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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
-- OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------------
Exact Name of Registrant as Specified in its Charter;
Commission State of Incorporation; Address of Principal I.R.S. Employer
File Number Executive Offices; and Telephone Number Identification No.
- ----------- --------------------------------------- -----------------
333-100240 Oncor Electric Delivery Company 75-2967830
a Texas Corporation
500 N. Akard Street
Dallas, TX 75201
(214) 486-2000
Securities registered pursuant to Section 12(b) of the Act: None
-----------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
---------------------------------------
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 No X
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
-- --
Aggregate market value of Oncor Electric Delivery Company Common Stock held
by non-affiliates: None
Common Stock outstanding at March 14, 2003: Oncor Electric Delivery Company
- - 66,362,000 shares, without par value
Oncor Electric Delivery Company meets the conditions set forth in General
Instructions (I) (1) (a) and (b) of Form 10-K and is therefore filing this
report with the reduced disclosure format.
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DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
PART I ----
Items 1. and 2. BUSINESS and PROPERTIES............................................................ 1
ONCOR ELECTRIC DELIVERY COMPANY AND SUBSIDIARIES.................................... 1
ELECTRIC RESTRUCTURING.............................................................. 2
ONCOR'S BUSINESS.................................................................... 3
REGULATION AND RATES................................................................ 4
ENVIRONMENTAL....................................................................... 4
Item 3. LEGAL PROCEEDINGS.......................................................................... 5
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 5
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................. 5
Item 6. SELECTED FINANCIAL DATA.................................................................... 5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................... 5
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 5
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 5
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................. 5
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................... 6
Item 11. EXECUTIVE COMPENSATION................................................................... 6
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 6
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 6
PART IV
Item 14. CONTROLS AND PROCEDURES.................................................................. 7
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 7
APPENDIX A - Financial Information
APPENDIX B - Oncor Electric Delivery Company Exhibits for 2002 Form 10-K
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of Oncor 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. Oncor will provide copies of current reports not posted
on the website upon request.
i
PART I
Items 1. and 2. BUSINESS and PROPERTIES
ONCOR ELECTRIC DELIVERY COMPANY AND SUBSIDIARIES
------------------------------------------------
Oncor Electric Delivery Company (Oncor) is a regulated electricity
transmission and distribution (T&D) company principally engaged in providing
delivery services to retail electric providers (REPs) that sell power in the
north-central, eastern and western parts of Texas. Oncor was created as a result
of the deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. On that date, the electricity T&D businesses of TXU
US Holdings Company (US Holdings), formerly TXU Electric Company, and TXU SESCO
Company were transferred to Oncor. The power generation and certain retail
operations of US Holdings, as well as certain other energy-related businesses of
TXU Corp. were transferred to TXU Energy Company LLC (TXU Energy). Both Oncor
and TXU Energy are wholly-owned subsidiaries of US Holdings, which is a
wholly-owned subsidiary of TXU Corp. For the year ended December 31, 2002,
approximately 80% of Oncor's revenues represented fees for delivery services
provided to TXU Energy under the restructured operating environment described
below.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001.
Oncor operates within the Electric Reliability Council of Texas (ERCOT)
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electric power systems
in Texas and the Independent System Operator of the interconnected transmission
system of those systems, and is responsible for ensuring equal access to
transmission service by all wholesale market participants in the ERCOT region.
Oncor is managed as a single, integrated electricity delivery business;
consequently, there are no separate reportable business segments.
Oncor's principal operations are:
o Electricity Transmission - Oncor's electricity transmission business
provides non-discriminatory wholesale open access to Oncor's transmission
facilities. Oncor's transmission facilities transverse almost 200,000
square miles of Texas and consist of 4,522 circuit miles of 345-kilovolt
(kV) transmission lines and 9,615 circuit miles of 138-kV and 69-kV
transmission lines and over 900 substations.
o Electricity Distribution - Oncor's electricity distribution business
distributes electricity for REPs in its certificated service area. Oncor's
service territory includes 92 counties and 370 incorporated municipalities
in the north-central, eastern and western parts of Texas. Oncor provides
delivery services to these REPs, which sell electricity to over 2.9 million
points of delivery. Oncor's distribution network consists of 55,178 miles
of overhead primary conductors, 22,073 miles of overhead secondary and
street light conductors, 12,264 miles of underground primary conductors and
7,332 miles of underground secondary and street light conductors. The
majority of Oncor's distribution network operates at 25-kV and 12.5-kV.
Oncor's transmission customers consist of municipalities, electric
cooperatives and other distribution companies. Oncor's distribution customers
consist of approximately 35 REPs in Oncor's certificated service area. One of
these REPs is TXU Energy, which is the largest REP operating in Oncor's
certificated service area. Delivery fee revenues from TXU Energy represent the
substantial majority of Oncor's revenues.
Oncor's operations do not include the production or sale of electricity,
but rather consist of providing T&D and related services.
For a more detailed discussion of Oncor's principal operations see
"Oncor's Business" below.
1
ELECTRIC RESTRUCTURING
----------------------
Restructuring Legislation -- Legislation passed during the 1999 session of
the Texas Legislature restructured the electric utility industry in Texas and
provided for a transition to increased competition in the generation and retail
sale of electricity (1999 Restructuring Legislation). By January 1, 2002, each
electric utility was required to separate (unbundle) its business activities
into a power generation company, a REP, and a T&D utility or separate T&D
utilities. Unbundled T&D utilities within the ERCOT region, such as Oncor,
remain regulated by the Public Utility Commission of Texas (Commission).
The 1999 Restructuring Legislation provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business. The
Settlement was approved by the Commission in June 2002. In August 2002, the
Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas, District Court in August 2002. In January 2003, US Holdings
concluded a settlement of these appeals and they were dismissed. Thus, the
Settlement became final.
The major elements of the Settlement affecting Oncor are:
Excess Mitigation Credit and Appeals Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had issued
an interim order that addressed Oncor's charges for T&D service when retail
competition would begin. Among other things, that interim order, and subsequent
final order issued in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed to the Travis
County, Texas District Court. Finalization of the Settlement means TXU Corp.'s
appeal has been dismissed. Also, in July 2001, the staff of the Commission had
notified US Holdings and the Commission that it disagreed with US Holdings'
computation of the level of earnings in excess of the regulatory earnings cap
for calendar year 2000. In August 2001, the Commission issued an order adopting
the staff position. US Holdings appealed this matter to the Travis County, Texas
District Court, which affirmed the Commission's order and US Holdings then
appealed that decision to the Third District Court of Appeals in Austin, Texas.
This appeal has now been dismissed.
Regulatory Asset Securitization -- In October 1999, US Holdings had filed
an application with the Commission for a financing order to permit the issuance
by a special purpose entity of $1.65 billion of securitization bonds. In May
2000, the Commission signed an order rejecting such request and authorized only
$363 million of such bonds. US Holdings filed an appeal with the Travis County,
Texas District Court and in September 2000, the Court issued a judgment that
reversed part of the Commission's order and affirmed other aspects of the
Commission's order. US Holdings and various other parties appealed this judgment
directly to the Supreme Court of Texas; and in June 2001, it issued a ruling and
in October 2001 remanded the case to the Commission, which consolidated it into
the Settlement Plan proceeding. In accordance with the Settlement, Oncor
received a financing order authorizing it to issue securitization bonds in the
aggregate principal amount of $1.3 billion to recover regulatory assets and
other qualified costs. The Settlement provides that there can be an initial
issuance of securitization bonds in the amount of up to $500 million, followed
by a second issuance of the remainder after 2003. The Settlement resolves all
issues related to regulatory assets and liabilities.
2
ONCOR'S BUSINESS
----------------
Electricity Transmission -- Oncor's electricity transmission business is
responsible for the real-time safe and reliable operations of its transmission
network. These responsibilities consist of the construction and maintenance of
transmission facilities and the monitoring, controlling and dispatching of
high-voltage electricity within Oncor's control area.
Oncor is a member of ERCOT, and the transmission business actively
supports the operation of ERCOT and all market participants. The transmission
business participates with ERCOT and other member utilities to plan, design and
obtain regulatory approval for construction of new transmission lines necessary
to increase bulk power transfer capability and to remove existing limitations
and constraints on the ERCOT transmission grid.
Transmission revenues are provided under tariffs approved by the
Commission and the Federal Energy Regulatory Commission (FERC). Network
transmission revenues are provided from the use of the transmission power lines
for delivery of power over facilities operating at 60,000 volts and above.
Transformation service revenues are provided from the use of distribution
substation facilities that transform power from high-voltage transmission to
distribution voltages below 60,000 volts. Other services offered by the
transmission business include, but are not limited to: system impact studies,
facilities studies and maintenance of substations and transmission lines owned
by other non-retail parties.
The principal generating facilities of TXU Energy, certain non-utility
generators and load centers of Oncor are connected by 4,522 circuit miles of 345
kV transmission lines and 9,615 circuit miles of 138- and 69-kV transmission
lines.
Oncor is connected by eight 345-kV lines to CenterPoint Energy (formerly
Reliant Energy Inc.); by four 345-kV, eight 138-kV and nine 69-kV lines to
American Electric Power Company; by two 345-kV and eight 138-kV lines to the
Lower Colorado River Authority; by four 345-kV and nine 138-kV lines to the
Texas Municipal Power Agency; by two asynchronous High Voltage Direct Current
interconnections to American Electric Power Company in the Southwest Power Pool;
and at several points with smaller systems operating wholly within Texas.
Electricity Distribution -- Oncor's electricity distribution business is
responsible for the overall safe and efficient operations of distribution
facilities, including power delivery, power quality and system reliability. The
Oncor distribution system supplies electricity to over 2.9 million points of
delivery. The electricity distribution business consists of the ownership,
management, construction, maintenance and operation of the distribution network
within Oncor's certificated service area. Over the past five years, the number
of Oncor's distribution system premises served has been growing an average of
more than 2% a year.
The 2.7 million formerly regulated electricity customers (retail customers
who purchase and consume electricity) are free to choose from REPs who compete
for their business. However, these REPs are now Oncor's customers. The changed
character of customers, however, does not mean that the safe and reliable
delivery of dependable energy is any less critical to Oncor's success. Service
quality, safety and reliability are of paramount importance to REPs, their
customers and Oncor. Oncor intends to continue to build on its inherited
tradition of low cost and high performance.
Oncor's distribution system receives electricity from the transmission
system through power distribution substations and distributes electricity to end
users and wholesale customers through 2,914 distribution feeders.
The Oncor distribution network consists of 55,178 miles of overhead
primary conductors, 22,073 miles of overhead secondary and street light
conductors, 12,264 miles of underground primary conductors and 7,332 miles of
underground secondary and street light conductors. The majority of the
distribution system operates at 25-kV and 12.5-kV.
Most of Oncor's power lines have been constructed over lands of others
pursuant to easements or along public highways, streets and rights-of-ways as
permitted by law. Substantially all of Oncor's T&D assets are subject to liens
under its mortgage indentures.
3
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended (PURA), requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals which held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated, and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO Company are named defendants in both suits. Oncor is
unable to predict the outcome of any litigation related to this matter.
REGULATION AND RATES
--------------------
Regulatory Proceedings Affecting Restructuring -- See Electric
Restructuring above for a description of the various regulatory proceedings
relating to the restructuring of the Texas electric industry.
Oncor is subject to various federal, state and local regulations. (See
Environmental below for information on environmental matters affecting Oncor).
As its operations are wholly within Texas, Oncor believes that it is not a
public utility as defined in the Federal Power Act and has been advised by its
counsel that it is not subject to general regulation under such Act.
The Commission has original jurisdiction over transmission rates and
services and over distribution rates and services in unincorporated areas and in
those municipalities that have ceded original jurisdiction to the Commission and
has exclusive appellate jurisdiction to review the rate and service orders and
ordinances of municipalities. Generally, PURA has prohibited the collection of
any rates or charges by a public utility that does not have the prior approval
of the Commission.
ENVIRONMENTAL
-------------
Oncor is subject to various federal, state and local regulations dealing
with environmental matters. These matters primarily include:
o storm water discharges from large construction sites,
o the protection of wetlands, the habitats of endangered and threatened
species and cultural resources in the siting of transmission rights of way,
o the regulation of underground gasoline storage tanks,
o the management and disposal of hazardous wastes, and
o the abatement of oil spills from occasional equipment failures.
In the past, polychlorinated biphenyls (PCBs) were commonly utilized in
transformers and other T&D equipment as insulation. In accordance with policies
that meet or exceed industry and regulatory standards, Oncor properly manages
and disposes of PCB contaminated equipment as it is removed from service. Oncor
estimates that less than 5% of its equipment in use is PCB-contaminated under
Environmental Protection Agency standards.
Oncor utilizes waste disposal sites operated by third parties for the
disposal of PCBs, lubricating oil, lighting and other wastes. Oncor has a
program of regularly auditing these sites for compliance with applicable
regulations.
4
Item 3. LEGAL PROCEEDINGS
Oncor is involved in various legal and administrative proceedings the
ultimate resolution of which, should not have a material effect on its financial
position, results of operation or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of Oncor's common stock is owned by US Holdings. Reference is made to
Note 7 to Financial Statements regarding limitations upon payment of dividends
on common stock of Oncor.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for Oncor is set forth under Selected
Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for Oncor is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for Oncor is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for Oncor is set forth under Statement
of Responsibility, Independent Auditors' Report, Statements of Consolidated
Income, Statements of Consolidated Comprehensive Income, Statements of
Consolidated Cash Flows, Consolidated Balance Sheets, Statements of Consolidated
Common Stock Equity and Notes to Financial Statements included in Appendix A to
this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
5
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Item 10 is not presented herein as Oncor meets the conditions set forth in
General Instruction (I) (1) (a) and (b).
Item 11. EXECUTIVE COMPENSATION
Item 11 is not presented herein as Oncor meets the conditions set forth in
General Instruction (I) (1) (a) and (b).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is not presented herein as Oncor meets the conditions set forth in
General Instruction (I) (1) (a) and (b).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is not presented herein as Oncor meets the conditions set forth in
General Instruction (I) (1) (a) and (b).
6
PART IV
Item 14. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of Oncor'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 within 90 days of
the filing date of this annual report. Based on the evaluation performed,
Oncor's management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective.
There have been no significant changes in Oncor's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation referenced above.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) Documents filed as part of this Report:
Financial Statements (included in Appendix A to this report):
Selected Financial Data .............................................................. A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... A-3
Statement of Responsibility........................................................... A-15
Independent Auditors' Report.......................................................... A-16
Statements of Consolidated Income for each of the three years in the
period ended December 31, 2002................................................. A-17
Statements of Consolidated Comprehensive Income for each of the
three years in the period ended December 31, 2002.............................. A-17
Statements of Consolidated Cash Flows for each of the three years in
the period ended December 31, 2002............................................. A-18
Consolidated Balance Sheets, December 31, 2002 and 2001............................... A-19
Statements of Consolidated Shareholder's Equity for each of the three years in
the period ended December 31, 2002............................................. A-20
Notes to Financial Statements......................................................... A-21
The consolidated financial statements schedules are omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K:
None
(c) Exhibits:
Included in Appendix B to this report.
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Oncor Electric Delivery Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
ONCOR ELECTRIC DELIVERY COMPANY
Date: March 26, 2003 By: /s/ ERLE NYE
----------------------------------
(Erle Nye, Chairman of the Board and
Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Oncor
Electric Delivery Company and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ ERLE NYE Principal Executive March 26, 2003
- ----------------------------------------------------------- Officer and Director
(Erle Nye, Chairman of the Board and Chief Executive)
/s/ SCOTT LONGHURST Principal Financial March 26, 2003
- ----------------------------------------------------------- Officer
(Scott Longhurst, Senior Vice President)
/s/ BIGGS C. PORTER Principal Accounting March 26, 2003
- ----------------------------------------------------------- Officer
(Biggs C. Porter, Vice President)
/s/ T. L. BAKER Director March 26, 2003
- -----------------------------------------------------------
(T. L. Baker)
/s/ MICHAEL J. McNALLY Director March 26, 2003
- -----------------------------------------------------------
(Michael J. McNally)
/s/ ERIC H. PETERSON Director March 26, 2003
- -----------------------------------------------------------
(Eric H. Peterson)
/s/ R. A. WOOLDRIDGE Director March 26, 2003
- -----------------------------------------------------------
(R. A. Wooldridge)
8
ONCOR ELECTRIC DELIVERY COMPANY
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of Oncor Electric
Delivery Company, certify that:
1. I have reviewed this annual report on Form 10-K of Oncor Electric Delivery
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 /s/ Erle Nye
------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
9
ONCOR ELECTRIC DELIVERY COMPANY
CERTIFICATION OF PFO
I, Scott Longhurst, Principal Financial Officer of Oncor Electric Delivery
Company, certify that:
1. I have reviewed this annual report on Form 10-K of Oncor Electric Delivery
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 /s/ Scott Longhurst
---------------------------------
Signature: Scott Longhurst
Title: Principal Financial Officer
10
Supplemental Information to be Furnished with Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act
No annual report, proxy statement, form of proxy or other proxy soliciting
material has been sent to security holders of Oncor Electric Delivery Company
during the period covered by this Annual Report on Form of 10-K for the fiscal
year ended December 31, 2002.
11
Appendix A
ONCOR ELECTRIC DELIVERY COMPANY
INDEX TO FINANCIAL INFORMATION
December 31, 2002
Page
Selected Financial Data..................................................................... A-2
Management's Discussion and Analysis of Financial Condition and Results of Operations....... A-3
Statement of Responsibility................................................................. A-15
Independent Auditors' Report................................................................ A-16
Financial Statements:
Statements of Consolidated Income and Comprehensive Income............................... A-17
Statements of Consolidated Cash Flows.................................................... A-18
Consolidated Balance Sheets.............................................................. A-19
Statements of Consolidated Shareholder's Equity.......................................... A-20
Notes to Financial Statements............................................................ A-21
A-1
ONCOR ELECTRIC DELIVERY COMPANY
SELECTED FINANCIAL DATA
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(Millions of Dollars, except ratios)
Total assets -- end of year............................... $9,022 $8,495 $8,149
Property, plant and equipment - net-- end of year......... $6,056 $5,802 $5,445
Capital expenditures.................................. 513 635 517
---------------------------------------------------------------------------------------------------
Capitalization-- end of year
Long-term debt, less amounts due currently............ $4,080 $3,282 $2,752
Shareholder's equity.................................. 2,649 2,701 2,532
------- ------- -------
Total.................................... $ 6,729 $ 5,983 $5,284
======= ======= =======
Capitalization ratios-- end of year
Long-term debt, less amounts due currently............ 60.6% 54.9% 52.1%
Shareholder's equity.................................. 39.4 45.1 47.9
------- ------- -------
Total.................................... 100.0% 100.0% 100.0%
======= ======= =======
---------------------------------------------------------------------------------------------------
Embedded interest cost on long-term debt--end of year(a).. 7.2% 8.6% 8.4%
---------------------------------------------------------------------------------------------------
Operating revenues........................................ $ 1,994 $ 2,314 $ 2,081
Net income (b)............................................ $ 122 $ 228 $ 226
---------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges........................ 2.32 2.24 2.28
---------------------------------------------------------------------------------------------------
(a) Represents the annual interest and amortization of any discounts,
premiums, issuance costs and any deferred gains/losses on
reacquisitions divided by the carrying value of the debt plus the
unamortized balance of any discounts, premiums, issuance costs and
gains/losses on reacquisitions at the end of the year and excludes
advances from affiliates.
(b) Net of extraordinary loss.
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Oncor Electric Delivery Company (Oncor) is a regulated electricity
transmission and distribution (T&D) company principally engaged in providing
delivery services to retail electric providers (REPs) that sell power in the
north-central, eastern and western parts of Texas. Oncor was created as a result
of the deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. On that date, the electricity T&D businesses of TXU
US Holdings Company (US Holdings), formerly TXU Electric Company, and TXU SESCO
Company were transferred to Oncor. The power generation and certain retail
operations of US Holdings, as well as certain other energy-related businesses of
TXU Corp. were transferred to TXU Energy Company LLC (TXU Energy). Both Oncor
and TXU Energy are wholly-owned subsidiaries of US Holdings, which is a
wholly-owned subsidiary of TXU Corp. For the year ended December 31, 2002,
approximately 80% of Oncor's revenues represented fees for delivery services
provided to TXU Energy under the restructured operating environment described
below.
Oncor operates within the Electric Reliability Council of Texas (ERCOT)
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electric power systems
in Texas and the Independent System Operator of the interconnected transmission
system of those systems, and is responsible for ensuring equal access to
transmission service by all wholesale market participants in the ERCOT region.
CRITICAL ACCOUNTING POLICIES
Oncor's accounting policies are detailed in Note 2 to Financial
Statements. Oncor follows accounting principles generally accepted in the United
States of America (US GAAP). In applying these accounting policies in the
preparation of Oncor's consolidated financial statements, management is required
to make estimates and assumptions about future events that affect the reporting
and disclosure of assets and liabilities at the balance sheet dates and revenue
and expense during the periods covered. The following is a summary of certain
critical accounting policies of Oncor that are impacted by judgments and
uncertainties and for which different amounts might be reported under a
different set of conditions or using different assumptions.
Revenue Recognition -- Oncor records revenue for delivery services under
the accrual method. Electricity T&D revenues are recognized when delivery
services are provided to customers on the basis of periodic cycle meter readings
and include an estimated accrual for the delivery fee value of electricity
provided from the meter reading date to the end of the period. The accrued
revenue is based on actual daily revenues for the most recent metered period
applied to the number of unmetered days through the end of the period.
Regulatory Assets and Liabilities -- The financial statements of Oncor
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with SFAS No. 71, "Accounting for the Effect of Certain Types of
Regulation." The assumptions and judgments used by regulatory authorities
continue to have an impact on the recovery of costs, the rate earned on invested
capital and the timing and amount of assets to be recovered by rates. (See Note
3 to Financial Statements.)
In 2002, Oncor recorded an extraordinary loss of $123 million (net of
income tax benefit of $66 million) to write-down regulatory assets subject to
securitization through the future issuance of $1.3 billion principal amount of
transition (securitization) bonds in accordance with US Holdings' regulatory
settlement plan (Settlement Plan) with the Public Utility Commission of Texas
(Commission) as described in Note 3 to Financial Statements. The regulatory
asset carrying value is intended to represent the estimated amount of future
cash flows to be recovered from REPs through increased rates; the determination
of such amount is based on estimates. Oncor's future payments of the bonds'
principal and interest will be equal to the amount of increased electricity
delivery rates. The writedown, which was taken as a result of the final approval
of the Settlement Plan, reflects the impact of lower interest rates. As actual
interest rates on the bonds may differ from current estimates, the regulatory
asset carrying value, which was $1.7 billion at December 31, 2002, is subject to
further adjustment.
A-3
Defined Benefit Pension Plans and Other Postretirement Benefit Plans--
Oncor is a participating employer in the TXU Retirement Plan (Retirement Plan),
a defined benefit pension plan sponsored by TXU Corp. Oncor also participates
with TXU Corp. and certain other affiliated subsidiaries of TXU Corp. to offer
certain health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees from TXU Corp.
Reported costs of providing non-contributory defined pension benefits and other
postretirement benefits (see Note 9 to Financial Statements) are dependent upon
numerous factors, assumptions and estimates.
For example, these costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions made to the plan, and earnings on plan assets. The Retirement
Plan's assets are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may also impact current and future
pension costs. Fluctuations in actual equity market returns as well as changes
in general interest rates may result in increased or decreased pension costs in
future periods. Pension costs may also be significantly affected by changes in
key actuarial assumptions, including anticipated rates of return on plan assets
and the discount rates used in determining the projected benefit obligation and
pension costs.
In accordance with SFAS 87, "Employers' Accounting for Pensions," changes
in pension obligations associated with these factors may not be immediately
recognized as pension costs on the income statement, but generally are
recognized in future years over the remaining average service period of plan
participants. As such, significant portions of pension costs recorded in any
period may not reflect the actual level of cash benefits provided to plan
participants.
As of December 31, 2002, key assumptions of the Retirement Plan and other
postretirement benefit plans were revised, including decreasing the expected
return on plan assets from 9% to 8.5% and decreasing the assumed discount rate
from 7.5% to 6.75%. In selecting assumed discount rates, TXU Corp. considered
fixed income security yield rates for AA rated portfolios as reported by
Moody's. In selecting an assumed rate of return on plan assets, TXU Corp.
considered past performance and economic forecasts for the types of investments
held by the plan. The market value of the Retirement Plan assets has been
affected by sharp declines in equity markets since the first quarter of 2000.
Plan asset values have declined $151 million and $49 million in 2002 and 2001,
respectively. The projected benefit obligation has increased by $165 million as
a result of the change in the discount rate. Further, based on the current
assumptions and available information, in 2003 pension expense is expected to
increase, as a result of the changed assumptions above and other actions, a
total of approximately $12 million over 2002 amounts. Pension cost and cash
funding requirements could increase in future years.
The amounts provided above for funding requirements and pension expense
mentioned above, represent allocations of the TXU Corp. Retirement Plan to
Oncor.
RESULTS OF OPERATIONS
2002 2001 2000
---- ---- ----
Operating statistics:
Electric energy delivered volumes (GWh)............................. 104,785 99,139 100,545
Electricity points of delivery...................................... 2,909 2,844 2,796
Operating revenues (million of dollars):
Affiliated..................................................... $ 1,586 $ 2,314 $ 2,081
Non-affiliated................................................. 408 - -
------- ------- -------
Total .................................................. $ 1,994 $ 2,314 $ 2,081
======= ======= =======
A-4
The 2001 and 2000 financial information for Oncor includes information
derived from the historical financial statements of US Holdings. Reasonable
allocation methodologies were used to unbundle the financial statements of US
Holdings between its generation and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate revenues, common expenses,
assets and liabilities between US Holdings' generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Allocations reflected in the financial information for 2001 and 2000 did not
necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. Had the unbundled T&D operations of US
Holdings actually existed as a separate entity, its results of operations could
have differed materially from those included in the historical financial
statements included herein.
2002 compared to 2001
Operating revenues decreased $320 million, or 14%, to $2.0 billion in
2002. Revenues in 2001 included amounts associated with generation and retail
expenses that were the responsibility of Oncor, but in 2002 such revenues and
expenses are the responsibility of TXU Energy. Excluding the impact of such
revenues in 2001, electric delivery revenues rose 3% on a 6% increase in
electricity volumes delivered. Because the fees to REPs for their large
commercial and industrial (C&I) customers are fixed for specified ranges of
volumes, changes in distribution volumes do not necessarily result in comparable
changes in reported revenues.
Operation and maintenance expenses decreased by $158 million, or 17%, to
$762 million. The decline reflected the effects of approximately $150 million in
customer support costs and bad debt expense in 2001 that are the responsibility
of TXU Energy in 2002, a recoverable regulatory asset writeoff of $73 million in
2001 and computer systems costs incurred in 2001 for changes related to the
restructuring of the Texas electricity market. These effects were partially
offset by the costs in 2002 of a consumer energy efficiency program, mandated by
the Commission, and higher transmission costs paid to other utilities.
Depreciation and amortization increased $25 million, or 10%, to $264
million. The increase reflected $12 million related to T&D property additions,
$9 million related to computer system additions and $4 million of debt issue
cost amortization.
Taxes other than income declined $152 million, or 28%, to $391 million in
2002 due to state gross receipts taxes that are reported in TXU Energy in 2002.
Effective in 2002, local gross receipts taxes related to electricity revenue are
an expense of Oncor while state gross receipts taxes are an expense of TXU
Energy.
Interest income of $49 million in 2002 reflected the reimbursement,
effective in 2002, from TXU Energy for carrying costs on regulatory assets.
Interest expense and other charges declined by $2 million, or 1%, to $265
million. The decline reflected $25 million due to lower average debt levels,
largely offset by $21 million of interest expense related to the regulatory
liability for the excess mitigation credit to REPs and a $2 million decrease in
capitalized interest.
Goodwill amortization of $1 million in 2001 ceased, reflecting the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142.
Income tax expense was $118 million in 2002 (including $100 million
related to operating income and $18 million related to nonoperating income),
resulting in an effective tax rate of 32.5% in 2002 compared to 34.3% in 2001.
The decline reflected nonrecurring regulatory-driven adjustments recorded in
2001 relating to prior years.
A-5
Income before extraordinary loss increased $17 million, or 7%, to $245
million reflecting the declines in operation and maintenance expenses and taxes
other than income, as well as higher interest income, partially offset by the
lower revenues. Net pension and postretirement benefit costs reduced net income
by $17 million in 2002 and $8 million in 2001.
Extraordinary loss in 2002 included a $123 million (net of income tax
benefit of $66 million) regulatory-related charge to writedown regulatory assets
related to securitization bonds to be issued in the future in accordance with
the Settlement Plan. The regulatory asset writedown reflects the difference
between the carrying value of the asset and the cash flows associated with the
securitization bonds expected to be recovered through higher electricity
delivery rates. This difference reflects the decline in interest rates.
2001 compared to 2000
Operating revenues increased $233 million, or 11%, to $2.3 billion in 2001.
This increase is primarily due to the impact on reported revenues of regulation,
reflecting higher recoverable costs. Electricity volumes delivered declined 1%
due to milder, more normal weather, the effects of which were partially offset
by 2% growth in number of customers.
Operation and maintenance expenses increased $109 million, or 13%, to $920
million. The increase reflected higher bad debt expense, driven by higher fuel
charges to customers in late 2000 and early 2001, increases in transmission
costs paid to other utilities and computer systems costs incurred in 2001 to
prepare for the restructuring of the Texas electricity market. Operation and
maintenance expenses in 2001 and 2000 included recoverable regulatory asset
write-offs of $73 million and $52 million, respectively.
Taxes other than income taxes increased $107 million, or 25%, to $543
million in 2001. The increase reflected higher state and local gross receipts
taxes as a result of the rise in revenues, driven by higher fuel costs, in late
2000 and early 2001.
Interest expense increased $7 million, or 3% to $267 million in 2001 due
to higher average debt balances, including advances from affiliates.
Income tax expense was $119 million in 2001 (including $118 million
related to operating income and $1 million related to nonoperating income),
resulting in an effective tax rate of 34.3% in 2001 compared to 34.7% in 2000.
Net income increased $2 million, or 1%, to $228 million in 2001,
reflecting the higher revenues largely offset by the higher operation and
maintenance expenses and taxes other than income.
COMPREHENSIVE INCOME
Oncor has historically used, and will continue to use, derivative
financial instruments that are highly effective in offsetting future cash flow
volatility related to interest rates. The amounts included in other
comprehensive income are expected to offset the impact of future rate changes on
related payments. Amounts in other comprehensive income include (i) the value of
cash flow hedges, based on current market conditions and (ii) the value of
dedesignated and terminated cash flow hedges at the time of such dedesignation,
less amortization, providing the transaction that was hedged is still
forecasted. The effects of the hedges will be recorded in the statement of
income as the hedged transactions are actually settled.
During 2002, changes in the fair value of derivatives effective as cash
flow hedges reflected losses of $39 million ($25 million after-tax). These
losses were due to decreases in the fair value of interest rate hedges because
of lower interest rates.
During 2002, $1 million in after-tax losses in other comprehensive income
were recognized in earnings.
A-6
See also discussion in Note 12 to Financial Statements under "Derivative
Financial Instruments and Hedging Activities."
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows -- Cash flows provided by operating activities for the year
ended December 31, 2002, were $233 million compared to $675 million and $441
million for the years ended December 31, 2001 and 2000, respectively. The
decrease in cash flows provided by operating activities in 2002 of $442 million,
or 65%, reflected higher accounts receivable from REPs of $245 million, largely
from TXU Energy, due to the start-up of billing REPs for T&D charges effective
January 1, 2002. The decrease also reflected a $180 million effect of the excess
mitigation credit (see Note 3 to Financial Statements) passed to REPs, which is
offset in financing activities as the related note receivable from TXU Energy is
collected. (See discussion in Note 12 to Financial Statements under "Affiliate
Transactions.")
The increase in cash flows in 2001 of $234 million was driven by increases
in accounts payable and lower cash payments for income taxes. The increase in
accounts payable related to billings for consulting services incurred primarily
to address compliance issues associated with the restructuring of the Texas
electric industry. Cash payments allocated from US Holdings to Oncor for income
taxes decreased to $33 million in 2001 from $125 million in 2000. This decrease
was attributable to several factors, including a tax refund received during
2001, as well as the impact of higher deductions for expenses such as bad debts
and software development.
Cash flows related to financing activities were a source of $364 million
in 2002, a use of $66 million in 2001 and a source of $81 million in 2000.
Debt-related transactions were as follows:
2002 2001
---- ----
(in millions)
Issuances:
Senior secured notes.......................... $2,050 $ -
Unsecured debentures.......................... 1,000 -
First mortgage bonds.......................... - 400
Advances from affiliates - net................ - 964
------ ------
$3,050 $1,364
====== ======
Repurchases/retirements:
First mortgage bonds.......................... $1,011 $ 848
Other debt.................................... 73 72
Advances from affiliates-net.................. 1,345 -
------ ------
$2,429 $ 920
====== ======
Financing activities also included repurchases of common stock of $150
million in 2002 and $455 million in 2001.
Cash flows used in investing activities totaled $555 million, $596 million
and $505 million for 2002, 2001 and 2000, respectively. Capital expenditures
declined to $513 million in 2002 from $635 million in 2001. Capital expenditures
are expected to total $542 million in 2003, substantially all of which is for
maintenance and organic growth of existing operations. Other investing
activities in 2002 included $39 million for termination of out-of-the-money cash
flow hedges, primarily reflecting a decline in interest rates.
Depreciation and amortization expense reported in the statement of cash
flows exceeds the amount reported in the statement of income by $21 million.
This difference primarily represents amortization of regulatory assets, which is
reported as operation and maintenance expenses in the statement of income.
A-7
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint
$1.0 billion 364-day revolving credit facility with a group of banks that
terminates in April 2003; borrowings outstanding at that time can be extended
for one year. This facility is used for working capital and general corporate
purposes. Up to $1.0 billion of letters of credit may be issued under the
facility. As of December 31, 2002, the remaining amount available under the
facility of $879 million, after $121 million used to support outstanding letters
of credit, was fully drawn by TXU Energy and US Holdings.
In October 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility was intended to fund interim
refinancings of approximately $700 million of maturing secured debt should
market conditions not support a timely, cost effective refinancing. The balance
was to be available for general corporate purposes at Oncor. In December 2002,
Oncor issued $850 million of senior secured notes, reducing the commitment to
$150 million. Oncor subsequently converted the commitment to a $150 million
364-day senior secured credit facility, expiring in December 2003, all of which
was available at December 31, 2002.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $60 million and $108
million outstanding as of December 31, 2002 and December 31, 2001, respectively.
The weighted average interest rate on short-term borrowings at December 31, 2002
and 2001, were 2.45% and 3.08%, respectively.
Over the next twelve months, Oncor will need to fund ongoing working
capital requirements and maturities of debt. Oncor has funded or intends to fund
these requirements through cash on hand, cash flows from operations and the
issuance of long-term debt or other securities. Other potential sources of
funding include credit facilities, bank borrowings and borrowings from
affiliated companies.
See Note 6 to Financial Statements for further detail of debt issuance and
retirements.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of December 31, 2002, Oncor, TXU
Energy (through certain subsidiaries), and TXU Gas are qualified originators of
accounts receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. As of December 31, 2002, Oncor had sold
$50 million face amount of receivables to TXU Receivables Company under the
program in exchange for cash of $16 million and $33 million in subordinated
notes, with $1 million of losses on sales for the year ended December 31, 2002,
that principally represent the interest costs on the underlying financing. These
losses approximated 5% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding to Oncor under the
program decreased from $67 million at September 30, 2002, to $50 million at
December 31, 2002, primarily due to seasonality.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent TXU Corp.'s subsidiaries' retained interests in the
transferred receivables and are recorded at book value, net of allowances for
bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the balance
sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program.
A-8
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of both
any originator and its parent guarantor, if any, declines below
BBB- by S&P's or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceeds stated thresholds.
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The resolution of these issues as well as the implementation of
new Provider of Last Resort rules by the Commission are expected to bring the
ratios in consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a 'BBB-' (S&P) and a 'Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators are downgraded so that there
are no eligible originators, the facility would terminate.
The accounts receivable program also contains a cross default provision -
see discussion below.
Credit Ratings of TXU Corp., US Holdings, TXU Energy and Oncor
The current credit ratings for TXU Corp., US Holdings, TXU Energy and
Oncor are presented below:
TXU Corp. US Holdings TXU Energy Oncor
-------- ----------- ---------- ----
(Senior (Senior (Senior
Unsecured) Unsecured) Unsecured) (Secured)
Standard and Poor's (S&P) BBB- BBB- BBB BBB
Moody's................ Ba1 Baa3 Baa2 Baa1
Fitch ................. BBB- BBB- BBB BBB+
Moody's currently maintains a negative outlook for TXU Corp. and a stable
outlook for US Holdings, TXU Energy and Oncor. Fitch currently maintains a
stable outlook for each such entity. Standard and Poor's currently maintains a
negative outlook for each such entity.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain financial covenants that require maintenance of specified
fixed charge coverage ratios, shareholders' equity to total capitalization
ratios and leverage ratios and/or contain minimum net worth covenants. As of
December 31, 2002, TXU Corp., US Holdings, Oncor and TXU Energy were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp., US Holdings, Oncor
and TXU Energy contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material
provisions are described below:
A-9
Credit Rating Provisions
- ------------------------
Under the accounts receivable program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating (or supply a parent
guarantee with a similar rating). A downgrade below the required ratings for an
originator would prevent that originator from selling its accounts receivable
under the program. If all originators are downgraded so that there are no
eligible originators, the facility would terminate. Upon termination, cash flows
to the originators would be delayed as collections of sold receivables were used
to repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days.
Other agreements of TXU Corp., US Holdings, Oncor and TXU Energy,
including the credit facilities discussed above, contain terms pursuant to which
the interest rates charged under the agreements may be adjusted depending on the
credit ratings of such entities.
Cross Default Provisions
- ------------------------
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default if there is a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions. Most agreements have a
cure period of up to 30 days from the occurrence of the specified event during
which the company is allowed to rectify or correct the situation before it
becomes an event of default.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-Day revolving credit
facility. Under this revolving credit facility, (i) a default by TXU Energy or
any subsidiary thereof would cause the maturity of outstanding balances under
such facility to be accelerated as to TXU Energy and US Holdings, but not as to
Oncor, (ii) a default by Oncor or any subsidiary thereof would cause the
maturity of outstanding balances to be accelerated under such facility as to
Oncor and US Holdings, but not as to TXU Energy, and (iii) a default by US
Holdings would cause the maturity of outstanding balances under such facility to
be accelerated as to US Holdings, but not as to Oncor or TXU Energy. Under the
Oncor $150 million credit facility, a default by Oncor or any subsidiary thereof
would cause the maturity of outstanding balances under such facility to be
accelerated.
The accounts receivable program, described above, contains a cross default
provision with a threshold of $50 million applicable to each of the originators
under the program. TXU Receivables Company and TXU Business Services Company
each have a cross default threshold of $50 thousand. If either an originator,
TXU Business Services Company or TXU Receivables Company defaults on
indebtedness of the applicable threshold, the facility could terminate.
Other arrangements, including leases, have cross default provisions, the
triggering of which would not result in a significant effect on Oncor's
liquidity.
Regulatory Asset Securitization -- The regulatory Settlement Plan approved
by the Commission provides Oncor with a financing order authorizing it to issue
securitization bonds in the aggregate principal amount of $1.3 billion to
monetize and recover generation-related regulatory assets. The Settlement Plan
provides that there will be an initial issuance of securitization bonds in the
amount of up to $500 million followed by a second issuance for the remainder
after 2003. (See Note 3 to Financial Statements.)
Retail Clawback -- The 1999 Restructuring Legislation included a provision
to incent affiliated REPs of utilities to actively compete for customers
outside their historical service territories. If TXU Energy retains more than
60% of its residential and small business customers in its historical service
territory after the first two years of competition, TXU Energy would pay a
retail clawback amount to Oncor over a two-year period, which Oncor will apply
as a credit to (reduction of) its delivery rates to REPs, including TXU Energy.
The amount of the retail clawback will be equal to the number of residential
and small business customers retained by TXU Energy in US Holdings' and TXU
SESCO Company's historical service territory as of January 1, 2004 less the
number of new customers added outside that service territory as of that date,
multiplied by $90. The calculation will be done separately for each of the
residential and small business classes. The retail clawback will have no effect
on Oncor's earnings or cash flows.
A-10
Capitalization -- As part of its restructuring, US Holdings determined
that the initial capitalization of Oncor at January 1, 2002, would consist of
approximately 40% shareholder's equity and 60% debt (total short-term and
long-term debt and advances from affiliates) to match the capital structure
upon which the T&D rates approved by the Commission are based. At December 31,
2002, the capitalization ratio was consistent with this determination.
On July 31, 2002, Oncor's Articles of Incorporation were amended to split
the shares of common stock on a 69,000-for-1 basis. Shares outstanding for all
periods have been restated to reflect this stock split.
In April 2002, Oncor repurchased 69,000 shares of its common stock
(adjusted for stock split) from US Holdings for $50 million. In July 2002, Oncor
repurchased another 69,000 shares (adjusted for stock split) of its common stock
from US Holdings for $50 million. US Holdings used the proceeds from the share
repurchases to repay advances from TXU Corp. On October 1, 2002, Oncor
repurchased 1,250,000 shares of its common stock from US Holdings for $50
million.
In January 2003, Oncor repurchased 1,250,000 shares of its common stock
from US Holdings for $50 million.
Long-term Contractual Obligations and Commitments -- The following table
summarizes the contractual cash obligations of Oncor for each of the periods
presented (see Notes 6 and 11 to Financial Statements for additional disclosures
regarding terms of these obligations.)
Payments Due
----------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Long-term debt ................... $319 $221 $92 $ - $200 $3,600
Operating leases ................. 4 5 6 5 4 22
---- ---- --- -- ---- ------
Total contractual cash obligations $323 $226 $98 $5 $204 $3,622
==== ==== === == ==== ======
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.
Some important factors, in addition to others specifically addressed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, that could have a significant impact on Oncor's operations,
financial results and financial condition, and could cause Oncor's actual
results or outcomes to differ materially from those discussed in the
forward-looking statements set forth below, include:
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the bankruptcy
filing by Enron, accounting irregularities of public companies, and
investigations by governmental authorities into energy trading activities,
companies in the regulated and non-regulated utility businesses have been under
a generally increased amount of public and regulatory scrutiny. Accounting
irregularities at certain companies in the industry have caused regulators and
legislators to review current accounting practices and financial disclosures.
The capital markets and rating agencies also have increased their level of
scrutiny. Oncor believes that it is complying with all applicable laws, but it
is difficult or impossible to predict or control what effect these events may
have on Oncor's financial condition or access to the capital markets.
Additionally, it is unclear what laws and regulations may develop, and Oncor
cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies, the energy
industry or its operations specifically.
Oncor is subject to changes in laws or regulations, including the Federal
Power Act, as amended, and the Public Utility Holding Company Act of 1935, as
amended, changing governmental policies and regulatory actions, including those
of the Commission and the Federal Energy Regulatory Commission (FERC), with
respect to matters including, but not limited to, operation and construction of
transmission facilities, acquisition, disposal, depreciation and amortization of
regulated assets and facilities and return on invested capital. Given the
newness of the competitive market in Texas, existing laws and regulations
governing the market structure could be reconsidered, revised or reinterpreted
or new laws or regulations could be adopted.
A-11
Oncor has recorded a receivable due from TXU Energy for incremental income
taxes Oncor will pay as it collects from customers amounts equivalent to the
$1.3 billion principal amount of the securitization bonds. TXU Energy continues
to reimburse Oncor for the excess mitigation credit passed to REP customers by
Oncor and for carrying costs on regulatory assets. Oncor is subject to risks of
any nonperformance of TXU Energy regarding these matters.
Oncor is subject to cost-of-service regulation and annual earnings
oversight. This regulatory treatment does not provide any assurance as to
achievement of earnings levels. Oncor's rates are regulated by the Commission
based on an analysis of Oncor's costs, as reviewed and approved in a regulatory
proceeding. As part of the regulatory Settlement Plan, Oncor has agreed not to
seek to increase its distribution rates prior to 2004. Thus, the rates Oncor is
allowed to charge may or may not match Oncor's costs and allowed return on
invested capital at any given time. While rate regulation is premised on the
full recovery of prudently incurred costs and a reasonable rate of return on
invested capital, there can be no assurance that the Commission will judge all
of Oncor's costs to have been prudently incurred or that the regulatory process
in which rates are determined will always result in rates that will produce full
recovery of Oncor's costs and the return on invested capital allowed by the
Commission.
Oncor's revenues from the distribution of electricity are collected from
REPs that sell the electricity Oncor distributes to such REPs' customers. Oncor
depends on these REPs to timely remit these revenues to Oncor. Oncor could
experience delays or defaults in payment from these REPs, adversely affecting
Oncor's cash flows and financial condition. Revenues from TXU Energy represent
the substantial majority of Oncor's revenues.
The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through Oncor's distribution facilities. While not
generally competitive now, manufacturers of self-generation facilities continue
to develop smaller-scale, more fuel-efficient generating units that can be
cost-effective options for certain customers.
Oncor relies on access to financial markets as a significant source of
liquidity for capital requirements not satisfied by operating cash flows.
Oncor's access to the financial markets could be adversely impacted by various
factors, such as a reduction in its credit ratings or the credit ratings of TXU
Corp. or TXU Corp.'s other subsidiaries and changes in credit markets that
reduce available credit or the ability to renew existing liquidity facilities on
acceptable terms. The inability to raise capital on favorable terms,
particularly during times of uncertainty in the financial markets, could impact
Oncor's ability to sustain and grow its businesses, which are capital intensive,
and would likely increase its capital costs.
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 Oncor'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.
Oncor is subject to extensive federal, state and local environmental
statutes, rules and regulations. There are capital, operating and other costs
associated with compliance with these environmental statutes, rules and
regulations, and those costs could increase in the future.
Oncor's ability to successfully and timely complete capital improvements
to existing facilities or other capital projects is contingent upon many
variables. Should any such efforts be unsuccessful, Oncor could be subject to
additional costs and/or the writeoff of its investment in the project or
improvement.
A-12
Oncor is subject to the effects of new or changes in, income tax rates or
policies and increases in taxes related to property, plant and equipment and
gross receipts and other taxes. Further, Oncor is subject to audit and reversal
of its tax positions by the Internal Revenue Service and state taxing
authorities.
Oncor's ability to obtain insurance, and the cost of and coverage provided
by such insurance, could be affected by events outside its control.
Oncor is subject to employee workforce factors, including loss or
retirement of key executives, availability of qualified personnel, collective
bargaining agreements with union employees or work stoppage.
TXU Corp. and US Holdings are not obligated to provide any loans, further
equity contributions or other funding to Oncor or any of its subsidiaries. Oncor
must compete with all of TXU Corp.'s other subsidiaries for capital and other
resources. While, as a member of the TXU corporate group, Oncor operates within
policies, including dividend policies, established by TXU Corp. that impact the
liquidity of Oncor, rate regulation of Oncor provides economic disincentives to
any significant reduction of Oncor's equity capitalization and prohibits
cross-subsidization of other TXU Corp. group members by Oncor.
The issues and associated risks and uncertainties described above are not
the only ones Oncor may face. Additional issues may arise or become material as
the energy industry evolves. The risks and uncertainties associated with these
additional issues could impair Oncor's businesses in the future. Reference is
made to the discussion above under Liquidity and Capital Resources.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that Oncor may experience a loss in value as a
result of changes in market variables such as interest rates, which Oncor is
exposed to in the ordinary course of business. Oncor enters into financial
instruments, such as interest rate swaps to manage interest rate risk related to
its indebtedness.
Interest Rate Risk -- The table below provides information concerning
Oncor's financial instruments as of December 31, 2002 and 2001, that are
sensitive to changes in interest rates. The weighted average rate is based on
the rate in effect at the reporting date. Capital leases and the effects of
unamortized premiums and discounts are excluded from the table. See Note 6 to
Financial Statements for a discussion of changes in debt obligations.
Expected Maturity Date
--------------------------------------------------
(Millions of Dollars) 2002 2001
There- 2002 Fair 2001 Fair
2003 2004 2005 2006 2007 After Total Value Total Value
---- ---- ---- ---- ---- ------ ----- ----- ----- -----
Long-term Debt
(including current maturities)
Fixed Rate ................... $319 $221 $92 - $200 $3,600 $4,432 $4,487 $2,066 $2,082
Average interest rate..... 6.94% 7.16% 6.75% - 5.00% 7.01% 6.92% - 7.78% -
Variable Rate ................ - - - - - - - - $1,600 $1,600
Average interest rate..... - - - - - - - - 2.93% -
Credit Risk -- Credit risk relates to the risk of loss that Oncor may
incur as a result of non-performance by its counterparties. Oncor's customers
consist primarily of REPs. As a requisite for obtaining and maintaining
certification, a REP must meet certain financial resource standards established
by the Commission. REP certificates granted by the Commission are subject to
suspension and revocation for significant violation of the Public Utility
Regulatory Act and Commission rules. Significant violations include failure to
timely remit payments for invoiced charges to a T&D utility pursuant to the
terms of tariffs adopted by the Commission. Additionally, the Commission's
ratemaking policies and practices permit recovery of annual bad debt charge-offs
through approved tariffs. Since most of the T&D services provided and invoiced
by Oncor are to its affiliated REP, TXU Energy, a material loss to Oncor arising
from nonperformance by this REP is considered unlikely.
A-13
Oncor's exposure to credit risk primarily represents trade accounts
receivable from unaffiliated customers, which was $62 million as of December 31,
2002. One nonaffiliated customer represented 12.6% of this amount.
REGULATION AND RATES
Restructuring Legislation -- See Note 3 to Financial Statements for a
description of the significant provisions of the legislation passed by the Texas
Legislature regarding the restructuring of the Texas electricity market to
provide for a transition to competition. The opening of the Texas market to
competition was effective January 1, 2002.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Oncor contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although Oncor believes that in making any such statement its
expectations are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to the risks
discussed above under "Risk Factors That May Affect Future Results" and the
following important factors, among others, that could cause the actual results
of Oncor to differ materially from those projected in any such forward-looking
statement:
o prevailing governmental policies and regulatory actions, including those of
the FERC and the Commission, with respect to:
o allowed rate of return;
o industry, market and rate structure;
o recovery of investments;
o acquisitions and disposal of assets and facilities;
o operation and construction of facilities;
o changes in tax laws and policies; and
o changes in and compliance with environmental and safety laws and policies;
o continued implementation of the 1999 Restructuring Legislation;
o legal and administrative proceedings and settlements;
o general industry trends;
o weather conditions and other natural phenomena, and acts of sabotage, wars or
terrorist activities;
o unanticipated population growth or decline, and changes in market demand and
demographic patterns;
o changes in business strategy, development plans or vendor relationships;
o unanticipated changes in interest rates, commodity prices or rates
of inflation;
o unanticipated changes in operating expenses, liquidity needs and capital
expenditures;
o commercial bank market and capital market conditions;
o inability of various counterparties to meet their obligations with respect
to Oncor's financial instruments;
o changes in technology used by and services offered by Oncor;
o significant changes in Oncor's relationship with its employees,
including the availability of qualified personnel, and the potential
adverse effects if labor disputes or grievances were to occur;
o significant changes in critical accounting policies material to Oncor; and
o actions of rating agencies.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Oncor undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for Oncor
to predict all of such factors, nor can it assess the impact of each such factor
or the extent to which any factor, or combination of factors, may cause the
actual results of Oncor to differ materially from those projected in any
forward-looking statement.
A-14
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENT OF RESPONSIBILITY
The management of Oncor Electric Delivery Company is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of Oncor Electric Delivery Company and other information included in this
report. The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
As appropriate, the statements include amounts based on informed estimates and
judgments of management.
The management of Oncor Electric Delivery Company is responsible for
establishing and maintaining a system of internal control, which includes the
internal controls and procedures for financial reporting, that is designed to
provide reasonable assurance, on a cost-effective basis, that assets are
safeguarded, transactions are executed in accordance with management's
authorization and financial records are reliable for preparing consolidated
financial statements. Management believes that the system of internal control
provides reasonable assurance that errors or irregularities that could be
material to the consolidated financial statements are prevented or would be
detected within a timely period. Key elements in this system include the
effective communication of established written policies and procedures,
selection and training of qualified personnel and organizational arrangements
that provide an appropriate division of responsibility. This system of internal
control is augmented by an ongoing internal audit program designed to evaluate
its adequacy and effectiveness. Management considers the recommendations of the
internal auditors and independent auditors concerning Oncor Electric Delivery
Company's system of internal control and takes appropriate actions which are
cost-effective in the circumstances. Management believes that, as of December
31, 2002, Oncor Electric Delivery Company's system of internal control was
adequate to accomplish the objectives discussed herein.
The independent auditing firm of Deloitte & Touche LLP is engaged to
audit, in accordance with auditing standards generally accepted in the United
States of America, the consolidated financial statements of Oncor Electric
Delivery Company and its subsidiaries and to issue their report thereon.
/s/ ERLE NYE /s/ T. L. BAKER
------------------------------- ----------------------------------------
Erle Nye, Chairman of the Board T. L. Baker, Vice Chairman and Oncor
and Chief Executive Group President
/s/ MIKE GREENE /s/ SCOTT LONGHURST
- -------------------------------- ------------------------------------------
Mike Greene, President Oncor Scott Longhurst, Senior Vice President and
Electric Delivery Company Principal Financial Officer
/s/ BIGGS C. PORTER
- ------------------------------------
Biggs C. Porter, Vice President and
Principal Accounting Officer
A-15
INDEPENDENT AUDITORS' REPORT
Oncor Electric Delivery Company:
We have audited the accompanying consolidated balance sheets of Oncor Electric
Delivery Company and subsidiaries (Oncor) as of December 31, 2002 and 2001, and
the related statements of consolidated income, comprehensive income,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
Oncor's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates and assumptions made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Oncor at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 14, 2003
A-16
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
--------------------------------------
2002 2001 2000
---- ---- ----
Millions of Dollars
Operating revenues:
Affiliated.................................................. $1,586 $2,314 $2,081
Nonaffiliated .............................................. 408 - -
------ ------ ------
Total operating revenues................................ 1,994 2,314 2,081
------ ------ ------
Operating expenses:
Operation and maintenance................................... 762 920 811
Depreciation and amortization............................... 264 239 232
Income taxes................................................ 100 118 118
Taxes other than income..................................... 391 543 436
------ ------ -----
Total operating expenses................................ 1,517 1,820 1,597
------ ------ -----
Operating income .............................................. 477 494 484
Other income and deductions:
Other income.............................................. 9 9 8
Other deductions.......................................... 7 7 5
Nonoperating income taxes................................ 18 1 2
Interest income-- affiliates................................... 49 - 1
Interest expense and other charges............................. 265 267 260
------ ------ -----
Income before extraordinary loss............................... 245 228 226
Extraordinary loss, net of tax effect.......................... (123) - -
------- ------ -----
Net income..................................................... $ 122 $ 228 $ 226
====== ====== =====
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
Millions of Dollars
Net income.................................................... $ 122 $ 228 $ 226
----- ----- -----
Other comprehensive income (loss)--
Net change related to derivatives (cash flow hedges):
Net change in fair value, net of tax benefit of $14. (25) - -
Amounts realized in earnings during the year........ 1 - -
----- ----- -----
Total............................................ (24) - -
===== ===== =====
Comprehensive income.......................................... $ 98 $ 228 $ 226
====== ===== =====
See Notes to Financial Statements.
A-17
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Millions of Dollars
Cash flows-- operating activities
Net income...................................................................... $122 $ 228 $ 226
Adjustments to reconcile net income to cash provided by operating activities:
Extraordinary loss, net of tax effect....................................... 123 - -
Depreciation and amortization .............................................. 285 239 305
Deferred income taxes and investment tax credits-- net ..................... 154 34 (24)
Gains from sale of assets .................................................. (2) - -
Reduction of revenues for earnings in excess of regulatory earnings cap..... - 5 -
Changes in operating assets and liabilities:
Accounts receivable-- trade (including affiliates)........................ (216) (23) (27)
Accounts payable-- trade (including affiliates)........................... (23) 28 (59)
Other assets.............................................................. (203) 60 (4)
Other liabilities......................................................... (7) 104 24
------ ------ ------
Cash provided by operating activities................................... 233 675 441
------ ------ ------
Cash flows-- financing activities
Issuances of long-term debt........................................................ 3,050 400 575
Retirements/repurchases of debt.................................................... (1,084) (920) (159)
Repurchase of common stock......................................................... (150) (455) (248)
Net change in advances from affiliates............................................. (1,345) 964 (83)
Decrease in note receivable from TXU Energy related to a regulatory liability...... 180 - -
Debt premium, discount, financing, reacquisition expenses and redemption deposits.. (287) (55) (4)
------ ------ ------
Cash provided by (used in) financing activities............................... 364 (66) 81
------ ------ ------
Cash flows-- investing activities
Capital expenditures............................................................... (513) (635) (517)
Proceeds from sale of assets....................................................... 4 - -
Other.............................................................................. (46) 39 12
------ ------ ------
Cash used in investing activities............................................. (555) (596) (505)
------ ------ ------
Net change in cash and cash equivalents.............................................. 42 13 17
Cash and cash equivalents-- beginning balance........................................ 35 22 5
------ ------ ------
Cash and cash equivalents-- ending balance........................................... $ 77 $ 35 $ 22
====== ====== =====
See Notes to Financial Statements.
A-18
ONCOR ELECTRIC DELIVERY COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
2002 2001
------ -----
Millions of Dollars
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 77 $ 35
Accounts receivable:
Affiliates (principally TXU Energy)............................................. 213 -
Other........................................................................... 62 131
Materials and supplies inventories - at average cost.............................. 40 38
Note receivable from TXU Energy................................................... 170 170
Other current assets.............................................................. 35 36
----- ------
Total current assets.......................................................... 597 410
Investments:
Restricted cash................................................................. 210 -
Other investments............................................................... 29 29
Property, plant and equipment - net............................................... 6,056 5,802
Due from TXU Energy............................................................... 437 617
Regulatory assets - net........................................................... 1,630 1,605
Other noncurrent assets........................................................... 63 32
----- ------
Total assets.................................................................. $9,022 $8,495
===== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Long-term debt due currently...................................................... $ 319 $ 370
Advances from affiliates.......................................................... 60 108
Accounts payable:
Affiliates...................................................................... - 43
Other........................................................................... 30 50
Customer deposits................................................................. 1 81
Accrued taxes..................................................................... 142 170
Accrued interest.................................................................. 70 54
Other current liabilities......................................................... 91 130
----- ------
Total current liabilities..................................................... 713 1,006
Accumulated deferred income taxes................................................... 1,296 1,204
Investment tax credits............................................................. 74 79
Other noncurrent liabilities and deferred credits................................... 210 223
Long-term debt, less amounts due currently.......................................... 4,080 3,282
Contingencies (Note 11)
Shareholder's equity (Note 7)....................................................... 2,649 2,701
----- ------
Total liabilities and shareholder's equity...................................... $9,022 $8,495
===== ======
See Notes to Financial Statements.
A-19
ONCOR ELECTRIC DELIVERY COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
December 31,
-------------------------------
2002 2001 2000
---- ---- ----
Millions of Dollars
Balance at beginning of year.......................................... $2,701 $2,532 $2,554
Net income......................................................... 122 228 226
Repurchase of common stock of US Holdings allocated to Oncor....... - (455) (248)
Common stock repurchased and retired (2002 - 1,388,000 shares).... (150)
Conversion of advances to capital.................................. - 396 -
Changes in accumulated other comprehensive loss, net of tax effects (24) - -
------ ----- -----
Balance at end of year................................................ $2,649 $2,701 $2,532
====== ====== ======
See Notes to Financial Statements.
A-20
ONCOR ELECTRIC DELIVERY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Oncor Electric Delivery Company (Oncor) was formed as a Texas corporation
in the fourth quarter of 2001. Oncor was created as a result of the deregulation
of the electric utility industry in Texas effective January 1, 2002. Oncor is a
wholly-owned subsidiary of TXU US Holdings Company (US Holdings), formerly TXU
Electric Company, which is a wholly-owned subsidiary of TXU Corp. Prior to
January 1, 2002, US Holdings was a regulated, integrated electric utility
company engaged in the generation, purchase, transmission, distribution and sale
of electricity (power) in the north-central, eastern and western parts of Texas.
Oncor is a regulated electricity transmission and distribution (T&D)
company principally engaged in providing delivery services to retail electric
providers (REPs) that sell power in the north-central, eastern and western parts
of Texas. For the year ended December 31, 2002, approximately 80% of Oncor's
revenues represented fees for delivery services provided to TXU Energy Company
LLC (TXU Energy) under the restructured operating environment described below.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
and provided for a transition to increased competition in the generation and
retail sale of electricity (1999 Restructuring Legislation). As a result, TXU
Corp. restructured certain of its US businesses effective January 1, 2002. In
order to satisfy its obligations to unbundle its business pursuant to the 1999
Restructuring Legislation and consistent with its business separation plan as
approved by the Public Utility Commission of Texas (Commission), as of January
1, 2002, US Holdings transferred:
o its electric T&D assets to Oncor, which is a utility regulated by the
Commission;
o its unregulated power generation assets to subsidiaries of TXU Energy,
which is the new competitive business and also a wholly-owned subsidiary of
US Holdings; and
o its retail customers to a subsidiary REP of TXU Energy.
In addition, the T&D assets of TXU SESCO Company, a subsidiary of TXU
Corp., also were transferred to Oncor.
The relationships of the entities affected by the restructuring and their
rights and obligations with respect to their collective assets and liabilities
are contractually described in a master separation agreement executed in
December 2001.
Oncor operates within the Electric Reliability Council of Texas (ERCOT)
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electric power systems
in Texas and the Independent System Operator of the interconnected transmission
system of those systems, and is responsible for ensuring equal access to
transmission service by all wholesale market participants in the ERCOT region.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The T&D operations that were combined to form
Oncor were part of fully integrated public utility businesses of subsidiaries of
TXU Corp., under common ownership and control for the periods presented prior to
January 1, 2002. The financial statements of Oncor as of December 31, 2001 and
December 31, 2000, present the financial position, results of operations and
cash flows of the combined T&D operations of US Holdings and TXU SESCO Company.
The financial statements for periods subsequent to January 1, 2002, present
Oncor's actual operating results. Effective January 1, 2002, in connection with
the transfer of US Holdings' retail customers to a subsidiary REP of TXU Energy,
certain assets and liabilities relating to the retail function, which had been
previously integrated with Oncor's regulated operations, were transferred from
Oncor to TXU Energy.
A-21
The prior year financial information for Oncor includes information
derived from the historical financial statements of US Holdings. Reasonable
allocation methodologies were used to unbundle the financial statements of US
Holdings between its power generation and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate revenues, common expenses,
assets and liabilities between US Holdings' power generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Allocations reflected in the financial information for 2001 and 2000 did not
necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. Had the unbundled T&D operations of US
Holdings actually existed as a separate entity, its results of operations could
have differed materially from those included in the historical financial
statements presented herein.
Use of Estimates -- The preparation of Oncor's consolidated financial
statements requires management to make estimates and assumptions about future
events that affect the reporting and disclosure of assets and liabilities at the
balance sheet dates and the reported amounts of revenue and expense. In the
event estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
No material adjustments, other than those disclosed elsewhere herein, were made
to previous estimates during the current year. In addition, see above for
discussion of estimates used and methodologies employed to derive the combined
financial statements for 2001 and 2000.
System of Accounts -- The accounting records of Oncor have been maintained
in accordance with the Federal Energy Regulatory Commission's (FERC) Uniform
System of Accounts as adopted by the Commission.
Regulatory Assets and Liabilities -- The financial statements of Oncor
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." The regulatory assets and liabilities include those that arose from
US Holdings' and TXU SESCO Company's T&D operations and those assigned from US
Holdings that arose from generation operations.
Goodwill and Intangible Assets -- Goodwill represents the excess of the
purchase price paid over the estimated fair value of the assets acquired and
liabilities assumed for each company acquired and was amortized over a range of
20 to 40 years.
SFAS No. 142, "Goodwill and Other Intangible Assets," became effective for
Oncor on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units, and the discontinuance of goodwill amortization. The
amortization of Oncor's goodwill from continuing operations ($1million annually)
ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Oncor completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill at that time. No impairment resulted from
the additional evaluation performed in 2002 as of October 1, which has been
selected as the annual impairment test date.
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SFAS No. 142 also requires additional disclosures regarding intangible
assets (other than goodwill) that are amortized:
As of December 31, 2002 As of December 31, 2001
------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ---- -------- ------------ ---
Amortized intangible assets
Capitalized software.............. $151 $53 $98 $131 $37 $94
Land easements.................... 168 51 117 161 54 107
---- ---- ---- ---- --- ---
Total....................... $319 $104 $215 $292 $91 $201
Amortized intangible asset balances are classified as property, plant and
equipment in the balance sheet. Oncor has no intangible assets (other than
goodwill) that are not amortized.
Aggregate amortization expense for intangible assets, other than goodwill,
for the years ended December 31, 2002, 2001 and 2000 was $19 million, $10
million and $15 million, respectively; estimated amounts for the next five years
are as follows:
Amortization
Year Expense
---- ------------
2003................................................ $20
2004................................................ 20
2005................................................ 20
2006................................................ 20
2007................................................ 9
At December 31, 2002 and 2001, goodwill of $25 million was reported in
investments on the balance sheet, which was net of accumulated amortization of
$7 million.
Property, Plant and Equipment -- T&D facilities are stated at original
cost. The cost of T&D facility additions includes labor and materials,
applicable overhead and payroll-related costs and an allowance for funds used
during construction (AFUDC). AFUDC is a regulatory cost accounting procedure
whereby amounts based upon interest charges on borrowed funds and a return on
equity capital used to finance construction are added to utility facilities
being constructed. Oncor used AFUDC rates of 6.6% in 2002 and 2001 and 9% in
2000.
Oncor capitalizes computer software costs in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." These costs are being amortized over periods ranging
from five to seven years.
Valuation of Long-Lived Assets -- Oncor evaluates the carrying value of
long-lived assets to be held and used when events and circumstances warrant such
a review. The carrying value of long-lived assets would be considered impaired
when the projected undiscounted cash flows associated with the assets are less
than carrying value. In that event, a loss would be recognized based on the
amount by which the carrying value exceeds the fair value. Fair value is
determined primarily by available market valuations or, if applicable,
discounted cash flows. (See Changes in Accounting Standards below.)
Financial Instruments -- Oncor utilizes derivative financial instruments
such as interest rate swaps in order to manage its exposure to changes in
interest rates. Oncor generally designates these derivatives as cash flow
hedges.
A-23
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires the recognition of derivatives in the balance sheet, the
measurement of those instruments at fair value and the recognition in earnings
of changes in the fair value of derivatives. SFAS No. 133 provides exceptions to
this accounting if (a) the derivative is deemed to represent a transaction in
the normal course of purchasing from a supplier and selling to a customer, or
(b) the derivative is deemed to be a cash flow or fair value hedge. In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Any hedge ineffectiveness is recorded in earnings. Amounts are reclassified from
other comprehensive income to earnings as the underlying transactions occur and
realized gains and losses are recognized in earnings. As of December 31, 2002,
Oncor had no fair value hedges.
Oncor documents designated debt-related hedging relationships, including
the strategy and objectives for entering into such hedge transactions and the
related specific firm commitments or forecasted transactions. Effectiveness is
assessed based on changes in cash flows of the hedges as compared to changes in
cash flows of the hedged items.
Revenue Recognition -- Oncor records revenue for delivery services under
the accrual method. Electricity T&D revenues are recognized when delivery
services are provided to customers on the basis of periodic cycle meter readings
and include an estimated accrual for the delivery fee value of electricity
provided from the meter reading date to the end of the period. The accrued
revenue is based on actual daily revenues for the most recent metered period
applied to the number of unmetered days through the end of the period.
Income Taxes -- Oncor is included in the consolidated federal income tax
return of TXU Corp. and its subsidiary companies. Oncor uses the separate return
method to compute its income tax provision. Because of the alternative minimum
tax (AMT), differences may arise between the consolidated federal income tax
liability of TXU Corp. and the aggregated separate tax liability of the group
members. In instances where this occurs, the difference is allocated pro-rata to
those companies that generated AMT on a separate company basis. Investment tax
credits are amortized to income over the estimated service lives of the
properties. Deferred income taxes are provided for temporary differences between
the book and tax basis of assets and liabilities. Certain provisions of SFAS No.
109, "Accounting for Income Taxes", provide that regulated enterprises are
permitted to recognize the expense associated with deferred taxes as regulatory
tax assets or tax liabilities if it is probable that such amounts will be
recovered from, or returned to, customers in future rates.
Taxes Other Than Income -- Local gross receipts taxes reported in taxes
other than income are generally not a "pass through" item such as sales and
excise taxes. Local gross receipts taxes are assessed to Oncor by local
governmental bodies, based on sales-related input, as a cost of doing business.
Oncor records local gross receipts tax as an expense.
Cash Equivalents -- For purposes of reporting cash and cash equivalents,
temporary cash investments purchased with a remaining maturity of three months
or less are considered to be cash equivalents.
Changes in Accounting Standards -- SFAS No. 143, "Accounting for Asset
Retirement Obligations", became effective on January 1, 2003. SFAS No. 143
requires entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the net
present value of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted each period, and the capitalized
cost is depreciated over the useful life of the related asset. The adoption of
SFAS No. 143 is not expected to have a material effect on Oncor's earnings or
financial condition.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective January 1, 2002. SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," for long-lived assets to be disposed of by sale, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," was issued in April 2002
and became effective on January 1, 2003. One of the provisions of this statement
is the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt." Any gain or loss on the early extinguishment of debt that was
classified as an extraordinary item in prior periods in accordance with SFAS No.
4 will be reclassified if it does not meet the criteria of an extraordinary item
as defined by Accounting Principles Board Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
A-24
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and became effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" was issued in
November 2002 and became effective for disclosures made in the December 31, 2002
financial statements. The interpretation requires expanded disclosures of
guarantees. In addition, the interpretation requires recording the fair market
value of guarantees upon issuance or modification after January 1, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for the quarter ending September 30, 2003.
For accounting standards not yet adopted or implemented, Oncor is
evaluating the potential impact on its financial position and results of
operations.
3. REGULATION AND RATES
Restructuring Legislation -- The 1999 Restructuring Legislation
restructured the electric utility industry in Texas and provided for a
transition to increased competition in the generation and retail sale of
electricity. By January 1, 2002, each electric utility was required to separate
(unbundle) its business activities into a power generation company, a REP, and a
T&D utility or separate T&D utilities. Unbundled T&D utilities within ERCOT,
such as Oncor, remain regulated by the Commission.
The 1999 Restructuring Legislation provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided a means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement was approved by the Commission in June, 2002. In August, 2002,
the Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas District Court in August, 2002. In January, 2003 US Holdings
concluded a settlement of these appeals and they were dismissed. Thus the
Settlement became final.
The major elements of the Settlement affecting Oncor are:
Excess Mitigation Credit and Appeals Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had issued
an interim order that addressed Oncor's charges for T&D service when retail
competition would begin. Among other things, that interim order, and subsequent
final order issued in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed to the Travis
County, Texas District Court. Finalization of the Settlement means TXU Corp.'s
appeal has been dismissed. Also, in July 2001, the staff of the Commission had
A-25
notified US Holdings and the Commission that it disagreed with US Holdings'
computation of the level of earnings in excess of the regulatory earnings cap
for calendar year 2000. In August 2001, the Commission issued an order adopting
the staff position. US Holdings appealed this matter to the Travis County, Texas
District Court, which affirmed the Commission's order and US Holdings then
appealed that decision to the Third District Court of Appeals in Austin, Texas.
This appeal has now been dismissed.
Regulatory Asset Securitization -- In October 1999, US Holdings filed an
application with the Commission for a financing order to permit the issuance by
a special purpose entity of $1.65 billion of securitization bonds. In May 2000,
the Commission signed an order rejecting such request and authorized only $363
million of such bonds. US Holdings filed an appeal with the Travis County, Texas
District Court and in September 2000, the Court issued a judgment that reversed
part of the Commission's order and affirmed other aspects of the Commission's
order. US Holdings and various other parties appealed this judgment directly to
the Supreme Court of Texas; and in June 2001, it issued a ruling and in October
2001 remanded the case to the Commission, which consolidated it into the
Settlement Plan proceeding. In accordance with the Settlement, Oncor received a
financing order authorizing it to issue securitization bonds in the aggregate
principal amount of $1.3 billion to recover regulatory assets and other
qualified costs. The Settlement provides that there can be an initial issuance
of securitization bonds in the amount of up to $500 million, followed by a
second issuance of the remainder after 2003. The Settlement resolves all issues
related to regulatory assets and liabilities.
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas, District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997, through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO are named defendants in both suits. Oncor is unable to
predict the outcome of any litigation related to this matter.
Summary -- Although Oncor cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in this
report, which might significantly alter its basic financial position, results of
operations or cash flows.
4. EXTRAORDINARY LOSS
In 2002, Oncor recorded an extraordinary loss of $123 million (net of
income tax benefit of $66 million) to write-down regulatory assets subject to
securitization through the issuance of $1.3 billion principal amount of
transition (securitization) bonds in accordance with US Holdings' Settlement
Plan with the Commission as described in Note 3. The regulatory asset carrying
value is intended to represent the estimated amount of future cash flows to
be recovered from REPs through increased rates; the determination of such amount
is based on estimates. Oncor's future payments of the bonds' principal and
interest will be equal to the amount of increased electricity delivery rates.
The writedown, which was taken as a result of the final approval of the
Settlement Plan, reflects the impact of lower interest rates. The carrying value
of such regulatory assets was $1.7 billion at December 31, 2002.
A-26
5. SHORT-TERM FINANCING
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
in April 2003; borrowings outstanding at that time can be extended for one year.
This facility is used for working capital and general corporate purposes. Up to
$1.0 billion of letters of credit may be issued under the facility. As of
December 31, 2002, the remaining amount available under the facility of $879
million, after $121 million used to support outstanding letters of credit, was
fully drawn by TXU Energy and US Holdings.
In October 2002, Oncor entered into a commitment for a secured credit
facility of up to $1 billion. The facility was intended to fund interim
refinancings of approximately $700 million of maturing secured debt should
market conditions not support a timely, cost effective refinancing. The balance
was to be available for general corporate purposes at Oncor. In December 2002,
Oncor issued $850 million of senior secured notes, reducing the commitment to
$150 million. Oncor subsequently converted the commitment to a $150 million
364-day senior secured credit facility, expiring in December 2003, all of which
was available at December 31, 2002.
Oncor is provided short-term financing by TXU Corp. and its affiliated
companies. Oncor had short-term advances from affiliates of $60 million and $108
million outstanding as of December 31, 2002 and December 31, 2001, respectively.
The weighted average interest rate on short-term borrowings at December 31, 2002
and 2001, were 2.45% and 3.08%, respectively.
Cross Default Provisions
- ------------------------
Certain financing arrangements of TXU Corp., US Holdings, TXU Energy and
Oncor contain provisions that would result in an event of default if there is a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions. Most agreements have a
cure period of up to 30 days from the occurrence of the specified event during
which the company is allowed to rectify or correct the situation before it
becomes an event of default.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross default under the
$1.0 billion joint US Holdings/TXU Energy/Oncor 364-Day revolving credit
facility. Under this revolving credit facility, (i) a default by TXU Energy or
any subsidiary thereof would cause the maturity of outstanding balances under
such facility to be accelerated as to TXU Energy and US Holdings, but not as to
Oncor, (ii) a default by Oncor or any subsidiary thereof would cause the
maturity of outstanding balances to be accelerated under such facility as to
Oncor and US Holdings, but not as to TXU Energy, and (iii) a default by US
Holdings would cause the maturity of outstanding balances under such facility to
be accelerated as to US Holdings, but not as to Oncor or TXU Energy. Under the
Oncor $150 million credit facility, a default by Oncor or any subsidiary thereof
would cause the maturity of outstanding balances under such facility to be
accelerated.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of December 31, 2002, Oncor, TXU
Energy (through certain subsidiaries), and TXU Gas are qualified originators of
accounts receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. As of December 31, 2002, Oncor had sold
$50 million face amount of receivables to TXU Receivables Company under the
program in exchange for cash of $16 million and $33 million in subordinated
notes, with $1 million of losses on sales for the year ended December 31, 2002,
that principally represent the interest costs on the underlying financing. These
losses approximated 5% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding to Oncor under the
program decreased from $67 million at September 30, 2002, to $50 million at
December 31, 2002, primarily due to seasonality.
A-27
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent TXU Corp.'s subsidiaries' retained interests in the
transferred receivables and are recorded at book value, net of allowances for
bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the balance
sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables 31-90 days
past due into the program.
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of both
any originator and its parent guarantor, if any, declines below
BBB- by S&P's or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceeds stated thresholds.
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The resolution of these issues as well as the implementation of
new POLR rules by the Commission are expected to bring the ratios in consistent
compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators are downgraded so that there
are no eligible originators, the facility would terminate.
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company, a subsidiary
of TXU Corp., which services the purchased receivables, each have a cross
default threshold of $50 thousand. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
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6. LONG-TERM DEBT
Oncor's long-term debt consists of the following:
December 31,
------------------
2002 2001
---- ----
9.320% Fixed Medium Term Secured Notes due January 15, 2002...................... $ -- $ 10
9.680% Fixed Medium Term Secured Notes due February 25, 2002..................... -- 20
9.700% Fixed Medium Term Secured Notes due March 1, 2002......................... -- 25
6.470% Fixed Medium Term Secured Notes due November 13, 2002..................... -- 3
6.560% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 10
6.580% Fixed Medium Term Secured Notes due November 20, 2002..................... -- 5
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... 4 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... 11 11
8.125% Fixed First Mortgage Bonds due February 1, 2002........................... -- 150
8.000% Fixed First Mortgage Bonds due June 1, 2002............................... -- 147
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. 132 194
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 69 95
2.426% Floating Rate Series C First Mortgage Bonds due June 15, 2003............. -- 400
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
8.875% Fixed First Mortgage Bonds due February 1, 2022........................... -- 112
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... 103 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
8.500% Fixed First Mortgage Bonds due August 1, 2024............................. -- 115
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 --
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 --
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 --
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 --
5.000% Fixed Debentures due September 1, 2007.................................... 200 --
7.000% Fixed Debentures due September 1, 2022.................................... 800 --
Long-term advances from affiliates............................................... -- 1,200
Unamortized premium and discount................................................. (33) (15)
----------- -----------
Total ....................................................................... 4,399 3,652
----------- -----------
Less amount due currently........................................................ 319 370
----------- -----------
Total Long-Term Debt............................................................. $ 4,080 $ 3,282
=========== ===========
In February 2003, Oncor gave notice of its intent to redeem on March 5,
2003, all ($103 million principal amount) of its Texas Utilities Electric
Company (now Oncor) First Mortgage and Collateral Trust Bonds, 8 3/4% Series due
November 1, 2023, at 104.01% of the principal amount thereof, plus accrued
interest to the redemption date. The notice is subject to receipt of the
redemption moneys by the trustee on or before the redemption date.
In December 2002, Oncor issued $850 million principal amount of its senior
secured notes in two series in a private placement with registration rights. One
series of $500 million bears interest at the annual rate of 6.375% and matures
in 2015 and the other series of $350 million bears interest at the annual rate
of 7.250% and matures in 2033. Each series is initially secured by a lien on an
equal principal amount of Oncor's first mortgage bonds and the lien of the
indenture under which the senior secured notes were issued; however, the liens
securing these bonds may be released in certain circumstances. The net proceeds
were used by Oncor for the repurchase and retirement of $61 million principal
amount of Oncor's 6.75% First Mortgage Bonds due in March 2003 and the
defeasance of the remaining $132 million principal amount, as well as the
repurchase and retirement of $25 million principal amount of Oncor's 6.75% First
Mortgage bonds due April 2003 and the defeasance of the remaining $69 million
principal amount. The remaining net proceeds were used for general corporate
purposes, including the repayment of short-term advances from affiliates. The
short-term advances represented amounts borrowed to redeem $400 million
principal amount of Oncor's First Mortgage Bonds floating rate Series C due June
15, 2003.
A-29
The defeasance amounts (approximately $210 million at December 31, 2002)
were deposited with the trustee for such bonds with irrevocable instructions
from Oncor to apply such deposited proceeds to the payment of principal and
interest on such bonds through maturity or the earliest redemption date. These
deposits are reflected in restricted cash on the balance sheet.
In August 2002, Oncor issued $1.0 billion aggregate principal amount of
unsecured debentures in two series in a private placement with registration
rights. One series of $200 million is due September 1, 2007 and bears interest
at the rate of 5%, and the other series of $800 million is due September 1, 2022
and bears interest at the rate of 7%. Proceeds from the issuance were used by
Oncor to repay advances from affiliates and commercial paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1,
2002, in the aggregate principal amount of $147 million, and in February 2002,
Oncor redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002, in
the aggregate principal amount of $150 million. Oncor funded the redemptions
through the issuance of commercial paper, advances from affiliates and cash from
operations.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of
senior secured notes in two series in a private placement with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. Each series is initially secured by
an equal principal amount of Oncor's first mortgage bonds; however, the lien of
those bonds may be released in certain circumstances. Proceeds from the issuance
were used by Oncor to repay advances from US Holdings.
Debt Restructure and Refinancing Plan -- On January 1, 2002, US Holdings'
business was restructured into a regulated T&D utility business and an
unregulated energy business. See Note 1 for a more detailed discussion of the
separation of the businesses. In connection with the restructuring, the
generation assets transferred to TXU Energy were released from the lien of US
Holdings' mortgage. Upon transfer of the T&D assets to Oncor, Oncor assumed US
Holdings' mortgage and the first mortgage bonds outstanding thereunder. US
Holdings remains a co-obligor with respect to payments. The substantial majority
of Oncor's electric utility property, plant and equipment is subject to the lien
of the mortgage.
Maturity requirements for the years 2003 through 2007 and thereafter under
long-term debt instruments outstanding at December 31, 2002, were as follows:
Year
----
2003 ............................................. $ 319
2004 ............................................. 221
2005 ............................................. 92
2006 ............................................. -
2007 ............................................. 200
Thereafter........................................ 3,600
Unamortized discounts and premiums................ (33)
-------
Total.......................................... $4,399
=======
A-30
7. SHAREHOLDER'S EQUITY
The balances of shareholder's equity for dates prior to January 1, 2002 in
the Statements of Consolidated Shareholder's Equity reflect the allocated
historical net book value of the T&D operations of US Holdings and TXU SESCO
that were combined to form Oncor. On January 1, 2002 these operations were
contributed to Oncor as required by the 1999 Restructuring Legislation, and
historical equity amounts were assigned to common stock.
The changes in shareholder's equity for the year ended December 31, 2002
are as follows (in millions of dollars):
Common stock without par value-- 100,000,000 authorized shares
Balance at December 31, 2001 (69,000,000 shares).................. $2,701
Common stock repurchased and retired (1,388,000 shares)......... (150)
------
Balance at December 31, 2002 (67,612,000 shares) ................ 2,551
------
Retained earnings:
Balance at December 31, 2001...................................... -
Net income...................................................... 122
------
Balance at December 31, 2002...................................... 122
------
Accumulated other comprehensive income (loss) net of tax effects:
Balance at December 31, 2001..................................... -
Changes related to derivatives (cash flow hedges) ............. (24)
------
Balance at December 31, 2002..................................... (24)
------
Shareholder's equity at December 31, 2002......................... $2,649
======
No shares of Oncor's common stock are held by or for its own account, nor
are any shares of such capital stock reserved for its officers and employees or
for options, warrants, conversions and other rights in connection therewith.
Oncor's mortgage restricts its payment of dividends to the amount of its
retained earnings.
On July 31, 2002, Oncor's Articles of Incorporation were amended to split
the shares of common stock on a 69,000-for-1 basis. Shares outstanding for all
periods have been restated to reflect this stock split.
In January 2003, Oncor repurchased 1,250,000 shares of its common stock
from US Holdings for $50 million.
In April 2002, Oncor repurchased 69,000 shares of its common stock
(adjusted for stock split) from US Holdings for $50 million. In July 2002,
Oncor repurchased another 69,000 shares (adjusted for stock split) of its
common stock from US Holdings for $50 million. On October 1, 2002, Oncor
repurchased 1,250,000 shares of its common stock from US Holdings for $50
million. US Holdings used the proceeds from the share repurchases to repay
advances from TXU Corp.
A-31
8. INCOME TAXES
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
------------------------------
2002 2001 2000
---- ---- ----
Reported in operating expenses
Current:
Federal...................................................... $(55) $ 83 $135
State........................................................ 1 1 7
---- ----- ----
Total................................................... (54) 84 142
Deferred:
Federal...................................................... 159 39 (19)
Investment tax credits.......................................... (5) (5) (5)
---- ----- ----
Total to operating expenses............................. 100 118 118
Reported in other income and deductions
Current:
Federal...................................................... 18 1 2
---- ---- ----
Total................................................... $118 $119 $120
==== ==== ====
Reconciliation of income taxes computed at the federal statutory rate to
income tax expense:
Year Ended December 31,
-----------------------------
2002 2001 2000
---- ---- ----
Income before income taxes and extraordinary items.......................... $363 $347 $346
Income taxes at the federal statutory rate of 35%........................... 127 121 121
Amortization of investment tax credits.................................... (5) (5) (5)
Amortization (under regulatory accounting) of statutory tax rate changes.. (8) (3) (5)
State income taxes, net of federal tax benefit............................ 1 1 5
Other..................................................................... 3 5 4
---- ---- ----
Income tax expense.......................................................... $118 $119 $120
==== ==== ====
Effective tax rate.......................................................... 33% 34% 35%
A-32
The components of Oncor's deferred tax assets and deferred tax liabilities
are as follows:
December 31,
--------------------------------------------------------------------
2002 2001
----------------------------------- -------------------------------
Total Current Noncurrent Total Current Noncurrent
----- ------- ---------- ----- ------- ----------
Deferred Tax Assets
Unamortized investment tax credits....... $ 40 $ - $40 $ 43 $ - $ 43
Regulatory liability..................... 60 - 60 124 - 124
Alternative minimum tax.................. 110 - 110 76 - 76
Employee benefits........................ 62 - 62 74 - 74
Deferred benefits of state income taxes.. 6 - 6 10 - 10
Other federal tax assets................. 13 1 12 32 15 17
Deferred state income taxes.............. 2 - 2 6 - 6
------ ----- ----- ----- ----- -----
Total deferred tax assets.............. $ 293 $ 1 $ 292 $ 365 $15 $ 350
====== ===== ===== ===== ===== =====
Deferred Tax Liabilities
Depreciation differences and capitalized
construction costs..................... $ 928 $ - $ 928 $ 832 $ - $ 832
Redemption of long-term debt............. 44 - 44 40 - 40
Securitizable regulatory asset........... 571 - 571 633 - 633
Deferred charges for state income taxes.. 17 16 1 15 11 4
Other federal tax liabilities............ 33 - 33 27 - 27
Deferred state income taxes.............. 11 - 11 18 - 18
------ ----- ------ ------ ----- ------
Total deferred tax liability........... 1,604 16 1,588 1,565 11 1,554
------ ----- ------ ------ ----- ------
Net Deferred Tax Liability (Asset)....... $1,311 $ 15 $1,296 $1,200 $ (4) $1,204
====== ===== ====== ====== ===== ======
At December 31, 2002, Oncor had approximately $110 million of alternative
minimum tax credit carryforwards available to offset future tax payments.
TXU Corp.'s income tax returns are subject to examination by applicable
tax authorities. The IRS is currently examining the tax returns of TXU Corp. and
its subsidiaries for the years 1993 through 1997. In management's opinion, an
adequate provision has been made for any future taxes that may be owed as a
result of any examinations.
9. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Oncor is a participating employer in the TXU Retirement Plan (Retirement
Plan), a defined benefit pension plan sponsored by TXU Corp. The Retirement Plan
is a qualified pension plan under Section 401(a) of the Internal Revenue Code of
1986, as amended (Code), and is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended (ERISA). Employees are
eligible to participate in the Retirement Plan upon their completion of one year
of service and the attainment of age 21. All benefits are funded by the
participating employers. The Retirement Plan provides benefits to participants
under one of two formulas: (i) a cash balance formula under which participants
earn monthly contribution credits based on their compensation and years of
service, plus monthly interest credits or (ii) a traditional defined benefit
formula based on years of service and the average earnings of the three years of
highest earnings.
All eligible employees hired after January 1, 2002 participate under the
cash balance formula. Certain employees who, prior to January 1, 2002,
participated under the traditional defined benefit formula, continue their
participation under that formula. Under the cash balance formula, future
increases in earnings will not apply to prior service costs. It is TXU Corp.'s
policy to fund the plans on a current basis to the extent deductible under
existing federal tax regulations. Such contributions, when made, are intended to
provide not only for benefits attributed to service to date, but also those
expected to be earned in the future.
A-33
The allocated net periodic pension benefit applicable to Oncor was $7
million for 2002, $14 million for 2001 and $15 million for 2000. Estimated
accrued pension cost applicable to Oncor as of December 31, 2002 and 2001, was
$15 million and $25 million, respectively. There were no contributions in 2002,
2001 and 2000. The amounts provided represent allocations of the TXU Corp.
Retirement Plan to Oncor. As of December 31, 2002, no minimum pension liability
had been allocated to Oncor.
In addition, Oncor's employees are eligible to participate in a qualified
savings plan, the TXU Thrift Plan (Thrift Plan). This plan is a
participant-directed defined contribution profit sharing plan qualified under
Section 401(a) of the Code, and is subject to the provisions of ERISA. The
Thrift Plan includes an employee stock ownership component. Under the terms of
the Thrift Plan, as amended effective January 1, 2002, employees who do not earn
more than the IRS threshold compensation limit used to determine highly
compensated employees may contribute, through pre-tax salary deferrals and/or
after-tax payroll deductions, the maximum amount of their salary or wages
permitted under law. Employees who earn more than such threshold may contribute
from 1% to 16% of their regular salary or wages. Employer matching contributions
are also made in an amount equal to 100% of employee contributions up to 6% of
regular salary or wages for employees who participate under the cash balance
formula of the Retirement Plan, and 75% of employee contributions up to 6% of
regular salary or wages for employees who participate under the traditional
defined benefit formula of the Retirement Plan. Employer matching contributions
are invested in TXU Corp. common stock. Contributions to the Thrift Plan,
including cash and TXU Corp. common stock, by TXU Corp. aggregated $30 million
for 2002, $16 million for 2001 and $15 million in 2000. Oncor's portion of such
contributions was $8 million in 2002, $5 million in 2001 and $6 million in 2000.
In addition to the Retirement Plan and the Thrift Plan, Oncor participates
with TXU Corp. and certain other affiliated subsidiaries of TXU Corp. to offer
certain health care and life insurance benefits to eligible employees and their
eligible dependents upon the retirement of such employees. For employees
retiring on or after January 1, 2002, the retiree contributions required for
such coverage vary based on a formula depending on the retiree's age and years
of service. The estimated net periodic postretirement benefits cost other than
pensions applicable to Oncor was $33 million for 2002, $27 million for 2001 and
$27 million for 2000. Contributions paid by Oncor to fund postretirement
benefits other than pensions were $25 million, $18 million and $18 million in
2002, 2001 and 2000, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of Oncor's
significant financial instruments that are not reported at fair value on the
balance sheet are as follows:
December 31, 2002 December 31, 2001
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ----- -------- -----
Long-term debt (including current maturities).................... $(4,399) $(4,487) $(3,652) $(3,682)
Off-balance sheet assets (liabilities):
Financial guarantees......................................... -- (3) -- --
With the implementation of SFAS No. 133 on January 1, 2001, financial
instruments that are derivatives are now recorded on the balance sheet at fair
value.
The fair value of long-term debt is estimated at the lesser of either the
call price or the market value as determined by quoted market prices, where
available, or, where not available, at the present value of future cash flows
discounted at rates consistent with comparable maturities with similar credit
risk. The carrying amounts for financial assets classified as current assets and
the carrying amounts for financial liabilities classified as current liabilities
approximate fair value due to the short maturity of such instruments.
A-34
11. COMMITMENTS AND CONTINGENCIES
Leases -- Oncor has entered into operating leases covering various
facilities and properties including transportation and data processing equipment
and office space. Certain of these leases contain renewal and purchase options
and residual value guarantees. Lease costs charged to operating expense for the
years ended December 31, 2002, 2001 and 2000 were $18 million, $15 million and
$16 million, respectively (including amounts paid by TXU Corp. and charged to
Oncor).
Future minimum lease commitments under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of December 31,
2002, are as follows:
Year
----
2003........................................................... $4
2004........................................................... 5
2005........................................................... 6
2006........................................................... 5
2007........................................................... 4
Thereafter..................................................... 22
----
Total future minimum lease payments....................... $ 46
====
Residual Value Guarantees in Operating Leases -- Oncor is the lessee under
various operating leases that obligate it to guarantee the residual values of
the leased facilities. At December 31, 2002, the aggregate maximum amount of
residual values guaranteed was approximately $64 million with an estimated
residual recovery of approximately $63 million. The average life of the lease
portfolio is approximately four years.
General -- Oncor is involved in various legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management,
should not have a material effect upon its financial position, results of
operations or cash flows.
12. SUPPLEMENTARY FINANCIAL INFORMATION
Credit Risk -- Credit risk relates to the risk of loss that Oncor may
incur as a result of non-performance by its counterparties. Oncor's customers
consist primarily of REPs. As a requisite for obtaining and maintaining
certification, a REP must meet the financial resource standards established by
the Commission. REP certificates granted by the Commission are subject to
suspension and revocation for significant violation of the Public Utility
Regulatory Act and Commission rules. Significant violations include failure to
timely remit payments for invoiced charges to a T&D utility pursuant to the
terms of tariffs adopted by the Commission. Additionally, the Commission's
ratemaking policies and practices permit recovery of annual bad debt charge-offs
through approved tariffs. Since most of the T&D services provided and invoiced
by Oncor are to its affiliated REPs, a material loss to Oncor arising from
nonperformance by its customers is considered unlikely.
Oncor's exposure to credit risk primarily represents trade accounts
receivable from unaffiliated customers, which was $62 million as of December 31,
2002. One nonaffilated customer represented 12.6% of this amount.
A-35
Regulatory Assets and Liabilities --
December 31,
-------------------
2002 2001
------ ------
Regulatory Assets
Generation-related regulatory assets subject to securitization.............. $1,652 $1,841
Securities reacquisition costs.............................................. 124 117
Recoverable deferred income taxes-- net..................................... 76 74
Other regulatory assets..................................................... 46 34
----- -----
Total regulatory assets................................................. 1,898 2,066
----- -----
Regulatory Liabilities
Liability to be applied to stranded generation assets (excess mitigation)... 170 355
Investment tax credit related and protected excess deferred taxes........... 98 106
------ ------
Total regulatory liabilities............................................ 268 461
------ ------
Net regulatory assets................................................... $1,630 $1,605
====== ======
Included in regulatory assets are assets of $1.8 billion at December 31,
2002, and $1.9 billion at December 31, 2001, that were not earning a return. Of
the assets not earning a return, $1.7 billion is expected to be recovered over
the term of the securitization bonds pursuant to the Settlement Plan approved by
the Commission. (See Note 3 for further discussion of the Settlement Plan.) The
remaining regulatory assets have a remaining recovery period of 14 to 31 years.
Restricted Cash -- At December 31, 2002, approximately $210 million of the
net proceeds from Oncor's issuance of senior secured notes on December 20, 2002,
was deposited in a trust to be used to redeem First Mortgage Bonds of Oncor due
in March and April 2003 and is reflected in investments on the balance sheet.
Accounts Receivable -- At December 31, 2002 and 2001, accounts receivable
of $275 million and $131 million are stated net of allowance for uncollectible
accounts of $1 million and $4 million, respectively. Accounts receivable at
December 31, 2002 and 2001 included unbilled revenues of $97 million and $50
million, respectively. The majority of the 2001 accounts receivable balance was
transferred to TXU Energy on January 1, 2002. Oncor recorded bad debt expense of
$5 million in 2002.
Affiliate Transactions -- The following represent significant affiliate
transactions of Oncor:
o Oncor records interest income receivable from TXU Energy with respect
to Oncor's generation-related regulatory assets that are subject to
securitization. The interest income reimburses Oncor for the interest
expense Oncor incurs on that portion of its debt deemed to be
associated with the generation-related regulatory assets. For the year
ended December 31, 2002, this interest income totaled $28 million. See
also Note 3.
o Under terms of the Settlement Plan, Oncor expects to issue
securitization bonds in the principal amount of $1.3 billion. The
incremental income taxes Oncor will pay on the increased delivery fees
to be charged to Oncor's customers related to the bonds will be
reimbursed by TXU Energy. Therefore, Oncor's financial statements
reflect a $437 million receivable from TXU Energy that will be
extinguished as Oncor pays the related income taxes.
o In addition, Oncor has a note receivable from TXU Energy related to the
excess mitigation credit established in accordance with the Settlement
Plan. Oncor has implemented the $350 million credit, plus interest, as
a reduction of its fees charged to REPs, including TXU Energy, for a
two-year period. The principal and interest payments on the note
receivable from TXU Energy reimburse Oncor for the credit applied to
the delivery fees billed to REPs. For the year ended December 31, 2002,
the principal payments received on the note receivable totaled $180
million and the interest income totaled $21 million.
o Average daily short-term advances from affiliates during 2002 were $790
million and interest expense incurred on the advances was $23 million.
The weighted average interest rate for 2002 was 2.3%.
A-36
o Oncor also records revenue from TXU Energy for electricity delivery
fees. For the year ended December 31, 2002, these revenues were $1.6
billion.
o TXU Business Services Company, a subsidiary of TXU Corp., charges Oncor
for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For 2002, 2001 and 2000, these costs
totaled $142 million, $197 million and $176 million, respectively, and
are reported in operation and maintenance expenses.
o Oncor charges TXU Gas Company, a subsidiary of TXU Corp., for customer
and administrative services. For 2002, 2001 and 2000, these charges
totaled $29 million, $43 million and $72 million, respectively, and are
largely reported as a reduction in operation and maintenance expenses.
Supplemental Cash Flow Information --
Year Ended December 31,
------------------------------
2002 2001 2000
---- ---- ----
Cash payments of interest (net of amounts capitalized).............. $242 $261 $251
Cash payments (refunds) of income taxes............................. (29) 33 125
Noncash conversion of advances to capital .......................... - 396 -
Noncash advances from affiliates.................................... (91) (101) 47
Property, Plant and Equipment --
December 31,
--------------------
2002 2001
---- ----
In Service
Transmission........................................................... $ 2,176 $ 1,979
Distribution........................................................... 6,376 6,110
Other assets........................................................... 434 430
------- -------
Total............................................................... 8,986 8,519
Less accumulated depreciation.......................................... 3,039 2,888
------- -------
Net of accumulated depreciation..................................... 5,947 5,631
Construction work in progress............................................. 87 149
Held for future use....................................................... 22 22
------- -------
Net property, plant and equipment................................... $ 6,056 $ 5,802
======= =======
Interest Expense and Related Charges --
Year Ended December 31,
---------------------------
2002 2001 2000
---- ---- ----
Interest ......................................................... $ 262 $ 260 $ 253
Amortization of debt expense...................................... 8 14 11
Allowance for borrowed funds used during construction and
capitalized interest............................................ (5) (7) (4)
----- ----- -----
Total interest expense and other related charges ........... $ 265 $ 267 $ 260
===== ===== =====
Derivative Financial Instruments and Hedging Activities -- Oncor's
derivative financial instruments that have been designated as cash flow hedges
match the terms of the underlying hedged items. As a result, Oncor experienced
no hedge ineffectiveness during 2002.
During 2002, Oncor entered into certain cash flow hedges related to future
forecasted interest payments. These hedges were terminated in May 2002, and $39
million ($25 million after-tax) was recorded as a charge to other comprehensive
income. These losses are being amortized to earnings over a period of up to
thirty years, as the transactions are still forecasted. These hedges essentially
represent the remaining balance in other comprehensive income.
As of December 31, 2002, it is expected that $1 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents
A-37
the projected value of the hedges over the next twelve months relative to what
would be recorded if the hedge transactions had not been entered into. The
amount expected to be reclassified is not a forecasted loss incremental to
normal operations, but rather it demonstrates the extent to which the volatility
in earnings (which would otherwise exist) is mitigated through the use of cash
flow hedges.
Quarterly Information (unaudited) -- In the opinion of Oncor, the
information below includes all adjustments necessary for a fair statement of
such amounts. Quarterly results are not necessarily indicative of a full year's
operations because of seasonal and other factors.
Operating Revenues Operating Income Net Income (Loss)
------------------ ---------------- -----------------
Quarter Ended 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
March 31........................... $ 494 $ 476 $ 124 $ 97 $ 71 $ 24
June 30............................ 500 529 123 110 65 40
September 30....................... 557 650 155 182 96 112
December 31........................ 443 659 75 105 (110)(1) 52
------ ------ ------ ------ ------ ------
$1,994 $2,314 $ 477 $ 494 $ 122 $ 228
====== ====== ====== ====== ====== ======
(1) Fourth quarter 2002 net income includes extraordinary charges of $123
million (net of tax benefit).
Other Income and Other Deductions -- Other income and other deductions
consist of several individually immaterial items.
A-38
Oncor Exhibits to 2002 Form 10-K
APPENDIX B
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
- -------- --------- -------
2 1-12833 2 -- Master Separation Agreement by and among TXU Electric
Form 8-K Delivery Company (now Oncor), TXU Generation Holdings
(filed January 16, Company LLC, TXU Merger Energy Trading Company LP, TXU SESCO
2002) Company, TXU SESCO Energy Services Company, TXU Energy
Retail Company LP and
TXU US Holdings, dated
as of December 14, 2001.
3(a) 333-100240 3(a) -- Articles of Incorporation.
3(b) 333-100240 3(b) -- Articles of Amendment, effective January 17, 2002, to the
Articles of Incorporation.
3(c) 333-100240 3(c) -- Articles of Amendment, effective July 31, 2002, to the
Articles of Incorporation.
3(d) 333-100240 3(d) -- Restated Bylaws.
4(a) 2-90185 4(a) -- Mortgage and Deed of Trust, dated as of December 1, 1983,
between Oncor and The Bank of New York, as Trustee.
4(a)(1) -- Supplemental Indentures to Mortgage and Deed of Trust:
Number Dated as of
------ -------------
2-90185 4(b) First April 1, 1984
33-24089 4(a)-1 Fifteenth July 1, 1987
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-49710 4(a)-1 Thirty-fourth April 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
1-12833 4(2)(1) Sixty-third January 1, 2002
Form 10-K
(2001)
1-12833 4 Sixty-fourth May 1, 2002
Form 10-Q
(Quarter ended March
31, 2002)
333-100240 4(f)(2) Sixty-fifth December 1, 2002
4(b) -- Agreement to furnish certain debt instruments.
4(c) 333-100240 4(a) -- Indenture and Deed of Trust, dated as of May 1, 2002,
between Oncor and The Bank of New York, as Trustee.
B-1
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
- -------- --------- -------
4(d) 333-100240 4(b) -- Officer's Certificate, dated May 6, 2002, establishing the
forms of the Oncor Senior Secured Notes of the 6.375% Series
due 2012 and the 7.000% Series due 2032.
4(e) 333-100240 4(c) -- Officer's Certificate dated December 20, 2002, establishing
(Pre-Effective the forms of the Oncor Senior Secured Notes of the 6.375%
Amendment No. 1) Series due 2015 and the 7.250% Series due 2033.
4(f) 333-100242 4(a) -- Indenture (for Unsecured Debt Securities), dated as of
August 1, 2002, between Oncor and The Bank of New York, as
Trustee.
4(g) 333-100242 4(b) -- Officer's Certificate, dated as of August 30, 2002,
establishing the forms of Oncor's 5% Debentures due 2007 and
7% Debentures due 2022.
10(a) 1-12833 10(b) -- 364 Day Competitive Advance and Revolving Credit Facility
Form 10-Q Agreement, dated as of April 24, 2002 among TXU Energy,
(Quarter ended March Oncor and US Holdings, Chase Manhattan Bank of Texas,
31, 2002) National Association, as Administrative Agent, certain banks
listed therein and The Chase Manhattan Bank, as Competitive
Advance Facility Agent.
10(b) 333-100240 10(c) -- Credit Agreement, dated December 20, 2002, among Oncor and
(Pre-Effective certain banks listed therein, and Credit Suisse First
Amendment No. 1) Boston, as Administrative Agent.
10(c) 333-100240 10(c) -- Generation Interconnection Agreement, dated December 14,
2001, between Oncor and TXU Generation Company LP.
10(d) 333-100240 10(d) -- Generation Interconnection Agreement, dated December 14,
2001, between Oncor and TXU Generation Company LP, for
itself and as Agent for TXU Big Brown Company LP, TXU
Mountain Creek Company LP, TXU Handley Company LP, TXU
Tradinghouse Company LP and TXU DeCordova Company LP
(Interconnection Agreement).
10(e) 333-100240 10(e) -- Amendment to Interconnection Agreement, dated May 31, 2002.
10(f) 333-100240 10(f) -- Standard Form Agreement between Oncor and Competitive
Retailer Regarding Terms and Conditions of Delivery of
Electric Power and Energy.
10(g) 1-12833 10(w) -- Stipulation and Joint Application for Approval of Settlement
Form 10-K as approved by the PUC in Docket Nos. 21527 and 24892.
(2002)
12 -- Computation of Ratio of Earnings to Fixed Charges.
99(a) -- Chief Executive Officer Certification.
99(b) -- Chief Financial Officer Certification.
- ------------------------------------------
* Incorporated herein by reference.
B-2