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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
-- OR --
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 333-91935
TXU Electric Delivery Transition Bond Company LLC
(Exact Name of Registrant as Specified in its Charter)
A Delaware Limited Liability Company 75-2851358
(State of Incorporation) (I.R.S. Employer Identification No.)
500 N. Akard Street, Dallas, Texas 75201 (214) 486-2000
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
-----------------------------------
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
--- ---
As of March 22, 2005, all outstanding common membership interests in TXU
Electric Delivery Transition Bond Company LLC were held by TXU Electric Delivery
Company.
TXU Electric Delivery Transition Bond Company LLC 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.
Item 1. BUSINESS............................................................................. 1
LEGISLATIVE BACKGROUND............................................................... 1
REQUIRED REPORTS..................................................................... 3
Item 2. PROPERTIES........................................................................... 3
Item 3. LEGAL PROCEEDINGS.................................................................... 3
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 3
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................. 4
Item 6. SELECTED FINANCIAL DATA.............................................................. 4
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 4
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................................... 4
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 4
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................................. 4
Item 9a. CONTROLS AND PROCEDURES............................................................. 4
Item 9b. OTHER INFORMATION................................................................... 4
PART II
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 5
Item 11. EXECUTIVE COMPENSATION............................................................... 5
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................................... 5
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 5
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................................... 5
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES........................................... 5
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Electric Delivery Transition Bond Company
LLC will be made available to the public, free of charge, on the TXU Electric
Delivery Company website at http://www.txuelectricdelivery.com, shortly after
they have been filed with the Securities and Exchange Commission. TXU Electric
Delivery Transition Bond Company LLC will provide copies of current reports not
posted on the website upon request. The information on TXU Electric Delivery
Company's website shall not be deemed a part of, or incorporated by reference
into, this report on Form 10-K.
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 retail competition
2003 Form 10-K................................. TXU Electric Delivery Transition Bond Company LLC's Annual
Report on Form 10-K for the year ended December 31, 2003
(formerly Oncor Electric Delivery Transition Bond Company LLC)
Commission..................................... Public Utility Commission of Texas
Company ....................................... TXU Electric Delivery Transition Bond Company LLC (formerly
Oncor Electric Delivery Transition Bond Company LLC), a wholly-owned
bankruptcy remote financing subsidiary of TXU Electric
Delivery Company
TXU Energy Holdings............................ refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
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
Financing Order ............................... the financing order issued by the Commission on August 5,
2002 to TXU Electric Delivery, its successors and assignees
that provide transmission and distribution service
Moody's........................................ Moody's Investors Services, Inc.
TXU Electric Delivery.......................... refers to TXU Electric Delivery Company, a subsidiary of US
Holdings, or TXU Electric Delivery and its consolidated
bankruptcy remote financing subsidiary, TXU 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
Settlement Plan................................ regulatory settlement plan that received final approval by
the Commission in January 2003
SFAS 71........................................ Statement of Financial Accounting Standards No. 71,
"Accounting for the Effect of Certain Types of Regulation"
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
ii
PART I
Item 1. BUSINESS
BUSINESS
--------
The Company is a bankruptcy remote special purpose Delaware limited
liability company, wholly-owned by TXU Electric Delivery. TXU Electric Delivery
is a wholly-owned subsidiary of US Holdings, the common shares of which are
wholly-owned by TXU Corp. TXU Electric Delivery is a regulated electricity
transmission and distribution company, principally engaged in providing delivery
services to REPs that sell electricity in the north-central, eastern and western
parts of Texas.
The Company was organized in November 1999 for the limited purposes of
issuing bonds and purchasing and owning transition property (as defined in the
1999 Restructuring Legislation) acquired from TXU Electric Delivery. For legal
purposes, the transition property has been sold to the Company by TXU Electric
Delivery. The Company had no operations until August 2003. In connection with
the acquisition of the transition property, the Company:
o registered and issued transition bonds,
o pledged its interest in the transition property and other transition
bond collateral to secure the transition bonds,
o has agreed to make debt service payments on the transition bonds, and
o has agreed to perform other activities that are necessary, suitable
or convenient to accomplish these purposes.
The Company is structured and is operated in a manner such that in the
event of bankruptcy proceedings against TXU Electric Delivery, the assets of the
Company will not be consolidated into the bankruptcy estate of TXU Electric
Delivery. TXU Electric Delivery is not the owner of the transition property
described herein, and the assets of the Company are not available to pay
creditors of TXU Electric Delivery or any of its affiliates.
Effective May 13, 2004, the Company changed its name from Oncor Electric
Delivery Transition Bond Company LLC to TXU Electric Delivery Transition Bond
Company LLC.
LEGISLATIVE BACKGROUND
In September 1999, the Texas legislature passed the 1999 Restructuring
Legislation to restructure the electric utility industry in Texas. The 1999
Restructuring Legislation provided for a transition to competition in the retail
and generation markets for electricity beginning in January 2002, and provided
for recovery of certain costs previously incurred by electric utilities. These
costs consist of generation-related regulatory assets as well as stranded costs,
which represent the excess of net book value over market value of generation
assets (as such regulatory and generation assets are defined by the 1999
Restructuring Legislation). Recovery of these costs is provided through
irrevocable, nonbypassable "transition charges" assessed on substantially all
existing and future retail electric customers within a utility's certificated
service territory as it existed on May 1, 1999. The 1999 Restructuring
Legislation authorized the Commission to issue a "financing order" approving the
issuance of "transition bonds" to facilitate the recovery of generation-related
regulatory assets and stranded costs. The Commission issued a financing order to
TXU Electric Delivery on August 5, 2002.
Transition Property - The 1999 Restructuring Legislation and the Financing
Order permitted TXU Electric Delivery to transfer its rights and interests in
the Financing Order, including the right to collect transition charges pursuant
to the 1999 Restructuring Legislation, to a special purpose entity (the Company)
formed by TXU Electric Delivery to issue debt secured by the right to receive
revenues arising from the transition charges. The electric utility's right to
receive the transition charges and its other rights and interests under the
Financing Order constitute "transition property" once transferred to the
Company. The transition property represents the irrevocable right to impose,
collect and receive transition charges in an amount sufficient to pay the
interest, fees, and expenses associated with the transition bonds, and the
aggregate principal amount of the transition bonds.
1
Transition Charges - TXU Electric Delivery and the Company have entered
into servicing agreements to support the transition bonds. Transition charges
are assessed and collected by TXU Electric Delivery as the servicer. The
servicer manages, services, bills and collects payments in respect of the
transition property under the terms of the servicing agreements. Transition
charges are collected by the servicer from REPs that collect transition charges
from retail customers as part of their normal collection activities. The REPs
must pay these billings to TXU Electric Delivery whether or not the REPs collect
them from the retail customers. Transition charges are billed based on a retail
customer's actual consumption of electricity or for certain classes of
commercial customers on the historical demand for electricity by such
customers. The Commission reviews and adjusts transition charges at least once
a year. This review is used to adjust any over or under collections during the
preceding 12 months and to provide for recovery of amounts sufficient to pay
all debt service and other required amounts and charges in connection with the
transition bonds during the following 12 months.
Servicing Fees - As long as TXU Electric Delivery or its affiliate or
agent acts as servicer, the annual aggregate servicing fee will be the greater
of $400,000 for all series of outstanding transition bonds or 0.05% per year of
the initial principal amount of all series of outstanding transition bonds. If a
successor servicer that is not affiliated with TXU Electric Delivery is
appointed, it will be entitled to receive a servicing fee not in excess of 0.60%
per year of the initial principal amount of each series of outstanding
transition bonds. The servicing fee will be recovered by the Company through the
transition charges. In addition, under the servicing agreements, TXU Electric
Delivery, as servicer, must seek interim and non-standard true-up adjustments
when certain conditions are met.
Administration Fees - TXU Electric Delivery and the Company have also
entered into an administration agreement, whereby TXU Electric Delivery provides
administrative services to the Company, such as clerical, secretarial and other
accounting services, at a fixed fee per year. As long as TXU Electric Delivery
or its affiliate or agent, act as administrator, the annual administration fee
will be $50,000, payable in arrears on each payment date. TXU Electric Delivery,
as administrator, is limited under the terms of the administration agreement to
total compensation in the form of the annual administration fee of $50,000 plus
any fees paid to third parties on behalf of the Company.
Operating Expenses - The Company can recover annual operating expenses,
including the annual administration fee to TXU Electric Delivery, of $185,000
annually through the transition charges.
2
REQUIRED REPORTS
The Company has included in this annual report on Form 10-K or
furnished on its website at www.txuelectricdelivery.com, as indicated, the
following information in respect of each series of outstanding transition
bonds, as required by the terms of the indenture relating to the
transition bonds. Exhibits that are filed as a part of this Form 10-K are
listed in Appendix B.
Filed as Exhibit
or Furnished
Required Item on Website
- ---------------------------------------------------------------------------------- ----------------
Monthly servicer reports (Series 2004-1 for October 2004).................. Exhibit 99 (a)(1)
Monthly servicer reports (Series 2004-1 for November 2004)................. Exhibit 99 (a)(2)
Monthly servicer reports (Series 2004-1 for December 2004)................. Exhibit 99 (a)(3)
Monthly servicer reports (Series 2003-1 for October 2004).................. Exhibit 99 (a)(4)
Monthly servicer reports (Series 2003-1 for November 2004)................. Exhibit 99 (a)(5)
Monthly servicer reports (Series 2003-1 for December 2004)................. Exhibit 99 (a)(6)
A statement reporting the balance in the collection accounts as
of the end of each quarter................................................ Exhibit 99 (b)
A quarterly statement affirming that, in all material respects,
for each materially significant REP, (a) each REP has been
billed in compliance with the requirements outlined in the
Financing Order; (b) each REP has made payments in compliance
with the requirements outlined in the Financing Order, and (c)
each REP satisfies the creditworthiness requirements of the
Financing Order............................................................ Exhibit 99 (c)
Interim True-up of Transition Charges...................................... Exhibit 99 (d)
Statement of Series 2003-1 Outstanding Bond Balances....................... Exhibit 99 (e)(1)
Statement of Series 2004-1 Outstanding Bond Balances....................... Exhibit 99 (e)(2)
Semi Annual Servicer's Certificate November 2004........................... Exhibit 99 (f)
Item 2. PROPERTIES
The Company does not own any tangible property, other than books and
records. The primary asset of the Company is the transition property described
in Item 1. Business.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
3
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable. All outstanding common membership interests in the
Company are held by TXU Electric Delivery.
Item 6. SELECTED FINANCIAL DATA
Item 6 is not presented herein as TXU Electric Delivery meets the
conditions set forth in General Instruction (I) (1) (a) and (b).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for the Company in its reduced
format as allowed for under the General Instruction (I)(1)(a) and (b) is set
forth under Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Appendix A to this report.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for the Company is set forth under
Report of Independent Registered Public Accounting Firm, Statements of Income,
Cash Flows, Balance Sheets, Members' Equity and Notes to Financial Statements
included in Appendix A of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9a. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company'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 December 31,
2004. Based on the evaluation performed, the Company's management, including the
principal executive officer and principal financial officer, concluded that the
disclosure controls and procedures were effective.
There have been no changes in the Company's internal controls over
financial reporting that have occurred during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9b. OTHER INFORMATION
None.
4
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Item 10 is not presented herein as the Company meets the conditions set
forth in General Instruction (I) (1) (a) and (b).
Item 11. EXECUTIVE COMPENSATION
Item 11 is not presented herein as the Company meets the conditions set
forth in General Instruction (I) (1) (a) and (b).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is not presented herein as the Company meets the conditions set
forth in General Instruction (I) (1) (a) and (b).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is not presented herein as the Company meets the conditions set
forth in General Instruction (I) (1) (a) and (b).
PART IV
Item 14. FINANCIAL ACCOUNTING FEES AND SERVICES
Not applicable.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report:
Financial Statements (included in Appendix A to this report):
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ A-2
Report of Independent Registered Public Accounting Firm.................................. A-22
Statements of Income for the years ended December 31, 2004 and 2003...................... A-23
Statements of Cash Flows for the years ended December 31, 2004 and 2003.................. A-24
Balance Sheets, December 31, 2004 and 2003............................................... A-25
Statements of Member's Equity for each of the three years in the period
ended December 31, 2004............................................................... A-26
Notes to Financial Statements............................................................ A-27
The financial statements schedules are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the consolidated financial statements or notes thereto.
(b) Exhibits furnished or filed as a part of this report: Included in Appendix
B to this report.
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Electric Delivery Transition Bond Company LLC has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TXU ELECTRIC DELIVERY
TRANSITION BOND COMPANY LLC
Date: March 29, 2005
By /s/ T. L. BAKER
---------------------------------------------------------
(T. L. Baker, Chairman of the Board and Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TXU Electric
Delivery Transition Bond Company LLC and in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ T. L. BAKER
- --------------------------------------------------------------- Principal Executive
(T. L. Baker, Chairman of the Board and Chief Officer and Manager March 29, 2005
Executive)
/s/ H. DAN FARELL Principal Financial Officer March 29, 2005
- ---------------------------------------------------------------
(H. Dan Farell, Senior Vice President and
Principal Financial Officer)
/s/ STANLEY J. SZLAUDERBACH Principal Accounting Officer March 29, 2005
- ---------------------------------------------------------------
(Stanley J. Szlauderbach, Senior Vice President)
/s/ DAVID A. CAMPBELL Director March 29, 2005
- ---------------------------------------------------------------
(David A. Campbell)
/s/ WILLIAM R. BECKSTEIN Director March 29, 2005
- ---------------------------------------------------------------
(William R. Beckstein)
/s/ RICHARD F. KLUMPP Director March 29, 2005
- ---------------------------------------------------------------
(Richard F. Klumpp)
/s/ KIRK R. OLIVER Director March 29, 2005
- ---------------------------------------------------------------
(Kirk R. Oliver)
/s/ ERIC H. PETERSON Director March 29, 2005
- ---------------------------------------------------------------
(Eric H. Peterson)
6
CERTIFICATION
I, H. Dan Farell, Senior Vice President and Principal Financial Officer
of TXU Electric Delivery Company, the servicer under the transition property
servicing agreement, certify that:
1. I have reviewed this annual report on Form 10-K and all other reports
containing distribution information filed for the period covered by this
annual report;
2. To the best of my knowledge, the information in these reports does
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading;
3. To the best of my knowledge, the financial information required to be
provided to the trustee by the servicer under the transition property
servicing agreement is included in these reports; and
4. I am responsible for reviewing the activities performed by the
servicer under the transition property servicing agreement and based
upon the review required under the transition property servicing
agreement the servicer has fulfilled its obligations under the
transition property servicing agreement.
Date: March 29, 2005
By /s/ H. DAN FARELL
--------------------------------
(H. Dan Farell, Senior Vice
President and Principal
Financial Officer of
TXU Electric Delivery Company
7
Appendix A
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
INDEX TO FINANCIAL INFORMATION
December 31, 2004
Page
Management's Discussion and Analysis of Financial Condition and Results of Operations....... A-2
Report of Independent Registered Public Accounting Firm..................................... A-22
Financial Statements:
Statements of Income.................................................................... A-23
Statements of Cash Flows................................................................ A-24
Balance Sheets.......................................................................... A-25
Statements of Member's Equity........................................................... A-26
Notes to Financial Statements........................................................... A-27
A-1
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
The Company is a bankruptcy remote special purpose Delaware limited
liability company, wholly-owned by TXU Electric Delivery. TXU Electric Delivery
is a wholly-owned subsidiary of US Holdings, the common shares of which are
wholly owned by TXU Corp. TXU Electric Delivery is a regulated electricity
transmission and distribution company principally engaged in providing delivery
services to REPs that sell electricity in the north-central, eastern and western
parts of Texas.
The Company was organized in November 1999 for the limited purposes of
issuing bonds and purchasing and owning transition property (as defined in the
1999 Restructuring Legislation) acquired from TXU Electric Delivery. For legal
purposes, the transition property has been sold to the Company by TXU Electric
Delivery. The Company had no operations until August 2003. In connection with
the acquisition of the transition property, the Company:
o registered and issued transition bonds,
o pledged its interest in the transition property and other transition
bond collateral to secure the transition bonds,
o has agreed to make debt service payments on the transition bonds, and
o has agreed to perform other activities that are necessary, suitable
or convenient to accomplish these purposes.
The Company is structured and is operated in a manner such that in the
event of bankruptcy proceedings against TXU Electric Delivery, the assets of the
Company will not be consolidated into the bankruptcy estate of TXU Electric
Delivery. TXU Electric Delivery is not the owner of the transition property
described herein, and the assets of the Company are not available to pay
creditors of TXU Electric Delivery or any of its affiliates.
Effective May 13, 2004, the Company changed its name from Oncor Electric
Delivery Transition Bond Company LLC to TXU Electric Delivery Transition Bond
Company LLC.
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations for the
Company do not present period-to-period comparisons of year to date results due
to the non-comparability of the periods presented. Year-to-date results for 2003
contained only four months of activity for the first series of transition bonds
while year-to-date results for 2004 contained twelve months of activity for the
first series of transition bonds and approximately six months of activity for
the second series of transition bonds.
On August 21, 2003, the Company issued and sold the first series of
transition bonds in an aggregate principal amount of $500,000,000. On June 7,
2004, the Company completed the issuance and sale of a second and final series
of transition bonds in an aggregate principal amount of $789,777,000. The
proceeds from the sale of the transition bonds were used to acquire transition
property from TXU Electric Delivery. Such property represents the irrevocable
right to impose, collect and receive transition charges in an amount sufficient
to pay the interest, fees, and expenses associated with the transition bonds, as
well as the aggregate principal amount of the transition bonds. The Company
pledged its interests in the related transition property and other transition
bond collateral to secure the transition bonds.
TXU Electric Delivery used the net proceeds from the sale of transition
property in connection with the issuance of the transition bonds to retire
portions of its debt and equity. The transition bonds have interest rates
ranging from 3.52% to 5.29% and scheduled final payment dates ranging from 2007
through 2016.
A-2
TXU Electric Delivery, on behalf of the Company, bills REPs transition
charges approved by the Commission to collect the funds needed to make scheduled
payments, including principal, interest, associated fees and expenses, and
funding of the over-collateralization subaccount, on the transition bonds.
During the twelve months ended December 31, 2004, operating revenues of
$106,713,274 included $4,139,808 of accrued unbilled revenues, as well as
$317,460 of interest income on those funds collected.
Under the Financing Order and its servicing agreements with the Company,
TXU Electric Delivery, as servicer, is required to seek interim and annual
adjustments to the transition charges to ensure that the expected collection of
the transition charges is adequate to pay principal and interest when due, pay
other qualified costs when due, and fund and/or replenish the
over-collateralization and capital subaccounts to the required levels.
As a result of variations in power consumption, temporary over or under
recovery of transition charges may occur. On January 15, 2004, TXU Electric
Delivery filed, on behalf of the Company, an interim true-up adjustment with
the Commission in respect of the first series of transition bonds. TXU Electric
Delivery requested the Commission increase the authorized transition charges to
generate sufficient funds to make the full scheduled payment in respect of the
first series of transition bonds on August 16, 2004, and to replenish the
capital subaccount for the first series of transition bonds to the required
$2,500,000 level. The capital subaccount had to be partially drawn down to make
the February 2004 scheduled payment on the first series of transition bonds.
The interim true-up adjustment was effective automatically on January 15, 2004
for use in the February 2004 billing cycle.
TXU Electric Delivery filed an annual adjustment to increase the
transition charges that service the first series of transition bonds on
August 16, 2004. The adjustment became effective with the September 2004
billing cycle.
In November 2004, TXU Electric Delivery filed an interim true-up
adjustment to increase the charges associated with both series of transition
bonds in order to generate sufficient funds to make the full scheduled payments
and restore the capital subaccounts for both series of bonds during 2005.
Collections of transition charges related to the first series of transition
bonds were not sufficient to replenish the capital subaccount for that series of
bonds to the required level at the August 16, 2004 payment. Collections of
transition charges related to the second series of transition bonds were not
sufficient to meet the required payment for those bonds at the November 15, 2004
payment, therefore, the capital subaccount for that series of bonds was
partially drawn down to meet the scheduled payment. This tariff adjustment
became effective with the first billing cycle in December 2004. This increase
was necessitated by collections being lower than projected in previous months.
In the November 2004 interim true-up adjustment for the second series
of transition bonds, TXU Electric Delivery made an error in the
calculation of the transition charges applicable to the Large General Service
Secondary class of customers. This error was clerical in nature and resulted
in the wrong number of forecasted kilowatt-hours for this particular
rate class for the applicable period. The result of the error is that the
transition charges currently being billed for this customer class are lower than
required to meet the May 16, 2005 scheduled payment on the second series of
bonds. As a result, the Company believes there will be insufficient funds on
that date (even considering the amount currently in the capital subaccount for
the second series of transition bonds, which will be used to help meet the
scheduled payment) to meet the full principal payment requirement on the bonds.
However, the Company believes there will be sufficient funds to make the
required interest payment on the bonds. Under the terms of the indenture that
govern the transition bonds, a failure to pay a scheduled principal payment on a
scheduled date does not result in an event of default.
In the case of such an error in an interim true-up adjustment, the
Financing Order requires that the error be corrected in the next available
true-up adjustment. The next available true-up adjustment for the second series
of transition bonds is the annual true-up adjustment, which TXU Electric
Delivery will file, as required, in May 2005. Any shortfall in principal on the
May 16, 2005 payment date, along with any deficiency in the capital subaccount,
will be taken into consideration in the annual true-up adjustment and the
transition charges will be set such that, based on the then current forecast of
customer usage, sufficient funds will be collected to meet the scheduled
principal and interest payments in November 2005 and May 2006, pay the principal
shortfall and replenish the capital subaccount to its required level by May
2006.
A-3
As of December 31, 2004, the capital subaccount for the first series of
transition bonds was $1,363,533 versus the required level of $2,500,000 and for
the second series of transition bonds was $1,419,316 versus the required level
of $3,948,885.
The Company accrues interest on the outstanding aggregate principal amount
of both series of transition bonds. For the years ended December 31, 2004 and
2003, interest expense totaled $41,454,452 and $7,777,756, respectively.
The Company also amortizes the transition property based on principal
payments over the life of the bonds. Such amortization for the years ended
December 31, 2004 and 2003 was $47,911,024 and $5,748,164, respectively.
To the extent revenues exceed the total of interest expense, amortization
of the transition property and other fees and expenses, the company records an
expense for over-recovery of transition charges. For the year ended December 31,
2004, the Company recorded over-recovery of transition charge expense and an
offsetting regulatory liability of $16,657,167. During 2003, the Company
recorded an over recovery of transition charges expense and an offsetting
regulatory liability of $5,770,918. See Note 2 to Financial Statements for a
discussion of accruals of unbilled revenues.
The Company's expense for servicing and administration fees earned by
TXU Electric Delivery totaled $636,479 for the year ended December 31, 2004 and
$169,793 for the year ended December 31, 2003.
Upon the issuance of the second series of transition bonds in 2004, TXU
Electric Delivery was required to contribute $3,948,885 to the capital
subaccount, pledged as collateral for that series of transition bonds. This was
in addition to the $2,500,000 that TXU Electric Delivery contributed to the
capital subaccount for the first series of transition bonds issued in 2003.
During the year ended 2004, three scheduled principal payments of
$7,693,695, $14,849,544 and $9,497,122 were made on the transition bonds. Cash
flows from operating activities provided $58,798,553 after payment of expenses
and interest associated with the transition bonds.
FINANCING ACTIVITIES
The Company's financial needs are limited to issuance of the transition
bonds. There is no provision to allow for any other borrowings.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of the indenture contain financial covenants that require
maintenance of specified collateral deposits in proportion to the aggregate
principal amount of the bonds outstanding. As of December 31, 2004, the Company
was in compliance with such covenants.
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FORWARD-LOOKING STATEMENTS
This report and other presentations made by the Company contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company 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 below under "RISK FACTORS" and the following
important factors, among others that could cause the actual results of the
Company to differ materially from those projected in such forward-looking
statements:
o state or federal legislative or regulatory developments,
o national or regional economic conditions,
o the accuracy of the servicer's estimates of market demand and prices
for energy,
o the accuracy of the servicer's estimates of industrial, commercial and
residential growth in TXU Electric Delivery's service territory,
including related estimates of conservation and electric usage
efficiency,
o weather conditions and other natural phenomena affecting retail
electric customer energy usage,
o acts of sabotage, terrorist activities or other catastrophic events,
o the speed, degree and effect of continued electric industry
restructuring,
o the operating performance of TXU Electric Delivery's facilities and
third-party suppliers of electric energy in TXU Electric Delivery's
service territory,
o the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and
any collections curves, and
o the operational and financial ability of REPs to bill and collect
transition charges and make timely payments of amounts billed by the
servicer to the REPs for transition charges.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company 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 the
Company 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.
RISK FACTORS
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 that investors should consider
carefully before deciding whether to purchase transition bonds of any series or
class include:
Material Payment Delays or Losses on Transition Bonds May be Experienced Due to
the Limited Sources of Payment for the Transition Bonds and Limited Credit
Enhancement
Material payment delays or losses on transition bonds may be
experienced if the assets securing transition bonds are insufficient to pay the
principal amount of such transition bonds and accrued interest on those
transition bonds in full. The only source of funds for payments of interest on
and principal of the transition bonds of a particular series is the related
collateral for that series. The collateral for a particular series of transition
bonds is limited to:
o the related transition property, including the irrevocable right to
impose, collect and receive the related transition charges from
customers and to adjust the transition charges at least annually;
o available funds on deposit in the applicable trust accounts held by
the indenture trustee;
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o contractual rights under the applicable sale agreement, the
applicable servicing agreement and other applicable contracts for
such series; and
o any other credit enhancements described in the applicable prospectus
supplement related to such series of transition bonds.
The transition bonds are not insured or guaranteed by TXU Electric
Delivery, including in its capacity as servicer, or by its ultimate parent, TXU
Corp., any of its affiliates (other than the Company), the indenture trustee or
any other person or entity. Thus, reliance for payment of the transition bonds
must be based upon collections of the related transition charges, available
funds on deposit in the applicable trust accounts held by the indenture trustee
and any other credit enhancement described in the applicable prospectus
supplement related to a series of transition bonds. A series of transition bonds
is payable only from collateral that secures such series and not from transition
charges imposed and collected for any other series of transition bonds. The
organizational documents of the Company restrict the right to acquire other
assets unrelated to the transactions described herein.
Judicial, Legislative or Regulatory Actions That May Adversely Affect an
Investment in Transition Bonds
Legal Action May Reduce the Value of an Investment in Transition Bonds.
The transition property is created pursuant to the 1999 Restructuring
Legislation and the Financing Order issued by the Commission. Investing in bonds
payable from an asset that depends for its existence on recently enacted
legislation with a limited history and judicial interpretation and regulatory
implementation and interpretation is risky. The 1999 Restructuring Legislation
was adopted in June 1999 by a vote of 142-4 in the Texas House and 27-3 in the
Senate and signed into law by Governor George W. Bush.
On December 31, 2001, a Settlement Plan was filed on behalf of US
Holdings, which, among other things, resolved all issues related to US Holdings'
stranded cost recovery and securitization of TXU Electric Delivery's regulatory
assets. On August 5, 2002, the Commission issued the Financing Order, pursuant
to the Settlement Plan, authorizing the issuance of transition bonds relating to
recovery of TXU Electric Delivery's regulatory assets. The Commission's order
approving the Settlement Plan and the Financing Order were appealed by certain
nonsettling parties to the Travis County, Texas District Court in August 2002.
In January 2003, US Holdings concluded a settlement of these appeals, and they
were dismissed. Thus, the settlement became final.
A portion of the 1999 Restructuring Legislation was challenged in Texas
state court. This portion of the 1999 Restructuring Legislation was upheld and
is no longer subject to appeal, as is discussed below. Notwithstanding the Texas
state court's decision, a future Texas state or federal court decision might
overturn the 1999 Restructuring Legislation or the Financing Order. Because the
securitization financing is a creation of statute, any alteration affecting the
validity of the relevant underlying legislative provisions could directly impact
the transition bonds. For example, if the provisions that create transition
property were invalidated, the validity of the principal assets securing the
transition bonds could be eliminated. As another example, if the provisions that
allow for the transition charge true-up adjustment process were invalidated, the
servicer could be prevented from ensuring that sufficient funds are deposited
with the indenture trustee for the scheduled payments on the transition bonds.
If an invalidation of any relevant underlying legislative provision or Financing
Order provision occurs, some or all of the investment in the transition bonds
may be lost or delays may be experienced in recovering the investment. The 1999
Restructuring Legislation or any of its provisions, including the provisions
relating to securitization, may be directly contested in courts or otherwise
become the subject of litigation.
The constitutionality of the securitization provisions of the 1999
Restructuring Legislation under the Texas Constitution was challenged in
connection with a securitization request made by Central Power and Light
Company. The constitutionality of the challenged provisions of the 1999
Restructuring Legislation was affirmed by the Travis County, Texas District
Court in July 2000. This judgment was appealed directly to the Texas Supreme
Court. On June 6, 2001, the Texas Supreme Court affirmed the judgment of the
Travis County, Texas District Court denying this appeal and finding that the
securitization provisions are constitutional. The Texas Supreme Court denied
rehearing, with a corrected opinion that did not affect the substance of the
original ruling, on August 30, 2001. No petition for writ of certiorari was
filed with the United States Supreme Court prior to the deadline for such a
filing.
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If in the future a state or federal court were to determine that the
relevant provisions of the 1999 Restructuring Legislation or the Financing Order
are unlawful or invalid, that decision could adversely affect the validity of
the transition bonds or the Company's ability to make payments on the transition
bonds. In that case, a loss on or delay in recovery of the investment in the
transition bonds may be experienced. If the 1999 Restructuring Legislation is
overturned, the limitation on appealing the Financing Order may also be
overturned. The Company cannot assure that another lawsuit challenging the
validity of the 1999 Restructuring Legislation will not be filed in the future
or that, if filed, such lawsuit would not be successful.
Other states have passed electric utility deregulation laws similar to the
1999 Restructuring Legislation, and some of these laws have been challenged by
judicial actions. To date, none of these challenges has succeeded, but future
judicial challenges could be made in other states. An unfavorable decision
regarding another state's law would not automatically invalidate the 1999
Restructuring Legislation or the Financing Order, but it might provoke a
challenge to the 1999 Restructuring Legislation or the Financing Order. In
addition, an unfavorable court decision with respect to another state's statute
may establish a legal precedent for a successful challenge to the 1999
Restructuring Legislation depending on the similarity of the other statute and
the applicability of the legal precedent to the 1999 Restructuring Legislation.
Furthermore, legal action in other states could heighten awareness of the
political and other risks of the transition bonds, and in that way may limit the
liquidity and value of the transition bonds. Therefore, legal activity in other
states may indirectly affect the value of an investment in transition bonds.
Neither the Company nor TXU Electric Delivery will indemnify an investor
for any changes in the law, including any amendment or repeal of the 1999
Restructuring Legislation that may affect the value of the transition bonds. TXU
Electric Delivery may have to indemnify the Company, however, if legal action
based on law in effect at the time of the issuance of the transition bonds
invalidates the transition property.
Further Legislative Action May Reduce the Value of An Investment in
Transition Bonds. The value of an investment in transition bonds may decline due
to legislative action. For example:
(a)Future Texas Legislative Action May Invalidate the Transition Bonds or
the Transition Property which is the Primary Source of Payments on the
Transition Bonds. Unlike many other states (including California,
Massachusetts and Michigan), the citizens of the State of Texas do not
have the constitutional right to adopt or revise laws by initiative or
referendum. Thus, absent any amendment of the constitution of the State
of Texas, the 1999 Restructuring Legislation cannot be amended or
repealed by direct action of the electorate. The Texas legislature may
repeal the 1999 Restructuring Legislation, or amend the 1999
Restructuring Legislation in a way that limits or alters the transition
property so as to reduce its value. However, under the 1999
Restructuring Legislation, the State of Texas has pledged for the
benefit and protection of TXU Electric Delivery and all financing
parties that it (including the Commission) will not take or permit any
action to be taken that would impair the value of the transition
property.
Hunton & Williams LLP has rendered its opinion to the Company and TXU
Electric Delivery in connection with the issuance of the first series
of the transition bonds, and rendered a similar opinion to the Company
and TXU Electric Delivery in connection with the second series of
transition bonds, that under the laws of the State of Texas and the
United States, holders of the transition bonds could successfully
challenge under the Federal Contracts Clause and the Texas Contracts
Clause the constitutionality of any legislation passed by the State of
Texas, including the Commission, which becomes law that repeals or
amends the 1999 Restructuring Legislation in such a manner that
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substantially impairs the value of the rights of the holders of the
transition bonds or the transition charges prior to the time that the
transition bonds are fully paid and discharged, unless it was
determined that such repeal or amendment was a legitimate and
reasonable exercise of the State of Texas' sovereign powers and
reasonable and necessary to serve a significant and legitimate public
purpose. Further, Hunton & Williams LLP rendered to the Company and TXU
Electric Delivery its opinion that a court would conclude that adverse
action by the Texas legislature or the Commission that repeals the
State of Texas' pledge to the holders of the transition bonds or
otherwise adversely affects the transition property would constitute a
compensable "taking" under the Takings Clauses of the United States and
Texas Constitutions, if the court determines that any such action is an
intentional action by the Texas legislature or the Commission, effects
a regulatory taking of the transition property and is for public use.
There is no assurance, however, that, even if a court were to award
just compensation, it would be sufficient to pay the full amount of
principal and interest on the transition bonds.
It may be possible for the Texas legislature to enact legislation that
would impair the rights and remedies of bondholders without violating
the State's pledge, if the legislature acts in order to serve a
significant and legitimate public purpose, such as protecting the
public health and safety or otherwise acts in the valid exercise of the
state's police power. Even if the legislature provides an investor with
an amount deemed to be just compensation, it may not be sufficient to
fully recover the investment. The Company cannot assure an investor of
the likelihood or legal validity of any action of this type by the
Texas legislature, or whether the action would be considered a taking.
As of the date of this report, the Company is not aware of any pending
legislation in the Texas legislature that would affect any provisions
of the 1999 Restructuring Legislation related to transition property or
transition charges or the provisions of the Financing Order.
The Company cannot assure an investor that a repeal or amendment to the
1999 Restructuring Legislation will not be sought or adopted or that
any action by the State of Texas adverse to an investment in the
transition bonds will not occur. In any such event, costly and
time-consuming litigation might ensue. Any litigation of this type
might adversely affect the price and liquidity of the transition bonds
and delay the payment of interest and principal and, accordingly, the
weighted average lives of the transition bonds.
(b)The 1999 Restructuring Legislation May be Overturned by the Federal
Government Without Full Compensation. The United States Congress or a
federal agency may decide that it can preempt the Texas legislature and
pass a law or adopt a rule or regulation prohibiting or limiting the
collection of transition charges, or otherwise affecting the energy
industry. A prohibition of this nature could negate the existence of
transition property. As of the date of this report, neither the House
nor the Senate committees having primary relevant jurisdiction have
considered, or indicated an intent to consider, the prohibition of the
recovery of stranded costs or transition charges. The Company cannot
predict whether any future bills that prohibit the recovery of stranded
costs or regulatory assets, or securitized financing for the recovery
of stranded costs, will become law or, if they become law, what their
final form or effect will be. The Company can give no assurance that a
court would consider the preemption by federal law of the Texas 1999
Restructuring Legislation a taking of property from the Company or from
the holders of transition bonds. Moreover, even if this preemption of
the 1999 Restructuring Legislation and/or the Financing Order by the
federal government were considered a taking under the U.S. Constitution
for which the government had to pay the estimated market value of the
taken transition property at the time of the taking, the Company can
give no assurance that this compensation would be sufficient to pay the
full amount of principal of and interest on the transition bonds or to
pay such amounts on a timely basis.
The Company and TXU Electric Delivery have agreed to take legal or
administrative action as may be reasonably necessary to block or
overturn any attempts to cause a repeal, modification or amendment to
the 1999 Restructuring Legislation, the Financing Order or the
transition property.
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Neither the Company, TXU Electric Delivery nor any successor seller or
servicer will indemnify an investor for any changes in the law that may
affect the value of the transition bonds. In addition, any action by
the United States Congress or Texas legislature, even if the action is
ultimately determined to be invalid, and even if full compensation is
ultimately provided to the holders of transition bonds, might result in
costly and time-consuming litigation. Any litigation of this type might
adversely affect the price and liquidity of the transition bonds and
the dates of payment of interest and principal. Moreover, given the
lack of judicial precedent directly on point, and the novelty in Texas
of transition property as security for transition bonds, the Company
cannot predict the outcome of any litigation with certainty.
Accordingly, an investor may suffer a loss on or delay in recovery of
an investment in the transition bonds.
(c)The Commission May Take Future Actions Which May Reduce the Value of an
Investment in Transition Bonds. The 1999 Restructuring Legislation
provides that the Financing Order is irrevocable upon issuance and is
not subject to reduction, impairment or adjustment by further action of
the Commission, except for the true-up adjustments. The State of Texas
(including the Commission) has pledged that it will not take or permit
any action to amend, alter or impair the value of transition property
created under the Financing Order, except as permitted in true-up
adjustments, until the principal, interest and premium, if any, and any
other charges incurred and contracts to be performed in connection with
the transition bonds have been paid and performed in full. The
Commission guarantees that it will take specific actions pursuant to
the Financing Order, as expressly authorized by the 1999 Restructuring
Legislation, to ensure that transition charge revenues are sufficient
to pay principal and interest on the transition bonds. However, the
Commission retains the power to adopt, revise or rescind rules or
regulations affecting the seller or a successor utility. The Commission
also retains the power to interpret the Financing Order. Any new or
amended regulations or orders by the Commission, for example, could
affect the ability of the servicer to collect the transition charges in
full and on a timely basis. The seller has agreed to take legal or
administrative action to resist any Commission rule, regulation or
decision that would reduce the value of the transition property. The
Company cannot assure an investor that the seller would be successful
in its efforts. Thus, future Commission rules, regulations or decisions
may adversely affect the rating of the transition bonds, their price or
the rate of transition charge collections and, accordingly, the
amortization of transition bonds and their weighted average lives. As a
result, an investor could suffer a loss in connection with an
investment in transition bonds.
The servicer is required to file with the Commission, on behalf of the
Company, any requested adjustments of the transition charges. There is
uncertainty associated with investing in transition bonds whose timely
payment of principal and interest may depend on true-up adjustments
because of the limited judicial or regulatory experience implementing
and interpreting the provisions of the 1999 Restructuring Legislation
providing for true-up adjustments. The Company cannot assure that the
foregoing adjustment procedures and adjustments will not be challenged.
Such challenges could result in costly and time consuming litigation. A
shortfall or material delay in transition charge collections due to
inaccurate forecasts, delayed implementation of true-up adjustments or
the failure to implement a true-up adjustment could result in payments
of principal of and interest on the transition bonds not being paid
according to the expected amortization schedule, lengthening the
weighted average life of the transition bonds, or in payments of
principal and interest not being made at all. As a result, an investor
could suffer a loss in connection with an investment.
On May 20, 2003, various electric cooperatives and municipally-owned
utilities in TXU Electric Delivery's service territory filed a petition
for rulemaking with the Commission requesting that the Commission adopt
a rule regarding the billing and collection of transition charges from
end-use customers in multiply-certificated service areas who switched
electricity providers after May 1, 1999. TXU Electric Delivery believes
that the number of such customers is less than one hundred. The rule
proposed by the petitioners only involves the method of collecting
A-9
transition charges, including the liability in connection therewith,
and would require the transition charges to be billed directly to those
customers by the servicer, rather than by the applicable electric
cooperative or municipally-owned utility. TXU Electric Delivery has
filed a response to the petition stating that the proposed rule would
violate the 1999 Restructuring Legislation and the Financing Order and
has filed a complaint with the Commission requesting that the
Commission order the electric cooperatives and municipally-owned
utilities to implement the current procedure. The Commission has denied
the rulemaking petition. The complaint proceeding is currently abated
to allow TXU Electric Delivery and the petitioners to pursue settlement
negotiations. Inasmuch as the petitioners assert that the issue in this
proceeding does not involve the legality of the recovery of the
transition charges or the amount thereof, TXU Electric Delivery does
not believe the result of this proceeding will be materially adverse to
holders of the transition bonds; however, TXU Electric Delivery cannot
predict the outcome.
Servicing Risks
Inaccurate Forecasting or Unanticipated Delinquencies Could Result in
Insufficient Funds to Make Scheduled Payments on the Transition Bonds. The
transition charges are generally assessed based on customer usage, which
includes kilowatts demanded and kilowatt-hours of electricity consumed by retail
customers in TXU Electric Delivery's service area. TXU Electric Delivery will
calculate the transition charges for each series of transition bonds according
to the methodology approved by the Financing Order authorizing those transition
charges. In addition, TXU Electric Delivery, as servicer, is required to file
with the Commission periodic adjustment calculations for the transition charges.
These adjustments are intended to provide, among other things, for timely
payment of the transition bonds, but the frequency of these adjustments is
limited to once per year for a standard true-up, no more than semi-annually (if
payment dates on transition bonds are semi-annual) or not more than once every
three months (if payment dates on the transition bonds are quarterly) for an
interim true-up, but can be more frequently for a non-standard true-up. TXU
Electric Delivery will generally base its adjustment calculations on any
shortfalls or excess in collections from customers during the prior adjustment
period and on projections of future electricity use and customers' ability to
pay their electric bills. If the servicer inaccurately forecasts electricity
consumption or demand or underestimates customer delinquencies or charge-offs
when setting or adjusting the transition charges, or if the effectiveness of the
adjustments is delayed for any reason, there could be a shortfall or material
delay in transition charge collections. A shortfall or material delay in
transition charge collections could result in payment of principal of and
interest on the transition bonds not being made according to the expected
amortization schedule, thus lengthening the weighted average life of the
transition bonds, or in payments of principal and interest not being made at
all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from TXU Electric Delivery's service territory
or reduce their electricity consumption;
o the occurrence of a natural disaster, such as a tornado, or an act of
war or terrorism or other catastrophic event unexpectedly disrupting
electrical service and reducing usage;
o problems with energy generation, transmission or distribution
resulting from the change in the market structure of the electric
industry;
o customers ceasing business or departing TXU Electric Delivery's
service territory;
o dramatic changes in energy prices resulting in decreased consumption;
o customers consuming less electricity because of increased conservation
efforts or increased electric usage efficiency; or
o customers switching to alternative sources of energy, including
self-generation of electric power.
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Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
o unexpected deterioration of the economy or the occurrence of a
natural disaster, or an act of war or terrorism or other catastrophic
event or the declaration of a heat moratorium causing greater
charge-offs than expected or forcing TXU Electric Delivery or a
successor distribution company to grant additional payment relief to
more customers;
o a change in law that makes it more difficult for TXU Electric
Delivery or a successor distribution company or a REP to terminate
service to nonpaying customers, or that requires TXU Electric
Delivery or a successor distribution company or REP to apply more
lenient credit standards in accepting customers;
o the introduction into the energy markets of REPs who collect payments
arising from the transition charges, but who may fail to remit retail
customer charges to the servicer in a timely manner; or
o the failure of REPs to submit accurate and timely information to the
servicer regarding their collections and charge-offs. See "It May Be
Difficult to Collect the Transition Charges from REPs."
There are Uncertainties Associated with Collecting the Transition
Charges, and There is Unpredictability Associated with a Deregulated Electricity
Market. TXU Electric Delivery has limited experience in calculating transition
charges for customers. The predictions associated with billing and collecting
transition charges are based primarily on historical collection of payments and
forecasted energy usage for which TXU Electric Delivery has records available.
These usage and collection records, however, may not reflect customers' payment
patterns or energy usage in the competitive market, as competition was
introduced in Texas for the first time on January 1, 2002. These records also
reflect limited experience with consolidated billing to REPs. Because that kind
of billing is new in Texas, unforeseen factors may adversely affect collection
of payments. Therefore, the records that TXU Electric Delivery has to date may
have limited value in calculating the initial transition charges and the
proposed true-up adjustments. Furthermore, TXU Electric Delivery, as servicer,
has only limited experience administering transition charges. Risks are
associated with TXU Electric Delivery's inexperience in calculating, billing and
collecting the transition charges and in managing customer payments on the
Company's behalf. A shortfall or material delay in collecting transition charges
could result in payments of principal not being paid according to the expected
amortization schedule, lengthening the weighted average life of the transition
bonds, or in payments of principal and interest not being made at all. As a
result, an investor could suffer a loss in connection with the investment.
An Investment in Transition Bonds Relies on TXU Electric Delivery or its
Successor Acting as Servicer of the Transition Property. TXU Electric Delivery,
as servicer, is responsible for billing and collecting transition charges from
REPs and for filing with the Commission to adjust these charges. If TXU Electric
Delivery ceases servicing the transition property, it might be hard to find a
successor servicer and any transfer of servicing to a successor servicer may
adversely affect an investor. Any successor servicer may have less experience
than TXU Electric Delivery and may have less capable billing and/or collection
systems than TXU Electric Delivery and may experience difficulties in collecting
transition charges and determining appropriate adjustments to transition
charges. A successor servicer might charge fees that, while permitted under the
Financing Order, are higher than the fees paid to TXU Electric Delivery as
servicer. If TXU Electric Delivery were to be replaced as servicer, any of these
factors and others could delay the timing of payments and may reduce the value
of an investment in transition bonds. Also, a change in servicer may cause
billing and/or payment arrangements to change, which may lead to a period of
disruption in which customers continue to remit payments according to the former
arrangement, resulting in delays in collection that could result in delays in
payment on the transition bonds. Under the TXU Electric Delivery servicing
agreements, no servicer default may be waived without the written consent of
both the Commission and holders of a majority of the applicable series of
outstanding transition bonds. The servicing agreements also grant the
independent right to the Commission, in addition to the right of the indenture
trustee on behalf of the transition bondholders, to require transfer of the
servicing to a successor servicer in the event of any such servicer default.
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Upon a default under a servicing agreement based upon the commencement of
a case by or against the servicer under the United States Bankruptcy Code or
similar laws, the indenture trustee and the Company may be prevented from
effecting a transfer of servicing. The 1999 Restructuring Legislation provides
that upon a default under the transition bonds, which may result from servicer's
failure to make required remittances, the indenture trustee would have the right
to apply to the Commission for an order that amounts arising from transition
charges be transferred to a separate account, and to apply to the district court
of Travis County, Texas for an order for sequestration and payment of revenues
arising from the transition charges. However, in the event that the servicer
becomes subject to a bankruptcy proceeding, federal bankruptcy law may prevent
the Commission or the Texas court from issuing or enforcing these orders. The
indenture requires the indenture trustee to request an order from the bankruptcy
court to permit the Commission or the Texas court to issue and enforce these
orders. However, the bankruptcy court may deny the request. The failure of the
servicer to make required remittances would likely result in a default under the
indenture.
Under the intercreditor agreement among the Company, TXU Electric
Delivery, the transition bond parties and the parties to TXU Corp.'s receivables
financing program, a replacement servicer would require the agreement of both
the trustee and the other parties to the intercreditor agreement. If the trustee
and the other parties are unable to agree on a replacement servicer within 10
business days, TXU Electric Delivery's independent auditors would appoint the
replacement servicer.
It May Be Difficult to Collect the Transition Charges from REPs. As part
of the restructuring of the Texas electric industry, retail customers in TXU
Electric Delivery's service territory began, as of January 1, 2002, or in
limited circumstances by participating in a pilot project, sooner, purchasing
electricity and related services from REPs rather than TXU Electric Delivery.
TXU Electric Delivery is no longer permitted to sell electricity directly to
retail customers. US Holdings currently has organized an affiliated REP to
provide electricity and related services to retail customers in TXU Electric
Delivery's service territory. In the future, US Holdings may establish
additional affiliated REPs or divest itself of one or more affiliated REPs.
REPs, including US Holdings' affiliated REP, issue a single bill to retail
customers purchasing electricity from a REP. The 1999 Restructuring Legislation
requires TXU Electric Delivery to allow each REP, including US Holdings'
affiliated REP, pursuant to a tariff to be filed by TXU Electric Delivery and
approved by the Commission, to issue a single bill to customers purchasing
electricity from that REP. This single bill includes all charges related to
purchasing electricity from the REP, including delivery services from TXU
Electric Delivery and the applicable transition charges. Retail customers will
pay transition charges to REPs who supply them with electric power. The REPs
will be obligated to remit payments of transition charges to the servicer less a
specified percentage allowance for charge-offs or delinquent customer accounts
whose service has been terminated, within 35 days of billing from the servicer,
even if the REPs do not collect the charges from retail customers. The
charge-off percentage will initially be based on the servicer's system-wide
charge-off percentage but will then be recalculated annually for each REP in
conjunction with the true-up adjustment process. Each REP's recourse for
transition charge payments remitted to the servicer but not collected ultimately
from customers will be limited to a credit against future transition charge
payments unless the REP and the servicer agree to alternative arrangements, but
in no event will the REP have recourse to the Company or the Company's funds for
such payments. In the event that the REP does not pay the transition charges to
the servicer, the servicer will have the right to collect transition charges
directly from those retail customers who receive their electricity bills from a
REP and have not paid the REP. REPs will bill most retail customers for the
transition charges, and as a result the Company will have to rely on a
relatively small number of entities for the collection of the bulk of the
transition charges. The servicer will not pay any shortfalls resulting from the
failure of any REP to forward transition charge collections. This may adversely
affect an investment in transition bonds because:
o REPs might use more permissive standards in bill collection and
credit appraisal than US Holdings historically used, and/or TXU
Electric Delivery's affiliated REP uses, with respect to its
customers, or might be less effective in billing and collecting. As a
result, those REPs may not be as successful in collecting the
transition charges as the servicer anticipated when setting the
transition charge.
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o If a REP defaults, the REP must either (i) allow the provider of
last resort ("POLR") or another certified REP of the customer's
choosing to assume responsibility for billing and collecting
transition charges from the REP's retail customers,
(ii) implement other mutually agreeable arrangements with the
servicer or (iii) arrange at the REP's own expense for all amounts
owed by its customers to be paid into a lock box controlled by the
servicer. In no event may the servicer directly bill a retail
customer for service that was previously billed by the REP and
previously paid by that customer to the REP. In addition, if a
replacement REP assumes the billing and collecting responsibility
during the period of a REP default, billing and collections may be
delayed due to the need to convert to such replacement provider's
systems or because such replacement provider may not have adequate
or complete information.
o A default by a REP which collects from a large number of customers
would have a greater impact than a default by a single customer.
o The bankruptcy of a REP may cause a delay in or prohibition of the
enforcement of rights against the REP, including the right to payment
to the servicer of transition charges previously collected by the
REP, or to comply with financial provisions of the 1999 Restructuring
Legislation or other state law.
o Any security deposit or other form of credit support made or
deposited by a REP may not be sufficient to cover any shortfalls
resulting from a failure of that REP to forward transition charges to
TXU Electric Delivery as servicer.
REPs who do not have a long-term unsecured credit rating of at least
"BBB-" and "Baa3" (or the equivalent from S&P and Moody's, respectively), will
be required to provide (i) a cash deposit, (ii) an affiliate guarantee, surety
bond or letter of credit or (iii) some combination of these forms of credit
support to the indenture trustee. The amount of such credit support will equal
two months' maximum expected collections of transition charges, as determined by
the servicer and agreed to by the REP, and any cash deposits will be deposited
in a REP security deposit subaccount. Credit support other than cash must be
provided by an investment grade entity. Documents representing any other form of
credit support will be held by the indenture trustee. Although the indenture
trustee will maintain the REP security deposit subaccounts, it will not have an
ownership interest in such subaccounts. However, the indenture trustee will have
a security interest in the Company's rights with respect to such subaccounts and
TXU Electric Delivery, as servicer, has agreed to use its reasonable best
efforts to obtain a security agreement from each REP with respect to such REP's
security deposit subaccount. In the event that a REP defaults in remitting
transition charges, the servicer may direct the indenture trustee to withdraw or
seek recourse for the amount of the payment default or, if less, withdraw the
full amount of that REP's security deposit from the REP security deposit
subaccount or seek full recourse against any other form of credit support
provided for deposit into the general subaccount of the applicable series.
In addition, the 1999 Restructuring Legislation provides for one or more
REPs in each designated geographical area to be designated the POLR for such
area or for specified classes of customers in such area. The 1999 Restructuring
Legislation requires the POLR to offer a standard retail service package of
basic electric service to retail customers in its designated area at a fixed,
nondiscountable rate approved by the Commission, regardless of the
creditworthiness of the customer. The REP serving as the POLR may face greater
difficulty in bill collection than other REPs, and therefore the servicer may
face greater difficulty in collecting transition charges from the REP serving as
the POLR.
As noted above, REPs issue a single bill to retail customers purchasing
electricity from a REP. This single bill includes all charges related to
purchasing electricity from the REP, delivery services from the transmission and
distribution utility and the applicable transition charges. This may increase
the risk that customers who have claims against the REP will attempt to offset
those claims against transition charges payable to the servicer or the Company.
This also increases the risk that a bankruptcy court in the event of a
bankruptcy of a REP would find that the REP has an interest in the transition
property and may make it more difficult to terminate a bankrupt REP or collect
transition charges from its customers.
A-13
Adjustments to transition charges and, in some cases, credit enhancements
(other than swap agreements) will be available to compensate for a failure by a
REP to pay transition charges over to the servicer. However, the amount of
credit enhancement funds may not be sufficient to protect an investment.
Customers Have Limited Experience in Paying the Transition Charges and
Paying Through REPs. The transition charges were introduced to customers for the
first time beginning with the billing period following the issuance of the first
series of transition bonds. As a result, customers may be confused by changes in
customer billing and payment arrangements. This confusion may cause the
misdirection or delay of collections of transition charges. Generation and
related services, including billing and collections, began to be provided by
REPs as part of a pilot project in July 2001. All customers in areas of Texas
subject to retail electric choice began to receive such services from REPs in
January 2002. Given the relatively recent introduction of customer choice, there
is limited information available as to how implementation is proceeding. Any
problems arising from new and untested systems or any lack of experience on the
part of the REPs with customer billing and collections could also cause delays
in billing and collecting transition charges. These delays could result in
shortfalls in transition charge collections and reduce the value of an
investment in transition bonds. As of December 31, 2004, TXU Electric Delivery
has not experienced any material problems with respect to its billing and
collections of these transition charges from REPs.
The Introduction of Competition to Metering Services in January 2004 May
Produce Unexpected Problems. Since January 2004, a commercial or industrial
retail customer may choose to own its own meter or may choose to have its meter
owned by a REP, the transmission and distribution utility, or another person
authorized by the customer. Until other entities are authorized by the
Commission, a transmission and distribution utility will continue to provide
metering services relating to the installation and removal of meters, meter
maintenance, meter testing and calibration, data collection, and data
management, including the transfer of meter data to the settlement agent. ERCOT
is required by the Commission's substantive rules to file with the Commission
quarterly updates on the operational readiness of the support systems necessary
for the Commission to authorize an entity other than the transmission and
distribution utility to provide the metering services described in the preceding
sentence. Should the Commission allow third parties to perform those metering
services in TXU Electric Delivery's service territory, there may be unforeseen
problems in converting to the third party's metering system, in taking accurate
meter readings and in collecting and processing accurate metering data.
Inaccurate metering data may lead to inaccuracies in the calculation and
imposition of transition charges and could give rise to disputes between the
servicer and REPs regarding payments and payment shortfalls. A shortfall or
material delay in collecting transition charges because of the foregoing could
result in payments of principal of the transition bonds not being paid according
to the expected amortization schedule, lengthening the weighted average life of
the transition bonds or payments of principal and interest not being made at
all.
Changes to Billing and Collection Practices May Reduce the Value of An
Investment in Transition Bonds. The Financing Order issued to TXU Electric
Delivery under the 1999 Restructuring Legislation sets forth the methodology for
determining the amount of the transition charges the Company may impose on each
customer. The servicer cannot change this methodology without approval from the
Commission. However, TXU Electric Delivery, as servicer, may set its own billing
and collection arrangements with REPs and with those customers from whom it
collects the transition charges directly, provided that these arrangements
comply with Commission customer safeguards. For example, to recover part of an
outstanding bill, TXU Electric Delivery may agree to extend a REP's or a
customer's payment schedule or to write off the remaining portion of the bill
including transition charges. Also, TXU Electric Delivery, or a successor to TXU
Electric Delivery as servicer, may change billing and collection practices. Any
change to billing and collection practices may have an adverse or unforeseen
impact on the timing and amount of customer payments and may reduce the amount
of transition charge collections and thereby limit the Company's ability to make
scheduled payments on the transition bonds. Separately, the Commission may
require changes to these practices. Any changes in billing and collection
regulation might adversely affect the billing terms and the terms of remittances
by REPs to the servicer or make it more difficult for the servicer to collect
the transition charges. These changes may adversely affect the value of the
transition bonds and their amortization, and, accordingly, their weighted
average lives.
A-14
Limits on Rights to Terminate Service May Make it More Difficult to
Collect Transition Charges. An important element of an electric utility's
policies and procedures relating to credit and collections is the right to
terminate or disconnect service on account of nonpayment. The Financing Order
provides that the sale of transition property by TXU Electric Delivery includes
all rights of TXU Electric Delivery to authorize disconnection of electric
service for nonpayment of transition charges. The Financing Order provides that,
if the servicer is billing customers for transition charges, the servicer shall
have the right to terminate service for nonpayment of transition charges
pursuant to the Commission rules. Nonetheless, Texas statutory requirements and
the rules and regulations of the Commission, which may change from time to time,
regulate and control the right to terminate service. In August 2002, the
Commission adopted new rules that significantly changed POLR service. Under the
new POLR rules, instead of being transferred to the POLR, non-paying residential
and small non-residential customers served by affiliated REPs are subject to
disconnection. Non-paying residential and small non-residential customers served
by non-affiliated REPs are transferred to the affiliated REP. Non-paying large
non-residential customers can be disconnected by any REP if the customer's
contract does not preclude it. Thus, within the new POLR framework, the POLR
provides electric service only to customers who request POLR service, whose
selected REP goes out of business, or who are transferred to the POLR by other
REPs for reasons other than non-payment. Effective June 1, 2004, REPs that meet
certain conditions will be permitted to request disconnection of non-paying
customers. TXU Electric Delivery's affiliated REP and the other REPs may not
terminate service to a customer on (1) a weekend day, (2) a day when the
previous day's high temperature did not exceed 32 degrees Fahrenheit and is
predicted to remain at or below that level for the next 24 hours or (3) a day
for which the National Weather Service issues a heat advisory for any county in
the service territory, or when a heat advisory has been issued for either of the
two prior calendar days. As a result, REPs must provide service to these
customers during this period without recouping transition charges from these
customers. This could cause a REP to go out of business, which may reduce the
amount of transition charge collections available for payments on the transition
bonds, although any associated reduction in payments would be factored into the
transition charge true-up adjustments.
Future Adjustments to Transition Charges by Customer Class May Result in
Insufficient Collections. The customers who will be responsible for paying
transition charges are divided into customer classes. Transition charges will be
allocated among customer classes and assessed in accordance with the formula
required under the 1999 Restructuring Legislation and specified in the Financing
Order. This allocation is based in part upon the existing rate structure of each
customer class. Adjustments to the transition charges will also be made
separately to each customer class. A shortfall in collections of transition
charges in one customer class may be corrected by making adjustments to the
transition charges payable by that customer class and any other customer class.
Some customer classes have a significantly smaller number of customers than
other customer classes. If customers in a class fail to pay transition charges,
the servicer may have to substantially increase the transition charges for the
remaining customers in that customer class and for other customer classes. The
servicer may also have to take this action if customers representing a
significant percentage of a class cease to be customers. These increases could
lead to further failures by the remaining customers to pay transition charges,
thereby increasing the risk of a shortfall in funds to pay the transition bonds.
The large industrial and the interruptible customer classes consist of a
small number of large customers. The failure of the customers in these customer
classes to pay transition charges could lead to increases in transition charges
to other members of this class as well as other customer classes. In addition,
with the issuance of each additional series of transition bonds, the transition
charges imposed on each customer class may increase. These increases could lead
to failures by customers to pay transition charges. In either case, these
increases could increase the risk of a shortfall in funds to pay the transition
bonds.
A-15
Risks Associated with the Unusual Nature of the Transition Property
TXU Electric Delivery May Not Recover Transition Charges More Than 15
Years from the Original Issue Date of the Series of Transition Bonds Relating to
Those Transition Charges. TXU Electric Delivery, or any successor servicer, is
prohibited from recovering transition charges after the fifteenth anniversary of
the date of issuance of the related transition bonds, but the Company may
continue to recover transition charges incurred during the applicable 15-year
period through the use of judicial process. Amounts collected from transition
charges imposed for electricity consumed through the fifteenth anniversary of
the date of issuance of the related transition bonds, or from credit enhancement
funds, may not be sufficient to repay the transition bonds in full. If that is
the case, no other funds will be available to pay the unpaid balance due on the
transition bonds.
Foreclosure of the Indenture Trustee's Lien on the Transition Property May
Not Be Practical. Under the 1999 Restructuring Legislation and the indenture,
the indenture trustee or the bondholders have the right to foreclose or
otherwise enforce the lien on transition property securing the transition bonds.
However, in the event of foreclosure, there is likely to be a limited market, if
any, for the transition property. Therefore, foreclosure may not be a realistic
or practical remedy, and the value of an investment in transition bonds may be
materially reduced.
Risks Associated with Potential Bankruptcy Proceedings
The Servicer Will Commingle the Transition Charges with Other Revenues,
Which May Obstruct Access to the Transition Charges in Case of the Servicer's
Bankruptcy. The servicer does not segregate the transition charges from its
general funds. The transition charges are segregated only when the servicer pays
them to the indenture trustee and the indenture trustee deposits them to the
applicable collection account. The servicer is permitted to remit collections on
a monthly basis if TXU Electric Delivery or a successor to TXU Electric
Delivery's electric public utility business remains the servicer, no servicer
default has occurred, and if:
o the servicer meets the credit ratings requirements of the applicable
rating agencies; or
o the servicer provides credit enhancement satisfactory to the
applicable rating agencies to assure remittance by the servicer to
the indenture trustee of the transition charges it collects.
If these conditions are not satisfied, the servicer is required to remit
collections to the indenture trustee within two business days of receipt.
Despite these requirements, the servicer might fail to pay the full amount of
the transition charges to the indenture trustee or might fail to do so on a
timely basis. This failure, whether voluntary or involuntary, could materially
reduce the amount of transition charge collections available to make payments on
the transition bonds.
The 1999 Restructuring Legislation provides that the Company's rights to
the transition property are not affected by the commingling of these funds with
any other funds of the servicer. In a bankruptcy of the servicer, however, a
bankruptcy court might rule that federal bankruptcy law takes precedence over
the 1999 Restructuring Legislation and does not recognize the Company's right to
collections of the transition charges that are commingled with other funds of
the servicer as of the date of bankruptcy. If so, the collections of the
transition charges held by the servicer as of the date of bankruptcy would not
be available to pay amounts owing on the transition bonds. In this case, the
Company would have only a general unsecured claim against the servicer for those
amounts. This decision could cause material delays in payment or losses on the
transition bonds and could materially reduce the value of an investment in
transition bonds.
REPs Will Commingle the Transition Charges with Other Revenues, Which May
Obstruct Access to the Transition Charges in Case of a REP's Bankruptcy. A REP
is not required to segregate the transition charges it collects from its general
funds, either on a series basis or otherwise, but will be required to remit to
the servicer amounts billed to it for transition charges, less an amount
relating to expected customer charge-offs, within 35 days of billing by the
servicer. A REP nonetheless might fail to pay the full amount of the transition
charges to the servicer or might fail to do so on a timely basis. This failure,
whether voluntary or involuntary, could materially reduce the amount of
transition charge collections available to make payments on one or more series
of transition bonds.
A-16
The 1999 Restructuring Legislation provides that the Company's rights to
the transition property are not affected by the commingling of these funds with
other funds. In a bankruptcy of a REP, however, a bankruptcy court might rule
that federal bankruptcy law takes precedence over the 1999 Restructuring
Legislation and does not recognize the Company's right to receive the collected
transition charges that are commingled with other funds of a REP as of the date
of bankruptcy. If so, the collected transition charges held by a REP prior to or
as of the date of bankruptcy would not be available to the Company to pay
amounts owing on the transition bonds. In this case, the Company would have only
a general unsecured claim against that REP for those amounts. This decision
could cause material delays in payment or losses on the transition bonds and
could materially reduce the value of an investment in transition bonds,
especially with respect to a default by TXU Energy Holdings, the largest REP in
TXU Electric Delivery's service territory.
If a REP Enters Bankruptcy Proceedings, Transition Charge Payments Made by
that REP to the Servicer May Constitute Preferences, and the Servicer May be
Required to Return such Funds to the Bankruptcy Estate of the REP. In the event
of a bankruptcy of a REP, a party in interest may take the position that the
remittance of funds prior to bankruptcy to the servicer, pursuant to the
Financing Order, constitutes a preference under bankruptcy law. If a court were
to hold that the remittance of funds constitutes a preference, any such
remittance within 90 days of the filing of the bankruptcy petition could be
avoidable, and the funds could be required to be returned to the bankruptcy
estate of the REP by the Company or the servicer. To the extent that transition
charges have been commingled with the general funds of the REP, the risk that a
court would hold that a remittance of funds was a preference would increase. The
Company or the servicer may be considered an "insider" with any REP that is
affiliated with the Company or the servicer. If the servicer or the Company are
considered to be an "insider" of the REP, any such remittance made within one
year of the filing of the bankruptcy petition could be avoidable as well if the
court were to hold that such remittance constitutes a preference. In either
case, the Company or the servicer would merely be an unsecured creditor of the
REP. If any funds were required to be returned to the bankruptcy estate of the
REP, the Company would expect that the amount of any future transition charges
would be increased through the true-up mechanism to recover the amount returned.
If the Servicer Enters Bankruptcy Proceedings, the Collections of the
Transition Charges Held By the Servicer as of the Date of Bankruptcy May
Constitute Preferences, Which Means These Funds Would Be Unavailable to Pay
Amounts Owing on the Transition Bonds. In the event of a bankruptcy of the
servicer, a party in interest may take the position that the remittance of funds
prior to bankruptcy of the servicer, pursuant to the Financing Order,
constitutes a preference under bankruptcy law. If a court were to hold that the
remittance of funds constitutes a preference, any such remittance within 90 days
of the filing of the bankruptcy petition could be avoidable, and the funds could
be required to be returned to the bankruptcy estate of the servicer. To the
extent that transition charges have been commingled with the general funds of
the servicer, the risk that a court would hold that a remittance of funds was a
preference would increase. In such case, the Company would merely be an
unsecured creditor of the servicer. If any funds were required to be returned to
the bankruptcy estate of the servicer, the Company would expect that the amount
of any future transition charges would be increased through the true-up
mechanism to recover the amount returned.
Bankruptcy of TXU Electric Delivery or any Successor Seller Could Result
in Losses or Delays in Payments on the Transition Bonds. The 1999 Restructuring
Legislation and the Financing Order provide that as a matter of Texas state law:
o the rights and interests of a selling utility under a financing
order, including the right to impose, collect and receive transition
charges, are contract rights of the seller;
A-17
o the seller may make a present transfer of its rights under a
financing order, including the right to impose, collect and receive
future transition charges that retail customers do not yet owe;
o upon the transfer to the Company, the rights will become transition
property and transition property constitutes a present property
right, even though the imposition and collection of transition
charges depend on further acts that have not yet occurred; and
o a transfer of the transition property from the seller, or its
affiliate, to the Company is a true sale of the transition property,
not a pledge of the transition property to secure a financing by the
seller.
These four provisions are important to maintaining payments on the
transition bonds in accordance with their terms during any bankruptcy of TXU
Electric Delivery. In addition, the Company has structured the transaction with
the objective of keeping the Company legally separate from TXU Electric Delivery
and its affiliates in the event of a bankruptcy of TXU Electric Delivery or any
such affiliate.
A bankruptcy court generally follows state property law on issues such as
those addressed by the state law provisions described above. However, a
bankruptcy court has authority not to follow state law if it determines that the
state law is contrary to a paramount federal bankruptcy policy or interest. If a
bankruptcy court in an TXU Electric Delivery bankruptcy refused to enforce one
or more of the state property law provisions described above for this reason,
the effect of this decision on a beneficial owner of transition bonds might be
similar to the treatment to be received in an TXU Electric Delivery bankruptcy
if the transition bonds had been issued directly by TXU Electric Delivery.
The Company has taken steps together with TXU Electric Delivery, as the
seller, to reduce the risk that in the event the seller or an affiliate of the
seller were to become the debtor in a bankruptcy case, a court would order that
the Company's assets and liabilities be substantively consolidated with those of
TXU Electric Delivery or an affiliate. These steps include the fact that the
Company is a separate special purpose limited liability company, and the
Company's organizational documents prevent the Company from commencing a
voluntary bankruptcy case without the unanimous affirmative vote of all the
Company's managers, including the managers independent of TXU Electric Delivery.
Nonetheless, these steps may not be completely effective, and thus if TXU
Electric Delivery or an affiliate of the seller were to become a debtor in a
bankruptcy case, a court might order that the Company's assets and liabilities
be consolidated with those of TXU Electric Delivery or an affiliate. A decision
by the bankruptcy court that, despite the separateness of the Company and TXU
Electric Delivery, the two companies should be consolidated, would have a
similar effect on a beneficial owner of transition bonds. Either decision could
cause material delays in payment of, or losses on, the transition bonds and
could materially reduce the value of an investment in such bonds. For example:
o the indenture trustee could be prevented from exercising any remedies
against TXU Electric Delivery on an investor's behalf, from
recovering funds to repay the transition bonds, from using funds in
the accounts under the indenture to make payments on the transition
bonds or from replacing TXU Electric Delivery as servicer, without
permission from the bankruptcy court;
o the bankruptcy court could order the indenture trustee to exchange
the transition property for other property, which might be of lower
value;
o tax or other government liens on TXU Electric Delivery's property
that arose after the transfer of the transition property to the
Company might nevertheless have priority over the indenture trustee's
lien and might be paid from transition charge collections before
payments on the transition bonds;
o the indenture trustee's lien might not be properly perfected in
transition property collections that were commingled with other funds
TXU Electric Delivery collected from its customers or REPs prior to
or as of the date of TXU Electric Delivery's bankruptcy or commingled
in the general funds of TXU Electric Delivery's affiliated REP as of
the date of that REP's bankruptcy, or might not be properly perfected
in all of the transition property, and the lien could therefore be
set aside in the bankruptcy, with the result that the transition
bonds would represent only general unsecured claims against TXU
Electric Delivery;
A-18
o the bankruptcy court might rule that neither the Company's property
interest nor the indenture trustee's lien extends to transition
charges in respect of electricity consumed after the commencement of
TXU Electric Delivery's bankruptcy case, with the result that the
transition bonds would represent only general unsecured claims
against TXU Electric Delivery;
o neither TXU Electric Delivery nor the Company may be obligated to
make any payments on the transition bonds during the pendency of the
bankruptcy case and/or pay interest accruing after the commencement
of the case;
o TXU Electric Delivery may be able to alter the terms of the
transition bonds as part of its plan of reorganization;
o the bankruptcy court might rule that the transition charges should be
used to pay a portion of the cost of providing electric service; or
o the bankruptcy court might rule that the remedy provisions of the
applicable sale agreement are unenforceable, leaving the Company with
a claim of actual damages against TXU Electric Delivery that may be
difficult to prove.
Furthermore, if TXU Electric Delivery enters into bankruptcy, it may be
permitted to stop acting as servicer and it may be difficult to find a third
party to act as servicer. The failure of a servicer to perform its duties or the
inability to find a successor servicer may cause payment delays or losses on an
investment in transition bonds. Also, the mere fact of a servicer or REP
bankruptcy proceeding could have an adverse effect on the resale market for the
transition bonds and on the value of the transition bonds.
The Sale of the Transition Property Could Be Construed as a Financing and
Not a Sale in a Case of TXU Electric Delivery's Bankruptcy Which Could Delay or
Limit Payment on the Transition Bonds. The 1999 Restructuring Legislation
provides that the characterization of a transfer of transition property as a
sale or other absolute transfer will not be affected or impaired in any manner
by treatment of the transfer as a financing for federal or state tax purposes or
financial reporting purposes. The Company and TXU Electric Delivery will treat
the transaction as a sale under applicable law, although for financial reporting
and federal and state income and franchise tax purposes the transaction is
intended to be treated as a financing and not a sale. In the event of a
bankruptcy of TXU Electric Delivery, a party in interest in the bankruptcy may
assert that the sale of the transition property to the Company was a financing
transaction and not a sale or other absolute transfer and that the treatment of
the transaction for financial reporting and tax purposes as a financing and not
a sale lends weight to that position. In a recent bankruptcy court case
involving LTV Steel Company, the debtor obtained an interim emergency motion to
use collections from accounts and inventory that it had sold on the grounds that
the sales were in fact disguised financings. The circumstances under which the
LTV Steel Company ruling would be followed by other courts are not certain. If a
court were to adopt reasoning similar to that of the court in the LTV Steel case
or were otherwise to characterize the transaction as a financing, the Company
would be treated as a secured creditor of TXU Electric Delivery in the
bankruptcy proceedings. Although the Company would in that case have a security
interest in the transition property, the Company would not likely be entitled to
access to the transition charge collections during the bankruptcy and would be
subject to the typical risks of a secured creditor in a bankruptcy case,
including the possible bankruptcy risks described in the immediately preceding
risk factor. As a result, repayment on the transition bonds could be
significantly delayed and a plan of reorganization in the bankruptcy might
permanently modify the amount and timing of payments to the Company of
transition charge collections and therefore the amount and timing of funds
available to the Company to make payments on the transition bonds.
A-19
Claims Against TXU Electric Delivery or any Successor Seller May Be
Limited in the Event of a Bankruptcy of the Seller. If the seller were to become
a debtor in a bankruptcy case, claims, including indemnity claims, by the
Company against the seller under the applicable sale agreement and the other
documents executed in connection with the applicable sale agreement would be
unsecured claims and would be subject to being discharged in the bankruptcy
case. In addition, a party in interest in the bankruptcy may request that the
bankruptcy court estimate any contingent claims that the Company have against
the seller. That party may then take the position that these claims should be
estimated at zero or at a low amount because the contingency giving rise to
these claims is unlikely to occur. If the seller were to become a debtor in a
bankruptcy case and the indemnity provisions of the applicable sale agreement
were triggered, a party in interest in the bankruptcy might challenge the
enforceability of the indemnity provisions. If a court were to hold that the
indemnity provisions were unenforceable, the Company would be left with a claim
for actual damages against the seller based on breach of contract principles.
The actual amount of these damages would be subject to estimation and/or
calculation by the court. The Company cannot give any assurance as to the result
if any of the above-described actions or claims were made. Furthermore, the
Company cannot give any assurance as to what percentage of their claims, if any,
unsecured creditors would receive in any bankruptcy proceeding involving the
seller.
A Bankruptcy of TXU Electric Delivery or Any Successor Seller Would Limit
the Remedies Available to the Indenture Trustee. Upon an event of default under
the indenture, the 1999 Restructuring Legislation permits the indenture trustee
to enforce the security interest in the transition property in accordance with
the terms of the indenture. In this capacity, the indenture trustee is permitted
to request a Travis County, Texas district court to order the sequestration and
payment to bondholders of all revenues arising with respect to the transition
property. There can be no assurance, however, that the Travis County, Texas
district court would issue this order after a seller bankruptcy in light of the
automatic stay provisions of Section 362 of the United States Bankruptcy Code.
In that event, the indenture trustee would be required to seek an order from the
bankruptcy court lifting the automatic stay to permit this action by the Texas
court, and an order requiring an accounting and segregation of the revenues
arising from the transition property. There can be no assurance that a court
would grant either order.
Other Risks Associated with an Investment in the Transition Bonds
Absence of a Secondary Market for Transition Bonds Could Limit the Ability
to Resell Transition Bonds. The underwriters for the transition bonds may assist
in resales of the transition bonds, but they are not required to do so. A
secondary market for the transition bonds of any series may not develop. If a
secondary market does develop, it may not continue or there may not be
sufficient liquidity to allow investors to resell any of their transition bonds.
The Company does not anticipate that any transition bonds will be listed on any
securities exchange.
TXU Electric Delivery's Obligation to Indemnify the Company for a Breach
of a Representation or Warranty May Not Be Sufficient to Protect an Investor's
Investment. If the seller breaches a representation or warranty in the
applicable sale agreement, or the servicer (initially TXU Electric Delivery)
breaches a representation or warranty under the applicable servicing agreement,
it is obligated to indemnify the Company and the indenture trustee for any
liability, obligation, claim, action, suit or payment resulting from that
breach, as well as any reasonable costs and expenses incurred. TXU Electric
Delivery will not be obligated to repurchase the transition property in the
event of a breach of any representation or warranty regarding the transition
property, and neither the indenture trustee nor the holders of transition bonds
will have the right to accelerate payments on the transition bonds because of
such a breach (absent an event of default under the indenture). The sale
agreements will provide that any change in the law by legislative enactment,
constitutional amendment or voter initiative that renders any of the
representations and warranties untrue would not constitute a breach under each
sale agreement. TXU Electric Delivery or any successor entity acting as seller
or servicer may not have sufficient funds available to satisfy its
indemnification obligations to the Company and to the indenture trustee;
therefore TXU Electric Delivery may not be able to pay investors amounts owing
on the transition bonds in full. If TXU Electric Delivery becomes obligated to
indemnify holders of transition bonds, the ratings on the transitions bonds will
likely be downgraded since holders of transition bonds will be unsecured
creditors of TXU Electric Delivery with respect to any of these indemnification
amounts. TXU Electric Delivery will not indemnify any person for any liability,
obligation, claim, action, suit or payment resulting solely from a downgrade in
the ratings on the transition bonds.
A-20
Risks Associated With the Use of Credit Enhancements, Hedge or Swap
Transactions. The Company may enter into certain forms of credit enhancement,
interest rate swaps or hedge arrangements with respect to a series or class of
floating rate transition bonds that entail additional kinds of risks, including
the risk associated with the credit of any party providing the credit
enhancement, interest rate swap or hedge.
An Investor Might Receive Principal Payments Later, or Earlier, Than
Expected. The amount and the rate of collection of transition charges that TXU
Electric Delivery will collect from each customer class will partially depend on
actual electricity usage and the amount of collections and write-offs for that
customer class. The amount and the rate of collection of transition charges,
together with the transition charge adjustments described above, will generally
determine whether there is a delay in the scheduled repayments of transition
bond principal. If TXU Electric Delivery collects transition charges at a slower
rate than expected from any customer class or REP, it may have to request
adjustments to the transition charges. If those adjustments are not timely and
accurate, investors may experience a delay in payments of principal and interest
or a material decrease in the value of their investment. If there is an
acceleration of the transition bonds before maturity, all classes will be paid
pro rata, therefore some classes may be paid earlier than expected and some
classes may be paid later than expected.
Technological Change May Make Alternative Energy Sources More Attractive.
The continuous process of technological development may result in the
introduction for an increasing number of retail consumers of economically
attractive alternatives to purchasing electricity through TXU Electric
Delivery's distribution facilities. Previously, only the largest industrial and
institutional users with large process steam requirements could use cogeneration
or self-generation installations cost-effectively. However, manufacturers of
self-generation facilities continue to develop smaller-scale, more
fuel-efficient generating units which can be cost-effective options for retail
consumers with smaller electric energy requirements. If such facilities have
rated capacities of 10 megawatts or less, consumers that rely on such facilities
do not generally have to pay transition charges under provisions of the 1999
Restructuring Legislation. Consumers may avoid a portion of their overall
transition charge bill by installing new on-site generation of over 10 megawatts
that reduces consumption through TXU Electric Delivery's transmission and
distribution system up to 12.5%. Technological developments may allow greater
numbers of retail consumers to avoid transition charges under such provisions,
which may reduce the total number of retail consumers from which transition
charges will be collected. A reduction in the number of payers of transition
charges could result in delays or a failure to make payments of interest on and
principal of the transition bonds.
A-21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of
TXU Electric Delivery Transition Bond Company:
We have audited the accompanying balance sheets of TXU Electric Delivery
Transition Bond Company LLC (the "Company") as of December 31, 2004 and 2003 and
the related statements of income and cash flows for the two years in the period
ended December 31, 2004, and the related statements of member's equity for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2004 and 2003,
and the results of its operations and cash flows for each of the two years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 29, 2005
A-22
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
STATEMENTS OF INCOME
Year Ended Year Ended
December 31, December 31,
2004 2003
------------- --------------
Operating revenues:
Transition charge revenue............................... $106,395,814 $19,461,574
Investment income....................................... 317,460 20,819
------------ -----------
Total operating revenues.............................. 106,713,274 19,482,393
------------ -----------
Operating expenses:
Interest expense........................................ 41,454,452 7,777,756
Amortization of transition property..................... 47,911,024 5,748,164
Over-recovery of transition charges..................... 16,657,167 5,770,918
Servicing fees, administrative and general expenses..... 690,631 185,555
------------ -----------
Total operating expenses.............................. 106,713,274 19,482,393
------------ -----------
Net income................................................... $ -- $ --
============ ===========
See Notes to Financial Statements
A-23
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
2004 2003
----------- ----------
Cash flows - operating activities:
Net income....................................... $ -- $ --
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization of transition property......... 47,911,024 5,748,164
Over-recovery of transition charges......... 16,657,167 5,770,918
Changes in operating assets...................... (11,532,312) (7,486,087)
Changes in operating liabilities................. 5,762,674 8,372,923
----------- ------------
Cash provided by operating activities....... 58,798,553 12,405,917
----------- ------------
Cash flows - financing activities:
Proceeds from issuance of Transition Bonds...... 789,777,000 500,000,000
Equity contribution from member (parent)......... 3,948,885 12,500,000
Repayment of Transition Bonds.................... (32,040,361) -
------------ ------------
Cash provided by financing activities....... 761,685,524 512,500,000
------------ ------------
Cash flows - investing activities:
Purchase of transition property.................. (789,777,000) (500,000,000)
Deposit of restricted funds...................... (30,707,077) (24,904,917)
------------ ------------
Cash used in investing activities........... (820,484,077) (524,904,917)
------------ ------------
Net increase in cash and cash equivalents........... -- 1,000
Cash and cash equivalents, beginning of period...... 1,000 --
------------ -------------
Cash and cash equivalents, end of period............ $ 1,000 $ 1,000
============ ============
A-24
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
BALANCE SHEETS
December 31, December 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,000 $ 1,000
Restricted cash................................................... 42,732,370 12,392,207
Transition charge receivable:
Affiliated REPs................................................. 12,622,632 5,581,423
Nonaffiliated REPs.............................................. 6,396,766 1,905,664
------------- -------------
Total current assets............................................ 61,752,768 19,880,294
Investments:
Restricted funds held in trust.................................... 12,879,625 12,512,711
Transition property, net of accumulated amortization
of $53,659,188 and $5,748,164................................... 1,236,117,812 494,251,836
-------------- -------------
Total assets.................................................... $1,310,750,205 $ 526,644,841
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Long-term debt due currently...................................... $ 90,305,053 $ 22,543,239
Accounts payable - affiliate...................................... 181,162 169,793
Accrued interest.................................................. 12,316,572 7,777,756
Other current liabilities......................................... 1,637,863 425,374
-------------- -------------
Total current liabilities....................................... 104,440,649 30,916,162
Transition bonds.................................................... 1,167,431,586 477,456,761
Regulatory liability................................................ 22,428,085 5,770,918
-------------- -------------
Total liabilities............................................... 1,294,300,320 514,143,841
Member's equity..................................................... 16,449,885 12,501,000
-------------- -------------
Total liabilities and member's equity........................... $1,310,750,205 $ 526,644,841
============== =============
See Notes to Financial Statements
A-25
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
STATEMENTS OF MEMBER'S EQUITY
Member's Equity December 31, 2002...................... $ 1,000
Equity contribution from parent - August 2003......... 6,346,154
Equity contribution from parent - December 2003........ 6,153,846
-------------
Member's equity December 31, 2003................. 12,501,000
Equity contribution from parent - June 2004............ 3,948,885
-------------
Member's Equity December 31, 2004...................... $ 16,449,885
=============
See Notes to Financial Statements.
A-26
TXU ELECTRIC DELIVERY TRANSITION BOND COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Business - The Company is a bankruptcy remote special purpose Delaware
limited liability company, wholly-owned by TXU Electric Delivery. TXU Electric
Delivery is a wholly-owned subsidiary of US Holdings, which is a wholly-owned
subsidiary of TXU Corp. TXU Electric Delivery is a regulated electricity
transmission and distribution company, principally engaged in providing delivery
services to REPs that sell electricity in the north-central, eastern and western
parts of Texas.
The Company was organized in November 1999 for the limited purposes of
issuing bonds and purchasing and owning transition property (as defined in the
1999 Restructuring Legislation) acquired from TXU Electric Delivery. Transition
property represents the irrevocable right to impose, collect and receive
transition charges in an amount sufficient to pay the interest, fees, and
expenses associated with the transition bonds, and the aggregate principal
amount of the transition bonds. For legal purposes, the transition property has
been sold to the Company by TXU Electric Delivery. The Company had no operations
until August 2003. In connection with the acquisition of the transition
property, the Company:
o registered and issued transition bonds,
o pledged its interest in the transition property and other transition
bond collateral to secure the transition bonds,
o has agreed to make debt service payments on the transition bonds, and
o has agreed to perform other activities that are necessary, suitable
or convenient to accomplish these purposes.
The Company is structured and is operated in a manner such that in the
event of bankruptcy proceedings against TXU Electric Delivery, the assets of the
Company will not be consolidated into the bankruptcy estate of TXU Electric
Delivery. TXU Electric Delivery is not the owner of the transition property
described herein, and the assets of the Company are not available to pay
creditors of TXU Electric Delivery or any of its affiliates.
Effective May 13, 2004, the Company changed its name from Oncor Electric
Delivery Transition Bond Company LLC to TXU Electric Delivery Transition Bond
Company LLC.
Basis of Presentation -- The financial statements of the Company 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 adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results of operations and financial position have
been included therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of the Company's financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense. In the event
estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
No material adjustments, other than those disclosed elsewhere herein, were made
to previous estimates during the current year.
Regulatory Assets and Liabilities -- The Company's business meets the
applicability criteria of SFAS 71. This accounting standard recognizes the
cost-based rate making process, which may result in differences in the
application of generally accepted accounting principles between regulated and
non-regulated entities.
A-27
Revenue Recognition -- Transition charges are billed to REPs by TXU
Electric Delivery, as servicer, on behalf of the Company. These transition
charges are recorded as revenue by the Company. Transition charges are
recognized when delivery services are provided to customers on the basis of
periodic cycle meter readings and include an estimated accrual for the
transition charge from the meter reading date to the end of the period. The
accrued transition charge is based on actual daily billings for the most recent
metered period applied to the number of unmetered days through the end of the
period.
Amortization -- The transition property acquired from TXU Electric
Delivery is amortized over the life of the transition bonds based on principal
payments over the life of the transition bonds.
Investment Income -- The Company earns investment income on funds held by
the indenture trustee, including the indenture trustee reserve established to
cover any future trustee fees and expenses associated with the transition bonds.
These funds held by the trustee are invested as allowed by the indenture.
Investment income on transition charge collections is recognized as earned and
serves to increase the over-recovery of transition charges by a corresponding
amount since it will be used to make payments on the transition bonds.
Income and Other Taxes -- The Company is organized as a single-member
limited liability company and will not be subject to United States federal
income tax as an entity separate from TXU Electric Delivery. In addition, the
Company's receipt of transition property, transition charges and short-term
earnings from investments of the transition charges will not be subject to state
and local tax. Accordingly, there is no provision for federal, state or local
taxes.
Comprehensive Income-- There are no other components of comprehensive
income besides net income.
3. RELATED PARTY TRANSACTIONS
Pursuant to administration and servicing agreements between the Company
and TXU Electric Delivery, TXU Electric Delivery furnishes to the Company, at a
fixed fee per year, billing, payment processing, collection, clerical,
secretarial and other accounting services, which are reflected as administrative
and general expenses in the income statement.The Company's expense for servicing
and administration fees earned by TXU Electric Delivery totaled $636,479 and
$169,793 for the years ended December 31, 2004 and 2003, respectively.
During the twelve months ended December 31, 2004 and 2003, transition
charges billed to TXU Energy Holdings, which are reflected in revenue, totaled
$70,309,612 and $14,177,528, respectively. The balance of accounts receivable
due from TXU Energy Holdings was $12,622,632 as of December 31, 2004 and
$5,581,423 as of December 31, 2003.
A-28
4. TRANSITION BONDS
Long-term Debt -- At December 31, 2004 and December 31, 2003, the Company's
long-term debt consisted of the following:
December 31, December 31,
2004 2003
-------------- --------------
2.260% Fixed Series 2003 Bonds due in semi-annual installments through February 15, 2007.... $ 80,456,761 $103,000,000
4.030% Fixed Series 2003 Bonds due in semi-annual installments through February 15, 2010.... 122,000,000 122,000,000
4.950% Fixed Series 2003 Bonds due in semi-annual installments through February 15, 2013.... 130,000,000 130,000,000
5.420% Fixed Series 2003 Bonds due in semi-annual installments through August 15, 2015...... 145,000,000 145,000,000
3.520% Fixed Series 2004 Bonds due in semi-annual installments through November 15, 2009.... 269,502,878 -
4.810% Fixed Series 2004 Bonds due in semi-annual installments through November 15, 2012.... 221,000,000 -
5.290% Fixed Series 2004 Bonds due in semi-annual installments through May 15, 2016......... 289,777,000 -
-------------- ------------
Total................................................................................... 1,257,736,639 500,000,000
Less amount due currently................................................................... 90,305,053 22,543,239
-------------- -----------
Total Long-Term Debt........................................................................ $1,167,431,586 $477,456,761
============== ============
The transition property sold to the Company is pledged as collateral for
the bonds, as well as restricted cash in the capital subaccount at December 31,
2004 of $2,786,476. Collections of transition charges will be used to pay the
principal, interest and associated costs of the transition bonds. The Company is
required to maintain restricted cash pledged as collateral for the bonds in an
amount equal to 0.5% of the initial aggregate principal amount of bonds
outstanding. Should the transition charges collected through the specified
payment dates listed above not provide adequate funds to make the scheduled
payments of principal and interest, the transition charges can continue to be
collected for approximately two years before the bond goes into default for
non-payment.
Maturity requirements for the years 2005 through 2009 and thereafter under
long-term debt instruments outstanding at December 31, 2004, were as follows:
Year
2005 ........................................... $ 90,305,053
2006 ........................................... 93,096,974
2007 ........................................... 96,548,577
2008 ........................................... 99,433,391
2009 ........................................... 103,243,823
Thereafter...................................... 775,108,821
--------------
Total...................................... $1,257,736,639
==============
The fair value of the outstanding transition bonds was approximately
$1,281,000,000 as of December 31, 2004 and approximately $516,000,000 as of
December 31, 2003.
Financial Covenants -- The terms of the indenture contain financial
covenants that require maintenance of specified collateral deposits in
proportion to the aggregate principal amount of the bonds outstanding. As of
December 31, 2004, the Company was in compliance with such covenants.
5. MEMBER'S INTEREST
Upon the issuance of the second series of transition bonds in June 2004,
TXU Electric Delivery was required to contribute $3,948,885 to the capital
subaccount, pledged as collateral for that series of transition bonds.
A-29
TXU Electric Delivery Transition Bond Company LLC Exhibits to 2004 Form 10-K
APPENDIX B
As
Exhibits Exhibit
(23) Consent of Experts
23 -- Consent of Deloitte & Touche, LLP, Independent Auditors
for TXU Electric Delivery Transition Bond Company LLC.
(32) Section 1350 Certifications.
32(a) -- Certification of Tom Baker, principal executive officer
of TXU Electric Delivery Transition Bond Company LLC,
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32(b) -- Certification of Kirk R. Oliver, principal financial
officer of TXU Electric Delivery Transition Bond Company
LLC, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99) Additional Exhibits.
99(a)(1) -- Monthly Servicer Report (Series 2004-1 for October 2004)
99(a)(2) -- Monthly Servicer Report (Series 2004-1 for November 2004)
99(a)(3) -- Monthly Servicer Report (Series 2004-1 for December 2004)
99(a)(4) -- Monthly Servicer Report (Series 2003-1 for October 2004)
99(a)(5) -- Monthly Servicer Report (Series 2003-1 for November 2004)
99(a)(6) -- Monthly Servicer Report (Series 2003-1 for December 2004)
99(b) -- Statement of Balances as of December 31, 2004
99(c) -- A quarterly statement affirming that, in all material
respects, for each materially significant REP, (a) each REP has
been billed in compliance with the requirements outlined in
the Financing Order; (b) each REP has made payments in compliance
with the requirements outlined in the Financing Order, and (c)
each REP satisfies the Creditworthiness requirements of the
Financing Order.
99(d) -- Interim True-up of Transition Charges
99(e) (1) -- Statement of Outstanding Bond Balances Series 2003-1
99(e) (2) -- Statement of Outstanding Bond Balances Series 2004-1
99(f) -- Semi-Annual Servicer's Certificate
* Incorporated herein by reference.
B-1