disclosed in the 2003 Form
10-K.
Regulatory Assets and Liabilities --
March 31, December 31,
2004 2003
--------- -----------
Regulatory Assets
Generation-related regulatory assets recoverable by securitization bonds.... $ 1,644 $ 1,654
Securities reacquisition costs.............................................. 123 121
Recoverable deferred income taxes-- net..................................... 97 96
Other regulatory assets..................................................... 94 95
------- -------
Total regulatory assets................................................ 1,958 1,966
------- -------
Regulatory Liabilities
Investment tax credit and protected excess deferred taxes................... 86 88
Over collection of transition bond (securitization) revenues................ 9 6
------- ------
Total regulatory liabilities........................................... 95 94
------- ------
Net regulatory assets.................................................. $ 1,863 $1,872
======= ======
Included above are assets of $121 million at March 31, 2004 and December
31, 2003 that are earning a return. The regulatory assets, other than those
subject to securitization, have a remaining recovery period of 15 to 47 years.
Included in other regulatory assets as of March 31, 2004 was $29 million
related to nuclear decommissioning liabilities.
Restricted Cash -- At March 31, 2004, TXU Electric Delivery Transition
Bond Company LLC had $9 million of restricted cash, representing collections
from customers that secure its securitization bonds and may be used only to
service its debt and pay its expenses. Restricted cash reported in investments
on the balance sheet as March 31, 2004 included $10 million restricted to
payment of trustee fees and expenses associated with the securitization bonds.
Accounts Receivable -- At March 31, 2004 and December 31, 2003, accounts
receivable are stated net of allowance for uncollectible accounts of $2 million.
During each of the three months ended March 31, 2004 and 2003, Oncor had no bad
debt expense or write-offs. Allowances related to receivables sold are reported
in other current liabilities and totaled $1 million at March 31, 2004 and
December 31, 2003.
Accounts receivable at March 31, 2004 and December 31, 2003 included
unbilled revenues of $95 million and $96 million, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of March 31, 2004 As of December 31, 2003
------------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets
Capitalized software.............. $ 167 $ 78 $ 89 $ 160 $ 72 $ 88
Land easements.................... 168 58 110 165 58 107
----- ----- ----- ------ ------- ------
Total....................... $ 335 $ 136 $ 199 $ 325 $ 130 $ 195
===== ===== ===== ===== ===== =====
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Oncor has no intangible assets (other than
goodwill) that are not amortized.
8
Aggregate amortization expense for intangible assets for the three months
ended March 31, 2004 and 2003 was $6 million.
Property, Plant and Equipment -- At March 31, 2004 and December 31, 2003,
property, plant and equipment was stated net of accumulated depreciation and
amortization of $3.4 billion and $3.3 billion, respectively.
As of March 31, 2004, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.4 billion) was
pledged as collateral for Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- 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, 2004 or 2003. These hedges relate to financing
transactions.
As of March 31, 2004, 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 and
other miscellaneous revenues, which totaled $349 million and $377
million for the three months ended March 31, 2004 and 2003,
respectively. These amounts included $100 thousand and $224 thousand
for the three months ended March 31, 2004 and 2003, respectively,
pursuant to a transmission maintenance agreement.
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, 2004 and 2003, this interest income totaled $12
million.
o The incremental income taxes Oncor will pay on the increased delivery
fees to be charged to Oncor's customers related to the securitization
bonds will be reimbursed by TXU Energy. Therefore, at both March 31,
2004 and December 31, 2003, Oncor's financial statements reflect a $436
million receivable from TXU Energy that will be extinguished as Oncor
pays the related income taxes.
o For the three months ended March 31, 2003, the principal payments
received on the note receivable from TXU Energy related to the excess
mitigation credit totaled $52 million and the interest income totaled
$3 million.
o Average daily short-term advances from affiliates for the three months
ended March 31, 2004 and 2003 were $35 and $130 million, respectively,
and the weighted average interest rate for the respective periods was
2.86% and 2.33%.
o TXU Business Services, 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, 2004 and 2003, these costs totaled $28 million
and are reported in operation and maintenance expenses.
o Oncor charges TXU Gas for meter reading and certain customer and
administrative services at cost. For the three months ended March 31,
2004 and 2003, these charges totaled $5 million and $8 million,
respectively, and are largely reported as a reduction in operation and
maintenance expenses.
o Oncor has recorded a regulatory asset and a corresponding noncurrent
affiliate payable to TXU Energy for the Asset Retirement Obligation
(ARO) pursuant to SFAS 143, related to the retirement and
decommissioning of nuclear generation plant assets. Periodically,
regulatory proceedings are conducted to review any over or
under-recovered decommissioning costs for the purpose of adjusting
Oncor's distribution rates. As of March 31, 2004, the balance of the
ARO nuclear regulatory asset was $29 million.
9
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 March 31, 2004, and the
related condensed statements of consolidated income, comprehensive income, and
cash flows for the three-month periods ended March 31, 2004 and 2003. 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, 2003, 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 March 11, 2004, 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, 2003, 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 14, 2004
<
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Oncor is a wholly-owned subsidiary of US Holdings, which is a wholly-owned
subsidiary of TXU Corp. Oncor is a regulated electricity transmission and
distribution 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 represented fees for delivery services provided to
TXU Energy. For the three months ended March 31, 2004, such affiliated revenues
represented 67% of Oncor's revenues. Oncor is managed as an integrated business;
consequently, there are no separate reportable business segments.
Issuance of Securitization Bonds -- Upon issuance of the remaining $790
million in securitization bonds, expected in the second quarter of 2004, under a
financing order issued by the Commission, Oncor expects to record an estimated
extraordinary gain of approximately $10 million after-tax. The gain would arise
because of an increase in the carrying value of the regulatory asset subject to
securitization due to the effect of higher interest rates on amounts to be
recovered from REPs through delivery fee surcharges.
RESULTS OF OPERATIONS
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein are stated in
millions of US dollars unless otherwise indicated.
Oncor is managed as an integrated business; consequently, there are no
separate reportable business segments.
Operating Data
Three Months Ended March 31,
----------------------------
2004 2003
-------- ---------
Operating statistics - volumes:
Electric energy delivered (GWh).................................... 23,631 23,908
Reliability statistics:
System Average Interruption Duration Index (SAIDI) (non-storm)(a).. 86.28 86.90
System Average Interruption Frequency Index (SAIFI) (non-storm)(a). 1.26 1.32
Customer Average Interruption Duration Index (CAIDI) (non-storm)(a) 68.46 65.66
Electricity points of delivery (end of period and in thousands):
Electricity distribution points of delivery (based on number of
meters)(b)......................................................... 2,942 2,914
Operating revenues (million of dollars):
Electricity transmission and distribution:
Affiliated - TXU Energy....................................... $ 349 $ 377
Non-affiliated................................................ 174 129
-------- --------
Total ..................................................... $ 523 $ 506
======== ========
Weather (average for service territory) (c) Percent of normal:
Heating degree days........................................ 88.6% 106.6%
- --------------------------
(a) SAIDI is the number of minutes the average customer is out of electric
service in a year. SAIFI is the number of times a year that the average
customer experiences an interruption to electric service; and CAIDI is the
duration in minutes of the average interruption to electric service.
(b) Includes lighting sites, primarily guard lights, for which TXU Energy is the
REP but are not included in TXU Energy's customer count. Such sites totaled
99,591 and 104,851 at March 31, 2004 and 2003, respectively.
(c) Weather data is obtained from Meteorlogix, an independent company that
collects weather data from reporting stations of the National Oceanic and
Atmospheric Administration (a federal agency under the US Department of
Commerce).
11
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
Operating revenues increased $17 million, or 3%, to $523 million in 2004.
Higher tariffs provided $29 million of this increase, reflecting delivery fee
surcharges associated with the issuance of securitization bonds in August 2003
($14 million), transmission rate increases approved in 2003 ($9 million) and an
increase in distribution tariffs to recover higher transmission costs ($6
million). Revenue growth also included $5 million in increased
disconnect/reconnect fees, reflecting disconnections initiated by REPs on
uncollected accounts and increased consumer switching due to competitive
activity. A 1% decline in electricity volumes delivered in 2004 resulted in a
$17 million decrease in revenue, reflecting lower consumption by residential
end-users due to weather, usage efficiencies and other factors.
Operation and maintenance cost increased $1 million to $189 million in
2004. There were no material increases or decreases within the expense
categories comprising this line item.
Depreciation and amortization increased $18 million, or 26%, to $87
million. The increase reflects $14 million in amortization of regulatory assets
associated with the issuance of securitization bonds and $4 million in higher
depreciation due to investments in delivery facilities to support growth and
normal replacements of delivery facilities.
Interest income declined $3 million to $12 million in 2004 reflecting a
decrease of $3 million in the reimbursement of interest from TXU Energy on the
excess mitigation credit note that was fully paid in 2003.
Interest expense and other charges decreased by $10 million, or 12%, to
$71 million in 2004 reflecting $4 million from lower average interest rates, due
to refinancing of long-term debt with lower rate debt issuances, $3 million from
lower average borrowings and $3 million less interest paid to REPs as the excess
mitigation credit ceased at the end of 2003.
Income tax expense was $31 million in 2004 (including $28 million related
to operating income and $3 million related to nonoperating income), representing
an effective tax rate of 32.0% in 2004, which was lower than the 33.7% effective
rate in 2003. The decrease primarily reflected the effect on postretirement
benefit expense of a non-taxable Medicare subsidy in 2004 ($3 million for the
quarter).
Net income increased $5 million, or 8%, to $66 million reflecting higher
disconnect/reconnect fees and lower net interest expense. Net pension and
postretirement benefit costs reduced net income by $4 million in 2004 and $5
million in 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows -- Cash flows provided by operating activities for the three
months ended March 31, 2004 were $9 million, compared to $4 million used by
operating activities for the three months ended March 31, 2003. The improved
cash flow performance of $13 million was driven by higher cash earnings (net
income adjusted for depreciation and deferred taxes) of $16 million.
Cash flows used in financing activities were $51 million in 2004, compared
to $43 million provided in 2003. Increases in advances and notes receivable from
affiliates in 2003 totaled $210 million. Retirements of debt totaled $8 million
in 2004 and $112 million, net of redemption deposit payments (restricted cash)
in 2003. Oncor repurchased $38 million of common stock held by US Holdings in
2004 compared to $50 million in 2003.
Cash flows used in investing activities, which consisted primarily of
capital expenditures, totaled $109 million and $115 million for the three months
ended March 31, 2004 and 2003, respectively.
12
Financing Activities
Over the next twelve months, Oncor will need to fund ongoing working
capital requirements and maturities of debt. Oncor has funded or intends to fund
these requirements through cash on hand, cash flows from operations, short-term
credit facilities and the issuance of long-term debt or other securities,
including securitization bonds.
Long-term Debt Activity -- During the three months ended March 31, 2004,
Oncor made scheduled principal payments on its 2.26% Fixed Series 2003 Bonds of
$8 million.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp. and its subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At March 31, 2004, there were no restrictions on the
payment of dividends under these provisions.
Capitalization -- The capitalization of Oncor at March 31, 2004, consisted
of 57.9% long-term debt, less current maturities, and 42.1% shareholder's
equity.
Equity -- Oncor's cash distributions may take the legal form of common
stock share repurchases or the payment of dividends on outstanding shares of its
common stock. The form of the distributions is primarily determined by current
and forecasted levels of retained earnings as well as state tax implications.
The common stock share repurchases made subsequent to January 1, 2002, are cash
distributions to US Holdings that for financial reporting purposes have been
recorded as a return of capital. Any future cash distributions to US Holdings
will be reported (i) as a return of capital if made through repurchases or (ii)
as a dividend if so declared by the board of directors. Any future common stock
share repurchases will reduce the amount of Oncor's equity, but will not change
US Holdings' 100% ownership of Oncor.
Credit Facilities -- Oncor has a joint revolving credit facility (with TXU
Energy) that allows for aggregate borrowings up to $450 million. This facility
expires in 2005 and can be used for working capital and general corporate
purposes. At March 31, 2004, $75 million had been borrowed under this facility
by TXU Energy. At December 31, 2003, this facility was undrawn. In addition, US
Holdings and TXU Corp. have credit facilities totaling $1.8 billion and $500
million that expire in 2005 and 2008, respectively. At March 31, 2004, $1.7
billion of these two facilities was unused. At December 31, 2003, $1.8 billion
of these two facilities was unused. Oncor expects that, to the extent capacity
is available, these additional facilities will be made available to it for
borrowings, letters of credit and other purposes. See Note 2 to Financial
Statements for details of all of these arrangements.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions. All new trade receivables under the program generated by
the originators are continuously purchased by TXU Receivables Company with the
proceeds from collections of receivables previously purchased. Funding to Oncor
under the program at March 31, 2004 and December 31, 2003 totaled $46 million
and $44 million, respectively. See Note 2 to Financial Statements for a more
complete description of the program including the financial impact on earnings
and cash flows for the periods presented and the contingencies that could result
in termination of the program.
Restricted Cash -- At March 31, 2004, TXU Electric Delivery Transition
Bond Company LLC had $9 million of restricted cash, representing collections
from customers that secure its securitization bonds and may be used only to
service its debt and pay its expenses. Restricted cash reported in investments
on the balance sheet as March 31, 2004 included $10 million principally related
to payment of fees associated with the securitization bonds.
13
Credit Ratings of TXU Corp. and its US Subsidiaries-- The current credit
ratings for TXU Corp. and certain of its US subsidiaries are presented below:
TXU Corp. US Holdings Oncor Oncor TXU Energy
--------- ----------- ----- ----- ----------
(Senior (Senior
Unsecured) Unsecured) (Secured) (Unsecured) (Senior Unsecured)
S&P........................ BBB- BBB- BBB BBB- BBB
Moody's.................... Ba1 Baa3 Baa1 Baa2 Baa2
Fitch...................... BBB- BBB- BBB+ BBB BBB
Moody's and Fitch currently maintain a stable outlook for TXU Corp., US
Holdings, TXU Energy and Oncor. 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 rating level 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,
shareholder's equity to total capitalization ratios and leverage ratios and/or
contain minimum net worth covenants. As of March 31, 2004, Oncor was in
compliance with all such applicable covenants.
Cross Default Provisions
Certain financing arrangements of Oncor contain provisions that would
result in an event of default if there were 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 US Holdings or any subsidiary thereof on financing
arrangements in excess of $50 million would result in a cross default under the
$1.4 billion US Holdings five-year revolving credit facility, the $400 million
US Holdings credit facility and $30 million of TXU Mining senior notes (which
have a $1 million cross default threshold).
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess of $50 million would result in a
cross default for such party under the TXU Energy/Oncor $450 million revolving
credit facility. Under this 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 under such facility to be accelerated as to
Oncor, but not as to TXU Energy.
A default by TXU Corp. on indebtedness in excess of $50 million would
result in a cross default under its $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 each have a cross
default threshold of $50,000. If either an originator, TXU Business Services or
TXU Receivables Company defaults on indebtedness of the applicable threshold,
the facility could terminate.
Oncor has other arrangements, including interest rate swap agreements and
leases with cross default provisions, the triggering of which would not result
in a significant effect on liquidity.
14
Long-term Contractual Obligations and Commitments -- There have been no
significant changes in contractual cash obligations of Oncor, since December 31,
2003 as disclosed in the 2003 Form 10-K.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables and in Note 2 to Financial
Statements.
COMMITMENTS AND CONTINGENCIES
See Note 4 to Financial Statements for details of contingencies, including
guarantees.
REGULATION AND RATES
Transmission Rates --On March 3, 2004, Oncor filed an annual request for
interim update of its wholesale transmission rate. Oncor requested a total
annualized revenue increase of $14 million. Approximately $8.5 million of this
increase would be recovered from wholesale customers, with the remaining $5.5
million to be recovered from REPs through the retail transmission cost recovery
factor (TCRF) of Oncor's distribution rate. Oncor's new wholesale transmission
rate was approved by the Commission and became effective on April 15, 2004.
In March 2004, the Commission approved an estimated annualized increase of
$9 million in the TCRF component of Oncor's distribution rates charged to REPs.
The effect of Oncor's wholesale transmission rate increase described in the
preceding paragraph will be included in Oncor's September 2004 TCRF update.
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 this
report, which might significantly alter its basic 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
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on Oncor's operations, financial
results and financial condition, and could cause TXU Corp.'s actual results or
outcomes to differ materially from any projected outcome contained in any
forward-looking statement in this report, include:
Oncor is subject to changes in laws or regulations, including the Texas
Public Utility Regulatory Act, as amended, 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 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
could be reconsidered, revised or reinterpreted, or new laws or regulations
could be adopted.
Oncor's rates are regulated by the Commission and are subject to
cost-of-service regulation and annual earnings oversight. This regulatory
15
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. 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 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.
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 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. 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's revenues from the distribution of electricity are collected from
approximately 43 retail electric providers, including TXU Energy, that sell the
electricity Oncor distributes to these retail electric providers' customers.
Oncor depends on these retail electric providers to timely remit these revenues
to Oncor. Oncor could experience delays or defaults in payment from these retail
electric providers. TXU Energy represents approximately 70% of Oncor's revenue
base.
In addition to revenues, Oncor is owed other significant amounts from TXU
Energy. The incremental income taxes Oncor will pay on the increased delivery
fees to be charged to Oncor's customers related to the aggregate issuance of
approximately $1.3 billion in securitization bonds will be reimbursed by TXU
Energy. Therefore, Oncor's financial statements reflect a $436 million
receivable from TXU Energy that will be extinguished as Oncor pays the related
income taxes.
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.
TXU Corp. and US Holdings are not obligated to provide any loans, further
equity contributions or other funding to Oncor. Oncor must compete with all of
TXU Corp.'s and US Holdings' 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, the regulation of Oncor's rates provides economic disincentives to any
significant reduction of Oncor's equity capitalization and prohibits
cross-subsidization of other TXU Corp. group members by Oncor.
The lack of necessary capital and cash reserves may adversely impact
Oncor's growth plans, its ability to raise additional debt and the evaluation of
its creditworthiness by rating agencies.
Oncor's ability to successfully and timely complete capital improvements
to existing facilities or other capital projects is contingent upon many
variables. If Oncor's efforts to complete capital improvements are unsuccessful,
Oncor could be subject to additional costs and/or the write-off of its
investment in the project or improvement.
16
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 TXU
Corp. or its other 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.
As a result of the energy crisis in California during 2001, the recent
volatility of natural gas prices in North America, the bankruptcy filing by
Enron Corporation, 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 ratings agencies also have increased their level of
scrutiny. Additionally, allegations against various energy trading companies of
"round trip" or "wash" transactions, which involve the simultaneous buying and
selling of the same amount of power at the same price and delivery location and
provide no true economic benefit, power market manipulation and inaccurate power
and commodity price reporting have had a negative effect on the industry. 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.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Oncor and its subsidiaries
(collectively, 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 Oncor's 2003 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 it is
made, and Oncor undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which it 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 them; nor can Oncor
assess the impact of each such factor or the extent to which any factor, or
combination of factors, may cause results to differ materially from those
contained in any forward-looking statement.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Except as discussed below, 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 2003 Form 10-K and
is therefore not presented herein.
INTEREST RATE RISK
See Note 2 to Financial Statements for a discussion of the issuance and
retirement of debt since December 31, 2003.
CREDIT RISK
Credit risk relates to the risk of loss that Oncor may incur as a result
of non-performance by its counterparties. Oncor's customers consist primarily of
REPs. As a requisite for obtaining and maintaining certification, a REP must
meet the financial resource standards established by the Commission. REP
certificates granted by the Commission are subject to suspension and revocation
for significant violation of PURA and Commission rules. Significant violations
include failure to timely remit payments for invoiced charges to a transmission
and distribution utility pursuant to the terms of tariffs adopted by the
Commission. Since most of the transmission and distribution services provided
and invoiced by Oncor are to its affiliated REP, TXU Energy, a material loss to
Oncor arising from nonperformance by its customers is considered unlikely.
Oncor's exposure to credit risk as of March 31, 2004 primarily represents
trade accounts receivable from unaffiliated customers of $61 million. Oncor has
two customers, one with a balance of $10 million and the other with at balance
of $8 million, each of which represented greater than 10% of this amount at
March 31, 2004. Both customers are non-investment grade quality; however, the
customers have consistently performed their obligations in accordance with their
agreements.
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.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits provided as part of Part II are:
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
-------- ------ -------
(31) Rule 13a - 14(a)/15d - 14(a) Certifications.
31(a) -- Certification of C. John Wilder, principal executive officer
of Oncor Electric Delivery Company, pursuant to Rule 13a -
14(a)/15d - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) -- Certification of Scott Longhurst, principal financial
officer of Oncor Electric Delivery Company, pursuant to Rule
13a - 14(a)/15d - 14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) Section 1350 Certifications.
32(a) -- Certification of C. John Wilder, principal executive officer
of Oncor Electric Delivery Company, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) -- Certification of Scott Longhurst, principal financial
officer of Oncor Electric Delivery Company, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(99) Additional Exhibits.
99 -- Condensed Statements of Consolidated Income - Twelve Months
Ended March 31, 2004
- ----------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K furnished or filed since December 31,
2003:
Date of Report Item Reported
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None
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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
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David H. Anderson
Vice President & Principal
Accounting Officer
Date: May 14, 2004
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