As filed with the Securities and Exchange Commission on September 16, 2003
Registration Statement No. 333-106894
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_____________________________________
ONCOR ELECTRIC DELIVERY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 4911 75-2967830
(State or Other (Primary Standard I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification
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.
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 SEPTEMBER 16, 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.
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, 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. The liens securing the New Notes and any Old
Notes not exchanged for New Notes may be released as described under the
section of the prospectus entitled DESCRIPTION OF THE NEW NOTES -
"Discharge of Lien; Release Date". In this prospectus, Oncor refers to any
Old Notes not exchanged for New Notes as Remaining Old Notes.
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 the New Notes. The related letter of transmittal
that is delivered with this prospectus 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 the Old Notes were acquired by the 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 of New Notes. See PLAN OF DISTRIBUTION in this prospectus.
PLEASE SEE RISK FACTORS BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A
DISCUSSION OF FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE
OFFER.
Neither the Securities and Exchange Commission 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.
- --------------------------------------------------------------------------------
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..................................................................11
FORWARD-LOOKING INFORMATION...................................................15
USE OF PROCEEDS...............................................................16
CAPITALIZATION AND SHORT-TERM DEBT............................................16
SELECTED FINANCIAL INFORMATION................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................................18
BUSINESS......................................................................32
MANAGEMENT OF ONCOR...........................................................38
RELATIONSHIPS AMONG ONCOR AND OTHER TXU COMPANIES.............................47
THE EXCHANGE OFFER............................................................49
DESCRIPTION OF THE NEW NOTES..................................................57
DESCRIPTION OF THE 1983 MORTGAGE BONDS........................................74
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS......................77
PLAN OF DISTRIBUTION..........................................................80
EXPERTS.......................................................................81
VALIDITY OF THE NEW NOTES.....................................................81
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 OF THIS
EXCHANGE OFFER.
2
SUMMARY
This summary highlights material information from this prospectus. However,
it does not contain all the important 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.
Oncor received approximately $833 million of net
proceeds from the sale of the Old Notes. Oncor
used those proceeds to defease or repurchase for
retirement approximately $194.5 million principal
amount of Oncor's First Mortgage and Collateral
Trust Bonds, 6 3/4% Series due March 1, 2003 and
$95 million principal amount of Oncor's First
Mortgage and Collateral Trust Bonds, 6 3/4% Series
due April 1, 2003, plus accrued interest. The
remaining net proceeds, approximately $536
million, were used for general corporate purposes,
including the repayment of short-term advances
from affiliates. A portion of these advances arose
from Oncor's previous redemption of $400 million
principal amount of Oncor's First Mortgage Bonds
Floating Rate Series C due June 15, 2003.
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 will be
substantially identical to the respective series
of Old Notes. Noteholders that properly tender
their Old Notes and do not validly withdraw their
tender before the expiration of the exchange offer
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 of this
exchange offer. 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, unless
extended by Oncor. 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
____________, 2003, or such other date that the
exchange offer has been extended to by Oncor as
provided in this prospectus.
3
RESALE OF NEW NOTES......... Based on interpretive letters written by the staff
of the SEC to companies other than Oncor, Oncor
believes that the New Notes may 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 Are not an affiliate of Oncor within the
meaning of Rule 405 under the Securities
Act;
o Are not a broker-dealer that acquired
the Old Notes directly from Oncor;
o Acquire the New Notes in the ordinary
course of your business; and
o Do not have an arrangement or
understanding with any person to
participate in a distribution of the
New Notes.
Also, if you are not a broker-dealer you
must represent that you are not engaged
in, and do not intend to engage in, a
distribution of the New Notes.
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.
Affiliates of Oncor, within the meaning of Rule
405 of the Securities Act, and broker- dealers
that acquired Old Notes directly from Oncor may
not rely on the above mentioned interpretive
letters written by the staff of the SEC.
Consequently, those affiliates and broker-dealers
may not participate in this exchange offer. They
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale of their Old Notes.
This prospectus may not be used for any such
resale of Old Notes.
CONDITIONS TO THIS
EXCHANGE OFFER............ Oncor may terminate this exchange offer before its
expiration if Oncor determines, in its reasonable
discretion, 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.
4
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, and wish to participate in this exchange
offer, you must instruct DTC to transmit to the
exchange agent a message indicating that you agree
to be bound by the terms of the accompanying
letter of transmittal. You should mail or
otherwise transmit the letter of transmittal or
facsimile thereof or agent's message (as
hereinafter defined), together with your Old
Notes, which should be in book-entry form if you
are a participant in DTC, and any other required
documentation to the exchange agent. The Bank of
New York will be the exchange agent for this
exchange offer.
GUARANTEED DELIVERY
PROCEDURES................ If you are a holder of Old Notes and wish to
tender your Old Notes, but your Old Notes are not
immediately available or you cannot deliver your
Old Notes or the letter of transmittal to the
exchange agent prior to the expiration of this
exchange offer, 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 date this exchange offer expires.
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 date this
exchange offer expires. The New Notes will be
delivered promptly after the expiration of this
exchange offer.
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 exchange
of Old Notes for New Notes. 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 have any further registration rights with
respect to their Remaining Old Notes, except in
the limited circumstances described in the next
sentence. The only holders that will have further
registration rights are broker dealers and
holders, other than broker dealers, (i) that were
not permitted by applicable law or interpretations
of the staff of the SEC to participate in the
exchange offer or (ii) that participated in the
exchange offer but do not receive freely tradeable
New Notes on the date of the exchange. 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 your
notes.
5
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, dated as of May 1, 2002, from
Oncor to The Bank of New York, as trustee. This is
the same indenture under which the Old Notes were
issued. In this prospectus, Oncor refers to this
indenture and deed of trust as the Indenture and
the trustee under the Indenture as the Trustee.
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, upon exchange, the New Notes 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 from Oncor to
The Bank of New York, as trustee. In this
prospectus, Oncor refers to this mortgage and deed
of trust as the 1983 Mortgage and the trustee
under the 1983 Mortgage as the Mortgage Trustee.
As described above, the New Notes will initially
be secured obligations of Oncor that will rank
equally with all of Oncor's other outstanding
secured debt. At June 30, 2003, Oncor had $3,113
million aggregate principal amount of secured debt
outstanding, of which $1,063 million aggregate
principal amount were first mortgage bonds not
held by the Trustee and $2,050 million in
aggregate principal amount were senior secured
notes, including the Old Notes.
The lien of the Indenture and the first mortgage
bonds may be released as briefly described below
and more fully described under DESCRIPTION OF THE
NEW NOTES - "Discharge of Lien; Release Date".
Upon release of the liens, 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. At June 30, 2003, Oncor had $1
billion principal amount of senior unsecured debt
outstanding.
The liens securing the New Notes and the Remaining
Old Notes may be released when the aggregate
principal amount of all first mortgage bonds,
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. See DESCRIPTION OF THE NEW NOTES -
"Discharge of Lien; Release Date".
6
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. 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 the period.
INTEREST PAYMENT DATES...... Oncor will pay interest on each series of the New
Notes semi- annually on January 15 and July 15.
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 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., BBB by Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies, Inc., and
BBB+ by Fitch, Inc.
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 the 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 custodian for DTC, and registered in
the name of DTC's nominee. 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.
7
BUSINESS
ONCOR ELECTRIC DELIVERY COMPANY AND AFFILIATES
Oncor is a wholly-owned subsidiary of TXU US Holdings Company which is a
wholly-owned subsidiary of TXU Corp. Oncor is a regulated company principally
engaged in providing electricity transmission and distribution services to
retail electric providers 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, 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, through a business held for sale and
formerly a joint venture, 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 and three
subsidiaries of TXU Gas are managed collectively as the 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 restructuring legislation passed during the 1999
session of the Texas legislature, US Holdings transferred its:
o regulated electric transmission and distribution assets to Oncor;
o unregulated electric power generation assets to various subsidiaries
of TXU Generation Holdings Company LLC, an unregulated, wholly-owned
subsidiary of TXU Energy; and
o retail customers to TXU Energy Retail Company LP, also an unregulated,
wholly-owned subsidiary of TXU Energy that operates TXU Energy's
retail electric provider business.
Also, on January 1, 2002 the regulated electric transmission and
distribution business of TXU SESCO Company, a subsidiary of TXU Corp., was
transferred to Oncor.
Oncor is managed as a single, integrated electric delivery business;
consequently, there are no separate reportable business segments. Oncor's
principal operations are:
o ELECTRIC TRANSMISSION - Oncor's 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 transmission lines and 9,615 circuit miles of
138- kilovolt and 69- kilovolt transmission lines and over 900
substations.
o ELECTRIC DISTRIBUTION - Oncor's electricity distribution business
distributes electricity for retail electric providers 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 retail electric providers, 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
8
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- kilovolt and 12.5- kilovolt.
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution companies. Oncor's distribution customers
consist of approximately 35 retail electric providers in Oncor's certificated
service area. One of these retail electric providers is TXU Energy, which is the
largest retail electric provider operating in Oncor's certificated service area.
For the six months ended June 30, 2003, Oncor had $992 million in revenues for
delivery services. Of this amount, $726 million, or 73%, represented revenues
from TXU Energy.
Oncor's operations do not include the production or sale of electricity,
but rather consist of providing transmission and distribution delivery 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 transmission and distribution utility
operating wholly within the State of Texas and is subject to the jurisdiction of
the Public Utility Commission of Texas and certain municipalities with respect
to rates and service. In this prospectus, Oncor refers to the Public Utility
Commission of Texas as the Commission.
On December 31, 2001, US Holdings filed a settlement plan with the
Commission. It resolved all major pending issues related to US Holdings'
transition to competition. The 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 of 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.
9
SUMMARY FINANCIAL DATA
You should read the following summary financial data together with the
sections of this prospectus entitled SELECTED FINANCIAL INFORMATION and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and the financial statements and the related notes to the 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 the methodologies used to combine this information 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 six months
ended June 30, 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.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------
2003 2002 2002 2001 2000
------- ------- ------- ------- -------
(MILLIONS OF DOLLARS, EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues...................... $ 992 $ 994 $ 1,994 $ 2,314 $ 2,081
Net income.............................. $ 113 $ 136 $ 122 $ 228 $ 226
Ratio of earnings to fixed charges(a) .. 2.05 2.56 2.32 2.24 2.28
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................ $ 9,023 $ 9,022 $ 8,495 $ 8,149
Property, plant and equipment - net..... $ 6,162 $ 6,056 $ 5,802 $ 5,445
Capitalization:
Long-term debt, less amounts due currently:
Secured debt........................ $ 2,981 $ 3,080 $ 2,082 $ 2,671
Unsecured debt...................... $ 1,000 $ 1,000 $ 1,200 $ 81
------- ------- ------- -------
Total............................. $ 3,981 $ 4,080 $ 3,282 $ 2,752
Shareholder's equity.................. $ 2,913 $ 2,649 $ 2,701 $ 2,532
------- ------- ------- -------
Total Capitalization............ $ 6,894 $ 6,729 $ 5,983 $ 5,284
======= ======= ======= =======
Capitalization ratios:
Long-term debt, less amounts due currently:
Secured debt........................ 43.2% 45.8% 34.8% 50.6%
Unsecured debt...................... 14.5% 14.8% 20.1% 1.5%
------- ------- ------- -------
Total............................. 57.7% 60.6% 54.9% 52.1%
Shareholder's equity.................. 42.3% 39.4% 45.1% 47.9%
------- ------- ------- -------
Total Capitalization............ 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
<FN>
__________________
(a) Calculated by dividing pretax income, excluding extraordinary charges, plus
fixed charges (interest expense and estimated interest within rental expense) by
fixed charges.
</FN>
10
RISK FACTORS
In addition to the other information in this prospectus, you should
consider the factors described below. The risks and uncertainties described
below are not the only risks Oncor may face. Additional risks and uncertainties
not presently known to Oncor or that Oncor currently deems immaterial may impair
its business operations. Each of the risks described below could have a material
adverse effect on Oncor's business, financial condition or results of operations
and could result in a loss or a decrease in the value of your New Notes and the
Remaining Old Notes.
RISKS RELATED TO ONCOR'S BUSINESSES
ONCOR'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 retail electric provider based on the amount of electricity Oncor
distributes on behalf of each retail electric provider. 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
transmission and distribution 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 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 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.
If Oncor's efforts to complete capital improvements are 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 are 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 filed by US Holdings with the Commission, 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 RETAIL ELECTRIC PROVIDERS.
Oncor's revenues from the distribution of electricity are collected from
approximately 35 retail electric providers that sell the electricity Oncor
distributes to these retail electric providers' customers. Oncor depends on
these retail electric providers to timely remit these revenues to Oncor. Oncor
could experience delays or defaults in payment from these retail electric
providers, adversely affecting Oncor's cash flows and financial condition. For
the six months ended June 30, 2003, Oncor had $992 million in revenues for
delivery services. Of this amount, $726 million, or 73%, represented revenues
from TXU Energy.
In addition to revenues, Oncor is owed other significant amounts, as
discussed below, from TXU Energy. Oncor's financial results and condition could
be adversely affected by any nonperformance of TXU Energy regarding these
matters.
11
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 six months ended June 30, 2003, this interest income
totaled $24 million.
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.
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 credit applied to
delivery fees billed to retail electric providers, including TXU Energy, for a
two-year period ending December 31, 2003. At June 30, 2003, the note receivable
balance was $71 million. The principal and interest payments on the note
receivable from TXU Energy reimburse Oncor for the credit applied to delivery
fees billed to retail electric providers. For the six months ended June 30,
2003, the principal payments received on the note receivable totaled $99 million
and the interest income totaled $5 million.
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 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,
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.
RISKS RELATED TO ONCOR'S CORPORATE AND FINANCIAL STRUCTURE
IN THE FUTURE, ONCOR MAY HAVE LIQUIDITY NEEDS THAT MAY BE DIFFICULT TO SATISFY.
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;
12
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.
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 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 have any
further rights to have those notes registered under the Securities Act, except
in the limited circumstances described in the next sentence. The only holders
that will have further registration rights are broker dealers and holders, other
than broker dealers, (i) that were not permitted by applicable law or
interpretations of the staff of the SEC to participate in the exchange offer or
(ii) that participated in the exchange offer but do not receive freely tradeable
New Notes on the date of the exchange. 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 Old Notes
for New Notes should allow sufficient time for the timely completion of the
13
exchange procedure. Neither Oncor nor the exchange agent is obligated to notify
you of any failure to follow the proper exchange procedure.
IF YOU ARE A BROKER-DEALER, YOUR ABILITY TO TRANSFER THE NEW NOTES MAY BE
RESTRICTED.
A broker-dealer that purchased Old Notes for its own account as part of
market-making or trading activities must deliver a prospectus when it sells the
New Notes. Oncor's obligation to make this prospectus available to
broker-dealers is limited. Consequently, Oncor cannot guarantee that a proper
prospectus will be available to broker-dealers wishing to resell their New
Notes.
RISKS RELATED TO THE NEW NOTES
THERE IS NO EXISTING MARKET FOR THE NEW NOTES AND ONCOR CANNOT ASSURE YOU THAT
AN ACTIVE TRADING MARKET WILL DEVELOP.
There is no existing market for the New Notes and Oncor does not intend to
apply for listing of the New Notes on any securities exchange. There can be no
assurance as to the liquidity of any market that may develop for the New Notes,
the ability of noteholders to sell their New Notes or the price at which the
noteholders will be able to sell their New Notes. Future trading prices of the
New 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 does not develop, purchasers may be unable to
resell their New 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 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, assuming any
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 these practices, the market price of Oncor securities, including the
New Notes, assuming any 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 ARE EXPECTED TO BECOME UNSECURED OBLIGATIONS OF ONCOR IN
THE FUTURE.
The Indenture provides that the lien securing the New 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. Consequently, the New 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 to collect payment therefor in the event of the
bankruptcy or liquidation of Oncor. After the New Notes become unsecured, Oncor
may incur secured debt without securing the New 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.
14
FORWARD-LOOKING INFORMATION
This prospectus contains "forward-looking statements." All statements,
other than statements of historical facts, that are included in this prospectus
that address activities, events or developments that Oncor expects or
anticipates to occur in the future, including such matters as projections,
future capital expenditures, business strategy, competitive strengths, goals,
future acquisitions, development or operation of transmission and distribution
assets, market and industry developments and the growth of Oncor's business and
operations, are forward-looking statements. Although Oncor believes that in
making any such forward-looking statement its expectations are based on
reasonable assumptions, any such forward-looking statement involves
uncertainties and is qualified in its entirety by reference to the following
important factors, among others, that could cause Oncor's actual results to
differ materially from those projected in 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 restructuring legislation passed by
the Texas legislature in 1999;
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 these factors. Also,
Oncor can not assess the impact of each 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.
15
USE OF PROCEEDS
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.
Oncor received approximately $833 million of net proceeds from the sale of
the Old Notes. Oncor used those proceeds to defease or repurchase for retirement
approximately $194.5 million principal amount of Oncor's First Mortgage and
Collateral Trust Bonds, 6 3/4% Series due March 1, 2003 and $95 million
principal amount of Oncor's First Mortgage and Collateral Trust Bonds, 6 3/4%
Series due April 1, 2003, plus accrued interest. The remaining net proceeds,
approximately $536 million, were used for general corporate purposes, including
the repayment of short-term advances from affiliates. A portion of these
advances arose from Oncor's previous redemption of $400 million principal amount
of Oncor's First Mortgage Bonds Floating Rate Series C due June 15, 2003.
CAPITALIZATION AND SHORT-TERM DEBT
The following table shows Oncor's capitalization and short-term debt as of
June 30, 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.
ADJUSTED(a)
OUTSTANDING AT --------------------------------
JUNE 30, 2003 AMOUNT PERCENT
(IN MILLIONS) (IN MILLIONS)
Capitalization:
Long-term debt, less amounts due currently:
First Mortgage Bonds .............................. $ 931 $ 931
Senior Secured Notes .............................. 2,050 2,050
Debentures ........................................ 1,000 1,000
------- ------- -----
Total long-term debt ............................ 3,981 3,981 57.7%
Shareholder's equity 2,913 2,913 42.3%
------- ------- -----
Total Capitalization ....................... $ 6,894 $ 6,894 100.0%
======= ======= =====
Short-term advances from affiliates ...................... $ 13 $ 45
Notes payable - commercial paper.......................... $ -- $ --
Long-term debt due currently.............................. $ 100 $ 100
<FN>
_________________
(a) Adjusted to reflect an increase of 32 million in short-term advances from
affiliates from the date indicated above through July 31, 2003.
</FN>
16
SELECTED FINANCIAL INFORMATION
The following table presents Oncor's selected financial information.
Although Oncor began operations on January 1, 2002, and is not a successor to US
Holdings or TXU SESCO, it is voluntarily providing selected financial
information for the years ended 2001, 2000 and 1999 based on the combined
historical financial data for the unbundled transmission and distribution
operations of US Holdings and TXU SESCO. Similar selected financial data for
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 the
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 the methodologies used to unbundle this information
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 six months
ended June 30, 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.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------
2003 2002 2002 2001 2000 1999
-------- -------- -------- --------- --------- ---------
(MILLIONS OF DOLLARS EXCEPT RATIOS AND PERCENTAGES)
INCOME STATEMENT DATA:
Operating revenues ..................$ 992 $ 994 $ 1,994 $ 2,314 $ 2,081 $ 1,931
Operating expenses ..................$ 743 $ 747 $ 1,517 $ 1,820 $ 1,597 $ 1,444
Operating income ....................$ 249 $ 247 $ 477 $ 494 $ 484 $ 487
Net income ..........................$ 113 $ 136 $ 122 $ 228 $ 226 $ 223
Ratio of earnings to fixed
charges(a)........................... 2.05 2.56 2.32 2.24 2.28 2.15
BALANCE SHEET DATA (END OF PERIOD):
Total assets ........................$ 9,023 $ 9,022 $ 8,495 $ 8,149
Property, plant and equipment --
net .................................$ 6,162 $ 6,056 $ 5,802 $ 5,445
Capitalization:
Long-term debt, less amounts
due currently:
Secured debt .....................$ 2,981 $ 3,080 $ 2,082 $ 2,671
Unsecured debt....................$ 1,000 $ 1,000 $ 1,200 $ 81
-------- -------- --------- ---------
Total ...........................$ 3,981 $ 4,080 $ 3,282 $ 2,752
Shareholder's equity ...............$ 2,913 $ 2,649 $ 2,701 $ 2,532
-------- -------- --------- ---------
Total Capitalization ...........$ 6,894 $ 6,729 $ 5,983 $ 5,284
-------- ======== ========= =========
Capitalization ratios:
Long-term debt, less amounts
due currently:
Secured debt ..................... 43.2% 45.8% 34.8% 50.6%
Unsecured debt ................... 14.5% 14.8% 20.1% 1.5%
-------- -------- --------- ---------
Total ........................... 57.7% 60.6% 54.9% 52.1%
Shareholder's equity ............... 42.3% 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 ...............$ 117 $ (69) $ 233 $ 675 $ 441 $ 623
Capital expenditures ................$ 245 $ 265 $ 513 $ 635 $ 517 $ 489
<FN>
______________________
(a) Calculated by dividing pretax income, excluding extraordinary charges, plus
fixed charges (interest expense and estimated interest within rental
expense) by fixed charges.
</FN>
17
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 the
financial statements included elsewhere in this prospectus.
BUSINESS
Oncor is a regulated company principally engaged in providing electricity
transmission and distribution services to retail electric providers that sell
power in the north-central, eastern and western parts of Texas.
Oncor is a wholly-owned subsidiary of US Holdings, which is a wholly-owned
subsidiary of TXU Corp. A majority of Oncor's revenues represent fees for
delivery services provided to TXU Energy, a wholly-owned subsidiary of US
Holdings. For the six months ended June 30, 2003, these affiliated revenues
represented 73% of Oncor's revenues.
Oncor is managed as an integrated business; consequently, there are no
separate reportable business segments.
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 and six months ended June 30, 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 transmission and distribution 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. 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 with the 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 retail electric providers through increased
rates; the determination of this 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.
DEFINED BENEFIT PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS--
Oncor is a participating employer in the TXU Retirement Plan, a defined benefit
pension plan sponsored by TXU Corp. Oncor also participates with TXU Corp. and
other affiliated subsidiaries of TXU Corp. to offer health care and life
insurance benefits to eligible employees and their eligible dependents upon the
18
retirement of such employees from TXU Corp. Reported costs of providing
non-contributory defined pension benefits and other postretirement benefits are
dependent upon numerous factors, assumptions and estimates. See Note 9 to the
financial statements for the years ended December 31, 2002, 2001 and 2000.
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 TXU 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 No. 87, 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 TXU 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 TXU 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 Retirement Plan to Oncor.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
OPERATING STATISTICS
Delivered electricity volumes (gigawatt hours)...... 24,378 26,232 48,286 49,818
Electric points of delivery (end of period
and in thousands)................................. 2,909 2,887
Operating revenues (million of dollars):
Affiliated - TXU Energy........................ $ 349 $ 397 $ 726 $ 813
Non-affiliated................................. 137 103 266 181
------- ------- ------- -------
Total ......................................... $ 486 $ 500 $ 992 $ 994
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------------
Operating revenues decreased $14 million, or 3%, to $486 million in 2003.
The decrease reflected higher unbilled revenues in 2002 resulting from billing
issues associated with the transition to competition, as previously disclosed.
Delivered electricity volumes for the year 2003 are expected to grow 2% over
2002 levels. The revenue decline was partially offset by $8 million in increased
disconnect/reconnect fees due to new provider of last resort rules in 2003 and
greater competition-related customer switching activities and $2 million in
higher transmission revenues due to increased tariffs. Increased wholesale
transmission rates approved by the Commission and effective in May 2003 and a
related increase in distribution tariffs, expected to be approved by the
Commission in the third quarter of 2003, are expected to result in an estimated
$44 million in incremental revenues on an annualized basis.
Operation and maintenance expenses increased by $1 million, or 1%, to $190
million in 2003. The increase reflected higher transmission costs paid to other
utilities, partially offset by lower employee-related and outside consulting
expenses arising from cost savings initiatives implemented in late 2002.
Depreciation and amortization increased $1 million, or 2%, to $68 million.
The increase reflects investments in delivery facilities to support growth and
normal replacements of equipment.
Taxes other than income rose $1 million, or 1%, to $93 million in 2003
primarily due to an increase in state franchise taxes and ad valorem taxes,
partially offset by a decline in local gross receipts taxes due to lower
revenues on which these taxes are based.
Interest income increased $3 million in 2003 reflecting a $7 million
increase in the reimbursement from TXU Energy for higher carrying costs on
regulatory assets, partially offset by $4 million in lower interest from TXU
Energy on the excess mitigation credit note receivable due to principal
repayments. See the discussion below regarding higher average interest rates.
Interest expense and other charges increased by $9 million, or 14%, to $74
million in 2003. Of the change, $7 million was due to higher average interest
rates on borrowings and $6 million was due to higher average borrowings,
partially offset by $4 million less interest passed to retail electric providers
related to the excess mitigation credit. The increase in average interest rates
reflected the refinancing of affiliate borrowings with higher rate long-term
debt issuances.
Income tax expense was $23 million in 2003, including $18 million related
to operating income and $5 million related to nonoperating income. The effective
tax rate decreased 3 points to 30.7% in 2003 from 33.7% in 2002, due primarily
to comparable amortization of investment tax credits and other items for tax
purposes on lower pre-tax earnings.
Net income decreased $13 million, or 20%, to $52 million primarily due to
lower revenues and higher interest expense. Net pension and postretirement
benefit costs reduced net income by $8 million in 2003 and $6 million in 2002.
20
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------
Oncor's operating revenues decreased $2 million to $992 million in 2003.
The decrease reflected higher unbilled revenues in 2002 resulting from billing
issues associated with the transition to competition, as previously disclosed.
Delivered electricity volumes for the year 2003 are expected to grow 2% over
2002 levels. The revenue decline was partially offset by $14 million in
increased disconnect/reconnect fees due to the new provider of last resort rules
and greater competition-related customer switching activities, $3 million in
nonrecurring billing settlements for tower space leases with telecommunications
companies and pole contract rentals from cable and telecommunication companies,
and $2 million in higher transmission revenues due to increased tariffs
effective in May 2003. Increased wholesale transmission rates approved by the
Commission and effective in May 2003 and a related increase in distribution
tariffs, expected to be approved by the Commission in the third quarter of 2003,
are expected to result in an estimated $44 million in incremental revenues on an
annualized basis.
Operation and maintenance expenses increased by $11 million, or 3%, to $378
million in 2003, driven by higher transmission costs paid to other utilities and
higher pension and other postretirement benefit costs, partially offset by the
lower employee-related and outside consulting expenses from cost savings
initiatives in late 2002.
Depreciation and amortization increased $6 million, or 5%, to $137 million.
The increase reflects investments in delivery facilities to support growth and
normal replacements of equipment.
Taxes other than income decreased $2 million, or 1%, to $185 million in
2003 due primarily to lower local gross receipts taxes, partially offset by
increases in state franchise taxes and ad valorem taxes.
Interest income increased $6 million in 2003 reflecting a $13 million
increase in the reimbursement from the TXU Energy segment for higher carrying
costs on regulatory assets, partially offset by $7 million less interest on the
excess mitigation credit note receivable. See discussion below regarding higher
average interest rates.
Interest expense and other charges increased by $28 million, or 22%, to
$155 million in 2003. Of the change, $24 million was due to higher average
interest rates on borrowings and $11 million was due to higher average
borrowings, partially offset by $7 million less interest passed to retail
electric providers related to the excess mitigation credit. The change in
average interest rates reflected the refinancing of affiliate borrowings with
higher rate long-term debt issuances.
Income tax expense was $54 million in 2003, including $43 million related
to operating income and $11 million related to nonoperating income. The
effective tax rate decreased 1 point to 32.3% in 2003 from 33.3% in 2002, due to
comparable amortization of investment tax credits and other items for tax
purposes on lower pre-tax earnings.
Net income decreased $23 million, or 17%, to $113 million in 2003,
primarily due to higher interest expense and operating and maintenance costs.
Net pension and postretirement benefit costs reduced net income by $16 million
in 2003 and $9 million in 2002.
21
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- --------- ----------
OPERATING STATISTICS:
Electric energy delivered volumes (GWh).............. 104,785 99,139 100,545
Electric points of delivery (end of period and
in thousands)........................................ 2,909 2,844 2,796
OPERATING REVENUES (MILLION OF DOLLARS):
Affiliated - TXU Energy......................... $ 1,586 $ 2,314 $ 2,081
Non-affiliated.................................. 408 - -
---------- --------- ----------
Total ................................... $ 1,994 $ 2,314 $ 2,081
========== ========= ==========
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 transmission and distribution operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the transmission and distribution
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 transmission and distribution 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. Further, certain financial information was deemed to be
not reasonably allocable because of the changed nature of Oncor's and TXU
Energy's operations subsequent to the opening of the market to competition, as
compared to US Holdings' previous operations. Such activities and related
financial information consisted primarily of costs related to retail customer
support activities, including billing and related bad debts expense and gross
receipts taxes, as well as regulated revenues associated with these costs.
Financial information related to these activities was reported in Oncor's
results of operations for the 2001 and 2000 periods. The resultant effects on
comparability to results of operations for 2002 are discussed immediately below.
Had the unbundled transmission and distribution 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.
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 these revenues and expenses
are the responsibility of TXU Energy. Excluding the impact of these revenues in
2001, electric delivery revenues rose 3% on a 6% increase in electricity volumes
delivered. Because the fees to retail electric providers for their large
commercial and industrial customers are fixed for specified ranges of volumes,
changes in distribution volumes do not necessarily result in comparable changes
in reported revenues.
Operation and maintenance 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.
22
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 retail electric providers 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
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,
23
based on current market conditions and (ii) the value of dedesignated and
terminated cash flow hedges at the time of the 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.
For the six months ended June 30, 2003, Oncor has not utilized cash flow
hedges although Oncor may enter into these hedges in the future. As a result,
there were no changes in fair value of derivatives effective as cash flow hedges
in 2003. For the three and six months ended June 30, 2002, changes in the fair
value of derivatives effective as cash flow hedges reflected losses of $40
million ($26 million after-tax) and $39 million ($25 million after-tax),
respectively. Losses in 2002 were due to cash flow hedges of certain future
forecasted interest payments, and these amounts will be realized in income as
the interest payments occur over a period of up to thirty years. Although the
hedges were terminated in 2002, the interest payments are expected to be made as
forecasted.
During the year ended December 31, 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 provided by operating activities for the six
months ended June 30, 2003 were $117 million, compared to $69 million used by
operating activities for the six months ended June 30, 2002. The improved cash
flow performance of $186 million was driven by favorable working capital
(accounts receivable, inventory, and accounts payable) changes of $243 million,
reflecting the unfavorable effect in the prior year of the start-up of billing
retail electric providers for transmission and distribution charges effective
January 1, 2002. This improvement was partially offset by $53 million in higher
excess mitigation credits passed to retail electric providers in 2003, the
effect of which was offset in financing costs through collections on the related
note receivable from TXU Energy.
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 retail electric providers of $245 million,
largely from TXU Energy, due to the start-up of billing retail electric
providers for transmission and distribution 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 retail
electric providers, 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 $87 million for the six
months ended June 30, 2003, compared to $339 million in the comparable period
for 2002. There were no issuances of debt in 2003. In 2002, Oncor issued $1.2
billion in long-term debt and had net issuances of $295 million in commercial
paper. Debt retirements totaled $321 million in 2003 compared to $352 million in
2002. Repayment of advances from affiliates required $47 million in 2003
24
compared to $780 million in 2002. In 2003, an equity contribution from US
Holdings provided $250 million in cash, and a redemption deposit (restricted
cash) of $210 million was used to fund debt retirements. Oncor collected $99
million in 2003 from TXU Energy on the note receivable related to the excess
mitigation credit compared to $46 million in 2002. Also in 2003, Oncor
repurchased $100 million of common stock held by US Holdings compared to $50
million 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 $239 million and $304 million for the six months
ended June 30, 2003 and 2002, respectively. Other investing activities in 2003
included a cash source of $6 million, primarily reflecting net proceeds from
retirements of property, plant and equipment. Other investing activities in 2002
of $39 million in cash used reflected termination of out-of-the-money cash flow
hedges related to financing activities. The decline in value of the hedges was
due to lower interest rates.
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
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 -- At June 30, 2003, Oncor and TXU Energy had a $450
million revolving credit facility that matures on February 25, 2005. This
facility is used for working capital and other general corporate purposes,
including letters of credit, and replaced 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 this facility. As of June 30, 2003, there were $21
million of outstanding letters of credit issued by TXU Energy, but no cash
borrowings under this facility.
This facility, as well as others available to US Holdings, will provide
back-up for any future issuance of commercial paper by Oncor and TXU Energy. At
June 30, 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 $13 million and $60
million outstanding as of June 30, 2003 and December 31, 2002, respectively. The
weighted average interest rates on short-term borrowings at June 30, 2003 and
December 31, 2002, were 3.07% and 2.45%, respectively.
25
LONG-TERM DEBT -- During the six months ended June 30, 2003, Oncor redeemed
or made scheduled principal payments on long-term debt as follows:
First mortgage bonds........................... $ 306
Medium term notes.............................. 15
Total......................................... $ 321
See Note 2 to Financial Statements the six months ended June 30, 2003 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 June 30, 2003, TXU Energy through
certain subsidiaries, Oncor and TXU Gas are qualified originators of accounts
receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. The June 30, 2003 financial statements
reflect the sale of $64 million face amount of Oncor's receivables to TXU
Receivables Company under the program in exchange for cash of $30 million and
$34 million in subordinated notes, with $0.3 million of losses on sales for the
six months ended June 30, 2003 that principally represents 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 increased $12 million in the six month period ended
June 30, 2003 primarily due to reserve requirements that were reduced through a
temporary amendment in recognition of improving collection trends. Funding
increases or decreases under the program are reflected as cash provided by or
used in operating activities.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, 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 consolidated
balance sheet.
In August 2003, the program was amended to extend the term to July 2004,
as well as to extend the period providing temporarily higher delinquency and
default compliance ratios through December 31, 2003. The program was also
amended to coincide with the credit facilities' covenants by removing investment
grade credit ratings as a requirement of an eligible originator and substituting
maintenance of fixed charge coverage ratios and debt to capital ratios as
requirements of an eligible originator. In June 2003, the program was amended to
provide temporarily higher delinquency and default compliance ratios and
temporary relief from the loss reserve formula. The June amendment reflected the
billing and collection delays previously experienced as a result of new systems
and processes in TXU Energy and The Electric Reliability Counsel of Texas for
clearing customers' switching and billing data upon the transition to
competition.
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) each of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
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 thresholds apply to the entire portfolio of
sold receivables, not separately to the receivables of each
originator.
26
The delinquency and dilution ratios exceeded the relevant thresholds during
the first four months of 2003, but waivers were granted. These ratios were
affected by issues related to the transition to deregulation. Billing and
collection delays arose due to implementation of new systems and processes
within TXU Energy and The Electric Reliability Counsel of Texas for clearing
customers' 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 rules by the
Commission and strengthened credit and collection policies and practices are
expected to bring the ratios into consistent compliance with the program.
Under the receivables sale program, all the originators are required to
maintain specified fixed charge coverage and leverage ratios or supply a parent
guarantor that meets the ratio requirements. The failure by an originator or its
parent guarantor, if any, to maintain the specified financial ratios would
prevent that originator from selling its accounts receivable under the program.
If all the originators and the parent guarantor, if any, fail to maintain the
specified financial ratios so that there are no eligible originators, the
facility would terminate. Prior to the August 2003 amendment extending the
program, originator eligibility was predicated on the maintenance of an
investment grade credit rating.
CREDIT RATINGS OF TXU CORP. AND CERTAIN US SUBSIDIARIES -- The current
credit ratings for TXU Corp., US Holdings, Oncor and TXU Energy are presented
below:
TXU Corp. US Holdings Oncor TXU Energy
---------- ----------- -------- ----------
(Senior (Senior (Senior
Unsecured) Unsecured) (Secured) Unsecured)
S&P ................. BBB- BBB- BBB BBB
Moody's................ Ba1 Baa3 Baa1 Baa2
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 of these entities. S&P currently maintains a negative
outlook for each of these entities.
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 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 a change.
FINANCIAL COVENANTS, CREDIT RATING PROVISIONS AND CROSS DEFAULT PROVISIONS
- -- Oncor has financing arrangements that contain financial covenants that
require maintenance of specified fixed charge coverage ratios, shareholders'
equity to total capitalization ratios and leverage ratios and/or contain minimum
net worth covenants. As of June 30, 2003, Oncor and its subsidiaries were in
compliance with all of these covenants.
Oncor has financing and other arrangements that contain provisions that are
specifically affected by changes in credit ratings and also include cross
default provisions. The material cross default provisions are described below.
Other agreements of Oncor, including some of the credit facilities
discussed above, contain terms pursuant to which the interest rates charged
under the agreements may be adjusted depending on the credit ratings of Oncor or
its subsidiaries.
Cross Default Provisions
------------------------
Oncor has financing arrangements that 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. These provisions are referred to as "cross
default" provisions.
27
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess 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 credit facility, a default by TXU Energy
or any subsidiary thereof would cause the maturity of outstanding balances under
this 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 this facility
as to Oncor, but not as to TXU Energy.
A default by TXU Corp. on indebtedness of $50 million or more would result
in a cross default under the new $500 million five-year revolving credit
facility.
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.
CAPITALIZATION -- The capitalization ratios of Oncor at June 30, 2003,
consisted of 58% ($3,981 million) long-term debt, less amounts due currently,
and 42% ($2,913 million) shareholder's equity. As part of its restructuring at
January 1, 2002, US Holdings determined that the goal for Oncor's initial
capital structure would consist of approximately 40% shareholder's equity and
60% debt (total short-term and long-term debt and advances from affiliates).
This targeted capital structure was adopted by the Commission in its rule-making
for setting rates as part of the transition to retail competition in Texas, and
the Commission applied that capital structure in setting Oncor's cost of service
rates. Debt issuances and repurchases of common stock subsequent to Oncor's
January 1, 2002 commencement of business reflect activities to move the actual
capital structure close to the target capital structure. The targeting of this
capital structure may result in future debt issuances and capital distributions.
Note 3 to the financial statements for the period ended June 30, 2003 and Note 7
to the financial statements for the periods ended December 31, 2002 and 2001
provide detailed disclosures regarding repurchases of common stock.
Oncor's cash distributions may take the legal form of common stock share
repurchases or the payment of dividends on outstanding shares of its common
stock. The form of the distributions is primarily determined by current and
forecasted levels of retained earnings as well as state tax implications. The
common stock share repurchases made subsequent to January 1, 2002 are cash
distributions to US Holdings that for financial reporting purposes have been
recorded as a return of capital. Any future cash distributions to US Holdings
will be reported (i) as a return of capital if made through repurchases or (ii)
as a dividend if so declared by the board of directors. Any future common stock
share repurchases will reduce the amount of Oncor's equity, but will not change
US Holdings' 100% ownership of Oncor.
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 as discussed above. The settlement provides for an initial
issuance of securitization bonds in the amount of up to $500 million, which was
completed on August 21, 2003, to be followed by a second issuance of the
remainder, which is expected to be completed in the first half of 2004. The
settlement resolves all issues related to regulatory assets and liabilities.
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 included elsewhere in this prospectus for
additional disclosures regarding terms of these obligations. For the six months
ended June 30, 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
======== ======== ======== ======== ======== =========
28
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 June 30,
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 and six months ended June 30, 2003 and 2002 included
elsewhere in this prospectus for a discussion of changes in debt obligations.
29
EXPECTED MATURITY DATE 2002 2001
-------------------------------------------------- --------------- ---------------
(MILLIONS OF DOLLARS)
THERE- FAIR 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 retail electric providers. As a requisite for obtaining and
maintaining certification, a retail electric provider must meet financial
resource standards established by the Commission. Retail electric provider
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 retail electric
provider, TXU Energy, a material loss to Oncor arising from nonperformance by
this retail electric provider 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
SETTLEMENT PLAN -- On December 31, 2001, US Holdings filed a settlement
plan with the Commission. It resolved all major pending issues related to US
Holdings' transition to competition pursuant to the restructuring legislation
passed by the Texas legislature in 1999. 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.
Excess Mitigation Credit -- Beginning in 2002, Oncor began implementing an
excess stranded cost mitigation credit designed to result in a $350 million,
plus interest, credit (reduction) applied to delivery fees billed to retail
electric providers applied over a two-year period ending December 31, 2003. The
actual amount of this credit is expected to exceed $350 million as delivery
volumes are anticipated to be higher than initially estimated. Oncor's earnings
and cash flows are 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 as discussed above. The settlement provides for an initial
issuance of securitization bonds in the amount of up to $500 million, which was
completed on August 21, 2003, to be followed by a second issuance of the
remainder, which is expected to be completed in the first half of 2004. The
settlement resolves all issues related to regulatory assets and liabilities.
Retail Clawback -- If 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 delivery fees billed by Oncor to retail electric providers, 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 1, 2004. In the fourth
quarter 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. Oncor's earnings and
30
cash flows will be unaffected by the retail clawback as it is funded by TXU
Energy.
Transmission and distribution utilities in Texas are required to file a
progress report with the Commission when over 35% of the residential or small
commercial price-to-beat customer load that existed in the transmission and
distribution utility's service territory prior to the January 1, 2002 onset of
customer choice is being served by retail electric providers other than the
transmission and distribution utility's affiliated retail electric provider.
Accordingly, on June 30, 2003, Oncor reported to the Commission that, as
of May 31, 2003, approximately 37%, of the total historical small commercial
customer load, as adjusted pursuant to Commission rules, in its service
territory was being served by retail electric providers other than TXU Energy.
For purposes of these reports, the Commission rules adjust the total
historical load to remove load for those individual small commercial customers
who now use more than 1,000 kilowatts, and for those customers in which the
aggregate use of all their affiliates under common control is more than 1,000
kilowatts and have contracted with Oncor's affiliated retail electric provider,
TXU Energy. The calculations do not take into account the small commercial load
that TXU Energy has gained outside of the Oncor service territory. Also the
report filed by Oncor does not address the residential category where a
significantly smaller percentage of the load is served by retail electric
providers other than TXU Energy.
If the 40% threshold related to the small commercial load is met, TXU
Energy would reassess, and adjust accordingly, the estimated $185 million
accrual it previously recorded, which included amounts related to this customer
category. In addition, TXU Energy would be able to price competitively to this
class of customer.
TRANSMISSION RATES -- In May 2003, the Commission approved wholesale
transmission rates that are estimated to result in an annual $44 million
increase in Oncor's transmission and distribution revenues. Approximately 60% of
the increase is recoverable from Oncor's non-affiliated wholesale transmission
customers. The remaining 40% of the increase will be recoverable from retail
electric providers upon an increase in Oncor's distribution tariffs expected to
be approved by the Commission in the third quarter of 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 years ended December 31,
2002, 2001 and 2000 and Note 1 to the financial statements for the three and six
months ended June 30, 2003 and 2002 for a discussion of changes in accounting
standards.
31
BUSINESS
OVERVIEW OF ONCOR ELECTRIC DELIVERY COMPANY AND AFFILIATES
Oncor is a regulated company principally engaged in providing electricity
transmission and distribution services to retail electric providers that sell
power in the north-central, eastern and western parts of Texas. Oncor is a
wholly-owned subsidiary of US Holdings, which is a wholly-owned subsidiary of
TXU Corp. A majority of Oncor's revenues represent fees for delivery services
provided to TXU Energy, a wholly-owned subsidiary of US Holdings. For the six
months ended June 30, 2003, these affiliated revenues represented 73% of Oncor's
revenues. 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, through a business held for sale and
formerly a joint venture, 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 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 transmission lines and 9,615 circuit miles of
138- kilovolt and 69- kilovolt transmission lines and over 900
substations.
o ELECTRIC DISTRIBUTION - Oncor's electricity distribution business
distributes electricity for retail electric providers 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 retail electric providers, 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- kilovolt and 12.5- kilovolt.
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution companies. Oncor's distribution customers
consist of approximately 35 retail electric providers in Oncor's certificated
service area. One of these retail electric providers is TXU Energy, which is the
largest retail electric provider operating in Oncor's certificated service area.
Oncor's operations do not include the production or sale of electricity,
but rather consist of providing transmission and distribution and related
services.
For a more detailed discussion of Oncor's principal operations see "Oncor's
Business" below.
32
OVERVIEW OF THE RESTRUCTURING
Legislation was passed during the 1999 session of the Texas Legislature
that restructured the electric utility industry in Texas. Among other matters,
that legislation provided that by January 1, 2002, each electric utility was
required to separate (unbundle) its business into the following: power
generation operations, a retail electric provider and a transmission and
distribution company or separate transmission and distribution companies. As a
result, TXU Corp. restructured its US 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 transmission and
distribution business and transferred to various subsidiaries of TXU Energy its
generation assets and retail customers. Also, on January 1, 2002, the regulated
electric transmission and distribution business of TXU SESCO was transferred to
Oncor. In addition, as of January 1, 2002, TXU Energy acquired the following
businesses from within the TXU system: the retail electric provider 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 the region of The Electric
Reliability Counsil of Texas. In this prospectus, Oncor refers to The Electric
Reliability Counsil of Texas as 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
33
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.
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-kilovolt transmission lines and 9,615 circuit miles of 138- and 69- kilovolt
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 retail electric
providers who compete for their business. However, these retail electric
providers 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 retail electric providers, 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-kilovolt and 12.5-kilovolt.
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.
34
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 retail electric providers in Oncor's certificated
service area. One of these retail electric providers is TXU Energy, which is the
largest retail electric provider operating in Oncor's certificated service area.
Delivery fee revenues from TXU Energy represent the majority of Oncor's
revenues. Each retail electric provider is licensed by the Commission and must
satisfy credit criteria and/or post collateral under Commission regulations.
Commission regulations require retail electric providers to pay invoices from
distribution companies within 35 days of receipt. Oncor provides retail electric
providers 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 that 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.
Settlement Plan -- On December 31, 2001, US Holdings filed a settlement
plan with the Commission. It resolved all major pending issues related to US
Holdings' transition to competition pursuant to the restructuring legislation
passed by the Texas legislature in 1999. 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 -- Beginning in 2002, Oncor began implementing an
excess stranded cost mitigation credit designed to result in a $350 million,
plus interest, credit (reduction) applied to delivery fees billed to retail
electric providers applied over a two-year period ending December 31, 2003. The
actual amount of this credit is expected to exceed $350 million as delivery
volumes are anticipated to be higher than initially estimated. Oncor's earnings
and cash flows are 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 as discussed above. The settlement provides for an initial
issuance of securitization bonds in the amount of up to $500 million, which was
completed on August 21, 2003, to be followed by a second issuance of the
remainder, which is expected to be completed in the first half of 2004. The
settlement resolves all issues related to regulatory assets and liabilities.
Retail Clawback -- If 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
35
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 delivery fees billed by Oncor to retail electric providers, 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 1, 2004. In the fourth
quarter 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. Oncor's earnings and
cash flows will be unaffected by the retail clawback as it is funded by TXU
Energy.
Transmission and distribution utilities in Texas are required to file a
progress report with the Commission when over 35% of the residential or small
commercial price-to-beat customer load that existed in the transmission and
distribution utility's service territory prior to the January 1, 2002 onset of
customer choice is being served by retail electric providers other than the
transmission and distribution utility's affiliated retail electric provider.
Accordingly, on June 30, 2003, Oncor reported to the Commission that, as
of May 31, 2003, approximately 37%, of the total historical small commercial
customer load, as adjusted pursuant to Commission rules, in its service
territory was being served by retail electric providers other than TXU Energy.
For purposes of these reports, the Commission rules adjust the total
historical load to remove load for those individual small commercial customers
who now use more than 1,000 kilowatts, and for those customers in which the
aggregate use of all their affiliates under common control is more than 1,000
kilowatts and have contracted with Oncor's affiliated retail electric provider,
TXU Energy. The calculations do not take into account the small commercial load
that TXU Energy has gained outside of the Oncor service territory. Also the
report filed by Oncor does not address the residential category where a
significantly smaller percentage of the load is served by retail electric
providers other than TXU Energy.
If the 40% threshold related to the small commercial load is met, TXU
Energy would reassess, and adjust accordingly, the estimated $185 million
accrual it previously recorded, which included amounts related to this customer
category. In addition, TXU Energy would be able to price competitively to this
class of customer.
Transmission rates -- In May 2003, the Commission approved wholesale
transmission rates that are estimated to result in an annual $44 million
increase in Oncor's transmission and distribution revenues. Approximately 60% of
the increase is recoverable from Oncor's non-affiliated wholesale transmission
customers. The remaining 40% of the increase will be recoverable from retail
electric providers upon an increase in Oncor's distribution tariffs expected to
be approved by the Commission in the third quarter of 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
36
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.
37
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 None November 6, 2001 Executive Vice President of TXU Corp.
and President of TXU Energy; prior
thereto, 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.
38
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
- ------------------- ------ -------------------- --------------------- --------------------------------------
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 LLP; other directorships: TXU
Energy and TXU Europe Limited.
EXECUTIVE OFFICERS
POSITIONS AND OFFICES DATE FIRST ELECTED TO
PRESENTLY HELD 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.
M. S. Greene 57 Vice Chairman August 4, 2003 Vice Chairman of Oncor and TXU Gas;
prior thereto, 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.
R. D. Trimble 54 President August 4, 2003 President of Oncor; prior thereto, Senior
Vice President of Oncor; prior thereto,
Senior Vice President of Oncor and TXU
Gas Distribution; prior thereto, Senior
Vice President of US Holdings.
There is no family relationship between any of the above-named directors
and executive officers.
39
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.
EXECUTIVE COMPENSATION
Oncor and its affiliates have paid or awarded compensation during the last
calendar year to the executive officers named in the Summary Compensation Table
for services in all capacities. Amounts reported in the Table as Bonus and LTIP
Payouts for any calendar year reflect the performance of the individual and TXU
Corp. in prior periods. Accordingly, amounts reported as Bonus in 2002 reflect
performance in 2001 and amounts reported as LTIP Payouts in 2002 reflect
performance for the three years ended in March 2002. Information relating to
compensation provided in 2003 based on performance in 2002 is contained in the
footnotes to the Table.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ --------------------------------
AWARDS PAYOUTS
--------------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS SATION($) AWARDS OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($)(5) (6) ($)(7) SARS (#) ($)(8) ($)(9)
- ------------------------ ------ --------- --------- --------- ---------- ----------- ---------- ----------
Erle Nye, (1) (10) ........... 2002 1,037,500 1,950,000 --- 236,250 --- 4,286,400 299,985
Chairman of the Board
and Chief Executive of
Oncor
T. L. Baker (2) (10).......... 2002 495,000 500,000 --- 112,500 --- 1,109,770 119,960
Vice Chairman of Oncor --- ---
--- ---
M. S. Greene (3) (10)......... 2002 326,667 200,000 --- 73,800 --- 351,516 82,420
President of Oncor
Scott R. Longhurst (4) (10)... 2002 185,194 128,290 170,875 --- --- --- 1,845
Senior Vice President
of Oncor
- -----------
(1) Compensation amounts represent compensation paid by TXU Corp.
(2) Mr. Baker was elected Vice Chairman of Oncor effective November 4,
2002 and resigned as an officer of Oncor effective August 4, 2003.
Compensation amounts represent compensation paid by Oncor.
(3) Mr. Greene was elected President of Oncor effective November 4, 2002.
Compensation amounts represent compensation paid by Oncor.
(4) Mr. Longhurst was appointed and subsequently elected Senior Vice
President of Oncor effective August 1, 2002. Compensation amounts
represent compensation paid by TXU Europe Limited and, beginning
November 1, 2002, TXU Business Services Company.
(5) Amounts reported as Bonus in the Summary Compensation Table are
attributable principally to the named executive officers' participation
in the TXU Annual Incentive Plan. Amounts reported for 2002 resulted
from performance in 2001. No TXU Annual Incentive Plan awards for 2002
performance were provided in 2003 to any officers. Under the current
terms of the TXU Annual Incentive Plan, target incentive awards ranging
from 20% to 75% of base salary, and a maximum award of 100% of base
salary, are established. The percentage of the target or maximum
actually awarded, if any, is dependent upon the attainment of
performance measurement criteria established in advance by TXU Corp.'s
Organization and Compensation Committee, as well as that committee's
evaluation of the participant's and TXU Corp.'s performance. Amounts
40
reported for Mr. Nye as Bonus also include amounts provided in his
employment contract as discussed in footnote (10) and an additional
bonus of $750,000 awarded in February 2002 in recognition of his
contributions to TXU Corp.'s performance in 2001.
(6) The amount reported for Mr. Longhurst as Other Annual Compensation
consists of benefits provided by TXU Corp. under the standard
expatriate policy in connection with his extended assignment in the
United States. The amount reported represents housing, relocation
expenses, taxes associated with these benefits paid on Mr. Longhurst's
behalf, and other benefits.
(7) Amounts reported as Restricted Stock Awards in the Summary Compensation
Table are attributable to the named officer's participation in the
Deferred and Incentive Compensation Plan. Participants in the Deferred
and Incentive Compensation Plan may defer a percentage of their base
salary not to exceed a maximum percentage determined by TXU Corp.'s
Organization and Compensation Committee for each plan year and in any
event not to exceed 15% of the participant's base salary. Salary
deferred under the Deferred and Incentive Compensation Plan is included
in amounts reported as Salary in the Summary Compensation Table. TXU
Corp. makes a matching award (Matching Award) equal to 150% of the
participant's deferred salary. Prior to 2002, one-half of any TXU
Annual Incentive Plan award (Incentive Award) was deferred and invested
under the Deferred and Incentive Compensation Plan. Matching Awards are
subject to forfeiture under circumstances including termination for
reasons other than death, disability or retirement. Under the Deferred
and Incentive Compensation Plan, a trustee purchases TXU Corp. common
stock with an amount of cash equal to each participant's deferred
salary and Matching Award, and accounts are established for each
participant containing performance units equal to such number of common
shares. Deferred and Incentive Compensation Plan investments, including
reinvested dividends, are restricted to TXU Corp. common stock, and the
value of each unit credited to participants' accounts equals the value
of a share of TXU Corp. common stock and is at risk based on the
performance of the stock. On the expiration of the five year maturity
period, the value of the participant's maturing accounts are paid in
cash based upon the then current value of the performance units;
provided, however, that in no event will a participant's account be
deemed to have a cash value which is less than the sum of such
participant's deferral together with 6% per annum interest compounded
annually. Participants may elect to defer amounts that would otherwise
mature under the Deferred and Incentive Compensation Plan, under and
subject to the provisions of the Salary Deferral Program as discussed
in footnote (9). The maturity period is waived if the participant dies
or becomes totally and permanently disabled. The maturity period may be
extended in the event that the amounts otherwise maturing under the
Deferred and Incentive Compensation Plan, combined with the employee's
other compensation, exceeds the annual compensation threshold
established under the plan.
Matching Awards that have been made under the Deferred and Incentive
Compensation Plan are included under Restricted Stock Awards in the
Summary Compensation Table. As a result of these awards, undistributed
Matching Awards and Incentive Awards made in prior years under Deferred
and Incentive Compensation Plan provisions that are no longer effective
and dividends reinvested thereon, the number and market value at
December 31, 2002 of such performance units (each of which is equal to
one share of common stock) held in the Deferred and Incentive
Compensation Plan accounts for Messrs. Nye, Baker and Greene were
61,832 ($1,155,022), 19,607 ($366,259) and 13,170 ($246,016),
respectively.
(8) Amounts reported as LTIP Payouts in the Summary Compensation Table are
attributable to the vesting and distribution of performance-based
restricted stock awards under the Long-Term Incentive Compensation Plan
and the distribution during the year of earnings on salaries previously
deferred under the Deferred and Incentive Compensation Plan.
The Long-Term Incentive Compensation Plan is a comprehensive,
stock-based incentive compensation plan providing for common
stock-based awards, including performance-based restricted stock.
Outstanding awards, as of December 31, 2002, of performance-based
restricted stock to the named executive officers may vest at the end of
a three-year performance period and provide for an ultimate
distribution of from 0% to 200% of the number of the shares initially
awarded, based on TXU Corp.'s total return to shareholders over that
three-year period compared to the total returns provided by the
companies comprising the Standard & Poor's Electric Utilities Index.
Dividends on restricted shares are reinvested in TXU Corp. common stock
and are paid in cash upon release of the restricted shares. Under the
terms of the Long-Term Incentive Compensation Plan, the maximum amount
of any award that may be paid in any one year to any of the named
41
executive officers is the fair market value of 100,000 shares of TXU
Corp.'s common stock determined as of the first day of such calendar
year. The portion of any award that, based on such limitation, cannot
be fully paid in any year is deferred until a subsequent year when it
can be paid. For 2002, based on TXU Corp. achieving the 5th highest
total return to shareholders of the returns provided by the companies
comprising the Standard & Poor's Electric Utilities Index over the
three-year period ending March 31, 2002, Messrs. Nye, Baker and Greene
each received 200% of the restricted shares awarded in May of 1999,
which stock was valued at $4,286,400, $1,071,600 and $321,480,
respectively.
Amounts reported also include earnings distributed during the year on
salaries previously deferred under the Deferred and Incentive
Compensation Plan for Messrs. Baker and Greene of $38,170 and $30,036,
respectively.
As a result of restricted stock awards under the Long-Term Incentive
Compensation Plan, and reinvested dividends thereon, the number of
shares of restricted stock and the market value of such shares at
December 31, 2002 held for Messrs. Nye, Baker, Greene and Longhurst
were 376,431 ($7,031,731), 68,207 ($1,274,107), 22,620 ($422,542) and
8,637 ($161,339), respectively.
As noted, salaries deferred under the Deferred and Incentive
Compensation Plan are included in amounts reported as Salary in the
Summary Compensation Table. Amounts shown in the table below represent
the number of shares purchased under the Deferred and Incentive
Compensation Plan with those deferred salaries for 2002 and the number
of shares awarded under the Long-Term Incentive Compensation Plan.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
DEFERRED AND INCENTIVE LONG-TERM INCENTIVE COMPENSATION PLAN
COMPENSATION PLAN
------------------------------ ----------------------------------------------------------
NUMBER OF PERFORMANCE NUMBER OF PERFORMANCE
SHARES, OR OTHER SHARES, OR OTHER
UNITS OR PERIOD UNTIL UNITS OR PERIOD UNTIL ESTIMATED FUTURE PAYOUTS
OTHER MATURATION OTHER MATURATION --------------------------
NAME RIGHTS (#) OR PAYOUT RIGHTS (#) OR PAYOUT MINIMUM (#) MAXIMUM (#)
------------------ ------------ ---------------- ---------- -------------- ----------- -----------
Erle Nye.......... 2,877 5 Years 150,000 3 Years 0 300,000
T. L. Baker....... 1,370 5 Years 40,000 3 Years 0 80,000
M. S. Greene...... 899 5 Years 9,000 3 Years 0 18,000
Scott R. Longhurst 0 5 Years 5,000 3 Years 0 10,000
(9) Amounts reported as All Other Compensation in the Summary Compensation
Table are attributable to the named executive officer's participation
in the plans noted, and as otherwise described, in this footnote.
Under the TXU Thrift Plan all eligible employees of TXU Corp. and any
of its participating subsidiaries may invest a portion of their regular
salary or wages in common stock of TXU Corp., or in a variety of
selected mutual funds. Under the TXU Thrift Plan, TXU Corp. matches a
portion of an employee's contributions. Currently, TXU Corp.'s matching
contribution is 75% of the first 6% of the employee's contribution for
employees covered under the traditional defined benefit component of
the TXU Retirement Plan, and 100% of the first 6% of the employee's
contribution for employees covered under the cash balance component of
the TXU Retirement Plan. All matching contributions are invested in
common stock of TXU Corp. The amounts reported under All Other
Compensation in the Summary Compensation Table include these matching
amounts which, for Messrs. Nye, Baker, Greene and Longhurst were
$12,000, $9,000, $9,000 and $1,845, respectively, during 2002.
Under the Salary Deferral Program each employee of TXU Corp. and its
participating subsidiaries whose annual salary is equal to or greater
than an amount established under the Salary Deferral Program ($106,030
for the program year beginning January 1, 2002) may elect to defer up
to 50% of annual base salary, and/or up to 100% of any bonus or
incentive award and maturing Deferred and Incentive Compensation Plan
awards, for a period of seven years, for a period ending with the
retirement of such employee, or for a combination of these periods. TXU
Corp. makes a matching award, subject to forfeiture under circumstances
42
including termination for reasons other than death, disability or
retirement, equal to 100% of up to the first 8% of salary deferred
under the Salary Deferral Program; provided that employees who first
become eligible to participate in the Salary Deferral Program on or
after January 1, 2002, who are also eligible, or become eligible, to
participate in the Deferred and Incentive Compensation Plan, are not
eligible to receive any Salary Deferral Program matching award.
Salaries and bonuses deferred under the Salary Deferral Program are
included in amounts reported under Salary and Bonus, respectively, in
the Summary Compensation Table. Deferrals are credited with earnings or
losses based on the performance of investment alternatives under the
Salary Deferral Program selected by each participant. At the end of the
applicable maturity period, the trustee for the Salary Deferral Program
distributes the deferrals and the applicable earnings in cash as a lump
sum or in annual installments. TXU Corp. is financing the retirement
option portion of the Salary Deferral Program through the purchase of
corporate-owned life insurance on the lives of participants. The
proceeds from such insurance are expected to allow TXU Corp. to fully
recover the cost of the retirement option. During 2002, matching
awards, which are included under All Other Compensation in the Summary
Compensation Table, were made for Messrs. Nye, Baker and Greene in the
amounts of $103,000, $49,200 and $40,733, respectively.
Under the TXU Split-Dollar Life Insurance Program split-dollar life
insurance policies are purchased for eligible corporate officers of TXU
Corp. and its participating subsidiaries. The death benefit of the
participants' insurance policies are equal to two, three or four times
their annual TXU Split-Dollar Life Insurance Program compensation
depending on their category. Individuals who first became eligible to
participate in the TXU Split-Dollar Life Insurance Program after
October 15, 1996, vest in the policies issued under the TXU
Split-Dollar Life Insurance Program over a six year period. TXU Corp.
pays the premiums for the policies and has received a collateral
assignment of the policies equal in value to the sum of all of its
insurance premium payments. Although the TXU Split-Dollar Life
Insurance Program is terminable at any time, it is designed so that if
it is continued, TXU Corp. will fully recover all of the insurance
premium payments it has made either upon the death of the participant
or, if the assumptions made as to policy yield are realized, upon the
later of 15 years of participation or the participant's attainment of
age 65. During 2002, the economic benefit derived by Messrs. Nye, Baker
and Greene from the term insurance coverage provided and the interest
foregone on the remainder of the insurance premiums paid amounted to
$184,985, $61,760 and $32,687, respectively.
(10) TXU Corp. or Oncor has entered into employment agreements with Messrs.
Nye, Baker, Greene and Longhurst as described in this footnote.
Effective June 1, 2002, TXU Corp. entered into a new employment
agreement with Mr. Nye, which supersedes his previous employment
agreement. The new agreement provides for an initial term expiring May
31, 2005, and a secondary term expiring May 31, 2007. During the
initial term, Mr. Nye will continue to serve as TXU Corp.'s Chairman of
the Board and Chief Executive until such time as his successor is
elected at which time Mr. Nye may continue as TXU Corp.'s Chairman of
the Board and/or in such other executive position as he and TXU Corp.
may mutually agree upon. During the secondary term, Mr. Nye will
continue as an employee of TXU Corp. or, with TXU Corp.'s approval, he
may retire and serve TXU Corp. in a consulting capacity through the
expiration of the secondary term. Mr. Nye will, during the initial
term, be entitled to a minimum annual base salary of $1,050,000,
eligibility for an annual bonus under the terms of the TXU Annual
Incentive Plan, and minimum annual restricted stock awards of 40,000
shares under the Long-Term Incentive Compensation Plan. The agreement
also provides for a special one-time bonus of $1,000,000 in
consideration for his entering into the new agreement. Such bonus is
payable in equal annual installments over a five year period. During
the secondary term, Mr. Nye will be entitled to an annual base salary
equal to 75% of his base salary prior to expiration of the initial term
and eligibility for a prorated bonus under the terms of the TXU Annual
Incentive Plan for the 2005 plan year. The agreement also provides Mr.
Nye with benefits following his retirement, including administrative
support, annual medical examinations and financial planning services.
The agreement also reconfirms TXU Corp.'s prior agreement to fund the
retirement benefit to which Mr. Nye will be entitled under TXU Corp.'s
supplemental retirement plan. Additionally, the agreement entitles Mr.
Nye to severance benefits in the event he dies, becomes disabled, is
terminated without cause or resigns or retires with TXU Corp.'s
approval during the term of the agreement, including the base salary
and annual incentive awards he would have received; continued payment
of the remaining special bonus annual installment payments; a payment
in lieu of foregone and forfeited incentive compensation; and health
care benefits. The agreement also provides for compensation and
benefits under circumstances described in the agreement following a
43
change-in-control of TXU Corp. during the initial term, including a
payment equal to the greater of three times his annualized base salary
and target bonus or the total base salary and bonus he would have
received for the remainder of the term of the agreement; any unpaid
portion of the special bonus; a payment in lieu of foregone and
forfeited incentive compensation; health care benefits; and a tax
gross-up payment to offset any excise tax which may result from such
change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. Baker effective
July 1, 2000. The agreement, as amended, provides for the continued
service by Mr. Baker through June 30, 2004 (Term). Under the terms of
the agreement, Mr. Baker will, during the Term, be entitled to a
minimum annual base salary of $420,000, eligibility for an annual bonus
under the terms of the TXU Annual Incentive Plan, and minimum
restricted stock awards of 12,000 shares under the Long-Term Incentive
Compensation Plan. The agreement entitles Mr. Baker to severance
benefits in the event he is terminated without cause during the Term,
including a payment equal to the greater of his annualized base salary
and target bonus, or the total amount of base salary and target bonuses
he would have received for the remainder of the Term; a payment in lieu
of foregone and forfeited incentive compensation; and health care
benefits. The agreement also provides for compensation and benefits
under circumstances described in the agreement following a
change-in-control of TXU Corp. during the Term, including a payment
equal to three times his annualized base salary and target bonus; a
payment in lieu of foregone and forfeited incentive compensation;
health care benefits and a tax gross-up payment to offset any excise
tax which may result from such change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. Greene
effective July 1, 2000. The agreement, as amended, provides for the
continued service by Mr. Greene through June 30, 2004 (Term). Under the
terms of the agreement, Mr. Greene will, during the Term, be entitled
to a minimum annual base salary of $300,000, eligibility for an annual
bonus under the terms of the TXU Annual Incentive Plan, and minimum
restricted stock awards of 5,000 shares under the Long-Term Incentive
Compensation Plan. The agreement entitles Mr. Greene to severance
benefits in the event he is terminated without cause during the Term,
including a payment equal to the greater of his annualized base salary
and target bonus, or the total amount of base salary and target bonuses
he would have received for the remainder of the Term; a payment in lieu
of foregone and forfeited incentive compensation; and health care
benefits. The agreement also provides for compensation and benefits
under circumstances described in the agreement following a
change-in-control of TXU Corp. during the Term, including a payment
equal to three times his annualized base salary and target bonus; a
payment in lieu of foregone and forfeited incentive compensation;
health care benefits and a tax gross-up payment to offset any excise
tax which may result from such change-in-control payments.
Oncor entered into an employment agreement with Mr. Longhurst effective
November 1, 2002. The agreement provides for the continued service by
Mr. Longhurst through July 31, 2005 (Term). Under the terms of the
agreement, Mr. Longhurst will, during the Term, be entitled to an
initial annual base salary of $205,000, eligibility for an annual bonus
under the terms of the TXU Annual Incentive Plan, a retention bonus
payment equal to $20,000 if Mr. Longhurst continues his employment
through the end of the Term, and eligibility for consideration for
awards under the Long-Term Incentive Compensation Plan. The agreement
also provides for benefits associated with Mr. Longhurst's transition
from international assignment status to his employment status with
Oncor, including housing, relocation and transportation assistance,
immigration assistance and tax preparation assistance. The agreement
entitles Mr. Longhurst to severance benefits in the event he is
terminated without cause during the Term, including a payment equal to
the base salary and target bonuses he would have received for the
remainder of the Term; the retention bonus payment; a payment in lieu
of international assignment transition benefits provided for in the
agreement; and relocation to the U.K. for Mr. Longhurst and his family.
TXU Corp. and its participating subsidiaries maintain retirement plans,
which are qualified under applicable provisions of the Internal Revenue
Code of 1986, as amended. Oncor refers to these retirement plans
collectively as the Retirement Plan. The Retirement Plan contains both
a traditional defined benefit component and a cash balance component.
Annual retirement benefits under the traditional defined benefit
component, which applied during 2002 to each of the named officers
other than Mr. Nye and Mr. Longhurst, are computed as follows: for each
year of accredited service up to a total of 40 years, 1.3% of the first
$7,800, plus 1.5% of the excess over $7,800, of the participant's
average annual earnings during his or her three years of highest
earnings. The Retirement Plan also contains a cash balance component,
which covers all employees who first become eligible to participate in
the Retirement Plan on or after January 1, 2002, and employees
44
previously covered under the traditional defined benefit component who,
during a one-time election period in 2001, and for certain employees
covered by collective bargaining agreements, during other specifically
negotiated election periods, elected to convert the actuarial
equivalent of their accrued traditional defined benefit to the cash
balance plan component. Mr. Nye elected to convert to the cash balance
plan during the 2001 election period. Under the cash balance component,
hypothetical accounts are established for participants and credited
with monthly contribution credits equal to a percentage of the
participant's compensation, 3.5%, 4.5%, 5.5% or 6.5% depending on the
participant's combined age and years of accredited service, and
interest credits based on the average yield of the 30-year Treasury
bond for the 12 months ending November 30 of the prior year. Amounts
reported under Salary for the named executive officers in the Summary
Compensation Table approximate earnings as defined under the
traditional defined benefit component of the Retirement Plan without
regard to any limitations imposed by the Internal Revenue Code.
Benefits paid under the traditional defined benefit component of the
Retirement Plan are not subject to any reduction for Social Security
payments but are limited by provisions of the Internal Revenue Code.
Based on benefits accrued under the cash balance component of the
Retirement Plan as of December 31, 2002, the estimated annual benefit
payable to Mr. Nye under such component at normal retirement age is
$1,138,269. Mr. Longhurst was covered by the Electricity Supply Pension
Scheme, in which TXU Europe participates, through October 31, 2002. As
of December 31, 2002, years of accredited service under the Retirement
Plan for Messrs. Nye, Baker, Greene and Longhurst were 40, 32, 32 and
0, respectively.
TXU PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------------------
Remuneration 20 25 30 35 40
------------ -------- -------- -------- ---------- -----------
$ 50,000 $ 14,688 $ 18,360 $ 22,032 $ 25,704 $ 29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
1,800,000 539,688 674,610 809,532 944,454 1,079,376
2,000,000 599,688 749,610 899,532 1,049,454 1,199,376
TXU Corp.'s supplemental retirement plan provides for the payment of
retirement benefits, which would otherwise be limited by the Internal Revenue
Code or the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the supplemental
retirement plan, retirement benefits are calculated in accordance with the same
formula used under the qualified plan, except that, with respect to calculating
the portion of the supplemental retirement plan benefit attributable to service
under the defined benefit component of the Retirement Plan, earnings also
include TXU Annual Incentive Plan awards (for 2002, 100% of the TXU Annual
Incentive Plan award, and for 2001 and 2000, 50% of the TXU Annual Incentive
Plan awards, are reported under Bonus for the named officers in the Summary
Compensation Table). The table set forth above illustrates the total annual
benefit payable at retirement under the Retirement Plan inclusive of benefits
payable under the supplemental retirement plan, prior to any reduction for
earlier-than-normal or a contingent beneficiary option which may be selected by
participants.
45
SECURITY OWNERSHIP OF MANAGEMENT
The following lists the common stock of TXU Corp. owned by the directors
and executive officers of Oncor at August 14, 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 August 14, 2003.
NAME BENEFICIALLY OWNED SHARE PLAN(1) TOTAL
---- ------------------ ------------- -----
(NUMBER OF SHARES)
T. L. Baker....................... 158,841 30,466 189,307
H. Dan Farell..................... 54,819 21,411 76,230
M. S. Greene ..................... 57,220 20,596 77,816
Scott R. Longhurst................ 29,300 0 29,300
Michael J. McNally................ 176,530 36,861 213,391
Erle Nye.......................... 497,895 94,685 592,580
Eric H. Peterson ................. 61,795 5,567 67,362
R. A. Wooldridge.................. 9,606 0 9,606
All directors and executive
officers as a group (8)......... 1,046,006 209,586 1,255,592
___________________
<FN>
(1) Share units held in deferred compensation accounts under the Deferred and
Incentive Compensation Plan. Although the Deferred and Incentive
Compensation Plan allows these units to be paid only in the form of cash,
investments in units under the Deferred and Incentive Compensation Plan
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.
</FN>
RELATIONSHIPS AND RELATED TRANSACTIONS
R. A. Wooldridge, a director of Oncor, is a partner of Hunton & Williams
LLP, which provides legal services to Oncor, TXU Corp. and other affiliates of
Oncor.
46
RELATIONSHIPS AMONG ONCOR AND OTHER TXU COMPANIES
On January 1, 2002, the regulated transmission and distribution assets of
US Holdings and TXU SESCO, which we refer to in this section of the prospectus
collectively as the T&D Assets, were transferred to Oncor in connection with the
restructuring of TXU Corp. as a result of the restructuring legislation passed
by the Texas legislature in 1999. 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 a master
separation agreement executed in December of 2001.
The master 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, retail electric providers,
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 of these 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 of the amounts collected or
refunded. In addition, pursuant to the master 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.
Transmission Maintenance Agreements with TXU Generation provide for maintenance
and operation support services by Oncor to the generation facilities owned by
TXU Generation. During 2002, TXU Energy paid Oncor approximately $2.4 million
for maintenance services rendered pursuant to these Transmission Maintenance
Agreements.
Oncor assumed 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.
OTHER SIGNIFICANT AFFILIATE TRANSACTIONS:
----------------------------------------
o Oncor records revenue from TXU Energy for electricity delivery fees.
For the three months ended June 30, 2003 and 2002, these revenues were
$349 million and $397 million, respectively. For the six months ended
June 30, 2003 and 2002, these revenue were $726 million and $813
million, respectively.
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 June 30, 2003 and 2002, this interest income
totaled $12 million and $5 million, respectively. For the six months
ended June 30, 2003 and 2002, this interest income totaled $24 million
and $11 million, respectively.
o Under terms of a settlement plan filed by US Holdings, 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
47
reflect a $437 million receivable from TXU Energy that will be
extinguished as Oncor pays the related income taxes.
o 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
credit applied to delivery fees billed to retail electric providers,
including TXU Energy, for a two-year period ending December 31, 2003.
At June 30, 2003, the note receivable balance was $71 million. The
principal and interest payments on the note receivable from TXU Energy
reimburse Oncor for the credit applied to receivables from retail
electric providers. For the three months ended June 30, 2003 and 2002,
the principal payments received on the note receivable totaled $47
million and $33 million, respectively and the interest income totaled
$2 million and $6 million, respectively. For the six months ended June
30, 2003 and 2002, the principal payments received on the note
receivable totaled $99 million and $46 million, respectively and the
interest income totaled $5 million and $12 million, respectively.
o Oncor charges TXU Gas for customer and administrative services. For
the three months ended June 30, 2003 and 2002, these charges totaled
$7 million each quarter. For the six months ended June 30, 2003 and
2002, these charges totaled $15 million and $14 million, respectively,
and are largely reported as a reduction in operation and maintenance
expenses.
o Average daily short-term advances from affiliates for the three months
ended June 30, 2003 and 2002, were $142 million and $1.2 billion,
respectively. Interest expense incurred on the advances was $1 million
and $9 million, respectively, and the weighted average interest rates
for the respective periods were 3.07% and 2.33%. Average daily
short-term advances from affiliates for the six months ended June 30,
2003 and 2002 were $136 million and $1.4 billion, respectively.
Interest expense incurred on the advances was $2 million and $21
million, respectively, and the weighted average interest rates for the
respective periods were 2.7% and 3.04%.
o TXU Business Services Company charges Oncor for certain financial,
accounting, information technology, environmental, procurement and
personnel services and other administrative services at cost. For the
three months ended June 30, 2003 and 2002, these costs totaled $27
million and $37 million, respectively. For the six months ended June
30, 2003 and 2002, these costs totaled $55 million and $71 million,
respectively and are included in operation and maintenance expense.
All agreements between Oncor and affiliated entities are on terms at least
as favorable to Oncor as could be obtained with unrelated third parties.
48
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 initially sold to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation and Banc One Capital
Markets, Inc. on December 20, 2002. In connection with the sale of the Old
Notes, Oncor and those initial purchasers entered into a registration rights
agreement, dated December 20, 2002, 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 the effectiveness of the exchange offer registration
statement to promptly offer both series of registered New Notes for
the respective series of unregistered Old Notes and consummate the
exchange offer within 315 days after December 20, 2002 and/or
(b) in any of the circumstances described in the next paragraph,
to cause a shelf registration statement that it files with the SEC
covering continuous re-sales of the Old Notes or New Notes to be
declared effective under the Securities Act within the later of (i)
180 days after being required or requested to file a shelf
registration statement and (ii) 270 days after December 20, 2002.
Oncor may file a shelf registration statement if (i) Oncor is not permitted
to effect the exchange offer because of any change in law or in applicable
interpretations of the staff of the SEC, or for any other reason the exchange
offer is not consummated on or prior to 315 days after December 20, 2002, (ii)
any initial purchaser so requests with respect to Old Notes not eligible to be
exchanged for New Notes or (iii) any holder, other than a broker-dealer, is not
permitted by applicable law or interpretations of the staff of the SEC to
participate in the exchange offer or, in the case of any holder, other than a
broker-dealer, that participates in the exchange offer, such holder does not
receive freely tradeable New Notes on the date of the exchange and any such
holder so requests.
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 the 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.
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 that
o any New Notes to be received by the holder will be acquired in the
ordinary course of the holder's business,
49
o the 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 the holder is not an "affiliate" of Oncor, as defined in Rule 405
under the Securities Act, since affiliates of Oncor may not
participate in the exchange offer, and
o if the holder is not a broker-dealer, the holder is not engaged in,
and does not intend to engage in, a distribution of the New Notes.
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third-parties, Oncor believes that the New Notes issued
pursuant to this exchange offer may be offered for resale and resold or
otherwise transferred by any holder of the New Notes, other than any 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 the New Notes
are acquired in the ordinary course of the holder's business and the holder has
no arrangement or understanding with any person to participate in the
distribution within the meaning of the Securities Act of the 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 the
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 the 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 these New Notes. These
broker-dealers may use this prospectus for this purpose. Each of these
broker-dealers may be deemed to be an "underwriter" within the meaning of the
Securities Act.
Affiliates of Oncor, within the meaning of Rule 405 of the Securities Act,
and broker-dealers that acquired Old Notes directly from Oncor may not rely on
the above mentioned interpretive letters written by the staff of the SEC.
Consequently, those affiliates and broker-dealers may not participate in this
exchange offer. They must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of their Old
Notes. This prospectus may not be used for any such resale of Old Notes.
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 that 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 date the exchange offer expires. 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 the 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.
50
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 on the Old Notes. Accordingly, the holders of Old Notes
that are accepted for exchange will not receive accrued but unpaid interest on
these Old Notes at the time of tender or exchange. Rather, interest will be paid
on the exchanged New Notes on the first Interest Payment Date after the
expiration of the exchange offer.
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.
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.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of any of the conditions under "Conditions to
the Exchange Offer" below, the tendered Old Notes will be returned, without
expense, to the tendering holder thereof promptly after the expiration or
termination of the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER
The exchange offer will expire at 5:00 p.m., New York City time, on
__________, 2003, unless extended. If extended, "expiration date" shall refer to
the latest date and time to which the 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 reasonable discretion,
o to delay accepting any Old Notes subsequent to the expiration date
only if the delay is in anticipation of receiving any necessary
governmental approvals, 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 reasonable discretion, constitutes a material change, Oncor will promptly
disclose the material change by means of a prospectus supplement. Oncor will
distribute the 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 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 promptly issue the New Notes of the
respective series after the expiration date. 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. While Oncor reserves the right to waive any defects or irregularities in
51
the conditions to the exchange offer, Oncor will not waive any condition with
respect to an individual holder unless Oncor waives the condition for all
holders.
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 promptly after the
expiration or termination of this exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Oncor may terminate this exchange offer before the expiration date, or
before acceptance of the Old Notes with respect to any conditions relating to
necessary governmental approvals, and, if so terminated, will not exchange any
New Notes for any Old Notes, if:
o any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to this exchange
offer which, in Oncor's reasonable judgment, might materially impair
its ability to proceed with this exchange offer; or
o any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the SEC, which, in Oncor's reasonable judgment, might
materially impair its ability to proceed with this exchange offer.
If Oncor determines in its reasonable discretion that any of the above
conditions exist, Oncor may
o refuse to accept any tendered Old Notes and promptly 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 the Old Notes to withdraw their tendered Old Notes, or
o waive the unsatisfied conditions with respect to this exchange offer
and accept all properly tendered Old Notes which have not been validly
withdrawn. If the waiver constitutes a material change to this
exchange offer, Oncor will promptly disclose the 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.
While Oncor reserves the right to waive any defects or irregularities in
the conditions to the exchange offer, Oncor will not waive any condition with
respect to an individual holder unless Oncor waives the condition for all
holders.
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 the
letter of transmittal, and mail or otherwise deliver the letter of transmittal
or the facsimile to the exchange agent prior to the expiration date. In
addition, either
o certificates for the 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.
52
The tender by a holder that is not validly withdrawn prior to the
expiration date will constitute an agreement between the holder and Oncor in
accordance with the terms and subject to the conditions 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 THEM.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered
o by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
o for the account of an Eligible Institution (as defined below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal 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, the Old Notes must be endorsed or
accompanied by a properly completed bond power signed by the registered holder
as the registered holder's name appears on that registered holder's 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 that 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 their Old Notes into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. These deliveries 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 the 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 the beneficial owner agrees that Oncor may enforce the
letter of transmittal against the beneficial owner.
53
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 the 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 the tendered Old Notes, unless tender is to
be made by book-entry transfer, and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days
after the date of delivery of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or Book-Entry Confirmation, as the case may be, together
with a properly completed and duly executed letter of transmittal, or
facsimile thereof, or agent's message in lieu thereof, with any
required signature guarantees and all other documents required by the
letter of transmittal, will be deposited by the Eligible Institution
with the Exchange Agent; and
(3) the certificates and/or other documents referred to in
clause (2) above are received by the exchange agent within the time
specified above.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Miscellaneous
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by Oncor in its reasonable 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's reasonable 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 the time that Oncor
shall reasonably 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 this 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,
promptly following the expiration or termination of this exchange offer.
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 the tendered 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, the
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, the unaccepted or non-exchanged Old Notes
will be credited to an account maintained with DTC, promptly 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 the Old Notes were acquired by the broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
54
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 these 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.
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 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 the 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 the Old Notes in the name of
the person withdrawing the tender, and
o specify the name in which any 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 withdrawal notices will be determined by Oncor in its reasonable
discretion, 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 the holder promptly 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
55
FEES AND EXPENSES
Oncor will pay the expenses, if any, of soliciting tenders. Oncor has not
retained any dealer-manager in connection with this exchange offer and will not
make any payments to brokers, dealers or others soliciting acceptances of this
exchange offer. Oncor, however, will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. Oncor will also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of the Old Notes and in handling
or forwarding tenders for exchange for their customers.
Oncor will pay all transfer taxes, if any, applicable to the exchange of
the Old Notes pursuant to this exchange offer. If, however, certificates
representing Old Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the registered holder of Old Notes tendered, or if tendered Old Notes
are registered in the name of any person other than the person signing the
related letter of transmittal, or if a transfer tax is imposed for any reason
other than the exchange of the Old Notes pursuant to this exchange offer, then
the amount of any resulting transfer tax, whether imposed on the registered
holder or any other persons, will be payable by the tendering holder. If
satisfactory evidence of payment of such tax or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer tax will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
Oncor will record the New Notes at the same carrying value as the Old Notes
for which they are exchanged, which is the aggregate principal amount of
tendered Old Notes, as reflected in Oncor's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized in connection with this exchange offer. The cost of this exchange
offer will be amortized over the term of the New Notes.
APPRAISAL OR DISSENTERS' RIGHTS
Holders of the Old Notes will not have appraisal or dissenters' rights in
connection with this exchange offer.
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DESCRIPTION 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. This section summarizes
the material terms of the New Notes and the Indenture, as supplemented by the
officer's certificate. This summary does not contain a complete description of
the New Notes or the Indenture. You should read this summary together with the
Indenture and officer's certificate for a complete understanding of all of the
provisions and for the definitions of some terms used in this summary. The
Indenture and the officer's certificate are available upon request to Oncor or
the Trustee. The Indenture, the officer's certificate and a form of each New
Note have been filed with the SEC as exhibits to the exchange offer registration
statement of which this prospectus is a part. In addition, the Indenture is
qualified under the Trust Indenture Act of 1939 and is therefore subject to the
provisions of that Act. You should read the Trust Indenture Act of 1939 for a
complete understanding of its provisions. In this section, Oncor includes
references in parentheses to sections of the Indenture. Whenever Oncor refers to
particular sections or defined terms of the Indenture herein, those 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. The
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 these 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 the period;
57
o be payable semi-annually in arrears on January 15 and July 15 of each
year, and at maturity;
o accrue from the date of the last interest payment on the Old Notes;
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 the 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 the 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
58
(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 the notice shall be of no effect
unless the 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 the 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 a
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:
59
(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 a first mortgage lien
on substantially all of Oncor's electric transmission and
distribution properties; and
(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."
As described above, the New Notes will initially be secured by liens on
substantially all of Oncor's tangible electric transmission and distribution
assets. At June 30, 2003, the net book value of these assets was $6.2 billion.
Similar to the Old Notes, the New Notes will initially be secured obligations of
Oncor that will rank equally with all of Oncor's other outstanding secured debt.
At June 30, 2003, Oncor had $3,113 million aggregate principal amount of secured
debt outstanding, of which $1,063 million aggregate principal amount were first
mortgage bonds not held by the Trustee and $2,050 million in aggregate principal
amount were senior secured notes, including the Old Notes.
See "Discharge of Lien; Release Date" for a discussion of the provisions of
the Indenture pursuant to which the lien of the Indenture can 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
60
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
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 the
satisfaction of the conditions discussed under "Discharge of Lien; Release Date"
below, 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 Permitted
Secured Debt and the 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 June 30, 2003,
Oncor had $3,113 million principal amount of 1983 Mortgage Bonds outstanding,
including the 1983 First Mortgage Bonds held by the Trustee. Of this amount,
$1,063 million are not held by the Trustee which equaled approximately 17% of
the net book value of Oncor's Electric Utility Property and approximately 15% 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 excepted property and subject to 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 this 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 this property, and also the benefit of the
prior lien of any additional Class A Mortgage on any property subject thereto,
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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. These 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 the 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,
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 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 lien of this nature
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 the 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
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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,
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 the 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 the
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 the adjustments need not be
made if the 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 the limitations
described below;
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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
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 the released property or any
interest therein or any improvements, extensions or additions to the released
property or renewals, replacements or substitutions of or for the released
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
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(1) to the knowledge of the 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.
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 this Secured Debt or
o Oncor delivers to the Trustee bonds, notes or other evidences of
indebtedness secured by the lien which secures this 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 the 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 this 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:
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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
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.)
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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, the lease is made expressly subject to
termination by Oncor or by the Trustee and by the purchaser of the
property so leased at any sale thereof at any time during the
continuance of an event of default under the Indenture;
o Oncor shall have delivered to the Trustee an officer's certificate and
an opinion of counsel as provided in the Indenture; and
o immediately after giving effect to the transaction, no event of
default under the Indenture, or event which, after notice or lapse of
time or both, would become an event of default under the Indenture,
shall have occurred and be continuing.
(Indenture, Section 1201.) In the case of the conveyance or other transfer of
the Electric Utility Property as or substantially as an entirety to any other
person, upon the satisfaction of all the conditions described above Oncor would
be released and discharged from all obligations under the Indenture and on the
Indenture Securities then outstanding unless Oncor elects to waive the 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
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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.
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.)
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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.
(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
69
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
the covenants and provisions of the Indenture that cannot be modified or be
amended without the consent of the holder of each outstanding Indenture Security
of any series affected. (Indenture, Section 913.)
The consent of the holders of a majority in aggregate principal amount of
the Indenture Securities of all series then outstanding, considered as one
class, is required for all other modifications to the Indenture. However, if
less than all of the series of Indenture Securities outstanding are directly
affected by a proposed supplemental indenture, then the consent only of the
holders of a majority in aggregate principal amount of the outstanding Indenture
Securities of all series that are directly affected, considered as one class,
will be required. No such amendment or modification may without the consent of
all the Holders of the Indenture Securities of all series then outstanding:
o change the stated maturity of the principal of, or any installment of
principal of or interest on, any debt security, or reduce the
principal amount of any Indenture Security or its rate of interest or
change the method of calculating that interest rate or reduce any
premium payable upon redemption, or change the currency in which
payments are made, or impair the right to institute suit for the
enforcement of any payment on or after the stated maturity of any
Indenture Security;
o create any lien ranking prior to the lien of the Indenture with
respect to more than 10% of the Mortgaged Property or, except as
provided in the Indenture in connection with the Release Date,
terminate the lien of the Indenture on more than 10% of the Mortgaged
Property or deprive any holder of the benefits of the security of the
lien of the Indenture;
o reduce the percentage in principal amount of the outstanding Indenture
Securities of any series the consent of the holders of which is
required for any supplemental indenture or any waiver of compliance
with a provision of the Indenture or any default thereunder and its
consequences, or reduce the requirements for quorum or voting; or
o modify some of the provisions of the Indenture relating to
supplemental indentures, waivers of some covenants and waivers of past
defaults with respect to the Indenture Securities of any series.
A supplemental indenture that changes the Indenture solely for the benefit
of one or more particular series of Indenture Securities, or modifies the rights
of the holders of Indenture Securities of one or more series, will not affect
the rights under the Indenture of the holders of the Indenture Securities of any
other series. (Indenture, Section 1302.)
The Indenture provides that Indenture Securities owned by Oncor or anyone
else required to make payment on the Indenture Securities shall be disregarded
and considered not to be outstanding in determining whether the required holders
have given a request or consent. (Indenture, Section 101.)
Oncor may fix in advance a record date to determine the required number of
holders entitled to give any request, demand, authorization, direction, notice,
consent, waiver or other such act of the holders, but Oncor shall have no
obligation to do so. If Oncor fixes a record date, that request, demand,
authorization, direction, notice, consent, waiver or other act of the holders
may be given before or after that record date, but only the holders of record at
the close of business on that record date will be considered holders for the
purposes of determining whether holders of the required percentage of the
outstanding New Notes and the Remaining Old Notes have authorized or agreed or
consented to the request, demand, authorization, direction, notice, consent,
waiver or other act of the holders. For that purpose, the outstanding New Notes
and the Remaining Old Notes shall be computed as of the record date.
Any request, demand, authorization, direction, notice, consent, election,
waiver or other act of a holder of any Indenture Security will bind every future
holder of that Indenture Security and the holder of every Indenture Security
issued upon the registration of transfer of or in exchange for that Indenture
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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:
(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 June 30, 2003, the Trustee
held approximately 66% 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.)
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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.)
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 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.
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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.
Oncor expects that, in accordance with DTC's customary procedures, 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 information provided by DTC.
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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 encumbrances, including
tax and construction liens, purchase money liens and certain other exceptions.
The 1983 Mortgage contains provisions that impose the lien of the 1983
Mortgage on improvements, extensions, replacements and additions to the 1983
Mortgaged Property acquired by Oncor after the date of the 1983 Mortgage, other
than the excepted property described above and subject to pre-existing liens
such as purchase money mortgages and other liens or defects in title. However,
if Oncor consolidates or merges with or conveys or transfers all or
substantially all of the mortgaged property to another corporation, the lien
created by the 1983 Mortgage will generally not cover the property of the
successor company, other than the property it acquires from Oncor and
improvements, extensions, replacements and additions to that property. (1983
Mortgage, Section 18.03.)
The 1983 Mortgage provides that the Mortgage Trustee shall have a lien upon
the 1983 Mortgaged Property, prior to the 1983 Mortgage Bonds, for the payment
of its reasonable compensation and expenses and for indemnity against certain
liabilities. (1983 Mortgage, Section 19.09.)
ISSUANCE OF ADDITIONAL 1983 MORTGAGE BONDS
The maximum principal amount of 1983 Mortgage Bonds that may be issued
under the 1983 Mortgage is unlimited. 1983 Mortgage Bonds of any series may be
issued from time to time on the basis of:
(1) 70% of qualified property additions after adjustments to offset
retirements;
(2) retirement of 1983 Mortgage Bonds or certain prior lien bonds;
and/or
(3) deposits of cash.
With certain exceptions, in the case of (2) above, the issuance of 1983
Mortgage Bonds must meet an earnings test. The adjusted net earnings before
income taxes for 12 out of the preceding 15 months must be at least twice the
annual interest requirements on all 1983 Mortgage Bonds at the time outstanding,
including the additional issuance and all other senior ranking indebtedness. In
general, interest on variable interest bonds, if any, is calculated using the
average rate in effect during the 12 month period.
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Property additions generally include electric, gas, steam and/or hot water
utility property but not fuel, securities, automobiles, other vehicles or
aircraft, or property used principally for the production or gathering of
natural gas.
The 1983 Mortgage contains 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 the conditions
provided in the 1983 Mortgage, 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.)
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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.
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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. Thelen Reid & Priest LLP,
Oncor's counsel, is of the opinion that, insofar as it relates to matters of law
or legal conclusions, the following summary is accurate in all material
respects. 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 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
77
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
receives interest that is not effectively connected with the trade or business,
78
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.
79
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.
80
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 and enforceability of the New Notes
for Oncor. However, all matters of Texas law will be passed upon only by Hunton
& Williams LLP, Dallas, Texas. At June 30, 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 $234,064 and $121,707,
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.
81
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
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Independent Accountants' Report...................................F-25
Condensed Statements of Consolidated Income and Consolidated
Comprehensive Income for the three and six months ended
June 30, 2003 and 2002............................................F-26
Condensed Statements of Consolidated Cash Flows for the
six months ended June 30, 2003 and 2002...........................F-27
Condensed Consolidated Balance Sheets as of June 30, 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 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 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 company
principally engaged in providing delivery services to retail electric providers
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 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. 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 Commission, as
of January 1, 2002, US Holdings transferred:
o its electric transmission and distribution 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 retail electric provider of TXU
Energy.
In addition, the transmission and distribution 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 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 transmission and distribution 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 transmission and
distribution operations of US Holdings and TXU SESCO. The financial statements
for periods subsequent to January 1, 2002, present Oncor's actual operating
results. Effective January 1, 2002, in connection with the transfer of US
Holdings' retail customers to a subsidiary retail electric provider 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 transmission and distribution operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the transmission and distribution
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 transmission and distribution 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 transmission and
distribution 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 FERC's 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's transmission and distribution 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 -- Transmission and distribution facilities
are stated at original cost. The cost of transmission and distribution 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 transmission and distribution 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 restructuring legislation passed by the
Texas legislature in 1999 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 retail electric provider, and a transmission and distribution utility
or separate transmission and distribution utilities. Unbundled transmission and
distribution utilities within ERCOT, such as Oncor, remain regulated by the
Commission.
The 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 with the Commission. It resolved all major pending issues
related to US Holdings' transition to competition pursuant to the 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. 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 Transmission and
Distribution 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 transmission and distribution
rates charged to retail electric providers. In June 2001, the Commission had
issued an interim order that addressed Oncor's charges for transmission and
distribution service when retail competition would begin. Among other things,
F-11
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 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 retail electric providers 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.
F-12
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.
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
F-13
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.
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 provider of last resort 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 transmission and distribution 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 transmission and
distribution 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 transmission and distribution 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 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.
The legal form of cash distributions to US Holdings has been common stock
share repurchases; but, for financial accounting, these cash distributions are
recorded as a return of capital.
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, a defined
benefit pension plan sponsored by TXU Corp. The TXU Retirement Plan is a
qualified pension plan under Section 401(a) of the Internal Revenue Code of
1986, as amended, and is subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended. Employees are eligible to participate
in the TXU 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 TXU 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 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. This plan is a participant-directed defined
contribution profit sharing plan qualified under Section 401(a) of the Internal
Revenue Code, and is subject to the provisions of ERISA. The TXU Thrift Plan
includes an employee stock ownership component. Under the terms of the TXU
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 TXU 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 TXU Retirement Plan. Employer matching
contributions are invested in TXU Corp. common stock. Contributions to the TXU
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 TXU Retirement Plan and the TXU 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 retail electric providers. As a requisite for obtaining and
maintaining certification, a retail electric provider must meet the financial
resource standards established by the Commission. Retail electric provider
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 retail electric
provider, 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 retail electric providers, 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 retail electric providers. 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%.
F-22
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.
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.
F-23
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
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
(1) Fourth quarter 2002 net income includes extraordinary charges of
$123 million (net of tax benefit).
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 June 30, 2003, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and six-month periods ended June 30, 2003 and 2002, and the
condensed statements of consolidated cash flows for the six-month periods ended
June 30, 2003 and 2002. These financial statements are the responsibility of
Oncor's management.
We conducted our reviews 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 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 reviews, 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
August 12, 2003
F-25
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ ------
(MILLIONS OF DOLLARS)
Operating revenues:
Affiliated............................. $349 $397 $ 726 $813
Nonaffiliated.......................... 137 103 266 181
Total operating revenues......... 486 500 992 994
Operating expenses:
Operation and maintenance.............. 190 189 378 367
Depreciation and amortization.......... 68 67 137 131
Income taxes........................... 18 29 43 62
Taxes, other than income............... 93 92 185 187
Total operating expenses........... 369 377 743 747
Operating income.......................... 117 123 249 247
Other income and deductions:
Other income........................... 2 1 4 2
Other deductions....................... 2 1 3 3
Nonoperating income taxes.............. 5 4 11 6
Interest income - affiliates.............. 14 11 29 23
Interest expense and other charges........ 74 65 155 127
Net income................................ $ 52 $ 65 $ 113 $136
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ ------
(MILLIONS OF DOLLARS)
Net income............................................. $ 52 $ 65 $ 113 $136
Other comprehensive income, net of tax effects:
Cash flow hedge activity -
Net change in fair value of derivatives
(net of tax benefit of $14 and $14)............. -- (26) -- (25)
Amounts realized in earnings during the period.... 1 -- 1 --
Total........................................... 1 (26) 1 (25)
Comprehensive income................................... $ 53 $ 39 $ 114 $111
See Notes to Financial Statements.
F-26
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
2003 2002
---- ----
(MILLIONS OF DOLLARS)
Cash flows -- operating activities:
Net income..................................................... $113 $136
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and amortization ............................. 142 143
Deferred income taxes and investment tax credits-- net .... 75 67
Changes in operating assets and liabilities ................... (213) (415)
Cash provided by (used in) operating activities.............. 117 (69)
Cash flows -- financing activities:
Issuances of long-term debt...................................... -- 1,200
Retirements/repurchases of debt.................................. (321) (352)
Capital contribution from parent................................. 250 --
Repurchase of common stock....................................... (100) (50)
Net issuances of commercial paper................................ -- 295
Net change in advances from affiliates........................... (47) (780)
Decrease in note receivable from TXU Energy related to a
regulatory liability........................................... 99 46
Redemption deposit applied to debt retirement.................... 210 --
Debt premium, discount, financing, and reacquisition expenses.... (4) (20)
Cash provided by financing activities........................ 87 339
Cash flows -- investing activities:
Capital expenditures............................................. (245) (265)
Other............................................................ 6 (39)
Cash used in investing activities............................ (239) (304)
Net change in cash and cash equivalents............................. (35) (34)
Cash and cash equivalents-- beginning balance....................... 77 35
Cash and cash equivalents-- ending balance.......................... $ 42 $ 1
See Notes to Financial Statements.
F-27
ONCOR ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(MILLIONS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 42 $ 77
Restricted cash................................... 210
Accounts receivable:
Affiliates (principally TXU Energy)............ 262 213
Trade.......................................... 92 62
Inventories....................................... 38 40
Note receivable from TXU Energy................... 71 170
Other current assets.............................. 57 35
Total current assets........................... 562 807
Investments.......................................... 27 29
Property, plant and equipment - net.................. 6,162 6,056
Due from TXU Energy.................................. 437 437
Regulatory assets - net.............................. 1,770 1,630
Other noncurrent assets.............................. 65 63
Total assets................................... $ 9,023 $ 9,022
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates.......................... $ 13 $ 60
Long-term debt due currently...................... 100 319
Accounts payable - trade.......................... 53 30
Accrued taxes..................................... 70 142
Accrued interest.................................. 92 70
Other current liabilities......................... 99 92
Total current liabilities ..................... 427 713
Accumulated deferred income taxes and investment
tax credits........................................ 1,433 1,370
Other noncurrent liabilities and deferred credits.... 269 210
Long-term debt, less amounts due currently........... 3,981 4,080
Contingencies (Note 4)
Shareholder's equity (Note 3)........................ 2,913 2,649
Total liabilities and shareholder's equity..... $ 9,023 $ 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 is a wholly-owned subsidiary of US
Holdings, which is a wholly-owned subsidiary of TXU Corp.
Oncor is a regulated electricity transmission and distribution company
principally engaged in providing delivery services to retail electric providers
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. For the six months ended
June 30, 2003, such affiliated revenues represented 73% 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 have been prepared in accordance with US GAAP and on the same basis as the
audited financial statements included in its 2002 Form 10-K.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. 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 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 145, regarding classification of
items as extraordinary, 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 145 did not result
in a reclassification for the six months ended June 30, 2002.
SFAS 146, regarding exit costs, became effective on January 1, 2003. SFAS
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 146 did not impact results of
operations for the six months ended June 30, 2003.
FIN 45 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 45 did not materially impact results of
operations for the six months ended June 30, 2003.
FIN 46 was issued in January 2003. FIN 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 in the quarter ending September 30, 2003 and immediately for
any new variable interest entities. The adoption of FIN 46 did not and is not
expected to impact financial position or results of operations.
SFAS 149 was issued in April 2003 and became effective for contracts
entered into or modified after June 30, 2003. SFAS 149 clarifies what contracts
may be eligible for the normal purchase and sale exception, the definition of a
F-29
derivative and the treatment in the statement of cash flows when a derivative
contains a financing component. The adoption of SFAS 149 is not expected to
impact financial position or results of operations.
SFAS 150 was issued in May 2003 and became effective June 1, 2003 for new
financial instruments and July 1, 2003 for existing financial instruments. SFAS
150 requires that certain mandatorily redeemable preferred securities be
classified as liabilities beginning July 1, 2003. SFAS 150 is not expected to
impact financial position.
EITF 01-8 was issued in May 2003 and is effective prospectively for
arrangements that are new, modified or committed to beginning July 1, 2003. This
guidance may require that certain types of arrangements be accounted for as
leases, including tolling and power supply contracts, take-or-pay contracts and
service contracts involving the use of specific property and equipment. The
adoption of EITF 01-8 is not expected to impact financial position or results of
operations.
2. FINANCING ARRANGEMENTS
CREDIT FACILITIES -- At June 30, 2003, Oncor and TXU Energy had a $450
million revolving credit facility that matures on February 25, 2005. This
facility is used for working capital and other general corporate purposes,
including letters of credit, and replaced 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 this facility. As of June 30, 2003, there were $21
million of outstanding letters of credit issued by TXU Energy, but no cash
borrowings under this facility.
This facility, as well as others available to US Holdings, will provide
back-up for any future issuance of commercial paper by Oncor and TXU Energy. At
June 30, 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 $13 million and $60
million outstanding as of June 30, 2003 and December 31, 2002, respectively. The
weighted average interest rates on short-term borrowings at June 30, 2003 and
December 31, 2002, were 3.07% and 2.45%, respectively.
F-30
LONG-TERM DEBT -- At June 30, 2003 and December 31, 2002, Oncor's long-term
debt consisted of the following:
JUNE 30, 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
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 Oncor............................................... 4,081 4,399
Less amount due currently..................................... 100 319
Total long-term debt.......................................... $ 3,981 $ 4,080
In April 2003, Oncor repaid all ($70 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 $72 million was utilized to fund the
maturity.
In March 2003, Oncor repaid 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 maturity.
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.
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 June 30, 2003, TXU Energy through
certain subsidiaries, Oncor and TXU Gas are qualified originators of accounts
receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. The June 30, 2003 financial statements
reflect the sale of $64 million face amount of Oncor's receivables to TXU
Receivables Company under the program in exchange for cash of $30 million and
$34 million in subordinated notes, with $0.3 million of losses on sales for the
six months ended June 30, 2003 that principally represents 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 increased $12 million in the six month period ended
June 30, 2003 primarily due to reserve requirements that were reduced through a
temporary amendment in recognition of improving collection trends. Funding
increases or decreases under the program are reflected as cash provided by or
used in operating activities.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be 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 Company, 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
F-31
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
In August 2003, the program was amended to extend the term to July 2004, as
well as to extend the period providing temporarily higher delinquency and
default compliance ratios through December 31, 2003. The program was also
amended to coincide with the credit facilities' covenants by removing investment
grade credit ratings as a requirement of an eligible originator and substituting
maintenance of fixed charge coverage ratios and debt to capital ratios as
requirements of an eligible originator. In June 2003, the program was amended to
provide temporarily higher delinquency and default compliance ratios and
temporary relief from the loss reserve formula. The June amendment reflected 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.
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) each of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
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
thresholds apply to the entire portfolio of sold receivables, not
separately to the receivables of each originator.
The delinquency and dilution ratios exceeded the relevant thresholds during
the first four months 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 customers' 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 POLR
rules by the Commission and strengthened credit and collection policies and
practices are expected to bring the ratios into consistent compliance with the
program.
Under the receivables sale program, all the originators are required to
maintain specified fixed charge coverage and leverage ratios or supply a parent
guarantor that meets the ratio requirements. The failure by an originator or its
parent guarantor, if any, to maintain the specified financial ratios would
prevent that originator from selling its accounts receivable under the program.
If all the originators and the parent guarantor, if any, fail to maintain the
specified financial ratios so that there are no eligible originators, the
facility would terminate. Prior to the August 2003 amendment extending the
program, originator eligibility was predicated on the maintenance of an
investment grade credit rating.
FINANCIAL COVENANTS, CREDIT RATING PROVISIONS AND CROSS DEFAULT PROVISIONS
- -- The terms of certain financing arrangements of Oncor contain financial
covenants that require maintenance of specified fixed charge coverage ratios,
shareholders' equity to total capitalization ratios and leverage ratios and/or
contain minimum net worth covenants. As of June 30, 2003, Oncor and its
subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of Oncor contain provisions that
are specifically affected by changes in credit ratings and also include cross
default provisions. The material cross default provisions are described below.
Other agreements of Oncor, including some of the credit facilities
discussed above, contain terms pursuant to which the interest rates charged
under the agreements may be adjusted depending on the credit ratings of Oncor or
its subsidiaries.
F-32
Cross Default Provisions
------------------------
Certain financing arrangements of 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.
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess 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 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.
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
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Common stock without par value:
Authorized shares - 100,000,000.......... $2,701 $2,551
Outstanding shares: June 30, 2003 -
65,112,000 and December 31, 2002 -
67,612,000
Retained earnings........................... 235 122
Accumulated other comprehensive loss........ (23) (24)
Total shareholder's equity............. $2,913 $2,649
In January and April 2003, Oncor repurchased a total of 2,500,000 shares of
its common stock from US Holdings for $100 million. In May 2003, Oncor received
a capital contribution from US Holdings of $250 million. The Board of Directors
passed resolutions to repurchase an additional 937,500 shares from US Holdings
for $37.5 million in both July and October 2003.
An Oncor mortgage restricts its payment of dividends to the amount of its
retained earnings. Certain other debt instruments and preferred securities of
TXU Corp.'s subsidiaries contain provisions that restrict payment of dividends
during any interest or distribution payment deferral period or while any payment
default exists. At June 30, 2003, there were no restrictions on the payment of
dividends under these provisions.
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 June 30, 2003, the aggregate maximum amount of
residual values guaranteed was approximately $63 million with an estimated
residual recovery of approximately $62 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
F-33
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.
5. SUPPLEMENTARY FINANCIAL INFORMATION
INTEREST EXPENSE AND RELATED CHARGES --
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------
2003 2002 2003 2002
----- ------ ------ ------
Interest................................................... $ 74 $ 65 $ 153 $ 125
Amortization of debt discounts and issuance costs.......... 1 2 4 5
Allowance for borrowed funds used during construction
and capitalized interest................................. (1) (2) (2) (3)
Total interest expense and other charges............ $ 74 $ 65 $ 155 $ 127
OTHER INCOME AND OTHER DEDUCTIONS -- Other income and other deductions
consist of several individually immaterial items.
REGULATORY ASSETS AND LIABILITIES --
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
REGULATORY ASSETS
Generation-related regulatory assets subject
to securitization................................ $ 1,652 $ 1,652
Securities reacquisition costs..................... 124 124
Recoverable deferred income taxes-- net............ 78 76
Other regulatory assets............................ 99 46
Total regulatory assets....................... 1,953 1,898
REGULATORY LIABILITIES
Liability related to excess mitigation............. 91 170
Investment tax credit related and protected
excess deferred taxes............................ 92 98
Total regulatory liabilities.................. 183 268
Net regulatory assets......................... $ 1,770 $1,630
Included above are assets of $1.8 billion at June 30, 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 the third quarter of 2003 and the first
half of 2004 pursuant to the regulatory settlement plan. All other regulatory
assets have a remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of June 30, 2003 was $41 million
related to nuclear decommissioning liabilities.
RESTRICTED CASH -- As of June 30, 2003, all $210 million of the net
proceeds from Oncor's issuance of senior secured notes in December 2002, held in
trust at December 31, 2002, had been used to repay interest and principal of
First Mortgage Bonds of Oncor due March and April 2003.
ACCOUNTS RECEIVABLE --Accounts receivable at June 30, 2003 and December 31,
2002 of $354 million and $275 million (including amounts due from affiliates)
included unbilled revenues of $98 million and $97 million, respectively. At June
30, 2003 and December 31, 2002, accounts receivable are stated net of allowance
for uncollectible accounts of $2 million and $1 million, respectively.
F-34
INTANGIBLE ASSETS -- SFAS 142, "Goodwill and Other Intangible Assets,"
became effective for Oncor on January 1, 2002. SFAS 142 requires the
discontinuance of goodwill amortization and additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
AS OF JUNE 30, 2003 AS OF DECEMBER 31, 2002
------------------------------ -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ----- -------- ------------ -----
Amortized intangible assets
(included in property, plant
and equipment):
Capitalized software.............. $148 $ 62 $ 86 $148 $ 53 $ 95
Land easements.................... 160 55 105 168 52 116
Total....................... $308 $117 $191 $316 $105 $211
Amortization expense for intangible assets was $12 million and $10 million
for the six months ended June 30, 2003 and 2002, respectively.
Oncor's unamortized intangible assets consist of goodwill of $25 million,
reported in investments on the balance sheet.
PROPERTY, PLANT AND EQUIPMENT -- At June 30, 2003 and December 31, 2002,
property, plant and equipment of $6.2 billion and $6.1 billion is stated net of
accumulated depreciation and amortization of $3.2 billion and $3.0 billion,
respectively.
As of June 30, 2003, substantially all of Oncor's property, plant and
equipment was pledged as collateral for Oncor's first mortgage bonds and senior
secured notes.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES -- During 2003,
Oncor has not utilized hedging instruments, although Oncor may enter into hedges
in the future. During 2002, Oncor's hedges matched the terms of the underlying
financing transaction. As a result, Oncor experienced no hedge ineffectiveness
during the six months ended June 30, 2003 or 2002.
As of June 30, 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 amortization of the
value of terminated interest payment hedges over the next twelve months.
AFFILIATE TRANSACTIONS -- The following represent significant affiliate
transactions of Oncor:
o Oncor records revenue from TXU Energy for electricity delivery fees.
For the three months ended June 30, 2003 and 2002, these revenues were
$349 million and $397 million, respectively. For the six months ended
June 30, 2003 and 2002, these revenue were $726 million and $813
million, respectively.
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 June 30, 2003 and 2002, this interest income totaled $12
million and $5 million, respectively. For the six months ended June 30,
2003 and 2002, this interest income totaled $24 million and $11
million, respectively.
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 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
credit applied to delivery fees billed to retail electric providers,
including TXU Energy, for a two-year period ending December 31, 2003.
At June 30, 2003, the note receivable balance was $71 million. The
principal and interest payments on the note receivable from TXU Energy
reimburse Oncor for the credit applied to receivables from retail
electric providers. For the three months ended June 30, 2003 and 2002,
F-35
the principal payments received on the note receivable totaled $47
million and $33 million, respectively and the interest income totaled
$2 million and $6 million, respectively. For the six months ended June
30, 2003 and 2002, the principal payments received on the note
receivable totaled $99 million and $46 million, respectively and the
interest income totaled $5 million and $12 million, respectively.
o Oncor charges TXU Gas Company, a subsidiary of TXU Corp., for customer
and administrative services. For the three months ended June 30, 2003
and 2002, these charges totaled $7 million each quarter. For the six
months ended June 30, 2003 and 2002, these charges totaled $15 million
and $14 million, respectively, and are largely reported as a reduction
in operation and maintenance expenses.
o Average daily short-term advances from affiliates for the three months
ended June 30, 2003 and 2002, were $142 million and $1.2 billion,
respectively. Interest expense incurred on the advances was $1 million
and $9 million, respectively, and the weighted average interest rates
for the respective periods were 3.07% and 2.33%. Average daily
short-term advances from affiliates for the six months ended June 30,
2003 and 2002 were $136 million and $1.4 billion, respectively.
Interest expense incurred on the advances was $2 million and $21
million, respectively, and the weighted average interest rates for the
respective periods were 2.7% and 3.04%.
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 June 30,
2003 and 2002, these costs totaled $27 million and $37 million,
respectively. For the six months ended June 30, 2003 and 2002, these
costs totaled $55 million and $71 million, respectively and are
included in operation and maintenance expense.
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 entered into agreements with Oncor's directors which provide,
among other things, for their indemnification by TXU Corp. to the fullest extent
permitted by Texas law, unless a final adjudication establishes that the
indemnitee's acts were committed in bad faith, were the result of active and
deliberate dishonesty or that the indemnitee personally gained a financial
profit to which the indemnitee was not legally entitled. These agreements
II-1
further provide, under certain circumstances, for the advancement of expenses
and the implementation of other arrangements for the benefit of the indemnitee.
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
The list of exhibits under the heading INDEX TO EXHIBITS on page II-5 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) The undersigned registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement,
provided, however, that paragraphs (3)(A)(i) and (3)(A)(ii) do
not apply if the registration statement is on Form S-3, Form
S-8 or Form F-3, and the information required to be included
in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the SEC by the
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
(C) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(D) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of its Annual Report
pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new
registration statement relating to the securities offered
herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(4) 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-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of New York, state of
New York on September 15, 2003.
ONCOR ELECTRIC DELIVERY COMPANY
By: /s/ Robert J. Reger
----------------------------
(Robert J. Reger, Jr.,
Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the 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 September 15, 2003
- ------------------------------------------ Officer and Director
(Erle Nye, Chairman of the Board
and Chief Executive)
/s/ Scott Longhurst* Principal Financial September 15, 2003
- ------------------------------------------ Officer
(Scott Longhurst, Senior Vice President)
/s/ David H. Anderson Principal Accounting September 15, 2003
- ------------------------------------------ Officer
(David H. Anderson, Vice President)
/s/ T.L. Baker* Director September 15, 2003
- ------------------------------------------
(T.L. Baker)
/s/ H. Dan Farell* Director September 15, 2003
- ------------------------------------------
(H. Dan Farell)
/s/ Michael J. McNally* Director September 15, 2003
- ------------------------------------------
(Michael J. McNally)
/s/ Eric H. Peterson* Director September 15, 2003
- ------------------------------------------
(Eric H. Peterson)
/s/ R.A. Wooldridge* Director September 15, 2003
- ------------------------------------------
(R.A. Wooldridge)
*By: /s/ Robert J. Reger, Jr. Attorney-in-Fact September 15, 2003
--------------------------------------
(Robert J. Reger, Jr.)
II-4
INDEX TO EXHIBITS
PREVIOUSLY FILED***
WITH
FILE AS
EXHIBIT NUMBER EXHIBIT
- ------- ------ -------
2 1-12833 Form 8-K 2 -- Master Separation Agreement by and
(January 16, among TXU Electric Delivery Company
2002) (now Oncor), TXU Generation Holdings
Company LLC, TXU Merger Energy
Trading Company LP, TXU SESCO
Company, TXU SESCO Energy Services
Company, TXU Energy Retail Company
LP and TXU Electric Company, dated
as of December 14, 2001.
3(a) 333-100240 3(a) -- Articles of Incorporation of Oncor.
3(b) 333-100240 3(b) -- Articles of Amendment, effective
January 17, 2002, to the Articles
of Incorporation of Oncor.
3(c) 333-100240 3(c) -- Articles of Amendment, effective
July 31, 2002, to the Articles of
Incorporation of Oncor.
3(d) 333-100240 3(d) -- Bylaws of Oncor,
as restated January 17, 2002.
4(a) 333-100240 4(a) -- Indenture.
4(b) 333-100240 4(b) -- Officer's Certificate, dated
May 6, 2002, to the Indenture.
4(c) 333-106894* 4(c) -- Officer's Certificate, dated
December 20, 2002, to the
Indenture.
4(d) 333-106894* 4(d) -- Form of the New 2015 Notes.
4(e) 333-106894* 4(e) -- Form of the New 2033 Notes.
4(f) 2-90185 4(a) -- 1983 Mortgage.
II-5
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) 333-106894* 4(f)(2) Sixty-fifth December 1, 2002.
4(g) 333-106894* 4(g) -- First Mortgage Bond, 6.375% Series
due 2015.
4(h) 333-106894* 4(h) -- First Mortgage Bond, 7.250% Series
due 2033.
4(I) 333-106894* 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
8-K/A (May 1, April 22, 2003, among Oncor, TXU
2003) Energy and certain banks listed
therein, and JPMorgan Chase Bank,
as 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.
II-6
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)
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)
10(f) 1-12833 10(a) -- Deferred and Incentive Compensation
Form 10-K Plan of TXU Corp., as restated,
(2001) effective August 17, 2001.
10(g) 1-12833 10(b) -- Salary Deferral Program of TXU
Form 10-K Corp., as restated, effective
(2001) August 17, 2001.
10(h) 1-12833 10(c) -- Second Supplemental Retirement Plan
Form 10-K for Employees of TXU Corp., as
(2001) amended and restated, effective
August 17, 2001.
10(i) 1-12833 10(d) -- Long-Term Incentive Compensation
Form 10-K Plan of TXU Corp., restated
(2002) effective as of May 20, 2002.
10(j) 1-12833 10(f) -- Annual Incentive Plan of the TXU
Form 10-K Corp., restated effective as of
(2001) August 17, 2001.
10(k) 1-12833 10(g) -- Split Dollar Life Insurance Program
Form 10-K of TXU Corp., amended and restated
(2001) effective as of August 17, 2001.
10(l) 1-12833 10(j) -- Employment Agreement, dated June 1,
Form 10-K 2002 between TXU Corp. and Erle
(2002) Nye.
10(m) -- Employment Agreement, dated July 1,
2000 between TXU Corp. and T.L.
Baker, as amended on May 11, 2001
and February 28, 2003.
10(n) -- Employment Agreement, dated July 1,
2000 between TXU Corp. and M.S.
Greene, as amended on May 11, 2001
and February 28, 2003.
10(o) -- Employment Agreement, dated June 1,
2002 between Oncor and Scott R.
Longhurst.
12 333-106894* 12 -- Computation of ratios of earnings
(years ended to fixed charges.
December 31,
2002, 2001 and
2000)
333-106894 -
Amendment
No. 1** (six
months ended
June 30, 2003
and 2002)
II-7
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.
24 333-106894* 24 -- Power of Attorney.
25 333-106894* 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) 333-106894* 99(b) -- Form of Notice of Guaranteed
Delivery.
99(c) 333-106894* 99(c) -- Form of Exchange Agent Agreement.
____________________________
* Represents the original Registration Statement filed on July 9, 2003.
** Represents Amendment No. 1 to the Registration Statement filed on August 22,
2003.
*** Incorporated herein by reference.
II-8