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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): MARCH 31, 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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ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
ONCOR ELECTRIC DELIVERY COMPANY
TXU US Holdings Company (US Holdings) is providing the following quarterly
financial information and management's discussion and analysis of financial
condition and results of operations (MD&A) 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
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 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 utility engaged in the transmission and
distribution of electric energy in the north-central, eastern and western parts
of Texas.
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.
The MD&A for the years ended December 31, 2001, 2000 and 1999 relates to
the financial information for those periods previously provided in the US
Holdings Form 8-K dated April 17, 2002 for Oncor (Oncor Form 8-K).
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
legislature designed to restructure the electric utility industry in Texas 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; 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.
1
TABLE OF CONTENTS
ONCOR ELECTRIC DELIVERY COMPANY FINANCIAL INFORMATION PAGE
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2002 and 2001.............................................3
Condensed Statements of Consolidated Comprehensive Income -
Three Months Ended March 31, 2002 and 2001.............................................3
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2002 and 2001.............................................4
Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001.................5
Notes to Financial Statements................................................................6
Management's Discussion and Analysis of Financial Condition and Results of Operations:
Three Months Ended March 31, 2002 and 2001 ...........................................12
Years Ended December 31, 2001, 2000 and 1999 .........................................19
SIGNATURE .........................................................................................22
2
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
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MILLIONS OF DOLLARS
Operating revenues................................................ $ 494 $ 476
Operating expenses
Operation and maintenance ................................... 178 185
Depreciation and amortization ............................... 64 60
Income taxes ................................................ 33 10
Taxes other than income ..................................... 95 124
------- -------
Total operating expenses ................................ 370 379
------- -------
Operating income ................................................. 124 97
Other income (deductions)
Other income (deductions) - net ........................... (1) --
Income tax expense ........................................ (2) --
------- -------
Total other income (deductions) ...................... (3) --
------- -------
Income before interest and other charges ......................... 121 97
Interest income - affiliates ..................................... 12 --
Interest expense and other charges ............................... 62 73
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Net income ....................................................... $ 71 $ 24
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CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
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MILLIONS OF DOLLARS
Net income............................................................ $ 71 $ 24
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Other comprehensive income -
Net change during period, net of tax effect:
Cash flow hedges:
Net change in fair value of derivatives........................ 1 --
------- -------
Total........................................................ 1 --
------- -------
Comprehensive income.................................................. $ 72 $ 24
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See Notes to Financial Statements.
3
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
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MILLIONS OF DOLLARS
Cash flows-- operating activities
Net income..................................................... $ 71 $ 24
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 73 63
Deferred income taxes and investment tax credits-- net .... 34 34
Changes in operating assets and liabilities.................... (320) (45)
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Cash provided by (used in) operating activities (142) 76
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Cash flows-- financing activities
Retirements/repurchases of debt................................ (205) (30)
Repurchase of common stock..................................... - (86)
Advances from affiliates-- net................................. 454 168
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Cash provided by financing activities...................... 249 52
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Cash flows-- investing activities
Capital expenditures........................................... (141) (132)
Other.......................................................... - (3)
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Cash used in investing activities.......................... (141) (135)
------- -------
Net change in cash and cash equivalents............................. (34) (7)
Cash and cash equivalents-- beginning balance....................... 35 22
------- -------
Cash and cash equivalents-- ending balance.......................... $ 1 $ 15
======= =======
See Notes to Financial Statements.
4
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,
2002 DECEMBER 31,
(UNAUDITED) 2001
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MILLIONS OF DOLLARS
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 1 $ 35
Accounts receivable:
Affiliates.................................................................... 181 -
Trade......................................................................... 63 131
Materials and supplies inventories-- at average cost................................. 37 38
Prepayments.......................................................................... 54 29
Other current assets................................................................. 2 7
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Total current assets.............................................................. 338 240
Investments............................................................................ 53 54
Property, plant and equipment-- net.................................................... 5,879 5,802
Due from TXU Energy ................................................................... 773 787
Regulatory assets-- net................................................................ 1,622 1,605
Deferred debits and other assets....................................................... 11 7
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Total assets...................................................................... $8,676 $8,495
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LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Long-term debt due currently......................................................... $ 374 $ 370
Advances from affiliates............................................................. 640 108
Accounts payable:
Affiliates........................................................................ - 43
Trade............................................................................. 39 50
Customer deposits.................................................................... - 81
Taxes accrued........................................................................ 100 170
Accrued interest..................................................................... 46 54
Other current liabilities............................................................ 129 130
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Total current liabilities......................................................... 1,328 1,006
Accumulated deferred income taxes...................................................... 1,228 1,204
Investment tax credits................................................................. 78 79
Other deferred credits and noncurrent liabilities...................................... 196 223
Long-term debt, less amounts due currently............................................. 3,073 3,282
Contingencies (Note 6)
Shareholder's equity................................................................... 2,773 2,701
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Total liabilities and shareholder's equity........................................ $8,676 $8,495
====== ======
See Notes to Financial Statements.
5
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)
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 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 and represents the
substantial majority of Oncor's revenues at this time. 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). 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 the 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
approved by the Commission, 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).
6
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The businesses that form Oncor were operated as
fully integrated utilities 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. 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 financial statements of Oncor as of December 31, 2001 and for the three
months ended March 31, 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.
The financial statements were 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.
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. Annual goodwill amortization of $0.8 million ceased effective
January 1, 2002. If goodwill amortization had ceased effective January 1, 2001,
there would not have been a material effect on net income for the three months
ended March 31, 2001.
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. As part of its effort to implement SFAS No. 142, Oncor
is in the process of completing the transitional impairment test. Based on
information gathered to date, Oncor does not anticipate an impairment charge as
a result of the adoption of SFAS No. 142.
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. The adoption of SFAS
No. 144 by Oncor has not affected its financial position or results of
operations.
7
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
is applicable to fiscal years beginning after May 15, 2002. One of the
provisions of this technical 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, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, shall be
reclassified.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
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 proceedings that are related to the 1999 Restructuring
Legislation. 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, the 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. Oncor recorded the effects of the settlement plan at December
31, 2001. The settlement plan must be approved by the Commission, which has held
hearings, has received briefs and has requested additional evidence from the
parties. The hearings are scheduled to continue on May 30, 2002. Oncor is unable
to predict the outcome of these proceedings.
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 plan 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 plan resolves all issues related to generation-related
regulatory assets and liabilities.
8
o Lawsuit and Regulatory Proceeding Resolution -- The parties agree to seek
dismissal of a number of pending lawsuits and regulatory proceedings.
See Note 4 to Financial Statements included in US Holdings' 2001 Annual
Report on Form 10-K for additional discussion regarding the implementation of
the 1999 Restructuring Legislation.
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 AND LONG-TERM DEBT
Oncor is provided short-term financing by TXU and affiliated companies.
Oncor had short-term advances from affiliates of $640 million and $108 million
as of March 31, 2002 and December 31, 2001, respectively. In addition, at March
31, 2002 and December 31, 2001, $1.2 billion of advances from affiliates were
classified as long-term debt because Oncor anticipated refinancing these
borrowings with long-term debt. In March and April 2002, Oncor entered into a
series of forward interest rate locks with a group of banks to effectively fix
the interest rate on the long-term fixed rate debt Oncor expected to issue
within the first six months of 2002. On May 6, 2002, Oncor issued $1.2 billion
aggregate principal amount of Senior Secured Notes in a private placement, of
which $700 million are due May 1, 2012 and bear interest at the rate of 6.375%
per annum, and $500 million are due May 1, 2032 and bear interest at the rate of
7.0% per annum. The notes are initially secured by a lien of a matching
principal amount of Oncor's first mortgage bonds issued under Oncor's Mortgage
and Deed of Trust, dated as of December 1, 1983, and a lien on Oncor's tangible
T&D property. The liens may be released in certain circumstances and subject to
certain conditions. Upon such release, the notes would cease to be secured
obligations of Oncor and would become senior unsecured general obligations of
Oncor. Proceeds from the issuance were used by Oncor to repay advances from
affiliates. As a result of the forward interest rate locks, the effective rates
of interest on the debt due in 2012 and 2032 are approximately 6.65% and 7.26%,
respectively. (See Note 7.)
In April 2002, US Holdings, Oncor and TXU Energy entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
on April 22, 2003. Up to $1.0 billion of letters of credit may be issued under
this facility. This facility will be used for working capital and general
corporate purposes.
During the second quarter of 2002, each of Oncor and TXU Energy expect to
begin selling commercial paper to fund their short-term liquidity requirements.
The new commercial paper programs will allow Oncor to sell up to $1.0 billion of
commercial paper. The existing TXU commercial paper program will be discontinued
once the Oncor and TXU Energy commercial paper programs have been established
and outstanding TXU commercial paper has been repaid.
The new credit facility discussed above, TXU's and US Holdings' existing
five-year $1.4 billion credit facility which terminates in February 2005 and
TXU's three-year $500 million credit facility which terminates in May 2005 will
provide back-up for outstanding commercial paper under the Oncor and TXU Energy
programs and the TXU program until it is discontinued. TXU, TXU Energy and Oncor
do not expect to sell commercial paper that, in the aggregate, is in excess of
aggregate available capacity under the back-up credit facilities.
9
5. SHAREHOLDER'S EQUITY
Oncor was formed as a Texas corporation in November 2001. As of March 31,
2002 and 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.
On March 4, 2002, Oncor's Board of Directors authorized the repurchase of
one share of Oncor's common stock for $50 million. The repurchase occurred on
April 1, 2002. On May 6, 2002, Oncor's Board of Directors authorized the
repurchase of one share of Oncor's common stock for $50 million on July 1, 2002.
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. 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.
7. SUPPLEMENTARY FINANCIAL INFORMATION
ACCOUNTS RECEIVABLE -- At March 31, 2002 and December 31, 2001, accounts
receivable are stated net of uncollectible accounts of $1 million and $4
million, respectively.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU sell customer accounts
receivable to a wholly-owned, bankruptcy-remote unconsolidated subsidiary of TXU
(TXU Receivables Company), 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 March 31, 2002, Oncor had sold $84
million face amount of receivables to TXU Receivables Company under the program
in exchange for cash of $43 million and $41 million in subordinated notes, with
$0.3 million representing costs of the program during the three months ended
March 31, 2002. Annualized costs of the program approximated 3.7% of the cash
proceeds from the receivables sales. The subordinated notes receivable from TXU
Receivables Company are included in accounts receivable in the consolidated
balance sheet.
10
PROPERTY, PLANT AND EQUIPMENT--
MARCH 31,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
Transmission ..................................................................... $ 1,978 $ 1,982
Distribution ..................................................................... 6,182 6,138
Other ............................................................................ 431 433
----------- ------------
Total ....................................................................... 8,591 8,553
Less accumulated depreciation .................................................... 2,951 2,922
----------- ------------
Net of accumulated depreciation ............................................. 5,640 5,631
Construction work in progress .................................................... 217 149
Property held for future use ..................................................... 22 22
----------- ------------
Net property, plant and equipment ........................................... $ 5,879 $ 5,802
=========== ============
GOODWILL -- At March 31, 2002 and December 31, 2001, goodwill of $25
million, included in investments, is stated net of accumulated amortization of
$7 million.
LEASES -- In the first quarter of 2002, 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.
DERIVATIVES AND HEDGES -- 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 three months
ended March 31, 2002. As of March 31, 2002, no net losses accumulated in other
comprehensive income are expected to be reclassified into earnings during the
next twelve months.
In March and April 2002, Oncor entered into a series of forward interest
rate locks with a group of banks to effectively fix the interest rate on
long-term fixed rate debt Oncor expected to issue within the first six months of
2002. Such contracts qualified for SFAS No. 133 hedge accounting treatment. On
May 6, 2002 Oncor issued $1.2 billion aggregate principal amount of Senior
Secured Notes. (See Note 4). Amounts included in Other Comprehensive Income
prior to the issuance 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.
AFFILIATED TRANSACTIONS -- 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 three months ended March
31, 2002 there was $78 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
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
For a discussion of the entities that comprise Oncor and the use of
historical data to prepare Oncor's financial statements, see Notes 1 and 2 to
Financial Statements in the US Holdings Form 8-K dated April 17, 2002 for Oncor
(Oncor Form 8-K).
OVERVIEW
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 T&D businesses unbundled from US Holdings and
TXU SESCO and combined effective January 1, 2002. Oncor is a wholly-owned
subsidiary of US Holdings, which is a wholly-owned subsidiary of 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 REPs in Oncor's certificated service area. Oncor's
largest distribution customer is TXU Energy, which is another wholly-owned
subsidiary of US Holdings and represents the substantial majority of Oncor's
revenues at this time. Oncor is managed as a single, integrated electric energy
delivery business; consequently, there are no separate reportable business
segments.
The financial statements of Oncor prior to January 1, 2002 present the
historical combined financial position, results of operations and cash flows of
the unbundled T&D operations of US Holdings and TXU SESCO. These businesses were
operated by subsidiaries of TXU under common ownership and control for the
periods presented prior to January 1, 2002. See Notes 1 and 2 to Financial
Statements included in the Oncor Form 8-K for more information regarding the
business restructuring and basis of presentation for the financial information
included herein, which reflects certain assumptions and estimates used in
unbundling US Holdings' historical financial information. Management believes
that the allocation methodologies used are reasonable. 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
historical combined financial statements included herein. The financial
information for the three months ended March 31, 2002 represents the actual
results of operations and financial position of Oncor and may not be comparable
to the combined financial information for the prior period.
CRITICAL ACCOUNTING POLICIES
Oncor's accounting policies are detailed in Note 2 to Financial Statements
included in the Oncor Form 8-K. Oncor follows accounting principles generally
accepted in the United States of America. In applying these accounting policies
in the preparation of Oncor's financial statements, management is required to
make estimates and assumptions about future events that affect the reporting and
disclosure of assets and liabilities at the balance sheet dates and revenues and
expenses during the periods covered. The following is a summary of certain
critical accounting policies of Oncor that are affected by judgments and
uncertainties and for which different amounts might be reported under a
different set of conditions or using different assumptions.
Regulatory Assets and Liabilities -- The historical 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 Oncor's T&D operations and those assigned from US Holdings
that arose from US Holdings' generation operations. (See Note 3 to Financial
Statements included in the Oncor Form 8-K.) 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.
12
Revenue Recognition -- Electric T&D 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. Revenues for the period ended
March 31, 2002 include estimated unbilled amounts due to temporary billing
delays associated with the transition to a competitive market in Texas.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
Oncor's operating revenues increased by $18 million, or 4%, to $494 million
in 2002. Electric energy deliveries in gigawatt-hours increased 3% in 2002.
Oncor's revenues in 2001 were determined by unbundling the T&D component of
revenues from US Holdings' bundled rate charged to customers for all operations
combined. T&D tariffs in 2002 were determined by the Commission in rate
proceedings that examined T&D costs under rules that would apply to a T&D
utility in a deregulated industry.
Operation and maintenance expense decreased $7 million, or 4%, to $178
million in 2002. Lower expense in 2002 primarily reflected decreases in customer
records and collection 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 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 in 2002 versus the
comparable period in 2001.
Other operating expenses decreased $25 million, or 14%, to $159 million in
2002. Taxes other than income taxes accounted for $29 million of the total
decrease, which was 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 offset by the $4 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 $12 million in 2002 represents carrying charges due from
TXU Energy on regulatory-related receivables and assets in accordance with the
Business Separation Agreement (see Note 1).
Interest expense and other charges, decreased $11 million, or 15%, to $62
million in 2002. This decrease was due to several factors, including the
retirement of long-term debt, lower weighted average interest rates paid on debt
and advances from affiliates.
Total income tax expense was $35 million in 2002, resulting in an effective
tax rate of 33% compared to 29% for the comparable 2001 period. The increase in
the effective tax rate was primarily due to higher state franchise taxes in
2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS -- Cash used in operating activities was $142 million during the
first quarter of 2002 compared to cash provided by operating activities of $76
million during the comparable 2001 period. This change was driven primarily by
an increase in accounts receivable largely from TXU Energy in 2002, which
reflects the start-up of billing REP's for T&D charges effective January 1,
2002, as well as the impact of temporary transitional systems issues in
connection with the opening of the Texas electricity market to competition that
delayed the billings to the REP's.
13
Cash provided by financing activities was $249 million during the first
quarter of 2002 versus $52 million during the 2001 first quarter. In 2002,
advances from affiliates increased $454 million, which was offset by payments of
$205 million for maturing debt. In addition to funding the retirement of debt,
advances from affiliates were also used by Oncor for payments of accrued taxes
and interest during the first quarter of 2002.
At March 31, 2002, $1.2 billion of advances from affiliates were classified
as long-term debt because Oncor anticipated refinancing these borrowings with
long-term debt. On May 6, 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 are due May 1, 2012 and bears an interest rate of 6.375%, and
the other series of $500 million are due May 1, 2032 and bear an interest rate
of 7.0%. The notes are initially secured by a lien of a matching principal
amount of Oncor's first mortgage bonds issued under Oncor's Mortgage and Deed of
Trust, dated as of December 1, 1983, and a lien on Oncor's tangible T&D
property. The liens may be released in certain circumstances and subject to
certain conditions. Upon such release, the notes would cease to be secured
obligations of Oncor and would become senior unsecured general obligations of
Oncor. Proceeds from the issuance were used by Oncor to repay advances from
affiliates. In March and April 2002, Oncor entered into a series of forward
interest rate locks with a group of banks to effectively fix the interest rate
on long-term fixed rate debt Oncor expected to issue within the first six months
of 2002. Such contracts qualified for SFAS 133 hedge accounting treatment.
Amounts included in Other Comprehensive Income prior to the issuance 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.
Cash flows used in investing activities, which primarily consisted of
capital expenditures, were $141 million and $135 million for the three months
ended March 31, 2002 and 2001, respectively.
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 debt and advances
from affiliates) to match the capital structure upon which the T&D rates
approved by the Commission are based. At March 31, 2002 the capitalization ratio
was approximately 60% debt and 40% shareholders equity. Excluding the current
portion of debt and advances classified as current, the capitalization ratios of
Oncor at March 31, 2002 were approximately 53% long-term debt and 47%
shareholder's equity.
SHORT-TERM FINANCING AND LIQUIDITY FACILITIES -- Short-term liquidity
requirements are expected to be met initially through advances from US Holdings.
Oncor had short-term advances from affiliates of $640 million outstanding as of
March 31, 2002.
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
on April 22, 2003. Up to $1.0 billion of letters of credit may be issued under
this facility. This facility will be used for working capital and general
corporate purposes.
During the second quarter of 2002, each of Oncor and TXU Energy expect to
begin selling commercial paper to fund their short-term liquidity requirements.
The new commercial paper programs will allow Oncor to sell up to $1.0 billion of
commercial paper. The existing TXU commercial paper program will be discontinued
once the Oncor and TXU Energy commercial paper programs have been established
and outstanding TXU commercial paper has been repaid.
The new credit facility discussed above, TXU's and US Holdings' existing
five-year $1.4 billion credit facility which terminates in February 2005 and
TXU's new three-year $500 million credit facility which terminates in May 2005
will provide back-up for outstanding commercial paper under the Oncor and TXU
Energy programs and the TXU program until it is discontinued. TXU, TXU Energy
and Oncor do not expect to sell commercial paper that, in the aggregate, is in
excess of aggregate available capacity under the back-up credit facilities.
In order to borrow under its credit facility, Oncor must be in compliance
with the applicable covenants and conditions. The primary financial covenant for
Oncor is a total debt to total capitalization ratio. Incremental borrowings that
would increase the outstanding principal amount borrowed are prohibited if a
material adverse change, as defined in the agreement, occurs. Oncor expects that
it will be able to remain in compliance with the covenants and meet the required
conditions. There are similar covenants and conditions applicable to TXU's and
US Holdings' ability to borrow under their credit facilities. The primary
financial covenants are a total debt to capitalization ratio and a fixed charge
coverage ratio. In the event Oncor, TXU or US Holdings fails to comply with the
14
applicable covenants and conditions under these facilities, Oncor may need to
pursue alternative sources of funding.
During 2002, Oncor will have additional financing needs to fund ongoing
working capital requirements and maturities of long-term debt. Oncor intends to
fund these financing needs through the issuance of long-term debt and/or equity
contributions from US Holdings. Other potential sources of funding include
proceeds from asset sales, bank borrowings and additional advances from US
Holdings, if necessary. Oncor may also from time to time utilize short-term
facilities to temporarily fund maturities and early redemptions of long-term
debt, as well as its other short-term requirements. If Oncor were unable to
access the capital markets to refund these short-term borrowings, additional
liquidity sources would be needed. Oncor does not anticipate the need for such
additional liquidity sources.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU sell customer accounts
receivable to a wholly-owned, bankruptcy-remote unconsolidated subsidiary of TXU
(TXU Receivables Company), 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 March 31, 2002, Oncor had sold $84
million face amount of receivables to TXU Receivables Company under the program
in exchange for cash of $43 million and $41 million in subordinated notes, with
$0.3 million representing costs of the program. Annualized costs of the program
approximated 3.7% of the cash proceeds from the receivables sales. The
subordinated notes receivable from TXU Receivables Company are included in
accounts receivable in the consolidated balance sheet.
If the program terminates, cash flows to the originators would temporarily
stop until the undivided interests of the financial institutions were
repurchased. The level of cash flows would normalize in approximately 35 days or
less. Although TXU Receivables Company expects to be able to pay its
subordinated notes from the collections of purchased receivables, these notes
are subordinated to the undivided interests of the financial institutions in
those receivables, and collections might not be sufficient to pay the
subordinated notes. The program may be terminated if either of the following
events occurs:
o the credit rating for the long-term senior debt securities of both any
originator and its parent guarantor, if any, declines below BBB- by
Standard and Poor's or Baa3 by Moody's or
o the delinquency ratio (delinquent for 31 days) for the sold
receivables exceeds 15% for any month, the default ratio (delinquent
for 91 days or deemed uncollectible) exceeds 5% for any month, or the
dilution ratio (reductions for discounts, disputes and other
allowances) exceeds 1% for any month.
REGULATORY ASSET SECURITIZATION -- The regulatory settlement plan filed
with the Commission, if approved, will provide for Oncor to 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
principal and interest on the transition bonds will be secured by payments from
retail customers designed to enable recovery of generation-related regulatory
assets and other qualified costs. The settlement plan provides that there will
be an initial issuance of securitization bonds in the amount of up to $500
million upon approval of the settlement plan, followed by a second issuance for
the remainder after 2003. For more information concerning securitization of
regulatory assets, see Note 3 to Financial Statements included in the Oncor Form
8-K.
Under the terms of the Business Separation Agreement executed in December
2001, the incremental income taxes Oncor will pay on the revenue associated with
the charge to customers related to the securitization bonds will be reimbursed
by TXU Energy. Therefore, as of March 31, 2002, Oncor's financial statements
reflected a $437 million receivable from TXU Energy that will be extinguished as
Oncor pays the related income taxes.
15
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss Oncor may incur as a result of changes in
the market or fair value of a particular instrument. As a result of regulation
of Oncor's business, Oncor has minimal exposure to energy price risk. To manage
risks related to changes in interest rates, Oncor may enter into derivative
instruments and other contractual commitments for non-trading purposes.
INTEREST RATE RISK -- Oncor manages its exposure to interest rate risk
primarily through its balance of fixed and variable rate instruments. The table
below provides information concerning Oncor's annual debt obligations as of
March 31, 2002 that are sensitive to changes in interest rates. Weighted average
variable rates are based on rates in effect at the reporting date.
EXPECTED MATURITY DATE
-------------------------------------------------------------------------------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES) MARCH 31, 2002 DECEMBER 31, 2001
THERE- FAIR FAIR
2002 2003 2004 2005 2006 AFTER TOTAL VALUE TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- ----- ----- -----
Long-term debt
(including current
maturities)
Fixed rate $ 176 $ 293 $ 220 $ 92 -- $ 1,066 $ 1,847 $ 1,876 $ 2,052 $ 2,082
Average interest rate 7.96% 6.78% 7.16% 6.75% -- 8.10% 7.70% -- 7.78% --
Variable rate -- $ 400 -- -- -- $ 1,200* $ 1,600 $ 1,600 $ 1,600 $ 1,600
Average interest rate -- 2.60% -- -- -- 3.08%* 2.99% -- 2.93% --
*Includes $1.2 billion of advances from affiliates that Oncor refinanced in
May 2002.
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 primary customers are 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 REP, a material loss to Oncor arising from
nonpayment by its customers is considered unlikely.
REGULATION AND RATES
Various regulatory proceedings are currently outstanding that are impacted
by the legislation passed during the 1999 session of the Texas Legislature that
restructures the electric utility industry in Texas. See Note 3 to Financial
Statements included in the Oncor Form 8-K for more information. 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
16
proceedings that related to the 1999 Restructuring Legislation. 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, the 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
hearings, has received briefs and has requested additional evidence from the
parties. The hearings are currently scheduled to continue on May 30, 2002. While
Oncor is unable to predict the outcome of these proceedings, Oncor does not
believe that its net financial results will be materially affected, as TXU
Energy has agreed to hold Oncor harmless from the results of any disallowance of
generation-related items, including securitization of regulatory assets,
stranded costs and fuel reconciliation.
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 and
distribution 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 disbursement agent on behalf of
TXU Energy. TXU Energy has agreed to reimburse Oncor for the financial
results of reducing its non-bypassable tariffs with respect to the EMC.
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 plan 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.
The settlement plan resolves all issues related to generation-related
regulatory assets and liabilities. If the settlement plan is not approved,
Oncor's actual cost of capital will continue to be used in the
determination of Oncor's regulated revenues in future rate proceedings.
o Lawsuit and Regulatory Proceeding Resolution -- The parties agree to seek
dismissal of a number of pending lawsuits and regulatory proceedings.
CHANGES IN 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. Annual
goodwill amortization of $0.8 million 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. 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. As part of its effort to implement SFAS No. 142, Oncor
is in the process of completing the transitional impairment test. Based on
information gathered to date, Oncor does not anticipate an impairment charge as
a result of the adoption of SFAS No. 142.
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.
17
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
is applicable to fiscal years beginning after May 15, 2002. One of the
provisions of this technical 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, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, shall be
reclassified.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
18
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The following discussion should be read in conjunction with Oncor's
financial statements and related notes for the years ended December 31, 2001,
2000 and 1999 included in the Oncor Form 8-K.
RESULTS OF OPERATIONS
2001 VERSUS 2000
Oncor's historical revenues allocated from US Holdings were determined by
unbundling the T&D component of revenues from US Holdings' bundled rate charged
to customers for all operations combined. The historical revenues of TXU SESCO's
T&D business included in Oncor's historical combined financial statements were
derived from the separate historical financial statements of TXU SESCO.
Allocation of revenues between TXU Energy and Oncor also reflected consideration
of return on invested capital, which is regulated for Oncor. Under continuing
regulation, Oncor will have the opportunity to recover increases in operating
costs and other expenses through adjustments to its regulated T&D rates.
Oncor's operating revenues increased by $233 million, or 11%, to $2.3
billion in 2001, primarily as a result of higher recoverable costs in 2001.
Electric energy deliveries in gigawatt-hours declined 1% in 2001 due to milder,
more normal weather and a slowing economy, partially offset by the effect of 2%
growth in the number of end-use consumers within Oncor's service territory.
Total operating expenses increased $223 million, or 14%, to $1.8 billion in
2001. Operation and maintenance expense increased $109 million, or 13%, to $920
million. Higher operation and maintenance expense in 2001 reflected several
factors, including: increased bad debt expense, which was driven by the rise in
fuel-related charges; increases in transmission costs; and systems-related
expenses incurred in preparing for the restructuring of the Texas electricity
markets. Operation and maintenance expense in both years included certain
recoverable charges (accelerated recovery of regulatory assets of $73 million in
2001 and $52 million in 2000). Property, plant and equipment additions in 2001
and 2000 to upgrade system capability and reliability resulted in the $7 million
increase in depreciation and amortization expense in 2001. Taxes other than
income taxes increased $107 million in 2001, primarily due to higher state and
local gross receipts taxes and higher regulatory assessments as a result of the
rise in revenues upon which such taxes are based in late 2000 and early 2001.
Interest expense, net of interest income, increased $11 million, or 4%, to
$274 million in 2001, due to higher average debt balances, including advances
from affiliates, during 2001 compared to 2000.
Income tax expense was $119 million in 2001 (including $118 million charged
to operating expenses and $1 million charged to other income (deductions)),
resulting in an effective tax rate of 34% in 2001 compared to 35% in 2000. Net
income increased by $2 million, or 1%, to $228 million in 2001.
2000 VERSUS 1999
Operating revenues increased $150 million, or 8%, to $2.1 billion in 2000,
largely in line with growth in electric energy delivery volumes, which for 2000
were 6% higher than in 1999. This increase was due to the effects of warmer than
normal summer weather and an extremely cold fourth quarter of 2000, as well as a
2% increase in end-use consumers.
Total operating expenses increased $153 million, or 11%, to $1.6 billion.
Higher operation and maintenance expense accounted for $101 million of the total
increase in operating expenses, which reflected a $52 million recoverable
write-off of certain restructuring expenses and other regulatory assets, as well
as increased regulated third-party transmission rates. Depreciation and
amortization expense was $21 million higher in 2000 compared to 1999. 2000
reflects a full year of depreciation expense, whereas prior to July 1, 1999,
depreciation expense had been redirected from T&D assets to nuclear production
assets in accordance with regulatory orders. This regulatory practice ceased
following the 1999 Restructuring Legislation. In addition, depreciation expense
19
increased due to property, plant and equipment additions to improve system
capability and reliability. Taxes other than income taxes, primarily
representing gross receipts taxes, increased $13 million.
Other income (deductions) - net decreased to $3 million in income in 2000
from $17 million in 1999. Results in 1999 were affected by a $12 million
(pre-tax) gain on a settlement related to a transmission services agreement with
another utility company.
Interest expense, net of interest income, decreased $16 million, or 6%, to
$263 million in 2000, primarily due to the remarketing of certain debt at lower
interest rates.
Income tax expense increased $14 million, or 13%, to $120 million in 2000
(including $118 million charged to operating expenses and $2 million charged to
other income (deductions)), resulting in an effective tax rate of 35% in 2000
compared to 32% in 1999. The effective tax rate in 2000 was affected by higher
state income taxes, while 1999 was affected by the resolution of a tax
contingency. Net income increased by $3 million, or 1%, to $226 million in 2000.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows -- Cash flows provided by operating activities were $675 million
in 2001 compared to $441 million and $623 million in 2000 and 1999,
respectively. The increase in cash flows provided by operating activities in
2001 was due largely to significant increases in accounts payable to affiliates
and lower cash payments for income taxes. The increase in accounts payable
relates to billings from affiliates for professional services incurred primarily
to address compliance issues associated with the restructuring of the Texas
electric industry effective January 1, 2002. Cash payments allocated from US
Holdings to Oncor for income taxes decreased to $33 million in 2001 from $125
million in 2000. This decrease was attributable to several factors, including a
tax refund received during 2001, as well as the impact of higher deductions for
expenses such as bad debts and software development. In 2000, the decrease in
cash flows from operating activities was also largely due to cash payments for
income taxes, which were $125 million in 2000 versus a refund of $33 million in
1999.
Cash flows used in financing activities were $66 million in 2001 compared
to cash flows provided by financing activities of $81 million in 2000 and cash
flows used in financing activities of $114 million in 1999. As a result of the
restructuring of US Holdings and related refinancings, there were substantial
early retirements and issuances of long-term debt in 2001. Financing
transactions during the year ended December 31, 2001 associated with debt
allocated from US Holdings included the following:
ISSUANCES REPURCHASES/
RETIREMENTS
(MILLIONS OF DOLLARS)
First mortgage bonds....................................... $ 400 $848
Advances from affiliates - net............................. 964 -
Other debt................................................. - 72
------ ----
Total............................................. $1,364 $920
====== ====
At December 31, 2001, $1.2 billion of advances from affiliates were
classified as long-term debt because Oncor anticipated refinancing these
advances with long-term debt to be issued during 2002.
Cash flows used in investing activities for 2001 totaled $596 million
versus $505 million for 2000 and $509 million for 1999. Capital expenditures
were $635 million, $517 million and $489 million for 2001, 2000 and 1999,
respectively. Increases in capital expenditures were primarily associated with
T&D infrastructure development and improvements to prepare for the restructuring
of the Texas electricity markets. Capital expenditures are estimated at $474
million for 2002, including spending for maintenance and growth of existing
operations as well as discretionary spending on potential development projects,
and are expected to be funded by cash flows from operations.
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Long-term Contractual Obligations and Commitments -- The following table
summarizes the contractual cash obligations of Oncor for each of the periods
presented. (See Notes 5 and 10 to Financial Statements included in the Oncor
Form 8-K for additional disclosures regarding terms of these obligations.)
Operating lease commitments include a twelve-year agreement for office
facilities entered into subsequent to December 31, 2001.
PAYMENTS DUE
------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER
------ ------ ------ ------ ------ -----------
(MILLIONS OF DOLLARS)
Long-term debt (including
long-term advances from affiliates) ............ $ 370 $ 704 $ 220 $ 92 $ - $2,266
Operating leases ................................. 4 4 4 6 6 37
------ ------ ------ ------ ------ ------
Total contractual cash obligations ............... $ 374 $ 708 $ 224 $ 98 $ 6 $2,303
====== ====== ====== ====== ====== ======
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU US HOLDINGS COMPANY
By /s/ Biggs C. Porter
-----------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: May 29, 2002
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