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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): JANUARY 1, 2002
TXU US HOLDINGS COMPANY
(FORMERLY TXU ELECTRIC 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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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 financial information 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 Electric Delivery Company was formed in the fourth quarter of
2001 as TXU Electric Delivery Company and renamed Oncor Electric Delivery
Company (Oncor) effective January 17, 2002. Oncor was created as a result of the
deregulation of the electric utility industry in Texas, which became effective
January 1, 2002. The transmission and distribution businesses of US Holdings and
TXU SESCO Company were transferred to Oncor, and the generation 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). Oncor is a regulated
electric utility engaged in the transmission and distribution of electric energy
in the north-central, eastern and western parts of Texas.
The relationships of the entities affected by the restructuring of US
Holdings due to deregulation 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),
which provides, in general, that the economic impacts of the transition from a
regulated to a competitive environment will be borne by TXU Energy.
On December 31, 2001, US Holdings filed a settlement plan with the Texas
Public Utility Commission (Commission) that, if approved, will resolve all major
pending issues related to US Holdings' transition to competition and will
supersede certain ongoing lawsuits and regulatory proceedings that principally
are related to deregulation. See Regulatory Settlement Plan in Note 3 to
Financial Statements for more information. The settlement plan has the
endorsement of the major customer groups in the state of Texas. Parties to the
settlement plan include the Commission staff, the Office of Public Utility
Counsel, a coalition of cities served by Oncor, Texas Industrial Energy
Consumers, Texas Retailers Association, and a new retail electric provider (REP)
for the state. The settlement plan does not remove regulatory oversight of
Oncor's business. The settlement plan must be approved by the Commission, which
has held a hearing and has received briefs from the parties. A decision could be
made as early as April 18, 2002. While Oncor is unable to predict the outcome of
these proceedings, under the Business Separation Agreement, TXU Energy has
agreed to hold Oncor harmless from the results of any disallowance of
generation-related items, such as securitization of regulatory assets, stranded
costs and fuel reconciliation. Oncor does not believe that its net financial
results will be materially affected if the settlement plan is not approved.
The combined historical results of operations of Oncor and TXU Energy are
essentially equivalent to the combined historical results of operations of the
US Electric and US Energy segments of TXU, with the principal exception being
the unallocated items discussed in the following paragraph.
Certain expenses of US Holdings were not allocated to either Oncor or TXU
Energy. These consisted primarily of legal, consulting and other costs
associated with the restructuring of US Holdings ($25 million in 2001 and $36
million in 2000), as well as interest expense and preferred stock dividends
related to debt and preferred stock, respectively, that will remain at US
Holdings ($24 million in 2001, $23 million in 2000 and $24 million in 1999).
Oncor is managed as a single, integrated electric energy delivery
business; consequently, there are no separate reportable business segments. The
following is a description of Oncor's operations:
Electric Transmission -- Oncor's electric transmission business provides
non-discriminatory wholesale open access to Oncor's transmission facilities
through business practices consistent with the standard of conduct rules enacted
by the Commission. The transmission system transverses almost 200,000 square
miles of Texas and consists of 4,698 circuit miles of 345-kilovolt (kV)
transmission lines and 9,859 circuit miles of 138-kV and 69-kV transmission
lines and over 900 substations. Oncor is connected by eight 345-kV lines to
Reliant Energy
1
Incorporated; by three 345-kV, eight 138-kV and nine 69-kV lines to American
Electric Power Company; by two 345-kV and eight 138-kV lines to the Lower
Colorado River Authority; by four 345-kV and nine 138-kV lines to the Texas
Municipal Power Agency; by two asynchronous High Voltage Direct Current
interconnections to utilities in the Southwest Power Pool; and at several points
with smaller systems operating wholly within Texas. Approximately 29,800
megawatts of generation capacity owned by Electric Reliability Council of Texas
(ERCOT) market participants, including TXU Energy, is connected to the Oncor
transmission system.
Oncor is a member of ERCOT, which is an intrastate network of
investor-owned entities, cooperatives, public entities, non-utility generators
and power marketers. ERCOT is the regional reliability coordinating organization
for member electric power systems in Texas, the Independent System Operator
(ISO) of the interconnected transmission system of those systems, and is
responsible for ensuring equal access to transmission service by all wholesale
market participants in the ERCOT region.
Oncor's electric transmission business supports the operation of the ERCOT
ISO and all ERCOT members. The transmission business has planning, design,
construction, operation and maintenance responsibility for the transmission grid
and for the load serving substations. The transmission business is participating
with the ISO and other ERCOT utilities to plan, design and obtain regulatory
approval for and construct new transmission lines necessary to increase bulk
power transfer capability and to remove existing limitations on the ERCOT
transmission grid.
Transmission services are provided under tariffs approved by the
Commission and the Federal Energy Regulatory Commission. Transmission service
offers the use of the transmission system for delivery of power over facilities
operating at 60,000 volts and above. Transformation service offers the use of
distribution substation assets to transform voltage to below 60,000 volts. Other
services offered by the transmission business include system impact studies,
facilities studies, and maintenance of substations and transmission lines owned
by other parties.
Electric Distribution -- The Oncor distribution system distributes
electricity for REPs in its certificated service area. These REPs provide
electricity through Oncor to over 2.7 million end-use consumers (including 2.4
million residential consumers and 350,000 commercial and industrial businesses).
The electric distribution business consists of the ownership, management,
construction, maintenance and operation of the distribution network within
Oncor's certificated service area. The number of distribution system connections
within Oncor's service territory has been growing an average of more than 2% a
year over the past several years. Operations include metering services, outage
response services and call center operations. In some municipalities, operations
also include operation of the street lighting systems. As part of the
restructuring of the Texas utility market, metering services will be provided on
a competitive basis beginning in January 2004 for commercial and industrial
customers and at the latest by September 2005 for residential customers.
The distribution business provides non-discriminatory open access to
Oncor's distribution facilities through business practices consistent with the
terms and conditions for retail delivery service enacted by the Commission.
Effective January 1, 2002, most of the 2.7 million electricity consumers of US
Holdings whose service was formerly regulated are free to choose from REPs who
compete for their business. The competing REPs are now Oncor's primary
customers.
Oncor's distribution network receives electricity from the transmission
grid through power distribution substations and distributes electricity to end
users and wholesale customers through 2,863 distribution feeders. The Oncor
distribution network consists of 54,873 miles of overhead primary conductors,
22,102 miles of overhead secondary and street light conductors, 11,624 miles of
underground primary conductors and 6,864 miles of underground secondary and
street light conductors. The majority of the distribution system operates at
25-kV and 12.5-kV.
Distribution services are provided under tariffs approved by the
Commission. New Commission rules and market protocols govern the commercial
retail operations of distribution companies and other market participants.
2
Most of Oncor's transmission and distribution lines have been constructed
over lands of others pursuant to easements or along public highways and streets
as permitted by law. The transmission and distribution networks transferred from
US Holdings to Oncor on January 1, 2002 are currently subject to the lien of
Oncor's mortgage and deed of trust.
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 legislation passed during the 1999 session of the Texas
Legislation designed to restructure the electric utility industry in Texas and
other legislation; power costs and availability; 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; changes in tax laws; access to facilities to meet changing demands;
competition for new business opportunities; legal and administrative proceedings
and settlements; significant changes in critical accounting policies material to
Oncor; and actions of rating agencies, among other factors, 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.
3
The following financial information of Oncor is being filed by US Holdings
for the purpose of providing historical financial information about Oncor's
business after giving effect to the transactions described in the Notes to
Financial Statements. Had Oncor actually existed as a separate entity, its
results of operations and financial position could have differed materially
from those included in the following financial statements. In addition, future
results of Oncor's operations and financial position could differ materially
from the historical results presented.
TABLE OF CONTENTS
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ONCOR ELECTRIC DELIVERY COMPANY FINANCIAL INFORMATION PAGE
-----
Independent Auditors' Report......................................... 5
Statements of Combined Income for the years
ended December 31, 2001, 2000 and 1999............................... 6
Statements of Combined Cash Flows for the years
ended December 31, 2001, 2000 and 1999............................... 7
Combined Balance Sheets-December 31, 2001 and 2000................... 8
Statements of Combined Shareholder's Equity for the years
ended December 31, 2001, 2000 and 1999............................... 9
Notes to Financial Statements........................................ 10
Signature............................................................... 25
4
INDEPENDENT AUDITORS' REPORT
Oncor Electric Delivery Company:
We have audited the accompanying combined balance sheets of Oncor Electric
Delivery Company (Oncor) and the businesses that comprise Oncor, as of December
31, 2001 and 2000, and the related statements of combined income, cash flows and
shareholder's equity for each of the three years in the period ended December
31, 2001. The combined financial statements include the accounts of Oncor and
related businesses as discussed in Note 1 to the financial statements. These
businesses were operated by subsidiaries of TXU Corp. under common ownership and
common management for the periods presented. These financial statements are the
responsibility of Oncor's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Oncor and related businesses as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
April 15, 2002
5
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF COMBINED INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
MILLIONS OF DOLLARS
Operating revenues................................................ $2,314 $ 2,081 $ 1,931
------ ------- -------
Operating expenses
Operation and maintenance.................................... 920 811 710
Depreciation and amortization................................ 239 232 211
Income taxes................................................. 118 118 100
Taxes other than income...................................... 543 436 423
------- ------- ------
Total operating expenses................................. 1,820 1,597 1,444
------- ------- ------
Operating income.................................................. 494 484 487
Other income (deductions)
Other income (deductions)-- net............................. 2 3 17
Income tax expense.......................................... (1) (2) (6)
------- ------- ------
Total other income (deductions)......................... 1 1 11
------- ------- ------
Income before interest and other charges.......................... 495 485 498
Interest income................................................... - 1 2
Interest expense and other charges
Interest..................................................... 274 264 281
Allowance for borrowed funds used during construction........ (7) (4) (4)
------- ------- ------
Total interest expense and other charges................. 267 260 277
------- ------- ------
Net income........................................................ $ 228 $ 226 $ 223
======= ======= ======
See Notes to Financial Statements.
6
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF COMBINED CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
MILLIONS OF DOLLARS
Cash flows-- operating activities
Net income..................................................... $ 228 $ 226 $ 223
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ............................. 324 316 246
Deferred income taxes and investment tax credits-- net .... 33 (24) 137
Changes in operating assets and liabilities:
Accounts receivable........................................ (23) (27) 65
Accounts payable-- affiliates.............................. 28 (60) 69
Accounts payable-- trade................................... -- 2 --
Interest and taxes accrued................................. 74 5 (79)
Other-- net................................................ 11 3 (38)
----- ------ -----
Cash provided by operating activities........... 675 441 623
----- ----- -----
Cash flows-- financing activities
Increase in debt allocated from US Holdings.................... 400 575 50
Retirements/repurchases of debt allocated from US Holdings..... (920) (159) (601)
Repurchase of common stock of US Holdings allocated to Oncor... (455) (248) (226)
Advances from affiliates-- net................................. 964 (83) 686
Debt premium, discount, financing and reacquisition expenses... (55) (4) (23)
----- ----- -----
Cash provided by (used in) financing activities............ (66) 81 (114)
------ ----- -----
Cash flows-- investing activities
Capital expenditures........................................... (635) (517) (489)
Other.......................................................... 39 12 (20)
----- ----- -----
Cash used in investing activities.......................... (596) (505) (509)
----- ----- -----
Net change in cash and cash equivalents............................. 13 17 -
Cash and cash equivalents-- beginning balance....................... 22 5 5
----- ----- -----
Cash and cash equivalents-- ending balance.......................... $ 35 $ 22 $ 5
====== ===== =====
See Notes to Financial Statements.
7
ONCOR ELECTRIC DELIVERY COMPANY
COMBINED BALANCE SHEETS
DECEMBER 31,
----------------------------------------------------
2001 2000
---- ----
MILLIONS OF DOLLARS
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 35 $ 22
Accounts receivable.................................................................. 131 108
Materials and supplies inventories-- at average cost................................. 38 32
Prepayments......................................................................... 29 26
Other current assets................................................................. 7 5
----- -----
Total current assets.............................................................. 240 193
Investments............................................................................ 54 53
Property, plant and equipment-- net.................................................... 5,802 5,445
Due from TXU Energy ................................................................... 787 182
Regulatory assets--
net................................................................ 1,605 2,266
Deferred debits and other assets....................................................... 7 10
----- -----
Total assets...................................................................... $8,495 $8,149
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Long-term debt due currently......................................................... $ 370 $ 217
Advances from affiliates............................................................. 108 842
Accounts payable:
Affiliates........................................................................ 43 15
Trade............................................................................. 50 50
Customer deposits.................................................................... 81 79
Taxes accrued........................................................................ 170 88
Accrued interest..................................................................... 54 62
Other current liabilities............................................................ 130 90
----- -----
Total current liabilities......................................................... 1,006 1,443
Accumulated deferred income taxes...................................................... 1,204 1,117
Investment tax credits................................................................. 79 85
Other deferred credits and noncurrent liabilities...................................... 223 220
Long-term debt, less amounts due currently............................................. 3,282 2,752
Contingencies (Note 10)
Shareholder's equity................................................................... 2,701 2,532
----- -----
Total liabilities and shareholder's equity........................................ $8,495 $8,149
====== ======
See Notes to Financial Statements.
8
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF COMBINED SHAREHOLDER'S EQUITY
DECEMBER 31,
---------------------------------------
200l 2000 1999
----- ----- ----
MILLIONS OF DOLLARS
Balance at beginning of year.......................................... $2,532 $2,554 $2,557
Net income......................................................... 228 226 223
Repurchase of common stock of US Holdings allocated to Oncor....... (455) (248) (226)
Conversion of advances to capital.................................. 396 - -
----- ----- -----
Balance at end of year................................................ $2,701 $2,532 $2,554
====== ====== ======
See Notes to Financial Statements.
9
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
deregulation 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 electric 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 30 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. Oncor is
managed as a single, integrated electric energy delivery business; consequently,
there are no separate reportable business segments.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructures the electric utility industry in Texas
(1999 Restructuring Legislation). Among other matters, the l999 Restructuring
Legislation required that, by January 1, 2002, each electric utility separate
(unbundle) its business into the following: power generation operations, a REP
and a transmission and distribution (T&D) company or separate T&D companies.
(See Note 3 for information concerning restructuring of the electric utility
industry in Texas.) As a result, TXU restructured certain of its businesses as
of January 1, 2002 and began to participate in retail competition in the Texas
electricity market on January 1, 2002.
As required by the 1999 Restructuring Legislation, US Holdings filed its
business separation plan with the Public Utility Commission of Texas
(Commission). This business separation plan and the March 2000 application to
the Commission laid the foundation for US Holdings to take part in retail
competition in the Texas electricity market as planned on 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
amended and approved by the Commission on October 31, 2001, as of January 1,
2002, US Holdings transferred:
o its regulated electric T&D business to Oncor;
o its unregulated electric power generation business to TXU Energy; and
o its retail customers to an unregulated subsidiary REP of TXU Energy.
Also, on January 1, 2002 the regulated electric T&D business of TXU SESCO
was 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).
10
The diagrams below summarize TXU's principal US legal entities and their
relationships before and after the restructuring.
[CHART OMITTED]
CHART
Organization Chart with 2 columns
Left Column
Title (centered over column) - BEFORE RESTRUCTURING
Top box, centered, labeled - TXU
Next level - 2 boxes, labeled (left to right)-
TXU Gas Company, TXU Electric Company
Next level - 1 box (under first box), labeled - TXU Energy Trading Company
Right Column
Title (centered over column) - AFTER RESTRUCTURING
Top box, centered, labeled - TXU
Next level - 2 boxes, labeled (left to right) - TXU Gas Company, US Holdings*
Next level - 2 boxes under second box, labeled (left to right) -
TXU Energy, Oncor
Next level - 3 boxes under first box, labeled (left to right) -
TXU Generation Holdings Company LLC, TXU
Energy Trading Company LP, TXU Energy Retail Company LP
*Formerly TXU Electric Company
Basis of Presentation and Combination - The businesses that form Oncor
were operated as fully integrated utilities of US Holdings and TXU SESCO.
Effective January 1, 2002, the T&D operations of US Holdings were
unbundled and combined with the T&D operations of TXU SESCO to form Oncor. The
combined financial statements of Oncor present the historical financial
position, results of operations and cash flows of the T&D operations of US
Holdings and TXU SESCO that were combined. These businesses were operated by
subsidiaries of TXU under common ownership and common management for the periods
presented.
The financial information of US Holdings' T&D business included in the
combined financial statements was derived from the historical financial
statements of US Holdings. US Holdings maintained expense accounts for each of
its component operations. However, revenues of US Holdings consisted of a
bundled rate for all operations combined. Historical Oncor revenues were
determined by unbundling the T&D component of revenues from US Holdings' bundled
rate charged to customers. Allocation of revenues between TXU Energy and Oncor
also reflected consideration of return on invested capital, which is regulated
for Oncor. 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'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. In connection with the Business Separation
Agreement, Oncor and TXU Energy have agreed on how the related advances and
intercompany accounts will be settled. This resulted in the reclassification of
$437 million as an intercompany receivable from TXU Energy, to be paid over the
term of the securitization bonds (see Note 3), with an offset to advances from
affiliates. The amounts for prior years have been reclassified to conform to the
current proposed settlement terms. There was no effect on earnings or
shareholder's equity as a result of such reclassification. Certain other
reclassifications have been made to the prior year assets, liabilities and cash
flows to conform to the current year presentation.
The financial information of TXU SESCO's T&D business included in the
combined financial statements was derived from the separate historical financial
statements of TXU SESCO.
11
Certain expenses of US Holdings were not allocated to either Oncor or TXU
Energy. These consisted primarily of legal, consulting and other costs
associated with the restructuring of US Holdings ($25 million in 2001 and $36
million in 2000), as well as interest expense and preferred stock dividends
related to debt and preferred stock, respectively, that will remain at US
Holdings ($24 million in 2001, $23 million in 2000 and $24 million in 1999).
Management believes that the allocation methodologies used are reasonable.
Had Oncor actually existed as a separate entity, its results of operations and
financial position could have differed materially from those included in the
combined financial statements included herein. In addition, future results of
Oncor's operations and financial position could differ materially from the
historical results presented.
The Business Separation Agreement provides, in general, that the economic
impacts of the transition from a regulated to a competitive environment will be
borne by TXU Energy, including stranded costs as finally determined and other
related items. Oncor will collect from (or refund to) REPs, through a
non-bypassable tariff (or credit), amounts associated with the unregulated
businesses' transition to competition and remit to (or collect from) TXU Energy
any such amounts which have not been securitized. These combined financial
statements reflect the transfer from TXU Energy to Oncor of all regulatory
assets and liabilities that would be subject to finalization at true-up of
stranded costs, as required by the 1999 Restructuring Legislation, with a
corresponding amount recorded as due from or to TXU Energy. Any changes to the
regulatory assets and liabilities and any final determination of stranded costs
at true-up will result in adjustments to the amount due from or to TXU Energy
and will be reflected in earnings of TXU Energy as an extraordinary item in
accordance with Statement of Financial Accounting Standards (SFAS) No. 101
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71." (See Regulatory Settlement Plan in Note 3.)
2. SIGNIFICANT ACCOUNTING POLICIES
Combination -- The combined financial statements were prepared on the
basis described above and are in conformity with accounting principles generally
accepted in the United States of America. 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.
Comprehensive Income -- There were no items affecting comprehensive income
for the periods reported; therefore, comprehensive income is the same as net
income.
Use of Estimates -- The preparation of Oncor's financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense during the periods.
In the event estimates or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
In addition, see Note 1 for discussion of estimates used and methodologies
employed to derive the combined financial statements.
System of Accounts -- The accounting records of Oncor are maintained in
accordance with the Federal Energy Regulatory Commission's Uniform System of
Accounts as adopted by the Commission.
Goodwill -- Goodwill represents the excess of the purchase price paid over
the estimated fair value of the assets acquired and liabilities assumed for each
company acquired and was amortized over 40 years. Annual goodwill amortization
of $0.8 million ceased after December 31, 2001 and remaining goodwill is subject
to an impairment-based review procedure. (See Changes in Accounting Standards
below.) At December 31, 2001 and 2000, goodwill of $25 million and $26 million,
respectively, is included in investments and is stated net of accumulated
amortization of $7 million and $6 million, respectively.
12
Property, Plant and Equipment -- T&D property, plant and equipment is
stated at original cost. The cost of T&D property additions includes labor and
materials, applicable overhead and payroll-related costs and an allowance for
funds used during construction (AFUDC). Other property is stated at cost.
Allowance For Funds Used During Construction -- AFUDC is a regulatory
accounting procedure whereby amounts based upon interest charges on borrowed
funds and a return on equity capital used to finance construction are added to
utility plant being constructed. Oncor used AFUDC rates of 6.6% in 2001 and 9.0%
in 2000 and 1999.
Valuation of Long-Lived Assets -- Oncor evaluates the carrying value of
long-lived assets to be held and used when events and circumstances warrant such
a review. The carrying value of long-lived assets would be considered impaired
when the projected undiscounted cash flows are less than the carrying value. In
that event, a loss would be recognized based on the amount by which the carrying
value exceeds the fair market value. Fair market value is determined primarily
by available market valuations or, if applicable, discounted cash flows. See
Changes in Accounting Standards below for a discussion of changes in valuation
criteria for long-lived assets effective January 1, 2002.
Regulatory Assets and Liabilities -- The combined financial statements of
Oncor reflect regulatory assets and liabilities under cost-based rate regulation
in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." The regulatory assets and liabilities include those that arose from
US Holdings' and TXU SESCO's T&D operations and those assigned from US Holdings
that arose from generation operations. (See Note 3.)
Revenue Recognition -- Electric T&D sales revenues 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 service
from the meter reading date to the end of the period.
Depreciation of Property, Plant and Equipment -- Depreciation of electric
utility plant is generally based upon an amortization of the original cost of
depreciable properties on a straight-line basis over the estimated service lives
of the properties. Depreciation of all other plant and equipment generally is
determined by the straight-line method over the estimated useful life of the
asset. Depreciation as a percent of average depreciable property approximated
2.9% for 2001, 2.9% for 2000 and 2.8% for 1999.
Oncor capitalizes computer software costs in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." These costs are being amortized over periods ranging
from five to seven years.
Income Taxes -- Oncor's operations are included in the consolidated
federal income tax return of TXU, and federal income taxes are allocated to
subsidiaries of TXU based upon their respective taxable income or loss.
Investment tax credits are amortized to income over the estimated service lives
of the properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities. Certain provisions of
SFAS No. 109, "Accounting for Income Taxes", provide that regulated enterprises
are permitted to recognize such deferred taxes as regulatory tax assets or tax
liabilities if it is probable that such amounts will be recovered from, or
returned to, customers in future rates.
Cash Equivalents -- For purposes of reporting cash and cash equivalents,
temporary cash investments purchased with a remaining maturity of three months
or less are considered to be cash equivalents.
Changes in Accounting Standards -- SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as extended by SFAS No. 137 and
amended by SFAS No. 138, became effective for Oncor on January 1, 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
13
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of derivatives in the balance
sheet and the measurement of those instruments at fair value.
Oncor had no derivatives at December 31, 2001 and 2000. Therefore,
adoption of SFAS No. 133 as of January 1, 2001 had no effect on its combined
financial statements.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", became effective for Oncor for transfers on
or after April 1, 2001. SFAS No. 140 revises the standard for accounting for
securitizations and other transfers of financial assets and collateral and
requires additional disclosures, which have been incorporated in the financial
statements. The adoption of SFAS No. 140 did not affect reported results.
SFAS No. 141, "Business Combinations", became effective for Oncor on July
1, 2001. SFAS No. 141 requires the use of the purchase method of accounting for
business combinations initiated and completed after June 30, 2001 and eliminates
the use of the pooling-of-interests method.
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 and the discontinuance of goodwill
amortization.
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. Any goodwill impairment
loss during the transition period will be recognized as the cumulative effect of
a change in accounting principle. Subsequent impairments, if any, will be
recorded in operations.
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. The offset to any liability recorded is added to the previously recorded
asset and the additional amount is depreciated over the same period as the
long-lived asset for which the retirement obligation is established. SFAS No.
143 also requires additional disclosures.
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.
For standards not yet adopted, Oncor is evaluating the potential impact on
its financial position and results of operations.
14
3. REGULATIONS, RATES AND RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY IN
TEXAS
1999 RESTRUCTURING LEGISLATION -- Legislation passed during the 1999
session of the Texas Legislature restructured the electric utility industry in
Texas and provided for a transition to competition. Among other matters with
accounting consequences, the legislation:
o provided that by January 1, 2002, each electric utility had to unbundle its
business into the following units: a power generation company, a REP and a
T&D company or separate T&D companies;
o authorized competition beginning January 1, 2002 in the retail and
generation markets for electricity;
o provides for the recovery of generation-related regulatory assets and
generation-related and purchased power-related costs that are in excess of
market value (stranded costs);*
o provides for a true-up in 2004 of stranded costs based on market
determinations;* and
o provides for a reduction in T&D rates (as a retail clawback) in certain
circumstances described below. *
- -------------
*The application of these provisions to US Holdings will change in the event the
settlement plan proposed to the Commission is approved. See Regulatory
Settlement Plan below.
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan with the Commission that, if approved, will resolve all major
pending issues related to US Holdings' transition to competition and will
supersede certain ongoing lawsuits and regulatory proceedings that are
principally related to deregulation. The settlement plan has the endorsement of
the major customer groups in the State of Texas. Parties to the settlement
include the Commission staff, the Office of Public Utility Counsel, a coalition
of cities served by Oncor, Texas Industrial Energy Consumers, Texas Retailers
Association, and a new REP for the state. The settlement plan does not remove
regulatory oversight of Oncor's business. The settlement plan must be approved
by the Commission, which has held a hearing and has received briefs from the
parties. A decision could be made as early as April 18, 2002. While Oncor is
unable to predict the outcome of these proceedings, under the Business
Separation Agreement, TXU Energy has agreed to hold Oncor harmless from the
results of any disallowance of generation-related items, such as securitization
of regulatory assets, stranded costs and fuel reconciliation. Oncor does not
believe that its net financial results will be materially affected if the
settlement plan is not approved.
The major terms of the settlement plan relating to Oncor are:
o Transmission and Distribution Rates -- In 2002, Oncor will implement an
excess mitigation credit (EMC) in the amount of $350 million (plus
interest), applied over a two-year period as a reduction to T&D rates
charged to REPs. This amount reflects resolution of stranded cost
mitigation, approximately $8.2 billion of fuel costs covering the period of
July 1998 through 2001, the unrecovered fuel balance at December 31, 2001,
and other items. Oncor's sole responsibility with respect to those matters
will be to act as collection or disbursement agent, and Oncor has no rights
or obligations with respect to any such amounts collected or refunded.
o Regulatory Asset Securitization -- Oncor will receive a financing order
authorizing it to issue securitization bonds in the aggregate amount of
$1.3 billion to monetize and recover generation-related regulatory assets.
The settlement provides that there will be an initial issuance of
securitization bonds in the amount of up to $500 million upon approval of
the settlement followed by a second issuance for the remainder after 2003.
This settlement resolves all issues related to generation-related
regulatory assets and liabilities.
15
o Lawsuit and Regulatory Proceeding Resolution -- The parties agree to seek
dismissal of a number of pending lawsuits and regulatory proceedings.
IMPLEMENTATION OF THE 1999 RESTRUCTURING LEGISLATION -- As noted in the
appropriate sections of the following discussion, the settlement plan filed with
the Commission by US Holdings, if adopted, will result in final determination
concerning certain provisions of the legislation. If the settlement plan is not
approved, certain other proceedings discussed below will not be resolved.
Transmission and Distribution Rates -- All REPs operating in Oncor's
certificated service area, including TXU Energy, pay the same rates and other
charges for distribution services. All other distribution companies in ERCOT pay
Oncor the same rates and other charges for transmission services. Oncor's
distribution rates are based on amounts of energy delivered. Transmission rates
are "postage stamp" rates that do not vary with the distance of energy
transmitted. The transmission and distribution rates that are in effect as of
January 1, 2002 for Oncor are based upon the resolution of US Holdings' rate
case brought before the Commission, which is discussed below.
Mitigation (see Regulatory Settlement Plan above) -- From January 1, 1998
through June 30, 1999, US Holdings' earnings of $170 million in 1998 and $52
million in 1999 in excess of the regulatory earnings cap (mitigation) were
recorded as additional depreciation of nuclear production assets. Effective July
1, 1999, following the 1999 Restructuring Legislation, all of US Holdings' and
TXU SESCO's earnings in excess of the regulatory earnings cap of $92 million in
1999, $310 million in 2000 and $40 million in 2001 were recorded as a reduction
of US Holdings' and TXU SESCO's revenues, with a corresponding regulatory
liability recorded.
On June 4, 2001, the Commission issued an interim order that addressed
Oncor's charges for T&D service when retail competition would begin. Among other
things, that interim order and subsequent final order issued on October 3, 2001
required Oncor to refund through reduced rates (which will necessitate a
corresponding reimbursement from TXU Energy), over the period from 2002-2008,
both the 1998-2000 earnings in excess of the regulatory earnings cap and an
estimate of the 2001 earnings in excess of the regulatory earnings cap. On June
20, 2001, US Holdings filed a petition with the Texas Supreme Court, requesting
that the Court issue a writ of mandamus compelling the Commission to vacate the
portions of its orders that require US Holdings to halt mitigation of stranded
costs and reverse the stranded cost mitigation already taken. On December 31,
2001, the Supreme Court of Texas denied the petition. The Commission's decision
continues to be under appeal to the Travis County, Texas District Court.
Stranded Cost Recovery (see Regulatory Settlement Plan above) -- In October
1999, US Holdings filed an application with the Commission for a financing order
(Docket No. 21527) to permit the issuance by a special purpose entity of $1.65
billion of transition bonds secured by payment in the form of a non-bypassable
charge from retail customers. On May 1, 2000, the Commission signed a final
order rejecting US Holdings' request for the $1.65 billion and authorized only
$363 million. US Holdings filed an appeal on May 2, 2000, with the Travis
County, Texas District Court. On September 7, 2000, the District Court issued a
final judgment that reversed part of the Commission's financing order, affirmed
other aspects of the Commission's financing order, and ordered the case remanded
to the Commission for further proceedings consistent with the judgment. US
Holdings and various other parties appealed this judgment directly to the
Supreme Court of Texas. On June 6, 2001, the Supreme Court of Texas issued what
US Holdings believes is a favorable ruling that should allow Oncor to issue
transition bonds of approximately $1.3 billion. On October 18, 2001, the Supreme
Court remanded the case to the Commission for determination of the final amount
of permitted securitization. The Commission has begun the remand proceeding
(Docket No. 24892). Oncor cannot predict when it will be completed, but is
prepared to move quickly in connection with the issuance of transition bonds
once a final financing order is issued by the Commission. If the regulatory
settlement plan described above is approved by the Commission, issues involving
securitization will be resolved.
As noted above, the principal and interest on the transition bonds would
be secured by payments from retail consumers designed to enable recovery of
generation-related regulatory assets and other qualified costs. These regulatory
assets have a carrying value of approximately $1.84 billion. Once transition
bonds are issued, the full amount of the regulatory assets will be amortized to
expense by Oncor over the life of the transition bonds. Any amount of the $1.84
16
billion which is in excess of the cash flows from transition bonds will be
expensed at the time such shortfall, if any, is determined.
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.
4. SHORT-TERM FINANCING
Oncor is provided short-term financing by TXU or affiliated companies.
Oncor had short-term advances from affiliates of $108 million and $842 million
as of December 31, 2001 and 2000, respectively. Average short-term borrowings
outstanding from affiliates were $475 million and $859 million during 2001 and
2000, respectively. Weighted average interest rates on advances were 3.08% and
7.36% on December 31, 2001 and 2000, respectively.
5. LONG-TERM DEBT
Long-term debt represents the portion of US Holdings' debt outstanding
during the periods that was allocated to Oncor. Interest expense on the
allocated debt reflects interest associated with the historical debt of US
Holdings supporting the T&D business, primarily using a blend of prevailing
short-term and long-term weighted-average interest rates.
DECEMBER 31,
2001 2000
---- ----
First Mortgage Bonds:
Fixed rate (6.25% to 8.875% due 2002 to 2025).......................... $1,978 $2,251
Variable rate (2.47% due 2003)......................................... 400 575
Long-term advances from affiliates.......................................... 1,200 -
Other....................................................................... 74 143
-------- ---------
Total long-term debt........................................... 3,652 2,969
Less amounts due currently.................................................. 370 217
----- --------
Total long-term debt, less amounts due currently............... $3,282 $2,752
====== ======
US Holdings' first mortgage bonds are secured by a mortgage with a major
financial institution. Upon transfer of US Holdings' T&D assets to Oncor, Oncor
assumed US Holdings' mortgage and the first mortgage bonds outstanding
thereunder.
At December 31, 2001, $1.2 billion 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 2002. Oncor has no
obligation to repay and does not anticipate repayment of these advances within
12 months should the refinancing not occur. The interest rate on long-term
advances from affiliates was 3.08% as of December 31, 2001.
17
Sinking fund and maturity requirements for the years 2002 through 2006
under long-term debt instruments outstanding at December 31, 2001 were as
follows:
2002..................................... $370
2003..................................... 704
2004..................................... 220
2005..................................... 92
2006..................................... -
6. SHAREHOLDER'S EQUITY
Oncor was formed as a Texas corporation in November 2001. As of December
31, 2001, Oncor had 100 million shares of no par value common stock authorized,
and 1,000 shares of common stock issued and outstanding.
As part of its restructuring, US Holdings determined that the initial
capitalization of Oncor at January 1, 2002 should consist of approximately 40%
shareholder's equity and 60% debt (total debt and advances from affiliates) to
match the capital structure upon which the T&D rates approved by the Commission
are based. Accordingly, $396 million of advances from affiliates were converted
to capital during 2001.
7. INCOME TAXES
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
---- ---- ----
Charged (credited) to operating expenses:
Current:
Federal......................................... $ 83 $ 135 $ (38)
State........................................... 1 7 1
------ ------ ------
Total.................................. 84 142 (37)
------ ------ ------
Deferred:
Federal
Depreciation differences and capitalized construction costs 14 19 71
Other....................................... 25 (38) 71
------ ------- ------
Total.................................. 39 (19) 142
------ ------- ------
Investment tax credits............................... (5) (5) (5)
------ ------- ------
Total to operating expenses............ 118 118 100
------ ------- ------
Charged to other income (deductions):
Current - Federal............................... 1 2 6
------ ------- ------
Total ............................ $119 $ 120 $ 106
==== ===== =====
Reconciliation of income taxes computed at the US federal statutory rate to provision for income taxes:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
---- ---- ----
Income before income taxes............................... $347 $ 346 $ 329
==== ===== ======
Income taxes at the US federal statutory rate of 35%..... $121 $ 121 $ 115
Amortization of investment tax credits............. (5) (5) (5)
Other.............................................. 3 4 (4)
----- ------ --------
Income tax expense....................................... $119 $ 120 $ 106
==== ===== =====
Effective tax rate....................................... 34% 35% 32%
18
The components of Oncor's deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31,
----------------------------------------------------------------------
2001 2000
----------------------------------- --------------------------------
TOTAL CURRENT NONCURRENT TOTAL CURRENT NONCURRENT
----- ------- ---------- ----- ------- ----------
DEFERRED TAX ASSETS
Alternative minimum tax............... $ 76 $ - $ 76 $ 105 $ - $ 105
Employee benefits.................... 74 - 74 66 - 66
Deferred benefits of state income taxes 10 - 10 50 - 50
Regulatory liability.................. 124 - 124 141 - 141
Other................................. 99 15 84 102 14 88
--------- ------- --------- -------- -------- -------
Total deferred tax assets...... 383 15 368 464 14 450
------- ------ ------- ------- ------- -------
DEFERRED TAX LIABILITIES
Depreciation differences and capitalized
construction costs................ 832 - 832 850 - 850
Securitizable regulatory assets....... 633 - 633 559 - 559
Deferred state income taxes........... 18 - 18 96 - 96
Other................................. 100 11 89 74 12 62
---------- ------ --------- --------- ------ ------
Total deferred tax liability.... 1,583 11 1,572 1,579 12 1,567
------- ------ ------- ------- ------ -------
NET DEFERRED TAX (ASSET) LIABILITY ... $1,200 $ (4) $1,204 $1,115 $ (2) $1,117
====== ======= ====== ====== ======= ======
DECEMBER 31,
----------------------------------------------------------------------
2001 2000
----------------------------------- --------------------------------
Net Net Net NET Net Net
Current Current Noncurrent Current Current Noncurrent
Asset Liability Liability Asset Liability Liability
----- --------- ---------- ------- --------- ----------
Summary of Deferred Income Taxes
US Federal............................ $ 4 $ - $1,192 $ - $ 2 $1,026
State................................. - - 12 4 - 91
----- ----- -------- ------- ---- --------
Total............................ $ 4 $ - $1,204 $ 4 $ 2 $1,117
====== ==== ====== ====== ===== ======
At December 31, 2001, Oncor had approximately $76 million of alternative
minimum tax credit carryforwards available to offset future tax payments.
Oncor's income tax returns are subject to audit by applicable tax
authorities. The IRS is currently examining the returns of TXU and its
subsidiaries for the tax years ended 1993 through 1997. In management's opinion,
an adequate provision has been made for any future taxes that may be owed as a
result of any audits.
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Oncor is a participating employer in the TXU Retirement Plan (Retirement
Plan), a defined benefit pension plan sponsored by TXU. The Retirement Plan is a
qualified pension plan under Section 401(a) of the Internal Revenue Code of
1986, as amended (Code), and is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended (ERISA). Employees are
eligible to participate in the Retirement Plan upon their completion of one year
of service and the attainment of age 21. All benefits are funded by the
participating employers. The Retirement Plan provides benefits to participants
under one of two formulas: (i) a cash balance formula under which participants
earn monthly contribution credits based on their compensation and years of
service, plus monthly interest credits, or (ii) a traditional defined benefit
formula based on years of service and the average earnings of the three years of
highest earnings. At December 31, 2001, the fair value of Retirement Plan assets
was $3.3 billion and the total of pension obligations, including net actuarial
losses, was $3.0 billion, discounted at 7.5%.
All eligible employees hired after January 1, 2002 will participate under
the cash balance formula. Certain employees who, prior to January 1, 2002,
participated under the traditional defined benefit formula, continue their
19
participation under that formula. Under the cash balance formula, future
increases in earnings will not apply to prior service costs. It is TXU's policy
to fund the plans on a current basis to the extent deductible under existing
federal tax regulations. Such contributions, when made, are intended to provide
not only for benefits attributed to service to date, but also those expected to
be earned in the future.
The allocated net periodic pension cost (benefit) applicable to Oncor was
$(14) million for 2001, $(15) million for 2000 and $8 million for 1999.
Estimated accrued pension cost applicable to Oncor as of December 31, 2001 and
2000 was $25 million and $41 million, respectively. Contributions were
$1 million, $1 million and $14 million in 2001, 2000 and 1999, respectively.
In addition, Oncor's employees are eligible to participate in a qualified
savings plan, the TXU Thrift Plan (Thrift Plan). This plan is a
participant-directed defined contribution profit sharing plan qualified under
Section 401(a) of the Code, and is subject to the provisions of ERISA. The
Thrift Plan includes an employee stock ownership component. Under the terms of
the Thrift Plan, as amended effective January 1, 2002, employees who do not earn
more than the IRS threshold compensation limit used to determine highly
compensated employees may contribute, through pre-tax salary deferrals and/or
after-tax payroll deductions, a specified amount of compensation ranging from 1%
to 20%. Employees who earn more than such threshold may contribute from 1% to
16% of their compensation. Employer matching contributions are also made in an
amount equal to 100% of employee contributions up to 6% of compensation for
employees who participate under the cash balance formula of the Retirement Plan,
and 75% of employee contributions up to 6% of compensation for employees who
participate under the traditional defined benefit formula of the Retirement
Plan. Employer matching contributions are invested in TXU common stock.
Contributions to the Thrift Plan by TXU aggregated $16 million for 2001 and $15
million for 2000 and 1999.
In addition to the Retirement Plan and the Thrift Plan, Oncor participates
with TXU and certain other affiliated subsidiaries of TXU to offer certain
health care and life insurance benefits to eligible employees and their eligible
dependents upon the retirement of such employees from TXU. For employees
retiring on or after January 1, 2002, the retiree contributions required for
such coverage vary based on a formula depending on the retiree's age and years
of service. The estimated net periodic postretirement benefit cost related to
Oncor for these plans was $27 million in 2001, $27 million in 2000 and $44
million in 1999. Estimated accrued postretirement benefits obligations as of
December 31, 2001 and 2000 were $115 million and $108 million, respectively.
Contributions paid by Oncor to fund postretirement benefits other than pensions
were $20 million, $19 million and $21 million in 2001, 2000 and 1999,
respectively. At December 31, 2001, the fair value of assets of the TXU plan was
$190 million, and the total of benefit obligations, including net actuarial
gains and losses, was $506 million.
The liabilities for accrued pension cost and accrued postretirement
benefits cost were based on estimates of retired employees by company. The
estimated liabilities for accrued pension cost and accrued postretirement
benefits cost recorded may be subject to revision based on final actuarial
determinations, resulting in an increase or decrease in advances to or from
affiliates.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of Oncor's
significant financial instruments as of December 31, 2001 were as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
On balance sheet liabilities:
Long-term debt (including current maturities)................ $3,652 $3,682 $2,969 $2,991
The fair values of long-term debt are estimated at the lesser of either
the call price or the market value as determined by quoted market prices, where
available, or, where not available, at the present value of future cash flows
discounted at rates consistent with comparable maturities with similar credit
risk. The carrying amounts for financial assets and liabilities classified as
20
current approximate fair value due to the short maturity of such instruments.
10. COMMITMENTS AND CONTINGENCIES
Leases -- Oncor has entered into operating leases covering various
facilities and properties including transportation equipment, data processing
equipment and office space. Certain of these leases contain renewal and purchase
options and residual value guarantees. Lease costs charged to operating expense
for 2001, 2000 and 1999 were $15 million, $16 million and $15 million,
respectively.
Future minimum lease commitments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of December 31,
2001, were as follows:
YEAR
----
2002.................................................. $ 4
2003.................................................. 4
2004.................................................. 3
2005.................................................. 3
2006.................................................. 3
Thereafter............................................ 15
----
Total future minimum lease payments.............. $32
===
Subsequent to December 31, 2001, Oncor entered into a twelve-year
operating lease agreement for office facilities effective August 1, 2002.
Minimum lease commitments under this agreement are $1 million beginning in 2004,
$3 million each year in 2005 and 2006, and $22 million thereafter.
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. Oncor believes the allegations in this suit are without merit
and intends to vigorously defend this suit if no settlement is reached, and
management 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,
should not have a material effect upon its financial position, results of
operations or cash flows.
11. SUPPLEMENTARY FINANCIAL INFORMATION
Credit Risk -- Credit risk relates to the risk of loss that Oncor would
incur as a result of nonpayment by its customers. Following deregulation,
Oncor's customers consist primarily of REPs. As a requisite for obtaining and
maintaining certification, a REP must meet the financial resource standards
established by the Commission. REP certificates granted by the Commission are
subject to suspension and revocation for significant violation of the Public
Utility Regulatory Act and Commission rules. Significant violations include
failure to timely remit payments for invoiced charges to a T&D utility pursuant
to the terms of tariffs adopted by the Commission. Additionally, the
Commission's ratemaking policies and practices permit recovery of annual bad
debt charge-offs through approved tariffs. Since most of the T&D services
provided and invoiced by Oncor are to its affiliated REPs, a material loss to
Oncor arising from nonpayment by its customers is considered unlikely.
21
Accounts Receivable -- At December 31, 2001 and 2000, accounts receivable
are stated net of uncollectible accounts of $4 million and $2 million,
respectively.
Sale of Receivables -- Prior to January 1, 2002, US Holdings and TXU Gas
Company sold certain customer accounts receivable to a wholly-owned,
bankruptcy-remote unconsolidated subsidiary of TXU Corp. (TXU Receivables
Company), which sells undivided interests in accounts receivable it purchases to
financial institutions. As of January 1, 2002, the facility was amended to add
TXU Energy Retail Company LP, TXU SESCO Energy Services Company and Oncor 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 December
31, 2001, Oncor's portion of US Holdings' receivables sold to TXU Receivables
Company then outstanding under the program was $231 million. The receivables
were sold in exchange for cash of $125 million and $104 million in subordinated
notes issued to the originators, with $2 million representing costs of the
program since inception in August 2001. Annualized costs of the program
approximated 3.7% of the cash proceeds from the receivables sales. As of
December 31, 2000, Oncor's portion of US Holdings' receivables sold under a
prior facility was $110 million. The subordinated notes receivable from TXU
Receivables Company are included in accounts receivables in the consolidated
balance sheet.
Property, Plant and Equipment--
DECEMBER 31,
------------------------
2001 2000
---- ----
Transmission.................................... $1,982 $1,771
Distribution.................................... 6,138 5,831
Other........................................... 433 370
----- -----
Total................................... 8,553 7,972
Less accumulated depreciation................... 2,922 2,704
------ ------
Net of accumulated depreciation......... 5,631 5,268
Construction work in progress................... 149 155
Property held for future use.................... 22 22
----- -----
Net property, plant and equipment....... $5,802 $5,445
====== ======
Capitalized software costs of $131 million at December 31, 2001 are
included in other property, plant and equipment. Amortization expense of $7
million and $12 million related to software costs was recorded in 2001 and 2000,
respectively.
Affiliate Transactions -- In addition to the accounts receivable program
with TXU Receivables Company, Oncor enters into transactions with TXU and other
affiliates. Interest expense related to advances from TXU and other affiliates
was $40 million, $54 million and $43 million for 2001, 2000 and 1999,
respectively. TXU, through an affiliate, billed Oncor $197 million, $176 million
and $170 million for 2001, 2000 and 1999, respectively, for financial,
accounting, information technology, environmental, procurement and personnel
services and other administrative services at cost. Also, Oncor billed a net of
$43 million, $74 million, and $94 million for 2001, 2000, and 1999,
respectively, to TXU and other affiliates primarily for employee services and
other administrative services at cost.
Based on the Business Separation Agreement, Oncor has receivables due from
TXU Energy arising from the restructuring of US Holdings to form Oncor and TXU
Energy as follows (see Note 1):
o Mitigation - Under the terms of the settlement plan discussed in Note 3,
Oncor will implement an excess mitigation credit of $350 million with
interest, to be returned to REPs, including TXU Energy, over a two-year
period beginning January 1, 2002. TXU Energy will reimburse Oncor for the
credit and related interest. Oncor's financial statements reflect the $350
million due from TXU Energy and a regulatory liability for the excess
mitigation credit.
22
o Securitization - Under the terms of the settlement plan, Oncor will issue
securitization bonds of $1.3 billion. The incremental income taxes Oncor
will pay on the revenue associated with the non-bypassable charge to
customers related to the bonds will be reimbursed by TXU Energy. Therefore,
Oncor's financial statements reflect a $437 million receivable from TXU
Energy that will be extinguished as Oncor pays the related income taxes.
Supplemental Cash Flow Information--
YEAR ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
Cash payments/(refunds):
Interest (net of AFUDC).................. $261 $251 $282
Income taxes............................. 33 125 (33)
Non-cash financing activities:
Conversion of advances to capital ......... 396 - -
Non-cash advances from affiliates ......... (101) 47 113
Regulatory Assets and Liabilities -- Oncor's regulatory assets
(liabilities) consist of those transferred from TXU Energy related to generation
operations and those arising from its T&D operations.
DECEMBER 31,
-------------------
2001 2000
---- ----
Under-recovered fuel................................... $ - $ 852
Mitigation............................................. (350) (396)
Investment tax credit related and protected excess deferred taxes - (250)
Other.................................................. - 49
------ ------
Total generation-related.......................... (350) 255
------ ------
Subject to securitization.............................. 1,841 1,865
------ ------
Securities reacquisition costs ........................ 116 128
Other.................................................. (2) 18
------ ------
Total T&D-related............................. 114 146
------- ------
Net regulatory assets............................. $1,605 $2,266
====== ======
23
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
23 Consent of Deloitte & Touche LLP
24
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: April 17, 2002
25
EXHIBIT INDEX
-------------
Exhibit No. Name
- ---------- ----
23 Consent of Independent Auditors for US Holdings