The ratings for Oncor’s senior unsecured debt were downgraded two notches by Moody’s and one notch by Fitch. S&P affirmed the existing rating of Oncor’s senior unsecured debt. While Oncor currently has no senior secured indebtedness, upon its revolving credit facility and its existing long-term debt becoming secured, the Oncor senior secured ratings above would apply.
All of the rating agencies placed the ratings for Oncor on “stable outlook”, with the exception of S&P, which placed Oncor’s rating on “developing”.
A rating reflects only the view of a rating agency, and is not a recommendation to buy, sell or hold securities. Any rating can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.
Material Credit Rating Covenants
Certain arrangements of Oncor, including its credit facility and certain leases, contain terms pursuant to which the interest rates charged under the agreements may be adjusted depending on credit ratings.
Material Cross Default Provisions
Certain financing arrangements contain provisions that may result in an event of default if there were a failure under other financing arrangements to meet payment terms or to observe other covenants that may result in an acceleration of payments due. Such provisions are referred to as “cross default” provisions.
A default by Oncor or any subsidiary thereof in respect of indebtedness in a principal amount in excess of $50 million may result in a cross default under its new credit facility totaling $2.0 billion. Under this credit facility, a default by Oncor or any subsidiary thereof may cause the maturity of outstanding balances under such facility to be accelerated.
Other arrangements, including leases, have cross default provisions, the triggering of which would not result in a significant effect on liquidity.
See Note 7 to Financial Statements for details of guarantees.
OFF BALANCE SHEET ARRANGEMENTS
Oncor participated in an accounts receivable securitization program. See discussion above under “Sale of Accounts Receivable” and in Note 4 to Financial Statements.
COMMITMENTS AND CONTINGENCIES
See Note 7 to Financial Statements for details of contingencies, including guarantees.
CHANGES IN ACCOUNTING STANDARDS
See Notes 1 and 2 to Financial Statements for a discussion of changes in accounting standards.
REGULATION AND RATES
2007 Texas Legislative Session
The Texas Legislature convened in its regular biennial session on January 9, 2007 and adjourned on May 28, 2007. The session was not a “sunset” session for the PUCT, so there was no requirement that the Legislature consider any electric industry-related bills. However, various measures pertaining to the electric industry were considered. The primary measures that were under consideration and could have materially affected Oncor’s business were ultimately not enacted. New PURA provisions were enacted that ensure the PUCT shall have authority to enforce commitments made in a filing under PURA Section 14.101 (such as the filing made by Texas Holdings and Oncor on April 25, 2007).
Oncor Matters Pending with the PUCT
In April 2007, the PUCT issued an order requiring Oncor to file a rate case based on a test year ending December 31, 2006. Because the PUCT has original jurisdiction over only transmission rates and the distribution rates charged in unincorporated areas and within cities that have ceded original jurisdiction to the PUCT, Oncor estimates that approximately one-third of its operating revenues would be subject to change under this order. On August 28, 2007, Oncor made the required filing, and the filing supports a rate increase of approximately $85 million over current rates subject to the original jurisdiction of the PUCT. However, Oncor requested that the PUCT enter an order abating the proceeding and convene a technical conference to consider a final order in the proceeding that would include the following provisions: (i) the PUCT will take "no action" on Oncor's proposed rate filing package and will enter an order confirming that Oncor's current rates will remain in effect until otherwise changed by a final order of the PUCT or other appropriate jurisdictional authority; (ii) Oncor will be required to file a system-wide rate case with the PUCT no later than July 1, 2008, based on a test year ended December 31, 2007 consistent with Oncor’s 2006 cities rate settlement; (iii) Oncor will be required to file an Earnings Monitor Report (EMR) with the PUCT no later than March 15, 2008, for calendar year 2007, and no later than March 15, 2009 for calendar year 2008, notwithstanding the pendency at the PUCT of this or any other Oncor rate case; and (iv) the PUCT will enter an accounting order, or similar directive, providing that if Oncor’s 2008 or 2009 EMR filings demonstrate that Oncor earned more than 10.75% return on equity (ROE) during the relevant period covered by the EMR filing, on a weather normalized basis, Oncor will record a credit to the regulatory asset related to self insurance reserve costs such that Oncor's ROE for the relevant period would be no higher than 10.75%. Due to the proposed stipulation discussed below, the Oncor rate case was abated (suspended) on October 18, 2007. One of the provisions of the proposed stipulation is that the Oncor rate case would be dismissed.
In April 2007, Oncor and Merger Sub (together, the Applicants) filed a Joint Report and Application (Report) with the PUCT pursuant to Section 14.101(b) of PURA and PUCT SUBST. R.25.75. These rules at that time required that a transaction involving the sale of more than 50% of the stock of a public utility be reported to the PUCT within a reasonable time subsequent to consummation of the transaction and that the PUCT shall determine whether the transaction is consistent with the public interest standards set out therein. The applicants filed the Report even though the Merger does not involve the direct sale of public utility stock and the PUCT does not have the authority to approve or reject the Merger. The Report contained commitments that took effect upon the closing of the Merger. Such commitments include: maintenance of specified Oncor debt-to-equity ratios, minimum Oncor capital expenditure levels, increased spending on demand-side management/energy efficiency programs over the amount in Oncor’s rates, minimum five year continued majority ownership by the Sponsor Group and that Oncor will not incur any indebtedness and will not guarantee or use its assets to secure any affiliate indebtedness incurred to finance the Merger. In connection with a proceeding resulting from the filing of the Report, several parties, including Oncor, the PUCT staff, and certain interveners have agreed on the terms of a stipulation. Because the proposed stipulation is not unanimous at this time, a procedural schedule has been set to enable the parties supporting and opposing the stipulation to file testimony, culminating with a hearing before the PUCT scheduled in December 2007. The proposed stipulation includes the following provisions, among others:
| · | Oncor will agree to a one-time $72 million credit, which is intended for all retail customers in its service territory. While the credit will be given to REPs, the intent of the parties to the agreement is that the credit will be passed through to end-use consumers, and only those REPs that agree to do so will receive their portion of the credit. |
| · | The PUCT will dismiss Oncor’s pending rate case discussed immediately above. Consistent with the 2006 cities rate settlement, Oncor will file a system-wide rate case no later than July 1, 2008 based on a test-year ended December 31, 2007. |
| · | Oncor will write-off regulatory assets of approximately $56 million related to self insurance reserve costs and 2002 restructuring expenses. |
| · | Dividends paid by Oncor will be limited through December 31, 2012, to an amount not to exceed Oncor’s net income (determined in accordance with GAAP), subject to certain defined adjustments. |
| · | Oncor will commit to minimum capital spending of $3.6 billion over the five-year period ending December 31, 2012, subject to certain defined conditions. |
| · | Oncor will commit to $100 million in spending over the five-year period ending December 31, 2012 on demand side management or other energy efficiency initiatives. This spending will not be recoverable in rates. |
Transmission Rates
In order to recover increased affiliate and third-party transmission costs from REPs, Oncor is allowed to request an update twice a year to the transmission cost recovery factor (TCRF) component of its retail delivery rate charged to REPs. In January 2007, an application was filed to increase the TCRF, which was administratively approved on February 22, 2007 and became effective March 1, 2007. This increase is expected to increase annualized revenues by $14 million. In July 2007, an application was filed to increase the TCRF, which was approved administratively on August 23, 2007 and became effective September 1, 2007. This increase is expected to increase annualized revenues by $26 million and includes the $15 million of the wholesale transmission rate increase which is recoverable from REPs as described below.
In February 2007, Oncor filed an application for an interim update of its wholesale transmission rate. The application was approved by the PUCT in April 2007 and the new rate went into effect immediately. Annualized revenues are expected to increase by approximately $38 million. Approximately $23 million of this increase is recoverable through transmission rates charged to wholesale customers, and the remaining $15 million is recoverable from REPs through the TCRF component of Oncor’s delivery rates charged to REPs.
Competitive Renewable Energy Zones
In the first quarter of 2007, the PUCT initiated a docket to identify the transmission facilities necessary to interconnect future renewable energy generating facilities. As part of the docket, the PUCT considered which zones would contain the best renewable energy sources. On July 20, 2007, the PUCT voted to designate zones with generation potential of over 20,000 MW.
The PUCT also opened a project to evaluate potential transmission service providers that are interested in constructing the designated transmission facilities. In connection with this project, Oncor indicated to the PUCT its interest in constructing any designated transmission facilities, particularly those within its traditional service territory and those that interconnect with Oncor's transmission facilities.
On October 2, 2007, the PUCT issued its interim order in the Competitive Renewable Energy Zones (CREZ) docket. Within six months of the date of the interim order, ERCOT will file the results of the CREZ Transmission Optimization Study. The study will include four scenarios of wind capacity, ranging from 10,000 MW to 22,806 MW. The PUCT will then determine the major transmission improvements needed to support the wind resources and select the transmission service providers that will construct the facilities. Oncor cannot predict the amount of transmission facilities in competitive renewable energy zones, if any, that it will construct.
Summary
Although Oncor cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions, no changes are expected in trends or commitments, other than those discussed in this report, which might significantly alter its basic financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that Oncor may experience a loss in value as a result of changes in market conditions such as interest rates, which Oncor is exposed to in the ordinary course of business. Oncor enters into financial instruments to manage interest rate risk related to its indebtedness.
Except as discussed below, the information required hereunder is not significantly different from the information set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in the 2006 Form 10-K and is therefore not presented herein.
CREDIT RISK
Credit Risk — Credit risk relates to the risk of loss associated with nonperformance by counterparties. Oncor’s customers consist primarily of REPs. As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the Commission. REP certificates granted by the Commission are subject to suspension and revocation for significant violation of PURA and Commission rules. Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the Commission.
Credit Exposure— Oncor’s exposure to credit risk associated with accounts receivable totaled $184 million from affiliated customers, of which $181 million is from TCEH, and $250 million from unaffiliated customers as of September 30, 2007. The unaffiliated customer receivable amount is inclusive of $112 million of accounts receivable funded under the accounts receivable securitization program and is before the allowance for uncollectible accounts. The unaffiliated exposure of $250 million consists almost entirely of noninvestment grade trade accounts receivable. Oncor does not have any customers that represent more than 10% of the unaffiliated trade receivable amount at September 30, 2007.
Oncor is also exposed to credit risk associated with the note receivable from TCEH totaling $332 million at September 30, 2007 (see Note 10 to Financial Statements).
Oncor is also exposed to credit risk related to the Capgemini put option with a carrying value of $51 million. Subject to certain terms and conditions, Cap Gemini North America, Inc. and its parent, Cap Gemini S.A., have guaranteed the performance and payment obligations of Capgemini under the services agreement, as well as the payment in connection with the put option. S&P currently maintains a BB+ rating with a CreditWatch positive outlook for Cap Gemini S. A.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Oncor contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that Oncor expects or anticipates to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of Oncor’s business and operations (often, but not always, through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projection,” “target,” “outlook,”), are forward-looking statements. Although Oncor believes that in making such forward-looking statement its expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors discussed under “Risk Factors” and the following important factors, among others, that could cause the actual results of Oncor to differ materially from those projected in such forward-looking statements:
| · | prevailing governmental policies and regulatory actions, including those of the Texas Legislature, the Governor of Texas, the FERC and the Commission, with respect to: |
| · | permitted capital structure; |
| · | industry, market and rate structure; |
| · | recovery of investments; |
| · | acquisitions and disposals of assets and facilities; |
| · | operation and construction of facilities; |
| · | changes in tax laws and policies; and |
| · | changes in and compliance with environmental and safety laws and policies; |
| · | continued implementation of the 1999 Restructuring Legislation; |
| · | legal and administrative proceedings and settlements; |
| · | general industry trends; |
| · | weather conditions and other natural phenomena, and acts of sabotage, wars or terrorist activities; |
| · | unanticipated population growth or decline, and changes in market demand and demographic patterns; |
| · | changes in business strategy, development plans or vendor relationships; |
| · | unanticipated changes in interest rates or rates of inflation; |
| · | unanticipated changes in operating expenses, liquidity needs and capital expenditures; |
| · | commercial bank market and capital market conditions; |
| · | inability of various counterparties to meet their obligations with respect to Oncor’s financial instruments; |
| · | changes in technology used by and services offered by Oncor; |
| · | significant changes in Oncor’s relationship with its employees, including the availability of qualified personnel, and the potential adverse effects if labor disputes or grievances were to occur; |
| · | significant changes in critical accounting policies material to Oncor; |
| · | actions by credit rating agencies; |
| · | the ability of Oncor to effectively execute its operational strategy; and |
| · | with respect to the Merger: the outcome of any legal proceedings that may be instituted against EFH Corp. and its subsidiaries, including Oncor, related to the Merger Agreement; risk that the Merger and related transactions disrupt current plans and operations and the potential difficulties in management and employee retention as a result of the Merger; the amount of the costs, fees, expenses and charges related to the Merger; and the impact of the substantial indebtedness incurred by EFH Corp. and its subsidiaries to finance the consummation of the Merger. |
Any forward-looking statement speaks only as of the date on which it is made, and Oncor undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for Oncor to predict all of them, nor can Oncor assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of Oncor’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures in effect as of the end of the current period included in this quarterly report. Based on the evaluation performed, Oncor’s management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective. During the most recent fiscal quarter covered by this quarterly report, no changes in Oncor’s internal controls over financial reporting have occurred that have materially affected, or are reasonably likely to materially affect, Oncor’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the discussion in Note 7 regarding legal proceedings.
ITEM 1A. RISK FACTORS
Risks Relating to Oncor’s Businesses
Oncor’s businesses are subject to ongoing complex governmental regulations and legislation that have impacted, and may in the future impact, its business and/or results of operations.
Oncor’s businesses operate in changing market environments influenced by various state and federal legislative and regulatory initiatives regarding the restructuring of the energy industry, including competition in the generation and sale of electricity. Oncor will need to continually adapt to these changes.
Oncor’s businesses are subject to changes in state and federal laws (including PURA, the Federal Power Act, the Atomic Energy Act, the Public Utility Regulatory Policies Act of 1978, the Clean Air Act and the Energy Policy Act of 2005) and changing governmental policy and regulatory actions (including those of the PUCT, the TCEQ, the FERC and the EPA) and also the rules, guidelines and protocols of ERCOT with respect to matters including, but not limited to, market structure and design, construction and operation of transmission facilities, acquisition, disposal, depreciation and amortization of regulated assets and facilities, recovery of costs and investments and return on invested capital. Changes in, revisions to, or reinterpretations of existing laws and regulations may have an adverse effect on Oncor’s businesses.
Although the recently concluded 2007 Texas Legislative Session closed without passage of legislation that significantly negatively impacted Oncor’s businesses, the legislature did adopt legislation that likely requires prior PUCT approval for any future direct or indirect disposition of Oncor, and ensures that the PUCT will have authority to enforce commitments made in a filing under PURA Section 14.101 (such as the filing made by Texas Holdings and Oncor on April 25, 2007). Several pieces of legislation were introduced that, if passed, may have had a material impact on Oncor and its financial prospects, including, for example, legislation that would have required Oncor to separate from its affiliates into a stand-alone companies. Although this legislation did not pass, there can be no assurance that future action of the Texas Legislature, which could be similar or different from the proposals considered by the most recent Texas Legislature, will not have a material adverse effect on Oncor and its financial prospects.
The litigation environment in which Oncor operates poses a significant risk to its businesses.
Oncor is involved in the ordinary course of business in a number of lawsuits involving employment, commercial, environmental and injuries and damages issues, among other matters. Judges and juries in the state of Texas have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and business tort cases. Oncor uses legal and appropriate means to contest litigation threatened or filed against it or them, but the litigation environment in the state of Texas poses a significant business risk.
The operation and maintenance of electricity delivery facilities involves significant risks that could adversely affect Oncor’s results of operations and financial condition.
The operation and maintenance of delivery facilities involves many risks, including, as applicable, start-up risks, breakdown or failure of facilities, lack of sufficient capital to maintain the facilities, the dependence on a specific fuel source or the impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of efficiency or reliability, the occurrence of any of which could result in lost revenues and/or increased expenses. A significant number of Oncor’s facilities were constructed many years ago. In particular, older transmission and distribution equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep operating at peak efficiency or reliability. The risk of increased maintenance and capital expenditures arises from (a) increased starting and stopping of generation equipment due to the volatility of the competitive market, (b) any unexpected failure to generate electricity, including failure caused by breakdown or forced outage and (c) damage to facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events. Further, Oncor’s ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, Oncor could be subject to additional costs and/or the write-off of its investment in the project or improvement.
Insurance, warranties or performance guarantees may not cover all or any of the lost revenues or increased expenses. Likewise, Oncor’s ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by events outside Oncor’s control.
The rates of Oncor’s electric delivery business are subject to regulatory review.
The rates charged by Oncor are regulated by the PUCT and certain cities and are subject to cost-of-service regulation and annual earnings oversight. This regulatory treatment does not provide any assurance as to achievement of earnings levels. Oncor’s rates are regulated based on an analysis of Oncor’s costs and capital structure, as reviewed and approved in a regulatory proceeding. While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCT will judge all of Oncor’s costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that Oncor’s rates are based upon or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of Oncor’s costs, including regulatory assets reported in the balance sheet, and the return on invested capital allowed by the PUCT. The PUCT may reduce Oncor’s rates to the extent the PUCT finds in a proceeding related to the Merger that the Merger is not in the public interest and disallow the effect of the Merger on rates if the PUCT finds that Merger will unreasonably affect Oncor’s sales or service. The PUCT is currently reviewing the report of the Merger filed by Oncor and Texas Holdings in a contested proceeding. Several of the parties to this proceeding, including Oncor and the PUCT staff, have agreed to a proposed stipulation; however, a hearing on the merits to consider this non-unanimous stipulation has been scheduled for December 12-13, 2007.
In 2004, certain cities within Oncor’s service territory, acting in their role as a regulatory authority (with original jurisdiction), initiated inquiries to determine if Oncor’s PUCT-established rates were just and reasonable. Oncor has entered into settlements deferring rate action, but Oncor will be required to file a rate case in 2008, based on a 2007 test year, unless Oncor and the cities mutually agree that such a filing is unnecessary.
In April 2007, the PUCT issued an order requiring Oncor to file a rate case based on a test year ending December 31, 2006. Because the PUCT has original jurisdiction over only transmission rates and the distribution rates charged in unincorporated areas and within cities that have ceded original jurisdiction to the PUCT, Oncor estimates that approximately one-third of its operating revenues would be subject to change under this order. On August 28, 2007, Oncor made the required filing, and the filing supports a rate increase of approximately $85 million over current rates subject to the original jurisdiction of the PUCT. However, Oncor requested that the PUCT enter an order abating the proceeding and convene a technical conference to consider a final order in the proceeding that would include the following provisions: (i) the PUCT will take “no action” on Oncor’s proposed rate filing package and will enter an order confirming that Oncor’s current rates will remain in effect until otherwise changed by a final order of the PUCT or other appropriate jurisdictional authority; (ii) Oncor will be required to file a system-wide rate case with the PUCT no later than July 1, 2008, based on a test year ended December 31, 2007 consistent with Oncor's 2006 cities rate settlement; (iii) Oncor will be required to file an Earnings Monitor Report (“EMR”) with the PUCT no later than March 15, 2008, for the calendar year 2007, and no later than March 15, 2009, for calendar year 2008, notwithstanding the pendency at the PUCT of this or any other Oncor rate case; and (iv) the PUCT will enter an accounting order, or similar directive, providing that if Oncor’s 2008 or 2009 EMR filings demonstrate that Oncor earned more than 10.75% return on equity (“ROE”) during the relevant period covered by the EMR filing, on a weather normalized basis, Oncor will record a credit to the regulatory asset related to self-insurance reserve costs, such that Oncor’s ROE for the relevant period would be no higher than 10.75%. Due to the proposed stipulation in the PUCT merger review proceeding (discussed above), the Oncor rate case was abated (suspended) on October 18, 2007. One of the provisions of the proposed stipulation is that the Oncor rate case would be dismissed. A hearing on the merits to consider the proposed stipulation has been scheduled for December 12-13, 2007. Oncor cannot predict the outcome of that hearing.
While Oncor believes the rates are just and reasonable, it cannot predict the results of any rate case.
Oncor’s capital deployment program may not be executed as planned, which could adversely impact its financial condition and results of operations.
With respect to Oncor’s capital deployment program for its electric delivery facilities, there can be no guarantee that the execution of such program will be successful. There can be no assurance that the capital investments Oncor intends to make in connection with its electric delivery business will produce the desired reductions in cost and improvements to service and reliability.
Ongoing performance improvement initiatives may not achieve desired cost reductions and may instead result in significant additional costs if unsuccessful.
The implementation of performance improvement initiatives identified by management may not produce the desired reduction in costs and may result in disruptions arising from employee displacements and the rapid pace of changes to organizational structure and operating practices and processes. Specifically, Oncor is subject to the risk that the joint venture outsourcing arrangement with Capgemini that provides business support services to Oncor or other similar arrangements may not produce the desired cost savings. Should Oncor wish to terminate or modify the arrangements with Capgemini or other providers, or if Capgemini or those other providers become financially unable to perform their obligations, Oncor would incur transition costs, which would likely be significant, to switch to another vendor.
Changes in technology may reduce the value of Oncor’s electric delivery facilities and may significantly impact Oncor’s businesses in other ways as well.
Research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including gas turbines, fuel cells, microturbines and photovoltaic (solar) cells. It is possible that advances in these or other technologies will reduce the costs of electricity production from these technologies to a level that will enable these technologies to compete effectively with traditional generation plants. Also, electricity demand could be reduced by increased conservation efforts and advances in technology, which could likewise significantly reduce the value of Oncor’s electric delivery facilities. Changes in technology could also alter the channels through which retail electric customers buy electricity. To the extent self-generation facilities become a more cost-effective option for certain customers, Oncor’s revenues could be reduced.
Oncor’s results of operations and financial condition could be negatively impacted by any development or event beyond Oncor’s control that causes economic weakness in the ERCOT market.
Oncor derives substantially all of its revenues from operations in the ERCOT market, which covers approximately 75% of the geographical area in the state of Texas. As a result, regardless of the state of the economy in areas outside the ERCOT market, economic weakness in the ERCOT market could lead to reduced demand for electricity in the ERCOT market. Such a reduction could have a material negative impact on Oncor’s results of operations and financial condition.
Oncor’s credit ratings could negatively affect its ability to access capital.
Downgrades in Oncor’s long-term debt ratings generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease. In connection with the merger, Fitch, Moody’s and S&P downgraded Oncor’s long term debt ratings.
Most of Oncor’s large customers, suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with it. As Oncor’s credit ratings decline, the costs to operate Oncor’s businesses will likely increase because counterparties may require the posting of collateral in the form of cash-related instruments, or counterparties may decline to do business with Oncor.
Also, in connection with the Merger, Oncor has committed to the PUCT that it will, in its 2007 and 2008 rate cases, support a cost of debt that does not exceed its actual cost of debt immediately prior to the announcement of the Merger. As such, in connection with these rate cases, in certain circumstances Oncor may not be able to recover additional debt costs caused by a credit rating downgrade.
The loss of the services of Oncor’s key management and personnel could adversely affect Oncor’s ability to operate its businesses.
Oncor’s future success will depend on its ability to continue to attract and retain highly qualified personnel. Oncor competes for such personnel with many other companies, in and outside Oncor’s industry, government entities and other organizations. Oncor may not be successful in retaining its current personnel or in hiring or retaining qualified personnel in the future. Additionally, the Merger may have a negative impact on Oncor’s ability to attract and retain key management and other employees. Oncor’s failure to attract new personnel or retain its existing personnel could have a material adverse effect on Oncor’s businesses.
In the future, Oncor could have liquidity needs that could be difficult to satisfy under some circumstances.
The inability to raise capital on favorable terms, particularly during times of uncertainty in the financial markets similar to that which is currently being experienced in the financial markets, could impact Oncor’s ability to sustain and grow its businesses and would likely increase capital costs. Oncor’s access to the financial markets could be adversely impacted by various factors, such as:
• changes in financial markets that reduce available credit or the ability to obtain or renew liquidity facilities on acceptable terms;
• economic weakness in the ERCOT market;
• changes in interest rates;
• a deterioration of Oncor’s credit or the credit or a reduction in Oncor’s credit ratings or the credit ratings of EFH Corp. or EFH Corp.’s other subsidiaries;
• a material breakdown in Oncor’s risk management procedures; and
• the occurrence of material adverse changes in Oncor’s businesses that restrict its ability to access its liquidity facilities.
Oncor’s ring fencing measures may not work as planned.
As discussed above, to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group, various legal, financial and contractual provisions were implemented. These enhancements are intended to minimize the risk that a court would order any of the Oncor Ring-Fenced Entities’ assets and liabilities to be substantively consolidated with those of any member of the Texas Holdings Group in the event that a member of the Texas Holdings Group were to become a debtor in a bankruptcy case. Nevertheless, bankruptcy courts have broad equitable powers, and as a result, outcomes thereunder are inherently difficult to predict. Accordingly, if any member of the Texas Holdings Group were to become a debtor in a bankruptcy case, there can be no assurance that a court would not order an Oncor Ring-Fenced Entity’s assets and liabilities to be substantively consolidated with those of such member of the Texas Holdings Group.
ITEM 6. EXHIBITS
(a) Exhibits provided as part of Part II are: |
Exhibits | Previously Filed With File Number* | As Exhibit | | |
3(i) | Articles of Incorporation. |
| 3(a) | | | — | Certificate of Formation of Oncor Electric Delivery Company LLC |
3(ii) | By-laws. |
| 3(b) | | | — | Amended and Restated Limited Liability Company Agreement of Oncor Electric Delivery Company LLC |
(10) | Material Contracts. |
| 10(a) | | | — | $2.0 billion Revolving Credit Agreement dated October 10, 2007 |
(31) | Rule 13a - 14(a)/15d - 14(a) Certifications. |
| 31(a) | | | — | Certification of Robert S. Shapard, Chairman of the Board and Chief Executive of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31(b) | | | — | Certification of David M. Davis, Vice President, Chief Financial Officer and Secretary of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(99) | Additional Exhibits | | | |
| 99 | | | — | Condensed Statements of Consolidated Income – Twelve Months Ended September 30, 2007. |
| |
| * | Incorporated herein by reference. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ONCOR ELECTRIC DELIVERY COMPANY LLC
| By: | |
| | David M. Davis |
| | Vice President, Chief Financial Officer and Secretary |
Date: November 14, 2007
