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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 30, 2002
TXU US HOLDINGS COMPANY
(for Oncor Electric Delivery Company)
(Exact Name of Registrant as Specified in its Charter)
TEXAS 1-11668 75-1837355
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(Address of Principal Executive Offices, Including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - (214) 812-4600
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TABLE OF CONTENTS
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PAGE
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Item 5. OTHER EVENTS AND REGULATION FD DISCLOSURE ........................................ 1
ONCOR ELECTRIC DELIVERY COMPANY FINANCIAL INFORMATION
Condensed Statements of Consolidated Income and Comprehensive Income -
Three and Six Months Ended June 30, 2002 and 2001 ............................... 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2002 and 2001 ......................................... 3
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 ...... 4
Notes to Financial Statements .................................................... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................ 12
Item 7. FINANCIAL STATEMENTS AND EXHIBITS ................................................ 17
SIGNATURE ................................................................................. 18
(i)
Item 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
ONCOR ELECTRIC DELIVERY COMPANY
TXU US Holdings Company (US Holdings), formerly TXU Electric Company, is
providing the following quarterly financial information and management's
discussion and analysis of financial condition and results of operations to meet
the ongoing needs of customers, counterparties and others for financial
information concerning its regulated transmission and distribution business,
Oncor Electric Delivery Company (Oncor). Oncor was created as a result of the
restructuring of the electric utility industry in Texas, which took effect on
January 1, 2002. Effective January 1, 2002, the regulated transmission and
distribution businesses of US Holdings and TXU SESCO Company were transferred to
Oncor, and the power production and certain retail operations of US Holdings
were transferred to TXU Energy Company LLC (TXU Energy). Both Oncor and TXU
Energy are wholly-owned subsidiaries of US Holdings, which is a wholly-owned
subsidiary of TXU Corp. (TXU).
Had Oncor actually existed as a separate entity prior to January 1, 2002,
its results of operations and financial position could have differed materially
from those included in the following financial statements for periods prior to
January 1, 2002. In addition, future results of Oncor's operations and financial
position could differ materially from the results presented herein.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by US Holdings contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although US Holdings 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 factors contained in the Forward-Looking Statements section of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' 2001 Form 10-K, as well as: general industry trends;
implementation of the Texas electricity deregulation legislation and other
legislation; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations including, without
limitation, environmental regulations; changes in tax laws; implementation of
new accounting standards; commercial paper market and capital market conditions;
and access to adequate transmission facilities to meet changing demands; among
others, that could cause the actual results of US Holdings or Oncor to differ
materially from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and US Holdings 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 US
Holdings 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 results to differ materially from those contained in any forward-looking
statement.
1
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Operating revenues ................................................. $ 500 $ 529 $ 994 $1,005
------ ------ ------ -------
Operating expenses
Operation and maintenance ..................................... 189 217 367 402
Depreciation and amortization ................................. 67 58 131 118
Income taxes .................................................. 29 19 62 29
Taxes other than income ....................................... 92 125 187 249
------ ------ ------ -------
Total operating expenses ................................ 377 419 747 798
------ ------ ------ -------
Operating income ................................................... 123 110 247 207
Interest income--affiliates ........................................ 11 - 23 -
Other income ....................................................... 1 1 2 3
Other deductions ................................................... 1 1 3 3
Nonoperating income taxes .......................................... 4 - 6 -
Interest expense and other charges ................................. 65 70 127 143
------ ------ ------ -------
Net income ......................................................... $ 65 $ 40 $ 136 $ 64
====== ====== ====== =======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Net income ........................................................ $ 65 $ 40 $ 136 $ 64
------ ------ ------ ------
Other comprehensive income (loss) -
Net change during period, net of tax effect:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001 ... - - - -
Net change in fair value of derivatives
(net of tax benefit of $14, $-, $14 and $-) ............ (26) - (25) -
------ ------ ------ ------
Total ................................................. (26) - (25) -
------ ------ ------ ------
Comprehensive income .............................................. $ 39 $ 40 $ 111 $ 64
====== ====== ====== ======
See Notes to Financial Statements.
2
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
---- ----
Millions of Dollars
Cash flows--operating activities
Net income ............................................................. $ 136 $ 64
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 145 125
Deferred income taxes and investment tax credits--net .............. 67 (7)
Changes in operating assets and liabilities ............................ (417) 17
----- -----
Cash provided by (used in) operating activities .......... (69) 199
----- -----
Cash flows--financing activities
Issuance of long-term debt ............................................. 1,200 -
Retirements/repurchases of debt ........................................ (352) (30)
Repurchase of common stock ............................................. (50) (189)
Net issuances of commercial paper ...................................... 295 -
Net increase (decrease) in advances from affiliates .................... (734) 370
Debt premium, discount, financing and reacquisition expenses ........... (20) (2)
----- -----
Cash provided by financing activities .............................. 339 149
----- -----
Cash flows--investing activities
Capital expenditures ................................................... (265) (356)
Other .................................................................. (39) (5)
----- -----
Cash used in investing activities .................................. (304) (361)
----- -----
Net change in cash and cash equivalents ..................................... (34) (13)
Cash and cash equivalents--beginning balance ................................ 35 22
----- -----
Cash and cash equivalents--ending balance ................................... $ 1 $ 9
===== =====
See Notes to Financial Statements.
3
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2002 December 31,
(Unaudited) 2001
---------- ------------
Millions of Dollars
ASSETS
Current assets
Cash and cash equivalents ........................................ $ 1 $ 35
Accounts receivable
Affiliates .................................................... 268 -
Trade ......................................................... 63 131
Materials and supplies inventories--at average cost .............. 38 38
Due from TXU Energy--current portion ............................. 221 170
Other current assets ............................................. 60 36
------ ------
Total current assets .......................................... 651 410
Investments ........................................................ 53 54
Property, plant and equipment--net ................................. 5,940 5,802
Due from TXU Energy ................................................ 519 617
Regulatory assets--net ............................................. 1,658 1,605
Deferred debits and other assets ................................... 24 7
------ ------
Total assets .................................................. $8,845 $8,495
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable--commercial paper .................................. $ 295 $ -
Long-term debt due currently ..................................... 950 370
Advances from affiliates ......................................... 128 108
Accounts payable
Affiliates .................................................... - 43
Trade ......................................................... 49 50
Customer deposits ................................................ - 81
Taxes accrued .................................................... 137 170
Accrued interest ................................................. 57 54
Other current liabilities ........................................ 90 130
------ ------
Total current liabilities ..................................... 1,706 1,006
Accumulated deferred income taxes .................................. 1,249 1,204
Investment tax credits ............................................. 76 79
Other deferred credits and noncurrent liabilities .................. 210 223
Long-term debt, less amounts due currently ......................... 2,842 3,282
Contingencies (Note 6)
Shareholder's equity (Note 5) ...................................... 2,762 2,701
------ ------
Total liabilities and shareholder's equity .................... $8,845 $8,495
====== ======
See Notes to Financial Statements.
4
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Oncor Electric Delivery Company (Oncor) was formed as a Texas corporation
in the fourth quarter of 2001, originally as TXU Electric Delivery Company, and
was renamed effective January 17, 2002. Oncor was created as a result of the
restructuring of the electric utility industry in Texas, which became effective
January 1, 2002. Oncor consists of the regulated electric transmission and
distribution businesses transferred from TXU US Holdings Company (US Holdings),
formerly TXU Electric Company, and TXU SESCO Company (TXU SESCO) effective
January 1, 2002. Oncor is a wholly-owned subsidiary of US Holdings, which is a
wholly-owned subsidiary of TXU Corp. (TXU).
Oncor is a regulated utility engaged in the transmission and distribution
of electric energy in the north-central, eastern and western parts of Texas.
Oncor's transmission customers consist of municipalities, electric cooperatives
and other distribution companies. Oncor's distribution customers consist of
approximately 35 retail electric providers (REPs) in Oncor's certificated
service area, including a subsidiary REP of TXU Energy Company LLC (TXU Energy),
which is another wholly-owned subsidiary of US Holdings. Revenues from TXU
Energy represent the substantial majority of Oncor's revenues. Oncor is managed
as a single, integrated electric delivery business; consequently there are no
separate reportable business segments.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU restructured certain of its
businesses as of January 1, 2002. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan as approved by the Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
.. its electric transmission and distribution (T&D) assets to Oncor;
.. its unregulated electric power production assets to subsidiaries of TXU
Energy; and
.. its retail customers to an unregulated subsidiary REP of TXU Energy.
Also, on January 1, 2002 the T&D assets of TXU SESCO, a subsidiary of TXU,
were transferred to Oncor.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001 (Business Separation Agreement).
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The T&D operations that comprise Oncor were part of
the fully integrated public utility businesses of US Holdings and TXU SESCO,
which were subsidiaries of TXU under common ownership and control for the
periods presented prior to January 1, 2002. The financial statements of Oncor as
of December 31, 2001 and for the three and six months ended June 30, 2001
present the financial position, results of operations and cash flows of the T&D
operations of US Holdings and TXU SESCO that were combined. The financial
statements for periods subsequent to January 1, 2002 present Oncor's actual
operating results. Effective January 1, 2002, in connection with the transfer of
US Holdings' retail customers to an unregulated subsidiary REP of TXU Energy,
certain assets and liabilities relating to the retail function, which was
previously integrated with Oncor's regulated operations, were transferred from
Oncor to TXU Energy.
5
The prior year financial information for Oncor includes information derived
from the historical financial statements of US Holdings. Reasonable allocation
methodologies were used to unbundle the financial statements of US Holdings
between its power production and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate common expenses, assets and
liabilities between US Holdings' power production and T&D operations. Interest
and other financing costs were determined based upon debt allocated. Had the
unbundled operations of US Holdings actually existed as separate entities, their
results of operations could have differed materially from those included in the
historical financial statements included herein.
The condensed consolidated financial statements of Oncor have been prepared
in accordance with accounting principles generally accepted in the United States
of America (US GAAP). 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. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of operations for an interim period may not give a true indication
of results for the full year. Certain previously reported amounts have been
reclassified to conform to current classifications. All intercompany items and
transactions between the combined companies have been eliminated. All dollar
amounts in the financial statements and notes to financial statements are stated
in millions of US dollars unless otherwise indicated.
Revenue Recognition -- Electric T&D fees are recognized when services are
provided to customers on the basis of periodic cycle meter readings and include
an estimated accrual for the value of electricity delivery fees from the meter
reading date to the end of the period.
Income Taxes -- Oncor is included in the consolidated federal income tax
return of TXU and subsidiary companies. Oncor uses the separate return method to
compute its income tax provision. Because of the alternative minimum tax (AMT),
differences may arise between the consolidated federal income tax liability and
the aggregated separate tax liability of the group members. In instances where
this occurs, the difference is allocated pro-rata to those companies that
generated AMT on a separate company basis.
Changes in Accounting Standards -- Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", became
effective for Oncor on January 1, 2002. SFAS No. 142 requires, among other
things, the allocation of goodwill to reporting units based upon the current
fair value of the reporting units and the discontinuance of goodwill
amortization. The amortization of Oncor's existing goodwill ($0.8 million
annually) ceased effective January 1, 2002.
In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Oncor has completed the
transitional impairment test, the results of which indicated no impairment of
goodwill. If goodwill amortization had ceased effective January 1, 2001, there
would not have been a material effect on net income for the three or six months
ended June 30, 2001.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for Oncor on January 1, 2003. SFAS No. 143 requires the recognition of
a fair value liability for any retirement obligation associated with long-lived
assets. SFAS No. 143 also requires additional disclosures. Oncor will conform
its accounting for asset retirement obligations to the new standard.
6
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for Oncor on January 1, 2002. SFAS No. 144 establishes
a single accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", for long-lived assets to be disposed of by sale and resolves
significant implementation issues related to SFAS No. 121. The adoption of SFAS
No. 144 by Oncor has not affected its financial position or results of
operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", was issued in April 2002 and
will be effective for Oncor on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", whereby any gain or loss on the early extinguishment of
debt that was classified as an extraordinary item in prior periods in accordance
with SFAS No. 4, shall be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and will be effective for Oncor on January
1, 2003. SFAS No. 146 requires that a liability for costs associated with an
exit or disposal activity be recognized only when the liability is incurred and
measured initially at fair value.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
3. REGULATIONS AND RATES
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan with the Commission, which was approved by the Commission on
June 20, 2002. On August 5, 2002, the Commission issued a financing order
pursuant to the settlement plan, authorizing the issuance of transition
(securitization) bonds of $1.3 billion. The Commission's order approving the
settlement plan and the financing order were appealed in separate dockets in
Travis County District Court on August 16, 2002. US Holdings is unable to
predict when the appeal process related to the Commission's approval of the
settlement plan and the financing order will be concluded or the outcome. If the
Commission's approval is upheld, the settlement plan resolves all major pending
issues related to US Holdings' transition to competition and will supersede
certain ongoing proceedings that are related to the 1999 Restructuring
Legislation. The settlement plan does not remove regulatory oversight of Oncor's
business. Oncor does not believe that the outcome will materially affect Oncor's
net financial results, as TXU Energy has agreed, under the Business Separation
Agreement, to hold Oncor harmless from the results of any disallowance of power
production-related items, including securitization of regulatory assets,
stranded costs and fuel reconciliation. For additional discussion of the
settlement plan and related items, see Note 4 to Financial Statements in US
Holdings' 2001 Form 10-K.
The principal and interest on the securitization bonds would be secured by
payments from retail consumers designed to enable recovery of power production-
related regulatory assets and other qualified costs. These regulatory assets
have a carrying value of approximately $1.84 billion. Once bonds are issued, the
associated amount of the regulatory assets will be amortized to expense by Oncor
over the life of the bonds.
Open-Access Transmission -- At the federal level, Federal Energy Regulatory
Commission (FERC) Order No. 888 requires all FERC-jurisdictional electric public
utilities to offer third parties wholesale transmission services under an
open-access tariff.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that,
7
as a result of the application of the invalid pricing rules, the defendants owe
unspecified amounts. US Holdings and TXU SESCO are named defendants in both
suits. Oncor is unable to predict the outcome of this litigation.
4. FINANCING ARRANGEMENTS
Credit Facilities -- In April 2002, US Holdings, TXU Energy and Oncor
entered into a joint $1.0 billion 364-day revolving credit facility with a group
of banks that terminates April 22, 2003. This facility will be used for working
capital and general corporate purposes.
During the second quarter of 2002, Oncor began issuing commercial paper to
fund its short-term liquidity requirements. The new commercial paper programs
allow each of TXU Energy and Oncor to issue up to $2.4 billion and $1.0 billion
of commercial paper, respectively.
The new $1.0 billion 364-day revolving credit facility, TXU's and US
Holdings' existing $1.4 billion credit facility that expires in February 2005,
and TXU's $500 million three-year revolving credit facility with a group of
banks that terminates in May 2005 provide back-up for outstanding commercial
paper under the TXU, TXU Energy and Oncor programs. As of June 30, 2002, total
outstanding commercial paper under these programs was $1.1 billion of which
Oncor's portion was $295 million. As of June 30, 2002, TXU had $186 million
outstanding under its commercial paper program, which was discontinued in July
2002. At that time, TXU was removed as a borrower under the $1.4 billion credit
facility. Commercial paper issuances are limited to the availability under the
back-up credit facilities, which was $2.2 billion at June 30, 2002, after
deducting outstanding letters of credit and outstanding borrowings. In July
2002, US Holdings entered into a $400 million credit facility that terminates no
later than November 30, 2002, that will also provide back-up for outstanding
commercial paper. The credit facilities discussed above contain cross default
provisions with a $50 million threshold. Under the $1.0 billion 364-day
revolving credit facility, a default by TXU Energy or any subsidiary thereof
that exceeds the threshold would cause the maturity of outstanding balances
under such facility to be accelerated as to TXU Energy and US Holdings, but not
as to Oncor. Also, under this facility, a default by Oncor or any subsidiary
thereof that exceeds the threshold would cause the maturity of outstanding
balances to be accelerated under such facility as to Oncor and US Holdings, but
not as to TXU Energy. Further, under this facility, a default by US Holdings
that exceeds the threshold would cause the maturity of outstanding balances
under such facility to be accelerated as to US Holdings, but not as to Oncor or
TXU Energy. Under the $1.4 billion credit facility and the recent $400 million
credit facility, a default by US Holdings or any subsidiary thereof that exceeds
the threshold would cause the maturity of outstanding balances under such
facility to be accelerated. Under the $500 million three-year revolving credit
facility, a default by TXU or any subsidiary thereof that exceeds the threshold
would cause the maturity of outstanding balances under such facility to be
acelerated.
Oncor is also provided short-term financing by TXU and affiliated
companies. Oncor had short-term advances from affiliates of $128 million and
$108 million outstanding as of June 30, 2002 and December 31, 2001,
respectively.
Long-Term Debt -- At June 30, 2002, $500 million of advances from
affiliates have been classified as long-term debt because Oncor currently
anticipates refinancing these borrowings with long-term debt to be issued during
the next 12 months. Oncor has no obligation to repay and does not anticipate
repayment of these advances within 12 months should the refinancing not occur.
On August 8, 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
Oncor funded the redemptions through the issuance of commercial paper, advances
from affiliates and cash from operations. These amounts were classified as
long-term debt due currently as of June 30, 2002.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of senior
secured notes in two series in a private placement. One series of $700 million
is due May 1, 2012 and bears interest at the rate of 6.375%, and the other
series of $500 million is due May 1, 2032 and bears interest at the rate of
7.0%. Each series is initially secured by an equal principal amount of Oncor's
first mortgage bonds; however, the lien of those bonds may be released in
certain circumstances. Proceeds from the issuance were used by Oncor to repay
long-term advances from affiliates. In March and April 2002, Oncor entered into
a series of forward interest rate swaps with a group of banks to effectively fix
the interest rates prior to the issuance of these notes. As a result of the
forward interest rate swaps, the effective rates of interest on the debt series
due in 2012 and 2032 are approximately 6.65% and 7.26%, respectively. (See Note
7.)
As of June 30, 2002, the secured long-term debt of Oncor consisted of $3.3
billion of first mortgage bonds and senior secured notes that are secured by a
lien on substantially all of its tangible electric T&D property. US Holdings
remains obligated on Oncor's first mortgage bonds. None of the long-term debt
obligations of TXU or US Holdings are guaranteed or secured by Oncor.
The terms of certain financing arrangements of TXU and its consolidated
subsidiaries contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders equity to total capitalization ratios
and leverage ratios and/or contain minimum net worth covenants. As of June 30,
2002, TXU and its consolidated subsidiaries were in compliance with all such
applicable covenants.
8
Oncor's mortgage restricts the payment of dividends to the amount of
Oncor's retained earnings. At June 30, 2002, there were no restrictions on the
payment of dividends under these provisions.
Sale of Receivables -- TXU, through its subsidiaries, has certain
facilities to provide financing through sales of customer accounts receivable.
Under the facilities, purchases of accounts receivable are funded by sales of
undivided interests therein to financial institutions. Accounts receivable are
continually sold to replace those accounts receivable that have been collected.
Certain US subsidiaries of TXU sell customer accounts receivable to TXU
Receivables Company, a wholly-owned bankruptcy remote indirect subsidiary of
TXU, which sells undivided interests in accounts receivable it purchases to
financial institutions. As of January 1, 2002, the facility includes TXU Energy
Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas Company
as qualified originators of accounts receivable under the program. TXU
Receivables Company may sell up to an aggregate of $600 million in undivided
interests in the receivables purchased from the originators under the program.
As of June 30, 2002, Oncor had sold $76 million face amount of receivables to
TXU Receivables Company under the program in exchange for cash of $36 million
and $39 million in subordinated notes, with $1 million of losses on sales for
the six months ended June 30, 2002, principally representing the interest on the
underlying financing. These losses approximated 4% of the cash proceeds from the
receivables sales on an annualized basis. If the program terminates, cash flows
to Oncor would temporarily stop until the undivided interests of the financial
institutions were repurchased. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, an affiliate of Oncor,
services the purchased receivables and is paid a market-based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent Oncor's retained interest in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the consolidated balance sheet.
5. SHAREHOLDER'S EQUITY
June 30, December 31,
2002 2001
-------- ------------
Common stock without par value:
Authorized shares - 100,000,000
Outstanding - 68,931,000 and 69,000,000 .......... $2,651 $ 32
Retained earnings ..................................... 136 2,669
Accumulated and other comprehensive income (loss) ..... (25) -
------ ------
Total shareholder's equity .................... $2,762 $2,701
====== ======
The amounts presented as of December 31, 2001 reflect the allocated
historical net book value of the T&D operations of US Holdings and TXU SESCO
that were combined to form Oncor. On January 1, 2002 these operations were
contributed to Oncor as required by the 1999 Restructuring Legislation, and
historical equity amounts were assigned to common stock. (See Note 1 for further
information concerning the business restructuring.)
On July 31, 2002, Oncor's Articles of Incorporation were amended to split
the shares of common stock on a 69,000-for-1 basis. Shares outstanding for all
periods presented have been restated to reflect this stock split.
In April 2002, Oncor repurchased 69,000 shares of its common stock from US
Holdings for $50 million. In July 2002, Oncor repurchased another 69,000 shares
of its common stock for $50 million.
6. CONTINGENCIES
Legal Proceedings -- On November 21, 2000, the City of Denton, Texas and
other Texas cities filed suit in the 134th Judicial District Court of Dallas
County, Texas against US Holdings, TXU Gas Company and TXU. The petition alleges
claims for breach of contract, negligent representation, fraudulent inducement
of contract, breach of duty of good faith and fair dealing and unjust enrichment
related to the defendants' alleged exclusion of certain revenues from the
cities' franchise fee base. Oncor assumed the obligations of US Holdings in
connection with this lawsuit pursuant to the Business Separation Agreement. No
specified damages have been alleged. On January 31, 2002, US Holdings, TXU Gas
Company and TXU entered into a Memorandum of Understanding with the plaintiffs
to settle this lawsuit, subject to the execution of a definitive settlement
agreement. Final versions of the settlement document have been provided to the
9
plaintiff cities for execution. If any plaintiff cities decline to execute the
settlement, the suit will continue as to those cities. Oncor believes the
allegations in this suit are without merit and intends to vigorously defend this
suit against any plaintiff cities that do not execute the settlement. Oncor does
not believe the ultimate resolution of this suit will have a material effect on
Oncor's financial position, results of operations or cash flows.
General -- Oncor is involved in various other legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management, is
not expected to have a material effect upon its financial position, results of
operations or cash flows.
7. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts Receivable -- At June 30, 2002 and December 31, 2001, accounts
receivable are stated net of uncollectible accounts of $1 million and $4
million, respectively. Accounts receivable included $48 million and $50 million
in unbilled revenues at June 30, 2002 and December 31, 2001, respectively.
Property, Plant and Equipment--
June 30, December 31,
2002 2001
-------- ------------
Transmission ...................................... $1,982 $1,979
Distribution ...................................... 6,217 6,110
Other ............................................. 432 430
------ ------
Total ..................................... 8,631 8,519
Less accumulated depreciation ..................... 2,984 2,888
------ ------
Net of accumulated depreciation ........... 5,647 5,631
Construction work in progress ..................... 271 149
Property held for future use ...................... 22 22
------ ------
Net property, plant and equipment ......... $5,940 $5,802
====== ======
Capitalized software costs of $132 million at June 30, 2002 and $131
million at December 31, 2001 were included in property, plant and equipment.
Amortization expense of $4 million and $8 million relating to these software
costs was recorded for the three and six months ended June 30, 2002,
respectively.
Goodwill -- At June 30, 2002 and December 31, 2001, goodwill of $25
million, included in investments, is stated net of accumulated amortization of
$7 million.
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $2.1 billion and regulatory liabilities of $411 million
at June 30, 2002, and regulatory assets of $2.1 billion and regulatory
liabilities of $461 million at December 31, 2001. Regulatory assets of $2.0
billion at June 30, 2002 and December 31, 2001 were not earning a return. Of the
assets not earning a return, $1.8 billion is associated with securitization
bonds to be issued pursuant to the regulatory settlement plan approved by the
Commission. (See Note 3 for further discussion of the settlement plan.) The
remaining regulatory assets have a weighted average remaining recovery period of
24 to 43 years.
Derivatives and Hedges -- In March and April 2002, Oncor entered into a
series of forward interest rate swaps with a group of banks to effectively fix
the interest rates on the senior secured notes discussed in Note 4. Such
contracts were designated as accounting hedges under SFAS No. 133, "Accounting
for Derivatives Instruments and Hedging Activities," and the fair values of the
contracts were reflected in Other Comprehensive Income. These contracts were
settled in May 2002 for $39 million. Amounts included in Other Comprehensive
Income will be reclassified into income over the term of the senior secured
notes resulting in effective interest rates of approximately 6.65% and 7.26% on
the notes due in 2012 and 2032, respectively.
The terms of Oncor's derivatives that have been designated as accounting
hedges match the terms of the underlying hedged items. As a result, Oncor
experienced no hedge ineffectiveness during the six months ended June 30, 2002.
As of June 30, 2002, net losses accumulated in other comprehensive income of $1
million are expected to be reclassified into earnings during the next twelve
months.
10
Affiliated Transactions -- In accordance with the Business Separation
Agreement, Oncor records interest income from TXU Energy for carrying costs
primarily related to the regulatory assets subject to securitization.
Supplemental Cash Flow Information -- During the six months ended June 30,
2002, there were $91 million in noncash advances to affiliates relating to the
transfer of certain assets and liabilities associated with US Holdings' retail
customers to an unregulated subsidiary REP of TXU Energy.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The prior year financial information for Oncor includes information derived
from the historical financial statements of US Holdings. Reasonable allocation
methodologies were used to unbundle the financial statements of US Holdings
between its power production and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate common expenses, assets and
liabilities between US Holdings' power production and T&D operations. Interest
and other financing costs were determined based upon debt allocated. Had the
unbundled operations of US Holdings actually existed as separate entities, their
results of operations could have differed materially from those included in the
historical financial statements included herein.
Three Months Ended June 30, 2002 versus Three Months Ended June 30, 2001
- ------------------------------------------------------------------------
Oncor's operating revenues decreased $29 million, or 5%, to $500 million
for the second quarter of 2002, due primarily to lower transmission revenues and
the absence of off system sales and other revenues that are earned by the retail
electric providers (REPs) beginning in 2002 and therefore reported by TXU Energy
in 2002. The decline in transmission revenues was due primarily to lower
regulatory rates.
Operation and maintenance expense decreased $28 million, or 13%, to $189
million for the second quarter of 2002. Lower expense in 2002 primarily
reflected decreases in customer support expenses and lower bad debt expense,
resulting from the changed character of Oncor's customers. Since January 1,
2002, most of the 2.7 million electricity consumers of US Holdings whose service
was formerly regulated have been free to choose from REPs who compete for their
business. These competing REPs, including TXU Energy, are now Oncor's primary
customers. Accordingly, the transfer of certain customer-related functions from
Oncor to TXU Energy resulted in decreased operations and maintenance expense for
Oncor. Total net pension and postretirement benefit expense increased $5 million
in 2002.
Other operating expenses (depreciation and amortization and taxes other
than income) decreased $24 million, or 13%, to $159 million for the second
quarter of 2002. Taxes other than income taxes accounted for $33 million of the
total decrease, which was primarily attributable to state gross receipts taxes
and regulatory assessments that are now incurred by REPs rather than by Oncor.
Local gross receipts taxes continue to be reported in Oncor's results. This
decrease was partially offset by the $9 million increase in depreciation and
amortization expense resulting from property, plant and equipment additions,
including infrastructure developments and improvements to prepare for the
restructuring of the Texas electricity markets and other capital projects to
upgrade system capability and reliability.
Interest income of $11 million for the second quarter of 2002 represents
carrying charges due from TXU Energy on regulatory-related receivables and
assets in accordance with the Business Separation Agreement. (See Note 11 to
Financial Statements included in the US Holdings' Current Report on Form 8-K
filed April 17, 2002 for Oncor (Oncor Form 8-K).
Interest expense and other charges decreased $5 million, or 7%, to $65
million for the second quarter of 2002. This decrease was due to the retirement
of long-term debt with higher weighted average interest rates than new debt
issued.
Total income tax expense increased $14 million, or 74%, to $33 million for
the second quarter of 2002, due mainly to higher pretax earnings. Income tax
expense is allocated between operating income, after interest expense and other
charges, and other nonoperating items in order to present the operating results
of regulated activities. The effective tax rate on regulated activities
increased from 32.2% in 2001 to 33.3% in 2002.
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Net income increased $25 million, or 63%, to $65 million for the second
quarter of 2002. The improvement was driven by lower taxes other than income,
higher interest income and reduced interest expense. Net pension and
postretirement benefit expense reduced net income by $5 million in 2002 and $2
million in 2001.
Six Months Ended June 30, 2002 versus Six Months Ended June 30, 2001
- --------------------------------------------------------------------
Oncor's operating revenues decreased $11 million, or 1%, to $994 million
for the first six months of 2002. Excluding the impact of lower transmission
revenues, as well as the absence of off system sales and other revenues that are
earned by the REP beginning in 2002, electric distribution revenues rose 4%, in
line with a 3% increase in electric volumes delivered in the distribution
operations. The decline in transmission revenues was due primarily to lower
regulatory rates.
Operation and maintenance expense decreased $35 million, or 9%, to $367
million for the first six months of 2002. Lower expense in 2002 primarily
reflected decreases in customer support expenses and lower bad debt expense,
resulting from the changed character of Oncor's customers as discussed above.
Total net pension and postretirement benefit expense increased $7 million in
2002.
Other operating expenses decreased $49 million, or 13%, to $318 million for
the first six months of 2002. Taxes other than income taxes accounted for $62
million of the total decrease, which was primarily attributable to reduced
expenses for state gross receipts taxes and regulatory assessments that are now
incurred by REPs rather than by Oncor. This decrease was partially offset by the
$13 million increase in depreciation and amortization expense resulting from
property, plant and equipment additions, including infrastructure developments
and improvements to prepare for the restructuring of the Texas electricity
markets and other capital projects to upgrade system capability and reliability.
Interest income of $23 million for the first six months of 2002 represents
carrying charges due from TXU Energy on regulatory-related receivables and
assets in accordance with the Business Separation Agreement. (See Note 11 to
Financial Statements included in the Oncor Form 8-K.)
Interest expense and other charges decreased $16 million, or 11%, to $127
million for the first six months of 2002. This decrease was due primarily to the
retirement of long-term debt with higher weighted average interest rates than
new debt issued.
Total income tax expense increased $39 million or 134% to $68 million for
the first six months of 2002, due mainly to higher pretax earnings. Income tax
expense is allocated between operating income, after interest and other charges,
and other nonoperating items in order to present the operating results of
regulated activities. The effective tax rate on regulated activities increased
from 31.2% in 2001 to 34.1% in 2002 due primarily to nonrecurring adjustments to
deferred tax balances recorded in 2001.
Net income increased by $72 million, or 113%, to $136 million for the first
six months of 2002. The improvement was driven by lower taxes other than income,
higher interest income and reduced interest expense. Net pension and
postretirement benefit expense reduced net income by $9 million in 2002 and $4
million in 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For information concerning liquidity and capital resources, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' Form 8-K for Oncor filed May 29, 2002. No significant
changes or events that might affect the financial condition of Oncor have
occurred subsequent to year-end other than as disclosed herein.
Cash Flows -- Cash flows used in operating activities during the first six
months of 2002 were $69 million compared to cash provided by operating
activities of $199 million for 2001. The decrease of $268 million reflected
higher accounts receivable in 2002, largely from TXU Energy, due to the start-up
of billing REPs for T&D charges effective January 1, 2002, partially offset by
higher cash income (net income adjusted for noncash income and expense items).
13
Cash flows provided by financing activities during the first six months of
2002 were $339 million, an increase of $190 million, or 128%, compared to $149
million for 2001. In 2002, Oncor issued $295 million in commercial paper and
$1.2 billion of senior secured notes, which was offset by debt retirements of
$352 million, $50 million of stock repurchases and net repayments of $734
million of advances from affiliates, including amounts classified in long-term
debt.
Cash flows used in investing activities, which primarily consisted of
capital expenditures, were $304 million and $361 million for the six months
ended June 30, 2002 and 2001, respectively. Investing activities in 2002 also
reflected $39 million in cash disbursed to settle interest rate swaps as
discussed in Note 7.
Issuances and Retirements -- During the six months ended June 30, 2002,
Oncor issued, redeemed, reacquired or made scheduled principal payments on
long-term debt as follows:
Issuances Retirements
--------- -----------
First mortgage bonds $ - $297
Medium term notes - 55
Senior secured notes 1,200 -
------ -----
$1,200 $352
At June 30, 2002 $500 million of advances have been classified as long-term
debt because Oncor currently anticipates refinancing these borrowings with
long-term debt to be issued during the next 12 months. Oncor has no obligation
to repay and does not anticipate repayment of these advances within 12 months
should the refinancing not occur.
On August 8, 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
Oncor funded the redemptions through the issuance of commercial paper, advances
from affiliates and cash from operations. These amounts have been classified as
long-term debt due currently as of June 30, 2002.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of senior
secured notes in two series in a private placement. One series of $700 million
is due May 1, 2012 and bears interest at the rate of 6.375%, and the other
series of $500 million is due May 1, 2032 and bears interest at the rate of
7.0%. Each series is initially secured by an equal principal amount of Oncor's
first mortgage bonds; however, the lien of those bonds may be released in
certain circumstances. Proceeds from the issuance were used by Oncor to repay
long-term advances from affiliates. In March and April 2002, Oncor entered into
a series of forward interest rate swaps with a group of banks to effectively fix
the interest rates prior to the issuance of these notes. As a result of the
forward interest rate swaps, the effective rates of interest on the debt series
due in 2012 and 2032 are approximately 6.65% and 7.26%, respectively. (See Note
7.)
As of June 30, 2002, the secured long-term debt of Oncor consisted of $3.3
billion of first mortgage bonds and senior secured notes that are secured by a
lien on substantially all of its tangible electric T&D property. None of the
long-term debt obligations of TXU or US Holdings are guaranteed or secured by
Oncor.
Oncor's mortgage restricts the payment of dividends to the amount of
Oncor's retained earnings. At June 30, 2002, there were no restrictions on the
payment of dividends under these provisions.
During the remainder of 2002, Oncor will have financing needs to fund
ongoing working capital requirements, maturities of long-term debt and repayment
of advances from affiliates. Oncor intends to fund these financing needs through
the issuance of commercial paper, issuance of long-term debt or other securities
and bank borrowings.
Short-term Financing and Liquidity Facilities -- Short-term liquidity
requirements are expected to be met through advances from US Holdings and the
issuance of commercial paper.
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
April 22, 2003. This facility will be used for working capital and general
corporate purposes.
During the second quarter of 2002, Oncor began issuing commercial paper to
fund its short-term liquidity requirements. The new commercial paper programs
allow each of TXU Energy and Oncor to issue up to $2.4 billion and $1.0 billion
of commercial paper, respectively.
14
The new $1.0 billion 364-day revolving credit facility, TXU's and US
Holdings' existing $1.4 billion credit facility that expires in February 2005,
and TXU's $500 million three-year revolving credit facility with a group of
banks that terminates in May 2005 provide back-up for outstanding commercial
paper under the TXU, TXU Energy and Oncor programs. As of June 30, 2002, total
outstanding commercial paper under these programs was $1.1 billion of which
Oncor's portion was $295 million. As of June 30, 2002, TXU had $186 million
outstanding under its commercial paper program, which was discontinued in July
2002. At that time, TXU was removed as a borrower under the $1.4 billion credit
facility. Commercial paper issuances are limited to the availability under the
back-up credit facilities, which was $2.2 billion at June 30, 2002, after
deducting outstanding letters of credit and outstanding borrowings. In July
2002, US Holdings entered into a $400 million credit facility that terminates no
later than November 30, 2002, that will also provide back-up for outstanding
commercial paper.
Oncor is also provided short-term financing by TXU and affiliated
companies. Oncor had short-term advances from affiliates of $128 million and
$108 million outstanding as of June 30, 2002 and December 31, 2001,
respectively.
Oncor also from time to time may utilize short-term facilities to
temporarily fund maturities and early redemptions of long-term debt, as well as
short-term requirements. If these facilities become unavailable for any reason,
other liquidity sources would be needed.
Financial Covenants -- The terms of certain financing arrangements of TXU
and its consolidated subsidiaries contain financial covenants that require
maintenance of specified fixed charge coverage ratios, shareholders equity to
total capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. TXU and its consolidated subsidiaries have credit rating covenants in
certain other financing arrangements and commercial agreements that would affect
Oncor's liquidity in the event of a downgrade to below investment grade status.
As of June 30, 2002, TXU and its consolidated subsidiaries were in compliance
with all such applicable covenants.
The goal of TXU and its subsidiaries is to continue to maintain credit
ratings necessary to allow Oncor to access the commercial paper market. If TXU
and certain subsidiaries were to experience a substantial downgrade of their
respective credit ratings, which they do not anticipate, Oncor's access to the
commercial paper markets might no longer be possible, resulting in the need to
seek other liquidity sources.
The credit facilities, discussed above, contain terms pursuant to which the
interest rates charged under the agreements may be adjusted depending on the
credit rating of the borrower and also contain cross default provisions with a
$50 million threshold. Under the $1.0 billion 364-day revolving credit facility,
a default by TXU Energy or any subsidiary thereof that exceeds the threshold
would cause the maturity of outstanding balances under such facility to be
accelerated as to TXU Energy and US Holdings, but not as to Oncor. Also, under
this facility, a default by Oncor or any subsidiary thereof that exceeds the
threshold would cause the maturity of outstanding balances to be accelerated
under such facility as to Oncor and US Holdings, but not as to TXU Energy.
Further, under this facility, a default by US Holdings that exceeds the
threshold would cause the maturity of outstanding balances under such facility
to be accelerated as to US Holdings, but not as to Oncor or TXU Energy. Under
the $1.4 billion credit facility and the recent $400 million credit facility, a
default by US Holdings or any subsidiary thereof that exceeds the threshold
would cause the maturity of outstanding balances under such facility to be
accelerated. Under the $500 million three-year revolving credit facility, a
default by TXU or any subsidiary thereof that exceeds the threshold would cause
the maturity of outstanding balances under such facility to be acelerated.
Sale of Receivables -- TXU, through its subsidiaries, has certain
facilities to provide financing through sales of customer accounts receivable.
Under the facilities, purchases of accounts receivable are funded by sales of
undivided interests therein to financial institutions. Accounts receivable are
continually sold to replace those accounts receivable that have been collected.
See Note 4 to Financial Statements for further discussion.
Regulatory Asset Securitization -- The regulatory settlement plan approved
by the Commission provides Oncor with a financing order authorizing it to issue
securitization bonds in the aggregate amount of $1.3 billion to monetize and
recover power production-related regulatory assets. The settlement plan provides
that there will be an initial issuance of the bonds in the amount of up to $500
million followed by a second issuance for the remainder after 2003.
15
Capitalization -- As part of its restructuring, US Holdings determined that
the initial capitalization of Oncor at January 1, 2002 would consist of
approximately 40% shareholder's equity and 60% debt (total short-term and
long-term debt and advances from affiliates) to match the capital structure upon
which the T&D rates approved by the Commission are based. At June 30, 2002, the
capitalization ratio was consistent with this determination.
In April 2002, Oncor repurchased 69,000 shares of its common stock
(adjusted for stock split) from US Holdings for $50 million. In July 2002, Oncor
repurchased another 69,000 shares (adjusted for stock split) of its common stock
for $50 million. US Holdings used the proceeds from the share repurchases to
repay advances from TXU.
CONTINGENCIES
See Note 6 to Financial Statements for a discussion of contingencies.
REGULATION AND RATES
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan with the Commission, which was approved by the Commission on
June 20, 2002. On August 5, 2002, the Commission issued a financing order
pursuant to the settlement plan, authorizing the issuance of transition
(securitization) bonds of $1.3 billion. The Commission's order approving the
settlement plan and the financing order were appealed in separate dockets in
Travis County District Court on August 16, 2002. Oncor is unable to predict when
the appeal process related to the Commission's approval of the settlement plan
and the financing order will be concluded or the outcome. If the Commission's
approval is upheld, the settlement plan resolves all major pending issues
related to US Holdings' transition to competition and will supersede certain
ongoing proceedings that are related to the 1999 Restructuring Legislation. The
settlement plan does not remove regulatory oversight of Oncor's business. Oncor
does not believe that the outcome will materially affect Oncor's net financial
results, as TXU Energy has agreed, under the Business Separation Agreement, to
hold Oncor harmless from the results of any disallowance of power
production-related items, including securitization of regulatory assets,
stranded costs and fuel reconciliation. For additional discussion of the
settlement plan and related items, see Note 3.
Open-Access Transmission -- At the federal level, Federal Energy Regulatory
Commission (FERC) Order No. 888 requires all FERC-jurisdictional electric public
utilities to offer third parties wholesale transmission services under an
open-access tariff.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO are named defendants in both suits. Oncor is unable to
predict the outcome of this litigation.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in US Holdings' Form 8-K for Oncor
filed May 29, 2002, and is therefore not presented herein.
CHANGES IN ACCOUNTING STANDARDS
See Note 2 to Financial Statements for discussion of changes in accounting
standards.
16
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99(a) Chief Executive Officer Certification
99(b) Chief Financial Officer Certification
17
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.
TXU US HOLDINGS COMPANY
By /s/ Biggs C. Porter
------------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: August 23, 2002
18