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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
-- OR --
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission File Number 333-100240
TXU Electric Delivery Company
(Formerly Oncor Electric Delivery Company)
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2967830
(State of Incorporation) (I.R.S. Employer Identification No.)
500 N. Akard Street, Dallas, TX 75201 (214) 486-2000
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
---- ----
Common Stock outstanding at August 10, 2004: 48,864,775 shares, without par
value
TXU Electric Delivery Company meets the conditions set forth in General
Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this
report with the reduced disclosure format.
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TABLE OF CONTENTS
- ---------------------------------------------------------------------------------------------------------------------
Page
----
Glossary........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income--
Three and Six Months Ended June 30, 2004 and 2003.......................................... 1
Condensed Statements of Consolidated Cash Flows --
Six Months Ended June 30, 2004 and 2003.................................................... 2
Condensed Consolidated Balance Sheets --
June 30, 2004 and December 31, 2003........................................................ 3
Notes to Condensed Financial Statements.................................................... 4
Report of Independent Registered Public Accounting Firm.................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 22
Item 4. Controls and Procedures.................................................................... 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 23
SIGNATURE........................................................................................... 25
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Electric Delivery Company are made
available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU Electric Delivery Company will provide copies of
current reports not posted on the website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
2003 Form 10-K................................. TXU Electric Delivery Company's Annual Report on
Form 10-K for the year ended December 31, 2003
Commission..................................... Public Utility Commission of Texas
Electric Delivery.............................. refers to TXU Electric Delivery Company, formerly Oncor
Electric Delivery Company, a subsidiary of US Holdings,
or Electric Delivery and its consolidated bankruptcy
remote financing subsidiary, TXU Electric Delivery
Transition Bond Company LLC, depending on context
Energy......................................... refers to Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries,
depending on context
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of the various electricity systems within
Texas
FASB........................................... Financial Accounting Standards Board, the designated
organization in the private sector for establishing standards
for financial accounting and reporting
FERC........................................... Federal Energy Regulatory Commission
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ Gigawatt-hours
Moody's........................................ Moody's Investors Services, Inc.
REP............................................ retail electric provider
S&P............................................ Standard & Poor's, a division of The McGraw Hill Companies
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
ii
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Operating revenues:
Affiliated............................................. $ 332 $ 349 $ 681 $ 726
Nonaffiliated.......................................... 186 137 360 266
----- ----- ----- -----
Total operating revenues............................. 518 486 1,041 992
Operating expenses:
Operation and maintenance.............................. 200 190 389 378
Depreciation and amortization.......................... 83 68 170 137
Income taxes........................................... 22 18 50 43
Taxes, other than income............................... 92 93 184 185
----- ----- ----- -----
Total operating expenses............................. 397 369 793 743
----- ----- ----- -----
Operating income.......................................... 121 117 248 249
Other income and deductions:
Other income........................................... 2 2 4 4
Other deductions....................................... 20 2 21 3
Nonoperating income tax expense (benefit).............. (1) 5 2 11
Interest income - affiliates.............................. 13 14 25 29
Interest expense and related charges...................... 70 74 141 155
----- ----- ----- -----
Income before extraordinary gain.......................... 47 52 113 113
Extraordinary gain, net of tax (Note 1)................... 16 -- 16 --
----- ----- ----- -----
Net income................................................ $ 63 $ 52 $ 129 $ 113
===== ===== ===== =====
CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Net income................................................ $ 63 $ 52 $ 129 $ 113
Other comprehensive income -
Cash flow hedge activity, net of tax effect:
Amounts realized in earnings during the period,
net of tax......................................... -- 1 1 1
----- ----- ----- -----
Total................................................ -- 1 1 1
----- ----- ----- -----
Comprehensive income...................................... $ 63 $ 53 $ 130 $ 114
===== ===== ===== =====
See Notes to Condensed Financial Statements.
1
TXU ELECTRIC DELIVERY COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2004 2003
------ -------
(millions of dollars)
Cash flows -- operating activities:
Net income................................................................ $ 129 $ 113
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ........................................ 170 142
Deferred income taxes and investment tax credits -- net .............. 48 75
Extraordinary gain, net of tax........................................ (16) --
Changes in operating assets and liabilities............................... (129) (213)
------- -------
Cash provided by operating activities................................... 202 117
Cash flows -- financing activities:
Issuance of long-term debt.................................................. 790 --
Retirements/repurchases of debt............................................. (108) (321)
Capital contribution from parent............................................ -- 250
Repurchase of common stock.................................................. (450) (100)
Net change in advances from affiliates...................................... (12) (47)
Decrease in note receivable from Energy related to a regulatory liability... -- 99
Redemption deposit applied to debt retirement............................... -- 210
Debt premium, discount, financing and reacquisition expenses................ (13) (4)
------- -------
Cash provided by financing activities................................... 207 87
Cash flows -- investing activities:
Capital expenditures........................................................ (249) (245)
Other....................................................................... (23) 6
------- -------
Cash used in investing activities....................................... (272) (239)
------- -------
Net change in cash and cash equivalents........................................ 137 (35)
Cash and cash equivalents -- beginning balance................................. 245 77
------- -------
Cash and cash equivalents -- ending balance.................................... $ 382 $ 42
======= =======
See Notes to Condensed Financial Statements
2
TXU ELECTRIC DELIVERY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
--------- ------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 382 $ 245
Restricted cash............................................................ 23 12
Accounts receivable:
Affiliates (principally Energy)......................................... 198 189
All other .............................................................. 72 58
Notes or other receivables due from Energy currently....................... 19 13
Materials and supplies inventories -- at average cost ..................... 30 29
Other current assets....................................................... 55 33
--------- ---------
Total current assets.................................................... 779 579
Investments................................................................... 87 44
Property, plant and equipment - net........................................... 6,389 6,333
Notes or other receivables due from Energy.................................... 418 423
Regulatory assets - net....................................................... 1,907 1,872
Other noncurrent assets....................................................... 100 65
--------- ---------
Total assets............................................................ $ 9,680 $ 9,316
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates................................................... $ 13 $ 25
Long-term debt due currently............................................... 190 243
Accounts payable - trade................................................... 62 43
Accrued taxes.............................................................. 93 147
Accrued interest........................................................... 88 88
Other current liabilities.................................................. 133 146
--------- ---------
Total current liabilities .............................................. 579 692
Investment tax credits........................................................ 66 68
Accumulated deferred income taxes............................................. 1,463 1,438
Other noncurrent liabilities and deferred credits............................. 314 279
Long-term debt, less amounts due currently.................................... 4,722 3,983
--------- ---------
Total liabilities....................................................... 7,144 6,460
Contingencies (Note 4)
Shareholder's equity (Note 3):
Common stock without par value:
Authorized shares - 100,000,000 shares;
Outstanding shares: 48,864,775 shares and
60,112,000 shares..................................................... 2,051 2,501
Retained earnings.......................................................... 509 380
Accumulated other comprehensive loss....................................... (24) (25)
--------- ---------
Total shareholder's equity.............................................. 2,536 2,856
--------- ---------
Total liabilities and shareholder's equity.............................. $ 9,680 $ 9,316
========= =========
See Notes to Condensed Financial Statements.
3
TXU ELECTRIC DELIVERY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - Electric Delivery, formerly Oncor Electric
Delivery Company, is a wholly-owned subsidiary of US Holdings, which is a
wholly-owned subsidiary of TXU Corp. Electric Delivery is a regulated
electricity transmission and distribution company principally engaged in
providing delivery services to REPs that sell power in the north-central,
eastern and western parts of Texas. A majority of Electric Delivery's revenues
represented fees for delivery services provided to Energy, also a subsidiary of
US Holdings. For the three and six months ended June 30, 2004, such affiliated
revenues represented 64% and 65%, respectively, of Electric Delivery's revenues.
Electric Delivery is managed as an integrated business; consequently there are
no separate reportable business segments.
Strategic Initiatives and Other Actions - As previously reported, on
February 23, 2004, C. John Wilder was named president and chief executive of TXU
Corp. Mr. Wilder was formerly executive vice president and chief financial
officer of Entergy Corporation. Mr. Wilder has been reviewing the operations of
TXU Corp. and has formulated certain strategic initiatives and continues to
develop others. Actions taken that impact Electric Delivery relate to TXU
Corp.'s cost structure, including organizational alignments and headcount as
well as non-core business activities.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Electric Delivery entered into a services agreement with
a subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini),
a new company initially providing business process support services to TXU Corp.
and subsidiaries, and immediately implementing a plan to offer similar services
to other utility companies. Under the ten-year agreement, over 2,500 TXU
Corp. employees (including over 200 employees from Electric Delivery)
transferred to Capgemini effective July 1, 2004. Outsourced base support
services performed by Capgemini for a fixed fee include information technology,
customer call center, billing, human resources, supply chain and certain
accounting activities.
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use Electric Delivery's
information technology assets, consisting primarily of capitalized software. A
portion of the software was in development and had not yet been placed in
service by Electric Delivery, and as a result of outsourcing its information
technology activities, Electric Delivery no longer intends to develop the
majority of these projects and from Electric Delivery's perspective the software
is abandoned. The agreements with Capgemini do not require that any software in
development be completed and placed in service. Consequently, the previously
capitalized balance for these software projects was written off in the second
quarter of 2004, resulting in a charge of $1 million (after-tax), reported in
other deductions. The remaining assets, totaling $58 million, were transferred
to a subsidiary of TXU Corp., at book value, which subsidiary holds the
investment in Capgemini, in exchange for an interest in that subsidiary, which
such interest is accounted for by Electric Delivery on the equity method.
Also as part of the services agreements, TXU Corp. agreed to indemnify
Capgemini for severance costs incurred by Capgemini for former employees
terminated within 18 months of their transfer to Capgemini. Accordingly,
Electric Delivery recorded an $11 million ($7 million after-tax) charge for
severance expense, in the second quarter of 2004, which represents a reasonable
estimate of the indemnity and is reported in other deductions. The charge
consists primarily of an allocation of severance related to TXU Business
Services Employees. In addition, TXU Corp. committed to pay up to $25 million
for costs associated with transitioning the outsourced activities to Capgemini.
The transition costs applicable to Electric Delivery are expected to be recorded
during the remainder of 2004.
Organizational Realignment and Headcount Reductions
---------------------------------------------------
During the second quarter of 2004, TXU Corp. completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, Electric Delivery recorded severance
charges totaling $7 million ($5 million after-tax), reported in other
deductions. The charge consists primarily of an allocation of termination-
related costs associated with TXU Business Services employees. Additionally,
Electric Delivery recorded $7 million of employee severance costs as a
regulatory asset.
Basis of Presentation -- The condensed consolidated financial statements
of Electric Delivery have been prepared in accordance with US GAAP and on the
same basis as the audited financial statements included in its 2003 Form 10-K.
In the opinion of management, all other adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
4
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 condensed
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 2003 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 dollars unless otherwise indicated.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first six months of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. TXU Corp. is accounting for the
effects of the Medicare Act in accordance with FASB Staff Position 106-2. For
the three and six months ended June 30, 2004, the effect of adoption of the
Medicare Act was a reduction of approximately $3 million and $6 million,
respectively, in Electric Delivery's postretirement benefit costs.
Extraordinary gain -- An extraordinary gain of $16 million (net of tax of
$9 million) in 2004 represents an increase in the carrying value of Electric
Delivery's regulatory asset subject to securitization. The second and final
tranche of the securitization bonds was issued in June 2004. The increase in the
related regulatory asset, with a carrying value of $1.7 billion, is due to the
effect of higher interest rates on the bonds and therefore increased amounts to
be recovered from REPs through delivery fee surcharges to service the bonds.
2. FINANCING ARRANGEMENTS
Short-term Borrowings -- At June 30, 2004, Electric Delivery had
short-term advances from affiliates of $13 million at a weighted average
interest rate of 2.86%. At December 31, 2003 Electric Delivery had outstanding
short-term advances from affiliates of $25 million at a weighted average
interest rate of 2.92%.
Credit Facilities -- At June 30, 2004, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) as follows:
- ----------------------------------------------------------------------------------------------------------------
At June 30, 2004
----------------------------------------------
Expiration Authorized Facility Letters Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- ----------------------------------------------------------------------------------------------------------------
364-day Credit Facility April 2005 TXU Corp. $ 700 $ -- $ 700 $ --
- ----------------------------------------------------------------------------------------------------------------
364-day Credit Facility April 2005 Energy 1,000 -- 1,000 --
- ----------------------------------------------------------------------------------------------------------------
364-day Credit Facility April 2005 TXU Gas 300 -- 300 --
- ----------------------------------------------------------------------------------------------------------------
Energy, Electric
364-day Credit Facility June 2005 Delivery 600 -- -- 600
- ----------------------------------------------------------------------------------------------------------------
Three-Year Revolving Credit Energy, Electric
Facility June 2007 Delivery 1,400 -- 675 725
- ----------------------------------------------------------------------------------------------------------------
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 465 -- 35
- ----------------------------------------------------------------------------------------------------------------
Five-Year Revolving Credit Energy, Electric
Facility June 2009 Delivery 500 -- -- 500
------ ------ ------ ------
- ----------------------------------------------------------------------------------------------------------------
Total $5,000 $ 465 $2,675 $1,860
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
In June 2004, US Holdings, Energy and Electric Delivery replaced $2.25
billion of credit facilities scheduled to mature in 2005 with $2.5 billion of
credit facilities maturing in June 2005, 2007 and 2009. These new facilities are
used for working capital and general corporate purposes and provide back-up for
any future issuances of commercial paper by Energy or Electric Delivery. At June
30, 2004, there was no such commercial paper outstanding.
5
TXU Corp.'s $500 million five-year revolving credit facility provides for
up to $500 million in letters of credit and/or up to $250 million of loans ($500
million in the aggregate). To the extent capacity is available under this
facility; it may be made available to US Holdings, Energy or Electric Delivery
for borrowings, letters of credit or other purposes.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program,
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of June 30, 2004, $50 million
of undivided interests in Electric Delivery's accounts receivable had been sold
by TXU Receivables Company. Effective June 30, 2004, the program was extended
through June 28, 2005. Additionally, the extension allows for increased
availability of funding through a credit ratings-based reduction of customer
deposits previously used to reduce the amount of undivided interests that could
be sold. Undivided interests will now be reduced by 100% of the customer deposit
for a Baa3/BBB- rating; 50% for a Baa2/BBB rating; and zero % for a Baa1/BBB+
and above rating (based on each originator's credit rating).
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities. The
program fees (losses on sale), which consist primarily of interest costs on the
underlying financing, were less than $1 million for the six-month periods ending
June 30, 2004 and 2003, and approximated 2.1% and 3.6% for the first six months
of 2004 and 2003, respectively, of the average funding under the program on an
annualized basis; these fees represent the net incremental costs of the program
to Electric Delivery and are reported in operation and maintenance expenses.
The June 30, 2004 balance sheet reflects $91 million face amount of trade
accounts receivable reduced by $50 million of undivided interests sold by TXU
Receivables Company. Funding under the program increased $6 million for the six
months ended June 30, 2004. Funding under the program for the six months ended
June 30, 2003 increased $12 million. Funding increases or decreases under the
program are reflected as operating cash flow activity in the statement of cash
flows. The carrying amount of the retained interests in the accounts receivable
approximated fair value due to the short-term nature of the collection period.
Activities of TXU Receivables Company related to Electric Delivery for the
six months ended June 30, 2004 and 2003 were as follows:
Six Months Ended June 30,
-------------------------
2004 2003
----------- --------
Cash collections on accounts receivable...................................... $ 281 $ 159
Face amount of new receivables purchased..................................... (291) (165)
Increase (decrease) in subordinated notes payable............................ 4 (6)
------- ------
Electric Delivery's operating cash flows provided under the program..... $ (6) $ (12)
======= ======
Upon termination of the program, cash flows to Electric Delivery would be
delayed as collections of sold receivables would be used by TXU Receivables
Company to repurchase the undivided interests sold instead of purchasing new
receivables. The level of cash flows would normalize in approximately 16 to 31
days.
6
Contingencies Related to Sale of 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) all 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 competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within Energy and ERCOT for clearing customers' switching and billing
data. Strengthened credit and collection policies and practices have brought the
ratios into consistent compliance with the program requirement.
Under terms of 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.
Long-Term Debt -- At June 30, 2004 and December 31, 2003, the long-term
debt of Electric Delivery and its consolidated subsidiary consisted of the
following:
June 30, December 31,
2004 2003
------- -----------
Electric Delivery
- -----------------
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. $ -- $ 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
7.625% 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(b)............................. 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(b)................................. 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized discount............................................................. (26) (30)
TXU Electric Delivery Transition Bond Company LLC (a)
- -----------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2007.............................................................. 95 103
4.030% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2010.............................................................. 122 122
4.950% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2013.............................................................. 130 130
5.420% Fixed Series 2003 Bonds due in bi-annual installments through
August 15, 2015................................................................ 145 145
3.520% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2009.............................................................. 279 --
4.810% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2012.............................................................. 221 --
5.290% Fixed Series 2004 Bonds due in bi-annual installments through
May 15, 2016................................................................... 290 --
------- -------
Total TXU Electric Delivery Transition Bond Company LLC...................... 1,282 500
------- -------
Total Electric Delivery...................................................... 4,912 4,226
Less amount due currently........................................................... 190 243
------- -------
Total long-term debt................................................................ $ 4,722 $ 3,983
======= =======
(a) These bonds are nonrecourse to Electric Delivery.
(b) Interest rates swapped to floating on an aggregate $900 million principal
amount.
7
In June 2004, Electric Delivery's wholly-owned, special purpose
bankruptcy-remote subsidiary, TXU Electric Delivery Transition Bond Company LLC,
issued $790 million aggregate principal amount of transition (securitization)
bonds in accordance with a settlement agreement with the Commission and a
financing order related to the transition to competition. The bonds were issued
in three classes that require bi-annual interest and principal installment
payments beginning in November 2004 through specified dates in 2009 through
2016. The transition bonds bear interest at fixed annual rates ranging from
3.52% to 5.29%. Electric Delivery used the proceeds to retire, subsequent to
June 30, 2004, two series of mortgage bonds with an aggregate principal amount
of $393 million due in 2025 and repurchase shares of common stock from its
parent for $375 million. As a result of the retirement of these two series of
mortgage bonds, Electric Delivery will be able to release the liens on its
outstanding senior secured notes, making them rank equally with Electric
Delivery's other senior unsecured debt. No decision has been made as to the
timing of such release.
Other retirements of long-term debt in 2004 totaling $8 million represent
payments at scheduled maturity dates.
Fair Value Hedges -- In April 2004, $900 million of fixed rate debt was
effectively converted to variable rates through interest rate swap transactions,
accounted for as fair value hedges, expiring through 2012. In August 2004,
fixed-to-variable swaps related to $700 million of such debt were settled for a
gain of $8 million, which will be amortized to offset interest expense over the
remaining life of the debt.
3. SHAREHOLDER'S EQUITY
In January 2004, Electric Delivery repurchased 937,500 shares of its
common stock from US Holdings for $37.5 million. In April 2004, Electric
Delivery repurchased an additional 937,500 shares of its common stock from US
Holdings for $37.5 million. In June 2004, Electric Delivery repurchased
9,372,225 shares of its common stock from US Holdings for $375 million.
The legal form of cash distributions to US Holdings has been common stock
repurchases; however, for accounting purposes, these cash distributions are
recorded as a return of capital.
The Electric Delivery mortgage restricts its payment of dividends to the
amount of its retained earnings. Certain debt instruments of Electric Delivery
contain provisions that restrict payment of dividends during any interest
payment deferral period or while any payment default exists. At June 30, 2004,
there were no restrictions on the payment of dividends under these provisions.
4. CONTINGENCIES
Guarantees -- Electric Delivery has entered into contracts that contain
guarantees to outside parties that could require performance or payment under
certain conditions. These guarantees have been grouped based on similar
characteristics and are described in detail below.
Residual value guarantees in operating leases -- Electric Delivery is the
lessee under various operating leases, entered into prior to January 1, 2003,
that obligate it to guarantee the residual values of the leased facilities. At
June 30, 2004, the aggregate maximum amount of residual values guaranteed was
approximately $50 million with an estimated residual recovery of approximately
$50 million. The average life of the lease portfolio is approximately four
years.
Surety bonds -- Electric Delivery has outstanding surety bonds of
approximately $1 million to support performance under various subsidiary
contracts and legal obligations in the normal course of business. The term of
the surety bond obligations is approximately one year.
General -- Electric Delivery is involved in various legal and
administrative proceedings in the normal course of business 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.
8
5. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Other Deductions --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
Other income:
Equity portion of allowance for funds used during
construction........................................... $ -- $ 1 $ 1 $ 2
Other.................................................... 2 1 3 2
----- ----- ----- -----
Total other income..................................... $ 2 $ 2 $ 4 $ 4
===== ===== ===== =====
Other deductions:
Employee severance charges............................... $ 18 $ -- $ 18 $ --
Software write-off....................................... 1 -- 1 --
Other.................................................... 1 2 2 3
----- ----- ----- -----
Total other deductions................................. $ 20 $ 2 $ 21 $ 3
===== ===== ===== =====
Interest Expense and Related Charges --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
Interest............................................. $ 70 $ 74 $ 140 $ 153
Amortization of debt discounts and issuance costs.... 1 1 3 4
Allowance for borrowed funds used during construction
and capitalized interest........................... (1) (1) (2) (2)
------ ------ ------ ------
Total interest expense and related charges..... $ 70 $ 74 $ 141 $ 155
====== ====== ====== ======
Retirement Plan And Other Postretirement Benefits - Electric Delivery is a
participating employer in the TXU Retirement Plan, a defined benefit pension
plan sponsored by TXU Corp. Electric Delivery 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
retirement of such employees. The allocated net periodic pension cost and net
periodic postretirement benefits cost other than pensions applicable to Electric
Delivery was $11 million for each of the three month periods ended June 30, 2004
and 2003, respectively, and $23 million and $24 million for the six months ended
June 30, 2004 and 2003, respectively.
The outsourcing transaction on July 1, 2004, (See Note 1 to Financial
Statements) caused a partial termination of the retirement plan, which combined
with a change in discount rate is expected to reduce pension and other
postretirement cost for the remainder of 2004.
At June 30, 2004, Electric Delivery estimates that its total contributions
to the pension plan and other postretirement benefit plans for the remainder of
2004 will not be materially different than previously disclosed in the 2003 Form
10-K.
Regulatory Assets and Liabilities --
June 30, December 31,
2004 2003
--------- ------------
Regulatory Assets
Generation-related regulatory assets recoverable by securitization bonds.... $ 1,669 $ 1,654
Securities reacquisition costs.............................................. 122 121
Recoverable deferred income taxes -- net.................................... 99 96
Other regulatory assets..................................................... 107 95
------- -------
Total regulatory assets................................................ 1,997 1,966
9
June 30, December 31,
2004 2003
--------- ------------
Regulatory Liabilities
Investment tax credit and protected excess deferred taxes................... 84 88
Over collection of transition bond (securitization) revenues................ 6 6
------- ------
Total regulatory liabilities........................................... 90 94
------- ------
Net regulatory assets.................................................. $ 1,907 $1,872
======= ======
Included above are assets of $121 million at June 30, 2004 and December
31, 2003, that are earning a return. The regulatory assets, other than those
subject to securitization, have a remaining recovery period of 15 to 47 years.
Included in other regulatory assets as of June 30, 2004 was $37 million
related to nuclear decommissioning liabilities.
Restricted Cash -- At June 30, 2004, TXU Electric Delivery Transition Bond
Company LLC had $23 million of restricted cash, representing collections from
customers that secure its securitization bonds and may be used only to service
its debt and pay its expenses. Restricted cash reported in investments on the
balance sheet as of June 30, 2004 included $10 million restricted to payment of
trustee fees and expenses and $4 million to serve as collateral for debt service
associated with the securitization bonds.
Accounts Receivable -- At June 30, 2004 and December 31, 2003, accounts
receivable are stated net of allowance for uncollectible accounts of $2 million.
During each of the six months ended June 30, 2004 and 2003, Electric Delivery
had no bad debt expense and no material accounts receivable write-offs.
Allowances related to receivables sold are reported in other current liabilities
and totaled $1 million at both June 30, 2004 and December 31, 2003.
Accounts receivable at June 30, 2004 and December 31, 2003 included
unbilled revenues of $94 million and $96 million, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of June 30, 2004 As of December 31, 2003
------------------------------------ -----------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets
Capitalized software
placed in service........ $ 58 $ 24 $ 34 $ 160 $ 72 $ 88
Land easements............ 168 58 110 165 58 107
----- ----- ----- ----- ----- -----
Total.................... $ 226 $ 82 $ 144 $ 325 $ 130 $ 195
===== ===== ===== ===== ===== =====
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Electric Delivery has no intangible assets
(other than goodwill) that are not amortized.
Aggregate amortization expense for intangible assets for the six months
ended June 30, 2004 and 2003 was $7 million and $9 million, respectively.
Property, Plant and Equipment -- At June 30, 2004 and December 31, 2003,
property, plant and equipment totaling $6.4 billion and $6.3 billion,
respectively, was stated net of accumulated depreciation and amortization of
$3.3 billion at both period-ends.
As of June 30, 2004, substantially all of Electric Delivery's electric
utility property, plant and equipment (with a net book value of $6.4 billion)
was pledged as collateral for Electric Delivery's first mortgage bonds and
senior secured notes.
10
Derivatives and Hedges -- Electric Delivery's derivative financial
instruments that have been designated as cash flow hedges match the terms of the
underlying hedged items. As a result, Electric Delivery experienced no hedge
ineffectiveness during the three or six months ended June 30, 2004 or 2003.
These hedges relate to financing transactions.
As of June 30, 2004, 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 Electric Delivery:
o Electric Delivery records revenue from Energy for electricity delivery
fees and other miscellaneous revenues, which totaled $332 million and
$349 million for the three months ended June 30, 2004 and 2003,
respectively, and $681 million and $726 million for the six months
ended June 30, 2004 and 2003, respectively. These amounts included $387
thousand and $590 thousand for the three months ended June 30, 2004 and
2003, respectively, and $487 thousand and $814 thousand for the six
months ended June 30, 2004 and 2003, respectively, pursuant to a
transformer maintenance agreement.
o Electric Delivery records interest income receivable from Energy to
reimburse Electric Delivery for interest on the securitization bonds
associated with generation-related regulatory assets. For the three
months ended June 30, 2004 and 2003, this interest income totaled
$14 million and $12 million, respectively. For the six months ended
June 30, 2004 and 2003, this interest income totaled $26 million and
$24 million, respectively.
o The incremental income taxes Electric Delivery will pay on the
increased delivery fees to be charged to Electric Delivery's customers
related to the securitization bonds will be reimbursed by Energy.
Therefore, at June 30, 2004 and December 31, 2003, Electric Delivery's
financial statements reflect a receivable of $437 million from Energy
that will be extinguished as Electric Delivery pays the related income
taxes.
o For the three and six months ended June 30, 2003, the principal
payments received on the note receivable from Energy related to the
excess mitigation credit, which ceased at the end of 2003, totaled $47
million and $99 million, respectively, and the interest income totaled
$2 million and $5 million, respectively.
o Average daily short-term advances from affiliates for the three months
ended June 30, 2004 and 2003 were $63 million and $142 million,
respectively, and the weighted average interest rate for the respective
periods was 2.85% and 3.07%. Average daily short-term advances from
affiliates for the six months ended June 30, 2004 and 2003 were $49
million and $136 million, respectively, and the weighted average
interest rate for the respective periods was 2.85% and 2.70%. Interest
expense incurred on the advances for the three months ended June 30,
2004 and 2003 was approximately $451 thousand and $1 million,
respectively, and for the six months ended June 30, 2004 and 2003 was
$1 million and $2 million, respectively.
o TXU Business Services charges Electric Delivery for certain financial,
accounting, information technology, environmental, procurement and
personnel services and other administrative services at cost. For the
three months ended June 30, 2004 and 2003, these costs totaled $41
million and $27 million and are reported in operation and maintenance
expenses. For the six months ended June 30, 2004 and 2003, these costs
totaled $69 million and $55 million.
o Electric Delivery charges TXU Gas for meter reading and certain
customer and administrative services at cost. For the three months
ended June 30, 2004 and 2003, these charges totaled $5 million and $7
million, respectively, and are largely reported as a reduction in
operation and maintenance expenses. For the six months ended June 30,
2004 and 2003, these charges totaled $10 million and $15 million,
respectively.
o Electric Delivery has recorded a regulatory asset and a corresponding
noncurrent affiliate payable to Energy for the Asset Retirement
Obligation (ARO) pursuant to SFAS 143, related to the retirement and
decommissioning of nuclear generation plant assets. Periodically,
regulatory proceedings are conducted to review any over or
under-recovered decommissioning costs for the purpose of adjusting
Electric Delivery's distribution rates. As of June 30, 2004, the
balance of the ARO nuclear regulatory asset was $37 million.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TXU Electric Delivery Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Electric Delivery Company and subsidiaries (Company) as of June 30, 2004, and
the related condensed statements of consolidated income and of comprehensive
income for the three-month and six-month periods ended June 30, 2004 and 2003,
and the condensed statements of consolidated cash flows for the six-month
periods ended June 30, 2004 and 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim 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 standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report dated March 11, 2004, 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, 2003, 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, 2004
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Electric Delivery, formerly Oncor Electric Delivery Company, is a
wholly-owned subsidiary of US Holdings, which is a wholly-owned subsidiary of
TXU Corp. Electric Delivery is a regulated electricity transmission and
distribution company principally engaged in providing delivery services to REPs
that sell power in the north-central, eastern and western parts of Texas. A
majority of Electric Delivery's revenues represented fees for delivery services
provided to Energy, also a subsidiary of US Holdings. For the three and six
months ended June 30, 2004, such affiliated revenues represented 64% and 65%,
respectively, of Electric Delivery's revenues. Electric Delivery is managed as
an integrated business; consequently, there are no separate reportable business
segments.
Issuance of Securitization Bonds -- Electric Delivery issued the remaining
$790 million in securitization bonds on June 7, 2004 under a financing order
issued by the Commission and recorded an extraordinary gain of approximately $16
million after-tax. The gain arose because of an increase in the carrying value
of the regulatory asset subject to securitization due to the effect of higher
interest rates on the bonds and therefore increased amounts to be recovered from
REPs through delivery fee surcharges to service the bonds.
Strategic Initiatives and Other Actions - As previously reported, on
February 23, 2004, C. John Wilder was named president and chief executive of TXU
Corp. Mr. Wilder was formerly executive vice president and chief financial
officer of Entergy Corporation. Mr. Wilder has been reviewing the operations of
TXU Corp. and has formulated certain strategic initiatives and continues to
develop others. Areas being reviewed that impact Electric Delivery include cost
structure, including organizational alignments and headcount and non-core
business activities.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Electric Delivery entered into a services agreement with
a subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini),
a new company initially providing business process support services to TXU Corp.
and subsidiaries and immediately implementing a plan to offer similar services
to other utility companies. Under the ten-year agreement, over 2,500 TUX Corp.
employees (including over 200 from Electric Delivery) transferred to
Capgemini effective July 1, 2004. Outsourced base support services performed by
Capgemini for a fixed fee include information technology, customer call center,
billing, human resources, supply chain and certain accounting activities.
Electric Delivery expects that the Capgemini arrangement will result in
significant cost savings and improved service levels.
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use Electric Delivery's
information technology assets, consisting primarily of capitalized software. A
portion of the software was in development and had not yet been placed in
service by Electric Delivery and as a result of outsourcing its information
technology activities, Electric Delivery no longer intends to develop the
majority of these projects and from Electric Delivery's perspective the software
is abandoned. The agreements with Capgemini do not require that any software in
development be completed and placed in service. Consequently, the previously
capitalized balance for these software projects was written off in the second
quarter of 2004, resulting in a charge of $1 million (after-tax), reported in
other deductions. The remaining assets, totaling $58 million, were transferred
to a subsidiary of TXU Corp., at book value, which subsidiary holds the
investment in Capgemini, in exchange for an interest in that subsidiary, which
such interest is accounted for by Electric Delivery on the equity method.
Also as part of the services agreements, TXU Corp. agreed to indemnify
Capgemini for severance costs incurred by Capgemini for former Electric Delivery
employees terminated within 18 months of their transfer to Capgemini.
Accordingly, Electric Delivery recorded an $11 million ($7 million after-tax)
charge for severance expense, in the second quarter of 2004, which represents a
reasonable estimate of the indemnity and is reported in other
deductions. The charge consists primarily of an allocation of severance related
to TXU Business Services employees. In addition, TXU Corp. committed to pay up
to $25 million for costs associated with transitioning the outsourced activities
to Capgemini. The transition costs applicable to Electric Delivery are expected
to be recorded during the remainder of 2004.
Organizational Realignment and Headcount reductions
---------------------------------------------------
During the second quarter of 2004, TXU Corp. completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, Electric Delivery recorded severance
charges totaling $7 million ($5 million after-tax), reported in other
deductions. The charge consists primarily of an allocation of termination-
related costs associated with TXU Business Services employees. Additionally,
Electric Delivery recorded $7 million of employee severance costs as a
regulatory asset.
13
RESULTS OF OPERATIONS
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein are stated in
millions of US dollars unless otherwise indicated.
Electric Delivery is managed as an integrated business; consequently,
there are no separate reportable business segments.
Operating Data
- ---------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2004 2003 2004 2003
------ ------ ------ ------
Operating statistics - volumes:
Electric energy delivered (GWh)............................................... 24,900 24,378 48,531 48,286
Reliability statistics:
System Average Interruption Duration Index (SAIDI) (non-storm)(a)............. 81.58 75.47
System Average Interruption Frequency Index (SAIFI)(non-storm) (a)............ 1.16 1.24
Customer Average Interruption Duration Index (CAIDI)(non-storm) (a)........... 70.35 60.96
Electricity points of delivery (end of period and in thousands):
Electricity distribution points of delivery (based on number of meters)(b).... 2,954 2,909
Operating revenues (millions of dollars):
Electricity transmission and distribution:
Affiliated (Energy)...................................................... $ 332 $ 349 $ 681 $ 726
Non-affiliated........................................................... 186 137 360 266
------- ------- ------- -------
Total operating revenues............................................... $ 518 $ 486 $ 1,041 $ 992
======= ======= ======= =======
- ---------------
(a) SAIDI is the average number of total electric service outage minutes per
customer in the past year. SAIFI is the average number of electric service
interruptions per customer in the past year. CAIDI is the average number of
electric service outage minutes per interruption in the past year.
(b) Includes lighting sites, principally guard lights, for which Energy is the
REP but are not included in Energy's customer count. Such sites totaled
98,292 and 103,554 at June 30, 2004 and 2003, respectively.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
Operating revenues increased $32 million, or 7%, to $518 million in 2004.
Higher tariffs provided $26 million of this increase, reflecting delivery fee
surcharges associated with the issuance of securitization bonds in August 2003
($14 million), transmission rate increases approved in late 2003 and 2004 ($7
million) and an increase in distribution tariffs to recover higher transmission
costs ($5 million). A 2% increase in electricity volumes delivered in 2004
resulted in a $3 million increase in revenue, reflecting customer growth of
1.5%. Delivery fee surcharges associated with the second issuance of
securitization bonds in June 2004 were billed to customers starting on July 1,
2004. The estimated impact of these additional surcharges for the remainder of
2004 is an increase to revenues of $44 million with an offsetting increase to
amortization expense for the same amount.
Operation and maintenance cost increased $10 million, or 5%, to $200
million in 2004. The increase reflects a $2 million increase in third-party
transmission costs, a $2 million increase in metering-related costs and a $3
million increase in deferred incentive compensation expense due primarily to a
higher TXU Corp. common stock price.
An unusual level of storm activity in the second quarter of 2004 resulted
in approximately $25 million in damage repairs and replacements, to be recorded
primarily as a regulatory asset for repairs, with a portion related to
replacements expected to be recorded as electric utility plant.
14
Depreciation and amortization increased $15 million, or 22%, to $83
million, primarily due to $14 million in higher amortization of regulatory
assets associated with the issuance of the securitization bonds (offsetting the
same amount of revenue increase).
Other deductions of $20 million in 2004 consist principally of
severance-related charges in connection with the Capgemini outsourcing
transaction discussed above under "Strategic Initiatives and Other Actions."
Interest income decreased by $1 million, or 7%, to $13 million in 2004
driven by a decrease in interest income from Energy related to the excess
mitigation credit that ceased at the end of 2003.
Interest expense and related charges decreased $4 million, or 5%, to $70
million in 2004. The decrease reflected a $5 million impact of lower average
interest rates and $3 million less interest paid to REPs in 2003 related to the
excess mitigation credit that ceased at the end of 2003, partially offset by a
$5 million impact of higher average borrowings.
Income tax expense was $21 million in 2004 (including $22 million related
to operating income and $1 million benefit related to nonoperating expense),
representing an effective tax rate of 30.9% in 2004, which was comparable to the
30.7% effective rate in 2003.
Income before extraordinary gain decreased $5 million, or 10%, to $47
million in 2004, primarily reflecting the other deductions and higher
depreciation and amortization expense and operation and maintenance expenses,
partially offset by higher revenues. Net pension and postretirement benefit
costs reduced income before extraordinary gain by $4 million in both 2004 and
2003.
An extraordinary gain of $16 million (net of tax of $9 million) in 2004
represents an increase in the carrying value of regulatory assets subject to
securitization. The second and final tranche of the securitization bonds was
issued in June 2004. The increase in the related regulatory asset is due to the
effect of higher interest rates on the bonds and therefore increased amounts to
be recovered from REPs through delivery fee surcharges to service the bonds.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
Operating revenues increased $49 million, or 5%, to $1.0 billion in 2004.
Higher tariffs provided a $54 million increase, reflecting delivery fee
surcharges associated with the issuance of securitization bonds in August 2003
($28 million), transmission rate increases approved in late 2003 and 2004 ($16
million) and an increase in distribution tariffs to recover higher transmission
costs ($11 million). Delivery fee surcharges associated with the second issuance
of securitization bonds in June 2004 were billed to customers starting on July
1, 2004. The estimated impact of these additional surcharges for the remainder
of 2004 is an increase to revenues of $44 million with an offsetting increase to
amortization expense for the same amount. Revenue growth also included $6
million in increased disconnect/reconnect fees, reflecting disconnections
initiated by REPs on uncollected accounts and increased consumer switching due
to competitive activity. Revenue growth was partially offset by an estimated $11
million effect of lower residential consumption because of milder weather, usage
efficiencies and other factors.
Operation and maintenance cost increased $11 million, or 3%, to $389
million in 2004. The increase reflects a $4 million increase in metering-related
costs associated with the increased disconnect/reconnect activity, a $4 million
increase in deferred incentive compensation expense due primarily to a higher
TXU Corp. common stock price and a $3 million increase in third-party
transmission costs.
Depreciation and amortization increased $33 million, or 24%, to $170
million, driven by $28 million in higher amortization of regulatory assets
associated with the issuance of securitization bonds (offsetting the same amount
of revenue increase).
Interest income declined $4 million to $25 million in 2004 driven by a
decrease in interest income from Energy related to the excess mitigation credit
that ceased at the end of 2003.
15
Other deductions of $21 million in 2004 consist principally of
severance-related charges in connection with the Capgemini outsourcing
transaction discussed above under "Strategic Initiatives and Other Matters."
Interest expense and related charges decreased $14 million, or 9%, to $141
million in 2004. The decrease reflected an $11 million impact of lower interest
rates and $5 million in interest paid to REPs in 2003 related to the excess
mitigation credit that ceased at the end of 2003, partially offset by a $2
million impact of higher average borrowings.
Income tax expense was $52 million in 2004 (including $50 million related
to operating income and $2 million related to nonoperating income), representing
an effective tax rate of 31.5% in 2004, which was lower than the 32.3% effective
rate in 2003. The decrease primarily reflected the effect of a non-taxable
Medicare subsidy in 2004 ($2.2 million for the six months ended June 30, 2004)
related to postretirement benefit expense.
Income before extraordinary gain was $113 million in both 2004 and 2003,
primarily reflecting the other deductions and higher depreciation and
amortization expenses and operation and maintenance expenses, offset by lower
interest expense and higher revenues. Net pension and postretirement benefit
costs reduced income before extraordinary gain by $8 million in 2004 and $9
million in 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows -- Cash flows provided by operating activities for the six
months ended June 30, 2004 were $202 million, compared to $117 million for the
six months ended June 30, 2003. The improved cash flow performance of $85
million was driven by the absence of the excess mitigation credit to REPs that
ceased at the end of 2003. The benefit was offset in financing activities due
to the absence of collections on a related note receivable from Energy.
Cash flows provided by financing activities were $207 million in 2004,
compared to $87 million in 2003. Net issuances of debt totaled $657 in 2004
compared to net repayments of debt totaling $162 million in 2003. Electric
Delivery repurchased $450 million of common stock from its parent in 2004
compared to $100 million in 2003. In 2003 Electric Delivery received a $250
million capital contribution from its parent and $99 million in collections on
a note receivable from Energy related to the excess mitigation credit.
Cash flows used in investing activities, which consisted primarily of
capital expenditures, totaled $272 million and $239 million for the six months
ended June 30, 2004 and 2003, respectively. The increase reflected $13 million
in higher removal costs on property retirements and $12 million in higher
restricted cash balances related to the transition charge collections.
Financing Activities
- --------------------
Over the next twelve months, Electric Delivery will need to fund ongoing
working capital requirements and maturities of debt. Electric Delivery has
funded or intends to fund these requirements through cash on hand, cash flows
from operations, short-term credit facilities and the issuance of long-term debt
or other securities.
Long-term Debt Activity -- During the six months ended June 30, 2004,
Electric Delivery issued $790 million in securitization bonds and made scheduled
principal payments of $100 million on its 8 1/4% First Mortgage Bonds and $8
million on its 2.26% Fixed Series 2003 Bond. Electric Delivery used the proceeds
to retire, subsequent to June 30, 2004, two series of mortgage bonds with an
aggregate principal amount of $393 million due in 2025 and repurchase shares of
common stock from its parent for $375 million.
The mortgage of Electric Delivery restricts its payment of dividends to
the amount of its retained earnings. Certain other debt instruments and
preferred securities of TXU Corp. and its 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, 2004, there
were no restrictions on the payment of dividends under these provisions.
Equity -- Electric Delivery'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
16
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
Electric Delivery's equity, but will not change US Holdings' 100% ownership of
Electric Delivery.
Capitalization -- The capitalization of Electric Delivery at June 30,
2004, consisted of 65.1% long-term debt, less current maturities, and 34.9%
shareholder's equity.
Credit Facilities -- Electric Delivery has joint credit facilities (with
Energy) that allows for aggregate borrowings up to $2.5 billion. These
facilities expire in 2005 through 2009 and can be used for working capital and
general corporate purposes. At June 30, 2004, $675 million had been borrowed
under these facilities by Energy. In July 2004, advances from TXU Corp. were
used to repay the $675 million borrowings. In addition, TXU Corp. had credit
facilities totaling $700 million and $500 million that expire in 2005 and 2008,
respectively. At June 30, 2004, $35 million of these two facilities was unused.
In July 2004 borrowings under the $700 million credit facility were repaid, and
it was subsequently terminated. Electric Delivery expects that, to the extent
capacity is available, TXU Corp.'s remaining credit facility will be made
available to it for borrowings, letters of credit and other purposes. See Note 2
to Financial Statements for details of all of these arrangements.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program,
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions. All new trade receivables under the program generated by
the originators are continuously purchased by TXU Receivables Company with the
proceeds from collections of receivables previously purchased. Funding to
Electric Delivery under the program at June 30, 2004 and December 31, 2003
totaled $50 million and $44 million, respectively. See Note 2 to Financial
Statements for a more complete description of the program including the
financial impact on earnings and cash flows for the periods presented and the
contingencies that could result in termination of the program.
Restricted Cash -- At June 30, 2004, TXU Electric Delivery Transition Bond
Company LLC had $23 million of restricted cash, representing collections from
customers that secure its securitization bonds and may be used only to service
its debt and pay its expenses. Restricted cash reported in investments on the
balance sheet as June 30, 2004 included $10 million related to payment of fees
and $4 million to serve as collateral for debt service associated with the
securitization bonds.
Credit Ratings of TXU Corp. and its Subsidiaries-- The current credit
ratings for TXU Corp. and certain of its subsidiaries are presented below:
TXU Corp. US Holdings Electric Delivery Electric Delivery Energy
------------------ ------------------ ----------------- ----------------- ----------------
(Senior Unsecured) (Senior Unsecured) (Secured) (Unsecured) (Senior Unsecured)
S&P............... BBB- BBB- BBB BBB- BBB
Moody's........... Ba1 Baa3 Baa1 Baa2 Baa2
Fitch............. BBB- BBB- BBB+ BBB BBB
Moody's and Fitch currently maintain a stable outlook for TXU Corp., US
Holdings, Energy and Electric Delivery. S&P currently maintains a negative
outlook for each such entity.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency, and is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
17
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of Electric Delivery contain
financial covenants that require maintenance of specified fixed charge coverage
ratios, shareholder's equity to total capitalization ratios and leverage ratios
and/or contain minimum net worth covenants. As of June 30, 2004, Electric
Delivery was in compliance with all such applicable covenants.
Cross Default Provisions
- ------------------------
Certain financing arrangements of Electric Delivery and its subsidiary
contain provisions that would result in an event of default if there were 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 Energy or Electric Delivery or any subsidiary thereof in
respect of indebtedness in a principal amount in excess of $50 million would
result in a cross default for such party under the $2.5 billion joint credit
facilities expiring in June 2005, 2007 and 2009. Under these credit facilities,
a default by Energy or any subsidiary thereof would cause the maturity of
outstanding balances under such facility to be accelerated as to Energy but not
as to Electric Delivery. Also, under this credit facility, a default by Electric
Delivery or any subsidiary thereof would cause the maturity of outstanding
balances under such facility to be accelerated as to Electric Delivery but not
as to Energy.
A default by TXU Corp. on indebtedness with a principal amount in excess
of $50 million would result in a cross default under its $500 million five-year
revolving credit facility expiring August 2008, which facility is also made
available to Electric Delivery.
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 each have a cross
default threshold of $50,000. If either an originator, TXU Business Services or
TXU Receivables Company defaults on indebtedness of the applicable threshold,
the facility could terminate.
Electric Delivery has other arrangements, including interest rate swap
agreements and leases with cross default provisions, the triggering of which
would not result in a significant effect on liquidity.
Long-term Contractual Obligations and Commitments -- The table below
reflects updates of amounts presented in the 2003 Form 10-K to reflect the
obligation under the business services outsourcing agreement with Capgemini and
the repayment of debt and other instruments as discussed in Note 1 to Financial
Statements.
Contractual Cash Obligations
- ----------------------------- One to Three to More
Less Than Three Five Than Five
One Year Years Years Years
-------- ----- ----- -----
Long-term debt -principal and interest......... $ 486 $ 849 $ 939 $7,143
Business services outsourcing obligations...... 82 124 124 311
There have been no other significant changes in contractual cash
obligations of Electric Delivery, since December 31, 2003 as disclosed in the
2003 Form 10-K.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables and in Note 2 to Financial
Statements.
18
COMMITMENTS AND CONTINGENCIES
See Note 4 to Financial Statements for details of contingencies, including
guarantees.
REGULATION AND RATES
Transmission Rates -- In March 2004, Electric Delivery filed an annual
request for interim update of its wholesale transmission rate. Electric Delivery
requested a total annualized revenue increase of $14 million. Approximately $8.5
million of this increase would be recovered through transmission rates charged
to wholesale customers, with the remaining $5.5 million to be recovered from
REPs through the retail transmission cost recovery factor (TCRF) of Electric
Delivery's retail delivery rate. Electric Delivery's new wholesale transmission
rate was approved by the Commission and became effective on April 15, 2004.
In March 2004, the Commission approved an estimated annualized increase of
$9 million in the TCRF component of Electric Delivery's distribution rates
charged to REPs. The effect of Electric Delivery's wholesale transmission rate
increase described in the preceding paragraph will be included in Electric
Delivery's September 2004 TCRF update. On July 26, 2004, Electric Delivery filed
a second request with the Commission to increase the TCRF component of its
retail delivery rates charged to REPs. The request, as proposed, will increase
annual revenues by an estimated $29.5 million. Electric Delivery anticipates
that this proposed increase will be implemented September 1, 2004.
Other Commission Matters - On May 27, 2004, the Commission opened an
investigation to gather information regarding Electric Delivery's and its
affiliates' compliance with the Commission's affiliate code of conduct rules.
Energy's conversations with the Commission indicate that this investigation was
prompted in large part by the utility's change in its legal corporate name from
Oncor Electric Delivery Company back to TXU Electric Delivery Company. Those
discussions indicate a reasonable expectation that the Commission will focus its
investigation on Energy's implementation of a disclaimer rule that requires
Energy to place a disclaimer in certain advertisements and on business cards to
explain the distinction between Energy and Electric Delivery.
Electric Delivery filed formal notice of its name change at the Commission
on June 1, 2004, by filing for approval re-issued tariffs that display the new
company name but are in all other respects identical to the pre-existing
tariffs. The Commission's Policy Development Division has issued an order
indicating that the re-issued tariff is to be administratively approved in
August. Two groups of competitive retailers appealed that order to the
Commission and in early August the Commissioners declined to consider the
appeal. The Commission staff on August 6, 2004, recommended approval of the
re-issued tariffs, subject to Electric Delivery running public service
announcements to explain the distinction between TXU Electric Delivery Company
and TXU Energy Company LLC. Therefore, on August 9, 2004, the Commission Policy
Development Division approved the re-issued tariffs and ordered Electric
Delivery to also educate the public on the difference between Electric Delivery
and its competitive affiliates.
The city of Denison, acting in its role as a regulatory authority,
initiated an inquiry on August 2, 2004 to determine if the rates of Electric
Delivery, which have been established by the Commission, are just and
reasonable. Certain other cities within the historical service territory are
considering similar requests. Electric Delivery expects to file information
responsive to the inquiry by the end of 2004, with city actions, if any, to take
place in 2005. It is too early to determine whether these inquiries will have
any material effect on Electric Delivery's rates. Electric Delivery has the
right to appeal any city action to the Commission.
On August 4, 2004, Rusk County Electric Cooperative filed a complaint at
the Commission, alleging that Energy and Electric Delivery have been violating
applicable laws by providing electric service to certain TXU Mining facilities
that the cooperative asserts may be lawfully served only by the Cooperative.
Energy and Electric Delivery believe that their actions have been and continue
to be lawful, and will vigorously defend themselves against the cooperative's
complaint.
Summary -- Although Electric Delivery 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.
CHANGES IN ACCOUNTING STANDARDS
See Note 1 to Financial Statements for a discussion of changes in
accounting standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
19
Some important factors, in addition to others specifically addressed in
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on Electric Delivery's operations,
financial results and financial condition, and could cause Electric Delivery's
actual results or outcomes to differ materially from any projected outcome
contained in any forward-looking statement in this report, include:
Electric Delivery is subject to changes in laws or regulations, including
the Texas Public Utility Regulatory Act, as amended, the Federal Power Act, as
amended, the Clean Air 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, the EPA and the FERC, with respect to matters
including, but not limited to, construction and operation of transmission
facilities, acquisition, disposal, depreciation and amortization of regulated
assets and facilities and return on invested capital.
Existing laws and regulations governing the market structure in Texas
could be reconsidered, revised or reinterpreted, or new laws or regulations
could be adopted.
Electric Delivery'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.
Electric Delivery's rates are regulated by the Commission based on an analysis
of Electric Delivery's costs, as reviewed and approved in a regulatory
proceeding. 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 Electric Delivery'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
Electric Delivery's costs and the return on invested capital allowed by the
Commission.
A portion of Electric Delivery's revenues is derived from rates that
Electric Delivery collects from each REP based on the amount of electricity
Electric Delivery distributes on behalf of each such REP. Thus, Electric
Delivery'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 and/or increased expenses. Insurance, warranties or performance
guarantees may not cover any or all of the lost revenues or increased expenses.
Natural disasters, war, terrorist acts and other catastrophic events may impact
Electric Delivery's operations in adverse ways, including disruption of power
production and energy delivery activities, declines in customer demand, cost
increases and instability in the financial markets. Electric Delivery's ability
to obtain insurance, and the cost of and coverage provided by such insurance
could be affected by events outside its control.
Electric Delivery's revenues from the distribution of electricity are
collected from approximately 46 retail electric providers, including Energy,
that sell the electricity Electric Delivery distributes to these retail electric
providers' customers. Electric Delivery depends on these retail electric
providers to timely remit these revenues to Electric Delivery. Electric Delivery
could experience delays or defaults in payment from these retail electric
providers. Energy represents approximately 65% of Electric Delivery's revenue
base.
In addition to revenues, Electric Delivery is owed other significant
amounts from Energy. The incremental income taxes Electric Delivery will pay on
the increased delivery fees to be charged to Electric Delivery's customers
related to the aggregate issuance of approximately $1.3 billion in
securitization bonds will be reimbursed by Energy. Therefore, Electric
Delivery's financial statements reflect a $437 million receivable from Energy
that will be extinguished as Electric Delivery pays the related income taxes.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through Electric Delivery's distribution facilities.
While not generally competitive now, manufacturers of self-generation facilities
continue to develop smaller-scale, more fuel-efficient generating units that can
be cost-effective options for certain customers.
20
TXU Corp. and US Holdings are not obligated to provide any loans, further
equity contributions or other funding to Electric Delivery. Electric Delivery
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,
Electric Delivery operates within policies, including dividend policies,
established by TXU Corp. that impact the liquidity of Electric Delivery, the
regulation of Electric Delivery's rates provides economic disincentives to any
significant reduction of Electric Delivery's equity capitalization and prohibits
cross-subsidization of other TXU Corp. group members by Electric Delivery.
The lack of necessary capital and cash reserves may adversely impact
Electric Delivery's growth plans, its ability to raise additional debt and the
evaluation of its creditworthiness by rating agencies.
Electric Delivery's ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables. If Electric Delivery's efforts to complete capital improvements
are unsuccessful, Electric Delivery could be subject to additional costs and/or
the write-off of its investment in the project or improvement.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact Electric Delivery's
ability to sustain and grow its businesses, which are capital intensive, and
would likely increase its capital costs. Electric Delivery 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. Electric Delivery's
access to the financial markets could be adversely impacted by various factors,
such as:
o changes in credit markets that reduce available credit or the ability
to renew existing liquidity facilities on acceptable terms;
o inability to access commercial paper markets;
o a deterioration of Electric Delivery's credit or a reduction in
Electric Delivery's credit ratings or the credit ratings of
TXU Corp. or its other subsidiaries;
o a material breakdown in Electric Delivery's risk management
procedures; and
o the occurrence of material adverse changes in Electric Delivery's
business that restrict Electric Delivery's ability to access its
liquidity facilities.
As a result of the energy crisis in California during 2001, the recent
volatility of natural gas prices in North America, the bankruptcy filing by
Enron Corporation, 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. Additionally, allegations against various energy trading companies of
"round trip" or "wash" transactions, which involve the simultaneous buying and
selling of the same amount of power at the same price and delivery location and
provide no true economic benefit, power market manipulation and inaccurate power
and commodity price reporting have had a negative effect on the industry.
Electric Delivery 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 Electric Delivery's financial condition or access to the capital
markets. Additionally, it is unclear what laws and regulations may develop, and
Electric Delivery cannot predict the ultimate impact of any future changes in
accounting regulations or practices in general with respect to public companies,
the energy industry or its operations specifically. Any such new accounting
standards could negatively impact reported financial results.
The issues and associated risks and uncertainties described above are not
the only ones Electric Delivery may face. Additional issues may arise or become
material as the energy industry evolves.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Electric Delivery and its
subsidiaries (collectively, Electric Delivery) contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although Electric Delivery believes that in making any such
statement its expectations are based on reasonable assumptions, any such
21
statement involves uncertainties and is qualified in its entirety by reference
to the risks discussed above under "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS"
and factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Electric Delivery's 2003 Form 10-K, that could cause the actual
results of Electric Delivery to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is
made, and Electric Delivery 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 Electric Delivery
to predict all of them; nor can Electric Delivery assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Except as presented below, the information required hereunder is not
significantly different from the information set forth in Item 7A. Quantitative
and Qualitative Disclosures About Market Risk included in the 2003 Form 10-K and
is therefore not presented herein.
INTEREST RATE RISK
See Note 2 to Financial Statements for a discussion of the issuance and
retirement of debt since December 31, 2003.
CREDIT RISK
Credit risk relates to the risk of loss that Electric Delivery may incur
as a result of non-performance by its counterparties. Electric Delivery's
customers consist primarily of REPs. As a requisite for obtaining and
maintaining certification, a REP must meet the financial resource standards
established by the Commission. REP certificates granted by the Commission are
subject to suspension and revocation for significant violation of PURA 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. Since most of the
transmission and distribution services provided and invoiced by Electric
Delivery are to its affiliated REP, Energy, a material loss to Electric Delivery
arising from nonperformance by its customers is considered unlikely.
Electric Delivery's exposure to credit risk as of June 30, 2004 primarily
represents trade accounts receivable from unaffiliated customers of $72 million.
Electric Delivery has two customers, each with a balance of $10 million, each of
which represented greater than 10% of this amount at June 30, 2004. Both
customers are non-investment grade quality; however, the customers have
consistently performed their obligations in accordance with their agreements.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of Electric Delivery's management, including the principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the disclosure controls and procedures in effect as of
the end of the current period included in this quarterly report. This evaluation
took into consideration the strategic initiatives described in Note 1 to
Financial Statements. Based on the evaluation performed, Electric Delivery's
management, including the principal executive officer and principal financial
officer, concluded that the disclosure controls and procedures were effective.
During the most recent fiscal quarter covered by this quarterly report, there
has been no change in Electric Delivery's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, Electric Delivery's internal control over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits provided as part of Part II are:
Previously Filed*
With File As
Exhibits Number Exhibit
- -------- ------- -------
3(i) Articles of Incorporation.
3(a) -- Composite Articles of Incorporation.
3(ii) By-laws
3(b) -- Amended and Restate Bylaws of TXU Electric Delivery Company,
dated and effective as of May 31, 2004.
(4) Instruments Defining the Rights of Security Holders.
4 333-91935 4 -- Series 2004-1 Supplement, dated as of June 7, 2004
Form 8-K (related to TXU Electric Delivery Transition Bond
(filed June 14, 2004) Company LLC).
(10) Material Contracts.
10(a) 1-2833 10(a) -- $2,500,000,000 Revolving Credit Agreement dated as of
Form 8-K June 24, 2004, among TXU Energy Company LLC and TXU
(filed July 1, 2004) Electric Delivery Company, the Lenders listed in
Schedule 2.01 thereto, JPMorgan Chase Bank as
Administrative Agent and the other parties named therein.
10(b) 1-2833 10(l) -- Master Framework Agreement dated May 17, 2004 by and
Form 10-Q between Oncor Electric Delivery Company (now TXU
(filed August 6, Electric Delivery Company) and Capgemini Energy LP.
2004)
10(c) 333-91935 10(a) -- Series 2004-1 Transition Property Purchase and Sale
Form 8-K Agreement, dated as of June 7, 2004 (related to TXU
(filed June 14, 2004) Electric Delivery Transition Bond Company LLC).
10(d) 333-91935 10(b) -- Series 2004-1 Transition Property Servicing Agreement,
Form 8-K dated as of June 7, 2004 (related to TXU Electric
(filed June 14, 2004) Delivery Transition Bond Company LLC).
(31) Rule 13a - 14(a)/15d - 14(a) Certifications.
31(a) -- Certification of Tom Baker, Chairman of the Board and
Chief Executive of TXU Electric Delivery Company, pursuant
to Rule 13a - 14(a)/15d - 14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31(b) -- Certification of Kirk R. Oliver, Executive Vice President
and Chief Financial Officer of TXU Electric Delivery Company,
pursuant to Rule 13a - 14(a)/15d - 14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(32) Section 1350 Certifications.
32(a) -- Certification of Tom Baker, Chairman of the Board and Chief
Executive of TXU Electric Delivery Company, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
(a) Exhibits provided as part of Part II are:
Previously Filed*
With File As
Exhibits Number Exhibit
- -------- ------- -------
32(b) -- Certification of Kirk R. Oliver, Executive Vice President
and Chief Financial Officer of TXU Electric Delivery Company,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(99) Additional Exhibits.
99 -- Condensed Statements of Consolidated Income - Twelve
Months Ended June 30, 2004
- -----------------
* Incorporated herein by reference.
(b) Reports on Form 8-K furnished or filed since March 31, 2003:
Date of Report Item Reported
-------------- -------------
May 19, 2004 Item 5 Other Events and Regulation FD Disclosure
Item 7 Financial Statements and Exhibits
May 24, 2004 Item 5 Other Events and Regulation FD Disclosure
Item 9 Regulation FD Disclosure
June 14, 2004 Item 5 Other Events and Regulation FD Disclosure
Item 7 Financial Statements and Exhibits
July 1, 2004 Item 5 Other Events and Regulation FD Disclosure
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU ELECTRIC DELIVERY COMPANY
By /s/ Scott Longhurst
-------------------------------
Name: Scott Longhurst
Title: Senior Vice President and
Principal Accounting Officer
Date: August 12, 2004
25