As filed with the Securities and Exchange Commission on July 9, 2003
Registration Statement No. 333-__________
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
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 Industrial Identification No.)
of Incorporation Classification
or Organization) Code Number)
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 and General Counsel Secretary and 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 LLP 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.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
_____________________________
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE FEE(1)
- -------------------------------------------------------------------------------------------------------------------
6.375% Exchange Senior Secured $500,000,000 100% $500,000,000 $40,450
Notes due 2015
7.250% Exchange Senior Secured $350,000,000 100% $350,000,000 $28,315
Notes due 2033
Total $850,000,000 -- $850,000,000 $68,765
(1) In accordance with Rule 457(f)(2) under the Securities Act of 1933, the
registration fee is based on the book value of the outstanding 6.375% Senior
Secured Notes due 2015 and 7.250% Senior Secured Notes due 2033 of Oncor
Electric Delivery Company to be cancelled in the exchange transaction hereunder.
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 JULY 9, 2003
PROSPECTUS
$850,000,000
ONCOR ELECTRIC DELIVERY COMPANY
OFFER TO EXCHANGE
$500,000,000 $350,000,000
6.375% EXCHANGE SENIOR SECURED 7.250% EXCHANGE SENIOR SECURED
NOTES DUE 2015 NOTES DUE 2033
FOR ANY AND ALL FOR ANY AND ALL
6.375% SENIOR SECURED 7.250% SENIOR SECURED
NOTES DUE 2015 NOTES DUE 2033
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 $500,000,000 6.375% Exchange Senior Secured Notes due 2015
(the New 2015 Notes) are identical in all material respects to the terms of
the $500,000,000 6.375% Senior Secured Notes due 2015 (the Old 2015 Notes).
The terms of the $350,000,000 7.250% Exchange Senior Secured Notes due 2033
(the New 2033 Notes) are identical in all material respects to the terms of
the $350,000,000 7.250% Senior Secured Notes due 2033 (the Old 2033 Notes).
The New 2015 Notes and the New 2033 Notes are collectively referred to in
this prospectus as the New Notes. The Old 2015 Notes and the Old 2033 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 10 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 , 2003.
RED HERRING
-----------
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
WHERE YOU CAN FIND MORE INFORMATION...................................2
SUMMARY...............................................................3
RISK FACTORS.........................................................10
FORWARD-LOOKING INFORMATION..........................................14
USE OF PROCEEDS......................................................15
CAPITALIZATION AND SHORT-TERM DEBT...................................15
SELECTED FINANCIAL INFORMATION.......................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................17
BUSINESS.............................................................29
MANAGEMENT OF ONCOR..................................................34
RELATIONSHIPS AMONG ONCOR AND OTHER TXU COMPANIES....................37
THE EXCHANGE OFFER...................................................38
DESCRIPTION OF THE NEW NOTES.........................................46
DESCRIPTION OF THE 1983 MORTGAGE BONDS...............................63
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.............66
PLAN OF DISTRIBUTION.................................................69
EXPERTS..............................................................70
VALIDITY OF THE NEW NOTES............................................70
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 An
exchange offer 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 exchange offer registration
statement. For a more complete understanding of this exchange offer, you should
refer to the exchange offer registration statement, including its exhibits and
any amendments thereto. Also, Oncor files periodic and current reports with the
SEC under File No. 333-100240.
The public may read and copy the exchange offer registration statement and
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 or any other reports
that Oncor files with the SEC 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 December
20, 2002 by Oncor in a transaction not requiring
registration under the Securities Act:
o $500,000,000 6.375% Senior Secured Notes due 2015
o $350,000,000 7.250% Senior Secured Notes due 2033
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 December 20, 2002 are currently
outstanding.
THE EXCHANGE OFFER;
NEW NOTES.......... Oncor is offering to exchange the New 2015 Notes for
the Old 2015 Notes and the New 2033 Notes for the Old
2033 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 2015 Notes will be identical in all material respects
to the terms of the Old 2015 Notes, and the terms of the New 2033 Notes will be
identical in all material respects to the terms of the Old 2033 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........ $500,000,000 principal amount of Oncor's 6.375%
Exchange Senior Secured Notes due 2015 and $350,000,000
principal amount of Oncor's 7.250% Exchange Senior
Secured Notes due 2033, 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 2015 Notes mature on January 15, 2015 and the
New 2033 Notes mature on January 15, 2033.
INTEREST RATE........ The New 2015 Notes will bear interest at the annual
rate of 6.375%. The New 2033 Notes will bear interest
at the annual rate of 7.250%. 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 December 20, 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 January 15 and July 15, beginning on
July 15, 2003.
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).
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.
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
6
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 wholly-owned subsidiary of TXU US Holdings Company (US Holdings)
which is a wholly-owned subsidiary of TXU Corp. Oncor is a regulated electricity
transmission and distribution (T&D) company principally engaged in providing
delivery services to retail electric providers (REPs) that sell power in the
north-central, eastern and western parts of Texas. A majority of Oncor's
revenues represent fees for delivery services provided to TXU Energy Company LLC
(TXU Energy), a wholly-owned subsidiary of US Holdings. Oncor is an indirect,
wholly-owned subsidiary of TXU Corp.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery, and telecommunications services. TXU Corp.
delivers or sells energy to approximately five million residential, commercial
and industrial customers in the United States and Australia.
Within the TXU corporate structure, Oncor, TXU Gas Company (TXU Gas) and
three 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'
three subsidiaries managed within the Oncor Group are Oncor Utility Solutions
(Texas) Company, Oncor Utility Solutions (North America) Company and Oncor
Utility Solutions (Canada) Company Limited. While these three 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 Corp.'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 T&D 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 REP
business.
Also, on January 1, 2002 the regulated electric T&D 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:
7
o ELECTRIC TRANSMISSION - Oncor's electricity 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 4,522 circuit miles
of 345-kilovolt (kV) transmission lines and 9,615 circuit miles of
138-kV and 69-kV transmission lines and over 900 substations.
o ELECTRIC DISTRIBUTION - Oncor's electricity distribution business
distributes electricity for REPs in its certificated service area.
Oncor's service territory includes 92 counties and 370 incorporated
municipalities in the north-central, eastern and western parts of
Texas. Oncor provides delivery services to these REPs, which sell
electricity to over 2.9 million points of delivery. Oncor's
distribution network consists of 55,178 miles of overhead primary
conductors, 22,073 miles of overhead secondary and street light
conductors, 12,264 miles of underground primary conductors and 7,332
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, which is the largest REP operating in Oncor's
certificated service area. Delivery fee revenues from TXU Energy represent the
substantial majority of Oncor's revenues.
Oncor's operations do not include the production or sale of electricity,
but rather consist of providing T&D and related services.
Most of Oncor's power lines have been constructed over lands of others
pursuant to easements or along public highways, streets and rights-of-way 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.
REGULATION
Oncor is a rate-regulated electric T&D utility operating wholly within the
State of Texas and is subject to the jurisdiction of the Public Utility
Commission of Texas (Commission) and certain municipalities with respect to
rates and service.
On December 31, 2001, US Holdings filed a settlement plan (Settlement Plan)
with the Commission. It resolved all major pending issues related to US
Holdings' transition to competition pursuant to the 1999 Restructuring
Legislation. The settlement (Settlement) provided for in the Settlement Plan
does not remove regulatory oversight of Oncor's business. The Settlement was
approved by the Commission in June, 2002 and has become final.
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.
8
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 years ended December 31, 2001 and 2000 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 this combined financial information. The
financial information for the three months ended March 31, 2003 and 2002 and the
financial information for the year ended December 31, 2002 represent the actual
results of operations and financial position for Oncor for the periods indicated
and may not be comparable to the combined financial information for the years
ended December 31, 2001 and 2000. In addition, because of the seasonal nature of
Oncor's business, results for an interim period may not be indicative of results
that may be expected for an entire year.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------
2003 2002 2002 2001 2000
-------- ------ ------- ------ --------
(MILLIONS OF DOLLARS, EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues...................... $ 506 $ 494 $ 1,994 $2,314 $ 2,081
Net income.............................. $ 61 $ 71 $ 122 $ 228 $ 226
Ratio of earnings to fixed charges(a) .. 2.11 2.66 2.32 2.24 2.28
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................ $ 8,996 $ 9,022 $8,495 $ 8,149
Property, plant and equipment - net..... $ 6,106 $ 6,056 $5,802 $ 5,445
Capitalization:
Long-term debt, less amounts due currently:
Secured debt........................ $ 3,081 $ 3,080 $2,082 $ 2,671
Unsecured debt...................... $ 1,000 $ 1,000 $1,200 $ 81
-------- ------- ------ --------
Total............................. $ 4,081 $ 4,080 $3,282 $ 2,752
Shareholder's equity.................. $ 2,660 $ 2,649 $2,701 $ 2,532
-------- ------- ------ --------
Total Capitalization............ $ 6,741 $ 6,729 $5,983 $ 5,284
======== ======= ====== ========
Capitalization ratios:
Long-term debt, less amounts due currently:
Secured debt........................ 45.7% 45.8% 34.8% 50.6%
Unsecured debt...................... 14.8% 14.8% 20.1% 1.5%
-------- ------- ------ --------
Total............................. 60.5% 60.6% 54.9% 52.1%
Shareholder's equity.................. 39.5% 39.4% 45.1% 47.9%
-------- ------- ------ --------
Total Capitalization............ 100.0% 100.0% 100.0% 100.0%
======== ======= ====== ========
__________________
(a) Calculated by dividing pretax income, excluding extraordinary charges, plus
fixed charges (interest expense and estimated interest within rental expense)
by fixed charges.
9
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'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 T&D facilities involves many risks,
including breakdown or failure of equipment and transmission lines, lack of
sufficient capital to maintain the facilities, the impact of unusual or adverse
weather conditions or other natural events, as well as the risk of performance
below expected levels of efficiency. This could result in lost revenues or
increased expenses. Insurance, warranties or performance guarantees may not
cover any or all of these lost revenues or increased expenses. Also, natural
disasters, war, terrorist acts and other catastrophic events may impact Oncor's
operations in adverse ways, including the the disruption of power production and
energy delivery activities, declines in customer demand, cost increases and
instability in the financial markets. Oncor's ability to obtain insurance, and
the cost of and coverage provided by such insurance, could be affected by events
outside its control.
Oncor's ability to successfully and timely complete capital improvements to
existing facilities or other capital projects is contingent upon many variables.
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.
RATE REGULATION OF ONCOR'S BUSINESS MAY DELAY OR DENY ONCOR FULL RECOVERY OF
ONCOR'S COSTS.
Oncor's rates are regulated by the Commission and is subject to
cost-of-service regulation and annual earnings oversight. This regulatory
treatment does not provide any assurance as to achievement of earnings levels.
Oncor's rates are regulated by the Commission based on an analysis of Oncor's
costs, as reviewed and approved in a regulatory proceeding. 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. While
rate regulation is premised on the full recovery of prudently incurred costs and
a reasonable rate of return on invested capital, there can be no assurance that
the Commission 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 and the return on
invested capital allowed by the Commission.
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 sell the electricity Oncor distributes to such REPs' customers. 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 and financial condition. 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. 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 amount of 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.
10
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 AND OTHER REGULATIONS THAT COULD
INCREASE ONCOR'S COSTS AND HAVE AN ADVERSE IMPACT ON ONCOR'S BUSINESS.
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.
In addition, Oncor is subject to changes in 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 Commission and the Federal Energy Regulatory Commission
(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.
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 these
laws or regulations could have an adverse impact on Oncor's business.
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.
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.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact Oncor's ability to
sustain and grow its businesses, which are capital intensive, and would likely
increase its capital costs. Oncor relies on access to financial markets as a
significant source of liquidity for capital requirements not satisfied by cash
on hand or operating cash flows. Oncor's access to the financial markets could
be adversely impacted by various factors, such as:
o changes in credit markets that reduce available credit or the ability
to renew existing liquidity facilities on acceptable terms;
o inability to access commercial paper markets;
o a deterioration of Oncor's credit or a reduction in Oncor's credit
ratings or the credit ratings of its subsidiaries;
o a material breakdown in Oncor's risk management procedures; and
o the occurrence of material adverse changes in Oncor's business that
restrict Oncor's ability to access its liquidity facilities.
11
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.
The Remaining Old Notes 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 the Remaining Old Notes will not (with limited
exceptions) have any further rights to have those notes registered under the
Securities Act. The value of the Remaining Old Notes could be adversely affected
by the conclusion of this exchange offer. There may be no market for the
Remaining Old Notes and thus you may be unable to sell those 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 will only occur upon the proper and timely
completion 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.
12
RISKS RELATED TO THE NEW 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 the Remaining 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 the Remaining Old Notes), the
ability of noteholders to sell their New Notes (or Remaining Old Notes) or the
price at which the noteholders will be able to sell their New Notes (or
Remaining Old Notes). Future trading prices of the New Notes (or Remaining 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 Remaining Old Notes) does not develop,
purchasers may be unable to resell their New Notes (or Remaining 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.
Any downgrade of Oncor's credit ratings or the credit ratings of TXU Corp.
or TXU Corp.'s other 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.
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
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 any such 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.
13
FORWARD-LOOKING INFORMATION
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act. 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 factors discussed above under the
section of this prospectus entitled RISK FACTORS and the following important
factors, among others, that could cause Oncor's actual results to differ
materially from those projected in such forward-looking statement:
o prevailing governmental policies and regulatory actions, including
those of the FERC and the Commission, with respect to:
o allowed rates of return;
o industry, market 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 continued implementation of the 1999 Restructuring Legislation;
o legal and administrative proceedings and settlements;
o general industry trends;
o weather conditions and other natural phenomena, and acts of sabotage,
war 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, commodity prices or rates of
inflation;
o unanticipated changes in operating expenses, liquidity needs and
capital expenditures;
o commercial bank market and capital market conditions;
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.
14
USE OF PROCEEDS
This exchange offer is intended to satisfy certain 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 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
March 31, 2003, 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.
OUTSTANDING AT ADJUSTED(a)
MARCH 31, 2003 -----------------------------
(IN MILLIONS) AMOUNT PERCENT
(IN MILLIONS)
Capitalization:
Long-term debt, less amounts due currently:
First Mortgage Bonds .............................. $ 1,031 $ 1,031
Senior Secured Notes .............................. 2,050 2,050
Debentures ........................................ 1,000 1,000
-------- --------
Total long-term debt ............................ 4,081 4,081 60.5%
Shareholder's equity 2,660 2,660 39.5%
-------- -------- ------
Total Capitalization ....................... $ 6,741 $ 6,741 100.0%
======== ======== ------
Short-term advances from affiliates ...................... $ 217 $ 13
Notes payable - commercial paper.......................... $ -- $ --
Long-term debt due currently.............................. $ 70 $ --
_________________
(a) Adjusted to reflect (i) a decrease in short-term advances from affiliates of
$204 million and (ii) a decrease in long-term debt due currently of $70 million
(related to the redemption of its First Mortgage and Collateral Trust Bonds 6
3/4% Series due April 1, 2003), in each case from the date indicated above
through June 30, 2003.
15
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 T&D operations of US Holdings and
TXU SESCO. Similar selected financial data for 1998 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
included within the combined financial information for the years ended December
31, 2001, 2000 and 1999 was derived from the separate historical financial
statements of US Holdings and TXU SESCO. Various unbundling and allocation
methodologies were used in combining this financial 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 this combined financial information. The financial
information for the three months ended March 31, 2003 and 2002 and the financial
information for the year ended December 31, 2002 represent the actual results of
operations and financial position for Oncor for the periods indicated and may
not be comparable to the combined financial information for the years ended
December 31, 2001, 2000 and 1999. In addition, because of the seasonal nature of
Oncor's business, results for an interim period may not be indicative of results
that may be expected for an entire year.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------
2003 2002 2002 2001 2000 1999
-------- -------- -------- --------- --------- ---------
(MILLIONS OF DOLLARS EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues ..................$ 506 $ 494 $ 1,994 $ 2,314 $ 2,081 $ 1,931
Operating expenses ..................$ 374 $ 370 $ 1,517 $ 1,820 $ 1,597 $ 1,444
Operating income ....................$ 132 $ 124 $ 477 $ 494 $ 484 $ 487
Net income ..........................$ 61 $ 71 $ 122 $ 228 $ 226 $ 223
Ratio of earnings to fixed
charges(a)........................... 2.11 2.66 2.32 2.24 2.28 2.15
BALANCE SHEET DATA (END OF
PERIOD):
Total assets ........................$ 8,996 $ 9,022 $ 8,495 $ 8,149
Property, plant and equipment
--net ...............................$ 6,106 $ 6,056 $ 5,802 $ 5,445
Capitalization:
Long-term debt, less amounts
due currently:
Secured debt .....................$ 3,081 $ 3,080 $ 2,082 $ 2,671
Unsecured debt....................$ 1,000 $ 1,000 $ 1,200 $ 81
-------- -------- --------- ---------
Total ...........................$ 4,081 $ 4,080 $ 3,282 $ 2,752
Shareholder's equity ...............$ 2,660 $ 2,649 $ 2,701 $ 2,532
-------- -------- --------- ---------
Total Capitalization ...........$ 6,741 $ 6,729 $ 5,983 $ 5,284
-------- ======== ========= =========
Capitalization ratios:
Long-term debt, less amounts
due currently:
Secured debt ..................... 45.7% 45.8% 34.8% 50.6%
Unsecured debt ................... 14.8% 14.8% 20.1% 1.5%
-------- -------- --------- ---------
Total ........................... 60.5% 60.6% 54.9% 52.1%
Shareholder's equity ............... 39.5% 39.4% 45.1% 47.9%
-------- -------- --------- ---------
Total Capitalization ........... 100.0% 100.0% 100.0% 100.0%
-------- ======== ========= =========
OTHER FINANCIAL DATA:
Cash provided by (used in)
operating activities ...............$ (4) $ (142) $ 233 $ 675 $ 441 $ 623
Capital expenditures ................$ 124 $ 141 $ 513 $ 635 $ 517 $ 489
____________________________________________
(a) Calculated by dividing pretax income, excluding extraordinary charges, plus
fixed charges (interest expense and estimated interest within rental
expense) by fixed charges.
16
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, FORWARD-LOOKING INFORMATION and SELECTED
FINANCIAL INFORMATION and Oncor's financial statements and related notes to such
financial statements included elsewhere in this prospectus.
BUSINESS
Oncor is a wholly-owned subsidiary of US Holdings which is a wholly-owned
subsidiary of TXU Corp. Oncor is a regulated electricity T&D company principally
engaged in providing delivery services to REPs that sell power in the
north-central, eastern and western parts of Texas. Oncor was formed as a Texas
corporation in the fourth quarter of 2001 and began operations on January 1,
2002. Oncor was created as a result of the deregulation of the electric utility
industry in Texas, which became effective January 1, 2002. On that date, the
regulated electricity T&D businesses of US Holdings and TXU SESCO were
transferred to Oncor.
Oncor operates within the Electric Reliability Council of Texas (ERCOT)
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electric power systems
in Texas and the Independent System Operator 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.
CRITICAL ACCOUNTING POLICIES
Oncor's accounting policies are detailed in Note 2 to the financial
statements for the years ended December 31, 2002, 2001 and 2000 and Note 1 to
the financial statements for the three months ended March 31, 2003 and 2002
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 Oncor's consolidated financial statements,
management is required to make estimates and assumptions about future events
that affect the reporting and disclosure of assets and liabilities at the
balance sheet dates and revenue and expense during the periods covered. The
following is a summary of certain critical accounting policies of Oncor that are
impacted by judgments and uncertainties and for which different amounts might be
reported under a different set of conditions or using different assumptions.
REVENUE RECOGNITION -- Oncor records revenue for delivery services under
the accrual method. Electricity T&D revenues are recognized when delivery
services are provided to customers on the basis of periodic cycle meter readings
and include an estimated accrual for the delivery fee value of electricity
provided from the meter reading date to the end of the period. The accrued
revenue is based on actual daily revenues for the most recent metered period
applied to the number of unmetered days through the end of the period.
REGULATORY ASSETS AND LIABILITIES -- The financial statements of Oncor
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with SFAS No. 71, "Accounting for the Effect of Certain Types of
Regulation." The assumptions and judgments used by regulatory authorities
continue to have an impact on the recovery of costs, the rate earned on invested
capital and the timing and amount of assets to be recovered by rates. (See Note
3 to the financial statements for the years ended December 31, 2002, 2001 and
2000.)
In 2002, Oncor recorded an extraordinary loss of $123 million (net of
income tax benefit of $66 million) to writedown regulatory assets subject to
securitization through the future issuance of $1.3 billion principal amount of
transition (securitization) bonds in accordance with US Holdings' regulatory
settlement plan (Settlement Plan) with the Public Utility Commission of Texas
(Commission) as described in Note 3 to Financial Statements for the years ended
December 31, 2002, 2001 and 2000. The regulatory asset carrying value is
intended to represent the estimated amount of future cash flows to be recovered
from REPs through increased rates; the determination of such amount is based on
estimates. Oncor's future payments of the bonds' principal and interest will be
equal to the amount of increased electricity delivery rates. The writedown,
which was taken as a result of the final approval of the Settlement Plan,
reflects the impact of lower interest rates. As actual interest rates on the
bonds may differ from current estimates, the regulatory asset carrying value,
which was $1.7 billion at December 31, 2002, is subject to further adjustment.
17
DEFINED BENEFIT PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS--
Oncor is a participating employer in the TXU Retirement Plan (Retirement Plan),
a defined benefit pension plan sponsored by TXU Corp. Oncor also participates
with TXU Corp. and certain other affiliated subsidiaries of TXU Corp. to offer
certain health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees from TXU Corp.
Reported costs of providing non-contributory defined pension benefits and other
postretirement benefits (see Note 9 to the financial statements for the years
ended December 31, 2002, 2001 and 2000) are dependent upon numerous factors,
assumptions and estimates.
For example, these costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions made to the plan, and earnings on plan assets. The Retirement
Plan's assets are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may also impact current and future
pension costs. Fluctuations in actual equity market returns as well as changes
in general interest rates may result in increased or decreased pension costs in
future periods. Pension costs may also be significantly affected by changes in
key actuarial assumptions, including anticipated rates of return on plan assets
and the discount rates used in determining the projected benefit obligation and
pension costs.
In accordance with SFAS 87, "Employers' Accounting for Pensions," changes
in pension obligations associated with these factors may not be immediately
recognized as pension costs on the income statement, but generally are
recognized in future years over the remaining average service period of plan
participants. As such, significant portions of pension costs recorded in any
period may not reflect the actual level of cash benefits provided to plan
participants.
As of December 31, 2002, key assumptions of the Retirement Plan and other
postretirement benefit plans were revised, including decreasing the expected
return on plan assets from 9% to 8.5% and decreasing the assumed discount rate
from 7.5% to 6.75%. In selecting assumed discount rates, TXU Corp. considered
fixed income security yield rates for AA rated portfolios as reported by
Moody's. In selecting an assumed rate of return on plan assets, TXU Corp.
considered past performance and economic forecasts for the types of investments
held by the plan. The market value of the Retirement Plan assets has been
affected by sharp declines in equity markets since the first quarter of 2000.
Plan asset values have declined $151 million and $49 million in 2002 and 2001,
respectively. The projected benefit obligation has increased by $165 million as
a result of the change in the discount rate. Further, based on the current
assumptions and available information, in 2003 pension expense is expected to
increase, as a result of the changed assumptions above and other actions, a
total of approximately $12 million over 2002 amounts. Pension cost and cash
funding requirements could increase in future years.
The amounts provided above for funding requirements and pension expense
mentioned above, represent allocations of the TXU Corp. Retirement Plan to
Oncor.
18
RESULTS OF OPERATIONS
Oncor is managed as an integrated business; consequently there are no
separate reportable business segments.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------- ----------------------------
2002 2001 2000 2003 2002
---------- --------- ---------- ------- --------
OPERATING STATISTICS:
Electric energy delivered volumes (GWh).............. 104,785 99,139 100,545 23,908 23,586
Electric points of delivery (end of period and 2,909 2,844 2,796 2,914 2,868
in thousands)........................................
OPERATING REVENUES (MILLION OF DOLLARS):
Affiliated - TXU Energy.........................$ 1,586 $ 2,314 $ 2,081 $ 377 $ 416
Non-affiliated.................................. 408 - - 129 78
---------- --------- ---------- ------- --------
Total ...................................$ 1,994 $ 2,314 $ 2,081 $ 506 $ 494
========== ========= ========== ======= ========
The 2001 and 2000 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 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
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate revenues, common expenses,
assets and liabilities between US Holdings' generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Allocations reflected in the financial information for 2001 and 2000 did not
necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. 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 combined
financial information included herein.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002
Operating revenues increased $12 million, or 2%, to $506 million in 2003.
The growth reflected $6 million in increased disconnect/reconnect fees due to
greater competition-related customer switching activities. Additional points of
delivery of approximately 1.6% contributed $2 million to revenue growth. The
revenue increase also reflected $3 million in nonrecurring billing settlements
for tower space leases with telecommunications companies and pole contract
rentals from cable and telecommunication companies.
Operation and maintenance expenses increased by $10 million, or 6%, to
$188 million in 2003. The increase reflected higher transmission costs paid to
other utilities, increased pension and other postretirement benefit costs, and
higher overhead feeder maintenance and tree trimming costs, partially offset by
lower employee-related and outside consulting expenses arising from cost savings
initiatives implemented in late 2002.
Depreciation and amortization increased $5 million, or 8%, to $69 million.
The increase reflects investments to support growth and normal replacements of
delivery facilities.
Taxes other than income declined $3 million, or 3%, to $92 million in 2003
primarily due to a decline in local gross receipts taxes. This decline reflects
the lagging effects of the change in revenue base on which the tax is calculated
due to deregulation.
Interest income increased $3 million to $15 million in 2003 reflecting an
increase in the reimbursement from TXU Energy for higher carrying costs on
regulatory assets.
19
Interest expense and other charges increased by $19 million, or 31%, to $81
million in 2003 principally due to higher average interest rates. The higher
average interest rates reflected issuances of higher rate long-term debt to
replace lower rate advances from affiliates.
Income tax expense was $31 million in 2003 (including $25 million related
to operating income and $6 million related to nonoperating income), representing
an effective tax rate of 33.7% in 2003, which was comparable to the 33.0%
effective rate in 2002, with no significant offsetting items.
Net income decreased $10 million, or 14%, to $61 million primarily due to
higher interest expense. Net pension and postretirement benefit costs reduced
net income by $8 million in 2003 and $3 million in 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Operating revenues decreased $320 million, or 14%, to $2.0 billion in 2002.
Revenues in 2001 included amounts associated with generation and retail expenses
that were the responsibility of Oncor, but in 2002 such revenues and expenses
are the responsibility of TXU Energy. Excluding the impact of such revenues in
2001, electric delivery revenues rose 3% on a 6% increase in electricity volumes
delivered. Because the fees to REPs for their large commercial and industrial
(C&I) 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 expenses decreased by $158 million, or 17%, to
$762 million. The decline reflected the effects of approximately $150 million in
customer support costs and bad debt expense in 2001 that are the responsibility
of TXU Energy in 2002, a recoverable regulatory asset writeoff of $73 million in
2001 and computer systems costs incurred in 2001 for changes related to the
restructuring of the Texas electricity market. These effects were partially
offset by the costs in 2002 of a consumer energy efficiency program, mandated by
the Commission, and higher transmission costs paid to other utilities.
Depreciation and amortization increased $25 million, or 10%, to $264
million. The increase reflected $12 million related to transmission and
distribution property additions, $9 million related to computer system additions
and $4 million of debt issue cost amortization.
Taxes other than income declined $152 million, or 28%, to $391 million in
2002 due to state gross receipts taxes that are reported in TXU Energy in 2002.
Effective in 2002, local gross receipts taxes related to electricity revenue are
an expense of Oncor while state gross receipts taxes are an expense of TXU
Energy.
Interest income of $49 million in 2002 reflected the reimbursement,
effective in 2002, from TXU Energy for carrying costs on regulatory assets.
Interest expense and other charges declined by $2 million, or 1%, to $265
million. The decline reflected $25 million due to lower average debt levels,
largely offset by $21 million of interest expense related to the regulatory
liability for the excess mitigation credit to REPs and a $2 million decrease in
capitalized interest.
Goodwill amortization of $1 million in 2001 ceased, reflecting the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142.
Income tax expense was $118 million in 2002 (including $100 million related
to operating income and $18 million related to nonoperating income), resulting
in an effective tax rate of 32.5% in 2002 compared to 34.3% in 2001. The decline
reflected nonrecurring regulatory-driven adjustments recorded in 2001 relating
to prior years.
Income before extraordinary loss increased $17 million, or 7%, to $245
million reflecting the declines in operation and maintenance expenses and taxes
other than income, as well as higher interest income, partially offset by the
lower revenues. Net pension and postretirement benefit costs reduced net income
by $17 million in 2002 and $8 million in 2001.
Extraordinary loss in 2002 included a $123 million (net of income tax
benefit of $66 million) regulatory-related charge to writedown regulatory assets
related to securitization bonds to be issued in the future in accordance with
the Settlement Plan. The regulatory asset writedown reflects the difference
20
between the carrying value of the asset and the cash flows associated with the
securitization bonds expected to be recovered through higher electricity
delivery rates. This difference reflects the decline in interest rates.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Operating revenues increased $233 million, or 11%, to $2.3 billion in 2001.
This increase is primarily due to the impact on reported revenues of regulation,
reflecting higher recoverable costs. Electricity volumes delivered declined 1%
due to milder, more normal weather, the effects of which were partially offset
by 2% growth in number of customers.
Operation and maintenance expenses increased $109 million, or 13%, to $920
million. The increase reflected higher bad debt expense, driven by higher fuel
charges to customers in late 2000 and early 2001, increases in transmission
costs paid to other utilities and computer systems costs incurred in 2001 to
prepare for the restructuring of the Texas electricity market. Operation and
maintenance expenses in 2001 and 2000 included recoverable regulatory asset
write-offs of $73 million and $52 million, respectively.
Taxes other than income taxes increased $107 million, or 25%, to $543
million in 2001. The increase reflected higher state and local gross receipts
taxes as a result of the rise in revenues, driven by higher fuel costs, in late
2000 and early 2001.
Interest expense increased $7 million, or 3% to $267 million in 2001 due to
higher average debt balances, including advances from affiliates.
Income tax expense was $119 million in 2001 (including $118 million related
to operating income and $1 million related to nonoperating income), resulting in
an effective tax rate of 34.3% in 2001 compared to 34.7% in 2000.
Net income increased $2 million, or 1%, to $228 million in 2001, reflecting
the higher revenues largely offset by the higher operation and maintenance
expenses and taxes other than income.
COMPREHENSIVE INCOME
Oncor has historically used, and will continue to use, derivative financial
instruments that are highly effective in offsetting future cash flow volatility
related to interest rates. The amounts included in other comprehensive income
are expected to offset the impact of future rate changes on related payments.
Amounts in other comprehensive income include (i) the value of cash flow hedges,
based on current market conditions and (ii) the value of dedesignated and
terminated cash flow hedges at the time of such dedesignation, less
amortization, providing the transaction that was hedged is still forecasted. The
effects of the hedges will be recorded in the statement of income as the hedged
transactions are actually settled.
During 2002, changes in the fair value of derivatives effective as cash
flow hedges reflected losses of $39 million ($25 million after-tax). These
losses were due to decreases in the fair value of interest rate hedges because
of lower interest rates.
During 2002, $1 million in after-tax losses in other comprehensive income
were recognized in earnings.
See also the discussion in Note 12 to the financial statements for the
years ended December 31, 2002, 2001 and 2000 under "Derivative Financial
Instruments and Hedging Activities" included elsewhere in this prospectus.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS -- Cash flows used by operating activities for the three months
ended March 31, 2003 were $4 million, compared to $142 million for the three
months ended March 31, 2002. The improved cash flow performance of $138 million
was driven by favorable working capital (accounts receivable, inventory, and
accounts payable) changes of $192 million, reflecting the unfavorable effect in
21
the prior year of the start-up of billing REPs for T&D charges effective January
1, 2002. Operating cash flow comparisons were negatively impacted by the higher
excess mitigation credit passed to REPs in 2003, the effect of which is
primarily offset in financing costs as the related note receivable from TXU
Energy is collected.
Cash flows provided by operating activities for the year ended December 31,
2002, were $233 million compared to $675 million and $441 million for the years
ended December 31, 2001 and 2000, respectively. The decrease in cash flows
provided by operating activities in 2002 of $442 million, or 65%, reflected
higher accounts receivable from REPs of $245 million, largely from TXU Energy,
due to the start-up of billing REPs for T&D charges effective January 1, 2002.
The decrease also reflected a $180 million effect of the excess mitigation
credit (see Note 3 to the financial statements for the years ended December 31,
2002, 2001 and 2000 included elsewhere in this prospectus) passed to REPs, which
is offset in financing activities as the related note receivable from TXU Energy
is collected. (See discussion in Note 12 to the financial statements for the
years ended December 31, 2002, 2001 and 2000 under "Affiliate Transactions"
included elsewhere in this prospectus.)
The increase in cash flows for the year ended December 31, 2001 of $234
million was driven by increases in accounts payable and lower cash payments for
income taxes. The increase in accounts payable related to billings for
consulting services incurred primarily to address compliance issues associated
with the restructuring of the Texas electric industry. Cash payments allocated
from US Holdings to Oncor for income taxes decreased to $33 million for the year
ended December 31, 2001 from $125 million for the comparable period 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.
Cash flows provided by financing activities were $43 million for the three
months ended March 31, 2003, compared to $249 million for the comparable period
in 2002. Debt retirements totaled $250 million in 2003, including $235 million
of first mortgage bonds and $15 million of medium term notes. Also in 2003,
Oncor repurchased $50 million of common stock held by US Holdings. A redemption
deposit (restricted cash) of $138 million was used to fund a debt retirement.
Advances from affiliates provided $158 million for the three months ended March
31, 2003 compared to $440 million for the comparable period in 2002.
Cash flows related to financing activities were a source of $364 million
for the year ended December 31, 2002, a use of $66 million for the comparable
period in 2001 and a source of $81 million for the comparable period in 2000.
Debt-related transactions were as follows:
2002 2001
------ ------
(IN MILLIONS)
Issuances:
Senior secured notes................ $2,050 $ -
Unsecured debentures................ 1,000 -
First mortgage bonds................ - 400
Advances from affiliates - net...... - 964
------ ------
$3,050 $1,364
====== ======
Repurchases/retirements:
First mortgage bonds................ $1,011 $ 848
Other debt.......................... 73 72
Advances from affiliates-net........ 1,345 -
------ ------
$2,429 $ 920
====== ======
Financing activities also included repurchases of common stock of $150
million for the year ended December 31, 2002 and $455 million for the comparable
period in 2001.
Cash flows used in investing activities, which consisted primarily of
capital expenditures, totaled $115 million and $141 million for the three months
ended March 31, 2003 and 2002, respectively. Other investing activities in 2003
included a cash source of $9 million, primarily reflecting net proceeds from
retirements of property, plant and equipment.
Cash flows used in investing activities totaled $555 million, $596 million
and $505 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Capital expenditures declined to $513 million for the year ended
December 31, 2002 from $635 million for the comparable period in 2001. Capital
expenditures are expected to total $542 million for the year ended December 31,
2003, substantially all of which is for maintenance and organic growth of
22
existing operations. Other investing activities for the year ended December 31,
2002 included $39 million for termination of out-of-the-money cash flow hedges,
primarily reflecting a decline in interest rates.
Depreciation and amortization expense reported in the statement of cash
flows for the year ended December 31, 2002 exceeds the amount reported in the
statement of income by $21 million. This difference primarily represents
amortization of regulatory assets, which is reported as operation and
maintenance expenses in the statement of income.
CREDIT FACILITIES -- As of March 31, 2003, Oncor had a $150 million 364-day
senior secured credit facility, expiring in December 2003, that was undrawn. The
facility was cancelled in April 2003.
In April 2003, a new $450 million revolving credit facility was
established for TXU Energy and Oncor that matures on February 25, 2005. The new
facility will be used for working capital and other general corporate purposes,
including commercial paper backup and letters of credit, and replaces the $1
billion 364-day revolving credit facility that expired in April 2003. Up to $450
million of letters of credit may be issued under the new facility.
This new facility, as well as others available to US Holdings, will
provide back-up for any future issuance of Oncor commercial paper. At March 31,
2003, Oncor had no outstanding commercial paper.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $217 million and $60
million outstanding as of March 31, 2003 and December 31, 2002, respectively.
The weighted average interest rates on short-term borrowings at March 31, 2003
and December 31, 2002, were 2.39% and 2.45%, respectively.
Over the next twelve months, Oncor will need to fund ongoing working
capital requirements and maturities of debt. Oncor has funded or intends to fund
these requirements through cash on hand, cash flows from operations and the
issuance of long-term debt or other securities. Other potential sources of
funding include credit facilities, bank borrowings and borrowings from
affiliated companies.
See Note 2 to the financial statements for the three months ended March
31, 2003 and 2002 and Note 6 to the financial statements for the years ended
December 31, 2002, 2001 and 2000 included elsewhere in this prospectus for
further detail of debt issuance and retirements.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of March 31, 2003, Oncor, TXU Energy
(through certain subsidiaries), 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 March 31, 2003, Oncor had sold $52
million face amount of receivables to TXU Receivables Company under the program
in exchange for cash of $13 million and $39 million in subordinated notes, with
$0.1 million of losses on sales for the three months ended March 31, 2003, that
principally represent the interest costs on the underlying financing. These
losses approximated 6% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding under the program
decreased from $16 million at December 31, 2002 to $13 million at March 31, 2003
primarily due to reserve requirements which apply factors from the prior
12-month period in determining the current period reserve. This period reflects
the billing and collection delays previously experienced as a result of new
systems and processes in TXU Energy and ERCOT for clearing customers switching
and billing data upon the transition to competition.
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 interests 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 balance sheet.
23
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
CONTINGENCIES RELATED TO RECEIVABLES PROGRAM -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB-
by Standard & Poor's (S&P) or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do
not waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds
during 2002 and in the first quarter of 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The billing delays have been resolved, but, while improving, the
lagging collection issues continue to impact the ratios. The implementation of
new provider of last resort (POLR) rules by the Commission and strengthened
credit and collection policies and practices are expected to bring the ratios in
consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (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 and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
The accounts receivable program also contains a cross default provision -
see discussion below.
24
CREDIT RATINGS OF TXU CORP., US HOLDINGS, TXU ENERGY AND ONCOR
The current credit ratings for TXU Corp., US Holdings, TXU Energy and Oncor
are presented below:
TXU Corp. US Holdings TXU Energy Oncor
----------- ------------ ----------- ---------
(Senior (Senior (Senior
Unsecured) Unsecured) Unsecured) (Secured)
S&P ........... BBB- BBB- BBB BBB
Moody's.......... Ba1 Baa3 Baa2 Baa1
Fitch ........... BBB- BBB- BBB BBB+
Moody's currently maintains a negative outlook for TXU Corp. and a stable
outlook for US Holdings, TXU Energy and Oncor. Fitch currently maintains a
stable outlook for each such entity. S&P currently maintains a negative outlook
for each such entity.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
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 TXU Corp., US Holdings, Oncor
and TXU Energy contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders' equity to total capitalization
ratios and leverage ratios and/or contain minimum net worth covenants. As of
March 31, 2003, TXU Corp., US Holdings, Oncor and TXU Energy were in compliance
with all such applicable covenants.
Certain financing and other arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material
provisions are described below.
Other agreements of TXU Corp., US Holdings, Oncor and TXU Energy,
including 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 such entities.
Cross Default Provisions
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default 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.
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million.
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount of $50 million or more would result in a
cross default for such party under the $450 million joint TXU Energy/Oncor
revolving credit facility. Under this 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, but not as to
Oncor. Also, under this 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, but not as to TXU Energy.
25
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
each have a cross default threshold of $50,000. If either an originator, TXU
Business Services Company or TXU Receivables Company defaults on indebtedness of
the applicable threshold, the facility could terminate.
Other arrangements, including leases, have cross default provisions, the
triggering of which would not result in a significant effect on Oncor's
liquidity.
CAPITALIZATION -- As part of its restructuring, US Holdings determined that
the initial capitalization of Oncor at January 1, 2002, would consist of
approximately 40% shareholder's equity and 60% debt (total short-term and
long-term debt and advances from affiliates) to match the capital structure upon
which the T&D rates approved by the Commission are based. At December 31, 2002,
the capitalization ratio was consistent with this determination.
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 have been restated to reflect this stock split.
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.
In both January and April 2003, Oncor repurchased 1,250,000 shares of its
common stock from US Holdings for $50 million. Resolutions have been passed to
repurchase an additional 937,500 shares from US Holdings for $37.5 million in
July 2003.
LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMITMENTS -- The following table
summarizes the contractual cash obligations of Oncor for each of the periods
presented (see Notes 6 and 11 to the financial statements for the years ended
December 31, 2002, 2001 and 2000 and Note 4 to the financial statements for the
three months ended March 31, 2003 and 2002 included elsewhere in this prospectus
for additional disclosures regarding terms of these obligations.) For the three
months ended March 31, 2003 there were no material changes in cash commitments
from those disclosed for the year ended December 31, 2002.
PAYMENTS DUE
----------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- ---------
Long-term debt ................... $ 319 $ 221 $ 92 $ -- $ 200 $ 3,600
Operating leases ................. 4 5 6 5 4 22
-------- -------- -------- -------- -------- ---------
Total contractual cash obligations $ 323 $ 226 $ 98 $ 5 $ 204 $ 3,622
======== ======== ======== ======== ======== =========
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that Oncor may experience a loss in value as a
result of changes in market variables such as interest rates, which Oncor is
exposed to in the ordinary course of business. Oncor enters into financial
instruments, such as interest rate swaps to manage interest rate risk related to
its indebtedness.
INTEREST RATE RISK -- The table below provides information concerning
Oncor's financial instruments as of December 31, 2002 and 2001 that are
sensitive to changes in interest rates. Comparable information as of March 31,
2003 is not significantly different from the December 31, 2002 information
provided below. The weighted average rate is based on the rate in effect at the
reporting date. Capital leases and the effects of unamortized premiums and
discounts are excluded from the table. See Note 6 to the financial statements
for the years ended December 31, 2002, 2001 and 2000 and Note 2 to the financial
statements for the three months ended March 31, 2003 and 2002 included elsewhere
in this prospectus for a discussion of changes in debt obligations.
26
EXPECTED MATURITY DATE
--------------------------------------------------
(MILLIONS OF DOLLARS) 2002 2001
THERE- 2002 FAIR 2001 FAIR
2003 2004 2005 2006 2007 AFTER TOTAL VALUE TOTAL VALUE
---- ---- ---- ---- ---- ------ ----- ----- ----- -----
Long-term Debt
(including current maturities)
Fixed Rate ................... $319 $221 $ 92 - $200 $3,600 $4,432 $4,487 $2,066 $2,082
Average interest rate..... 6.94% 7.16% 6.75% - 5.00% 7.01% 6.92% - 7.78% -
Variable Rate ................ - - - - - - - - $1,600 $1,600
Average interest rate..... - - - - - - - - 2.93% -
CREDIT RISK -- Credit risk relates to the risk of loss that Oncor may incur
as a result of non-performance by its counterparties. Oncor's customers consist
primarily of REPs. As a requisite for obtaining and maintaining certification, a
REP must meet certain financial resource standards established by the
Commission. REP certificates granted by the Commission are subject to suspension
and revocation for significant violation of the Public Utility Regulatory Act
and Commission rules. Significant violations include failure to timely remit
payments for invoiced charges to a transmission and distribution utility
pursuant to the terms of tariffs adopted by the Commission. Additionally, the
Commission's ratemaking policies and practices permit recovery of annual bad
debt charge-offs through approved tariffs. Since most of the transmission and
distribution services provided and invoiced by Oncor are to its affiliated REP,
TXU Energy, a material loss to Oncor arising from nonperformance by this REP is
considered unlikely.
Oncor's exposure to credit risk primarily represents trade accounts
receivable from unaffiliated customers, which was $62 million as of December 31,
2002. One nonaffiliated customer represented 12.6% of this amount.
REGULATION AND RATES
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement was approved by the Commission in June 2002 and has become final.
Excess Mitigation Credit -- Beginning in 2002, Oncor began implementing an
excess stranded cost mitigation credit designed to result in a $350 million,
plus interest, reduction to T&D rates charged to REPs applied over a two-year
period. The actual amount of this credit is expected to be somewhat higher as
delivery volumes are anticipated to be higher than initially estimated; however,
Oncor's earnings will be unaffected by the increase as TXU Energy will fund the
increased credit.
Regulatory Asset Securitization -- In accordance with the Settlement,
Oncor received a financing order authorizing it to issue securitization bonds in
the aggregate principal amount of $1.3 billion to recover regulatory assets and
other qualified costs. The Settlement provides that there can be an initial
issuance of securitization bonds in the amount of up to $500 million, followed
by a second issuance of the remainder after 2003. The Settlement resolves all
issues related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial power consumption after
the first two years of competition, the amount of the retail clawback credit
will be equal to the number of residential and small commercial customers
retained by TXU Energy in its historical service territory on January 1, 2004,
less the number of new customers TXU Energy has added outside of its historical
service territory as of January 1, 2004, multiplied by $90. This determination
will be made separately for the residential and small commercial classes. The
credit, if any, will be applied to T&D rates charged by Oncor to REPs, including
TXU Energy, over a two-year period beginning January 1, 2004. Under the
settlement agreement, TXU Energy will make a compliance filing with the
Commission reflecting customer count as of January 2004. In the fourth quarter
27
of 2002, TXU Energy recorded a $185 million ($120 million after-tax) charge for
the retail clawback, which represents the current best estimate of the amount to
be funded to Oncor over the two-year period.
TRANSMISSION RATES -- Under Commission rules, transmission service
providers are allowed to update transmission rates on an annual basis to reflect
changes in invested capital. On March 27, 2003, Oncor filed with the Commission
a request for an interim update of its previously approved wholesale
transmission rates. The increased annual revenue related to this request is
approximately $28.4 million. The Commission approved Oncor's request as filed
and the new rates were effective May 9, 2003.
SUMMARY -- Although Oncor cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments other than those discussed in this
prospectus, which might significantly alter Oncor's financial position, results
of operations or cash flows.
CHANGES IN ACCOUNTING STANDARDS
See Note 2 to the financial statements for the the years ended December 31,
2002, 2001 and 2000 and Note 1 to the financial statements for the three months
ended March 31, 2003 and 2002 for a discussion of changes in accounting
standards.
28
BUSINESS
OVERVIEW OF ONCOR ELECTRIC DELIVERY COMPANY AND AFFILIATES
Oncor is a wholly-owned subsidiary of US Holdings which is a wholly-owned
subsidiary of TXU Corp. Oncor is a regulated electricity T&D company principally
engaged in providing delivery services to REPs that sell power in the
north-central, eastern and western parts of Texas. A majority of Oncor's
revenues represent fees for delivery services provided to TXU Energy, a
wholly-owned subsidiary of US Holdings. Oncor is an indirect, wholly-owned
subsidiary of TXU Corp.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery, and telecommunications services. TXU Corp.
delivers or sells energy to approximately five million residential, commercial
and industrial customers in the United States and Australia.
Within the TXU corporate structure, Oncor, TXU Gas and three 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' three
subsidiaries managed within the Oncor Group are Oncor Utility Solutions (Texas)
Company, Oncor Utility Solutions (North America) Company and Oncor Utility
Solutions (Canada) Company Limited. While these three 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 electricity 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 4,522 circuit miles
of 345-kilovolt (kV) transmission lines and 9,615 circuit miles of
138-kV and 69-kV transmission lines and over 900 substations.
o ELECTRIC DISTRIBUTION - Oncor's electricity distribution business
distributes electricity for REPs in its certificated service area.
Oncor's service territory includes 92 counties and 370 incorporated
municipalities in the north-central, eastern and western parts of
Texas. Oncor provides delivery services to these REPs, which sell
electricity to over 2.9 million points of delivery. Oncor's
distribution network consists of 55,178 miles of overhead primary
conductors, 22,073 miles of overhead secondary and street light
conductors, 12,264 miles of underground primary conductors and 7,332
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, which is the largest REP operating in Oncor's
certificated service area. Delivery fee revenues from TXU Energy represent the
substantial majority of Oncor's revenues.
Oncor's operations do not include the production or sale of electricity,
but rather consist of providing T&D and related services.
For a more detailed discussion of Oncor's principal operations see "Oncor's
Business" below.
29
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 T&D company or separate T&D
companies. As a result, TXU Corp. restructured certain of its businesses
effective January 1, 2002 and began to participate in retail competition in the
Texas electricity market on that date.
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 T&D business and
transferred to various subsidiaries of TXU Energy its generation assets and
retail customers. Also, on January 1, 2002, the regulated electric T&D 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 Corp.'s principal US legal entities and
their relationships before and after the restructuring:
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 Portfolio** Management Company, TXU Energy Retail
__________________________
* Formerly TXU Electric Company
** Formerly TXU Energy Trading Company
A more detailed discussion of each of Oncor's principal operations follows.
ONCOR'S BUSINESS
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. Oncor operates within ERCOT. ERCOT is an intrastate
network of investor-owned entities, cooperatives, public entities, non-utility
generators and power marketers. ERCOT is the regional reliability coordinating
organization for member electric power systems in Texas and the Independent
System Operator 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.
30
ELECTRIC TRANSMISSION -- Oncor's electricity transmission business is
responsible for the real-time safe and reliable operations of its transmission
network. These responsibilities consist of the construction and maintenance of
transmission facilities and the monitoring, controlling and dispatching of
high-voltage electricity within Oncor's control area.
Oncor is a member of ERCOT, and the transmission business actively supports
the operation of ERCOT and all market participants. The transmission business
participates with ERCOT and other member utilities to plan, design and obtain
regulatory approval for construction of new transmission lines necessary to
increase bulk power transfer capability and to remove existing limitations and
constraints on the ERCOT transmission grid.
Transmission revenues are provided under tariffs approved by the Commission
and the FERC. Network transmission revenues are provided from the use of the
transmission power lines for delivery of power over facilities operating at
60,000 volts and above. Transformation service revenues are provided from the
use of distribution substation facilities that transform power from high-voltage
transmission to distribution voltages below 60,000 volts. Other services offered
by the transmission business include, but are not limited to: system impact
studies, facilities studies and maintenance of substations and transmission
lines owned by other non-retail parties.
The principal generating facilities of TXU Energy, certain non-utility
generators and load centers of Oncor are connected by 4,522 circuit miles of 345
kV transmission lines and 9,615 circuit miles of 138- and 69-kV transmission
lines.
Oncor is connected by eight 345-kV lines to CenterPoint Energy (formerly
Reliant Energy Inc.); by four 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 American Electric Power Company in the Southwest Power Pool;
and at several points with smaller systems operating wholly within Texas.
ELECTRIC DISTRIBUTION -- Oncor's electricity distribution business is
responsible for the overall safe and efficient operations of distribution
facilities, including power delivery, power quality and system reliability. The
Oncor distribution system supplies electricity to over 2.9 million points of
delivery. The electricity distribution business consists of the ownership,
management, construction, maintenance and operation of the distribution network
within Oncor's certificated service area. Over the past five years, the number
of Oncor's distribution system premises served has been growing an average of
more than 2% a year.
The 2.7 million formerly regulated electricity customers (retail customers
who purchase and consume electricity) are free to choose from REPs who compete
for their business. However, these REPs are now Oncor's customers. The changed
character of customers, however, does not mean that the safe and reliable
delivery of dependable energy is any less critical to Oncor's success. Service
quality, safety and reliability are of paramount importance to REPs, their
customers and Oncor. Oncor intends to continue to build on its inherited
tradition of low cost and high performance.
Oncor's distribution system receives electricity from the transmission
system through power distribution substations and distributes electricity to end
users and wholesale customers through 2,914 distribution feeders.
The Oncor distribution network consists of 55,178 miles of overhead primary
conductors, 22,073 miles of overhead secondary and street light conductors,
12,264 miles of underground primary conductors and 7,332 miles of underground
secondary and street light conductors. The majority of the distribution system
operates at 25-kV and 12.5-kV.
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.
31
CONSTRUCTION PROGRAM -- Construction expenditures for the years 2003
through 2005 are estimated as follows:
2003 2004 2005
-------- --------- --------
(Millions of Dollars)
Transmission $ 225 $ 240 $ 240
Distribution 315 310 293
-------- --------- --------
Total $ 540 $ 550 $ 533
======== ========= ========
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 companies. Oncor's distribution customers
consist of approximately 35 REPs in Oncor's certificated service area. One of
these REPs is TXU Energy, which is the largest REP operating in Oncor's
certificated service area. Delivery fee revenues from TXU Energy represent the
substantial majority of Oncor's revenues. Each REP is licensed by the Commission
and must satisfy credit criteria and/or post collateral under Commission
regulations. Commission 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. Since Oncor's operations are wholly in the state of Texas,
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 Commission has original jurisdiction over Oncor's transmission rates
and services. With respect to Oncor's distribution rates and services, the
Commission has original jurisdiction in unincorporated areas and those
municipalities that have ceded original jurisdiction to the Commission 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 Commission.
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed the
Settlement Plan with the Commission. It resolved all major pending issues
related to US Holdings' transition to competition pursuant to the 1999
Restructuring Legislation. The Settlement provided for in the Settlement Plan
does not remove regulatory oversight of Oncor's business nor does it eliminate
TXU Energy's price-to-beat rates and related fuel adjustments. The Settlement
was approved by the Commission in June 2002 and has become final.
The major elements of the Settlement affecting Oncor are:
Excess Mitigation Credit and Appeals Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit
designed to result in a $350 million, plus interest, reduction to T&D rates
charged to REPs applied over a two-year period. The actual amount of this credit
is expected to be somewhat higher as delivery volumes are anticipated to be
higher than initially estimated; however, Oncor's earnings will be unaffected by
the increase as TXU Energy will fund the increased credit.
Regulatory Asset Securitization -- In accordance with the Settlement, Oncor
received a financing order authorizing it to issue securitization bonds in the
aggregate principal amount of $1.3 billion to recover regulatory assets and
other qualified costs. The Settlement provides that there can be an initial
issuance of securitization bonds in the amount of up to $500 million, followed
by a second issuance of the remainder after 2003. The Settlement resolves all
issues related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial power consumption after
the first two years of competition, the amount of the retail clawback credit
will be equal to the number of residential and small commercial customers
retained by TXU Energy in its historical service territory on January 1, 2004,
less the number of new customers TXU Energy has added outside of its historical
service territory as of January 1, 2004, multiplied by $90. This determination
will be made separately for the residential and small commercial classes. The
credit, if any, will be applied to T&D rates charged by Oncor to REPs, including
TXU Energy, over a two-year period beginning January 1, 2004. Under the
settlement agreement, TXU Energy will make a compliance filing with the
Commission reflecting customer count as of January 2004. In the fourth quarter
32
of 2002, TXU Energy recorded a $185 million ($120 million after-tax) charge for
the retail clawback, which represents the current best estimate of the amount to
be funded to Oncor over the two-year period.
Transmission Rates -- Under Commission rules, transmission service
providers are allowed to update transmission rates on an annual basis to reflect
changes in invested capital. On March 27, 2003, Oncor filed with the Commission
a request for an interim update of its previously approved wholesale
transmission rates. The increased annual revenue related to this request is
approximately $28.4 million. The Commission approved Oncor's request as filed
and the new rates were effective May 9, 2003.
See also Note 3 to the financial statements for the years ended December
31, 2002, 2001 and 2000 for further discussion of regulatory matters related to
Oncor.
Summary -- Although Oncor cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments other than those discussed in this
prospectus, which might significantly alter Oncor's financial position, results
of operations or cash flows.
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.
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 properly manages and disposes of PCB contaminated equipment as it is
removed from service. Oncor estimates that less than 5% of its equipment in use
is PCB-contaminated under Environmental Protection Agency standards.
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 -- Oncor is party to 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.
33
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 2004) IN MAY 2004) OTHER DIRECTORSHIPS
- ----------------------------------------------------- ------------------------- ---------------------------------------
T. L. Baker 57 Vice Chairman November 6, 2001 Executive Vice President of TXU Corp.
and 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; other
directorships: TXU Gas.
H. Dan Farell 53 None May 16, 2003 Executive Vice President and Chief
Financial Officer of TXU Corp. and
Executive Vice President of US
Holdings; prior thereto, President
of TXU Gas Distribution and TXU
Lone Star Pipeline; prior thereto,
President TXU Gas Distribution and
Oncor; prior thereto, Executive
Vice President of TXU Electric, TXU
Gas Distribution and TXU SESCO;
prior thereto, Chairman of the
Board of TXU Electricity Limited
and Managing Director of TXU
Australia; other directorships: US
Holdings, TXU Energy and TXU Gas.
Michael J. McNally 48 None November 6, 2001 Executive Vice President of TXU
Corp.; prior thereto, Executive
Vice President and Chief Financial
Officer of TXU Corp. and Executive
Vice President of US Holdings;
other directorships: US Holdings,
TXU Energy, TXU Gas and TXU Europe
Limited.
Erle Nye 66 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 65 None November 6, 2001 Partner in the law firm of Hunton &
Williams; other directorships: TXU
Energy and TXU Europe Limited.
34
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 2004) IN MAY 2004) (PRECEDING FIVE YEARS)
- -------------------- -------- ----------------------- ----------------------- ----------------------------------------
Erle Nye 66 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 Executive Vice President of TXU Corp.
and 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.
M. S. Greene 57 President November 4, 2002 President of Oncor; prior thereto,
President of Transmission Division
of Oncor and TXU Lone Star Pipeline;
prior thereto, Executive Vice
President of TXU Fuel Company and
TXU Mining Company.
Scott R. Longhurst 36 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.
35
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 June 30, 2003. 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 June 30, 2003.
NAME BENEFICIALLY OWNED SHARE PLAN(1) TOTAL
---- ------------------ ------------- -----
(NUMBER OF SHARES)
T. L. Baker................. 158,452 38,680 197,132
H. Dan Farell............... 54,615 26,700 81,315
M. S. Greene ............... 56,990 26,069 83,059
Scott R. Longhurst.......... 29,176 0 29,176
Michael J. McNally.......... 176,000 46,218 222,218
Erle Nye.................... 496,194 108,127 604,321
Eric H. Peterson ........... 61,686 5,536 67,222
R. A. Wooldridge............ 9,593 0 9,593
All directors and executive
officers as a group (8)... 1,042,706 251,330 1,294,036
_________________
(1) Share units held in deferred compensation accounts under the TXU
Deferred and Incentive Compensation Plan (DICP). Although the DICP
allows such units to be paid only in the form of cash, investments in
units under the DICP create essentially the same investment stake in
the performance of TXU Corp.'s common stock as do investments in actual
shares of TXU Corp.'s common stock.
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.
36
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 Corp. as a result of 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. 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 Commission 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.
37
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Oncor is offering to exchange the New 2015 Notes for the Old 2015 Notes and
the New 2033 Notes for the Old 2033 Notes, as described herein. Unlike the Old
Notes, the New Notes will be registered under the Securities Act.
The Old Notes were sold to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation and Banc One Capital
Markets, Inc. (the Initial Purchasers) on December 20, 2002. In connection with
the sale of the Old Notes, Oncor and the Initial Purchasers entered into a
registration rights agreement, dated December 20, 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 December 20, 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 December 20, 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
December 20, 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
on the Old Notes 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 certain 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
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.
38
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 December 20,
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.
As of the date of this prospectus, $500,000,000 in aggregate principal
amount of the Old 2015 Notes and $350,000,000 in aggregate principal amount of
the Old 2033 Notes is outstanding. This prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes.
39
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.
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:
40
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
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
41
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:
(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
42
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.
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.
43
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: Kin Lau
By Telephone: (212) 815-3750
By Facsimile: (212) 298-1915
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.
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
44
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.
45
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 of each series will be identical in all material respects to
the Old Notes of the respective series, 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 2015 Notes will mature on January 15, 2015, and the New 2033 Notes
will mature on January 15, 2033, 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 2015 Notes and at the rate of 7.250% with respect to the New 2033
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 January 15 and July 15 of each
year, commencing July 15, 2003, and at maturity;
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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 December 20, 2002; and
o be paid to the persons in whose names the New Notes are registered at
the close of business on December 31 for the January 15 interest
payment date and on July 1 for the July 15 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) .30% with respect to the New 2015 Notes or (ii) .35% with
respect to the New 2033 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 Merrill Lynch Government Securities,
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
48
(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
49
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 March 31, 2003,
Oncor had outstanding 1983 Mortgage Bonds in an aggregate principal amount equal
to approximately $3,182 million ($1,132 million of which are not held by the
Trustee (which equaled approximately 17% 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
50
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,
51
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
52
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
such property and renewals, replacements and substitutions of or for
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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;
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;
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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
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.
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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
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.
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(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
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
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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 to matters with respect to which it, as such 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:
59
(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. As of March 31, 2003, the Trustee
held approximately 64% 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
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.)
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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.
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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
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.
62
DESCRIPTION OF THE 1983 MORTGAGE BONDS
The first mortgage bonds were issued on December 20, 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
December 20, 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.
63
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.)
64
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.
65
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
66
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 15% for years 2003 through 2008, and 20%
for years 2009 and later, where the property is held for more than one year. For
property held for one year or less, capital gain of a non-corporate United
States Holder is generally taxed at rates applicable to ordinary income.
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
67
receives interest that is not effectively connected with the trade or business,
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
years 2003 through 2010 is 28%, and for years 2011 and later is 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.
68
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-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.
69
EXPERTS
The financial statements of Oncor as of December 31, 2002 and 2001, and for
the three years ended December 31, 2002, included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. Such 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 LLP,
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 LLP,
Dallas, Texas. At March 31, 2003, the fair market value of securities of TXU
Corp. and its subsidiaries owned by attorneys at each of the firms of Hunton &
Williams LLP 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 $185,200 and $111,300, respectively. Robert A.
Wooldridge, a partner at Hunton & Williams LLP, is a member of the governing
boards 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 boards of certain subsidiaries of TXU Corp.
70
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Independent Auditors' Report.......................................................... F-2
Statements of Consolidated Income and Consolidated Comprehensive
Income for the years ended December 31, 2002, 2001 and 2000........................... F-3
Statements of Consolidated Cash Flows for the years
ended December 31, 2002, 2001 and 2000................................................ F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001.......................... F-5
Statements of Consolidated Shareholder's Equity for the years
ended December 31, 2002, 2001 and 2000................................................ F-6
Notes to Financial Statements......................................................... F-7
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Independent Accountants' Report....................................................... F-25
Condensed Statements of Consolidated Income and Consolidated
Comprehensive Income for the three months ended March 31, 2003 and 2002............... F-26
Condensed Statements of Consolidated Cash Flows for the
three months ended March 31, 2003 and 2002............................................ F-27
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002................................................................. F-28
Notes to Financial Statements......................................................... F-29
F-1
INDEPENDENT AUDITORS' REPORT
ONCOR ELECTRIC DELIVERY COMPANY:
We have audited the accompanying consolidated balance sheets of Oncor Electric
Delivery Company and subsidiaries (Oncor) as of December 31, 2002 and 2001, and
the related statements of consolidated income, comprehensive income,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2002. 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 and
assumptions 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 consolidated financial statements present fairly, in all
material respects, the financial position of Oncor at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 14, 2003
F-2
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------- ------- -------
MILLIONS OF DOLLARS
Operating revenues:
Affiliated.................................................. $1,586 $2,314 $2,081
Nonaffiliated .............................................. 408 - -
------- ------- -------
Total operating revenues................................ 1,994 2,314 2,081
------- ------- -------
Operating expenses:
Operation and maintenance................................... 762 920 811
Depreciation and amortization............................... 264 239 232
Income taxes................................................ 100 118 118
Taxes other than income..................................... 391 543 436
------- ------- -------
Total operating expenses................................ 1,517 1,820 1,597
------- ------- -------
Operating income .............................................. 477 494 484
Other income and deductions:
Other income................................................ 9 9 8
Other deductions............................................ 7 7 5
Nonoperating income taxes.................................. 18 1 2
Interest income-- affiliates................................... 49 - 1
Interest expense and other charges............................. 265 267 260
------- ------- -------
Income before extraordinary loss............................... 245 228 226
Extraordinary loss, net of tax effect.......................... (123) - -
------- ------- -------
Net income..................................................... $ 122 $ 228 $ 226
======= ======= =======
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------- ------- -------
MILLIONS OF DOLLARS
Net income.................................................... $ 122 $ 228 $ 226
------- ------- -------
Other comprehensive income (loss)--
Net change related to derivatives (cash flow hedges):
Net change in fair value, net of tax benefit of $14. (25) - -
Amounts realized in earnings during the year........ 1 - -
------- ------- -------
Total.................................................. (24) - -
======= ======= =======
Comprehensive income.......................................... $ 98 $ 228 $ 226
======= ======= =======
See Notes to Financial Statements.
F-3
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
------- ------ ------
MILLIONS OF DOLLARS
Cash flows-- operating activities
Net income..................................................................... $ 122 $ 228 $ 226
Adjustments to reconcile net income to cash provided by operating activities:
Extraordinary loss, net of tax effect........................................ 123 - -
Depreciation and amortization ............................................... 285 239 305
Deferred income taxes and investment tax credits-- net ...................... 154 34 (24)
Gains from sale of assets ................................................... (2) - -
Reduction of revenues for earnings in excess of regulatory earnings cap...... - 5 -
Changes in operating assets and liabilities:
Accounts receivable-- trade (including affiliates)......................... (216) (23) (27)
Accounts payable-- trade (including affiliates)............................ (23) 28 (59)
Other assets............................................................... (203) 60 (4)
Other liabilities.......................................................... (7) 104 24
------- ------ ------
Cash provided by operating activities.................................... 233 675 441
------- ------ ------
Cash flows-- financing activities
Issuances of long-term debt..................................................... 3,050 400 575
Retirements/repurchases of debt................................................. (1,084) (920) (159)
Repurchase of common stock...................................................... (150) (455) (248)
Net change in advances from affiliates.......................................... (1,345) 964 (83)
Decrease in note receivable from TXU Energy related to a regulatory liability... 180 - -
Debt premium, discount, financing, reacquisition expenses and redemption deposits (287) (55) (4)
------- ------ ------
Cash provided by (used in) financing activities............................ 364 (66) 81
------- ------ ------
Cash flows-- investing activities
Capital expenditures............................................................ (513) (635) (517)
Proceeds from sale of assets.................................................... 4 - -
Other........................................................................... (46) 39 12
------- ------ ------
Cash used in investing activities.......................................... (555) (596) (505)
------- ------ ------
Net change in cash and cash equivalents........................................... 42 13 17
Cash and cash equivalents-- beginning balance...................................... 35 22 5
------- ------ ------
Cash and cash equivalents-- ending balance........................................ $ 77 $ 35 $ 22
======= ====== ======
See Notes to Financial Statements.
F-4
ONCOR ELECTRIC DELIVERY COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2002 2001
------ ------
MILLIONS OF DOLLARS
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 77 $ 35
Accounts receivable:
Affiliates (principally TXU Energy)............................................. 213 -
Other........................................................................... 62 131
Materials and supplies inventories - at average cost.............................. 40 38
Note receivable from TXU Energy................................................... 170 170
Other current assets.............................................................. 35 36
------ ------
Total current assets.......................................................... 597 410
Investments:
Restricted cash................................................................. 210 -
Other investments............................................................... 29 29
Property, plant and equipment - net............................................... 6,056 5,802
Due from TXU Energy............................................................... 437 617
Regulatory assets - net........................................................... 1,630 1,605
Other noncurrent assets........................................................... 63 32
------ ------
Total assets.................................................................. $9,022 $8,495
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Long-term debt due currently...................................................... $ 319 $ 370
Advances from affiliates.......................................................... 60 108
Accounts payable:
Affiliates...................................................................... - 43
Other........................................................................... 30 50
Customer deposits................................................................. 1 81
Accrued taxes..................................................................... 142 170
Accrued interest.................................................................. 70 54
Other current liabilities......................................................... 91 130
------ ------
Total current liabilities..................................................... 713 1,006
Accumulated deferred income taxes................................................... 1,296 1,204
Investment tax credits............................................................. 74 79
Other noncurrent liabilities and deferred credits................................... 210 223
Long-term debt, less amounts due currently.......................................... 4,080 3,282
Contingencies (Note 11)
Shareholder's equity (Note 7)....................................................... 2,649 2,701
------ ------
Total liabilities and shareholder's equity...................................... $9,022 $8,495
====== ======
See Notes to Financial Statements.
F-5
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
DECEMBER 31,
---------------------------------
2002 2001 2000
------ ------ ------
MILLIONS OF DOLLARS
Balance at beginning of year.......................................... $2,701 $2,532 $2,554
Net income......................................................... 122 228 226
Repurchase of common stock of US Holdings allocated to Oncor....... - (455) (248)
Common stock repurchased and retired (2002 - 1,388,000 shares)..... (150)
Conversion of advances to capital.................................. - 396 -
Changes in accumulated other comprehensive loss, net of tax effects (24) - -
------ ------ ------
Balance at end of year................................................ $2,649 $2,701 $2,532
====== ====== ======
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. Oncor was created as a result of the deregulation
of the electric utility industry in Texas effective January 1, 2002. Oncor is a
wholly-owned subsidiary of TXU US Holdings Company (US Holdings), formerly TXU
Electric Company, which is a wholly-owned subsidiary of TXU Corp. Prior to
January 1, 2002, US Holdings was a regulated, integrated electric utility
company engaged in the generation, purchase, transmission, distribution and sale
of electricity (power) in the north-central, eastern and western parts of Texas.
Oncor is a regulated electricity transmission and distribution (T&D)
company principally engaged in providing delivery services to retail electric
providers (REPs) that sell power in the north-central, eastern and western parts
of Texas. For the year ended December 31, 2002, approximately 80% of Oncor's
revenues represented fees for delivery services provided to TXU Energy Company
LLC (TXU Energy) under the restructured operating environment described below.
BUSINESS RESTRUCTURING - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
and provided for a transition to increased competition in the generation and
retail sale of electricity (1999 Restructuring Legislation). As a result, TXU
Corp. restructured certain of its US businesses effective 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, which is a utility regulated by the
Commission;
o its unregulated power generation assets to subsidiaries of TXU Energy,
which is the new competitive business and also a wholly-owned
subsidiary of US Holdings; and
o its retail customers to a subsidiary REP of TXU Energy.
In addition, the T&D assets of TXU SESCO Company, a subsidiary of TXU
Corp., also 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.
Oncor operates within the Electric Reliability Council of Texas (ERCOT)
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electric power systems
in Texas and the Independent System Operator 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.
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
December 31, 2000, present the financial position, results of operations and
cash flows of the combined T&D operations of US Holdings and TXU SESCO Company.
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 a 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.
F-7
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
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.
Allocations reflected in the financial information for 2001 and 2000 did not
necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. 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.
USE OF ESTIMATES -- The preparation of Oncor's consolidated 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. In the
event estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
No material adjustments, other than those disclosed elsewhere herein, were made
to previous estimates during the current year. In addition, see above for
discussion of estimates used and methodologies employed to derive the combined
financial statements for 2001 and 2000.
SYSTEM OF ACCOUNTS -- The accounting records of Oncor have been maintained
in accordance with the Federal Energy Regulatory Commission's (FERC) Uniform
System of Accounts as adopted by the Commission.
REGULATORY ASSETS AND LIABILITIES -- The 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 Company's T&D operations and those assigned from US
Holdings that arose from generation operations.
GOODWILL AND INTANGIBLE ASSETS -- 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 a range of
20 to 40 years.
SFAS No. 142, "Goodwill and Other Intangible Assets," became effective for
Oncor on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units, and the discontinuance of goodwill amortization. The
amortization of Oncor's goodwill from continuing operations ($1 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 at that time. No impairment resulted from
the additional evaluation performed in 2002 as of October 1, which has been
selected as the annual impairment test date.
F-8
SFAS No. 142 also requires additional disclosures regarding intangible
assets (other than goodwill) that are amortized:
AS OF DECEMBER 31, 2002 AS OF DECEMBER 31, 2001
--------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ---- -------- ------------ ----
Amortized intangible assets
Capitalized software............... $151 $ 53 $ 98 $131 $ 37 $ 94
Land easements..................... 168 51 117 161 54 107
-------- ------------ ---- -------- ------------ ----
Total............................ $319 $104 $215 $292 $ 91 $201
======== ============ ==== ======= ============ ====
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Oncor has no intangible assets (other than
goodwill) that are not amortized.
Aggregate amortization expense for intangible assets, other than goodwill,
for the years ended December 31, 2002, 2001 and 2000 was $19 million, $10
million and $15 million, respectively; estimated amounts for the next five years
are as follows:
AMORTIZATION
YEAR EXPENSE
---- ------------
2003................................................. $20
2004................................................. 20
2005................................................. 20
2006................................................. 20
2007................................................. 9
At December 31, 2002 and 2001, goodwill of $25 million was reported in
investments on the balance sheet, which was net of accumulated amortization of
$7 million.
PROPERTY, PLANT AND EQUIPMENT -- T&D facilities are stated at original
cost. The cost of T&D facility additions includes labor and materials,
applicable overhead and payroll-related costs and an allowance for funds used
during construction (AFUDC). AFUDC is a regulatory cost 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 facilities
being constructed. Oncor used AFUDC rates of 6.6% in 2002 and 2001 and 9% in
2000.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT -- Depreciation is generally
calculated on a straight-line basis over the estimated service lives of the
properties. Depreciation as a percent of average depreciable property
approximated 2.9% for 2002, 2001 and 2000.
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.
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 associated with the assets are less
than carrying value. In that event, a loss would be recognized based on the
amount by which the carrying value exceeds the fair value. Fair value is
determined primarily by available market valuations or, if applicable,
discounted cash flows. (See Changes in Accounting Standards below.)
FINANCIAL INSTRUMENTS -- Oncor utilizes derivative financial instruments
such as interest rate swaps in order to manage its exposure to changes in
interest rates. Oncor generally designates these derivatives as cash flow
hedges.
F-9
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
requires the recognition of derivatives in the balance sheet, the measurement of
those instruments at fair value and the recognition in earnings of changes in
the fair value of derivatives. SFAS No. 133 provides exceptions to this
accounting if (a) the derivative is deemed to represent a transaction in the
normal course of purchasing from a supplier and selling to a customer, or (b)
the derivative is deemed to be a cash flow or fair value hedge. In accounting
for cash flow hedges, derivative assets and liabilities are recorded on the
balance sheet at fair value with an offset in other comprehensive income. Any
hedge ineffectiveness is recorded in earnings. Amounts are reclassified from
other comprehensive income to earnings as the underlying transactions occur and
realized gains and losses are recognized in earnings. As of December 31, 2002,
Oncor had no fair value hedges.
Oncor documents designated debt-related hedging relationships, including
the strategy and objectives for entering into such hedge transactions and the
related specific firm commitments or forecasted transactions. Effectiveness is
assessed based on changes in cash flows of the hedges as compared to changes in
cash flows of the hedged items.
REVENUE RECOGNITION -- Oncor records revenue for delivery services under
the accrual method. Electricity T&D revenues are recognized when delivery
services are provided to customers on the basis of periodic cycle meter readings
and include an estimated accrual for the delivery fee value of electricity
provided from the meter reading date to the end of the period. The accrued
revenue is based on actual daily revenues for the most recent metered period
applied to the number of unmetered days through 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. 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 the expense associated with 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.
TAXES OTHER THAN INCOME -- Local gross receipts taxes reported in taxes
other than income are generally not a "pass through" item such as sales and
excise taxes. Local gross receipts taxes are assessed to Oncor by local
governmental bodies, based on sales-related input, as a cost of doing business.
Oncor records local gross receipts tax as an expense.
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. 143, "Accounting for Asset
Retirement Obligations", became effective on January 1, 2003. SFAS No. 143
requires entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the net
present value of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted each period, and the capitalized
cost is depreciated over the useful life of the related asset. The adoption of
SFAS No. 143 is not expected to have a material effect on Oncor's earnings or
financial condition.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective 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.
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
became 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
F-10
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 became 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.
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" was issued in
November 2002 and became effective for disclosures made in the December 31, 2002
financial statements. The interpretation requires expanded disclosures of
guarantees. In addition, the interpretation requires recording the fair market
value of guarantees upon issuance or modification after January 1, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for the quarter ending September 30, 2003.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
3. REGULATION AND RATES
RESTRUCTURING LEGISLATION -- The 1999 Restructuring Legislation
restructured the electric utility industry in Texas and provided for a
transition to increased competition in the generation and retail sale of
electricity. By January 1, 2002, each electric utility was required to separate
(unbundle) its business activities into a power generation company, a REP, and a
T&D utility or separate T&D utilities. Unbundled T&D utilities within ERCOT,
such as Oncor, remain regulated by the Commission.
The 1999 Restructuring Legislation provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided a means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
REGULATORY SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement was approved by the Commission in June, 2002. In August, 2002,
the Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas District Court in August, 2002. In January, 2003 US Holdings
concluded a settlement of these appeals and they were dismissed. Thus the
Settlement became final.
The major elements of the Settlement affecting Oncor are:
Excess Mitigation Credit and Appeals Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had 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 in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed to the Travis
F-11
County, Texas District Court. Finalization of the Settlement means TXU Corp.'s
appeal has been dismissed. Also, in July 2001, the staff of the Commission had
notified US Holdings and the Commission that it disagreed with US Holdings'
computation of the level of earnings in excess of the regulatory earnings cap
for calendar year 2000. In August 2001, the Commission issued an order adopting
the staff position. US Holdings appealed this matter to the Travis County, Texas
District Court, which affirmed the Commission's order and US Holdings then
appealed that decision to the Third District Court of Appeals in Austin, Texas.
This appeal has now been dismissed.
Regulatory Asset Securitization -- In October 1999, US Holdings filed an
application with the Commission for a financing order to permit the issuance by
a special purpose entity of $1.65 billion of securitization bonds. In May 2000,
the Commission signed an order rejecting such request and authorized only $363
million of such bonds. US Holdings filed an appeal with the Travis County, Texas
District Court and in September 2000, the Court issued a judgment that reversed
part of the Commission's order and affirmed other aspects of the Commission's
order. US Holdings and various other parties appealed this judgment directly to
the Supreme Court of Texas; and in June 2001, it issued a ruling and in October
2001 remanded the case to the Commission, which consolidated it into the
Settlement Plan proceeding. In accordance with the Settlement, Oncor received a
financing order authorizing it to issue securitization bonds in the aggregate
principal amount of $1.3 billion to recover regulatory assets and other
qualified costs. The Settlement provides that there can be an initial issuance
of securitization bonds in the amount of up to $500 million, followed by a
second issuance of the remainder after 2003. The Settlement resolves all issues
related to regulatory assets and liabilities.
OPEN-ACCESS TRANSMISSION -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas, District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997, through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO are named defendants in both suits. Oncor is unable to
predict the outcome of any litigation related to this matter.
SUMMARY -- Although Oncor cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in this
report, which might significantly alter its basic financial position, results of
operations or cash flows.
4. EXTRAORDINARY LOSS
In 2002, Oncor recorded an extraordinary loss of $123 million (net of
income tax benefit of $66 million) to writedown regulatory assets subject to
securitization through the future issuance of $1.3 billion principal amount of
transition (securitization) bonds in accordance with US Holdings' Settlement
Plan with the Commission as described in Note 3. The regulatory asset carrying
value is intended to represent the estimated amount of future cash flows to be
recovered from REPs through increased rates; the determination of such amount is
based on estimates. Oncor's future payments of the bonds' principal and interest
will be equal to the amount of increased electricity delivery rates. The
writedown, which was taken as a result of the final approval of the Settlement
Plan, reflects the impact of lower interest rates. As actual interest rates on
the bonds may differ from current estimates, the regulatory asset carrying
value, which was $1.7 billion at December 31, 2002, is subject to further
adjustment.
5. SHORT-TERM FINANCING
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
in April 2003; borrowings outstanding at that time can be extended for one year.
F-12
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. As of
December 31, 2002, the remaining amount available under the facility of $879
million, after $121 million used to support outstanding letters of credit, was
fully drawn by TXU Energy and US Holdings.
In October 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility was 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
was to be available for general corporate purposes at Oncor. In December 2002,
Oncor issued $850 million of senior secured notes, reducing the commitment to
$150 million. Oncor subsequently converted the commitment to a $150 million
364-day senior secured credit facility, expiring in December 2003, all of which
was available at December 31, 2002.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $60 million and $108
million outstanding as of December 31, 2002 and December 31, 2001, respectively.
The weighted average interest rate on short-term borrowings at December 31, 2002
and 2001, were 2.45% and 3.08%, respectively.
Cross Default Provisions
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default 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.
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. Under this revolving credit facility, (i) 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, (ii) 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, and (iii) 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. Under the
Oncor $150 million credit facility, a default by Oncor or any subsidiary thereof
would cause the maturity of outstanding balances under such facility to be
accelerated.
SALE OF RECEIVABLES -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of December 31, 2002, Oncor, TXU
Energy (through certain subsidiaries), 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 December 31, 2002, Oncor had sold
$50 million face amount of receivables to TXU Receivables Company under the
program in exchange for cash of $16 million and $33 million in subordinated
notes, with $1 million of losses on sales for the year ended December 31, 2002,
that principally represent the interest costs on the underlying financing. These
losses approximated 5% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding to Oncor under the
program decreased from $67 million at September 30, 2002, to $50 million at
December 31, 2002, primarily due to seasonality.
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 TXU Corp.'s subsidiaries' retained interests 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 balance
sheet.
F-13
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program.
CONTINGENCIES RELATED TO RECEIVABLES PROGRAM -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of both
any originator and its parent guarantor, if any, declines below
BBB- by S&P's or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceeds stated thresholds.
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The resolution of these issues as well as the implementation of
new POLR rules by the Commission are expected to bring the ratios in consistent
compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (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.
The accounts receivable program also 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 could terminate.
F-14
6. LONG-TERM DEBT
Oncor's long-term debt consists of the following:
DECEMBER 31,
--------------------
2002 2001
------- -------
9.320% Fixed Medium Term Secured Notes due January 15, 2002...................... $ -- $ 10
9.680% Fixed Medium Term Secured Notes due February 25, 2002..................... -- 20
9.700% Fixed Medium Term Secured Notes due March 1, 2002......................... -- 25
6.470% Fixed Medium Term Secured Notes due November 13, 2002..................... -- 3
6.560% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 10
6.580% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 5
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... 4 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... 11 11
8.125% Fixed First Mortgage Bonds due February 1, 2002........................... -- 150
8.000% Fixed First Mortgage Bonds due June 1, 2002............................... -- 147
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. 132 194
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 69 95
2.426% Floating Rate Series C First Mortgage Bonds due June 15, 2003............. -- 400
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
8.875% Fixed First Mortgage Bonds due February 1, 2022........................... -- 112
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... 103 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
8.500% Fixed First Mortgage Bonds due August 1, 2024............................. -- 115
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 --
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 --
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 --
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 --
5.000% Fixed Debentures due September 1, 2007.................................... 200 --
7.000% Fixed Debentures due September 1, 2022.................................... 800 --
Long-term advances from affiliates............................................... -- 1,200
Unamortized premium and discount................................................. (33) (15)
------- -------
Total ....................................................................... 4,399 3,652
------- -------
Less amount due currently........................................................ 319 370
------- -------
Total Long-Term Debt............................................................. $ 4,080 $ 3,282
======= =======
In February 2003, Oncor gave notice of its intent to redeem on March 5,
2003, all ($103 million principal amount) of its Texas Utilities Electric
Company (now Oncor) First Mortgage and Collateral Trust Bonds, 8 3/4% Series due
November 1, 2023, at 104.01% of the principal amount thereof, plus accrued
interest to the redemption date. The notice is subject to receipt of the
redemption moneys by the trustee on or before the redemption date.
In December 2002, Oncor issued $850 million principal amount of its senior
secured notes in two series in a private placement with registration rights. One
series of $500 million bears interest at the annual rate of 6.375% and matures
in 2015 and the other series of $350 million bears interest at the annual rate
of 7.250% and matures in 2033. Each series is initially secured by a lien on an
equal principal amount of Oncor's first mortgage bonds and the lien of the
indenture under which the senior secured notes were issued; however, the liens
securing these bonds may be released in certain circumstances. The net proceeds
were used by Oncor for the repurchase and retirement of $61 million principal
amount of Oncor's 6.75% First Mortgage Bonds due in March 2003 and the
defeasance of the remaining $132 million principal amount, as well as the
repurchase and retirement of $25 million principal amount of Oncor's 6.75% First
Mortgage bonds due April 2003 and the defeasance of the remaining $69 million
principal amount. The remaining net proceeds were used for general corporate
purposes, including the repayment of short-term advances from affiliates. The
short-term advances represented amounts borrowed to redeem $400 million
principal amount of Oncor's First Mortgage Bonds floating rate Series C due June
15, 2003.
F-15
The defeasance amounts (approximately $210 million at December 31, 2002)
were deposited with the trustee for such bonds with irrevocable instructions
from Oncor to apply such deposited proceeds to the payment of principal and
interest on such bonds through maturity or the earliest redemption date. These
deposits are reflected in restricted cash on the balance sheet.
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 advances from US Holdings.
DEBT RESTRUCTURE AND REFINANCING PLAN -- On January 1, 2002, US Holdings'
business was restructured into a regulated T&D utility business and an
unregulated energy business. See Note 1 for a more detailed discussion of the
separation of the businesses. In connection with the restructuring, the
generation assets transferred to TXU Energy were released from the lien of US
Holdings' mortgage. Upon transfer of the T&D assets to Oncor, Oncor assumed US
Holdings' mortgage and the first mortgage bonds outstanding thereunder. US
Holdings remains a co-obligor with respect to payments. The substantial majority
of Oncor's electric utility property, plant and equipment is subject to the lien
of the mortgage.
Maturity requirements for the years 2003 through 2007 and thereafter under
long-term debt instruments outstanding at December 31, 2002, were as follows:
YEAR
- ----
2003 ............................................. $ 319
2004 ............................................. 221
2005 ............................................. 92
2006 ............................................. --
2007 ............................................. 200
Thereafter........................................ 3,600
Unamortized discounts and premiums................ (33)
------
Total........................................ $4,399
======
F-16
7. SHAREHOLDER'S EQUITY
The balances of shareholder's equity for dates prior to January 1, 2002 in
the Statements of Consolidated Shareholder's Equity 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.
The changes in shareholder's equity for the year ended December 31, 2002
are as follows (in millions of dollars):
Common stock without par value-- 100,000,000 authorized shares
Balance at December 31, 2001 (69,000,000 shares).................. $2,701
Common stock repurchased and retired (1,388,000 shares)........ (150)
------
Balance at December 31, 2002 (67,612,000 shares) ................ 2,551
------
Retained earnings:
Balance at December 31, 2001...................................... -
Net income..................................................... 122
------
Balance at December 31, 2002...................................... 122
------
Accumulated other comprehensive income (loss) net of tax effects:
Balance at December 31, 2001...................................... -
Changes related to derivatives (cash flow hedges) ............. (24)
------
Balance at December 31, 2002...................................... (24)
------
Shareholder's equity at December 31, 2002........................... $2,649
======
No shares of Oncor's common stock are held by or for its own account, nor
are any shares of such capital stock reserved for its officers and employees or
for options, warrants, conversions and other rights in connection therewith.
Oncor's mortgage restricts its payment of dividends to the amount of its
retained earnings.
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 have been restated to reflect this stock split.
In January 2003, Oncor repurchased 1,250,000 shares of its common stock
from US Holdings for $50 million.
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. On October 1, 2002, Oncor repurchased
1,250,000 shares 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.
F-17
8. INCOME TAXES
The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------ ------ ------
Reported in operating expenses Current:
Federal............................................................. $ (55) $ 83 $ 135
State............................................................... 1 1 7
------ ------ ------
Total............................................................ (54) 84 142
Deferred:
Federal............................................................ 159 39 (19)
Investment tax credits............................................... (5) (5) (5)
------ ------ ------
Total to operating expenses..................................... 100 118 118
Reported in other income and deductions
Current:
Federal............................................................ 18 1 2
------ ------ ------
Total........................................................... $ 118 $ 119 $ 120
====== ====== ======
Reconciliation of income taxes computed at the federal statutory rate to
income tax expense:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------ ------ ------
Income before income taxes and extraordinary items...................... $ 363 $ 347 $ 346
Income taxes at the federal statutory rate of 35%....................... 127 121 121
Amortization of investment tax credits............................... (5) (5) (5)
Amortization (under regulatory accounting) of statutory tax rate changes (8) (3) (5)
State income taxes, net of federal tax benefit....................... 1 1 5
Other................................................................ 3 5 4
------ ------ ------
Income tax expense...................................................... $ 118 $ 119 $ 120
====== ===== =====
Effective tax rate...................................................... 33% 34% 35%
F-18
The components of Oncor's deferred tax assets and deferred tax liabilities
are as follows:
DECEMBER 31,
------------
2002 2001
---- ----
TOTAL CURRENT NONCURRENT TOTAL CURRENT NONCURRENT
------ ------- ---------- ----- ------- ----------
DEFERRED TAX ASSETS
Unamortized investment tax credits... $ 40 $ - $ 40 $ 43 $ - $ 43
Regulatory liability................. 60 - 60 124 - 124
Alternative minimum tax.............. 110 - 110 76 - 76
Employee benefits.................... 62 - 62 74 - 74
Deferred benefits of state income taxes 6 - 6 10 - 10
Other federal tax assets............. 13 1 12 32 15 17
Deferred state income taxes.......... 2 - 2 6 - 6
------ ------ -------- ------ ------ --------
Total deferred tax assets......... $ 293 $ 1 $ 292 $ 365 $ 15 $ 350
====== ====== ======== ====== ====== ========
DEFERRED TAX LIABILITIES
Depreciation differences and capitalized
construction cost $ 928 - $ 928 $ 832 $ - $ 832
Redemption of long-term debt......... 44 - 44 40 - 40
Securitizable regulatory asset....... 571 - 571 633 - 633
Deferred charges for state income taxes 17 16 1 15 11 4
Other federal tax liabilities........ 33 - 33 27 - 27
Deferred state income taxes.......... 11 - 11 18 - 18
------ ------ -------- ------ ------ --------
Total deferred tax liability...... 1,604 16 1,588 1,565 11 1,554
------ ------ -------- ------ ------ --------
NET DEFERRED TAX LIABILITY (ASSET)... $1,311 $ 15 $1,296 $1,200 $ (4) $1,204
====== ====== ======== ====== ====== ========
At December 31, 2002, Oncor had approximately $110 million of alternative
minimum tax credit carryforwards available to offset future tax payments.
TXU Corp.'s income tax returns are subject to examination by applicable tax
authorities. The IRS is currently examining the tax returns of TXU Corp. and its
subsidiaries for the years 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 examinations.
9. 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 Corp. 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.
All eligible employees hired after January 1, 2002 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 Corp.'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.
F-19
The allocated net periodic pension benefit applicable to Oncor was $7
million for 2002, $14 million for 2001 and $15 million for 2000. Estimated
accrued pension cost applicable to Oncor as of December 31, 2002 and 2001, was
$15 million and $25 million, respectively. There were no contributions in 2002,
2001 and 2000. The amounts provided represent allocations of the TXU Corp.
Retirement Plan to Oncor. As of December 31, 2002, no minimum pension liability
had been allocated to Oncor.
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, the maximum amount of their salary or wages
permitted under law. Employees who earn more than such threshold may contribute
from 1% to 16% of their regular salary or wages. Employer matching contributions
are also made in an amount equal to 100% of employee contributions up to 6% of
regular salary or wages for employees who participate under the cash balance
formula of the Retirement Plan, and 75% of employee contributions up to 6% of
regular salary or wages for employees who participate under the traditional
defined benefit formula of the Retirement Plan. Employer matching contributions
are invested in TXU Corp. common stock. Contributions to the Thrift Plan,
including cash and TXU Corp. common stock, by TXU Corp. aggregated $30 million
for 2002, $16 million for 2001 and $15 million in 2000. Oncor's portion of such
contributions was $8 million in 2002, $5 million in 2001 and $6 million in 2000.
In addition to the Retirement Plan and the Thrift Plan, Oncor participates
with TXU Corp. and certain other affiliated subsidiaries of TXU Corp. to offer
certain health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees. 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 benefits cost other than
pensions applicable to Oncor was $33 million for 2002, $27 million for 2001 and
$27 million for 2000. Contributions paid by Oncor to fund postretirement
benefits other than pensions were $25 million, $18 million and $18 million in
2002, 2001 and 2000, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of Oncor's
significant financial instruments that are not reported at fair value on the
balance sheet are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- --------------------
CARRYING VALUE CARRYING FAIR
AMOUNT FAIR AMOUNT VALUE
-------- -------- --------- --------
Long-term debt (including current maturities).................... $(4,399) $(4,487) $(3,652) $(3,682)
Off-balance sheet assets (liabilities):
Financial guarantees......................................... -- (3) -- --
With the implementation of SFAS No. 133 on January 1, 2001, financial
instruments that are derivatives are now recorded on the balance sheet at fair
value.
The fair value of long-term debt is 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 classified as current assets and
the carrying amounts for financial liabilities classified as current liabilities
approximate fair value due to the short maturity of such instruments.
F-20
11. COMMITMENTS AND CONTINGENCIES
LEASES -- Oncor has entered into operating leases covering various
facilities and properties including transportation and 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 the
years ended December 31, 2002, 2001 and 2000 were $18 million, $15 million and
$16 million, respectively (including amounts paid by TXU Corp. and charged to
Oncor).
Future minimum lease commitments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of December 31,
2002, are as follows:
YEAR
----
2003..................................................... $ 4
2004..................................................... 5
2005..................................................... 6
2006..................................................... 5
2007..................................................... 4
Thereafter............................................... 22
----
Total future minimum lease payments................... $ 46
====
RESIDUAL VALUE GUARANTEES IN OPERATING LEASES -- Oncor is the lessee under
various operating leases that obligate it to guarantee the residual values of
the leased facilities. At December 31, 2002, the aggregate maximum amount of
residual values guaranteed was approximately $64 million with an estimated
residual recovery of approximately $63 million. The average life of the lease
portfolio is approximately four years.
GENERAL -- Oncor is involved in various 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.
12. SUPPLEMENTARY FINANCIAL INFORMATION
CREDIT RISK -- Credit risk relates to the risk of loss that Oncor may incur
as a result of non-performance by its counterparties. Oncor's customers consist
primarily of REPs. As a requisite for obtaining and maintaining certification, a
REP must meet the financial resource standards established by the Commission.
REP certificates granted by the Commission are subject to suspension and
revocation for significant violation of the Public Utility Regulatory Act and
Commission rules. Significant violations include failure to timely remit
payments for invoiced charges to a T&D utility pursuant to the terms of tariffs
adopted by the Commission. Additionally, the Commission's ratemaking policies
and practices permit recovery of annual bad debt charge-offs through approved
tariffs. Since most of the T&D services provided and invoiced by Oncor are to
its affiliated REPs, a material loss to Oncor arising from nonperformance by its
customers is considered unlikely.
Oncor's exposure to credit risk primarily represents trade accounts
receivable from unaffiliated customers, which was $62 million as of December 31,
2002. One nonaffiliated customer represented 12.6% of this amount.
F-21
REGULATORY ASSETS AND LIABILITIES --
DECEMBER31,
--------------------
2002 2001
------- -------
REGULATORY ASSETS
Generation-related regulatory assets subject to securitization.............. $ 1,652 $ 1,841
Securities reacquisition costs.............................................. 124 117
Recoverable deferred income taxes-- net..................................... 76 74
Other regulatory assets..................................................... 46 34
------- -------
Total regulatory assets.................................................. 1,898 2,066
------- -------
REGULATORY LIABILITIES
Liability to be applied to stranded generation assets (excess mitigation)... 170 355
Investment tax credit related and protected excess deferred taxes........... 98 106
------- -------
Total regulatory liabilities............................................. 268 461
------- -------
Net regulatory assets.................................................... $ 1,630 $ 1,605
======= =======
Included in regulatory assets are assets of $1.8 billion at December 31,
2002, and $1.9 billion at December 31, 2001, that were not earning a return. Of
the assets not earning a return, $1.7 billion is expected to be recovered over
the term of the securitization bonds pursuant to the Settlement Plan approved by
the Commission. (See Note 3 for further discussion of the Settlement Plan.) The
remaining regulatory assets have a remaining recovery period of 14 to 31 years.
RESTRICTED CASH -- At December 31, 2002, approximately $210 million of the
net proceeds from Oncor's issuance of senior secured notes on December 20, 2002,
was deposited in a trust to be used to redeem First Mortgage Bonds of Oncor due
in March and April 2003 and is reflected in investments on the balance sheet.
ACCOUNTS RECEIVABLE -- At December 31, 2002 and 2001, accounts receivable
of $275 million and $131 million are stated net of allowance for uncollectible
accounts of $1 million and $4 million, respectively. Accounts receivable at
December 31, 2002 and 2001 included unbilled revenues of $97 million and $50
million, respectively. The majority of the 2001 accounts receivable balance was
transferred to TXU Energy on January 1, 2002. Oncor recorded bad debt expense of
$5 million in 2002.
AFFILIATE TRANSACTIONS -- The following represent significant affiliate
transactions of Oncor:
o 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 assets. For the year
ended December 31, 2002, this interest income totaled $28 million. See
also Note 3.
o Under terms of the Settlement Plan, Oncor expects to issue
securitization bonds in the principal amount of $1.3 billion. The
incremental income taxes Oncor will pay on the increased delivery fees
to be charged to Oncor's 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.
o 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 year ended
December 31, 2002, the principal payments received on the note
receivable totaled $180 million and the interest income totaled $21
million.
o Average daily short-term advances from affiliates during 2002 were
$790 million and interest expense incurred on the advances was $23
million. The weighted average interest rate for 2002 was 2.3%.
o Oncor also records revenue from TXU Energy for electricity delivery
fees. For the year ended December 31, 2002, these revenues were $1.6
billion.
F-22
o TXU Business Services Company, a subsidiary of TXU Corp., charges
Oncor for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For 2002, 2001 and 2000, these costs
totaled $142 million, $197 million and $176 million, respectively, and
are reported in operation and maintenance expenses.
o Oncor charges TXU Gas Company, a subsidiary of TXU Corp., for customer
and administrative services. For 2002, 2001 and 2000, these charges
totaled $29 million, $43 million and $72 million, respectively, and
are largely reported as a reduction in operation and maintenance
expenses.
SUPPLEMENTAL CASH FLOW INFORMATION --
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------ ------ ------
Cash payments of interest (net of amounts capitalized)................... $ 242 $ 261 $ 251
Cash payments (refunds) of income taxes.................................. (29) 33 125
Noncash conversion of advances to capital ............................... - 396 -
Noncash advances from affiliates......................................... (91) (101) 47
PROPERTY, PLANT AND EQUIPMENT --
DECEMBER 31,
-----------------------
2002 2001
------ ------
In service
Transmission............................................................. $2,176 $1,979
Distribution............................................................. 6,376 6,110
Other assets............................................................. 434 430
------ ------
Total.................................................................. 8,986 8,519
Less accumulated depreciation............................................ 3,039 2,888
------ ------
Net of accumulated depreciation........................................ 5,947 5,631
Construction work in progress................................................. 87 149
Held for future use........................................................... 22 22
------ ------
Net property, plant and equipment...................................... $6,056 $5,802
====== ======
INTEREST EXPENSE AND RELATED CHARGES --
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------ ------ ------
Interest ......................................................... $ 262 $ 260 $ 253
Amortization of debt expense...................................... 8 14 11
Allowance for borrowed funds used during construction and
capitalized interest............................................. (5) (7) (4)
------ ------ ------
Total interest expense and other related charges ................ $ 265 $ 267 $ 260
====== ====== ======
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES -- Oncor's
derivative financial instruments that have been designated as cash flow hedges
match the terms of the underlying hedged items. As a result, Oncor experienced
no hedge ineffectiveness during 2002.
During 2002, Oncor entered into certain cash flow hedges related to future
forecasted interest payments. These hedges were terminated in May 2002, and $39
million ($25 million after-tax) was recorded as a charge to other comprehensive
income. These losses are being amortized to earnings over a period of up to
thirty years, as the transactions are still forecasted. These hedges essentially
represent the remaining balance in other comprehensive income.
As of December 31, 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. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
F-23
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which the volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
QUARTERLY INFORMATION (UNAUDITED) -- In the opinion of Oncor, the
information below includes all adjustments necessary for a fair statement of
such amounts. Quarterly results are not necessarily indicative of a full year's
operations because of seasonal and other factors.
OPERATING REVENUES OPERATING INCOME NET INCOME (LOSS)
------------------ ----------------- -----------------
Quarter Ended 2002 2001 2002 2001 2002 2001
------- ------ ------ ------ ----- ------
March 31........................... $ 494 $ 476 $ 124 $ 97 $ 71 $ 24
June 30............................ 500 529 123 110 65 40
September 30....................... 557 650 155 182 96 112
December 31........................ 443 659 75 105 (110)(1) 52
------- ------ ------ ------ ----- ------
$1,994 $2,314 $ 477 $ 494 $ 122 $ 228
======= ====== ====== ====== ===== ======
<FN>
(1) Fourth quarter 2002 net income includes extraordinary charges of $123 million (net
of tax benefit).
</FN>
OTHER INCOME AND OTHER DEDUCTIONS -- Other income and other deductions
consist of several individually immaterial items.
F-24
INDEPENDENT ACCOUNTANTS' REPORT
ONCOR ELECTRIC DELIVERY COMPANY:
We have reviewed the accompanying condensed consolidated balance sheet of Oncor
Electric Delivery Company and subsidiaries (Oncor) as of March 31, 2003, and the
related condensed statements of consolidated income, comprehensive income, and
cash flows for the three-month periods ended March 31, 2003 and 2002. These
financial statements are the responsibility of Oncor's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Oncor as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholder's equity for the year
then ended (not presented herein); and in our report dated February 14, 2003, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 2003
F-25
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------- --------
(MILLIONS OF DOLLARS)
Operating revenues:
Affiliated.................................................. $ 377 $ 416
Nonaffiliated .............................................. 129 78
------- ------
Total operating revenues................................ 506 494
------- ------
Operating expenses:
Operation and maintenance................................... 188 178
Depreciation and amortization............................... 69 64
Income taxes................................................ 25 33
Taxes, other than income.................................... 92 95
------- ------
Total operating expenses................................ 374 370
------- ------
Operating income .............................................. 132 124
Other income and deductions:
Other income................................................ 2 1
Other deductions............................................ 1 2
Nonoperating income taxes................................... 6 2
Interest income-- affiliates................................... 15 12
Interest expense and other charges............................. 81 62
------- ------
Net income..................................................... $ 61 $ 71
======= ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------- --------
(MILLIONS OF DOLLARS)
Net income..................................................... $ 61 $ 71
Other comprehensive income--
Cash flow hedge activity, net of tax effect:
Net change in fair value of derivatives ............. -- 1
------- ------
Total................................................ -- 1
------- ------
Comprehensive income........................................... $ 61 $ 72
====== ======
See Notes to Financial Statements.
F-26
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
(MILLIONS OF DOLLARS)
Cash flows -- operating activities:
Net income................................................................... $ 61 $ 71
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ........................................... 71 71
Deferred income taxes and investment tax credits-- net .................. 44 34
Changes in operating assets and liabilities ................................. (180) (318)
---------- ----------
Cash used in operating activities.......................................... (4) (142)
---------- ----------
Cash flows -- financing activities:
Retirements/repurchases of debt................................................ (250) (205)
Repurchase of common stock..................................................... (50) --
Net change in advances from affiliates......................................... 158 440
Decrease in note receivable from TXU Energy related to a regulatory liability.. 52 14
Redemption deposit applied to debt retirement.................................. 138 --
Debt premium, discount, financing, and reacquisition expenses.................. (5) --
---------- ----------
Cash provided by financing activities...................................... 43 249
---------- ----------
Cash flows -- investing activities:
Capital expenditures........................................................... (124) (141)
Other.......................................................................... 9 --
---------- ----------
Cash used in investing activities.......................................... (115) (141)
---------- ----------
Net change in cash and cash equivalents........................................... (76) (34)
Cash and cash equivalents-- beginning balance...................................... 77 35
---------- ----------
Cash and cash equivalents-- ending balance........................................ $ 1 $ 1
========== ==========
See Notes to Financial Statements.
F-27
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
-------- ---------
(MILLIONS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 1 $ 77
Restricted cash............................................................ 72 210
Accounts receivable:
Affiliates (principally TXU Energy)..................................... 222 213
Trade................................................................... 101 62
Inventories................................................................ 39 40
Note receivable from TXU Energy............................................ 118 170
Other current assets....................................................... 63 35
-------- ---------
Total current assets.................................................... 616 807
Investments................................................................... 26 29
Property, plant and equipment - net........................................... 6,106 6,056
Due from TXU Energy........................................................... 437 437
Regulatory assets - net....................................................... 1,749 1,630
Other noncurrent assets....................................................... 62 63
-------- ---------
Total assets............................................................ $ 8,996 $ 9,022
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates................................................... $ 217 $ 60
Long-term debt due currently............................................... 70 319
Accounts payable - trade................................................... 39 30
Accrued taxes.............................................................. 59 142
Accrued interest........................................................... 84 70
Other current liabilities.................................................. 89 92
-------- ---------
Total current liabilities .............................................. 558 713
Accumulated deferred income taxes and investment tax credits.................. 1,416 1,370
Other noncurrent liabilities and deferred credits............................. 281 210
Long-term debt, less amounts due currently.................................... 4,081 4,080
Contingencies (Note 4)
Shareholder's equity (Note 3)................................................. 2,660 2,649
-------- ---------
Total liabilities and shareholder's equity.............................. $ 8,996 $ 9,022
======== =========
See Notes to Financial Statements.
F-28
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Oncor Electric Delivery Company (Oncor) is a
wholly-owned subsidiary of TXU US Holdings Company (US Holdings) which is a
wholly-owned subsidiary of TXU Corp.
Oncor is a regulated electricity transmission and distribution (T&D)
company principally engaged in providing delivery services to retail electric
providers (REPs) that sell power in the north-central, eastern and western parts
of Texas. A majority of Oncor's revenues represented fees for delivery services
provided to TXU Energy Company LLC (TXU Energy), a wholly-owned subsidiary of
TXU US Holdings Company (US Holdings). For the three months ended March 31,
2003, such affiliated revenues represented 75% of Oncor's revenues.
Oncor is managed as an integrated business; consequently there are no
separate reportable business segments.
BASIS OF PRESENTATION - The condensed consolidated financial statements of
Oncor and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 143, "Accounting for Asset Retirement Obligations", on the same basis as the
audited financial statements included in its Annual Report on Form 10-K for the
year ended December 31, 2002 (2002 Form 10-K). In the opinion of management, all
other adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations and financial position have been
included therein. All intercompany items and transactions have been eliminated
in consolidation. 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
Exchange Commission (SEC). Because the consolidated interim financial statements
do not include all of the information and footnotes required by US GAAP, they
should be read in conjunction with the audited financial statements and related
notes included in the 2002 Form 10-K. The results of operations for an interim
period may not give a true indication of results for a full year. All dollar
amounts in the financial statements and tables in the notes are stated in
millions of US dollars unless otherwise indicated. Certain previously reported
amounts have been reclassified to conform to current classifications.
CHANGES IN ACCOUNTING STANDARDS -- SFAS No. 143 became effective on
January 1, 2003. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period of its
inception. Although Oncor has no such asset retirement obligations, Oncor
recovers regulated nuclear decommissioning fees from REPs on behalf of TXU
Energy. As a result of the recognition by TXU Energy of nuclear decommissioning
asset retirement obligations, Oncor recognized a regulatory asset of $48 million
at January 1, 2003, with an offsetting noncurrent liability due to TXU Energy.
During the first quarter of 2003, these respective account balances were
increased $9 million related to changes in TXU Energy's asset retirement
obligation and the related decommissioning trust fund. Over the remaining life
of the nuclear facility, the regulatory asset and the liability to TXU Energy
will be reversed as decommissioning fees are adjusted under the regulatory
process to provide sufficient funds to TXU Energy for the decommissioning. The
adoption of SFAS No. 143 does not affect Oncor's earnings or financial
condition.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," became 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." The
adoption of SFAS No. 145 did not result in a reclassification of Oncor's results
of operations for the three months ended March 31, 2002.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," became 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. The
adoption of SFAS No. 146 did not materially impact Oncor's results of operations
for the three months ended March 31, 2003.
F-29
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" requires recording
the fair value of guarantees upon issuance or modification after December 31,
2002. The interpretation also requires expanded disclosures of guarantees (see
Note 4 under Residual Value Guarantees in Operating Leases). The adoption of FIN
No. 45 did not materially impact Oncor's results of operations for the three
months ended March 31, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for existing variable interest entities for the
quarter ending September 30, 2003 and immediately for any new variable interest
entities.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," was issued in April 2003 and becomes effective on June 30,
2003. SFAS No. 149 clarifies the definition of a derivative and the treatment in
the statement of cash flows when a derivative contains a financing component.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
2. FINANCING ARRANGEMENTS
CREDIT FACILITIES -- At March 31, 2003, Oncor had a $150 million 364-day
senior secured credit facility, expiring in December 2003, that was undrawn. The
facility was cancelled in April 2003.
In April 2003, a new $450 million revolving credit facility was established
for TXU Energy and Oncor that matures on February 25, 2005. The new facility
will be used for working capital and other general corporate purposes, including
commercial paper backup and letters of credit, and replaces the $1 billion
364-day revolving credit facility that expired in April 2003. Up to $450 million
of letters of credit may be issued under the new facility.
This new facility, as well as others available to US Holdings, will provide
back-up for any future issuance of Oncor commercial paper. At March 31, 2003,
Oncor had no outstanding commercial paper.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $217 million and $60
million outstanding as of March 31, 2003 and December 31, 2002, respectively.
The weighted average interest rates on short-term borrowings at March 31, 2003
and December 31, 2002, were 2.39% and 2.45%, respectively.
F-30
LONG-TERM DEBT -- At March 31, 2003 and December 31, 2002, Oncor's
long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... $ -- $ 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... -- 11
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. -- 133
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 70 70
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized premium and discount................................................. (32) (35)
--------- ------------
Total ....................................................................... 4,151 4,399
--------- ------------
Less amount due currently........................................................ 70 319
--------- ------------
Total Long-Term Debt............................................................. $4,081 $4,080
========= ============
In March 2003, Oncor redeemed all ($103 million principal amount) of its
First Mortgage and Collateral Trust Bonds, 8.75% Series due November 1, 2023, at
104.01% of the principal amount thereof, plus accrued interest to the redemption
date.
In March 2003, Oncor redeemed all ($133 million principal amount) of its
First Mortgage Bonds, 6.75% Series, at the maturity date for par value plus
accrued interest. A restricted cash deposit of $138 million was utilized to fund
the redemption.
In April 2003, Oncor redeemed all ($70 million principal amount) of its
First Mortgage Bonds, 6.75% series, at the maturity date for par value plus
accrued interest. The remaining restricted cash deposit of $72 million was
utilized to fund the redemption.
Cross Default Provisions
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default 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.
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million.
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount of $50 million or more would result in a
cross default for such party under the TXU Energy/Oncor $450 million revolving
credit facility. Under this 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, 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, but not as to TXU Energy.
F-31
SALE OF RECEIVABLES -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of March 31, 2003, Oncor, TXU Energy
(through certain subsidiaries), and TXU Gas Company (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 March 31,
2003, Oncor had sold $52 million face amount of receivables to TXU Receivables
Company under the program in exchange for cash of $13 million and $39 million in
subordinated notes, with $0.1 million of losses on sales for the three months
ended March 31, 2003, that principally represent the interest costs on the
underlying financing. These losses approximated 6% of the cash proceeds from the
sale of undivided interests in accounts receivable on an annualized basis.
Funding under the program decreased from $16 million at December 31, 2002 to $13
million at March 31, 2003 primarily due to reserve requirements which apply
factors from the prior 12-month period in determining the current period
reserve. This period reflects the billing and collection delays previously
experienced as a result of new systems and processes in TXU Energy and the
Electric Reliability Council of Texas (ERCOT) for clearing customers switching
and billing data upon the transition to competition.
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 interests 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 balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
CONTINGENCIES RELATED TO RECEIVABLES PROGRAM -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB-
by Standard & Poor's (S&P) Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do
not waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds during
the first quarter of 2003, but waivers were granted. These ratios were affected
by issues related to the transition to deregulation. Certain billing and
collection delays arose due to implementation of new systems and processes
within TXU Energy and ERCOT for clearing customer switching and billing data.
The billing delays have been resolved, but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios in consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a 'BBB-' (S&P) and a 'Baa3' (Moody's) rating or better (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 and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
F-32
The accounts receivable program also 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 each have a
cross default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
3. SHAREHOLDER'S EQUITY
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Common stock without par value:
Authorized shares - 100,000,000................................. $ 2,501 $ 2,551
Outstanding shares: March 31, 2003 - 66,362,000 and
December 31, 2002 - 67,612,000
Retained earnings.................................................. 183 122
Accumulated other comprehensive loss............................... (24) (24)
------- -------
Total shareholder's equity.................................... $ 2,660 $ 2,649
======= =======
In both January and April 2003, Oncor repurchased 1,250,000 shares of its
common stock from US Holdings for $50 million. On May 5, 2003, the Board of
Directors passed resolutions to repurchase an additional 937,500 shares from US
Holdings for $37.5 million in July 2003.
4. CONTINGENCIES
RESIDUAL VALUE GUARANTEES IN OPERATING LEASES -- Oncor is the lessee under
various operating leases that obligate it to guarantee the residual values of
the leased facilities. At March 31, 2003, the aggregate maximum amount of
residual values guaranteed was approximately $64 million with an estimated
residual recovery of approximately $63 million. The average life of the lease
portfolio is approximately four years.
OPEN-ACCESS TRANSMISSION -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
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 Company are named defendants in both suits. Oncor is
unable to predict the outcome of any litigation related to this matter.
Oncor is involved in various 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-33
5. SUPPLEMENTARY FINANCIAL INFORMATION
INTEREST EXPENSE AND RELATED CHARGES --
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
Interest .............................................................. $ 79 $ 60
Amortization of debt discounts and issuance costs...................... 3 3
Allowance for borrowed funds used during construction and capitalized interest (1) (1)
----- ----
Total interest expense and other related charges ............ $ 81 $ 62
===== =====
OTHER INCOME AND OTHER DEDUCTIONS -- Other income and other deductions
consist of several individually immaterial items.
REGULATORY ASSETS AND LIABILITIES --
MARCH 31, DECEMBER 31,
2003 2002
---- ----
REGULATORY ASSETS
Generation-related regulatory assets subject to securitization.............. $ 1,652 $ 1,652
Securities reacquisition costs.............................................. 125 124
Recoverable deferred income taxes-- net..................................... 77 76
Other regulatory assets..................................................... 115 46
------- -------
Total regulatory assets................................................ 1,969 1,898
------- -------
REGULATORY LIABILITIES
Liability related to excess mitigation...................................... 125 170
Investment tax credit related and protected excess deferred taxes........... 95 98
------- -------
Total regulatory liabilities........................................... 220 268
------- -------
Net regulatory assets.................................................. $ 1,749 $ 1,630
======= =======
Included above are assets of $1.8 billion at March 31, 2003 and December
31, 2002, that were not earning a return. Of the assets not earning a return,
$1.652 billion is expected to be recovered over the term of the securitization
bonds expected to be issued by Oncor in 2003 and 2004 pursuant to the regulatory
settlement plan approved by the Commission. All other regulatory assets have a
remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of March 31, 2003 was $57 million
related to nuclear decommissioning liabilities. (See Note 1 for a discussion of
the accounting impact of recovering certain asset retirement obligations for TXU
Energy.)
RESTRICTED CASH -- At March 31, 2003, approximately $72 million of the net
proceeds from Oncor's issuance of senior secured notes in December 2002 remained
in a trust to pay interest and principal of First Mortgage Bonds of Oncor due in
April 2003.
ACCOUNTS RECEIVABLE -- At March 31, 2003 and December 31, 2002, accounts
receivable are stated net of allowance for uncollectible accounts of $1 million.
Accounts receivable at March 31, 2003 and December 31, 2002 included unbilled
revenues of $94 million and $97 million, respectively.
INTANGIBLE ASSETS -- SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for Oncor on January 1, 2002. SFAS No. 142 requires the
discontinuance of goodwill amortization and additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
F-34
AS OF MARCH 31, 2003 AS OF DECEMBER 31, 2002
-------------------- ------------------ ----
GROSS GROSS ACCUMULATED
CARRYING AMORTI- CARRYING AMORTI-
AMOUNT ZATION NET AMOUNT ZATION NET
------ ------ --- ------ ------ ---
Amortized intangible assets
Capitalized software.............. $ 148 $ 58 $ 90 $ 148 $ 53 $ 95
Land easements.................... 168 53 115 168 52 116
----- ----- ----- ----- ----- -----
Total....................... $ 316 $ 111 $ 205 $ 316 $ 105 $ 211
===== ===== ===== ===== ===== =====
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Oncor has no intangible assets that are not
amortized.
Aggregate amortization expense for intangible assets for the three months
ended March 31, 2003 and 2002 was $6 million and $5 million, respectively.
PROPERTY, PLANT AND EQUIPMENT -- At March 31, 2003 and December 31, 2002,
property, plant and equipment was stated net of accumulated depreciation and
amortization of $3.1 billion and $3.0 billion, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES -- Oncor's
derivative financial instruments that have been designated as cash flow hedges
match the terms of the underlying hedged items. As a result, Oncor experienced
no hedge ineffectiveness during the three months ended March 31, 2003 or 2002.
These hedges relate to financing transactions.
As of March 31, 2003, 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. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which the volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
AFFILIATE TRANSACTIONS -- The following represent significant affiliate
transactions of Oncor:
o 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 assets. For the
three months ended March 31, 2003 and 2002, this interest income
totaled $12 million and $6 million, respectively.
o Under terms of the regulatory settlement plan, Oncor expects to issue
securitization bonds in the principal amount of $1.3 billion. The
incremental income taxes Oncor will pay on the increased delivery fees
to be charged to Oncor's customers related to the bonds will be
reimbursed by TXU Energy. Therefore, Oncor's financial statements
reflect a $437 million non-interest bearing receivable from TXU Energy
that will be extinguished as Oncor pays the related income taxes.
o In addition, Oncor has a note receivable from TXU Energy related to
the excess mitigation credit established in accordance with the
regulatory 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 beginning January 1, 2002.
At March 31, 2003, the remaining regulatory liability of $125 million
related to the credit reflected an increase of $7 million in the first
quarter of 2003, due to an increase in expected energy volumes on
which the fee reduction is based, with an offset recorded to accounts
receivable from TXU Energy. The remaining $118 million is recorded as
a note receivable. 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 months ended March 31,
2003 and 2002, the respective principal payments received on the note
receivable totaled $52 million and $14 million, as well as interest
income of $3 million and $6 million.
F-35
o Average daily short-term advances from affiliates for the three months
ended March 31, 2003 and 2002 were $130 million and $1.6 billion,
respectively, interest expense incurred on the advances was $1 million
and $12 million, respectively, and the weighted average interest rate
for the respective periods was 2.33% and 3.04%.
o Oncor also records revenues from TXU Energy for electricity delivery
fees. For the three months ended March 31, 2003 and 2002, these
revenues were $377 million and $416 million, respectively.
o TXU Business Services Company, a subsidiary of TXU Corp., charges
Oncor for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For the three months ended March 31,
2003 and 2002, these costs totaled $28 million and $34 million,
respectively, and are reported in operation and maintenance expenses.
o Oncor charges TXU Gas for customer and administrative services. For
the three months ended March 31, 2003 and 2002, these charges totaled
$8 million and $7 million, respectively, and are largely reported as a
reduction in operation and maintenance expenses.
F-36
$850,000,000
ONCOR ELECTRIC DELIVERY COMPANY
OFFER TO EXCHANGE
$500,000,000 $350,000,000
6.375% EXCHANGE SENIOR SECURED NOTES DUE 2015 7.250% EXCHANGE SENIOR SECURED NOTES DUE 2033
(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 2015 7.250% SENIOR SECURED NOTES DUE 2033
(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.
ITEM 21. EXHIBITS
II-1
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
POWER OF ATTORNEY
Each director and/or officer of Oncor whose signature appears below hereby
appoints the Agents for Service named in this registration statement, and each
of them severally, as his/her attorney-in-fact to sign in his/her name and
behalf, in any and all capacities stated below, and to file with the SEC, any
and all amendments, including post-effective amendments, to this registration
statement; and the registrant hereby also appoints each such Agent for Service
as its attorney-in-fact with like authority to sign and file any such amendments
in its name and on its behalf.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Dallas, state of Texas on
July 9, 2003.
ONCOR ELECTRIC DELIVERY COMPANY
By: /s/ Erle Nye
-----------------------------------
(Erle Nye, Chairman of the Board
and Chief Executive)
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 July 9, 2003
- ------------------------------ Officer and Director
(Erle Nye, Chairman of the Board
and Chief Executive)
/s/ Scott Longhurst Principal Financial July 9, 2003
- ------------------------------ Officer
(Scott Longhurst, Senior Vice President)
/s/ David H. Anderson Principal Accounting July 9, 2003
- ------------------------------ Officer
(David H. Anderson, Vice President)
/s/ T.L. Baker Director July 9, 2003
- ------------------------------
(T.L. Baker)
/s/ H. Dan Farell Director July 9, 2003
- ------------------------------
(H. Dan Farell)
/s/ Michael J. McNally Director July 9, 2003
- ------------------------------
(Michael J. McNally)
/s/ Eric H. Peterson Director July 9, 2003
- ------------------------------
(Eric H. Peterson)
/s/ R.A. Wooldridge Director July 9, 2003
- ------------------------------
(R.A. Wooldridge)
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
(January 16, (now Oncor), TXU Generation Holdings Company LLC, TXU Merger Energy
2002) 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.
4(c) -- Officer's Certificate, dated December 20, 2002, to the Indenture.
4(d) -- Form of the New 2015 Notes.
4(e) -- Form of the New 2033 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) -- First Mortgage Bond, 6.375% Series due 2015.
4(h) -- First Mortgage Bond, 7.250% Series due 2033.
4(I) -- Registration Rights Agreement, dated December 20, 2002.
5(a) -- Opinion of Hunton & Williams LLP.
5(b) -- Opinion of Thelen Reid & Priest LLP.
8 -- Opinion of Thelen Reid & Priest LLP with respect to material United
States Federal tax matters contained in Exhibit 5(b).
10(a) 1-12833 Form 10(e) -- Credit Agreement, dated as of April 22, 2003, among Oncor, TXU Energy
8-K/A (May 1, and certain banks listed therein, and JPMorgan Chase Bank, as
2003) Administrative Agent.
10(b) 333-100240 10(c) -- Generation Interconnection Agreement, dated December 14, 2001, between
TXU Electric Delivery Company (now Oncor) and TXU Generation Company LP.
10(c) 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)
II-5
10(d) 333-100240 10(e) -- Amendment to Interconnection Agreement, dated May 31, 2002
10(e) 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.
15 -- Letter of Deloitte & Touche LLP regarding the use of unaudited interim
financial information.
23(a) -- Consent of Deloitte & Touche LLP.
23(b) -- Consents of Hunton & Williams LLP and Thelen Reid & Priest LLP
contained in Exhibits 5(a) and 5(b), respectively.
24 -- Power of Attorney (see page II-3 of this registration statement).
25 -- Statement of Eligibility on Form T-1 of The Bank of New York with
respect to the Indenture.
99(a) -- Form of Letter of Transmittal.
99(b) -- Form of Notice of Guaranteed Delivery.
99(c) -- Form of Exchange Agent Agreement.
- -------------------------
*Incorporated herein by reference.
II-6