As filed with the Securities and Exchange Commission on January 6, 2003
Registration Statement No. 333-100240
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------------
ONCOR ELECTRIC DELIVERY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 4911 75-2967830
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
500 N. AKARD STREET, DALLAS, TEXAS 75201
(214) 486-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
ERIC H. PETERSON, ESQ. PETER B. TINKHAM, ESQ.
Executive Vice President Secretary and
and General Counsel Assistant Treasurer
TXU Corp. TXU Corp.
Energy Plaza Energy Plaza
1601 Bryan Street 1601 Bryan Street
Dallas, Texas 75201 Dallas, Texas 75201
(214) 812-4600 (214) 812-4600
ROBERT A. WOOLDRIDGE, ESQ. ROBERT J. REGER, JR., ESQ.
Hunton & Williams Thelen Reid & Priest LLP
1601 Bryan Street 875 Third Avenue
Dallas, Texas 75201 New York, New York 10022
(214) 979-3000 (212) 603-2000
(Names, Addresses, Including Zip Codes, and Telephone Numbers,
Including Area Codes, of Agents for Service)
-----------------------------
It is respectfully requested that the Securities and Exchange Commission
also send copies of all notices, orders and communications to:
LUCAS F. TORRES, ESQ.
Pillsbury Winthrop LLP
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
-----------------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED JANUARY 6, 2003
PROSPECTUS
$1,200,000,000
ONCOR ELECTRIC DELIVERY COMPANY
OFFER TO EXCHANGE
$700,000,000 $500,000,000
6.375% EXCHANGE SENIOR SECURED NOTES 7.000% EXCHANGE SENIOR SECURED NOTES
DUE 2012 DUE 2032
FOR ANY AND ALL FOR ANY AND ALL
6.375% SENIOR SECURED NOTES 7.000% SENIOR SECURED NOTES
DUE 2012 DUE 2032
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ,
2003, UNLESS EXTENDED.
CERTAIN TERMS OF THE NEW NOTES AND THIS EXCHANGE OFFER
o The terms of the $700,000,000 6.375% Exchange Senior Secured Notes due 2012
(the New 2012 Notes) are identical in all material respects to the terms of
the $700,000,000 6.375% Senior Secured Notes due 2012 (the Old 2012 Notes).
The terms of the $500,000,000 7.000% Exchange Senior Secured Notes due 2032
(the New 2032 Notes) are identical in all material respects to the terms of
the $500,000,000 7.000% Senior Secured Notes due 2032 (the Old 2032 Notes).
The New 2012 Notes and the New 2032 Notes are collectively referred to in
this prospectus as the New Notes. The Old 2012 Notes and the Old 2032 Notes
are collectively referred to in this prospectus as the Old Notes. Unlike
the Old Notes, however, the New Notes are registered under the Securities
Act of 1933, as amended (the Securities Act), and the transfer restrictions
and registration rights and related additional interest provisions
applicable to the Old Notes do not apply to the New Notes.
o Like the Old Notes, the New Notes will initially have the benefit of first
liens on the tangible transmission and distribution property of Oncor
Electric Delivery Company (Oncor). The liens securing the New Notes (and
any Old Notes not exchanged for New Notes (the Remaining Old Notes)) may be
released in certain circumstances and subject to certain conditions.
o Oncor will accept any and all Old Notes that are properly tendered and not
validly withdrawn before the expiration of this exchange offer.
o Tenders of Old Notes may be validly withdrawn at any time prior to
expiration of this exchange offer.
o You will not recognize any income, gain or loss for United States federal
income tax purposes as a result of this exchange.
o Old Notes of each series may be exchanged for New Notes of the respective
series only in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof.
o Oncor does not intend to apply for listing of the New Notes on any
securities exchange or to arrange for the New Notes to be quoted on any
automated quotation system.
Each broker-dealer that receives New Notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The related letter of transmittal
that is delivered with this prospectus (the Letter of Transmittal) states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Oncor has agreed that, for a period of 90 days after the
consummation of this exchange offer, Oncor will make this prospectus available
to any broker-dealer for use in connection with any such resale. See PLAN OF
DISTRIBUTION in this prospectus.
PLEASE SEE RISK FACTORS BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A
DISCUSSION OF FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE
OFFER.
Neither the Securities and Exchange Commission (SEC) nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this prospectus is , 2002.
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. Oncor may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell or a solicitation of an offer to buy these securities in any
jurisdiction in which an offer, solicitation or sale is not permitted.
TABLE OF CONTENTS
PAGE
----
SUMMARY........................................................................3
RISK FACTORS..................................................................11
FORWARD-LOOKING INFORMATION...................................................16
USE OF PROCEEDS...............................................................17
CAPITALIZATION AND SHORT-TERM DEBT............................................17
SELECTED FINANCIAL INFORMATION................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION...................................................................19
BUSINESS......................................................................32
MANAGEMENT OF ONCOR...........................................................39
RELATIONSHIPS AMONG ONCOR AND OTHER TXU COMPANIES.............................42
THE EXCHANGE OFFER............................................................43
DESCRIPTION OF THE NEW NOTES..................................................51
DESCRIPTION OF THE 1983 MORTGAGE BONDS........................................68
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS......................71
PLAN OF DISTRIBUTION..........................................................74
EXPERTS.......................................................................75
VALIDITY OF THE NEW NOTES.....................................................75
FINANCIAL STATEMENTS.........................................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH ONCOR HAS REFERRED YOU. ONCOR HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE AS OF THE DATE OF THIS PROSPECTUS. THE BUSINESS PROFILE, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS OF ONCOR MAY HAVE CHANGED SINCE
THAT DATE. THIS PROSPECTUS IS AN OFFER TO EXCHANGE ONLY THE NOTES OFFERED BY
THIS PROSPECTUS, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS
LAWFUL TO DO SO.
WHERE YOU CAN FIND MORE INFORMATION
In connection with this exchange offer, Oncor has filed with the SEC a
registration statement under the Securities Act relating to the New Notes to be
issued in this exchange offer. As permitted by SEC rules, this prospectus omits
information included in the registration statement. For a more complete
understanding of this exchange offer, you should refer to the registration
statement, including its exhibits and any amendments thereto.
The public may read and copy any reports or other information that Oncor
files with the SEC at the SEC's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents
are also available to the public at the web site maintained by the SEC at
http://www.sec.gov. You may also obtain a copy of the exchange offer
registration statement at no cost by writing or telephoning Oncor at the
following address:
Oncor Electric Delivery Company
500 N. Akard Street
Dallas, Texas 75201
214-486-2000
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST DOCUMENTS FROM ONCOR
NO LATER THAN ______, 2003 WHICH IS FIVE DAYS BEFORE THE EXPIRATION DATE (AS
DEFINED BELOW).
2
SUMMARY
This summary highlights selected information from this prospectus and does
not contain all the information that may be important to you. This summary does
not contain all of the information that you should consider before making any
decision concerning this exchange offer. For a more complete understanding of
this exchange offer, Oncor encourages you to read this entire prospectus and the
documents to which Oncor refers you.
THE EXCHANGE OFFER
ISSUANCE OF THE OLD NOTES............. The following notes were issued and sold
on May 6, 2002 by Oncor in a transaction
not requiring registration under the
Securities Act:
o $700,000,000 6.375% Senior
Secured Notes due 2012
o $500,000,000 7.000% Senior
Secured Notes due 2032
The initial purchasers of the Old Notes
sold beneficial interests in the Old
Notes to qualified institutional buyers
pursuant to Rule 144A of the Securities
Act and to non-US persons pursuant to
Regulation S of the Securities Act. All
of the Old Notes originally issued by
Oncor on May 6, 2002 are currently
outstanding.
THE EXCHANGE OFFER; NEW NOTES........ Oncor is offering to exchange the New
2012 Notes for the Old 2012 Notes and
the New 2032 Notes for the Old 2032
Notes. The New Notes of each series will
have been registered under the
Securities Act and be of a like
principal amount and like tenor of the
respective series of Old Notes.
Noteholders that properly tender their
Old Notes and do not validly withdraw
such tender before the Expiration Date
(as defined below) will have the benefit
of this exchange offer. Old Notes of
each series may be exchanged for New
Notes of the respective series only in
minimum denominations of $1,000 and
integral multiples of $1,000 in excess
thereof. Oncor will issue the New Notes
on or promptly after the Expiration Date
(as defined below). See THE EXCHANGE
OFFER in this prospectus.
EXPIRATION DATE...................... This exchange offer will expire at
5:00 p.m., New York City time, on
__________, 2003 (the Expiration Date)
unless extended. If extended, the term
Expiration Date will mean the latest
date and time to which this exchange
offer is extended. Oncor will accept for
exchange any and all Old Notes which are
properly tendered in this exchange offer
and not validly withdrawn before
5:00 p.m., New York City time, on the
Expiration Date.
RESALE OF NEW NOTES.................. Based on interpretive letters written by
the staff of the SEC to companies other
than Oncor, Oncor believes that, subject
to certain exceptions, the New Notes may
generally be offered for resale, resold
and otherwise transferred by you,
without compliance with the registration
and prospectus delivery provisions of
the Securities Act, if you:
o acquire the New Notes in the
ordinary course of your business;
o do not have an arrangement or
understanding with any person to
participate in a distribution of
the New Notes;
o are not an affiliate of Oncor
within the meaning of Rule 405
under the Securities Act; and
o are not a broker-dealer that
acquired the Old Notes directly
from Oncor.
3
If Oncor's belief is inaccurate, holders
of New Notes who offer, resell or
otherwise transfer New Notes in
violation of the Securities Act may
incur liability under that Act. Oncor
will not assume or indemnify holders
against any such liability.
If you are a broker-dealer that
purchased Old Notes for your own account
as part of market-making or trading
activities, you must deliver a
prospectus when you sell any of the New
Notes. Oncor has agreed under a
registration rights agreement that
relates to the Old Notes to allow you to
use this prospectus for this purpose for
a period of 90 days after the
consummation of this exchange offer.
CONDITIONS TO THIS EXCHANGE OFFER ... Oncor may terminate this exchange offer
before the Expiration Date if it
determines that its ability to proceed
with this exchange offer could be
materially impaired due to
o any legal or governmental
actions,
o any new law, statute, rule or
regulation, or
o any interpretation by the staff
of the SEC of any existing law,
statute, rule or regulation.
TENDER PROCEDURES--
BENEFICIAL OWNER .................. If you wish to tender Old Notes that are
registered in the name of a broker,
dealer, commercial bank, trust company
or other nominee, you should contact the
registered holder promptly and instruct
the registered holder to tender on your
behalf.
IF YOU ARE A BENEFICIAL HOLDER, YOU
SHOULD FOLLOW THE INSTRUCTIONS RECEIVED
FROM YOUR BROKER OR NOMINEE WITH RESPECT
TO TENDERING PROCEDURES AND CONTACT YOUR
BROKER OR NOMINEE DIRECTLY.
TENDER PROCEDURES--
REGISTERED HOLDERS AND
DTC PARTICIPANTS................... If you are a registered holder of Old
Notes and wish to participate in this
exchange offer, you must complete, sign
and date the accompanying Letter of
Transmittal, or a facsimile thereof. If
you are a participant in The Depository
Trust Company (DTC), and wish to
participate in this exchange offer, you
must instruct DTC to transmit to the
Exchange Agent (as defined below) a
message indicating that you agree to be
bound by the terms of the Letter of
Transmittal. You should mail or
otherwise transmit the Letter of
Transmittal or facsimile (or agent's
message (as hereinafter defined)),
together with your Old Notes (in
book-entry form if you are a participant
in DTC) and any other required
documentation to The Bank of New York
(the Exchange Agent).
GUARANTEED DELIVERY PROCEDURES....... If you are a holder of Old Notes and
wish to tender such Old Notes, but such
Old Notes are not immediately available
or you cannot deliver such Old Notes or
the Letter of Transmittal to the
Exchange Agent prior to the Expiration
Date, then you must tender your Old
Notes according to the special
guaranteed delivery procedures. See THE
EXCHANGE OFFER in this prospectus.
WITHDRAWAL RIGHTS.................... You may validly withdraw tenders of Old
Notes at any time before 5:00 p.m., New
York City time, on the Expiration Date.
4
ACCEPTANCE OF OLD NOTES AND DELIVERY
OF NEW NOTES....................... Subject to the satisfaction or waiver of
the conditions to this exchange offer,
Oncor will accept for exchange any and
all Old Notes that are properly tendered
and not validly withdrawn before
5:00 p.m., New York City time, on the
Expiration Date. The New Notes will be
delivered promptly after the Expiration
Date.
CERTAIN MATERIAL UNITED STATES
FEDERAL INCOME TAX
CONSIDERATIONS..................... The exchange of New Notes of each series
for Old Notes of the respective series
will not be a taxable event for United
States federal income tax purposes. As a
result, you will not recognize any
income, gain or loss with respect to any
such exchange. See MATERIAL UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
in this prospectus.
EFFECT ON HOLDERS OF THE REMAINING
OLD NOTES.......................... All of the Remaining Old Notes will
continue to be subject to restrictions
on their transfer in accordance with the
Securities Act. After this exchange
offer, holders of the Remaining Old
Notes will not (with limited exceptions)
have any further registration rights
(including, but not limited to, the
related additional interest provisions)
with respect to such notes. The value of
the Remaining Old Notes could be
adversely affected by the conclusion of
this exchange offer. There could be no
market for the Remaining Old Notes and
thus you may be unable to sell such
notes.
THE NEW NOTES
The terms of the New 2012 Notes will be identical in all material respects
to the terms of the Old 2012 Notes, and the terms of the New 2032 Notes will be
identical in all material respects to the terms of the Old 2032 Notes. The New
Notes, however, will be registered under the Securities Act and will not have
the registration rights (and related additional interest provisions) or transfer
restrictions which were applicable to the Old Notes. The New Notes of each
series will evidence the same debt as the Old Notes of the respective series.
The New Notes will be governed by the same indenture as the Old Notes. For more
information about the New Notes, see DESCRIPTION OF THE NEW NOTES in this
prospectus.
ISSUER............................... Oncor Electric Delivery Company
THE NEW NOTES........................ $700,000,000 principal amount of Oncor's
6.375% Exchange Senior Secured Notes due
2012 and $500,000,000 principal amount
of Oncor's 7.000% Exchange Senior
Secured Notes due 2032, all of which
have been registered under the
Securities Act.
RANKING.............................. Oncor will issue the New Notes under its
indenture and deed of trust (Indenture),
dated as of May 1, 2002, from Oncor to
The Bank of New York, as trustee
(Trustee), which is the same indenture
under which the Old Notes were issued.
Similar to the Old Notes, the New Notes
will initially be secured by (i) the
lien of a matching aggregate principal
amount of Oncor's first mortgage bonds
that Oncor issued to the Trustee for the
benefit of the holders of the Old Notes
(and New Notes exchanged for Old Notes
in connection with this exchange offer)
and (ii) a lien on Oncor's tangible
electric transmission and distribution
property. The first mortgage bonds were
issued under Oncor's Mortgage and Deed
of Trust, dated as of December 1, 1983
(1983 Mortgage) from Oncor (which
succeeded to and was substituted for TXU
Electric Company) to The Bank of New
York, as trustee (Mortgage Trustee).
5
The lien of the Indenture and the first
mortgage bonds may be released in
certain circumstances and subject to
certain conditions. Upon any such
release, the New Notes (and any
Remaining Old Notes) will cease to be
secured obligations of Oncor and will
become senior unsecured general
obligations of Oncor pari passu with all
of Oncor's other senior unsecured
indebtedness. See DESCRIPTION OF THE NEW
NOTES - "Discharge of Lien; Release
Date" in this prospectus.
MATURITY............................. The New 2012 Notes mature on May 1, 2012
and the New 2032 Notes mature on May 1,
2032.
INTEREST RATE........................ The New 2012 Notes will bear interest at
the annual rate of 6.375%. The New 2032
Notes will bear interest at the annual
rate of 7.000%. Interest on each New
Note will accrue from the date of the
last interest payment on the Old Notes.
If no interest has been paid on the Old
Notes, interest will accrue from May 6,
2002, which is the date the Old Notes
were originally issued. Interest will be
calculated on the basis of a 360-day
year consisting of twelve 30-day months,
and with respect to any period less than
a full month, on the basis of the actual
number of days elapsed during such
period.
INTEREST PAYMENT DATES............... Oncor will pay interest on each series
of the New Notes semi-annually on May 1
and November 1, beginning on November 1,
2002.
REDEMPTION........................... Oncor may at its option redeem all or
part of each series of the New Notes
(and/or the Remaining Old Notes) at the
respective "make-whole" redemption
prices discussed in this prospectus
under DESCRIPTION OF THE NEW NOTES -
"Optional Redemption," plus accrued and
unpaid interest to the redemption date.
LIMITATION ON SECURED DEBT........... If any New Notes (or any Remaining Old
Notes) are outstanding under the
Indenture, Oncor will not issue, incur
or assume any debt secured by a lien
upon any of Oncor's property, except for
certain permitted secured debt, unless
the New Notes (and the Remaining Old
Notes) are also secured by that lien,
without the consent of the holders of a
majority of all outstanding securities
issued under the Indenture, including
the New Notes (and the Remaining Old
Notes). See DESCRIPTION OF THE NEW NOTES
- "Limitation on Secured Debt" in this
prospectus.
RATINGS.............................. The New Notes are expected to be
assigned ratings consistent with the Old
Notes. The Old Notes are currently rated
Baa1 by Moody's Investors Service, Inc.
(Moody's), BBB by Standard & Poor's
Ratings Services (S&P), a division of
The McGraw Hill Companies, Inc., and
BBB+ by Fitch, Inc. (Fitch), the same
ratings as those currently assigned to
the Old Notes. A rating reflects only
the view of a rating agency, and it is
not a recommendation to buy, sell,
exchange or hold the Old Notes or the
New Notes. Any rating can be revised
upward or downward or withdrawn at any
time by a rating agency if such rating
agency decides that circumstances
warrant that change.
On December 13, 2002, Moody's downgraded
the credit ratings of TXU Corp., TXU Gas
Company (TXU Gas) and Oncor (from A3 to
Baa1 for Oncor's secured debt). Moody's
currently maintains a negative outlook
for TXU Corp., TXU Gas and TXU Australia
Holdings (Partnership) Limited
Partnership (TXU Australia), and a
6
stable outlook for TXU US Holdings
Company (US Holdings), Oncor and TXU
Energy Company LLC (TXU Energy). On
December 12, 2002, Fitch downgraded the
credit ratings of TXU Corp., its US
subsidiaries (from A- to BBB+ for
Oncor's secured debt) and TXU Australia.
Fitch currently maintains a stable
outlook for each such entity. In October
2002, S&P downgraded the credit ratings
of TXU Corp., its US subsidiaries (from
BBB+ to BBB for Oncor's secured debt)
and TXU Australia. S&P currently
maintains a negative outlook for each
such entity. See MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - "Financial
Condition, Capital Resources and Results
of Operations - Credit Ratings of TXU
Corp., US Holdings, Oncor and TXU
Energy" in this prospectus for a chart
that contains the current credit ratings
of TXU Corp. and certain of its US
subsidiaries (including Oncor).
RISK FACTORS ........................ You should carefully consider each of
the factors described in the section of
this prospectus entitled RISK FACTORS
before participating in this exchange
offer.
FORM................................. The New Notes will be represented by one
or more permanent global notes in fully
registered form. Each global note will
be deposited with the Trustee as
custodian for DTC, and registered in the
name of DTC's nominee, except in certain
limited circumstances described in this
prospectus. See DESCRIPTION OF THE NEW
NOTES -- "Book-Entry" in this
prospectus.
TRUSTEE AND PAYING AGENT............. The Bank of New York
GOVERNING LAW........................ The Indenture is, and the New Notes will
be, governed by the laws of the State of
New York.
BUSINESS
ONCOR ELECTRIC DELIVERY COMPANY AND AFFILIATES
Oncor is a regulated utility engaged in the transmission and distribution
of electricity in the north-central, eastern and western parts of Texas. Oncor
is an indirect, wholly-owned subsidiary of TXU Corp. In this prospectus, "TXU"
refers to TXU Corp. together with its direct and indirect subsidiaries.
TXU is an energy services company that engages in electricity generation,
wholesale energy sales, trading and risk management activities, retail energy
sales, energy delivery, other energy-related services and, through a joint
venture, telecommunications services. TXU serves more than five million
customers and owns and operates more than 20,000 megawatts of competitive
generation in North America and Australia.
TXU's principal operations currently are conducted through:
o US Holdings, formerly TXU Electric Company, of which Oncor and TXU
Energy are direct, wholly-owned subsidiaries;
o TXU Gas; and
o TXU Australia.
Until the middle of October 2002, TXU also conducted its operations in the
United Kingdom (UK) and other European countries through TXU Europe Limited (TXU
Europe). Between October 4 and October 14, 2002, the major credit rating
agencies downgraded TXU Europe's credit ratings to below investment grade due
7
primarily to continued pressure on operating results in the UK. On October 14,
2002, TXU announced that TXU Europe was offering for sale all or portions of its
business. On October 21, 2002, TXU Europe sold certain of its operations. On
November 19, 2002, TXU Europe and several of its subsidiaries were placed into
the administration process in the UK (similar to bankruptcy proceedings in the
US). The proceeds from the sale of certain of TXU Europe's operations, as well
as any other proceeds that may be realized, will not be available to TXU Corp.
or any of its other subsidiaries (including Oncor). These actions effectively
represent a determination by TXU to exit all of its operations in Europe. TXU
Corp. expects to record a charge of approximately $4.2 billion in the fourth
quarter of 2002, consisting primarily of the write-off of its investment in TXU
Europe ($3.7 billion as of September 30, 2002). The charge also includes
write-offs of receivables due from TXU Europe and amounts previously recorded in
other comprehensive income, consisting primarily of the cumulative translation
loss associated with TXU Europe, as well as certain anticipated income tax and
other obligations related to the exiting of the European operations. This charge
is before consideration of any income tax deduction with respect to the tax
basis ($3.4 billion) of TXU Corp.'s investment in TXU Europe, as well as certain
income tax contingencies, as such matters continue to be under review. TXU Corp.
has no intention to continue to fund the operations or obligations of TXU
Europe.
Within TXU, Oncor, TXU Gas and two subsidiaries of TXU Gas are managed
collectively as the Oncor group (Oncor Group) and are reported by TXU Corp. as
its energy delivery segment. TXU Gas' two subsidiaries managed within the Oncor
Group are Oncor Utility Solutions (Texas) Company and Oncor Utility Solutions
(North America) Company. While these two entities share the Oncor name, they are
not subsidiaries of Oncor.
Neither TXU Corp. nor any of its other subsidiaries or affiliates,
including members of the Oncor Group other than Oncor, will guarantee or provide
other credit or funding support for any of the New Notes or any of the Remaining
Old Notes.
Oncor was formed as part of TXU's response to electric industry
restructuring in Texas. Through December 31, 2001, US Holdings operated as a
vertically-integrated electric utility subsidiary of TXU Corp., generating,
transmitting and distributing electricity to customers in its service territory.
On January 1, 2002, with the advent of the deregulation of the generation and
supply markets pursuant to certain legislation passed during the 1999 session of
the Texas legislature (the 1999 Restructuring Legislation), US Holdings
transferred its:
o regulated electric transmission and distribution assets to Oncor;
o unregulated electric power generation assets to various subsidiaries
of TXU Generation Holdings Company LLC (TXU Generation), an
unregulated, wholly-owned subsidiary of TXU Energy; and
o retail customers to TXU Energy Retail Company LP, also an unregulated,
wholly-owned subsidiary of TXU Energy that operates TXU Energy's
retail electric provider (REP) business.
Also, on January 1, 2002 the regulated electric transmission and
distribution business of TXU SESCO Company (TXU SESCO), a subsidiary of TXU
Corp., was transferred to Oncor.
Oncor is managed as a single, integrated electric delivery business;
consequently, there are no separate reportable business segments. Oncor's
principal operations are:
o ELECTRIC TRANSMISSION - Oncor's electric transmission business
provides non-discriminatory wholesale open access to Oncor's
transmission facilities. Oncor's transmission facilities transverse
almost 200,000 square miles of Texas and consist of 4,698 circuit
miles of 345-kilovolt (kV) transmission lines, 9,859 circuit miles of
138-kV and 69-kV transmission lines and over 900 substations.
o ELECTRIC DISTRIBUTION - Oncor's electric distribution business
distributes electricity for REPs in its certificated service area.
This service area includes 92 counties and 370 incorporated
municipalities in the north-central, eastern and western parts of
Texas. REPs provide electricity through Oncor to over 2.7 million
customers (including 2.4 million residential customers and 350,000
commercial and industrial businesses). Oncor's 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 Oncor's
distribution network operates at 25-kV and 12.5-kV.
8
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution companies. Oncor's distribution customers
consist of approximately 35 REPs in Oncor's certificated service area. One of
these REPs is TXU Energy. TXU Energy is by far the largest REP operating in
Oncor's certificated service area. Revenues from TXU Energy represent the
substantial majority of Oncor's revenues.
Oncor's operations do not include the production or sale of electricity,
the procurement, supply or delivery of fuel for the generation of electricity,
the solicitation or billing of retail electric customers or service as a
provider of last resort.
Most of Oncor's transmission facilities 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 facilities and the
distribution network transferred from US Holdings to Oncor on January 1, 2002
are currently subject to the lien of the 1983 Mortgage. All of the transmission
facilities and the distribution network of Oncor are currently subject to the
lien of the Indenture.
ONCOR'S STRATEGY
Oncor's strategy focuses on the ownership, management and operation of
electric transmission and distribution assets. This strategy seeks to
aggressively manage operating costs and expenditures through efficiencies and
best practices while continuing to build on TXU's tradition of excellent service
and high performance.
REGULATION
Oncor is a rate-regulated electric transmission and distribution utility
operating wholly within the State of Texas and is subject to the jurisdiction of
the Public Utility Commission of Texas (PUCT) and certain municipalities with
respect to rates and service.
Oncor's current rates were established by an October 3, 2001 final order
issued by the PUCT. On December 31, 2001, US Holdings filed a settlement plan
(Settlement Plan) with the PUCT, which was approved by the PUCT on June 20,
2002. On August 5, 2002, the PUCT issued a financing order pursuant to the
Settlement Plan authorizing the issuance of transition (securitization) bonds
with a principal amount of $1.3 billion. The PUCT's order approving the
Settlement Plan and the financing order were appealed by certain nonsettling
parties in five separate dockets in Travis County, Texas District Court in
August 2002. The court has consolidated these dockets into one, and a hearing on
the merits is scheduled for February 4, 2003. US Holdings and Oncor are unable
to predict when the appeal process related to the PUCT's approval of the
Settlement Plan and the financing order will be concluded or the outcome. If the
PUCT's approval is upheld, the Settlement Plan resolves all major pending issues
related to US Holdings' transition to competition and will supersede certain
ongoing proceedings that are related to the 1999 Restructuring Legislation,
including Oncor's transmission and distribution rates and regulatory asset
securitization and Oncor's appeal of portions of the PUCT order that deal with
mitigation of stranded costs. The Settlement Plan and these ongoing proceedings
are discussed in this prospectus under the heading BUSINESS - "Oncor's
Business - Regulation and Rates." The Settlement Plan does not remove regulatory
oversight of Oncor's business. Oncor does not believe that the outcome of the
appeal process will materially affect Oncor's net financial results, as TXU
Energy has agreed, under a master separation agreement executed in December 2001
(Business Separation Agreement), to hold Oncor harmless from the results of any
disallowance of generation-related items, including securitization of regulatory
assets, stranded costs and fuel reconciliation. See RELATIONSHIPS AMONG ONCOR
AND OTHER TXU COMPANIES in this prospectus.
Oncor is also subject to various federal, state and local regulations
dealing with environmental matters.
MISCELLANEOUS
Oncor is a Texas corporation that was formed in November 2001 and began
operations on January 1, 2002. The mailing address of Oncor's principal
executive offices is 500 N. Akard Street, Dallas, Texas 75201; Oncor's telephone
number is (214) 486-2000.
9
SUMMARY FINANCIAL DATA
You should read the following summary financial data together with the
sections of this prospectus entitled SELECTED FINANCIAL INFORMATION and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and the financial statements and the related notes to such financial
statements included elsewhere in this prospectus. The financial information for
the transmission and distribution operations included within the combined
financial statements for the years ended December 31, 2001, 2000 and 1999 and
the nine months ended September 30, 2001 was derived from the separate
historical financial statements of US Holdings and TXU SESCO. Various unbundling
and allocation methodologies were used in combining this information. While
Oncor believes that such methodologies 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 these combined financial
statements. In addition, the future results of operations and financial position
of Oncor could differ materially from the results presented for periods prior to
2002. The condensed consolidated financial information for the nine months ended
September 30, 2002 represents the actual results of operations and financial
position for Oncor and may not be comparable to the combined financial
information for the nine months ended September 30, 2001. In addition, because
of the seasonal nature of Oncor's business, results for the interim periods
presented may not be indicative of results that may be expected for an entire
year.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ---------------------------------
2002 2001 2001 2000 1999
(MILLIONS OF DOLLARS, EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues............................... $ 1,551 $ 1,655 $ 2,314 $ 2,081 $ 1,931
Net income....................................... $ 232 $ 176 $ 228 $ 226 $ 223
Ratio of earnings to fixed charges(a) ........... 2.75 2.21 2.24 2.28 2.15
BALANCE SHEET DATA (END OF PERIOD):
Total assets..................................... $ 8,948 $ 8,495 $ 8,149
Property, plant and equipment - net.............. $ 6,003 $ 5,802 $ 5,445
Capitalization:
Long-term debt, less amounts due currently:
Secured debt............................... $ 2,341 $ 2,082 $ 2,671
Unsecured debt............................. $ 1,000 $ 1,200 $ 81
-------- --------- ---------
Total................................... $ 3,341 $ 3,282 $ 2,752
Shareholder's equity.......................... $ 2,808 $ 2,701 $ 2,532
--------- --------- ---------
Total Capitalization................. $ 6,149 $ 5,983 $ 5,284
========= ========= =========
Capitalization ratios:
Long-term debt, less amounts due currently:
Secured debt............................... 38.1% 34.8% 50.6%
Unsecured debt............................. 16.2% 20.1% 1.5%
-------- --------- ---------
Total................................... 54.3% 54.9% 52.1%
Shareholder's equity.......................... 45.7% 45.1% 47.9%
--------- --------- ---------
Total Capitalization................. 100.0% 100.0% 100.0%
========= ========= =========
- -------------------
<FN>
(a) Calculated by dividing pretax income, excluding extraordinary charges,
plus fixed charges (interest expense and estimated interest within
rental expense) by fixed charges.
</FN>
10
RISK FACTORS
In addition to the other information in this prospectus, you should
consider the factors described below. The risks and uncertainties described
below are not the only risks Oncor may face. Additional risks and uncertainties
not presently known to Oncor or that Oncor currently deems immaterial may impair
its business operations. Each of the risks described below could have a material
adverse effect on Oncor's business, financial condition or results of operations
and could result in a loss or a decrease in the value of your New Notes (and the
Remaining Old Notes).
RISKS RELATED TO ONCOR'S BUSINESSES
ONCOR IS OPERATING IN A NEW MARKET ENVIRONMENT IN WHICH ONCOR AND OTHERS HAVE
LIMITED OPERATING EXPERIENCE.
The competitive electric market in Texas is new. Oncor, the PUCT, the
Electric Reliability Council of Texas (ERCOT) and other market participants have
limited operating history under the market framework created by the 1999
Restructuring Legislation. ERCOT is the independent system operator that is
responsible for maintaining reliable operations of the bulk electric power
supply system in the ERCOT region. Its responsibilities include ensuring that
information relating to a customer's choice of REP is conveyed in a timely
manner to anyone needing the information. Some operational difficulties were
encountered in the pilot program conducted last year and are currently being
experienced. Problems in the flow of information between ERCOT, the transmission
and distribution utilities and the REPs have resulted in delays in switching
customers from one REP to another and have created uncertainty as to the amount
of transmission and distribution charges owed by each REP, which has resulted in
delays in billing and payment of such amounts. While the flow of information is
improving, operational problems in the new system and processes are still being
resolved. If these issues are not effectively resolved in a timely manner,
Oncor's financial results could be adversely affected.
Given the newness of the competitive market in Texas, existing laws and
regulations governing the market structure could be reconsidered, revised or
reinterpreted or new laws or regulations could be adopted. Any changes to such
laws or regulations could have a detrimental effect on Oncor's business. In
addition, Oncor is subject to changes in other laws or regulations, including
the Federal Power Act, as amended, and the Public Utility Holding Company Act of
1935, as amended, changing governmental policies and regulatory actions,
including those of the PUCT and the FERC, with respect to matters including, but
not limited to, operation and construction of transmission facilities,
acquisition, disposal, depreciation and amortization of regulated assets and
facilities and return on invested capital. Any changes to these laws or
regulations could also have a detrimental effect on Oncor's business.
ONCOR'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL AND ARE SUBJECT TO RISKS
THAT ARE BEYOND ONCOR'S CONTROL.
A portion of Oncor's revenues is derived from rates that Oncor collects
from each REP based on the amount of electricity Oncor distributes on behalf of
each such REP. Thus, Oncor's revenues and results of operations are subject to
seasonality, weather conditions and other changes in electricity usage. In
addition, the operation of electricity transportation facilities involves many
risks, including start up risks, breakdown or failure of equipment and
transmission lines, lack of sufficient capital to maintain the facilities, as
well as the risk of performance below expected levels of output or efficiency.
Also, the cost of repairing damage to Oncor's facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, will adversely impact Oncor's revenues,
operating and capital expenses and results of operations. Insurance, warranties
or performance guarantees may not cover any or all of the lost revenues or
increased expenses. Likewise, Oncor's ability to obtain insurance, and the cost
of and coverage provided by such insurance, could be affected by events outside
its control.
Also, Oncor's ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables and subject to substantial risks. Should any such efforts be
unsuccessful, Oncor could be subject to additional costs and/or the write off of
its investment in the project or improvement.
11
RATE REGULATION OF ONCOR'S BUSINESS MAY DELAY OR DENY ONCOR FULL RECOVERY OF
ONCOR'S COSTS.
Oncor's rates are regulated by the PUCT based on an analysis of Oncor's
expenses incurred in a test year. As part of the Settlement Plan, which is
discussed in this prospectus under the heading BUSINESS - "Oncor's
Business - Regulation and Rates," Oncor has agreed not to seek to increase its
distribution rates prior to 2004. Thus, the rates Oncor is allowed to charge may
or may not match Oncor's expenses at any given time. While rate regulation in
Texas is premised on the full recovery of prudently incurred costs and a
reasonable rate of return on equity, there can be no assurance that the PUCT
will judge all of Oncor's costs to have been prudently incurred or that the
regulatory process in which rates are determined will always result in rates
that will produce full recovery of Oncor's cost.
COLLECTION OF ONCOR'S DISTRIBUTION REVENUES IS CONCENTRATED IN A SMALL NUMBER OF
REPS.
Oncor's revenues from the distribution of electricity are collected from
REPs that supply the electricity Oncor distributes to such REPs' customers.
Currently, Oncor does business with approximately 35 REPs. Oncor depends on
these REPs to timely remit these revenues to Oncor. Oncor could experience
delays or defaults in payment from these REPs, adversely affecting Oncor's cash
flows. Revenues from TXU Energy represent the substantial majority of Oncor's
revenues.
In addition to revenues, Oncor is owed other significant amounts from TXU
Energy. TXU Energy has agreed to hold Oncor harmless, in accordance with the
Business Separation Agreement, from the results of any disallowances by the PUCT
of generation-related items, including securitization of regulatory assets,
stranded costs and fuel reconciliation. Further, Oncor has recorded a receivable
due from TXU Energy for incremental income taxes Oncor will pay as it collects
from customers amounts equivalent to the $1.3 billion principal of the
securitization bonds. TXU Energy continues to reimburse Oncor for the excess
mitigation credit passed to REP customers by Oncor and for carrying costs on
regulatory assets. Oncor's financial results and condition could be adversely
affected by any nonperformance of TXU Energy regarding these matters. See the
financial statements and related notes to such financial statements included
elsewhere in this prospectus for more detailed information related to these
obligations of TXU Energy to Oncor.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE AND MAY
ADVERSELY AFFECT ONCOR'S REVENUES AND RESULTS OF OPERATIONS.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through Oncor's distribution facilities. While not
generally competitive now, manufacturers of self-generation facilities continue
to develop smaller-scale, more fuel-efficient generating units that can be cost-
effective options for certain customers. Any reduction in the amount of electric
energy distributed by Oncor as a result of these technologies may have an
adverse impact on Oncor's revenues and results of operations in the future.
ONCOR IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS THAT MAY INCREASE THE
COST OF ONCOR'S TRANSMISSION AND DISTRIBUTION OF ELECTRICITY.
Oncor is subject to extensive federal, state and local environmental
statutes, rules and regulations. There are capital, operating and other costs
associated with compliance with these environmental statutes, rules and
regulations, and those costs could increase in the future.
ONCOR IS SUBJECT TO THE EFFECTS OF CHANGES IN TAX RATES OR POLICIES AND THESE
EFFECTS MAY HAVE A NEGATIVE IMPACT ON ONCOR'S BUSINESS OR RESULTS OF OPERATIONS.
Oncor is subject to the effects of new or changes in, income tax rates or
policies and increases in taxes related to property, plant and equipment and
gross receipts and other taxes. Further, Oncor is subject to audit and reversal
of its tax positions by the Internal Revenue Service and state taxing
authorities.
12
ONCOR IS SUBJECT TO EMPLOYEE WORKFORCE FACTORS THAT COULD AFFECT ONCOR'S
BUSINESS OR FINANCIAL CONDITION.
Oncor is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
RISKS RELATED TO ONCOR'S CORPORATE AND FINANCIAL STRUCTURE
IN THE FUTURE, ONCOR MAY HAVE LIQUIDITY NEEDS THAT MAY BE DIFFICULT TO SATISFY
UNDER SOME CIRCUMSTANCES.
Currently, Oncor is unable to access the commercial paper markets due to
events that have impacted TXU Corp. While Oncor believes that its current
liquidity facilities are adequate to satisfy its anticipated needs, its future
liquidity needs may exceed available sources due to a combination of unfavorable
conditions, such as a significant reduction, or a withdrawal, of its credit
ratings or the credit ratings of TXU Corp. or TXU Corp.'s other US subsidiaries
and changes in commercial paper, bank or other credit markets that reduce
available credit or the ability to renew existing liquidity facilities on
acceptable terms. The absence of adequate liquidity could negatively impact
Oncor's ability to operate its business, results of operations and financial
condition.
RECENT EVENTS IN THE ENERGY MARKETS THAT ARE BEYOND ONCOR'S CONTROL HAVE
INCREASED THE LEVEL OF PUBLIC AND REGULATORY SCRUTINY IN ONCOR'S INDUSTRY AND IN
THE CAPITAL MARKETS AND HAVE RESULTED IN INCREASED REGULATION AND NEW ACCOUNTING
STANDARDS. THE REACTION TO THESE EVENTS MAY HAVE NEGATIVE IMPACTS ON ONCOR'S
BUSINESS, FINANCIAL CONDITION AND ACCESS TO CAPITAL.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the bankruptcy
filing by Enron, accounting irregularities of public companies, and
investigations by governmental authorities into energy trading activities,
companies in the regulated and non-regulated utility businesses have been under
a generally increased amount of public and regulatory scrutiny. Accounting
irregularities at certain companies in the industry have caused regulators and
legislators to review current accounting practices and financial disclosures.
The capital markets and ratings agencies also have increased their level of
scrutiny. Oncor believes that it is complying with all applicable laws, but it
is difficult or impossible to predict or control what effect these events may
have on Oncor's financial condition or access to the capital markets.
Additionally, it is unclear what laws and regulations may develop, and Oncor
cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies, the energy
industry or its operations specifically. Any such new accounting standards could
negatively impact reported financial results.
ONCOR'S PARENT COMPANIES ARE NOT OBLIGATED TO HELP MAINTAIN ITS CAPITAL.
Oncor is an indirect, wholly-owned subsidiary of TXU Corp. and a direct,
wholly-owned subsidiary of US Holdings. TXU Corp. and US Holdings are not
obligated to provide any loans, further equity contributions or other funding to
Oncor or any of its subsidiaries. Oncor must compete with all of TXU Corp.'s and
US Holdings' other subsidiaries for capital and other resources. While, as a
member of the TXU corporate group, Oncor operates within policies, including
dividend policies, established by TXU Corp. that impact the liquidity of Oncor,
the regulation of Oncor's rates provides economic disincentives to any
significant reduction of Oncor's equity capitalization and prohibits
cross-subsidization of other TXU Corp. group members by Oncor.
The lack of necessary capital and cash reserves may adversely impact
Oncor's growth plans, its ability to raise additional debt and the evaluation of
its creditworthiness by rating agencies.
RISKS RELATED TO THIS EXCHANGE OFFER
IF YOU FAIL TO EXCHANGE OLD NOTES, THEY WILL REMAIN SUBJECT TO TRANSFER
RESTRICTIONS.
Any Old Notes that remain outstanding after the expiration of this exchange
offer will continue to be subject to restrictions on their transfer in
accordance with the Securities Act. After the expiration of this exchange offer,
holders of Old Notes will not (with limited exceptions) have any further rights
to have their Old Notes registered under the Securities Act. The value of the
Remaining Old Notes could be adversely affected by the conclusion of this
13
exchange offer. There may be no market for the Remaining Old Notes and thus you
may be unable to sell such notes.
LATE DELIVERIES OF OLD NOTES AND OTHER REQUIRED DOCUMENTS COULD PREVENT YOU FROM
EXCHANGING YOUR OLD NOTES.
Noteholders are responsible for complying with all exchange offer
procedures. The issuance of New Notes in exchange for Old Notes will only occur
upon the proper and timely completion by holders of Old Notes of the procedures
described in this prospectus under the heading THE EXCHANGE OFFER. Therefore,
holders of Old Notes that wish to exchange such Old Notes for New Notes should
allow sufficient time for the timely completion of the exchange procedure.
Neither Oncor nor the Exchange Agent is obligated to notify you of any failure
to follow the proper exchange procedure.
IF YOU ARE A BROKER-DEALER, YOUR ABILITY TO TRANSFER THE NEW NOTES MAY BE
RESTRICTED.
A broker-dealer that purchased Old Notes for its own account as part of
market-making or trading activities must deliver a prospectus when it sells the
New Notes. Oncor's obligation to make this prospectus available to
broker-dealers is limited. Consequently, Oncor cannot guarantee that a proper
prospectus will be available to broker-dealers wishing to resell their New
Notes.
RISKS RELATED TO THE NEW NOTES (AND THE REMAINING OLD NOTES) -
THERE IS NO EXISTING MARKET FOR THE NEW NOTES (OR OLD NOTES) AND ONCOR CANNOT
ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP.
There is no existing market for the New Notes (or Old Notes) and Oncor does
not intend to apply for listing of the New Notes (or Old Notes) on any
securities exchange. There can be no assurance as to the liquidity of any market
that may develop for the New Notes (or Old Notes), the ability of noteholders to
sell their New Notes (or Old Notes) or the price at which the noteholders will
be able to sell their New Notes (or Old Notes). Future trading prices of the New
Notes (or Old Notes) will depend on many factors including, among other things,
prevailing interest rates, Oncor's operating results and the market for similar
securities. If a market for the New Notes (or Old Notes) does not develop,
purchasers may be unable to resell the New Notes (or Old Notes) for an extended
period of time. Consequently, a noteholder may not be able to liquidate its
investment readily.
THE MARKET PRICE OF THE NEW NOTES (AND THE REMAINING OLD NOTES) MAY FLUCTUATE.
Oncor's actual operating history began January 1, 2002. 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
transmission and distribution operations of US Holdings and TXU SESCO. Thus, any
material differences between Oncor's actual results and the historical combined
results contained in this prospectus could have a significant impact on the
market price of the New Notes (and the Remaining Old Notes), assuming any such
market develops. Likewise, any downgrade of Oncor's credit ratings or the credit
ratings of TXU Corp. or TXU Corp.'s other US subsidiaries by Moody's, S&P or
Fitch could have a significant adverse impact on the market price of the New
Notes (and the Remaining Old Notes), assuming any such market develops. On
December 13, 2002, Moody's downgraded the credit ratings of TXU Corp., TXU Gas
and Oncor (from A3 to Baa1 for Oncor's secured debt). Moody's currently
maintains a negative outlook for TXU Corp., TXU Gas and TXU Australia, and a
stable outlook for US Holdings, Oncor and TXU Energy. On December 12, 2002,
Fitch downgraded the credit ratings of TXU Corp., its US subsidiaries (from A-
to BBB+ for Oncor's secured debt) and TXU Australia. Fitch currently maintains a
stable outlook for each such entity. In October 2002, S&P downgraded the credit
ratings of TXU Corp., its US subsidiaries (from BBB+ to BBB for Oncor's secured
debt) and TXU Australia. S&P currently maintains a negative outlook for each
such entity. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - "Financial Condition, Capital Resources and Results of
Operations - Credit Ratings of TXU Corp., US Holdings, Oncor and TXU Energy"
in this prospectus for a chart that contains the current credit ratings of TXU
Corp. and certain of its US subsidiaries (including Oncor).
In addition, the fact that some other participants in the energy industry
have engaged in questionable accounting and business practices has adversely
impacted the market for securities issued by those participants as well as
14
others in the energy industry. While neither Oncor nor any of its affiliates has
engaged in such practices, the market price of Oncor securities, including the
New Notes (and the Remaining Old Notes) (assuming such a market develops), may
also be adversely impacted by continuing developments and disclosures,
concerning other industry participants, over which Oncor has no control.
THE NEW NOTES (AND THE REMAINING OLD NOTES) ARE EXPECTED TO BECOME UNSECURED
OBLIGATIONS OF ONCOR IN THE FUTURE.
The Indenture provides that the lien securing the New Notes (and the
Remaining Old Notes) may be discharged and the first mortgage bonds and any
other Class A Bonds held by the Trustee may be deemed satisfied and discharged
when all Class A Bonds, other than the Class A Bonds held by the Trustee, do not
exceed the greater of 5% of the net book value of Oncor's Electric Utility
Property or 5% of Oncor's Capitalization. The retirement of Oncor's first
mortgage bonds could be accomplished through the redemption, purchase or payment
at maturity of first mortgage bonds. At the time of the discharge, there will be
no collateral for the New Notes (and the Remaining Old Notes) and the New Notes
(and the Remaining Old Notes) will become senior unsecured general obligations
of Oncor pari passu with all other senior unsecured indebtedness of Oncor. The
absence of collateral could materially adversely affect the ability of the
holders of the New Notes (and the Remaining Old Notes) to collect payment
therefor in the event of the bankruptcy or liquidation of Oncor. After the New
Notes (and the Remaining Old Notes) become unsecured, Oncor may incur secured
debt without securing the New Notes (and the Remaining Old Notes) to the extent
permitted by the limitation on secured debt in the Indenture. For a more
detailed discussion and for certain definitions used in this risk factor, see
DESCRIPTION OF THE NEW NOTES in this prospectus.
15
FORWARD-LOOKING INFORMATION
This prospectus contains statements that are not historical fact and
constitute "forward-looking statements". All statements, other than statements
of historical fact, that are included in this prospectus that address activity,
events or developments that Oncor expects or anticipates to occur in the future,
including such matters as projections, future capital expenditures, business
strategy, competitive strengths, goals, future acquisitions, market and industry
developments and the growth of Oncor's businesses and operations, are
forward-looking statements. Although Oncor believes that in making any such
forward-looking statement its expectations are based on reasonable assumptions,
any such forward-looking statement involves uncertainties and is qualified in
its entirety by reference to the following important factors, among others, that
could cause Oncor's actual results to differ materially from those projected in
any such forward-looking statement:
O prevailing governmental policies and regulatory actions, including
those of the Federal Energy Regulatory Commission (FERC) and the PUCT,
with respect to:
o allowed rates of return;
o industry and rate structure;
o recovery of investments;
o acquisitions and disposals of assets and facilities;
o operation and construction of facilities;
o changes in tax laws and policies; and
o changes in and compliance with environmental and safety laws and
policies;
O implementation of the 1999 Restructuring Legislation;
O legal and administrative proceedings and settlements, including the
pending appeals of the PUCT's approval of the Settlement Plan
discussed herein;
O weather conditions, other natural phenomena and acts of sabotage, wars
or other terrorist activities;
O unanticipated population growth or decline, and changes in market
demand and demographic patterns;
O changes in business strategy, development plans or vendor
relationships;
O unanticipated changes in interest rates or rates of inflation;
O unanticipated changes in operating expenses and capital expenditures;
O commercial bank market and capital market conditions;
O competition for new business opportunities;
O inability of various counterparties to meet their obligations with
respect to Oncor's financial instruments;
O changes in technology used and services offered by Oncor;
O significant changes in Oncor's relationship with its employees,
including the availability of qualified personnel, and the potential
adverse effects if labor disputes or grievances were to occur;
O significant changes in critical accounting policies material to Oncor;
and
O actions of rating agencies.
Any forward-looking statement speaks only as of the date on which it is
made, and Oncor undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which it is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for Oncor to predict all of such factors. Also,
Oncor can not 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.
16
USE OF PROCEEDS
The exchange offer contemplated hereby is intended to satisfy some of
Oncor's obligations under the related registration rights agreement. Oncor will
not receive any cash proceeds from the issuance of the New Notes in this
exchange offer. In exchange for issuing the New Notes as described in this
prospectus, Oncor will receive an equal aggregate principal amount of Old Notes,
which will be cancelled.
CAPITALIZATION AND SHORT-TERM DEBT
The following table shows Oncor's capitalization and short-term debt as of
September 30, 2002, and as adjusted. You should read the information in this
table together with the sections of this prospectus entitled SELECTED FINANCIAL
INFORMATION and MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and the financial statements and the related notes
included elsewhere in this prospectus.
ADJUSTED(a)
OUTSTANDING AT ----------------------------------------------
SEPTEMBER 30, 2002 AMOUNT PERCENT
(IN MILLIONS) (IN MILLIONS)
Capitalization:
Long-term debt, less amounts due currently:
First Mortgage Bonds ............................ $ 1,141 $ 1,141
Senior Secured Notes ............................ 1,200 2,050
Debentures ...................................... 1,000 1,000
------- -------
Total long-term debt ......................... 3,341 4,191 60%
Shareholder's equity 2,808 2,808 40%
------- ------- ----
Total Capitalization ................... $ 6,149 $ 6,999 100%
======= ======= ====
Short-term advances from affiliates ...................... $ 30 $ --
Notes payable - commercial paper.......................... $ 103 $ --
Long-term debt due currently.............................. $ 722 $ 217(b)
- -------------------
<FN>
(a) To give effect to (i) the net increase of $506 million in short-term
advances from affiliates since September 30, 2002 ($400 million of which was
used to redeem $400 million principal amount of Oncor's First Mortgage Bonds
Floating Rate Series C due June 15, 2003), (ii) the repayment of $103 million
principal amount of outstanding commercial paper since September 30, 2002, (iii)
the repayment of $18 million principal amount of Oncor's Medium Term Notes
Series D that matured in November 2002 and (iv) the issuance of $850 million of
Oncor's senior secured notes on December 20, 2002 and the application of a
portion of the net proceeds thereof to (A) repurchase approximately $62 million
principal amount of Oncor's First Mortgage and Collateral Trust Bonds 6 3/4%
Series due March 1, 2003 and approximately $25 million principal amount of
Oncor's First Mortgage and Collateral Trust Bonds 6 3/4% Series due April 1,
2003 and (B) repay $536 million principal amount of outstanding short-term
advances from affiliates.
(b) Approximately $203 million of this amount represents first mortgage bonds
that were defeased by Oncor on December 20, 2002. The funds for such defeasance
were deposited with the trustee for such first mortgage bonds with irrevocable
instructions from Oncor to apply such deposited proceeds to the payment of
principal and interest on such first mortgage bonds through maturity.
</FN>
17
SELECTED FINANCIAL INFORMATION
The following table presents Oncor's selected financial information.
Although Oncor began operations on January 1, 2002 (and is not a successor to US
Holdings or TXU SESCO), it is voluntarily providing selected financial
information for the years ended 2001, 2000 and 1999 based on the combined
historical financial data for the unbundled transmission and distribution
operations of US Holdings and TXU SESCO. Similar selected financial data for
years prior to 1999 is not available without unreasonable or undue effort,
expense or burden. The information set forth below should be read together with
the section of this prospectus entitled MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the financial statements and
related notes to such financial statements included elsewhere in this
prospectus. The financial information for the transmission and distribution
operations included within the combined financial statements for the years ended
December 31, 2001, 2000 and 1999 and the nine months ended September 30, 2001
was derived from the separate historical financial statements of US Holdings and
TXU SESCO. Various unbundling and allocation methodologies were used in
combining this information. While Oncor believes that such methodologies 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 these combined financial statements. In addition, the future results
of operations and financial position of Oncor could differ materially from the
results presented for periods prior to 2002. The condensed consolidated
financial information for the nine months ended September 30, 2002 represents
the actual results of operations and financial position for Oncor and may not be
comparable to the combined financial information for the nine months ended
September 30, 2001. In addition, because of the seasonal nature of Oncor's
business, results for the interim periods presented may not be indicative of
results that may be expected for an entire year.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------
2002 2001 2001 2000 1999
-------- ------- ---------- --------- ----------
(MILLIONS OF DOLLARS EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues ................................ $ 1,551 $ 1,655 $ 2,314 $ 2,081 $ 1,931
Operating expenses ................................ $ 1,149 $ 1,266 $ 1,820 $ 1,597 $ 1,444
Operating income .................................. $ 402 $ 389 $ 494 $ 484 $ 487
Net income ........................................ $ 232 $ 176 $ 228 $ 226 $ 223
Ratio of earnings to fixed charges(a).............. 2.75 2.21 2.24 2.28 2.15
BALANCE SHEET DATA (END OF PERIOD):
Total assets ...................................... $ 8,948 $ 8,495 $ 8,149
Property, plant and equipment-- net ............... $ 6,003 $ 5,802 $ 5,445
Capitalization:
Long-term debt, less amounts due currently:
Secured debt .................................. $ 2,341 $ 2,082 $ 2,671
Unsecured debt................................. $ 1,000 $ 1,200 $ 81
-------- -------- --------
Total ....................................... $ 3,341 $ 3,282 $ 2,752
Shareholder's equity ............................. 2,808 2,701 2,532
-------- -------- --------
Total Capitalization ....................... $ 6,149 $ 5,983 $ 5,284
======== ======== ========
Capitalization ratios:
Long-term debt, less amounts due currently:
Secured debt .................................. 38.1% 34.8% 50.6%
Unsecured debt ................................ 16.2% 20.1% 1.5%
------ ------- -------
Total ....................................... 54.3% 54.9% 52.1%
Shareholder's equity ............................. 45.7% 45.1% 47.9%
------- ------- -------
Total Capitalization ....................... 100.0% 100.0% 100.0%
======= ======= =======
OTHER FINANCIAL DATA:
Cash provided by (used in) operating
activities ....................................... $ 62 $ 468 $ 675 $ 441 $ 623
Capital expenditures .............................. $ 389 $ 497 $ 635 $ 517 $ 489
- -------------------
<FN>
(a) Calculated by dividing pretax income, excluding extraordinary charges,
plus fixed charges (interest expense and estimated interest within rental
expense) by fixed charges.
</FN>
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the sections of
this prospectus entitled RISK FACTORS and SELECTED FINANCIAL INFORMATION and
Oncor's financial statements and related notes to such financial statements
included in elsewhere in this prospectus. 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 Oncor's combined financial statements for the
years ended December 31, 2001, 2000 and 1999 and Note 1 to Oncor's condensed
consolidated financial statements for the nine months ended September 30, 2002
and 2001 included elsewhere in this prospectus.
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 transmission and distribution
businesses transferred from US Holdings and TXU SESCO effective on January 1,
2002. Oncor is a wholly-owned subsidiary of US Holdings, which is a wholly-owned
subsidiary of TXU Corp.
Oncor is a regulated utility engaged in the transmission and distribution
of electric energy in the north-central, eastern and western parts of Texas.
Oncor's transmission customers consist of municipalities, electric cooperatives
and other distribution companies. Oncor's distribution customers consist of
approximately 35 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 which 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.
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 transmission and distribution operations of US Holdings and TXU
SESCO. These businesses were operated by subsidiaries of TXU Corp. under common
ownership and control for the periods prior to January 1, 2002. The financial
information of US Holdings' transmission and distribution 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 transmission and distribution 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 operation 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 revenues, common expenses,
assets and liabilities between US Holdings' power generation and transmission
and distribution operations. Interest and other financing costs were determined
based upon debt allocated.
See Notes 1 and 2 to Oncor's combined financial statements for the years
ended December 31, 2001, 2000 and 1999 and Notes 1 and 2 to Oncor's condensed
consolidated financial statements for the nine months ended September 30, 2002
and 2001 included elsewhere in this prospectus for more information regarding
the business restructuring and the basis of presentation for the financial
information included in this section of this prospectus, which reflects certain
assumptions and estimates used in unbundling US Holdings' historical financial
information. Oncor 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 combined financial statements included
herein. In addition, future results of Oncor's operations and financial position
could differ materially from the historical results presented herein.
The financial information for the three and nine months ended September 30,
2002 represents the actual results of operations and financial position of Oncor
and may not be comparable to the combined financial information for the three
and nine months ended September 30, 2001.
19
CRITICAL ACCOUNTING POLICIES
Oncor's significant accounting policies are detailed in Note 2 to Oncor's
combined financial statements for the years ended December 31, 2001, 2000 and
1999 and Note 2 to Oncor's condensed consolidated financial statements for the
nine months ended September 30, 2002 and 2001 included elsewhere in this
prospectus. Oncor follows accounting principles generally accepted in the United
States of America. In applying these accounting policies in the preparation of
its financial statements, Oncor 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 combined financial statements of
Oncor reflect regulatory assets and liabilities under cost-based rate regulation
in accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets and liabilities include those that arose from Oncor's transmission and
distribution operations and those assigned from US Holdings that arose from US
Holdings' generation operations. For more information, see Note 3 to Oncor's
combined financial statements for the years ended December 31, 2001, 2000 and
1999 and Note 3 to Oncor's condensed consolidated financial statements for the
nine months ended September 30, 2002 and 2001 included elsewhere in this
prospectus. TXU Energy has agreed under the Business Separation Agreement to
hold Oncor harmless from the results of any disallowance of generation-related
items, including securitization of regulatory assets, stranded costs and fuel
reconciliation.
Revenue Recognition -- Electric transmission and distribution 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 fees from the meter reading date to the end of the period.
RESULTS OF OPERATIONS
The following discussion addresses changes in individual line items of the
income statement. However, as a regulated entity, Oncor's revenues are designed
to recover reasonable and necessary operating costs in addition to an allowed
return on its invested capital. As part of the Settlement Plan, Oncor has agreed
not to seek to increase its distribution rates prior to 2004. Thus, the rates
Oncor is allowed to charge may or may not match Oncor's costs and allowed return
on invested capital at any given time.
THREE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2001
Oncor's operating revenues decreased $93 million, or 14%, to $557 million
for the third quarter of 2002. The decline was due primarily to the effect of
certain revenues, related to load imbalances within the Electric Reliability
Council of Texas (ERCOT), that are reported by TXU Energy beginning in 2002.
Distribution revenues rose 5% on a 7% increase in electricity volumes delivered,
excluding $17 million in unfavorable adjustments in the quarter related to
estimates of unbilled revenues. Because the fees to REPs for their large
commercial and industrial customers are fixed for specified ranges of volumes,
changes in distribution volumes do not necessarily result in comparable changes
in reported revenues.
Operation and maintenance expense decreased $11 million, or 5%, to $193
million for the third quarter of 2002. Lower expense in 2002 primarily reflected
decreases totaling $27 million in customer support costs 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 customers of US Holdings
whose service was formerly regulated have been free to choose from REPs who
compete for their business. These competing REPs, including TXU Energy, are now
Oncor's primary customers. Accordingly, the transfer of certain customer-related
functions from Oncor to TXU Energy resulted in decreased operation and
maintenance expense for Oncor. Partially offsetting this effect were higher
costs in 2002 to administer energy efficiency programs to reduce load, as
required by regulations, and increased transmission fees paid to other T&D
companies, as well as an increase in total net pension and postretirement
benefit expense of $3 million, to $6 million in 2002.
20
Depreciation and amortization increased $5 million, or 8%, to $65 million
for the third quarter of 2002. The increase resulted 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.
Taxes other than income decreased $42 million, or 30%, to $97 million for
the third quarter of 2002. This decrease was primarily attributable to state
gross receipts taxes that are now incurred by TXU Energy rather than by Oncor.
Local gross receipts taxes continue to be reported in Oncor's results.
Interest income rose $11 million, or 100%, for the third quarter of 2002,
reflecting transactions with TXU Energy in accordance with the Business
Separation Agreement. See note 7 to Oncor's condensed consolidated financial
statements for the nine months ended September 30, 2002 included elsewhere in
this prospectus.
Interest expense and other charges decreased $3 million, or 4%, to $66
million for the third quarter of 2002. This decrease was due to the retirement
of long-term debt with higher interest rates than new debt issued.
Income tax expense is allocated between operating income, after interest
expense and other charges, and other nonoperating items in order to present the
operating results of regulated activities. The effective tax rate on regulated
activities decreased to 34.6% in 2002 from 36.5% in 2001 due primarily to the
effect of nonrecurring regulatory-driven adjustments recorded in 2001 relating
to prior years.
Net income decreased $16 million, or 14%, to $96 million for the third
quarter of 2002. The decrease reflected lower revenues, partially offset by
lower taxes other than income, lower operation and maintenance expense and
higher interest income. Net pension and postretirement benefit expense reduced
net income by $4 million in 2002 and $2 million in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2001
Oncor's operating revenues decreased $104 million, or 6%, to $1.6 billion
for the first nine months of 2002. The decline was due primarily to the impact
of certain revenues reported by TXU Energy in 2002, as described above.
Distribution revenues rose 7% on a 6% increase in electricity volumes delivered.
Because the fees to REPs for their large commercial and industrial customers are
fixed for specified ranges of volumes, changes in distribution volumes do not
necessarily result in comparable changes in revenues.
Operation and maintenance expense decreased $46 million, or 8%, to $560
million for the first nine months of 2002. Lower expense in 2002 primarily
reflected decreases totaling $79 million in customer support expenses and lower
bad debt expense resulting from the changed character of Oncor's customers as
discussed above, partially offset by higher costs in 2002 to administer energy
efficiency programs to reduce load, as required by regulators, and increased
fees paid to other T&D companies. Also, total net pension and postretirement
benefit expense increased $10 million to $19 million in 2002.
Depreciation and amortization increased $18 million, or 10%, to $196
million for the first nine months of 2002. The increase resulted 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.
Taxes other than income taxes decreased $104 million, or 27%, to $284
million for the first nine months of 2002. The decrease was primarily
attributable to state gross receipts taxes that are now incurred by TXU Energy
rather than by Oncor.
Interest income rose $34 million, or 100%, for the first nine months of
2002, reflecting transactions with TXU Energy in accordance with the Business
Separation Agreement. See note 7 to Oncor's condensed consolidated financial
statements for the nine months ended September 30, 2002 included elsewhere in
this prospectus.
Interest expense and other charges decreased $19 million, or 9%, to $193
million for the first nine months of 2002. This decrease was due primarily to
the retirement of long-term debt with higher interest rates than new debt
issued.
21
Income tax expense is allocated between operating income, after interest
and other charges, and other nonoperating items in order to present the
operating results of regulated activities. The effective tax rate on regulated
activities decreased to 34.3% in 2002 from 34.7% in 2001.
Net income increased by $56 million, or 32%, to $232 million for the first
nine months of 2002. The improvement reflected lower taxes other than income,
lower operation and maintenance expenses and higher interest income, partially
offset by lower revenues. Net pension and postretirement benefit expense reduced
net income by $12 million in 2002 and $6 million in 2001.
YEAR ENDED DECEMBER 31, 2001 VERSUS 2000
Oncor's historical revenues allocated from US Holdings were determined by
unbundling the transmission and distribution component of revenues from US
Holdings' bundled rate charged to customers for all operations combined. The
historical revenues of TXU SESCO's transmission and distribution 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 transmission and
distribution 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.
YEAR ENDED DECEMBER 31, 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 transmission and distribution
assets to nuclear production assets in accordance with regulatory orders. This
regulatory practice ceased following the 1999 Restructuring Legislation. In
22
addition, depreciation expense 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.
COMPREHENSIVE INCOME
Oncor has historically used, and may continue to use, derivatives that are
highly effective in offsetting future cash flow volatility in interest rates.
The fair value of derivatives that are effective as cash flow hedges are
recorded as derivative assets or liabilities with an offset in other
comprehensive income.
The amounts included in other comprehensive income reflect the value of the
cash flow hedges to be used in the future to offset the impact on related
payments of expected changes in interest. The effects of the accounting hedges
will be recorded in the statement of income as the related transactions are
actually settled.
Other comprehensive income for the nine months ended September 30, 2002
reflected a loss of $25 million (net of tax effect), which was due to a decrease
in the fair value of interest rate hedges because of lower interest rates.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows -- Cash flows provided by operating activities during the first
nine months of 2002 were $62 million compared to $468 million for 2001. The
decrease of $406 million reflected higher accounts receivable of $277 million in
2002, largely from TXU Energy, due to the start-up of billing REPs for T&D
charges effective January 1, 2002, and a $133 million effect of the excess
mitigation credit (see note 7 to Oncor's condensed consolidated financial
statements for the nine months ended September 30, 2002 included elsewhere in
this prospectus) passed to customers, which is offset in financing activities as
the related note receivable from TXU Energy is collected.
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 provided by financing activities during the first nine months of
2002 were $336 million, compared to $16 million for 2001. In 2002, Oncor issued
$103 million in commercial paper, $1.0 billion of fixed rate debentures and $1.2
billion of senior secured notes. Also, in 2002, Oncor retired $580 million of
debt, repurchased stock in the aggregate amount of $100 million and made net
repayments of $1.2 billion of advances from affiliates, including amounts
classified as long-term debt.
23
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 was
classified as long-term debt because Oncor anticipated refinancing these
advances with long-term debt to be issued during 2002. In May 2002, Oncor
refinanced these advances with long-term debt.
Cash flows used in investing activities, which primarily consisted of
capital expenditures, were $432 million and $485 million for the nine months
ended September 30, 2002 and 2001, respectively. Investing activities in 2002
also reflected $39 million in cash disbursed to settle interest rate swaps as
discussed in note 7 to Oncor's condensed consolidated financial statements for
the nine months ended September 30, 2002 included elsewhere in this prospectus.
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
transmission and distribution infrastructure development and improvements to
prepare for the restructuring of the Texas electricity markets. Capital
expenditures are estimated at $526 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.
Issuances and Retirements -- During the nine months ended September 30,
2002, Oncor issued, redeemed, reacquired or made scheduled principal payments on
long-term debt as follows:
ISSUANCES RETIREMENTS
--------- -----------
(MILLIONS OF DOLLARS)
First mortgage bonds..................... $ - $525
Senior secured notes (Old Notes)......... 1,200 -
Medium term notes........................ - 55
Fixed Rate Debentures.................... 1,000 -
-------- ----
Total........................ $ 2,200 $580
======== ====
See Note 3 to Oncor's condensed consolidated financial statements for the
nine months ended September 30, 2002 included elsewhere in this prospectus for
further detail of debt issuances and retirements.
On December 15, 2002 Oncor redeemed its $400 million Floating Rate Series C
First Mortgage Bonds due June 15, 2003.
On December 20, 2002, Oncor issued $850 million principal amount of its
senior secured notes to defease, repurchase for retirement or redeem an equal
principal amount of its first mortgage bonds, and entered into a secured credit
facility for up to $150 million which will be used for general corporate
purposes at Oncor. The senior secured notes were issued in two series. The first
series ($500 million) bears interest at the rate of 6.375% and matures in 2015
and the second series ($350 million) bears interest at the rate of 7.250% and
matures in 2033.
24
CREDIT FACILITIES - TXU Corp., US Holdings, Oncor and TXU Energy had credit
facilities (some of which provide for long-term borrowings) available as
follows:
CREDIT FACILITIES
-------------------------------------------------------
AT SEPTEMBER 30, 2002 AT NOVEMBER 5, 2002(a)
--------------------- ----------------------
AUTHORIZED FACILITY LETTERS CASH LETTERS CASH
FACILITY EXPIRATION DATE BORROWERS LIMIT OF CREDIT BORROWINGS OF CREDIT BORROWINGS
-------- --------------- --------- ----- --------- ---------- --------- ----------
(MILLIONS OF DOLLARS)
364-Day Revolving Credit Facility........ April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ 81 $ - $ 88 $ 912
Five -Year Revolving Credit Facility(b).. February 2005 US Holdings 1,400 462 - 461 939
Three-Year Revolving Credit Facility..... May 2005 TXU Corp. 500 -- 350 - 500
Standby Liquidity Facility(d)............ November 2002 US Holdings 400 -- - - 400
Standby Liquidity Facility(d)............ November 2002 US Holdings, TXU
Energy, Oncor 400 -- - - 400
------- ------- ------- ------- -------
Total(c)............................ $ 3,700 $ 543 $ 350 $ 549 $ 3,151
======= ======= ======= ======= =======
- ------------------
<FN>
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately $2.6
billion in cash against their available credit facilities, none of which is
an obligation of Oncor. These funds and other available cash will be used,
in part, to repay outstanding commercial paper. (See discussion below under
Recent Actions by TXU )
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
TXU Corp. was removed as a borrower under this facility effective July 31,
2002.
(c) Supported commercial paper borrowings.
(d) Borrowings of $800 million against these facilities have been repaid. These
facilities expired on November 30, 2002.
</FN>
On December 20, 2002, Oncor entred into a secured credit facility for up to
$150 million. Oncor intends to use this facility for general corporate purposes
at Oncor. This facility has not been drawn upon, and is not reflected in the
credit facilities chart set forth above.
In July 2002, US Holdings entered into the $400 million Standby Liquidity
Facility that expired on November 30, 2002. In August 2002, US Holdings, TXU
Energy and Oncor entered into the joint $400 million Standby Liquidity Facility
that also expired on November 30, 2002. Borrowings of $800 million against those
facilities have been repaid.
In May 2002, TXU Corp. entered into the $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
is being used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the joint
$1.0 billion 364-day revolving credit facility with a group of banks that
terminates in April 2003 but can be extended for one year. This facility is
being used for working capital and general corporate purposes. Up to $1.0
billion of letters of credit may be issued under the facility. This facility and
the $500 million three-year revolving credit facility described above replaced
the TXU Corp. and US Holdings $1.4 billion 364-day revolving credit facility
that expired in April 2002.
In the second quarter of 2002, each of Oncor and TXU Energy began issuing
commercial paper to fund its short-term liquidity requirements. The commercial
paper programs allow each of Oncor and TXU Energy to issue up to $1.0 billion
and $2.4 billion of commercial paper, respectively. At September 30, 2002, each
of the credit facilities listed above provided back-up for outstanding
commercial paper under the Oncor and TXU Energy programs. The TXU Corp.
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of September 30, 2002, total outstanding commercial paper
under these programs was $1,082 million of which Oncor's portion was $103
million. Because of liquidity concerns in the US financial markets, commercial
paper markets have become inaccessible to Oncor and TXU Energy. Existing
borrowings under the program are being repaid upon maturity. Commercial paper
borrowings are expected to resume as market concerns regarding the liquidity of
TXU Corp. and its US and Australian subsidiaries are mitigated.
All of the credit facilities discussed above, with the exception of the
Oncor facility that was entered into on December 20, 2002, are included in the
credit facilities table above.
Over the next twelve months, Oncor and its subsidiaries will have financing
needs to fund ongoing working capital requirements and maturities of debt. Oncor
and its subsidiaries have funded or intend to fund these financing needs through
25
cash on hand, cash flows from operations, short-term credit facilities and the
issuance of long-term debt or other securities. Other potential sources of
funding include bank borrowings and commercial paper issuances.
Oncor is also provided short-term financing by TXU Corp. and affiliated
companies. Oncor had short-term advances from affiliates of $30 million and $108
million outstanding as of September 30, 2002 and December 31, 2001,
respectively.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
indirect subsidiary of TXU Corp., which sells undivided interests in accounts
receivable it purchases to financial institutions. As of January 1, 2002, TXU
Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas
are 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 September 30, 2002, Oncor had sold $67 million face amount of receivables
to TXU Receivables Company under the program in exchange for cash of $32 million
and $34 million in subordinated notes, with $1 million of losses on sales for
the nine months ended September 30, 2002, principally representing the interest
on the underlying financing. These losses approximated 4% of the cash proceeds
from the sale of undivided interests in accounts receivable on an annualized
basis. Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent Oncor's retained interest in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the consolidated balance sheet.
RECENT ACTIONS BY TXU
In October 2002, TXU made a determination to exit its TXU Europe
operations. Further, in consideration of concerns in US financial markets about
its liquidity, such concerns having already been prevalent in the markets with
respect to the performance of the US energy sector, TXU took the following
actions to strengthen TXU Corp.'s and its US and Australian subsidiaries' credit
position:
O Reduced the TXU Corp. common stock dividend by 80% to an annual
indicated rate of $.50 per share effective with the dividend payable
on January 2, 2003.
O Significantly reduced planned capital expenditures in all of TXU's
businesses. These reductions are primarily directed to developmental
as opposed to maintenance spending.
O Reversed previous plans to support TXU Europe with up to $700 million
in capital contributions.
O Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default
(TXU Australia's financing arrangements have no cross-default
provisions that would have been triggered by a TXU Europe default.)
O US Holdings and TXU Energy drew $2.6 billion in cash on their US
revolving credit facilities. Oncor is not obligated with respect to
any of these funds.
O On November 22, 2002, TXU Energy issued $750 million of 9%
exchangeable subordinated notes due 2012. The net proceeds were used
to repay a portion of the $800 million outstanding under the two
Standby Liquidity Facilities discussed above which expired on November
30, 2002. Oncor is not obligated with respect to these notes of TXU
Energy.
O On December 2, 2002, TXU Corp. issued approximately $516 million of
common stock.
O On December 20, 2002, Oncor issued $850 million principal amount of
its senior secured notes to defease, repurchase for retirement or
redeem an equal principal amount of its first mortgage bonds, and
entered into a secured credit facility for up to $150 million which
will be used for general corporate purposes at Oncor.
26
CREDIT RATINGS OF TXU CORP., US HOLDINGS, ONCOR AND TXU ENERGY
The current credit ratings for TXU Corp., US Holdings, Oncor and TXU
Energy are presented below:
TXU Corp. US Holdings Oncor TXU Energy
------------ ------------ --------- -------------
(Senior (Senior (Secured) (Senior
Unsecured) Unsecured) Unsecured)
S&P............ BBB- BBB- BBB BBB
Moody's........ Ba1 Baa3 Baa1 Baa2
Fitch.......... BBB- BBB- BBB+ BBB
On December 13, 2002, Moody's downgraded the credit ratings of TXU Corp.,
TXU Gas and Oncor. Moody's currently maintains a negative outlook for TXU Corp.,
TXU Gas and TXU Australia, and a stable outlook for US Holdings, TXU Energy and
Oncor. On December 12, 2002, Fitch downgraded the credit ratings of TXU Corp.,
its US subsidiaries and TXU Australia. Fitch currently maintains a stable
outlook for each such entity. In October 2002, S&P downgraded the credit ratings
of TXU Corp., its US subsidiaries and TXU Australia. S&P currently maintains a
negative outlook for each such entity. The current credit ratings listed above
reflect the above referenced action taken by the respective credit rating
agency.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
FINANCIAL COVENANTS, CREDIT RATING PROVISIONS AND CROSS DEFAULT PROVISIONS
- -- The terms of certain financing arrangements of Oncor and US Holdings contain
financial covenants that require maintenance of specified fixed charge coverage
ratios, shareholder's equity to total capitalization ratios and leverage ratios
and/or contain minimum net worth covenants. As of September 30, 2002, Oncor and
US Holdings were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp., US Holdings and
Oncor contain provisions that are specifically affected by changes in credit
ratings and also include cross default provisions. The material provisions are
described below:
Credit Rating Provisions
------------------------
Under the $600 million Accounts Receivables Sale Program, all originators
(currently TXU Gas, TXU Energy Retail Company LP, SESCO Energy Services Company
and Oncor), are required to maintain a 'BBB-' (S&P) and a 'Baa3' (Moody's)
rating (or supply a parent guarantee with a similar rating). A downgrade below
the required ratings for an originator would prevent that originator from
selling its accounts receivables under the program. If all originators are
downgraded so that there are no eligible originators, the facility would
terminate. Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used to repurchase the undivided interests
of the financial institutions instead of purchasing new receivables. The level
of cash flows would normalize in approximately 16 to 31 days.
Certain agreements of US Holdings and Oncor, including some of the credit
facilities discussed above, contain terms pursuant to which the interest rates
charged under the agreements may be adjusted depending on the credit ratings of
TXU Corp. or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Corp., US Holdings and Oncor contain
provisions that would result in an event of default under these arrangements if
there is a failure under other financing arrangements to meet payment terms or
to observe other covenants that would result in an acceleration of payments due.
Such provisions are referred to as "cross default" provisions. Most agreements
have a cure period of up to 30 days from the occurrence of the specified event
during which the company is allowed to rectify or correct the situation before
it becomes an event of default.
27
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-Day Revolving Credit
Facility, the $1.4 billion US Holdings 5-Year Revolving Credit Facility and two
TXU Energy letter of credit reimbursement and credit facility agreements ($68.1
million and $54.2 million currently outstanding, respectively). Under the joint
US Holdings/TXU Energy/Oncor $1.0 billion 364-Day Revolving Credit Facility, a
default by TXU Energy or any subsidiary thereof would cause the maturity of
outstanding balances under such facility to be accelerated as to TXU Energy and
US Holdings, but not as to Oncor. Also, under this credit facility, a default by
Oncor or any subsidiary thereof would cause the maturity of outstanding balances
to be accelerated under such facility as to Oncor and US Holdings, but not as to
TXU Energy. Further, under this credit facility, a default by US Holdings would
cause the maturity of outstanding balances under such facility to be accelerated
as to US Holdings, but not as to Oncor or TXU Energy.
The accounts receivable program, described above, contains a cross default
provision with a threshold of $50 million applicable to each of the originators
under the program. TXU Receivables Company and TXU Business Services Company, a
subsidiary of TXU Corp. which services the purchased receivables, each have a
cross default threshold of $50 thousand. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility would terminate.
US Holdings and Oncor have other arrangements, including interest rate swap
agreements and leases, with cross default provisions, the triggering of which
would not result in a significant effect on liquidity.
REGULATORY ASSET SECURITIZATION -- The Settlement Plan approved by the
PUCT, and subject to appeal, provides Oncor with a financing order authorizing
it to issue transition (securitization) bonds in the aggregate principal 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 followed by a second
issuance for the remainder after 2003. See note 5 to Oncor's condensed
consolidated financial statements for the nine months ended September 30, 2002
included elsewhere in this prospectus.
RETAIL CLAWBACK -- The 1999 Restructuring Legislation included a provision
to incent affiliated REPs of utilities to actively compete for customers outside
their traditional service areas. If TXU Energy retains more than 60% of its
residential and small business customers in its traditional service area after
the first two years of competition, TXU Energy would pay a retail clawback
amount to Oncor over a two-year period, which Oncor will apply as a credit to
(reduction of) its delivery rates to REPs, including TXU Energy, serving
customers under price-to-beat rates. The amount of the retail clawback will be
equal to the number of residential and small business customers retained by TXU
Energy in its traditional service area as of January 1, 2004 less the number of
new customers added outside that service area as of that date, multiplied by
$90. The calculation will be done separately for each of the residential and
small business classes. The terms of the retail clawback, as described above,
are pursuant to the Settlement Plan approved by the PUCT and subject to appeal.
The retail clawback will have no effect on Oncor's earnings or cash flows.
CAPITALIZATION -- As part of its restructuring, US Holdings determined that
the initial capitalization of Oncor at January 1, 2002 would consist of
approximately 40% shareholder's equity and 60% debt (total short-term and
long-term debt and advances from affiliates) to match the capital structure upon
which the transmission and distribution rates approved by the PUCT are based. At
September 30, 2002, the capitalization ratio was consistent with this
determination.
In April 2002, Oncor repurchased 69,000 shares of its common stock
(adjusted for stock split) from US Holdings for $50 million. In July 2002, Oncor
repurchased another 69,000 shares (adjusted for stock split) of its common stock
from US Holdings for $50 million. US Holdings used the proceeds from the share
repurchases to repay advances from TXU Corp. On October 1, 2002, Oncor
repurchased 1,250,000 shares of its common stock from US Holdings for $50
million.
MINIMUM PENSION LIABILITY -- TXU Corp. believes that if actual investment
returns continue at current levels and interest rates remain unchanged through
the rest of the year, it will be required to record an increase in minimum
pension liability as of December 31, 2002. The minimum pension liability
represents the difference between the excess of accumulated benefit obligation
over the plans' assets and the liability recorded. A majority of the liability
would be recorded as a reduction to shareholder's equity, as a component of
accumulated comprehensive income. A preliminary estimate based on information
28
available at this time indicates that the minimum pension liability for the TXU
Corp. plan would be approximately $140 million. The recording of the liability
will not affect TXU Corp.'s or any of its subsidiaries' financial covenants in
any of their credit agreements.
Further, based on the current assumptions and available information, in
2003 funding requirements related to the pension plans are expected to increase
by $10 million and pension expense is expected to increase approximately $30
million over the current year amounts for TXU Corp. Amounts applicable to Oncor
have not yet been determined.
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 and TXU Corp. 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. All
of the plaintiff-cities have now executed a settlement agreement to settle this
suit. The resolution of this suit will not have a material effect on Oncor's
financial position, results of operations or cash flows.
GENERAL -- Oncor is involved in various other legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management, is
not expected to have a material effect upon its financial position, results of
operations or cash flows.
REGULATION AND RATES
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed the
Settlement Plan with the PUCT, which was approved by the PUCT on June 20, 2002.
On August 5, 2002, the PUCT issued a financing order, pursuant to the Settlement
Plan, authorizing the issuance of transition (securitization) bonds with a
principal amount of $1.3 billion. The PUCT's order approving the Settlement Plan
and the financing order were appealed by certain nonsettling parties in five
separate dockets in Travis County, Texas District Court in August 2002. The
court has consolidated these dockets into one, and a hearing on the merits is
scheduled for February 4, 2003. US Holdings is unable to predict when the appeal
process related to the PUCT's approval of the Settlement Plan and the financing
order will be concluded or the outcome. If the PUCT's orders are upheld, the
Settlement Plan resolves all major pending issues related to US Holdings'
transition to competition and will supersede certain proceedings that are
related to the 1999 Restructuring Legislation. The Settlement Plan does not
remove regulatory oversight of Oncor's business. Oncor does not believe that the
outcome will materially affect Oncor's net financial results, as TXU Energy has
agreed, under the Business Separation Agreement, to hold Oncor harmless from the
results of any disallowance by the PUCT of generation-related items, including
securitization of regulatory assets, stranded costs and fuel reconciliation.
The principal and interest on the securitization bonds would be secured by
payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the securitization bonds are
issued, the full amount of the regulatory assets will be amortized to expense by
Oncor over the life of the securitization bonds. Any amount of the $1.8 billion
which is in excess of the cash flows from the customer payments to service the
securitization bonds will be expensed by Oncor at the time such shortfall, if
any, is determined. US Holdings is unable to predict when the appeal of the
financing order will be concluded; however, assuming the securitization bonds
were issued at the present time and considering current interest rates, the
amount of the regulatory asset's carrying value would exceed the cash flows from
the securitization bonds by approximately $130 million.
OPEN-ACCESS TRANSMISSION -- At the federal level, 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 PUCT's open access wholesale transmission rules, which had mandated the use
of a particular rate setting methodology, were invalid because they exceeded the
29
statutory authority of the PUCT. 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 PUCT 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, which are named defendants in both suits, are unable to predict the
outcome of this litigation.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," became effective on January 1, 2002. SFAS No. 142
requires, among other things, the allocation of goodwill to reporting units
based upon the current fair value of the reporting units, and the discontinuance
of goodwill amortization. The amortization of Oncor's existing goodwill
($0.8 million annually) ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Oncor completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill. If goodwill amortization had ceased
effective January 1, 2001, there would not have been a material effect on net
income for the three or nine month periods ended September 30, 2001. The annual
test for impairment will be made as of October 1 each year.
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be
effective on January 1, 2003. SFAS No. 143 requires the recognition of a fair
value liability for any retirement obligation associated with long-lived assets.
SFAS No. 143 also requires additional disclosures. Oncor will conform its
accounting for asset retirement obligations to the new standard effective with
2003 reporting.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective 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, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations. The adoption of SFAS No. 144 by
Oncor has not affected its financial position or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," was issued in April 2002 and
will be effective on January 1, 2003. One of the provisions of this statement is
the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt." 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 will be
reclassified if it does not meet the criteria of an extraordinary item as
defined by Accounting Principles Board Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and will be effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
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.
30
Interest Rate Risk -- The table below provides information concerning
Oncor's financial instruments as of September 30, 2002 and December 31, 2001
that are sensitive to changes in interest rates. Unamortized debt issuance
discounts are excluded from the table. The primary change from December 2001 is
due to the change in components of long-term debt outstanding, resulting from
issuances and retirements as described in note 3 to Oncor's condensed
consolidated financial statements for the nine months ended September 30, 2002
included in this prospectus. Oncor may enter into interest rate swaps
under which it agrees to exchange the difference between fixed-rate and
variable-rate interest amounts calculated with reference to specified notional
principal amounts at dates that generally coincide with interest payments.
Weighted average variable rates are based on rates in effect at the reporting
date.
SEPTEMBER 30, DECEMBER 31,
EXPECTED MATURITY DATE 2002 2001
------------------------------------------------------ -----------------------------------
(MILLIONS OF DOLLARS, EXCEPT PERCENTS)
THERE- FAIR FAIR
2002 2003 2004 2005 2006 2007 AFTER TOTAL VALUE TOTAL VALUE
---- ---- ---- ---- ---- ---- ------ ----- ----- ----- -----
Long-term Debt
(including current maturities)
Fixed Rate.................... $ 18 $ 304 $ 221 $ 92 $-- $ 200 $2,851 $3,686 $3,868 $2,052 $2,082
Average interest rate..... 6.55% 6.89% 7.16% 6.75% -- 5.00% 7.09% 6.95% -- 7.78% --
Variable Rate ................ $ -- $ 400 $ -- $ -- $-- $ -- $ -- $ 400 $ 400 $1,600 $1,600
Average interest rate..... -- 2.43% -- -- -- -- -- 2.43% -- 2.93% --
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 PUCT. REP certificates granted by the PUCT are subject to suspension and
revocation for significant violation of the Public Utility Regulatory Act and
PUCT rules. Significant violations include failure to timely remit payments for
invoiced charges to a transmission and distribution utility pursuant to the
terms of tariffs adopted by the PUCT. Additionally, the PUCT's ratemaking
policies and practices permit recovery of annual bad debt charge-offs through
approved tariffs. Since most of the transmission and distribution 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.
31
BUSINESS
OVERVIEW OF ONCOR ELECTRIC DELIVERY COMPANY AND AFFILIATES
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 was formed in the fourth quarter of 2001 and began operations on
January 1, 2002. On that date, the regulated transmission and distribution
assets of US Holdings and TXU SESCO were transferred to Oncor in connection with
the "unbundling" of those assets required by the 1999 Restructuring Legislation.
See - "Overview of the Restructuring" below. Oncor is a wholly owned subsidiary
of US Holdings. Prior to January 1, 2002, US Holdings was a
vertically-integrated electric utility directly engaged in the production,
purchase, transmission, distribution and sale of electric energy in the
north-central, eastern and western parts of Texas. US Holdings is a wholly-owned
subsidiary of TXU Corp.
TXU is an energy services company that engages in electricity generation,
wholesale energy sales, trading and risk management activities, retail energy
sales, energy delivery, other energy-related services and, through a joint
venture, telecommunications services. TXU serves more than five million
customers and owns and operates more than 20,000 megawatts of competitive
generation in North America and Australia.
Within TXU, Oncor, TXU Gas and two subsidiaries of TXU Gas are managed
collectively as the Oncor Group and reported by TXU Corp. as its energy delivery
segment. TXU Gas' two subsidiaries managed within the Oncor Group are Oncor
Utility Solutions (Texas) Company and Oncor Utility Solutions (North America)
Company. While these two entities share the Oncor name, they are not
subsidiaries of Oncor.
Neither TXU Corp. nor any of its subsidiaries or affiliates, including
members of the Oncor Group other than Oncor, will guarantee or provide other
credit or funding support for any of the New Notes or any of the Remaining Old
Notes.
Oncor is managed as a single, integrated electric delivery business;
consequently, there are no separate reportable business segments.
Oncor's principal operations are:
o ELECTRIC TRANSMISSION - Oncor's electric transmission business
provides non-discriminatory wholesale open access to Oncor's
transmission facilities. Oncor's transmission facilities transverse
almost 200,000 square miles of Texas and consist of 4,698 circuit
miles of 345-kV transmission lines and 9,859 circuit miles of 138-kV
and 69-kV transmission lines and over 900 substations.
o ELECTRIC DISTRIBUTION - Oncor's electric distribution business
distributes electricity for REPs in its certificated service area.
Oncor's service area includes 92 counties and 370 incorporated
municipalities in the north-central, eastern and western parts of
Texas. These REPs provide electricity through Oncor to over 2.7
million customers (including 2.4 million residential customers and
350,000 commercial and industrial businesses). Oncor's 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 Oncor's
distribution network operates at 25-kV and 12.5-kV.
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution companies. Oncor's distribution customers
consist of approximately 35 REPs in Oncor's certificated service area. One of
these REPs is TXU Energy. TXU Energy is by far the largest REP operating in
Oncor's certificated service area. Revenues from TXU Energy represent the
substantial majority of Oncor's revenues.
Oncor's operations do not include the production or sale of electricity,
the generation, supply or delivery of fuel for the generation of electricity,
the solicitation or billing of retail electric customers or service as a
provider of last resort.
For a more detailed discussion of Oncor's principal operations see "Oncor's
Business" below.
32
OVERVIEW OF THE RESTRUCTURING
Legislation was passed during the 1999 session of the Texas Legislature
that restructured the electric utility industry in Texas. Among other matters,
the l999 Restructuring Legislation provided that by January 1, 2002, each
electric utility was required to separate (unbundle) its business into the
following: power generation operations, a REP and a transmission and
distribution company or separate transmission and distribution companies. As a
result, TXU restructured certain of its businesses effective January 1, 2002 and
began to participate in retail competition in the Texas electricity market on
January 1, 2002.
Until December 31, 2001, US Holdings operated as a vertically-integrated
electric utility subsidiary of TXU Corp., generating, transmitting and
distributing electricity to customers in its service territory. On January 1,
2002, US Holdings transferred to Oncor its regulated transmission and
distribution business and transferred to various subsidiaries of TXU Energy its
generation assets and retail customers. Also, on January 1, 2002, the regulated
electric transmission and distribution business of TXU SESCO was transferred to
Oncor. In addition, as of January 1, 2002, TXU Energy acquired the following
businesses from within the TXU system: the REP business of TXU SESCO; the energy
trading business and the unregulated commercial/industrial retail gas operations
of TXU Gas; and the energy management services businesses and other affiliates
of TXU Corp., including the fuel procurement and coal mining businesses that
service the generation operations. US Holdings and its subsidiaries possess all
necessary franchises, licenses and certificates to enable them to conduct their
businesses.
The diagrams below summarize TXU's principal US legal entities and their
relationships before and after the restructuring of TXU required by the 1999
Restructuring Legislation:
CHART
Organization Chart with 2 columns
Left Column
Title (centered over column) - Before Restructuring
Top Box, centered, labeled - TXU Corp.
Next level - 2 boxes, labeled (left to right) - TXU Gas, TXU Electric Company
Next level - 1 box (under first box), labeled - TXU Energy Trading
Right Column
Title (centered over column) - After Restructuring
Top box, centered, labeled - TXU Corp.
Next level - 2 boxes, labeled (left to right) - TXU Gas, 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,
TXU Energy Trading, TXU Energy Retail
- --------------------------
* Formerly TXU Electric Company
[Graphic Omitted]
A more detailed discussion of each of Oncor's principal operations follows.
ONCOR'S BUSINESS
SERVICE AREA -- Oncor's service area is located in the north-central,
eastern and western parts of Texas, with a population in excess of 7 million -
about one-third of the population of Texas. Electric service is provided to
approximately 2.7 million customers in 92 counties and 370 incorporated
municipalities, including the Dallas-Fort Worth metropolitan area. The area is a
diversified commercial and industrial center with substantial banking,
insurance, telecommunications, electronics, aerospace, petrochemical and
specialized steel manufacturing, and automotive and aircraft assembly. The
territory served includes major portions of the oil and gas fields in the
Permian Basin and East Texas, as well as substantial farming and ranching
sections of the state.
33
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 PUCT. The transmission system transverses almost 200,000 square miles of
Texas and consists of 4,698 circuit miles of 345-kilovolt (kV) transmission
lines, 9,859 circuit miles of 138- and 69-kV transmission line and over 900
substations. Oncor is connected by eight 345-kV lines to Reliant Energy Inc.; 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 ERCOT market participants, including TXU Energy, is
connected to the Oncor transmission system.
Oncor is a member of ERCOT, 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. (See "Construction Program" below)
Transmission services are provided under tariffs approved by the PUCT and
the FERC. 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 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 -- Oncor's electric distribution business 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).
Oncor's 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 network
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 electric 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.
Oncor's electric 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 PUCT.
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. (See "Customers" below)
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 network operates at
25-kV and 12.5-kV.
Distribution services are provided under tariffs approved by the PUCT. New
PUCT rules and market protocols govern the commercial retail operations of
distribution companies and other market participants.
34
Most of Oncor's transmission facilities 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 facilities and the
distribution network transferred from US Holdings to Oncor on January 1, 2002
are currently subject to the lien of the 1983 Mortgage. All of the transmission
facilities and the distribution network of Oncor are currently subject to the
lien of the Indenture.
STRATEGY -- As legislative, regulatory, economic and technological changes
occur, the energy and utility industries are faced with increasing pressure to
become more efficient while adhering to regulatory requirements. Oncor's
strategy considers a number of variables, including price, reliability of
service, the cost of energy alternatives, new technologies and governmental
regulations. Oncor aggressively manages its operating costs and capital
expenditures through streamlined business processes. These strategies focus on
asset ownership, management and operation and include initiatives to improve
return on assets and to maximize value.
Service quality, reliability and efficiency are of paramount importance to
REPs, their customers, and Oncor. Oncor intends to play a key role in the new
competitive energy marketplace by being dependable and flexible, and continuing
to build on TXU's tradition of low cost and high performance.
CONSTRUCTION PROGRAM -- Construction expenditures for the years 2002
through 2004 are estimated as follows:
2002 2003 2004
--------- --------- ---------
(Millions of Dollars)
Transmission $ 212 $ 217 $ 240
Distribution 309 323 310
--------- --------- ---------
Total $ 521 $ 540 $ 550
========= ========= =========
CUSTOMERS -- There are no individually significant unaffiliated customers
upon which Oncor's business or results of operations are highly dependent.
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution customers. Oncor's distribution customers
consist of approximately 35 REPs in Oncor's certificated service area. One of
these REPs is TXU Energy. TXU Energy is by far the largest REP served in Oncor's
certificated service area. Revenues from TXU Energy represent the substantial
majority of Oncor's revenues. Each REP is licensed by the PUCT and must satisfy
credit criteria and/or post collateral under PUCT regulations. PUCT regulations
require REPs to pay invoices from distribution companies within 35 days of
receipt. Oncor provides REPs with invoices and related meter readings on a daily
basis.
REGULATION AND RATES -- Oncor is subject to various federal, state and
local regulations. Oncor believes that it is not a public utility as defined in
the Federal Power Act, as amended and has been advised by its counsel that it is
not subject to general regulation under such Act. Oncor possesses all necessary
franchises, licenses and certificates to enable it to conduct its businesses.
The PUCT has original jurisdiction over Oncor's transmission rates and
services. With respect to Oncor's distribution rates and services, the PUCT has
original jurisdiction in unincorporated areas and those municipalities that have
ceded original jurisdiction to the PUCT and has exclusive appellate jurisdiction
to review the rate and service orders and ordinances of municipalities.
Generally, the Public Utility Regulatory Act has prohibited the collection of
any rates or charges by a public utility that does not have the prior approval
of the PUCT.
Regulatory Settlement Plan -- The Settlement Plan was approved by the PUCT
on June 20, 2002. On August 5, 2002, the PUCT issued a financing order pursuant
to the Settlement Plan, authorizing the issuance of transition (securitization)
bonds of $1.3 billion. The PUCT's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties in five separate
dockets in Travis County, Texas District Court in August 2002. The court has
consolidated these dockets into one, and a hearing on the merits is scheduled
for February 4, 2003. US Holdings and Oncor are unable to predict when the
appeal process related to the PUCT's approval of the Settlement Plan and the
financing order will be concluded or the outcome of the appeal process. If the
PUCT's approval is upheld, the Settlement Plan resolves all major pending issues
35
related to US Holdings' transition to competition and will supersede certain
ongoing proceedings that are related to the 1999 Restructuring Legislation. The
Settlement Plan does not remove regulatory oversight of Oncor's business. Oncor
does not believe that the outcome of the appeal process will materially affect
Oncor's net financial results, as TXU Energy has agreed, under the Business
Separation Agreement, to hold Oncor harmless from the results of any
disallowance of generation-related items, including securitization of regulatory
assets, stranded costs and fuel reconciliation. See RELATIONSHIPS AMONG ONCOR
AND OTHER TXU COMPANIES in this prospectus.
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 in the amount of $350 million (plus
interest), applied over a two-year period as a reduction to
transmission 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 excess mitigation credit.
o Regulatory Asset Securitization -- Oncor has received a financing
order, which, if upheld on appeal, authorizes it to issue
securitization bonds in the aggregate amount of $1.3 billion to
monetize and recover generation-related regulatory assets. The
financing order provides for an initial issuance of securitization
bonds in the amount of up to $500 million, followed by a second
issuance for the remainder after 2003. The Settlement Plan and related
financing order resolve all issues related to generation-related
regulatory assets and liabilities.
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, if PUCT
approval is upheld, will result in the final determination concerning certain
provisions of the legislation. If the PUCT's approval of the Settlement Plan is
not upheld, certain other proceedings discussed below will remain unresolved.
Rates -- All REPs operating in Oncor's service area, including TXU Energy,
pay the same rates and other charges for distribution services. All other
distribution companies in the ERCOT region 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 based upon amounts of energy
transmitted under "postage stamp" rates that do not vary with the distance the
energy is 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 PUCT, 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 October 3, 2001, the PUCT issued a final order that addressed Oncor's
charges for transmission and distribution service when retail competition would
begin. Among other things, that order required Oncor to reduce rates (with a
corresponding reimbursement from TXU Energy), over the period from 2002-2008,
for 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 PUCT to vacate
the portions of its then preliminary 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 denied the petition. The PUCT's
decision continues to be under appeal to the Travis County, Texas District
Court.
36
Stranded Cost Recovery -- In October 1999, US Holdings filed an application
with the PUCT for a financing order (Docket No. 21527) to permit the issuance by
a special purpose subsidiary of Oncor of $1.65 billion of transition
(securitization) bonds secured by payments, in the form of a non-bypassable
charge, from retail customers. On May 1, 2000, the PUCT 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 PUCT's financing order, affirmed other
aspects of the PUCT's financing order, and ordered the case remanded to the PUCT
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 the special purpose subsidiary of Oncor to
issue securitization bonds of approximately $1.3 billion. On October 18, 2001,
the Supreme Court remanded the case to the PUCT for determination of the final
amount of permitted securitization. On January 2, 2002, the remand proceeding
(Docket No. 24892) was consolidated with Docket No. 25230 relating to the
Settlement Plan. However, on August 5, 2002, the PUCT issued a financing order,
in connection with its approval of the Settlement Plan authorizing the issuance
of securitization bonds of $1.3 billion. Appeals of the PUCT's approval of the
Settlement Plan and related financing order are pending. US Holdings and Oncor
cannot predict when the appeal process will be completed, but Oncor is prepared
to move quickly in connection with the issuance of securitization bonds if the
financing order issued by the PUCT is upheld. If the PUCT's approval of the
financing order is upheld, issues involving securitization will be resolved.
As noted above, the principal and interest on the securitization 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 $1.8 billion. Once
securitization bonds are issued, the full amount of the regulatory assets will
be amortized to expense by Oncor over the life of the securitization bonds. Any
amount of the $1.8 billion which is in excess of the cash flows from
securitization bonds will be expensed at the time such shortfall, if any, is
determined. US Holdings and Oncor are unable to predict when the appeal of the
financing order will be concluded; however, assuming the securitization bonds
were issued at the present time and considering current interest rates, the
amount of the regulatory asset's carrying value would exceed the cash flows from
the securitization bonds by approximately $130 million.
Open-Access Transmission -- At the federal level, 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 PUCT'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 PUCT. 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 PUCT 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.
Environmental -- Oncor is subject to various federal, state and local
regulations dealing with environmental matters. These matters primarily include:
o storm water discharges from large construction sites,
o the protection of wetlands, the habitats of endangered and threatened
species and cultural resources in the siting of transmission rights of
way,
o the regulation of underground gasoline storage tanks,
o the management and disposal of hazardous wastes, and
o the abatement of oil spills from occasional equipment failures.
37
In the past, polychlorinated biphenyls (PCBs) were commonly utilized in
transformers and other transmission and distribution equipment as insulation. In
accordance with policies that meet or exceed industry and regulatory standards,
Oncor maintains an ongoing program of identifying PCB-contaminated equipment and
abating the contaminates. Oncor estimates that less than 5% of its equipment in
use is PCB-contaminated under Environmental- Protection Agency standards. Over
time all PCB-contaminated equipment will be replaced by Oncor.
Oncor utilizes waste disposal sites operated by third parties for the
disposal of PCBs, lubricating oil, lighting and other wastes. Oncor has a
program of regularly auditing these sites for compliance with applicable
regulations.
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 and TXU Corp. 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. All
of the plaintiff-cities have now executed a settlement agreement to settle this
suit. The resolution of this suit will not have a material effect on Oncor's
financial position, results of operations or cash flows.
Oncor is party to other lawsuits arising in the ordinary course of its
business. Oncor believes, based on its current knowledge and advice of counsel,
that the ultimate resolution of all such lawsuits and claims should not have a
material adverse effect on its financial position, results of operation or cash
flows.
38
MANAGEMENT OF ONCOR
TXU Corp. controls US Holdings, and US Holdings, in turn, controls Oncor.
US Holdings elects Oncor's board of directors, and US Holdings may choose to
appoint additional directors, or remove current directors, from time to time at
its discretion. Each member of the board of directors holds office until a
successor is elected and qualified or until resignation or removal. Oncor's
board of directors elects its officers and each of Oncor's officers serve at the
discretion of the board of directors. Oncor began operations on January 1, 2002;
consequently, Oncor's management did not receive any compensation for services
rendered to Oncor prior to that date. Oncor's directors receive no compensation
in their capacity as directors.
BOARD OF DIRECTORS
OTHER POSITIONS AND
OFFICES PRESENTLY DATE FIRST ELECTED AS PRESENT PRINCIPAL OCCUPATION OR
HELD WITH ONCOR DIRECTOR EMPLOYMENT AND PRINCIPAL
(CURRENT TERM EXPIRES (CURRENT TERM EXPIRES BUSINESS (PRECEDING FIVE YEARS),
NAME OF DIRECTOR AGE IN MAY 2003) IN MAY 2003) OTHER DIRECTORSHIPS
- -------------------- ----- --------------------- ---------------------- --------------------------------------
T. L. Baker 57 Vice Chairman November 6, 2001 Vice Chairman of Oncor and TXU Gas;
prior thereto, President of Oncor
and TXU Gas; prior thereto,
President of TXU Electric Company;
prior thereto, President, Electric
Service Division of TXU Electric
Company, TXU Gas Distribution
Division of TXU Gas (TXU Gas
Distribution) and TXU SESCO; prior
thereto, Executive Vice President
of TXU Electric Company; prior
thereto, Senior Vice President of
TXU Electric Company; other
directorships: TXU Gas.
Michael J. McNally 48 None November 6, 2001 Executive Vice President and Chief
Financial Officer of TXU Corp. and
Executive Vice President of US
Holdings; prior thereto, President,
Transmission Division of TXU
Electric Company; other
directorships: US Holdings, TXU
Energy, TXU Gas and TXU Europe
Limited.
Erle Nye 65 Chairman of the Board November 6, 2001 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., Oncor, TXU
Energy, TXU Gas and US Holdings;
prior thereto, President and Chief
Executive of TXU Corp. and Chairman
of the Board and Chief Executive of
TXU Electric Company; other
directorships: TXU Corp., US
Holdings, TXU Energy, TXU Gas and
TXU Europe Limited.
Eric H. Peterson 42 None November 1, 2002 Executive Vice President and General
Counsel of TXU Corp.; prior
thereto, Senior Vice President and
General Counsel for DTE Energy;
prior thereto, Partner in the law
firm of Worsham, Forsythe &
Wooldridge; other directorships: US
Holdings, TXU Energy and TXU Gas.
R. A. Wooldridge 64 None November 6, 2001 Partner in the law firm of Hunton &
Williams; other directorships: US
Holdings, TXU Energy, TXU Gas and
TXU Europe Limited.
39
EXECUTIVE OFFICERS
POSITIONS AND OFFICES DATE FIRST ELECTED
PRESENTLY HELD TO PRESENT OFFICES
(CURRENT TERM EXPIRES (CURRENT TERM EXPIRES BUSINESS EXPERIENCE
NAME OF OFFICER AGE IN MAY 2003) IN MAY 2003) (PRECEDING FIVE YEARS)
- -------------------- ----- --------------------- ---------------------- --------------------------------------
Erle Nye 65 Chairman of the Board November 12, 2001 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., Oncor, TXU
Energy, TXU Gas and US Holdings;
prior thereto, President and Chief
Executive of TXU Corp. and Chairman
of the Board and Chief Executive of
TXU Electric Company.
T. L. Baker 57 Vice Chairman November 4, 2002 Vice Chairman of Oncor and TXU Gas;
prior thereto, President of Oncor
and TXU Gas; prior thereto,
President of TXU Electric Company;
prior thereto, President, Electric
Service Division of TXU Electric
Company, TXU Gas Distribution and
TXU SESCO; prior thereto, Executive
Vice President of TXU Electric
Company; prior thereto, Senior Vice
President of TXU Electric Company.
M. S. Greene 57 President November 4, 2002 President of Oncor; prior thereto,
President of Transmission Division
of Oncor and TXU Lone Star Pipeline
Division of TXU Gas; prior thereto,
Executive Vice President of TXU
Fuel Company and TXU Mining
Company.
Scott R. Longhurst 35 Senior Vice President November 4, 2002 Senior Vice President of Oncor and TXU
Gas; prior thereto, Senior Vice
President - Finance and Strategy of
Oncor and TXU Gas; prior thereto,
Vice President - Corporate
Financial Planning of TXU Business
Services Company; prior thereto,
Vice President of Finance of TXU
Europe Limited; prior thereto,
Chief Financial Officer of Shell
Oil Products Joint Venture Saudi
Arabia.
There is no family relationship between any of the above-named directors
and executive officers.
40
OWNERSHIP OF ONCOR'S COMMON STOCK
All of Oncor's common stock is owned by US Holdings, a wholly-owned
subsidiary of TXU Corp. There is no public trading market for Oncor's common
stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following lists the common stock of TXU Corp. owned by the directors
and executive officers of Oncor at November 6, 2002. The named individuals have
sole voting and investment power for the shares of common stock reported.
Ownership of such common stock by the directors and executive officers,
individually and as a group, constituted less than 1% of the outstanding shares
of TXU Corp. common stock at November 6, 2002.
NAME BENEFICIALLY OWNED SHARE PLAN(1) TOTAL
---- ------------------ ------------- -----
(NUMBER OF SHARES)
T. L. Baker......................... 90,973 27,916 118,889
M. S. Greene ....................... 30,159 18,999 49,158
Scott R. Longhurst.................. 8,638 397 9,035
Michael J. McNally.................. 126,098 33,508 159,606
Erle Nye............................ 418,065 87,204 505,269
Eric H. Peterson ................... 26,266 0 26,266
R. A. Wooldridge.................... 8,560 0 8,560
All directors and executive
officers as a group (7).......... 708,759 168,024 876,783
- -------------------
<FN>
(1) Share units held in deferred compensation accounts under the TXU Deferred
and Incentive Compensation Plan (DICP), or in the case of Mr. Longhurst,
share units under the TXU Europe Group Sharesave Scheme (the Europe Plan).
Although the DICP allows such units to be paid only in the form of cash,
investments in units under the DICP and the Europe Plan create essentially
the same investment stake in the performance of TXU Corp.'s common stock as
do investments in actual shares of common stock.
</FN>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
R. A. Wooldridge, a director of Oncor, is a partner of Hunton & Williams,
which provides legal services to Oncor, TXU Corp. and other affiliates of Oncor.
41
RELATIONSHIPS AMONG ONCOR AND OTHER TXU COMPANIES
On January 1, 2002, the regulated transmission and distribution assets of
US Holdings and TXU SESCO (collectively, the T&D Assets) were transferred to
Oncor in connection with the restructuring of TXU accomplished pursuant to the
1999 Restructuring Legislation. The relationships of the TXU entities affected
by the restructuring and their rights and obligations with respect to their
collective assets and liabilities are contractually described in the Business
Separation Agreement.
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
business' transition to competition and remit to (or collect from) TXU Energy
any such amounts which have not been securitized. Oncor's sole responsibility
shall be to act as collection or disbursement agent and Oncor has no rights or
obligations with respect to any such amounts collected or refunded. These
collection agent obligations will be resolved by the proposed regulatory
settlement. See "BUSINESS -- "Oncor's Business -- Regulation and Rates" above.
In addition, pursuant to the Business Separation Agreement, Oncor
o assumed all liabilities and obligations relating to the T&D Assets and
the business and operations related thereto, accruing or arising prior
to or after January 1, 2002;
o assumed certain litigation pending at January 1, 2002 relating to the
T&D Assets; and
o agreed to indemnify the other TXU entities for liabilities and
obligations assumed.
In connection with the restructuring, Oncor entered into other agreements
with TXU entities. The Decommissioning Funds Collection Agent Agreement between
Oncor and TXU Generation provides for the collection by Oncor and the remittance
to TXU Generation of a decommissioning funds tariff in an amount determined and
approved by the PUCT for the decommissioning of the Comanche Peak nuclear
generating station. Oncor acts merely as a collection agent for TXU Generation
under this agreement and is not otherwise obligated for decommissioning costs.
Oncor entered into two ERCOT Standard Generation Interconnection Agreements
with TXU Generation for the interconnection between Oncor's transmission and
distribution facilities and the generation facilities owned by TXU Generation. A
Transmission Maintenance Agreement with TXU Generation provides for maintenance
and operation support services by Oncor to the generation facilities owned by
TXU Generation.
Oncor assumed certain interconnection obligations of US Holdings under
three power purchase agreements with unaffiliated entities. In addition, US
Holdings remains obligated on Oncor's first mortgage bonds.
42
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Oncor is offering to exchange the New 2012 Notes for the Old 2012 Notes and
the New 2032 Notes for the Old 2032 Notes, as described herein. Unlike the Old
Notes, the New Notes will be registered under the Securities Act.
The Old Notes were sold to Lehman Brothers Inc., Barclays Capital Inc., BNP
PARIBAS Securities Corp., BNY Capital Markets, Inc., First Union Securities Inc.
and Westdeutsche Landesbank Gironzentrale (the Initial Purchasers) on May 6,
2002. In connection with the sale of the Old Notes, Oncor and the Initial
Purchasers entered into a registration rights agreement, dated May 6, 2002 (the
Registration Rights Agreement), which requires Oncor, among other things, to:
(a) use its reasonable best efforts to cause an exchange offer
registration statement that it files with the SEC under the Securities Act
with respect to both series of the New Notes identical in all material
respects to the respective series of Old Notes to be declared effective
under the Securities Act within 270 days after May 6, 2002, and upon such
effectiveness to promptly offer both series of registered New Notes for the
respective series of unregistered Old Notes and consummate such exchange
offer within 315 days after May 6, 2002 and/or
(b) in certain circumstances, to cause a shelf registration statement
that it files with the SEC covering continuous re-sales of the Old Notes or
New Notes, as the case may be, to be declared effective under the
Securities Act within the later of (i) 180 days after being required or
requested to file such shelf registration statement and (ii) 270 days after
May 6, 2002.
The Registration Rights Agreement also provides that if Oncor fails to
perform any of its obligations set forth in (a) and (b) above, the interest rate
will be increased by 0.50% per annum until any such default is cured, or if
earlier, the date on which the Old Notes may first be resold in reliance on
Rule 144(k) of the Securities Act, provided however, the additional interest
rate may not exceed in the aggregate 0.50% per annum.
The New Notes of each series referred to in (a) above will be issued in a
like principal amount and identical in all material respects as the respective
series of Old Notes, except that the New Notes will be registered under the
Securities Act and will be issued without a restrictive legend. Consequently,
the New Notes, unlike the Old Notes, may be resold by a holder without any
restrictions on their transfer under the Securities Act. Also, the registration
rights and related additional interest provisions applicable to the Old Notes do
not apply to the New Notes.
A copy of the Registration Rights Agreement has been filed as an exhibit to
the exchange offer registration statement of which this prospectus is a part.
The exchange offer contemplated hereby is being made pursuant to the
Registration Rights Agreement to satisfy some of Oncor's obligations under that
agreement.
The term "holder" with respect to this exchange offer means any person in
whose name Old Notes are registered on Oncor's books, any other person who has
obtained a properly completed assignment from the registered holder or any DTC
participant whose Old Notes are held of record by DTC.
By tendering Old Notes for New Notes in this exchange offer, a holder is
deemed to represent to Oncor, among other things, that
O any New Notes to be received by such holder will be acquired in the
ordinary course of such holder's business,
O such holder has no arrangement or understanding with any person to
participate in the distribution of the New Notes within the meaning of
the Securities Act,
O such holder is not an "affiliate" of Oncor, as defined in Rule 405
under the Securities Act, or if such holder is such an affiliate, such
holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, and
43
O if such holder is not a broker-dealer, such holder is not engaged in,
and does not intend to engage in, a distribution of such New Notes.
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third-parties, Oncor believes that the New Notes issued
pursuant to this exchange offer may be offered for resale and resold or
otherwise transferred by any holder of such New Notes (other than any such
holder which is an "affiliate" of Oncor within the meaning of Rule 405 under the
Securities Act and except as otherwise discussed below with respect to holders
which are broker-dealers) without compliance with the registration and
prospectus delivery requirements of the Securities Act, so long as such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of such New Notes. Any
holder who tenders Old Notes in this exchange offer for the purpose of
participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the SEC and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Under no circumstances may this prospectus be used
for any offer to resell or any resale or other transfer in connection with a
distribution of the New Notes. In the event that Oncor's belief is not correct,
holders of the New Notes who transfer New Notes in violation of the prospectus
delivery provisions of the Securities Act and without an exemption from
registration thereunder may incur liability thereunder. Oncor will not assume or
indemnify holders against any such liability.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must agree to
deliver a prospectus in connection with any resale of such New Notes. Any such
broker-dealer may use this prospectus for such purpose. Any such broker-dealer
may be deemed to be an "underwriter" within the meaning of the Securities Act.
The foregoing interpretation of the staff of the SEC does not apply to, and this
prospectus may not be used in connection with, the resale by any broker-dealer
of any New Notes received in exchange for an unsold allotment of Old Notes
purchased directly from Oncor. See PLAN OF DISTRIBUTION.
Oncor has not entered into any arrangement or understanding with any person
to distribute the New Notes to be received in this exchange offer.
This exchange offer is not being made to, nor will Oncor accept tenders for
exchange from, holders of Old Notes in any jurisdiction in which this exchange
offer or the acceptance thereof would not be in compliance with the securities
or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying Letter of Transmittal, Oncor will accept any and all Old
Notes properly tendered and not validly withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender their Old Notes in whole
or in part in minimum denominations only of $1,000 and integral multiples of
$1,000 in excess thereof. For each Old Note accepted for exchange, the holder of
the Old Note will receive a New Note (of the respective series) having a
principal amount equal to that of the surrendered Old Note.
The form and terms of the New Notes of each series will be the same as the
form and terms of the Old Notes of the respective series. However, the
registration rights and related additional interest provisions and the transfer
restrictions applicable to such Old Notes will not be applicable to the New
Notes and the New Notes, unlike the Old Notes, will be registered under the
Securities Act. The New Notes of each series will evidence the same debt as the
Old Notes of the respective series. The New Notes will be issued under and
entitled to the benefits of the Indenture pursuant to which the Old Notes were
issued.
No interest will be paid in connection with this exchange. The New Notes
will bear interest, at the respective interest rate, from and including the last
Interest Payment Date (as hereinafter defined) on the Old Notes, or if an
Interest Payment Date has not yet occurred, from and including May 6, 2002, the
date the Old Notes were issued. Accordingly, the holders of Old Notes that are
accepted for exchange will not receive accrued but unpaid interest on such Old
Notes at the time of tender or exchange. Rather, such interest will be paid on
the exchanged New Notes on the first Interest Payment Date after the Expiration
Date.
44
As of the date of this prospectus, $700,000,000 in aggregate principal
amount of the Old 2012 Notes and $500,000,000 in aggregate principal amount of
the Old 2032 Notes is outstanding. This prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes.
Oncor will be deemed to have accepted validly tendered Old Notes when it
shall have given oral (promptly confirmed in writing) or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the New Notes from Oncor.
The Remaining Old Notes will remain outstanding and will be entitled to the
rights and benefits of the Indenture. If any tendered Old Notes are not accepted
for exchange because of an invalid tender or the occurrence of certain other
events set forth herein or otherwise, such Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER
As defined hereinabove, Expiration Date means 5:00 p.m., New York City
time, on __________, 2003 unless extended. If extended, "Expiration Date" means
the latest date and time to which this exchange offer is extended.
Oncor will notify the Exchange Agent of any extension of the current
Expiration Date by oral (promptly confirmed in writing) or written notice and
will mail to the registered holders an announcement thereof, prior to 9:00 a.m.,
New York City time, on the next business day after such Expiration Date.
Oncor reserves the right, in its sole discretion,
O to delay accepting any Old Notes, to extend this exchange offer or to
terminate this exchange offer if any of the conditions set forth below
under "Conditions to the Exchange Offer" shall not have been satisfied
by giving oral (promptly confirmed in writing) or written notice of
such delay, extension or termination to the Exchange Agent, or
O to amend the terms of this exchange offer in any manner.
Any such delay, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders. If Oncor amends this exchange offer in a manner that Oncor determines,
in its sole discretion, constitutes a material change, Oncor will promptly
disclose such material amendment by means of a prospectus supplement. Oncor will
distribute such prospectus supplement to the registered holders of Old Notes,
and will extend this exchange offer to the extent required by law.
Without limiting the manner in which Oncor may choose to make a public
announcement of any delay, extension, amendment or termination of this exchange
offer, Oncor will have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to this exchange offer,
Oncor will accept, promptly after the Expiration Date, all Old Notes properly
tendered and not validly withdrawn and will issue New Notes of the respective
series promptly after acceptance of such Old Notes. See "Conditions to the
Exchange Offer." For purposes of this exchange offer, Oncor will be deemed to
have accepted properly tendered Old Notes for exchange when it shall have given
oral (promptly confirmed in writing) or written notice thereof to the Exchange
Agent.
New Notes will only be issued after the Exchange Agent timely receives (1)
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof or an agent's message (as hereinafter defined) in lieu thereof) and (2)
all other required documents. However, Oncor reserves the absolute right to
waive any defects or irregularities in the tender or conditions of this exchange
offer.
Old Notes that are not accepted for exchange and Old Notes submitted for a
greater principal amount than the tendering holder desires to exchange will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the expiration or termination of this exchange offer.
45
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of this exchange offer, Oncor will not be
required to exchange any New Notes for any Old Notes and may terminate this
exchange offer before the acceptance of any Old Notes for exchange, if:
O any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to this exchange
offer which, in Oncor's reasonable judgment, might materially impair
its ability to proceed with this exchange offer; or
O any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the SEC, which, in Oncor's reasonable judgment, might
materially impair its ability to proceed with this exchange offer.
If Oncor determines in its sole discretion that any of the above conditions
exist, Oncor may
O refuse to accept any tendered Old Notes and return all previously
tendered Old Notes to the tendering holders,
O extend this exchange offer and retain all Old Notes tendered prior to
the Expiration Date, subject, however, to the rights of holders who
tendered such Old Notes to withdraw their tendered Old Notes, or
O waive such unsatisfied conditions with respect to this exchange offer
and accept all properly tendered Old Notes which have not been validly
withdrawn. If such waiver constitutes a material change to this
exchange offer, Oncor will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered
holders, and Oncor will extend this exchange offer to the extent
required by law.
PROCEDURES FOR TENDERING--REGISTERED HOLDERS AND DTC PARTICIPANTS
Registered holders of Old Notes, as well as beneficial owners who are
direct participants in DTC, who desire to participate in this exchange offer
should follow the directions set forth below and in the Letter of Transmittal.
All other beneficial owners should follow the instructions received from
their broker or nominee and should contact their broker or nominee directly. The
instructions set forth below and in the Letter of Transmittal DO NOT APPLY to
these beneficial owners.
Registered Holders
A registered holder must complete, sign and date the Letter of Transmittal,
or facsimile thereof, have the signatures thereon guaranteed if required by such
Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal
or such facsimile to the Exchange Agent prior to the Expiration Date. In
addition, either
O certificates for such tendered Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or
O the holder must comply with the guaranteed delivery procedures
described below.
The Old Notes will be properly tendered if the Letter of Transmittal and
other required documents are received by the Exchange Agent at the address set
forth below under "Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not validly withdrawn prior to the
Expiration Date will constitute an agreement between such holder and Oncor in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR
CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO OLD NOTES, LETTER OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS
46
SHOULD BE SENT TO ONCOR. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered
O by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or
O for the account of an Eligible Institution (as defined below).
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantor
must be a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (Eligible Institution).
If a Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power signed by such registered holder
as such registered holder's name appears on such Old Notes.
If a Letter of Transmittal or any Old Notes or bond or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person or persons should so indicate when signing. Moreover,
unless waived by Oncor, evidence satisfactory to Oncor, must be submitted with
the Letter of Transmittal as to such person or persons authority to so act.
DTC Participants
Any financial institution that is a participant in DTC's systems may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfer. Such delivery must be accompanied by either
O the Letter of Transmittal or facsimile thereof, with any required
signature guarantees or
O an agent's message (as hereinafter defined),
and any other required documents, and must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with. The Exchange Agent will make a request to
establish an account with respect to the Old Notes at DTC for purposes of this
exchange offer within two business days after the date of this prospectus.
The term "agent's message" means a message, electronically transmitted by
DTC to, and received by, the Exchange Agent, and forming a part of the
Book-Entry Confirmation (as defined in the Letter of Transmittal), which states
that DTC has received an express acknowledgement from a beneficial owner of Old
Notes stating that such beneficial owner has received and agrees to be bound by,
and makes each of the representations and warranties contained in the Letter of
Transmittal, and that such beneficial owner agrees that Oncor may enforce the
Letter of Transmittal against such beneficial owner.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and
O whose Old Notes are not immediately available,
O who cannot deliver their Old Notes, the Letter of Transmittal or any
other required documents to the Exchange Agent prior to the Expiration
Date, or
O who cannot complete the procedures for book-entry tender on a timely
basis may effect a tender if:
47
(1) the tender is made through an Eligible Institution;
(2) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder, the
certificate number(s) of such Old Notes (unless tender is to be made
by book-entry transfer) and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days
after the date of delivery of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or Book-Entry Confirmation, as the case may be, together
with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof or agent's message in lieu thereof), with any
required signature guarantees and all other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution
with the Exchange Agent; and
(3) the certificates and/or other documents referred to in
clause (2) above are received by the Exchange Agent within the time
specified above.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Miscellaneous
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by Oncor in its sole discretion, which determination will be
final and binding. Oncor reserves the absolute right to reject any and all Old
Notes not properly tendered or any tendered Old Notes that Oncor's acceptance of
which would, in the opinion of Oncor's counsel, be unlawful. Oncor also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular Old Notes. Oncor's interpretation of the terms and conditions of this
exchange offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as Oncor
shall determine. Although Oncor intends to notify tendering holders of defects
or irregularities with respect to their tenders of Old Notes, none of Oncor, the
Exchange Agent, nor any other person shall incur any liability for failure to
give such notification. Old Notes will not be deemed properly tendered until
such defects or irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered (and which have not been
cured or waived) will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as promptly as
practicable following the Expiration Date.
New Notes will only be issued after timely receipt by the Exchange Agent of
(1) certificates for the Old Notes tendered for exchange or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at DTC, (2) a
properly completed and duly executed Letter of Transmittal (or facsimile thereof
or agent's message in lieu thereof) and (3) all other required documents. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of this exchange offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Notes will be returned, without expense, to the tendering
holder thereof (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described below, such unaccepted or non-exchanged Old Notes will be
credited to an account maintained with DTC) as promptly as practicable after the
expiration or termination of this exchange offer.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See PLAN OF DISTRIBUTION.
Oncor reserves the right in its sole discretion to purchase or make offers
for any Old Notes that remain outstanding subsequent to the Expiration Date or,
as set forth above under "Conditions to the Exchange Offer," to terminate this
exchange offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of this
exchange offer.
48
WITHDRAWAL OF TENDERS OF OLD NOTES
Except as otherwise provided herein, tenders of Old Notes may be validly
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To validly withdraw a tender of Old Notes in this exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must
O specify the name of the person having deposited the Old Notes to be
withdrawn, which Oncor refers to as the "Depositor,"
O identify the Old Notes to be withdrawn (including the certificate
number (unless tendered by book-entry transfer)),
O be signed by the holder in the same manner as the original signature
on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to
the Old Notes register the transfer of such Old Notes in the name of
the person withdrawing the tender, and
O specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If Old Notes have been tendered
pursuant to book-entry transfer, any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the
withdrawn Old Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by any method of delivery
described in this paragraph.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by Oncor, which
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been properly tendered for purposes of this
exchange offer and will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal. Consequently, no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are properly
retendered. Validly withdrawn Old Notes may be properly retendered by following
one of the procedures described above under "Procedures for Tendering" at any
time prior to the Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of this exchange
offer. Requests for additional copies of this prospectus or of the Letter of
Transmittal and requests for Notice of Guaranteed Delivery with respect to the
exchange of the Old Notes should be directed to the Exchange Agent addressed as
follows:
The Bank of New York
Corporate Trust Operations
Reorganization Unit
101 Barclay Street - 7 East
New York, New York 10286
Attention: Diane Amoroso
By Telephone: (212) 298-1915
By Facsimile: (212) 815-3738
FEES AND EXPENSES
Oncor will pay the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telecopier, telephone or in person by officers and employees of Oncor and its
affiliates.
49
Oncor has not retained any dealer-manager in connection with this exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of this exchange offer. Oncor, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. Oncor will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of the Old Notes and in handling
or forwarding tenders for exchange for their customers.
Oncor will pay all transfer taxes, if any, applicable to the exchange of
the Old Notes pursuant to this exchange offer. If, however, certificates
representing Old Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the registered holder of Old Notes tendered, or if tendered Old Notes
are registered in the name of any person other than the person signing the
related Letter of Transmittal, or if a transfer tax is imposed for any reason
other than the exchange of the Old Notes pursuant to this exchange offer, then
the amount of any resulting transfer tax (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such tax or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer tax will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
Oncor will record the New Notes at the same carrying value as the Old Notes
for which they are exchanged, which is the aggregate principal amount of
tendered Old Notes, as reflected in Oncor's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized in connection with this exchange offer. The cost of this exchange
offer will be amortized over the term of the New Notes.
APPRAISAL OR DISSENTERS' RIGHTS
Holders of the Old Notes will not have appraisal or dissenters' rights in
connection with this exchange offer.
50
DESCRIPTION OF THE NEW NOTES
The following description sets forth certain terms and provisions of the
New Notes.
GENERAL
Oncor issued the Old Notes, and will issue the New Notes under the
Indenture, as supplemented by an officer's certificate. The provisions of the
Indenture, as supplemented, are incorporated herein by this reference and the
Indenture as so supplemented is available upon request to the Trustee. The
Indenture and its associated documents contain the full legal text of the
matters described in this section. Because this section is a summary, it does
not describe every aspect of the New Notes or the Indenture. This summary is
subject to and qualified in its entirety by reference to all of the provisions
of the New Notes and the Indenture, including definitions of certain terms used
in the Indenture. Oncor also includes references in parentheses to certain
sections of the Indenture. Whenever Oncor refers to particular sections or
defined terms of the Indenture herein, such sections or defined terms are
incorporated by reference herein.
The New Notes are two separate series of debt securities that Oncor may
issue under the Indenture. The New Notes and all other debt securities
(including any Remaining Old Notes) issued under the Indenture are collectively
referred to herein as Indenture Securities. The Indenture permits Oncor to issue
an unlimited amount of Indenture Securities from time to time. All Indenture
Securities of any one series need not be issued at the same time, and a series
may be reopened for issuances of additional Indenture Securities of such series.
This means that Oncor may from time to time, without the consent of the existing
holders of the New Notes of any series, create and issue further Indenture
Securities having the same terms and conditions as the New Notes in all
respects, except for issue date, issue price and, if applicable, the initial
interest payment on such Indenture Securities. Additional Indenture Securities
issued in this manner will be consolidated with, and will form a single series
with the New Notes.
The New Notes will be identical in all material respects to the Old Notes,
except that the registration rights and related additional interest provisions
and transfer restrictions applicable to the Old Notes are not applicable to the
New Notes. The New Notes of each series will be of the same series as the
respective series of Old Notes, and will be considered as a single class for
purposes of any acts of Holders (such as voting and consents) under the
Indenture. To the extent any Old Notes are not exchanged for New Notes, those
Old Notes will remain outstanding under the Indenture and will rank pari passu
with the New Notes.
The New Notes will be issued in fully registered form, without interest
coupons, and in denominations of $1,000 and integral multiples of $1,000 in
excess thereof. The New Notes will initially be issued in book-entry form and
will be represented by one or more fully registered global certificates. Such
global certificates will be registered in the name of Cede & Co., as registered
owner and as nominee for DTC. Purchases of beneficial interests in these global
certificates will be made in book-entry form. Except under the limited
circumstances described in this prospectus, purchasers of such beneficial
interests will not receive certificates representing their beneficial interests
in the New Notes. See "Book-Entry" below.
The New Notes may be transferred without charge, other than for applicable
taxes or other governmental charges, at The Bank of New York, New York, New
York.
MATURITY AND INTEREST
The New 2012 Notes will mature on May 1, 2012, and the New 2032 Notes will
mature on May 1, 2032, unless earlier redeemed. Interest on the New Notes of
each series will:
O be payable in U.S. dollars at the rate of 6.375% with respect to the
New 2012 Notes and at the rate of 7.000% with respect to the New 2032
Notes;
O be computed for each interest period on the basis of a 360 day year
consisting of twelve 30 day months and with respect to any period less
than a full month, on the basis of the actual number of days elapsed
during such period;
O be payable semi-annually in arrears on May 1 and November 1 of each
year, commencing November 1, 2002, and at maturity;
51
O accrue from the date of the last interest payment on the Old Notes,
and if no such interest has been paid on the Old Notes then interest
will accrue from May 6, 2002; and
O be paid to the persons in whose names the New Notes are registered at
the close of business on April 16th for the May 1 interest payment
date and on October 17th for the November 1 interest payment date.
Oncor shall not be required to make transfers or exchanges of the New
Notes for a period of 15 days next preceding an interest payment date.
The covenants contained in the Indenture will not afford holders of New
Notes protection in the event of a highly-leveraged transaction involving Oncor.
OPTIONAL REDEMPTION
Oncor may redeem the New Notes of each series, in whole or in part, at its
option, at any time prior to their maturity. Oncor will give notice of its
intent to redeem the New Notes at least 30 days prior to the redemption date. If
Oncor redeems all or any part of the New Notes of any series, it will pay a
"make-whole" redemption price equal to the greater of
o 100% of the principal amount of the New Notes of such series being
redeemed or
o the sum of the present values of the remaining scheduled payments of
principal and interest on the New Notes of such series being redeemed,
discounted to the redemption date on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate
plus (i) .25% with respect to the New 2012 Notes or (ii) .30% with
respect to the New 2032 Notes,
plus, in each case, accrued interest on those New Notes of such series to
the redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Independent Investment Banker as having a maturity comparable to
the remaining term of the New Notes to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of the New Notes.
"Comparable Treasury Price" means, with respect to any redemption date,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the H. 15 Daily
Update of the Federal Reserve Bank or (ii) if such release (or any successor
release) is not published or does not contain prices on such business day, the
Reference Treasury Dealer Quotation actually obtained by the Trustee for such
redemption date.
"H.15(519)" means the weekly statistical release entitled "H.15 (519)
Selected Interest Rates", or any successor publication, published by the Board
of Governors of the Federal Reserve System.
"H.15 Daily Update" means the daily update of H.15(519) available through
the worldwide website of the Board of Governors of the Federal Reserve System or
any successor site or publication.
"Independent Investment Banker" means the Reference Treasury Dealer.
"Reference Treasury Dealer" means Lehman Brothers Inc., and its successors;
provided, however, that if the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"),
Oncor shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
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(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by the Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such redemption date.
If, at the time notice of redemption is given, the redemption moneys are
not held by the Trustee, the redemption may be made subject to their receipt on
or before the date fixed for redemption and such notice shall be of no effect
unless such moneys are so received.
Upon payment of the redemption price, on and after the redemption date
interest will cease to accrue on the New Notes or portions thereof called for
redemption.
PAYMENT AND PAYING AGENTS
Interest on each New Note payable on any interest payment date will be paid
to the person in whose name that New Note is registered at the close of business
on the regular record date for that interest payment date. However, interest
payable at maturity will be paid to the person to whom the principal is paid. If
there has been a default in the payment of interest on any New Note, the
defaulted interest may be paid to the holder of that New Note as of the close of
business on a date between 10 and 15 days before the date proposed by Oncor for
payment of such defaulted interest or in any other manner permitted by any
securities exchange on which that New Note may be listed, if the Trustee finds
it workable. (Indenture, Section 307.)
Principal, premium, if any, and interest on the New Notes at maturity will
be payable upon presentation of the New Notes at the corporate trust office of
The Bank of New York, in The City of New York, as paying agent for Oncor.
However, Oncor may choose to make payment of interest by check mailed to the
address of the persons entitled to such payment. Oncor may change the place of
payment on the New Notes, appoint one or more additional paying agents
(including Oncor) and remove any paying agent, all at the discretion of Oncor.
(Indenture, Section 702.)
REGISTRATION AND TRANSFER
The transfer of New Notes may be registered, and New Notes may be exchanged
for other New Notes of the same series or tranche, of authorized denominations
and with the same terms and principal amount, at the offices of the Trustee in
New York, New York. (Indenture, Section 305.) Oncor may designate one or more
additional places, or change the place or places previously designated, for
registration of transfer and exchange of the New Notes. (Indenture, Section
702.) No service charge will be made for any registration of transfer or
exchange of the New Notes. However, Oncor may require payment to cover any tax
or other governmental charge that may be imposed in connection with such
registration of transfer or exchange. Oncor will not be required to execute or
to provide for the registration, transfer or exchange of
O any New Note during the 15 days before an interest payment date;
O any New Note during the 15 days before giving any notice of
redemption; or
O any New Note selected for redemption except the unredeemed portion of
any New Note being redeemed in part.
(Indenture, Section 305.)
SECURITY
Except as described below under this heading and under "Issuance of
Additional Indenture Securities," and subject to the exceptions discussed under
"Discharge of Lien; Release Date", all Indenture Securities will be secured,
equally and ratably, by:
(1) the first lien of an equal principal amount of 1983 Mortgage Bonds
issued under the 1983 Mortgage, and delivered to the Trustee under the
Indenture, and other Class A Bonds as described below; as discussed
under "Description of the 1983 Mortgage Bonds - Security," the 1983
Mortgage constitutes, subject to certain exceptions, a first mortgage
lien on substantially all of Oncor's electric transmission and
distribution properties; and
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(2) the lien of the Indenture on substantially all of Oncor's tangible
electric transmission and distribution property located in Texas,
which lien is a first lien on that property not covered by the 1983
Mortgage and is otherwise junior to the lien of the 1983 Mortgage. If
Oncor acquires any property that is subject to a Class A Mortgage, the
lien of the Indenture would be junior to the lien of that Class A
Mortgage. Oncor sometimes refers to its property that is subject to
the lien of the Indenture as "Mortgaged Property."
See "Discharge of Lien; Release Date" for a discussion of provisions of the
Indenture pursuant to which, subject to the satisfaction of the specified
conditions, the lien of the Indenture would be discharged and the Indenture
Securities would become Oncor's unsecured obligations.
CLASS A BONDS
As discussed below under "Consolidation, Merger and Conveyance of Assets,"
Oncor will be permitted to merge or consolidate with another company upon
meeting specified requirements. Following a merger or consolidation of another
company into Oncor, Oncor could deliver to the Trustee first mortgage bonds
issued under an existing mortgage on the properties of such other company as the
basis for the issuance of additional Indenture Securities. In such event, the
Indenture Securities would be secured, additionally, by the first lien of such
first mortgage bonds and by the lien of the Indenture on the electric
transmission and distribution property acquired from such other company, which
would be junior to the lien of such existing mortgage. The 1983 Mortgage and all
such other mortgages are hereinafter collectively referred to as the "Class A
Mortgages," and all first mortgage bonds issued under the Class A Mortgages are
hereinafter collectively referred to as the "Class A Bonds." (Indenture,
Section 1706.)
Class A Bonds, including 1983 Mortgage Bonds, that are the basis for the
authentication and delivery of Indenture Securities (a) will be delivered to,
and registered in the name of, the Trustee or its nominee and will be owned and
held by the Trustee, subject to the provisions of the Indenture, for the benefit
of the holders of all Indenture Securities outstanding from time to time; (b)
will mature or be subject to mandatory redemption on the same dates, and in the
same principal amounts, as such Indenture Securities; and (c)(i) may, but need
not, bear interest and (ii) may, but need not, contain provisions for their
redemption at Oncor's option, any such redemption to be made at a redemption
price or prices not less than the principal amount of such Class A Bonds.
(Indenture, Sections 1602 and 1701). To the extent that Class A Bonds do not
bear interest, holders of Indenture Securities will not have the benefit of the
lien of a Class A Mortgage in respect of an amount equal to accrued interest, if
any, on the Indenture Securities; however, such holders will nevertheless have
the benefit of the lien of the Indenture in respect of the amount of accrued
interest.
Any payment by Oncor of principal of or premium or interest on the Class A
Bonds delivered to and held by the Trustee will be applied by the Trustee to the
payment of any principal, premium or interest, as the case may be, in respect of
the Indenture Securities which is then due. Oncor's obligation under the
Indenture to make such payment in respect of the Indenture Securities will be
deemed satisfied and discharged to the extent of such payment. If, at the time
of any such payment of principal of Class A Bonds, there is no principal then
due in respect of the Indenture Securities, the proceeds of the payment will
constitute "Funded Cash" and will be held by the Trustee as part of the
Mortgaged Property, to be withdrawn, used or applied as provided in the
Indenture. If, at the time of any such payment of premium or interest on Class A
Bonds, there is no premium or interest then due on the Indenture Securities, the
payment will be remitted to Oncor at Oncor's request; except that, if any event
of default under the Indenture, as described below, has occurred and is
continuing, the payment will be held as part of the Mortgaged Property until the
event of default under the Indenture has been cured or waived. (Indenture,
Section 1702). See "Withdrawal of Cash" below.
Any payment by Oncor on Indenture Securities authenticated and delivered on
the basis of the delivery to the Trustee of Class A Bonds (other than by
application of the proceeds of a payment in respect of such Class A Bonds) will,
to the extent thereof, be deemed to satisfy and discharge Oncor's obligations,
if any, to make a corresponding payment, in respect of such Class A Bonds which
is then due. (Indenture, Section 1702).
The Trustee may not sell, assign or otherwise transfer any Class A Bonds
except to a successor trustee under the Indenture. (Indenture, Section 1704.) At
the time any Indenture Securities which have been authenticated and delivered
upon the basis of Class A Bonds, cease to be outstanding (other than as a result
54
of the application of the proceeds of the payment or redemption of such Class A
Bonds), the Trustee will surrender to Oncor, or upon Oncor's order, an equal
principal amount of such Class A Bonds. (Indenture, Section 1703.)
When the aggregate principal amount of all Class A Bonds outstanding under
all Class A Mortgages, other than those held by the Trustee, does not exceed the
greater of 5% of the net book value of Oncor's Electric Utility Property or 5%
of Oncor's Capitalization, then, at Oncor's request and subject to satisfaction
of certain conditions, the Class A Bonds held by the Trustee will be deemed
satisfied and discharged, the Trustee will surrender such Class A Bonds for
cancellation, and the New Notes will become senior unsecured debt of Oncor,
subject to certain Permitted Secured Debt and certain exceptions described
below. (Indenture, Section 1811.) See "Discharge of Lien; Release Date" below.
At the date of this prospectus, the only Class A Mortgage is the 1983
Mortgage, and the only Class A Bonds issuable at this time are 1983 Mortgage
Bonds issuable under the 1983 Mortgage. When all of the outstanding 1983
Mortgage Bonds which are not held by the Trustee do not exceed the greater of 5%
of the net book value of Oncor's Electric Utility Property or 5% of Oncor's
Capitalization, and assuming no other Class A Mortgage exists at the time, the
Indenture may become unsecured.
"Capitalization" means the total of all the following items appearing on,
or included in, Oncor's unconsolidated balance sheet; (i) liabilities for
indebtedness maturing more than 12 months from the date of determination, and
(ii) common stock, common stock expense, accumulated other comprehensive income
or loss, preferred stock, preference stock, premium on common stock and retained
earnings (however the foregoing may be designated), less, to the extent not
otherwise deducted, the cost of shares of Oncor's capital stock held in Oncor's
treasury, if any. Capitalization shall be determined in accordance with
generally accepted accounting principles and practices applicable to the type of
business in which Oncor is engaged, and may be determined as of the date not
more than 60 days prior to the happening of the event for which the
determination is being made.
For purposes of the calculations referred to above, as of December 20,
2002, Oncor had outstanding 1983 Mortgage Bonds in an aggregate principal amount
equal to approximately $3,229 million ($1,179 million of which are not held by
the Trustee (which at September 30, 2002 would have equaled approximately 20% of
the net book value of Oncor's Electric Utility Property and approximately 19% of
Oncor's Capitalization)). These 1983 Mortgage Bonds have different maturities
and redemption premiums. Some do not mature until 2025, but all are redeemable
on or before July 1, 2005. In addition, Oncor may purchase or defease any of
these 1983 Mortgage Bonds.
LIEN OF THE INDENTURE
The Indenture creates a lien on substantially all tangible properties of
Oncor in Texas used in the transmission and distribution of electric energy,
other than certain excepted property and subject to certain permitted liens, in
each case as described below. Oncor's transmission and distribution properties
of the type subject to the lien of the Indenture, regardless of whether the
Release Date has occurred, but exclusive of Excepted Property described below,
are sometimes referred to as "Electric Utility Property." At the date of this
prospectus, substantially all of such property, while subject to the lien of the
Indenture, is also subject to the prior lien of the 1983 Mortgage. For so long
as the 1983 Mortgage is in effect, and all of the outstanding 1983 Mortgage
Bonds and any other Class A Bonds, that are not held by the Trustee, exceed the
greater of 5% of the net book value of Oncor's Electric Utility Property or 5%
of Oncor's Capitalization, the Indenture Securities will have the benefit of the
first mortgage lien of the 1983 Mortgage on such property, and also the benefit
of the prior lien of any additional Class A Mortgage on any property subject
thereto, to the extent of the aggregate principal amount of Class A Bonds,
issued under the respective Class A Mortgages, held by the Trustee.
PERMITTED LIENS
The lien of the Indenture is subject to permitted liens described in the
Indenture. Such permitted liens include liens existing at the execution date of
the Indenture such as the lien of the 1983 Mortgage, liens on property at the
time Oncor acquires such property such as the lien of any other Class A
Mortgage, tax liens and other governmental charges which are not delinquent or
which are being contested in good faith, mechanics', construction and
materialmen's liens, certain judgment liens, easements, reservations and rights
of others (including governmental entities) in, and defects of title in, Oncor's
property, certain leases and leasehold interests, liens to secure public
obligations, rights of others to take minerals, timber, electric energy or
capacity, gas, water, steam or other products produced by Oncor or by others on
55
Oncor's property, rights and interests of Persons other than Oncor arising out
of agreements relating to the common ownership or joint use of property, and
liens on the interests of such Persons in such property, liens which have been
bonded or for which other security arrangements have been made, liens created in
connection with the issuance of tax-exempt bonds, purchase money liens and liens
related to the construction or acquisition of property, or the development or
expansion of property, liens which secure specified Indenture Securities equally
and ratably with other obligations, and additional liens on any of Oncor's
property (other than Excepted Property, as described below) to secure debt for
borrowed money in an aggregate principal amount not exceeding the greater of 10%
of Oncor's Net Tangible Assets or 10% of Oncor's Capitalization. (Indenture,
Granting Clauses and Sections 101 and 707.)
The Indenture provides that the Trustee will have a lien, prior to the lien
on behalf of the holders of Indenture Securities, upon the Mortgaged Property
for the payment of its reasonable compensation and expenses and for indemnity
against certain liabilities. (Indenture, Section 1007.) Any such lien would be a
Permitted Lien under the Indenture.
EXCEPTED PROPERTY
The lien of the Indenture does not cover, among other things, the following
types of property: property located outside of Texas; cash and securities not
paid, deposited or held under the Indenture; contracts, leases and other
agreements of all kinds, contract rights, bills, notes and other instruments,
accounts receivable, transition property, claims, demands and judgments;
governmental and other licenses, permits, franchises, consents and allowances;
intellectual property rights and other general intangibles; vehicles, movable
equipment, aircraft and vessels; all goods, stock in trade, wares, merchandise
and inventory held for sale or lease in the ordinary course of business;
materials, supplies, inventory and other personal property consumable in the
operation of the Mortgaged Property; fuel; tools and equipment; furniture and
furnishings; computers and data processing, telecommunications and other
facilities used primarily for administrative or clerical purposes or otherwise
not necessary for the operation or maintenance of electric transmission and
distribution facilities; coal, lignite, ore, gas, oil and other minerals and
timber rights; electric energy, gas, steam, water and other products generated,
produced, manufactured, purchased or otherwise acquired; real property and
facilities used primarily for the production or gathering of natural gas;
leasehold interests; all property which prior to the execution date of the
Indenture has been released from the lien of the 1983 Mortgage; all property
which subsequent to the execution date of the Indenture has been released from
the lien of the Indenture; and any and all property not acquired or constructed
by Oncor for use in its electric transmission and distribution business. Oncor
sometimes refers to property of Oncor not covered by the lien of the Indenture
as "Excepted Property." (Indenture, Granting Clauses.)
Oncor may enter into supplemental indentures with the Trustee, without the
consent of the holders, in order to subject additional property (including
property that would otherwise be excepted from such lien) to the lien of the
Indenture. (Indenture, Section 1301.) This property would constitute Property
Additions and would be available as a basis for the issuance of Indenture
Securities. See "Issuance of Additional Indenture Securities."
The Indenture provides that after-acquired property (other than Excepted
Property) will be subject to the lien of the Indenture. (Indenture, Second
Granting Clause.) However, in the case of consolidation or merger (whether or
not Oncor is the surviving company) or transfer of the Mortgaged Property as or
substantially as an entirety, the Indenture will not be required to be a lien
upon any of the properties either owned or subsequently acquired by the
successor company except properties acquired from Oncor in or as a result of
such transfer, as well as improvements, extensions and additions (as defined in
the Indenture) to such properties and renewals, replacements and substitutions
of or for any part or parts thereof. (Indenture, Section 1203) See
"Consolidation, Merger and Conveyance of Assets" below.
See "Discharge of Lien; Release Date" for a discussion of provisions of the
Indenture pursuant to which, subject to the satisfaction of specified
conditions, all the Mortgaged Property would be released from the lien of the
Indenture and Indenture Securities would become Oncor's unsecured obligations.
ISSUANCE OF ADDITIONAL INDENTURE SECURITIES
Subject to the issuance restrictions described below, the maximum principal
amount of Indenture Securities that may be authenticated and delivered under the
Indenture is unlimited. (Indenture, Section 301.) Prior to the Release Date,
56
Indenture Securities of any series may be issued from time to time on the basis
of, and in an aggregate principal amount not exceeding:
O the aggregate principal amount of Class A Bonds delivered to the
Trustee; (Indenture, Section 1602.)
O the Cost or Fair Value to Oncor (whichever is less) of Property
Additions (as described below) which do not constitute Funded Property
(generally, Property Additions which have been made the basis of the
authentication and delivery of Indenture Securities, the release of
Mortgaged Property or the withdrawal of cash, which have been
substituted for retired Funded Property or which have been used for
other specified purposes) after certain deductions and additions,
primarily including adjustments to offset property retirements;
(Indenture, Section 1603.)
O the aggregate principal amount of retired Indenture Securities, but if
Class A Bonds had been made the basis for the authentication and
delivery of such retired Indenture Securities, only after the
discharge of the related Class A Mortgage; or (Indenture, Section
1604.)
O an amount of cash deposited with the Trustee. (Indenture, Section
1605.)
Property Additions generally include any property that is owned by Oncor
and is subject to the lien of the Indenture. (Indenture, Section 103.)
Oncor expects that, until the Release Date, it will issue Indenture
Securities primarily on the basis of Class A Bonds issued under the 1983
Mortgage. However, Oncor has the right to issue additional Indenture Securities
on the basis of property additions, retired Indenture Securities and cash
deposits, and not on the basis of Class A Bonds issued under the 1983 Mortgage.
RELEASE OF PROPERTY
Unless an event of default under the Indenture has occurred and is
continuing, Oncor may obtain the release from the lien of the Indenture of any
Mortgaged Property, except for cash held by the Trustee, upon delivery to the
Trustee of an amount in cash equal to the amount, if any, by which the Cost of
the property to be released (or, if less, the Fair Value to Oncor of such
property at the time it became Funded Property) exceeds the aggregate of:
O an amount equal to the aggregate principal amount of obligations
secured by Purchase Money Liens upon the property to be released and
delivered to the Trustee;
O an amount equal to the Cost or Fair Value to Oncor (whichever is less)
of certified Property Additions not constituting Funded Property after
certain deductions and additions, primarily including adjustments to
offset property retirements (except that such adjustments need not be
made if such Property Additions were acquired or made within the
90-day period preceding the release);
O the aggregate principal amount of Indenture Securities Oncor would be
entitled to issue on the basis of retired Indenture Securities (with
such entitlement being waived by operation of such release);
O any amount of cash and/or an amount equal to the aggregate principal
amount of obligations secured by Purchase Money Liens upon the
property released delivered to the trustee or other holder of a lien
prior to the lien of the Indenture, subject to certain limitations
described below;
O the aggregate principal amount of Indenture Securities delivered to
the Trustee (with such Indenture Securities to be canceled by the
Trustee); and
O any taxes and expenses incidental to any sale, exchange, dedication or
other disposition of the property to be released.
(Indenture, Section 1803.)
Property that is not Funded Property may generally be released from the
lien of the Indenture without depositing any cash or property with the Trustee
as long as (a) the aggregate amount of Cost or Fair Value to Oncor (whichever is
less) of all Property Additions which do not constitute Funded Property
(excluding the property to be released) after certain deductions and additions,
primarily including adjustments to offset property retirements, is not less than
zero or (b) the Cost or Fair Value (whichever is less) of property to be
57
released does not exceed the aggregate amount of the Cost or Fair Value to Oncor
(whichever is less) of Property Additions acquired or made within the 90-day
period preceding the release. (Indenture, Section 1804.)
The Indenture provides simplified procedures for the release of property
which has been released from the lien of a Class A Mortgage, minor properties
and property taken by eminent domain, and provides for dispositions of certain
obsolete property and grants or surrender of certain rights without any release
or consent by the Trustee. (Indenture Sections 1802, 1805, 1807 and 1808.)
If Oncor retains any interest in any property released from the lien of the
Indenture, the Indenture will not become a lien on such property or such
interest therein or any improvements, extensions or additions to such property
or renewals, replacements or substitutions of or for such property or any part
or parts thereof. (Indenture, Section 1810.)
WITHDRAWAL OF CASH
Unless an event of default under the Indenture has occurred and is
continuing, and subject to certain limitations, cash held by the Trustee may,
generally, (1) be withdrawn by Oncor (a) to the extent of the Cost or Fair Value
to Oncor (whichever is less) of Property Additions not constituting Funded
Property, after certain deductions and additions, primarily including
adjustments to offset retirements (except that such adjustments need not be made
if such Property Additions were acquired or made within the 90-day period
preceding the withdrawal) or (b) in an amount equal to the aggregate principal
amount of Indenture Securities that Oncor would be entitled to issue on the
basis of retired Indenture Securities (with the entitlement to such issuance
being waived by operation of such withdrawal) or (c) in an amount equal to the
aggregate principal amount of any outstanding Indenture Securities delivered to
the Trustee, or (2) upon Oncor's request, be applied to (a) the purchase of
Indenture Securities or (b) the payment (or provision for payment) at stated
maturity of any Indenture Securities or the redemption (or provision for
payment) of any Indenture Securities which are redeemable (Indenture, Section
1806); except that cash deposited with the Trustee as the basis for the
authentication and delivery of Indenture Securities, as well as cash
representing a payment of principal of Class A Bonds, may, in addition, be
withdrawn in an amount equal to the aggregate principal amount of Class A Bonds
delivered to the Trustee. (Indenture, Sections 1605 and 1702.)
DISCHARGE OF LIEN; RELEASE DATE
At any time when the aggregate principal amount of all Class A Bonds
outstanding under all Class A Mortgages, other than those held by the Trustee,
does not exceed the greater of 5% of the net book value of Oncor's Electric
Utility Property or 5% of Oncor's Capitalization, the Indenture may be amended
and supplemented, without the consent of the holders of New Notes or any other
Indenture Securities (including any Remaining Old Notes), to eliminate all terms
and conditions relating to collateral for the Indenture Securities, with the
result that Oncor's obligations under the Indenture and the Indenture Securities
(including the New Notes) would be entirely unsecured. Oncor refers to the date
on which the elimination of collateral occurs as the "Release Date."
The occurrence of the Release Date is subject to Oncor's delivery of the
following documents to the Trustee:
O a company order requesting execution and delivery by the Trustee of a
supplemental indenture and other instruments necessary to discharge,
cancel, terminate or satisfy the lien of the Indenture;
O an officer's certificate stating that
(1) to the knowledge of such officer, no event of default under the
Indenture has occurred and is continuing and
(2) the aggregate principal amount of all Class A Bonds outstanding
under all Class A Mortgages, other than those held by the
Trustee, does not exceed the greater of 5% of the net book value
of Oncor's Electric Utility Property or 5% of Oncor's
Capitalization; and
O an opinion of counsel to the effect that none of Oncor's Electric
Utility Property, other than Excepted Property, is subject to any lien
other than the lien of the Indenture and Permitted Liens.
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Upon the execution and delivery of the amendment of the Indenture as
contemplated above, the lien of the Indenture will be deemed to have been
satisfied and discharged and the Trustee will release the Mortgaged Property
from the lien of the Indenture. (Indenture, Section 1811.)
LIMITATION ON SECURED DEBT
So long as any of the Indenture Securities remain outstanding, Oncor will
not issue any Secured Debt other than Permitted Secured Debt (in each case as
defined below) without the consent of the holders of a majority in principal
amount of the outstanding Indenture Securities of all series with respect to
which this covenant is made, considered as one class; provided, however, that
this covenant will not prohibit the creation or existence of any Secured Debt if
either:
o Oncor makes effective provision whereby all New Notes and other
affected Indenture Securities then outstanding will be secured equally
and ratably with such Secured Debt or
o Oncor delivers to the Trustee bonds, notes or other evidences of
indebtedness secured by the lien which secures such Secured Debt in an
aggregate principal amount equal to the aggregate principal amount of
the New Notes and other affected Indenture Securities then outstanding
and meeting certain other requirements set forth in the Indenture.
"Secured Debt" means Debt created, issued, incurred or assumed by Oncor
which is secured by a lien upon any of Oncor's property (other than Excepted
Property). For purposes of this covenant, any Capitalized Lease Liabilities of
Oncor will be deemed to be Debt secured by a lien on Oncor's property.
"Debt" means:
O Oncor's indebtedness for borrowed money evidenced by a bond,
debenture, note or other written instrument or agreement by which
Oncor is obligated to repay such borrowed money;
O any guaranty by Oncor of any such indebtedness of another person; and
O any Capitalized Lease Liabilities of Oncor.
"Debt" does not include, among other things:
O indebtedness under any installment sale or conditional sale agreement
or any other agreement relating to indebtedness for the deferred
purchase price of property or services;
O any trade obligations (including any obligations under power or other
commodity purchase agreements and any associated hedges or
derivatives) or other obligations in the ordinary course of business;
O obligations under any lease agreement that are not Capitalized Lease
Liabilities; or
o any liens securing indebtedness, neither assumed nor guaranteed by
Oncor nor on which it customarily pays interest, existing upon real
estate or rights in or relating to real estate acquired by Oncor for
substation, transmission line, transportation line, distribution line
or right of way purposes.
"Permitted Secured Debt" means, as of any particular time:
O Class A Bonds and Indenture Securities issued prior to the Release
Date;
O Secured Debt which matures less than one year from the date of the
issuance or incurrence and is not extendible at the option of the
issuer; and any refundings, refinancings and/or replacements of any
such Secured Debt by or with Secured Debt that matures less than one
year from the date of such refunding, refinancing and/or replacement
and is not extendible at the option of the issuer;
O Secured Debt secured by Purchase Money Liens or any other liens
existing or placed upon property at the time of, or within one hundred
eighty (180) days after, the acquisition thereof by Oncor, and any
refundings, refinancings and/or replacements of any such Secured Debt;
provided, however, that no such Purchase Money Lien or other Lien
shall extend to or cover any of Oncor's property other than (1) the
property so acquired and improvements, extensions and additions to
59
such property and renewals, replacements and substitutions of or for
the property or any part or parts of the property and (2) with respect
to Purchase Money Liens, other property subsequently acquired by
Oncor;
O Secured Debt relating to governmental obligations the interest on
which is not included in gross income for purposes of federal income
taxation pursuant to Section 103 of the Internal Revenue Code of 1986,
as amended (or any successor provision of law), for the purpose of
financing or refinancing, in whole or in part, costs of acquisition or
construction of property to be used by Oncor, to the extent that the
lien which secures the Secured Debt is required either by applicable
law or by the issuer of such governmental obligations or is otherwise
necessary in order to establish or maintain the exclusion from gross
income; and any refundings, refinancings and/or replacements of any
Secured Debt by or with similar Secured Debt;
O Secured Debt (i) which is related to the construction or acquisition
of property not previously owned by Oncor or (ii) which is related to
the financing of a project involving the development or expansion of
Oncor's property and (iii) in either case, the obligee in respect of
which has no recourse to Oncor or any of Oncor's property other than
the property constructed or acquired with the proceeds of such
transaction or the project financed with the proceeds of such
transaction (or the proceeds of such property or such project); and
any refundings, refinancings and/or replacements of any such Secured
Debt by or with Secured Debt described in clause (iii) above; and
O in addition to the Permitted Secured Debt described above, Secured
Debt not otherwise so permitted in an aggregate principal amount not
exceeding the greater of 10% of Oncor's Net Tangible Assets or 10% of
Oncor's Capitalization.
"Net Tangible Assets" means the amount shown as total assets on Oncor's
unconsolidated balance sheet, less (i) intangible assets including, but without
limitation, such items as goodwill, trademarks, trade names, patents,
unamortized debt discount and expense and other regulatory assets carried as
assets on Oncor's unconsolidated balance sheet and (ii) appropriate adjustments,
if any, on account of minority interests. Net Tangible Assets shall be
determined in accordance with generally accepted accounting principles and
practices applicable to the type of business in which Oncor is engaged.
"Capitalized Lease Liabilities" means the amount, if any, shown as
liabilities on Oncor's unconsolidated balance sheet for capitalized leases of
electric transmission and distribution property not owned by Oncor, which amount
shall be determined in accordance with generally accepted accounting principles
and practices applicable to the type of business in which Oncor is engaged.
(Indenture, Section 707.)
DEFEASANCE
Oncor will be discharged from its obligations on the New Notes of a
particular series if it irrevocably deposits with the Trustee or any paying
agent, other than Oncor, sufficient cash or government securities to pay the
principal, interest, any premium and any other sums when due on the stated
maturity date or a redemption date of that series of New Notes. (Indenture,
Section 801.)
CONSOLIDATION, MERGER AND CONVEYANCE OF ASSETS
Under the terms of the Indenture, Oncor may not consolidate with or merge
into any other entity or convey, transfer or lease as or substantially as an
entirety to any entity its Electric Utility Property, unless:
O the surviving or successor entity, or an entity which acquires by
conveyance or transfer or which leases the Electric Utility Property
of Oncor as or substantially as, an entirety, is organized and validly
existing under the laws of any domestic jurisdiction and it expressly
assumes Oncor's obligations on all Indenture Securities then
outstanding under the Indenture and if such consolidation, merger,
conveyance, sale or other transfer occurs prior to the Release Date,
confirms the lien of the Indenture on the Mortgaged Property;
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O in the case of a lease, such lease is made expressly subject to
termination by Oncor or by the Trustee and by the purchaser of the
property so leased at any sale thereof at any time during the
continuance of an event of default under the Indenture;
O Oncor shall have delivered to the Trustee an officer's certificate and
an opinion of counsel as provided in the Indenture; and
O immediately after giving effect to the transaction, no event of
default under the Indenture, or event which, after notice or lapse of
time or both, would become an event of default under the Indenture,
shall have occurred and be continuing.
(Indenture, Section 1201.) In the case of the conveyance or other transfer of
the Electric Utility Property as or substantially as an entirety to any other
person, upon the satisfaction of all the conditions described above Oncor would
be released and discharged from all obligations under the Indenture and on the
Indenture Securities then outstanding unless Oncor elects to waive such release
and discharge. (Indenture, Section 1204.)
The Indenture does not prevent or restrict:
O any conveyance or other transfer, or lease, of any part of Oncor's
Electric Utility Property which does not constitute the entirety, or
substantially the entirety, thereof or (Indenture, Section 1205.)
O any conveyance, transfer or lease of any of Oncor's properties where
Oncor retains Electric Utility Property with a fair value in excess of
143% of the aggregate principal amount of all outstanding Indenture
Securities, and any other outstanding debt securities that rank
equally with, or senior to, the Indenture Securities with respect to
such Electric Utility Property, other than any Class A Bonds held by
the Trustee. This fair value will be determined within 90 days of the
conveyance, transfer or lease by an independent expert that Oncor
selects and that is approved by the Trustee. (Indenture, Section
1206.)
The terms of the Indenture do not restrict Oncor in a merger in which Oncor
is the surviving entity. (Indenture, Section 1205.)
EVENTS OF DEFAULT
"Event of default," when used in the Indenture with respect to Indenture
Securities, means any of the following:
O failure to pay interest on any Indenture Security for 30 days after it
is due;
O failure to pay the principal of or any premium on any Indenture
Security when due;
O failure to perform any other covenant in the Indenture that continues
for 90 days after Oncor receives written notice from the Trustee, or
Oncor and the Trustee receive a written notice from the holders of at
least 33% in aggregate principal amount of the outstanding Indenture
Securities;
O events of bankruptcy, insolvency or reorganization of Oncor specified
in the Indenture;
O as long as the Trustee holds any outstanding Class A Bonds which were
delivered as the basis for the authentication and delivery of
outstanding Indenture Securities, the occurrence of a matured event of
default under the related Class A Mortgage (other than any such
matured event of default which (i) is not a failure to make payments
on Class A Bonds and is not of similar kind or character to the event
of default relating to events of bankruptcy, insolvency or
reorganization, referred to above and (ii) has not resulted in the
acceleration of the outstanding Class A Bonds under such Class A
Mortgage); provided, however, that the waiver or cure of such event of
default under a Class A Mortgage will constitute a waiver and cure of
the corresponding event of default under the Indenture, and the
rescission and annulment of the consequences thereof will constitute a
rescission and annulment of the corresponding consequences under the
Indenture; or
O any other event of default included in any supplemental indenture or
officer's certificate for that series of Indenture Securities.
(Indenture, Sections 901 and 1301.)
REMEDIES
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If an event of default under the Indenture occurs and is continuing, then
the Trustee or the holders of at least 33% in aggregate principal amount of the
outstanding Indenture Securities may declare the principal amount of all of the
Indenture Securities to be due and payable immediately.
At any time after a declaration of acceleration has been made and before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the event of default under the Indenture giving rise to the declaration
of acceleration will be considered cured, and the declaration and its
consequences will be considered rescinded and annulled, if:
O Oncor has paid or deposited with the Trustee a sum sufficient to pay:
(1) all overdue interest on all outstanding Indenture Securities;
(2) the principal of and premium, if any, on the outstanding
Indenture Securities that have become due otherwise than by such
declaration of acceleration and overdue interest thereon;
(3) interest on overdue interest to the extent lawful; and
(4) all amounts due to the Trustee under the Indenture; and
O Any other event of default under the Indenture with respect to the
Indenture Securities of that series has been cured or waived as
provided in the Indenture.
(Indenture, Section 902.)
There is no automatic acceleration, even in the event of bankruptcy,
insolvency or reorganization of Oncor.
Subject to the Indenture, under certain circumstances and to the extent
permitted by law, if an event of default under the Indenture occurs and is
continuing prior to the Release Date, the Trustee has the power to appoint a
receiver of the Mortgaged Property, and is entitled to all other remedies
available to mortgagees and secured parties under the Uniform Commercial Code or
any other applicable law. (Indenture, Section 917.)
Upon the occurrence and continuance of an event of default under the
Indenture after the Release Date, the remedies of the Trustee and the holders
under the Indenture would be limited to the rights of unsecured creditors.
In addition to every other right and remedy provided in the Indenture, the
Trustee may exercise any right or remedy available to the Trustee in its
capacity as owner and holder of Class A Bonds which arises as a result of a
default or matured event of default under any Class A Mortgage, whether or not
an event of default under the Indenture has occurred and is continuing.
(Indenture, Section 916.)
Other than its duties in case of an event of default under the Indenture,
the Trustee is not obligated to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the holders, unless the
holders offer the Trustee a reasonable indemnity. (Indenture, Section 1003.) If
they provide this reasonable indemnity, the holders of a majority in principal
amount of the outstanding Indenture Securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any power conferred upon the Trustee. The Trustee is
not obligated to comply with directions that conflict with law or other
provisions of the Indenture. (Indenture, Section 912.)
No holder of Indenture Securities will have any right to institute any
proceeding under the Indenture, or any remedy under the Indenture, unless:
O the holder has previously given to the Trustee written notice of a
continuing event of default under the Indenture;
O the holders of a majority in aggregate principal amount of the
outstanding Indenture Securities of all series have made a written
request to the Trustee, and have offered reasonable indemnity to the
Trustee to institute proceedings; and
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O the Trustee has failed to institute any proceeding for 60 days after
notice and has not received during such period any direction from the
holders of a majority in aggregate principal amount of the outstanding
Indenture Securities, inconsistent with the written request of holders
referred to above.
(Indenture, Section 907.) However, these limitations do not apply to a suit by a
holder of an Indenture Security for payment of the principal, premium, if any,
or interest on the Indenture Security on or after the applicable due date.
(Indenture, Section 908.)
Oncor will provide to the Trustee an annual statement by an appropriate
officer as to Oncor's compliance with all conditions and covenants under the
Indenture. (Indenture, Section 705.)
MODIFICATION AND WAIVER
Without the consent of any holder of Indenture Securities, Oncor and the
Trustee may enter into one or more supplemental indentures for any of the
following purposes:
O to evidence the assumption by any permitted successor of the covenants
of Oncor in the Indenture and in the Indenture Securities;
O to add one or more covenants or other provisions for the benefit of
the holders of all or any series or tranche of Indenture Securities,
or to surrender any right or power conferred upon Oncor;
O to add additional events of default under the Indenture for all or any
series of Indenture Securities;
O to change or eliminate or add any provision to the Indenture;
provided, however, if the change will adversely affect the interests
of the holders of Indenture Securities of any series in any material
respect, the change, elimination or addition will become effective
only:
(1) when the consent of the holders of Indenture Securities of such
series has been obtained in accordance with the Indenture or
(2) when no Indenture Securities of the affected series remain
outstanding under the Indenture;
O to provide additional security for any Indenture Securities;
O to establish the form or terms of Indenture Securities of any other
series as permitted by the Indenture;
O to provide for the authentication and delivery of bearer securities
with or without coupons;
O to evidence and provide for the acceptance of appointment by a
separate or successor Trustee or co-trustee;
O to provide for the procedures required for use of a noncertificated
system of registration for the Indenture Securities of all or any
series;
O to change any place where principal, premium, if any, and interest
shall be payable, Indenture Securities may be surrendered for
registration of transfer or exchange and notices to Oncor may be
served;
O to amend and restate the Indenture as originally executed and as
amended from time to time, with such additions, deletions and other
changes that do not adversely affect the interests of the holders of
Indenture Securities of any series in any material respect;
O to cure any ambiguity or inconsistency; or
O after the Release Date, to amend the Indenture to eliminate any
provisions related to the lien of the Indenture, Mortgaged Property
and Class A Bonds which are no longer applicable.
(Indenture, Section 1301.)
The holders of at least a majority in aggregate principal amount of the
Indenture Securities of all series then outstanding may waive compliance by
Oncor with some restrictive provisions of the Indenture. (Indenture, Section
706.) The holders of not less than a majority in principal amount of the
outstanding Indenture Securities may waive any past default under the Indenture,
except a default in the payment of principal, premium, if any, or interest and
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certain covenants and provisions of the Indenture that cannot be modified or be
amended without the consent of the holder of each outstanding Indenture Security
of any series affected. (Indenture, Section 913.)
The consent of the holders of a majority in aggregate principal amount of
the Indenture Securities of all series then outstanding, considered as one
class, is required for all other modifications to the Indenture. However, if
less than all of the series of Indenture Securities outstanding are directly
affected by a proposed supplemental indenture, then the consent only of the
holders of a majority in aggregate principal amount of the outstanding Indenture
Securities of all series that are directly affected, considered as one class,
will be required. No such amendment or modification may without the consent of
all the Holders of the Indenture Securities of all series then outstanding:
O change the stated maturity of the principal of, or any installment of
principal of or interest on, any debt security, or reduce the
principal amount of any Indenture Security or its rate of interest or
change the method of calculating that interest rate or reduce any
premium payable upon redemption, or change the currency in which
payments are made, or impair the right to institute suit for the
enforcement of any payment on or after the stated maturity of any
Indenture Security;
O create any lien ranking prior to the lien of the Indenture with
respect to more than 10% of the Mortgaged Property or, except as
provided in the Indenture in connection with the Release Date,
terminate the lien of the Indenture on more than 10% of the Mortgaged
Property or deprive any holder of the benefits of the security of the
lien of the Indenture;
O reduce the percentage in principal amount of the outstanding Indenture
Securities of any series the consent of the holders of which is
required for any supplemental indenture or any waiver of compliance
with a provision of the Indenture or any default thereunder and its
consequences, or reduce the requirements for quorum or voting; or
O modify some of the provisions of the Indenture relating to
supplemental indentures, waivers of some covenants and waivers of past
defaults with respect to the Indenture Securities of any series.
A supplemental indenture that changes the Indenture solely for the benefit
of one or more particular series of Indenture Securities, or modifies the rights
of the holders of Indenture Securities of one or more series, will not affect
the rights under the Indenture of the holders of the Indenture Securities of any
other series. (Indenture, Section 1302.)
The Indenture provides that Indenture Securities owned by Oncor or anyone
else required to make payment on the Indenture Securities shall be disregarded
and considered not to be outstanding in determining whether the required holders
have given a request or consent. (Indenture, Section 101.)
Oncor may fix in advance a record date to determine the required number of
holders entitled to give any request, demand, authorization, direction, notice,
consent, waiver or other such act of the holders, but Oncor shall have no
obligation to do so. If Oncor fixes a record date, that request, demand,
authorization, direction, notice, consent, waiver or other act of the holders
may be given before or after that record date, but only the holders of record at
the close of business on that record date will be considered holders for the
purposes of determining whether holders of the required percentage of the
outstanding New Notes (and the Remaining Old Notes) have authorized or agreed or
consented to the request, demand, authorization, direction, notice, consent,
waiver or other act of the holders. For that purpose, the outstanding New Notes
(and the Remaining Old Notes) shall be computed as of the record date.
Any request, demand, authorization, direction, notice, consent, election,
waiver or other act of a holder of any Indenture Security will bind every future
holder of that Indenture Security and the holder of every Indenture Security
issued upon the registration of transfer of or in exchange for that Indenture
Security. A transferee will also be bound by acts of the Trustee or Oncor in
reliance thereon, whether or not notation of that action is made upon the
Indenture Security. (Indenture, Section 106.)
VOTING OF CLASS A BONDS
The Indenture provides that the Trustee will, as holder of Class A Bonds
delivered as the basis for the issuance of Indenture Securities, attend such
meetings of bondholders under the related Class A Mortgage, or deliver its proxy
in connection therewith, as relate to matters with respect to which it, as such
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holder, is entitled to vote or consent. The Indenture provides that, so long as
no event of default under the Indenture has occurred and is continuing, the
Trustee will, as holder of such Class A Bonds, vote or consent (without any
consent or other action by the holders of the Indenture Securities, except as
described in the proviso of paragraph (4) below) in favor of any amendments or
modifications to the Class A Mortgage of substantially the same tenor and effect
as follows:
(1) to modify the 1983 Mortgage to allow Oncor to issue 1983 Mortgage
Bonds up to 70% of the lower of (a) the fair value to Oncor of
the property subject to the lien of the 1983 Mortgage (1983
Mortgaged Property) as of a valuation date specified by Oncor and
(b) the cost of the 1983 Mortgaged Property as of such valuation
date;
(2) to make certain technical amendments to the 1983 Mortgage;
(3) to conform any provision of a Class A Mortgage in all material
respects to the correlative provision of the Indenture, to add to
a Class A Mortgage any provision not otherwise contained therein
which conforms in all material respects to a provision contained
in the Indenture, to delete from a Class A Mortgage any provision
to which the Indenture contains no correlative provision and any
combination of the foregoing; and/or
(4) with respect to any amendments or modifications to any Class A
Mortgage other than those amendments or modifications referred to
in clauses (1) through (3) above, vote all such Class A Bonds
delivered under such Class A Mortgage, or consent with respect
thereto, proportionately with the vote or consent of holders of
all other Class A Bonds outstanding under such Class A Mortgage
the holders of which are eligible to vote or consent, as
evidenced by a certificate delivered by the trustee under such
Class A Mortgage; provided, however, that the Trustee will not
vote in favor of, or consent to, any amendment or modification of
a Class A Mortgage which, if it were an amendment or modification
of the Indenture, would require the consent of holders of
Indenture Securities as described under "Modification and
Waiver," without the prior consent of holders of Indenture
Securities which would be required for such an amendment or
modification of the Indenture. (Indenture, Section 1705.)
As described more fully in "Description of the 1983 Mortgage Bonds -
Modification" below, Oncor may make amendments to, or eliminate certain
covenants in, the 1983 Mortgage with the consent of the holders of 60% of the
outstanding 1983 Mortgage Bonds issued under the 1983 Mortgage. A holder of
Indenture Securities would no longer benefit from such covenants contained in
the 1983 Mortgage should the Trustee vote these 1983 Mortgage Bonds to amend or
eliminate the covenants as described above. Upon the issuance of the Old Notes,
the Trustee held approximately 35% of the outstanding 1983 Mortgage Bonds, and
as of December 20, 2002, the Trustee held approximately 63% of the outstanding
1983 Mortgage Bonds.
RESIGNATION OF A TRUSTEE
The Trustee may resign at any time by giving written notice to Oncor or may
be removed at any time by act of the holders of a majority in principal amount
of all series of Indenture Securities then outstanding delivered to the Trustee
and Oncor. No resignation or removal of the Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by a
successor trustee. So long as no event of default or event which, after notice
or lapse of time, or both, would become an event of default has occurred and is
continuing and except with respect to a trustee appointed by act of the holders,
if Oncor has delivered to the Trustee a resolution of its Board of Directors
appointing a successor trustee and such successor has accepted the appointment
in accordance with the terms of the Indenture, the Trustee will be deemed to
have resigned and the successor will be deemed to have been appointed as trustee
in accordance with the Indenture. (Indenture, Section 1010.)
NOTICES
Notices to holders of New Notes will be given by mail to the addresses of
such holders as they may appear in the security register for New Notes.
(Indenture, Section 108.)
TITLE
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Oncor, the Trustee, and any agent of Oncor or the Trustee, may treat the
person in whose name New Notes are registered as the absolute owner thereof,
whether or not the New Notes may be overdue, for the purpose of making payments
and for all other purposes irrespective of notice to the contrary. (Indenture,
Section 308.)
GOVERNING LAW
The Indenture and the New Notes will be governed by, and construed in
accordance with, the laws of the State of New York except where otherwise
required by law. (Indenture, Section 114.)
INFORMATION ABOUT THE TRUSTEE
The Trustee under the Indenture is The Bank of New York. In addition to
acting as Trustee, The Bank of New York also acts as the Mortgage Trustee. The
Bank of New York also acts, and may act, as trustee under various other
indentures, trusts and guarantees of Oncor and its affiliates. The Bank of New
York will also act as the Exchange Agent. Oncor and its affiliates maintain
deposit accounts and credit and liquidity facilities and conduct other banking
transactions with the trustee in the ordinary course of their businesses.
BOOK-ENTRY
The certificates representing the New Notes will be issued in fully
registered form, without coupons. The New Notes will be deposited with, or on
behalf of, DTC, and registered in the name of Cede & Co., as DTC's nominee in
the form of one or more global certificates or will remain in the custody of the
Trustee pursuant to a FAST Balance Certificate Agreement between DTC and the
Trustee. Upon the issuance of the global certificates, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such global certificates to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in a global certificate will be limited to persons who have
accounts with DTC (participants) or persons who hold interests through
participants. Ownership of beneficial interests in a global certificate will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
global certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the New Notes represented by such global certificate
for all purposes under the Indenture and the New Notes. No beneficial owner of
an interest in a global certificate will be able to transfer the interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the Indenture and, if applicable, those of Euroclear and Clearstream
Banking.
Payments of the principal of and interest on a global certificate will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither Oncor, the Trustee nor any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global certificate or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests. DTC or its nominee, upon receipt of any payment of principal or
interest in respect of a global certificate, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such global certificate as shown on the records of
DTC or its nominee. Oncor also expects that payments by participants to owners
of beneficial interests in such global certificate held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of a
certificated New Note for any reason, including to sell New Notes to persons in
jurisdictions which require such delivery of such New Notes or to pledge such
New Notes, such holder must transfer its interest in a global certificate in
accordance with DTC's applicable procedures, the procedures set forth in the
Indenture and, if applicable, those of Euroclear and Clearstream Banking.
DTC will take any action permitted to be taken by a holder of New Notes
only at the direction of one or more participants to whose account the DTC
interests in a global certificate is credited and only in respect of such
66
portion of the aggregate principal amount of the New Notes as to which such
participant or participants has or have given such direction. However, if there
is an event of default under the New Notes, DTC will exchange a global
certificate for certificated New Notes, which it will distribute to its
participants.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "Clearing
Agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly (indirect participants). The rules applicable to DTC and
its participants are on file with the SEC.
Although DTC, Euroclear and Clearstream Banking are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the New
Notes represented by global certificates among their respective participants,
they are under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither Oncor nor the
Trustee will have any responsibility for the performance by DTC, Euroclear or
Clearstream Banking or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as a depositary for a
global certificate and a successor depositary is not appointed by Oncor within
90 days, Oncor will issue certificated New Notes in exchange for a global
certificate.
Oncor will make all payments of principal and interest in immediately
available funds.
Secondary trading in long-term bonds and notes of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, beneficial
interests in the New Notes that are not certificated New Notes will trade in
DTC's Same-Day Funds Settlement System until maturity. Therefore, the secondary
market trading activity in such interests will settle in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on trading activity in the New Notes.
The information under this sub-caption "Book-Entry" concerning DTC and
DTC's book-entry system has been obtained from sources that Oncor believes to be
reliable, but Oncor does not take any responsibility for the accuracy of this
information.
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DESCRIPTION OF THE 1983 MORTGAGE BONDS
The first mortgage bonds were issued on May 6, 2002 under the 1983
Mortgage. All first mortgage bonds issued or to be issued under the 1983
Mortgage, including the first mortgage bonds delivered to the Trustee on May 6,
2002 in connection with the issuance of the Old Notes, are collectively referred
to in this prospectus as the 1983 Mortgage Bonds. Material terms of the 1983
Mortgage Bonds are summarized below. Whenever particular provisions or defined
terms in the 1983 Mortgage are referred to under this DESCRIPTION OF 1983
MORTGAGE BONDS, such provisions or defined terms are incorporated by reference
in this prospectus.
The 1983 Mortgage Bonds are, or will be, secured by a first mortgage lien
on substantially all of Oncor's property as described below under "Security and
Priority." All 1983 Mortgage Bonds are equally secured and rank equally with
respect to each other.
SECURITY AND PRIORITY
The 1983 Mortgage Bonds are secured by a first lien on substantially all of
Oncor's property acquired from US Holdings on January 1, 2002, other than cash
and securities (except those specifically deposited); equipment, materials or
supplies held for sale or other disposition; any fuel and similar consumable
materials and supplies; automobiles, other vehicles, aircraft and vessels;
timber, minerals, mineral rights and royalties; receivables, contracts, leases
and operating agreements; electric energy, gas, water, steam, ice and other
products for sale, distribution or other use; natural gas wells; and gas
transportation lines or other property used in the sale of natural gas to
customers or to a natural gas distribution or pipeline company, up to the point
of connection with any distribution network.
In addition, the first mortgage lien is subject to certain encumbrances,
including tax and construction liens, purchase money liens and certain other
exceptions.
The 1983 Mortgage contains provisions that impose the lien of the 1983
Mortgage on improvements, extensions, replacements and additions to the 1983
Mortgaged Property acquired by Oncor after the date of the 1983 Mortgage, other
than the excepted property described above and subject to pre-existing liens
such as purchase money mortgages and other liens or defects in title. However,
if Oncor consolidates or merges with or conveys or transfers all or
substantially all of the mortgaged property to another corporation, the lien
created by the 1983 Mortgage will generally not cover the property of the
successor company, other than the property it acquires from Oncor and
improvements, extensions, replacements and additions to that property. (1983
Mortgage, Section 18.03.)
The 1983 Mortgage provides that the Mortgage Trustee shall have a lien upon
the 1983 Mortgaged Property, prior to the 1983 Mortgage Bonds, for the payment
of its reasonable compensation and expenses and for indemnity against certain
liabilities. (1983 Mortgage, Section 19.09.)
ISSUANCE OF ADDITIONAL 1983 MORTGAGE BONDS
The maximum principal amount of 1983 Mortgage Bonds that may be issued
under the 1983 Mortgage is unlimited. 1983 Mortgage Bonds of any series may be
issued from time to time on the basis of:
(1) 70% of qualified property additions after adjustments to offset
retirements;
(2) retirement of 1983 Mortgage Bonds or certain prior lien bonds;
and/or
(3) deposits of cash.
With certain exceptions, in the case of (2) above, the issuance of 1983
Mortgage Bonds must meet an earnings test. The adjusted net earnings before
income taxes for 12 out of the preceding 15 months must be at least twice the
annual interest requirements on all 1983 Mortgage Bonds at the time outstanding,
including the additional issuance and all other senior ranking indebtedness. In
general, interest on variable interest bonds, if any, is calculated using the
average rate in effect during the 12 month period.
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Property additions generally include electric, gas, steam and/or hot water
utility property but not fuel, securities, automobiles, other vehicles or
aircraft, or property used principally for the production or gathering of
natural gas.
The 1983 Mortgage contains certain restrictions upon the issuance of 1983
Mortgage Bonds against property additions subject to prior liens. (1983
Mortgage, Sections 1.04 to 1.07 and 3.01 to 7.01.)
It is expected that the 1983 Mortgage Bonds to be delivered to the Trustee
will be issued upon the basis of the retirement of 1983 Mortgage Bonds.
RELEASE AND SUBSTITUTION OF PROPERTY
Property subject to the first mortgage lien may be released upon the basis
of:
(1) the deposit of cash or, to a limited extent, purchase money
mortgages;
(2) property additions, after making adjustments in certain cases to
offset retirement and after making adjustments for prior lien
bonds outstanding against property additions; and/or
(3) waiver of the right to issue 1983 Mortgage Bonds,
in each case without applying any earnings test.
Cash may be withdrawn upon the bases stated in (2) and (3) above.
When property released is not funded property, property additions used to
effect the release may be available as credits under the 1983 Mortgage. Similar
provisions are in effect as to cash proceeds of such property. The 1983 Mortgage
contains special provisions with respect to certain prior lien bonds deposited
and disposition of moneys received on deposited prior lien bonds. (1983
Mortgage, Sections 1.05, 7.02, 7.03, 9.05, 10.01 to 10.04 and 13.03 to 13.09.)
DIVIDEND RESTRICTIONS
The 1983 Mortgage provides that Oncor may declare or pay dividends (other
than dividends payable solely in shares of its common stock) on any shares of
its common stock only out of the unreserved and unrestricted retained earnings
and will not make any such declaration or payment when it is insolvent, or when
the payment thereof would render Oncor insolvent. (1983 Mortgage, Section 9.07.)
The amount restricted is subject to being increased or decreased on the
basis of various factors, and any restricted retained earnings can be otherwise
used by Oncor.
SPECIAL PROVISIONS FOR RETIREMENT OF 1983 MORTGAGE BONDS
If mortgaged property is condemned or sold (other than in a project to be
jointly owned by Oncor and others) to any governmental authority resulting in
the receipt of $50,000,000 or more as proceeds, Oncor (subject to certain
conditions) must apply such proceeds, less certain deductions, to the retirement
of 1983 Mortgage Bonds. (1983 Mortgage, Section 9.14.)
MODIFICATION
The rights of bondholders may be modified with the consent of holders of
60% of all 1983 Mortgage Bonds outstanding, or, if less than all series of 1983
Mortgage Bonds are adversely affected, the consent of the holders of 60% of the
1983 Mortgage Bonds adversely affected and (unless 1983 Mortgage Bonds issued
prior to 1989 are retired or the holders of those 1983 Mortgage Bonds otherwise
consent) of the holders of a majority of all 1983 Mortgage Bonds. In general, no
modification of the terms of payment of principal, premium, if any, or interest
and no modification affecting the first lien or reducing the percentage required
for modification, is effective against any bondholder without such holder's
consent. (1983 Mortgage, Article XXI.)
69
VOTING OF 1983 MORTGAGE BONDS HELD BY THE TRUSTEE
The Trustee will, as holder of the 1983 Mortgage Bonds, attend such
meetings of bondholders under the 1983 Mortgage, or deliver its proxy in
connection therewith, as to matters with respect to which it is entitled to vote
or consent. See DESCRIPTION OF THE NOTES - Voting of Class A Bonds.
DEFAULTS AND NOTICE OF DEFAULTS
"Defaults" are defined in the 1983 Mortgage as:
O default in payment of principal;
O default for 60 days in payment of interest or an installment of any
fund required to be applied to the purchase or redemption of any 1983
Mortgage Bonds;
O default in payment of principal or interest with respect to certain
prior lien bonds;
O certain events in bankruptcy, insolvency or reorganization; and
O default in other covenants for 90 days after notice. (1983 Mortgage,
Section 15.01.)
The Mortgage Trustee may withhold notice of default, except in the case of
a default in the payment of principal, interest or an installment of any fund
required to be applied to the purchase or redemption of any 1983 Mortgage Bonds,
if it determines that doing so is in the best interest of the bondholders. (1983
Mortgage, Section 15.02.)
The Mortgage Trustee or the holders of 25% of the 1983 Mortgage Bonds may
declare the principal and interest due and payable on default, but a majority
may annul such declaration if such default has been cured. (1983 Mortgage,
Section 15.03.)
No holder of 1983 Mortgage Bonds may enforce the lien of the 1983 Mortgage
without giving the Mortgage Trustee written notice of a default and unless the
holders of 25% of the 1983 Mortgage Bonds have requested the Mortgage Trustee to
act and have offered it reasonable opportunity to act and indemnity satisfactory
to it against the costs, expenses and liabilities to be incurred thereby and the
Mortgage Trustee shall have failed to act. (1983 Mortgage, Section 15.16.)
The holders of a majority of the 1983 Mortgage Bonds may direct the time,
method and place of conducting any proceedings for any remedy available to the
Mortgage Trustee or exercising any trust or power conferred on the Mortgage
Trustee. (1983 Mortgage, Section 15.07.)
The Mortgage Trustee is not required to risk its funds or incur personal
liability if there is reasonable ground for believing that repayment is not
reasonably assured. (1983 Mortgage, Section 19.08.)
SATISFACTION AND DISCHARGE
Upon Oncor making due provision for the payment of all of the 1983 Mortgage
Bonds and paying all other sums due under the 1983 Mortgage, the 1983 Mortgage
will cease to be of further effect and may be discharged. (1983 Mortgage,
Article XX.)
ANNUAL REPORT TO THE MORTGAGE TRUSTEE
Oncor must give the Mortgage Trustee an annual statement as to whether or
not Oncor has fulfilled its obligations under the 1983 Mortgage throughout the
preceding calendar year.
70
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of exchanging Old Notes for New Notes and of the ownership and
disposition of the New Notes as of the date hereof and represents the opinion of
Thelen Reid & Priest LLP, Oncor's counsel, insofar as it relates to matters of
law or legal conclusions. Except where noted, it deals only with New Notes held
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended, and does not deal with special situations, such as
those of dealers or traders in securities or currencies, banks, financial
institutions, tax-exempt organizations, life insurance companies, real estate
investment trusts, regulated investment companies, persons holding New Notes as
a part of a hedging or conversion transaction or a straddle, persons who mark to
market their securities, persons whose functional currency is not the United
States dollar or former United States citizens or long-term residents who are
subject to special rules on account of their loss of United Stated citizenship
or resident alien status. In addition, this discussion does not address the tax
consequences to persons who purchased Old Notes other than pursuant to their
initial issuance and distribution, and who acquire New Notes other than in this
exchange offer. It also does not include any description of any alternative
minimum tax consequences or the tax laws of any state, local or foreign
jurisdiction.
The discussion below is based upon the provisions of the Internal Revenue
Code, Treasury Regulations promulgated thereunder, and administrative rulings
and judicial decisions under the Internal Revenue Code as of the date hereof,
all of which may be repealed, revoked or modified at any time, with either
forward-looking or retroactive effect, so as to result in United States federal
income tax consequences different from those discussed below.
PROSPECTIVE HOLDERS OF NEW NOTES ARE ADVISED TO CONSULT WITH THEIR TAX
ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF NEW NOTES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR OTHER TAX LAWS.
As used herein, a "United States Holder" means a beneficial owner of an Old
Note or a New Note that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate, the
income of which is subject to United States federal income taxation regardless
of its source, or a trust, the administration of which is subject to the primary
supervision of a court within the United States and for which one or more United
States persons have the authority to control all substantial decisions. As used
herein, the term "Non-United States Holder" means a beneficial owner of an Old
Note or a New Note that is not a United States Holder.
EXCHANGE OF OLD NOTES FOR NEW NOTES
An exchange of Old Notes for New Notes in this exchange offer will not
constitute a taxable exchange of the notes for United States federal income tax
purposes. Rather, the New Notes will be treated as a continuation of the Old
Notes. As a result, a holder will not recognize any income, gain or loss for
United States federal income tax purposes upon the exchange of Old Notes for New
Notes, and the holder will have the same tax basis and holding period in the
holder's New Notes as the holder had in the Old Notes immediately before the
exchange.
UNITED STATES HOLDERS
PAYMENTS OF INTEREST
Stated interest on a New Note will generally be taxable to a United States
Holder as ordinary income at the time it is paid or accrued in accordance with
the holder's method of accounting for tax purposes.
SALE, EXCHANGE AND RETIREMENT OF THE NEW NOTES
Upon the sale, exchange or retirement of New Notes (including a deemed
disposition for United States federal income tax purposes), a United States
Holder will recognize gain or loss equal to the difference between (i) the
amount realized upon the sale, exchange or retirement, other than amounts
attributable to accrued but unpaid interest, and (ii) the holder's adjusted tax
basis in the New Notes. The holder's adjusted tax basis in the New Notes will
71
be, in general, its initial purchase price for the Old Notes it is exchanging.
The gain or loss upon the sale, exchange or retirement of the New Notes will be
capital gain or loss and will be long-term capital gain or loss if at the time
of sale, exchange or retirement, the New Notes are treated as having been held
for more than one year. Under current law, the deductibility of capital losses
is subject to limitations. Capital gain of a non-corporate United States Holder
is generally taxed at a maximum rate of 20% where the property is held for more
than one year, and at a maximum rate of 18% where the property is purchased
after December 31, 2000, and held for more than five years.
NON-UNITED STATES HOLDERS
NON-UNITED STATES HOLDERS NOT ENGAGED IN A TRADE OR BUSINESS WITHIN THE
UNITED STATES
Payments of Interest
Except as described in the following paragraph, a Non-United States Holder
will not be subject to federal income tax on interest received on the New Notes
if the interest is not effectively connected with a trade or business that the
holder conducts within the United States. To obtain this tax-free treatment, the
holder (or a financial institution acting on behalf of the holder) must file a
statement with Oncor or Oncor's paying agent confirming that the holder is the
beneficial owner of the New Notes and is not a United States person. The holder
should make the statement on IRS Form W-8BEN, which requires the holder to
certify, under penalties of perjury, the holder's name, address and status as a
non-United States person. Alternatively, a financial institution holding the New
Notes on behalf of the holder may file a statement confirming the holder's
status as a non-United States person if the financial institution is in
possession of documentary evidence of the non-United States status, as
prescribed in the Treasury Regulations. However, if Oncor has actual knowledge
or reason to know that the beneficial owner of the New Notes is a United States
Holder, Oncor must disregard any certificate or statement to the contrary and
withhold federal income tax.
The exemption described above is not available to a Non-United States
Holder that (a) owns 10% or more of Oncor's stock, either actually or by
application of constructive ownership rules, or (b) is a controlled foreign
corporation related to Oncor through stock ownership. Oncor will withhold
federal income tax at the rate of 30% (or lower treaty rate, if applicable) in
the case of interest payments to holders described in this paragraph.
Sale, Exchange and Retirement of the New Notes
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain recognized on a sale, exchange or
retirement of a New Note (including a deemed disposition for United States
federal income tax purposes) unless (1) the gain is effectively connected with
the holder's trade or business in the United States (discussed below); or (2) in
the case of a Non-United States Holder who is an individual and holds the New
Note as a capital asset, the holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met. However, any amount attributable to accrued but unpaid
interest on the New Note will be treated in the same manner as payments of
interest on the New Note made to the Non-United States Holder, as described
above.
NON-UNITED STATES HOLDERS ENGAGED IN A TRADE OR BUSINESS WITHIN THE UNITED
STATES
Payments of Interest
Interest paid on a New Note that is effectively connected with the conduct
by a Non-United States Holder of a trade or business in the United States is
generally taxed at the graduated rates that are applicable to United States
persons. In the case of a Non-United States Holder that is a corporation,
effectively connected earnings and profits (which may include effectively
connected interest received on the New Notes) that are not currently distributed
may also be subject to the United States federal branch profits at a 30% rate,
unless the tax is reduced or eliminated by an applicable income tax treaty.
Oncor will not withhold United States federal income tax on interest paid on a
New Note to a Non-United States Holder if the holder furnishes Oncor with IRS
Form W-8ECI establishing that the interest is effectively connected. If a
Non-United States Holder engaged in a trade or business within the United States
receives interest that is not effectively connected with the trade or business,
72
the interest will be taxed in the manner described above in the case of
Non-United States Holders who are not engaged in a trade or business within the
United States.
Sale, Exchange or Retirement of the New Notes
Gain derived by a Non-United States Holder from the sale or other
disposition (including a deemed disposition for United States federal income tax
purposes) of a New Note that is effectively connected with the conduct by the
holder of a trade or business in the United States is generally taxed at the
graduated rates that are applicable to United States persons. In the case of a
Non-United States Holder that is a corporation, effectively connected income may
also be subject to the United States federal branch profits tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments to United States Holders of interest on, and the proceeds from the
sale, retirement or other disposition of New Notes are subject to information
reporting unless the holder establishes an exemption.
Payments to United States Holders of interest on, or the proceeds from the
sale, retirement, or other disposition of the New Notes may be subject to
"backup withholding" tax if (a) the holder fails to certify his or her correct
social security number or other taxpayer identification number ("TIN") to the
payor responsible for backup withholding (for example, the Holder's securities
broker) on IRS Form W-9 or a substantially similar form signed under penalty of
perjury, or (b) the Internal Revenue Service notifies the payor that the holder
is subject to backup withholding due to the holder's failure to properly report
interest and dividends on his or her tax return. The backup withholding rate for
2002 and 2003 is 30%; for 2004 and 2005, 29%; for 2006 though 2010, 28%; and for
2011 and later years, 31%.
Backup withholding does not apply to interest payments made to exempt
recipients, such as corporations.
Non-United States Holders will be subject to backup withholding and
information reporting with respect to payments of principal or interest on the
New Notes unless (i) the holder provides a properly completed and signed IRS
Form W-8BEN (or acceptable substitute) and the payor does not have actual
knowledge or reason to know that the form is incorrect, or (ii) the beneficial
owner otherwise establishes an exemption.
In addition, Non-United States Holders generally will not be subject to
information reporting or backup withholding with respect to payments of
principal or interest on the New Notes paid or collected by a foreign office of
a custodian, nominee or other foreign agent on behalf of the holder, or with
respect to the payment of the proceeds of the sale of New Notes to the holder by
a foreign office of a broker. If, however, the foreign office acting for a
Non-United States Holder is an office of a United States person, a controlled
foreign corporation or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a United States trade or
business, or a foreign partnership with certain connections to the United
States, payments of principal, interest or proceeds will be subject to
information reporting unless (i) the custodian, nominee, agent or broker has
documentary evidence that the beneficial owner is not a United States person and
certain other conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption. Payments that are subject to information reporting as
described in the preceding sentence will not be subject to backup withholding
unless the payor has actual knowledge or reason to know that the payee is a
United States person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules generally will be allowed as a credit or a refund
against the holder's United States federal income tax liability, if certain
required information is provided to the Internal Revenue Service.
73
PLAN OF DISTRIBUTION
As discussed under THE EXCHANGE OFFER in this prospectus, based on an
interpretation of the staff of the SEC, New Notes issued pursuant to this
exchange offer may be offered for resale and resold or otherwise transferred by
a holder of such New Notes (other than any such holder which is an "affiliate"
of Oncor within the meaning of Rule 405 under the Securities Act and except as
otherwise discussed below with respect to holders which are broker-dealers)
without compliance with the registration and prospectus delivery requirements of
the Securities Act so long as such New Notes are acquired in the ordinary course
of such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. Oncor has agreed that, for a period of 90 days after the
consummation of this exchange offer, Oncor will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale.
Oncor will not receive any proceeds from any sale of New Notes by
broker-dealers.
New Notes received by broker-dealers for their own account pursuant to this
exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes that
were received by it for its own account pursuant to this exchange offer and any
broker or dealer that participated in a distribution of such New Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The accompanying Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the consummation of the registered exchange
offer, Oncor will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. Oncor has agreed with the Initial
Purchasers of the Old Notes to pay expenses incident to this exchange offer
(including the expenses of one counsel for the holders of the Old Notes) other
than commissions or commissions of any brokers or dealers and will indemnify the
holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
By acceptance of this exchange offer, each broker-dealer that receives New
Notes for its own account pursuant to this exchange offer agrees that, upon
receipt of notice from Oncor of the happening of any event which makes any
statement in this prospectus untrue in any material respect or requires the
making of any changes in the prospectus in order to make the statements therein
not misleading (which notice Oncor agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of this prospectus until
Oncor has amended or supplemented this prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented prospectus
to such broker-dealer.
The interpretation of the staff of the SEC referred to in the first
paragraph of this section does not apply to, and this prospectus may not be used
in connection with, the resale by any broker-dealer of any New Notes received in
exchange for an unsold allotment of Old Notes purchased directly from Oncor.
74
EXPERTS
The combined financial statements of Oncor as of December 31, 2001 and
2000, and for the three years ended December 31, 2001, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein. Such combined financial statements have
been included in this prospectus in reliance upon the report of such independent
auditors given upon their authority as experts in accounting and auditing.
VALIDITY OF THE NEW NOTES
Thelen Reid & Priest LLP, New York, New York, and Hunton & Williams,
Dallas, Texas, will pass upon the validity of the New Notes for Oncor. However,
all matters of Texas law will be passed upon only by Hunton & Williams, Dallas,
Texas. At November 30, 2002, the fair market value of securities of TXU owned by
attorneys at each of the firms of Hunton & Williams and Thelen Reid & Priest LLP
participating in the representation of Oncor in connection with the preparation
of this prospectus and the registration statement was approximately $163,750 and
$95,000, respectively. Robert A. Wooldridge, a partner at Hunton & Williams, is
a member of the governing board of certain subsidiaries of TXU Corp., including
Oncor. Robert J. Reger, Jr., a partner at Thelen Reid & Priest LLP, is an
officer and a member of the governing board of certain subsidiaries of TXU Corp.
75
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
----
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Independent Auditors' Report......................................... F-2
Statements of Combined Income for the years
ended December 31, 2001, 2000 and 1999............................... F-3
Statements of Combined Cash Flows for the years
ended December 31, 2001, 2000 and 1999............................... F-4
Combined Balance Sheets as of December 31, 2001 and 2000............. F-5
Statements of Combined Shareholder's Equity for the years
ended December 31, 2001, 2000 and 1999............................... F-6
Notes to Financial Statements........................................ F-7
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Condensed Statements of Consolidated Income for the
three and nine months ended September 30, 2002 and 2001.............. F-20
Condensed Statements of Consolidated Comprehensive Income for the
three and nine months ended September 30, 2002 and 2001.............. F-20
Condensed Statements of Consolidated Cash Flows for the
three and nine months ended September 30, 2002 and 2001.............. F-21
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001................................................ F-22
Notes to Financial Statements........................................ F-23
F-1
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.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 15, 2002
F-2
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.
F-3
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.
F-4
ONCOR ELECTRIC DELIVERY COMPANY
COMBINED BALANCE SHEETS
DECEMBER 31,
--------------------
2001 2000
---- ----
ASSETS MILLIONS OF DOLLARS
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.
F-5
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF COMBINED SHAREHOLDER'S EQUITY
DECEMBER 31,
------------------------------------------
2001 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.
F-6
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 (PUCT).
This business separation plan and the March 2000 application to the PUCT 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 PUCT 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).
The diagrams below summarize TXU's principal US legal entities and their
relationships before and after the restructuring.
F-7
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
[Graphic Omitted]
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.
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
F-8
$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
business' 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 PUCT.
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.
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.
F-9
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,
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.
F-10
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 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.
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 PUCT is approved. See Regulatory
Settlement Plan below.
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan with the PUCT 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 PUCT 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 PUCT, 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
F-11
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.
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 PUCT 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 PUCT, 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 PUCT 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 PUCT 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 PUCT'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 PUCT 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 PUCT 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 PUCT's financing order, affirmed other
aspects of the PUCT's financing order, and ordered the case remanded to the PUCT
F-12
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 PUCT for determination of the final amount of permitted
securitization. The PUCT 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 PUCT. If the regulatory settlement plan described above is
approved by the PUCT, 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
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 PUCT'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 PUCT. 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 PUCT 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
======== ========
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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.
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 PUCT 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:
Current - Federal.................................................... 1 2 6
------ ----- -----
Total ................................................. $ 119 $ 120 $ 106
====== ===== =====
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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%
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.
F-15
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
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 post-retirement
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 the final actuarial
determinations, resulting in an increase or decrease in advances to or from
affiliates.
F-16
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
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 operation 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.
F-17
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 PUCT. REP certificates granted by the PUCT are subject to
suspension and revocation for significant violation of the Public Utility
Regulatory Act and PUCT 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 PUCT. Additionally, the PUCT'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.
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.
F-18
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.
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
======= =======
F-19
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2002 2001 2002 2001
--------- -------- -------- --------
MILLIONS OF DOLLARS
Operating revenues................................................ $ 557 $ 650 $ 1,551 $ 1,655
--------- -------- -------- --------
Operating expenses................................................
Operation and maintenance................................... 193 204 560 606
Depreciation and amortization............................... 65 60 196 178
Income taxes................................................ 47 65 109 94
Taxes other than income..................................... 97 139 284 388
--------- -------- -------- --------
Total operating expenses.............................. 402 468 1,149 1,266
--------- -------- -------- --------
Operating income.................................................. 155 182 402 389
Interest income - affiliates...................................... 11 - 34 -
Other income...................................................... - 1 2 4
Other deductions.................................................. 1 2 4 5
Nonoperating income taxes......................................... 3 - 9 -
Interest expense and other charges................................ 66 69 193 212
--------- -------- -------- --------
Net income $ 96 $ 112 $ 232 $ 176
========= ======== ======== ========
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2002 2001 2002 2001
--------- -------- -------- --------
MILLIONS OF DOLLARS
Net income....................................................... $ 96 $ 112 $ 232 $ 176
--------- -------- -------- --------
Other comprehensive income (loss) -
Net change during period, net of tax effect:
Cash flow hedges:
Net change in fair value of derivatives
(net of tax benefit of $ -, $ -, $14, and $ -)..... - - (25) -
--------- -------- -------- --------
Total.............................................. - - (25) -
--------- -------- -------- --------
Comprehensive income............................................. $ 96 $ 112 $ 207 $ 176
========= ======== ======== ========
See Notes to Financial Statements.
F-20
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2001
MILLIONS OF DOLLARS
Cash flows - operating activities
Net income................................................................................ $ 232 $ 176
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization....................................................... 216 193
Deferred income taxes and investment tax credits - net.............................. 125 (23)
Changes in operating assets and liabilities............................................... (511) 122
-------- --------
Cash provided by operating activities............................................... 62 468
-------- --------
Cash flows - financing activities
Issuances of long-term debt............................................................... 2,200 400
Retirements/repurchases of debt........................................................... (580) (175)
Repurchase of common stock................................................................ (100) (239)
Net issuances of commercial paper......................................................... 103 -
Net change in advances from affiliates.................................................... (1,245) 34
Debt premium, discount, financing and reacquisition expense............................... (42) (4)
-------- ---------
Cash provided by financing activities............................................... 336 16
-------- --------
Cash flows - investing activities
Capital expenditures...................................................................... (389) (497)
Other..................................................................................... (43) 12
--------- --------
Cash used in investing activities................................................... (432) (485)
-------- --------
Net change in cash and cash equivalents......................................................... (34) (1)
Cash and cash equivalents - beginning balance................................................... 35 22
-------- --------
Cash and cash equivalents - ending balance...................................................... $ 1 $ 21
======== ========
See Notes to Financial Statements.
F-21
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------------------------
MILLIONS OF DOLLARS
ASSETS
Current assets
Cash and cash equivalents................................................. $ 1 $ 35
Accounts receivable
Affiliates.......................................................... 277 -
Trade............................................................... 69 131
Materials and supplies inventories - at average cost...................... 39 38
Due from TXU Energy....................................................... 197 170
Other current assets...................................................... 58 36
-------- --------
Total current assets................................................ 641 410
Investments............................................................... 54 54
Property, plant and equipment - net....................................... 6,003 5,802
Due from TXU Energy....................................................... 457 617
Regulatory assets - net................................................... 1,757 1,605
Deferred debits and other assets.......................................... 36 7
-------- --------
Total assets........................................................ $ 8,948 $ 8,495
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable - commercial paper.......................................... $ 103 $ -
Long-term debt due currently.............................................. 722 370
Advances from affiliates.................................................. 30 108
Accounts payable
Affiliates.......................................................... - 43
Trade............................................................... 36 50
Customer deposits......................................................... 2 81
Taxes accrued............................................................. 140 170
Accrued interest.......................................................... 75 54
Other current liabilities................................................. 83 130
-------- --------
Total current liabilities........................................... 1,191 1,006
Accumulated deferred income taxes............................................... 1,317 1,204
Investment tax credits.......................................................... 75 79
Other deferred credits and noncurrent liabilities............................... 216 223
Long-term debt, less amounts due currently...................................... 3,341 3,282
Contingencies (Note 6)
Shareholder's equity (Note 4)................................................... 2,808 2,701
-------- --------
Total liabilities and shareholder's equity................................ $ 8,948 $ 8,495
======== ========
See Notes to Financial Statements.
F-22
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 (T&D) 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.
Oncor is a regulated utility engaged in the transmission and distribution
of electric energy in the north-central, eastern and western parts of Texas.
Oncor's transmission customers consist of municipalities, electric cooperatives
and other distribution companies. Oncor's distribution customers consist of
approximately 35 retail electric providers (REPs) in Oncor's certificated
service area, including a subsidiary REP of TXU Energy Company LLC (TXU Energy),
which is another wholly-owned subsidiary of US Holdings. Revenues from TXU
Energy represent the substantial majority of Oncor's revenues. Oncor is managed
as a single, integrated electric delivery business; consequently, there are no
separate reportable business segments.
BUSINESS RESTRUCTURING - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses as of January 1, 2002. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan as approved by the Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
o its electric T&D assets to Oncor;
o its unregulated power generation assets to subsidiaries of TXU Energy;
and
o its retail customers to an unregulated subsidiary REP of TXU Energy.
Also, on January 1, 2002 the T&D assets of TXU SESCO, a subsidiary of TXU
Corp., were transferred to Oncor.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001 (Business Separation Agreement).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The T&D operations that were combined to form
Oncor were part of fully integrated public utility businesses of subsidiaries of
TXU Corp., under common ownership and control for the periods presented prior to
January 1, 2002. The financial statements of Oncor as of December 31, 2001 and
for the three and nine months ended September 30, 2001 present the financial
position, results of operations and cash flows of the combined T&D operations of
US Holdings and TXU SESCO. 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 had been previously integrated with
Oncor's regulated operations, were transferred from Oncor to TXU Energy.
The prior year financial information for Oncor includes information
derived from the historical financial statements of US Holdings. Reasonable
allocation methodologies were used to unbundle the financial statements of US
Holdings between its power generation and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
F-23
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate revenues, common expenses,
assets and liabilities between US Holdings' power generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Had the unbundled T&D operations of US Holdings actually existed as a separate
entity, its results of operations could have differed materially from those
included in the historical financial statements presented herein.
The condensed consolidated financial statements of Oncor have been
prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP). In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations and financial position have been
included therein. Certain information and footnote disclosures normally included
in annual consolidated financial statements prepared in accordance with US GAAP
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The results of operations for an interim period may not
give a true indication of results for the full year. Certain previously reported
amounts have been reclassified to conform to current classifications. All
intercompany items and transactions between the combined companies have been
eliminated. All dollar amounts in the financial statements and notes to
financial statements are stated in millions of US dollars unless otherwise
indicated.
REVENUE RECOGNITION -- Electric T&D fees are recognized when services are
provided to customers on the basis of periodic cycle meter readings and include
an estimated accrual for the value of electricity delivery fees from the meter
reading date to the end of the period.
INCOME TAXES - Oncor is included in the consolidated federal income tax
return of TXU Corp. and its subsidiary companies. Oncor uses the separate return
method to compute its income tax provision. Because of the alternative minimum
tax (AMT), differences may arise between the consolidated federal income tax
liability of TXU Corp. and the aggregated separate tax liability of the group
members. In instances where this occurs, the difference is allocated pro-rata to
those companies that generated AMT on a separate company basis.
CHANGES IN ACCOUNTING STANDARDS - Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," became
effective on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units, and the discontinuance of goodwill amortization. The
amortization of Oncor's existing goodwill ($0.8 million annually) ceased
effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Oncor completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill. If goodwill amortization had ceased
effective January 1, 2001, there would not have been a material effect on net
income for the three or nine month periods ended September 30, 2001. The annual
test for impairment will be made as of October 1 each year.
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be
effective on January 1, 2003. SFAS No. 143 requires the recognition of a fair
value liability for any retirement obligation associated with long-lived assets.
SFAS No. 143 also requires additional disclosures. Oncor will conform its
accounting for asset retirement obligations to the new standard effective with
2003 reporting.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective 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, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations. The adoption of SFAS No. 144 by
Oncor has not affected its financial position or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," was issued in April 2002
and will be effective on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Any gain or loss on the early extinguishment of debt
that was classified as an extraordinary item in prior periods in accordance with
F-24
SFAS No. 4 will be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and will be effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
3. FINANCING ARRANGEMENTS
CREDIT FACILITIES - TXU Corp., US Holdings, Oncor and TXU Energy had
credit facilities (some of which provide for long-term borrowings) available as
follows:
CREDIT FACILITIES
------------------------------------------------------------
AT SEPTEMBER 30, 2002 AT NOVEMBER 5, 2002(a)
--------------------- ----------------------
AUTHORIZED FACILITY LETTERS CASH LETTERS CASH
FACILITY EXPIRATION DATE BORROWERS LIMIT OF CREDIT BORROWINGS OF CREDIT BORROWINGS
-------- --------------- ---------- -------- --------- ---------- --------- ----------
(MILLIONS OF DOLLARS)
364-Day Revolving Credit Facility.. April 2003 US Holdings,
TXU Energy,
Oncor $ 1,000 $ 81 $ - $ 88 $ 912
Five -Year Revolving Credit
Facility(b)........................ February 2005 US Holdings 1,400 462 - 461 939
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 350 - 500
Standby Liquidity Facility......... November 2002 US Holdings 400 - - - 400
Standby Liquidity Facility......... November 2002 US Holdings,
TXU Energy,
Oncor 400 - - - 400
------- ------- ------- ------- -------
Total (c)..................... $ 3,700 $ 543 $ 350 $ 549 $ 3,151
======= ======= ======= ======= =======
<FN>
- ----------------
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately $2.6
billion in cash against their available credit facilities, none of which is
an obligation of Oncor. These funds and other available cash will be used,
in part, to repay outstanding commercial paper.
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
TXU Corp. was removed as a borrower under this facility effective July 31,
2002.
(c) Supported commercial paper borrowings.
</FN>
On October 30, 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility is intended to fund interim
refinancings of approximately $700 million of maturing secured debt should
market conditions not support a timely, cost effective refinancing. The balance
will be available for general corporate purposes at Oncor.
In July 2002, US Holdings entered into the $400 million Standby Liquidity
Facility that terminates no later than November 30, 2002. In August 2002, US
Holdings, TXU Energy and Oncor entered into the joint $400 million Standby
Liquidity Facility that also expires November 30, 2002. Borrowings of $800
million against those facilities are expected to be repaid no later than the
expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
will be used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the joint
$1.0 billion 364-day revolving credit facility with a group of banks that
terminates in April 2003 but can be extended for one year. This facility is used
for working capital and general corporate purposes. Up to $1.0 billion of
letters of credit may be issued under the facility. This facility and the $500
million three-year revolving credit facility described above replaced the TXU
Corp. and US Holdings $1.4 billion 364-day revolving credit facility that
expired in April 2002.
In the second quarter of 2002, each of Oncor and TXU Energy began issuing
commercial paper to fund its short-term liquidity requirements. The commercial
paper programs allow each of Oncor and TXU Energy to issue up to $1.0 billion
and $2.4 billion of commercial paper, respectively. At September 30, 2002, each
of the credit facilities listed above provided back-up for outstanding
commercial paper under the Oncor and TXU Energy programs. The TXU Corp.
F-25
commercial paper program was discontinued in July 2002, and at that time, TXU
Corp. was removed as a borrower under the $1.4 billion Five-Year Revolving
Credit Facility. As of September 30, 2002, total outstanding commercial paper
under these programs was $1,082 million of which Oncor's portion was $103
million. Because of liquidity concerns in the US financial markets, commercial
paper markets became inaccessible. Existing borrowings under the program are
being repaid upon maturity. Commercial paper borrowings are expected to resume
as market concerns regarding the liquidity of TXU Corp. and its subsidiaries are
mitigated.
All of the credit facilities discussed above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above.
Oncor is also provided short-term financing by TXU Corp. and its
affiliated companies. Oncor had short-term advances from affiliates of $30
million and $108 million outstanding as of September 30, 2002 and December 31,
2001, respectively.
LONG-TERM DEBT - In August 2002, Oncor issued $1.0 billion aggregate
principal amount of unsecured debentures in two series in a private placement
with registration rights. One series of $200 million is due September 1, 2007
and bears interest at the rate of 5%, and the other series of $800 million is
due September 1, 2022 and bears interest at the rate of 7%. Proceeds from the
issuance were used by Oncor to repay advances from affiliates and commercial
paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1, 2002
in the aggregate principal amount of $147 million and in February 2002, Oncor
redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002 in the
aggregate principal amount of $150 million. Oncor funded the redemptions through
the issuance of commercial paper, advances from affiliates and cash from
operations.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of
senior secured notes in two series in a private placement with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. Each series is initially secured by
an equal principal amount of Oncor's first mortgage bonds; however, the lien of
those bonds may be released in certain circumstances. Proceeds from the issuance
were used by Oncor to repay long-term advances from US Holdings. In March and
April 2002, Oncor entered into a series of forward interest rate swaps with a
group of banks to effectively fix the annual interest rates prior to the
issuance of these notes. As a result of the forward interest rate swaps, the
effective annual rates of interest on the senior secured notes due in 2012 and
2032 are fixed at 6.65% and 7.26%, respectively. (See Note 7.)
As of September 30, 2002, the aggregate secured long-term debt of Oncor
consisted of $3.1 billion of first mortgage bonds and senior secured notes that
are secured by a lien on substantially all of its tangible electric T&D
property. US Holdings remains obligated on Oncor's first mortgage bonds. None of
the long-term debt obligations of TXU Corp. or US Holdings are guaranteed or
secured by Oncor.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
indirect subsidiary of TXU Corp., which sells undivided interests in accounts
receivable it purchases to financial institutions. As of January 1, 2002, TXU
Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas
Company are 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 September 30, 2002, Oncor had sold $67 million face amount of receivables
to TXU Receivables Company under the program in exchange for cash of $32 million
and $34 million in subordinated notes, with $1 million of losses on sales for
the nine months ended September 30, 2002, principally representing the interest
on the underlying financing. These losses approximated 4% of the cash proceeds
from the sale of undivided interests in accounts receivable on an annualized
basis. Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
F-26
Company represent Oncor's retained interest in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the consolidated balance sheet.
4. SHAREHOLDER'S EQUITY
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Common stock without par value:
Authorized shares - 100,000,000
Outstanding - 68,862,000 and 69,000,000................... $ 2,601 $ 32
Retained earnings................................................ 232 2,669
Accumulated other comprehensive income (loss).................... (25) -
------------ ------------
Total shareholder's equity................................. $ 2,808 $ 2,701
============ ============
The amounts presented as of December 31, 2001 reflect the allocated
historical net book value of the T&D operations of US Holdings and TXU SESCO
that were combined to form Oncor. On January 1, 2002 these operations were
contributed to Oncor as required by the 1999 Restructuring Legislation, and
historical equity amounts were assigned to common stock. (See Note 1 for further
information concerning the business restructuring.)
On July 31, 2002, Oncor's Articles of Incorporation were amended to split
the shares of common stock on a 69,000-for-1 basis. Shares outstanding for all
periods presented have been restated to reflect this stock split.
In April 2002, Oncor repurchased 69,000 shares of its common stock from US
Holdings for $50 million. In July 2002, Oncor repurchased another 69,000 shares
of its common stock for $50 million. On October 1, 2002, Oncor repurchased
1,250,000 shares of its common stock from US Holdings for $50 million.
5. REGULATIONS AND RATES
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan with the Commission, which was approved by the Commission on
June 20, 2002. On August 5, 2002, the Commission issued a financing order,
pursuant to the settlement plan, authorizing the issuance of transition
(securitization) bonds with a principal amount of $1.3 billion. The Commission's
order approving the settlement plan and the financing order were appealed by
certain nonsettling parties in five separate dockets in Travis County, Texas
District Court in August 2002. The court has consolidated these dockets into
one, and a hearing on the merits is scheduled for February 4, 2003. US Holdings
is unable to predict when the appeal process related to the Commission's
approval of the settlement plan and the financing order will be concluded or the
outcome. If the Commission's orders are upheld, the settlement plan resolves all
major pending issues related to US Holdings' transition to competition and will
supersede certain proceedings that are related to the 1999 Restructuring
Legislation. The settlement plan does not remove regulatory oversight of Oncor's
business. Oncor does not believe that the outcome will materially affect Oncor's
net financial results, as TXU Energy has agreed, under the Business Separation
Agreement, to hold Oncor harmless from the results of any disallowance by the
Commission of generation-related items, including securitization of regulatory
assets, stranded costs and fuel reconciliation. For additional discussion of the
settlement plan and related items, see Note 4 to Financial Statements in US
Holdings' 2001 Form 10-K.
The principal and interest on the securitization bonds would be secured by
payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the bonds are issued, the
full amount of the regulatory assets will be amortized to expense by Oncor over
the life of the bonds. Any amount of the $1.8 billion which is in excess of the
cash flows from the customer payments to service the bonds will be expensed by
Oncor at the time such shortfall, if any, is determined. US Holdings is unable
to predict when the appeal of the financing order will be concluded; however,
assuming the bonds were issued at the present time and considering current
interest rates, the amount of the regulatory asset's carrying value would exceed
the cash flows from the bonds by approximately $130 million.
F-27
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, which are named defendants in both suits, are unable to
predict the outcome of this litigation.
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 Corp. 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 Corp. entered into a Memorandum of Understanding with the
plaintiffs to settle this lawsuit, subject to the execution of a definitive
settlement agreement. Final versions of the settlement document have been
provided to the plaintiff cities for execution. Most of the cities named as
plaintiffs in the litigation have accepted the settlement and executed the
settlement agreement. If any plaintiff cities decline to execute the settlement,
the suit will continue as to those cities. Oncor believes the allegations in
this suit are without merit and intends to vigorously defend this suit against
any plaintiff cities that do not execute the settlement. Oncor does not believe
the ultimate resolution of this suit will have a material effect on Oncor's
financial position, results of operations or cash flows.
GENERAL -- Oncor is involved in various other legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management, is
not expected to have a material effect upon its financial position, results of
operations or cash flows.
7. SUPPLEMENTARY FINANCIAL INFORMATION
ACCOUNTS RECEIVABLE -- At September 30, 2002 and December 31, 2001,
accounts receivable are stated net of uncollectible accounts of $1 million and
$4 million, respectively. Accounts receivable included $121 million and $50
million in unbilled revenues at September 30, 2002 and December 31, 2001,
respectively.
PROPERTY, PLANT AND EQUIPMENT --
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Transmission .................................................... $ 2,053 $ 1,979
Distribution..................................................... 6,297 6,110
Other............................................................ 435 430
------------ ------------
Total...................................................... 8,785 8,519
Less accumulated depreciation.................................... 3,033 2,888
------------ ------------
Net of accumulated deprecation............................. 5,752 5,631
Construction work in progress.................................... 229 149
Property held for future use..................................... 22 22
------------ ------------
Net property, plant and equipment.......................... $ 6,003 $ 5,802
============ ============
F-28
Capitalized software costs of $132 million at September 30, 2002 and $131
million at December 31, 2001 were included in property, plant and equipment.
Amortization expense of $4 million and $12 million relating to these software
costs was recorded for the three and nine months ended September 30, 2002,
respectively.
GOODWILL -- At September 30, 2002 and December 31, 2001, goodwill of $25
million, included in investments, is stated net of accumulated amortization of
$7 million.
REGULATORY ASSETS AND LIABILITIES -- Included in regulatory assets -- net
are regulatory assets of $2.1 billion and regulatory liabilities of $323 million
at September 30, 2002, and regulatory assets of $2.1 billion and regulatory
liabilities of $461 million at December 31, 2001. Regulatory assets of $2.0
billion at September 30, 2002 and $1.9 billion at December 31, 2001 were not
earning a return. Of the assets not earning a return, $1.8 billion is expected
to be recovered over the term of the securitization bonds pursuant to the
regulatory settlement plan approved by the Commission. (See Note 5 for further
discussion of the settlement plan.) The remaining regulatory assets have an
average remaining recovery period of 24 to 43 years.
DERIVATIVES AND HEDGES -- In March and April 2002, Oncor entered into a
series of forward interest rate swaps with a group of banks to effectively fix
the interest rates on the senior secured notes discussed in Note 3. Such
contracts were designated as accounting hedges under SFAS No. 133, "Accounting
for Derivatives Instruments and Hedging Activities," and the fair values of the
contracts were reflected in Other Comprehensive Income. These contracts were
settled in May 2002 for $39 million in cash. The related amounts included in
Other Comprehensive Income will be reclassified into income over the term of the
senior secured notes resulting in fixed effective annual interest rates of 6.65%
and 7.26% on the notes due in 2012 and 2032, respectively.
As of September 30, 2002, it is expected that $1 million of after tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months.
AFFILIATE TRANSACTIONS -- Reference should be made to Note 5 regarding the
regulatory settlement plan and the Business Separation Agreement between TXU
Energy and Oncor. In accordance with the Business Separation Agreement, Oncor
records interest income receivable from TXU Energy with respect to Oncor's
generation-related regulatory assets that are subject to securitization. The
interest income reimburses Oncor for the interest expense Oncor incurs on that
portion of its debt deemed to be associated with the generation-related
regulatory asset. For the three and nine months ended September 30, 2002, this
interest income totaled $6 million and $17 million, respectively. In addition,
Oncor has a note receivable from TXU Energy related to the excess mitigation
credit established in accordance with the settlement plan. Oncor has implemented
the $350 million credit, plus interest, as a reduction of its fees charged to
REPs, including TXU Energy, for a two-year period. The principal and interest
payments on the note receivable from TXU Energy reimburse Oncor for the credit
applied to the delivery fees billed to REPs. For the three and nine months ended
September 30, 2002, the principal payments received on the note receivable
totaled $86 million and $133 million, and the interest income totaled $5 million
and $17 million, respectively. Oncor also records revenue from TXU Energy for
electricity delivery fees. For the three and nine months ended September 30,
2002, these revenues were $441 million and $1.3 billion, respectively. TXU
Business Services Company, a subsidiary of TXU Corp., charges Oncor for
financial, accounting, information technology, environmental, procurement and
personnel services and other administrative services at cost. For the three and
nine months ended September 30, 2002, these costs totaled $37 million and $108
million, respectively, and are included in operation and maintenance expense.
SUPPLEMENTAL CASH FLOW INFORMATION -- For the nine month period ended
September 30, 2002, there were $91 million in noncash advances to affiliates
relating to the transfer, effective January 1, 2002, of certain assets and
liabilities associated with US Holdings' retail customers to TXU Energy in
connection with the transition to deregulation.
OTHER INCOME AND DEDUCTIONS -- Other income and deductions consist of
several immaterial items.
F-29
$1,200,000,000
ONCOR ELECTRIC DELIVERY COMPANY
OFFER TO EXCHANGE
$700,000,000 $500,000,000
6.375% EXCHANGE SENIOR SECURED NOTES DUE 2012 7.000% EXCHANGE SENIOR SECURED NOTES DUE 2032
(WHICH ARE REGISTERED UNDER THE SECURITIES ACT) (WHICH ARE REGISTERED UNDER THE SECURITIES ACT)
FOR ANY AND ALL FOR ANY AND ALL
6.375% SENIOR SECURED NOTES DUE 2012 7.000% SENIOR SECURED NOTES DUE 2032
(WHICH ARE NOT REGISTERED UNDER THE SECURITIES ACT) (WHICH ARE NOT REGISTERED UNDER THE SECURITIES ACT)
Until _________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act ("TBCA") permits
Oncor, in certain circumstances, to indemnify any present or former director,
officer, employee or agent of Oncor against judgments, penalties, fines,
settlements and reasonable expenses incurred in connection with a proceeding in
which any such person was, is or is threatened to be, made a party by reason of
holding such office or position, but only to a limited extent for obligations
resulting from a proceeding in which the person is found liable on the basis
that a personal benefit was improperly received or in circumstances in which the
person is found liable in a derivative suit brought on behalf of the Oncor.
Article Ten of the Articles of Incorporation of Oncor provides as follows:
(a) The Corporation shall indemnify and may purchase and maintain
insurance or other arrangements on behalf of any and all persons whom it may
lawfully indemnify and insure to the fullest extent permitted by the TBCA, as
the same exists or may hereafter be amended, or by the laws of the State of
Texas, as in effect from time to time.
(b) A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for any act or omission in
such director's capacity as director, except that this provision does not
eliminate or limit the liability of a director to the extent the director is
found liable for: (i) a breach of the director's duty of loyalty to the
Corporation or its shareholders; (ii) an act or omission not in good faith that
constitutes a breach of duty of the director to the Corporation or an act or
omission that involves intentional misconduct or a knowing violation of the law;
(iii) a transaction from which the director received an improper benefit whether
or not the benefit resulted from an action taken within the scope of the
director's office; or (iv) an act or omission for which the liability of the
director is expressly provided for by an applicable statute. If the laws of the
State of Texas are hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by such laws as so amended.
(c) No repeal or modification of this Article Ten by the shareholders of
the Corporation shall adversely affect any right or protection of a director or
other person lawfully indemnified by the Corporation existing at the time of
such repeal or modification or with respect to events occurring prior to such
time.
Section 13. of the Bylaws of Oncor provides as follows:
Without further specific approval of the shareholders of the Corporation,
the Corporation shall indemnify and may purchase, enter into, maintain or
provide insurance or other arrangements for the benefit of any person who is or
was a Director, officer, employee or agent of the Corporation or is or was
serving another entity at the request of the Corporation as a Director, officer,
employee or agent or otherwise, to the fullest extent permitted by the laws of
the State of Texas, including without limitation Art. 2.02-1 of the Texas
Business Corporation Act or any successor provision, against any liability
asserted against or incurred by any such person in any such capacity or arising
out of such person's service in such capacity whether or not the Corporation
would otherwise have the power to indemnify against any such liability under the
Texas Business Corporation Act. If the laws of the State of Texas are amended to
authorize the purchase, entering into, maintaining or providing of insurance,
indemnification or other arrangements in the nature of those permitted hereby to
a greater extent than presently permitted, then the Corporation shall have the
power and authority to purchase, enter into, maintain and provide any additional
insurance, indemnification or other arrangements in such regard as shall be
permitted from time to time by the laws of the State of Texas without further
approval of the shareholders of the Corporation. No repeal or modification of
such laws or this Section shall adversely affect any such insurance, arrangement
or right to indemnification existing at the time of such repeal.
TXU Corp. has insurance covering its expenditures that might arise in
connection with Oncor's lawful indemnification of Oncor's directors and officers
for their liabilities and expenses. Directors and officers of Oncor also have
insurance which insures them against certain other liabilities and expenses.
II-1
ITEM 21. EXHIBITS
The list of exhibits under the heading INDEX TO EXHIBITS on page II-4 of
this registration statement is incorporated in this Item 21 by reference.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this registration statement through
the date of responding to the request.
(2) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Pre-effective Amendment No. 1 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of New York, state of New York on January 6, 2003.
ONCOR ELECTRIC DELIVERY COMPANY
By: /s/ Robert J. Reger, Jr.
----------------------------------
(Robert J. Reger, Jr., Esq.,
Attorney-in-fact)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Erle Nye* Principal Executive Officer January 6, 2003
- ------------------------------------------- and Director
(Erle Nye, Chairman of the Board
and Chief Executive)
/s/ Scott Longhurst* Principal Financial January 6, 2003
- ------------------------------------------- Officer
(Scott Longhurst, Senior Vice President -
Finance and Strategy)
/s/ Biggs C. Porter * Principal Accounting January 6, 2003
- ------------------------------------------- Officer
(Biggs C. Porter, Vice President)
/s/ T.L. Baker* Director January 6, 2003
- -------------------------------------------
(T.L. Baker)
/s/ Michael J. McNally* Director January 6, 2003
- -------------------------------------------
(Michael J. McNally)
/s/ R.A. Wooldridge* Director January 6, 2003
- -------------------------------------------
(R.A. Wooldridge)
*By: /s/ Robert J. Reger, Jr. Attorney-in-Fact January 6, 2003
--------------------------------------
(Robert J. Reger, Jr.)
II-3
INDEX TO EXHIBITS
PREVIOUSLY FILED**
--------------------------------
WITH
FILE AS
EXHIBIT NUMBER EXHIBIT
- ------- ------ -------
2 1-12833 Form 8-K 2 -- Master Separation Agreement by and among TXU Electric Delivery
Company (now Oncor), TXU Generation (January 16, 2002) Holdings
Company LLC, TXU Merger Energy Trading Company LP, TXU SESCO
Company, TXU SESCO Energy Services Company, TXU Energy Retail
Company LP and TXU Electric Company, dated as of December 14,
2001.
3(a) 333-100240* 3(a) -- Articles of Incorporation of Oncor.
3(b) 333-100240* 3(b) -- Articles of Amendment, effective January 17, 2002, to the Articles
of Incorporation of Oncor.
3(c) 333-100240* 3(c) -- Articles of Amendment, effective July 31, 2002, to the Articles
of Incorporation of Oncor.
3(d) 333-100240* 3(d) -- Bylaws of Oncor, as restated January 17, 2002.
4(a) 333-100240* 4(a) -- Indenture.
4(b) 333-100240* 4(b) -- Officer's Certificate, dated May 6, 2002, to the Indenture with
the form of the Old 2012 Notes and the form of the Old 2032
Notes attached thereto.
4(c) -- Officer's Certificate, dated December 20, 2002, to the Indenture.
4(d) 333-100240* 4(c) -- Form of the New 2012 Notes.
4(e) 333-100240* 4(d) -- Form of the New 2032 Notes.
4(f) 2-90185 4(a) -- 1983 Mortgage.
II-4
4(f)(1) -- Supplemental Indentures to the
1983 Mortgage:
Number Dated as of
------ -----------
2-90185 4(b) First April 1, 1984
33-24089 4(a)-1 Fifteenth July 1, 1987
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-46293 4(a)-1 Thirty-third February 1, 1992
33-49710 4(a)-1 Thirty-fourth April 1, 1992
33-49710 4(a)-3 Thirty-sixth June 1, 1992
33-57576 4(a)-1 Thirty-eighth August 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
0-11442 Form 4(a)-2 Sixty-first February 1, 2001
10-K (2000)
0-12833 Form 4(a)-2 Sixty-second July 1, 2001
10-Q (Quarter
ended June 30,
2001)
0-12833 Form 4(a)-2 Sixty-third January 1, 2002
10-K (2001)
0-12833 Form 4 Sixty-fourth May 1, 2002
10-Q (Quarter
ended March
31, 2002
4(f)(2) -- Sixty-fifth December 1, 2002.
4(g) 333-100240* 4(f) -- First Mortgage Bond, 6.375% Series due 2012.
4(h) 333-100240* 4(g) -- First Mortgage Bond, 7.000% Series due 2032.
4(i) -- First Mortgage Bond, 6.375% Series due 2015.
4(j) -- First Mortgage Bond, 7.250% Series due 2033.
4(k) 333-100240* 4(h) -- Registration Rights Agreement.
5(a) 333-100240* 5(a) -- Opinion of Hunton & Williams.
5(b) 333-100240* 5(b) -- Opinion of Thelen Reid & Priest LLP.
10(a) 1-12833 Form 10-Q -- 364-Day Revolving Credit Agreement, dated as of April 24, 2002,
(Quarter ended among TXU Energy, Oncor, US (Quarter ended Holdings, JPMorgan
March 31, 2002) Chase Bank, as Administrative Agent, and the financial
institutions named March 31, 2002) therein.
10(b) 333-100240* 10(b) -- Credit Agreement, dated August 30, 2002, among TXU Energy,
Oncor, US Holdings and certain banks listed therein, and
Barclays Bank PLC, as Administrative Agent.
10(c) -- Credit Agreement, dated December 20, 2002, among Oncor and
certain banks listed therein, and Credit Suisse First Boston, as
Administrative Agent.
II-5
10(d) 333-100240* 10(c) -- Generation Interconnection Agreement, dated December 14, 2001,
between TXU Electric Delivery Company (now Oncor) and TXU
Generation Company LP.
10(e) 333-100240* 10(d) -- Generation Interconnection Agreement, dated December 14, 2001,
between TXU Electric Delivery Company (now Oncor) and TXU
Generation Company LP, for itself and as Agent for TXU Big Brown
Company LP, TXU Mountain Creek Company LP, TXU Handley Company
LP, TXU Tradinghouse Company LP and TXU DeCordova Company LP
(Interconnection Agreement)
10(f) 333-100240* 10(e) -- Amendment to Interconnection Agreement, dated May 31, 2002
10(g) 333-100240* 10(f) -- Standard Form Agreement between Oncor and Competitive Retailer
Regarding Terms and Conditions of Delivery of Electric Power and
Energy (Delivery Service Agreement)
12 -- Computation of ratios of earnings to fixed charges.
23(a) -- Consent of Deloitte & Touche LLP.
23(b) 333-100240* 23(b) -- Consents of Hunton & Williams and Thelen Reid & Priest LLP
contained in Exhibits 5(a) and 5(b), respectively.
24 333-100240* 24 -- Power of Attorney.
25 333-100240* 25 -- Statement of Eligibility on Form T-1 of The Bank of New York
with respect to the Indenture.
99(a) 333-100240* 99(a) -- Form of Letter of Transmittal.
99(b) 333-100240* 99(b) -- Form of Notice of Guaranteed Delivery.
99(c) 333-100240* 99(c) -- Form of Exchange Agent Agreement.
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* Represents the original Registration Statement filed on October 2, 2002.
**Incorporated herein by reference.