UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

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FORM 10-Q

 

 

[√] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED JUNE  30, 2015

 

― OR ―

 

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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Commission File Number 333-100240

 

 

Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

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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  √    

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    √     No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____    Accelerated filer ____    Non-Accelerated filer  √      (Do not check if a smaller reporting company)

Smaller reporting company___

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes___ No  √   

 

As of July 30, 2015,  80.03% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Energy Future Holdings Corp., 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC and 0.22% of the outstanding membership interests were indirectly held by certain members of Oncor’s management and board of directors.  None of the membership interests are publicly traded.

 

 

 

 

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TABLE OF CONTENTS

 

 

Oncor Electric Delivery Company LLC’s (Oncor) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public, free of charge, on the Oncor website at http://www.oncor.com as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission.  The information on Oncor’s website or available by hyperlink from the website shall not be deemed a part of, or incorporated by reference into, this quarterly report on Form 10-Q.  The representations and warranties contained in any agreement that we have filed as an exhibit to this quarterly report on Form 10-Q or that we have or may publicly file in the future may contain representations and warranties made by and to the parties thereto as of specific dates.  Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties’ risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.

 

This Form 10-Q and other Securities and Exchange Commission filings of Oncor and its subsidiary occasionally make references to Oncor (or “we,” “our,” “us” or “the company”) when describing actions, rights or obligations of its subsidiary.  These references reflect the fact that the subsidiary is consolidated with Oncor for financial reporting purposes.  However, these references should not be interpreted to imply that Oncor is actually undertaking the action or has the rights or obligations of its subsidiary or that the subsidiary company is undertaking an action or has the rights or obligations of its parent company or of any other affiliate.

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GLOSSARY

 

 

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

 

 

 

 

See Notes to Financial Statements.

 

 

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

 

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

References in this report to “we,” “our,” “us” and “the company” are to Oncor and/or its subsidiary as apparent in the context.  See “Glossary” for definition of terms and abbreviations.

 

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas.  Revenues from TCEH represented 24% and 25% of our total operating revenues for the six months ended June 30, 2015 and 2014, respectively.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group.  Oncor Holdings owns 80.03% of our membership interests, Texas Transmission owns 19.75% of our membership interests and certain members of our management team and board of directors indirectly own the remaining membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

 

Our consolidated financial statements include our wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a variable interest entity.  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds in 2003 and 2004.  Bondco issued $1.3 billion principal amount of transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.

 

Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.

 

EFH Corp. Bankruptcy Proceedings

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.

 

Basis of Presentation

 

Our condensed consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as the audited financial statements in our 2014 Form 10-K.  Adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included

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therein.  All intercompany items and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC.  Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes in our 2014 Form 10-K.  The results of operations for an interim period may not give a true indication of results for a full year due to seasonality.  All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated.

 

Use of Estimates

 

Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements.  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.

 

Derivative Instruments and Mark-to-Market Accounting

 

We have from time-to-time entered into derivative instruments to hedge interest rate risk.  If the instrument meets the definition of a derivative under accounting standards related to derivative instruments and hedging activities, the fair value of each derivative is recognized on the balance sheet as a derivative asset or liability and changes in the fair value are recognized in net income, unless criteria for certain exceptions are met.  This recognition is referred to as “mark-to-market” accounting.

 

Reconcilable Tariffs

 

The PUCT has designated certain tariffs (TCRF, EECRF surcharges, AMS surcharges and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.

 

Contingencies

 

We evaluate and account for contingencies using the best information available.  A loss contingency is accrued and disclosed when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated.  If a range of probable loss is established, the minimum amount in the range is accrued, unless some other amount within the range appears to be a better estimate.  If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency is disclosed to the effect that the probable loss cannot be reasonably estimated.  A loss contingency will be disclosed when it is reasonably possible that an asset has been impaired or a liability incurred.  If the likelihood that an impairment or incurrence is remote, the contingency is neither accrued nor disclosed.  Gain contingencies are recognized upon realization.

 

Changes in Accounting Standards 

In April 2015, the Financial Accounting Standards Board issued a new accounting standard update, which changes the presentation of debt issuance costs in the balance sheet. The update requires that such costs be presented as a direct reduction to the face value of the related debt rather than as an asset.  This will make the presentation of debt issuance costs consistent with debt discounts.  The update is effective for interim and annual periods beginning after December 15, 2015.  Early application is permitted.  When adopted, we anticipate that both other noncurrent assets and long-term debt amounts will decrease by approximately $40 million.

 

 

 

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2.    EFH BANKRUPTCY PROCEEDINGS

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.

 

The US Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  Since that time, we have collected $127 million of the prepetition amount.    We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates had not been established  as of June 30, 2015.

 

 

Potential Change in Control of Majority Owner or Other Change in Ownership of Oncor

 

In January 2015, the bankruptcy court approved the debtors' bidding procedures motion that set forth the process by which the debtors were authorized to solicit proposals (i.e., bids) from third parties to acquire (in any form and employing any structure, whether taxable (in whole or in part) or tax-free) an indirect equity ownership interest in Oncor in accordance with the US Bankruptcy Code.  These bidding procedures contemplated that the debtors select a stalking horse bid after a two-stage closed bidding process, and, after approval by the bankruptcy court of such stalking horse bid, the debtors conduct a round of open bidding culminating in an auction intended to obtain a higher or otherwise best bid for a transaction.  Initial bids were received in early March 2015 and second round bids were received in April 2015. Following receipt and negotiation of second round bids, the debtors in the EFH Bankruptcy Proceedings elected not to select a stalking horse bid.    

 

 As part of the EFH Bankruptcy Proceedings, on July 23, 2015, EFH Corp. and the other debtors filed with the bankruptcy court an amended joint plan of reorganization (as such may be amended from time to time, Plan of Reorganization) and related amended disclosure statement (as such may be amended from time to time, Disclosure Statement).  In general, the Plan of Reorganization proposes a structure that involves a tax-free deconsolidation of TCEH from EFH Corp. and the reorganization of EFH Corp. and EFIH either: (1) pursuant to a plan of reorganization backstopped by existing creditors and third party investors or (2) a standalone plan of reorganization pursuant to which the creditors of EFH Corp. and EFIH would convert their debt into equity of reorganized EFH Corp..    In this regard, the Plan of Reorganization provides for a series of transactions that likely would lead to a significant change in the indirect equity ownership of Oncor.    We cannot predict the outcome of the EFH Bankruptcy Proceedings and the related stakeholder negotiations, including whether the bankruptcy court will approve any of the structures contemplated by the Plan of Reorganization and related transactions or whether any such transactions will (or when they will) ultimately close because any such transactions would be the subject of customary closing conditions, including receipt of all applicable regulatory approvals and the requirements of the US Bankruptcy Code or the bankruptcy court.

 

 

The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential impacts on Oncor at this time is unknown.  The Plan of Reorganization and the Disclosure Statement are subject to revision in response to creditor claims and objections, the ultimate outcome of stakeholder negotiations and the requirements of the US Bankruptcy Code or the bankruptcy court.  Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict.  As indicated above, the Plan of Reorganization contemplates potential transactions that would result in a change in control of Oncor or otherwise implicate a regulatory review.  We have made some preliminary preparations for potential change in control filings, including discussions with EFH Corp. and others, in light of the proposals in the EFH Bankruptcy Proceedings and the filing of the Plan of Reorganization and Disclosure Statement, but cannot predict the result of any transaction or review.    In addition, we will continue to evaluate our affiliate transactions and contingencies throughout the EFH

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Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.

 

See Note 10 for details of our related-party transactions with members of the Texas Holdings Group.

 

3.    REGULATORY MATTERS

 

2008 Rate Review

 

In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (Docket 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011 with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015.  At the request of the court, the parties filed responses to the petitions for review in June 2015. We filed a reply brief on July 30, 2015, the deadline for all parties to file replies. There is no deadline for the court to act.  If our appeals efforts are unsuccessful and the proposed consolidated tax savings adjustment is implemented, we estimate that on remand, the impact on earnings of the consolidated tax savings adjustment’s value could range from zero, as originally determined by the PUCT in Docket 35717, to an approximate $130 million loss (after tax).  We do not believe that any of the other issues ruled upon by the Austin Court of Appeals would result in a material impact to our results of operations or financial condition. 

 

See Note 3 to Financial Statements in our 2014 Form 10-K for additional information regarding regulatory matters.

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4.    REGULATORY ASSETS AND LIABILITIES

 

Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT.  Components of the regulatory assets and liabilities are provided in the table below.  Amounts not earning a return through rate regulation are noted.

 

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5.    BORROWINGS UNDER CREDIT FACILITIES

 

At June 30, 2015, we had a $2.4 billion secured revolving credit facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances.  The revolving credit facility expires in October 2016. We have the option of requesting up to two one-year extensions, with such extensions subject to certain conditions and lender approval.  The terms of the revolving credit facility allow us to request an additional increase in our borrowing capacity of $100 million, provided certain conditions are met, including lender approval.

 

Borrowings under the revolving credit facility are classified as short-term on the balance sheet and are secured equally and ratably with all of our other secured indebtedness by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.

 

At June 30, 2015, we had outstanding borrowings under the revolving credit facility totaling $780 million with an interest rate of 1.31% and outstanding letters of credit totaling $7 million.  At December 31, 2014, we had outstanding borrowings under the revolving credit facility totaling $711 million with an interest rate of 1.29% and outstanding letters of credit totaling $7 million.

 

Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  At June 30, 2015, all outstanding borrowings bore interest at LIBOR plus 1.125%.  Amounts borrowed under the revolving credit facility, once repaid, can be borrowed again from time to time.

 

An unused commitment fee is payable quarterly in arrears and upon termination or commitment reduction at a rate equal to 0.100% to 0.275% (such spread depending on certain credit ratings assigned to our senior secured debt) of the daily unused commitments under the revolving credit facility.  Letter of credit fees on the stated amount of letters of credit issued under the revolving credit facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to the spread over adjusted LIBOR.  Customary fronting and administrative fees are also payable to letter of credit fronting banks.  At June 30, 2015, letters of credit bore interest at 1.325%, and a commitment fee (at a rate of 0.125% per annum) was payable on the unfunded commitments under the revolving credit facility, each based on our current credit ratings.

 

Subject to the limitations described below, borrowing capacity available under the revolving credit facility at June 30, 2015 and December 31, 2014 was $1.613 billion and $1.682 billion, respectively.  Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions.  As described further in Note 6, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust.  At June 30, 2015, the available borrowing capacity of the revolving credit facility could be fully drawn.

 

The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets.  In addition, the revolving credit facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants.  For purposes of the ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with US GAAP).  The debt calculation excludes transition bonds issued by Bondco, but includes the unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with US GAAP plus indebtedness described above.  At June 30, 2015, we were in compliance with this covenant and with all other covenants.

 

 

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6.    LONG-TERM DEBT

 

At June 30, 2015 and December 31, 2014, our long-term debt consisted of the following:

 

 

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(a)   Secured by first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness.  See “Deed of Trust” below for additional information.

(b)   The transition bonds are nonrecourse to Oncor and were issued to securitize a regulatory asset.

 

Debt-Related Activity in 2015

 

Debt Repayments

 

Repayments of long-term debt in the six months ended June 30, 2015 totaled $569 million representing $500 million aggregate principal amount of 6.375% senior secured notes paid at the scheduled maturity date of January 15, 2015 and $69 million representing transition bond principal payments at scheduled maturity dates.

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Issuance of New Senior Secured Notes

 

In March 2015, we issued $350 million aggregate principal amount of 2.950% senior secured notes maturing in April 2025  (2025 Notes) and $375 million aggregate principal amount of 3.750% senior secured notes maturing in April 2045  (2045 Notes, and together with the 2025 Notes, the Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $714 million from the sale of the Notes to repay borrowings under our revolving credit facility and for other general corporate purposes.  The Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.

 

Interest on the Notes is payable in cash semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2015.  Prior to January 1, 2025, in the case of the 2025 Notes, and October 1, 2044, in the case of the 2045 Notes, we may at our option at any time redeem all or part of the Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a make-whole premium.  On and after January 1, 2025, in the case of the 2025 Notes, and October 1, 2044, in the case of the 2045 Notes, Oncor may redeem the Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of such Notes, plus accrued and unpaid interest. The Notes also contain customary events of default, including failure to pay principal or interest on the Notes when due.

 

The Notes were issued in a private placement and were not registered under the Securities Act.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the Notes.  We have agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the Notes.  If a registration statement for the exchange offer is not declared effective by the SEC within 270 days after the issue date of the Notes or the exchange offer is not completed within 315 days after the issue date of the Notes (an exchange default), then the annual interest rate on the Notes will increase 50 basis points per annum until the earlier of the expiration of the exchange default or the second anniversary of the issue date of the Notes.

 

Deed of Trust

 

Our secured indebtedness, including the revolving credit facility described in Note 5, is secured equally and ratably by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.  The Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At June 30, 2015, the amount of available bond credits was approximately $2.637 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.103 billion.

 

Fair Value of Long-Term Debt

 

At June 30, 2015 and December 31, 2014, the estimated fair value of our long-term debt (including current maturities) totaled $6.622 billion and $6.844 billion, respectively, and the carrying amount totaled $5.791 billion and $5.636 billion, respectively.  The fair value is estimated by an independent party who uses observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.

 

7.    COMMITMENTS AND CONTINGENCIES

 

EFH Bankruptcy Proceedings

 

On the EFH Petition Date,  EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.    The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  See Notes  2 and 10 for  a  discussion of the potential impacts on us as a result of the EFH Bankruptcy Proceedings and our related-party transactions involving members of the Texas Holdings Group, respectively.

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Legal/Regulatory Proceedings

 

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 3 in this report and Note 8 to Financial Statements in our 2014 Form 10-K for additional information regarding our legal and regulatory proceedings.

 

8.    MEMBERSHIP INTERESTS

 

Cash Distributions

 

 

Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At June 30, 2015, $68 million was available for distribution to our members as our regulatory capitalization ratio was 59.6% debt and 40.4% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  The debt calculation excludes transition bonds issued by Bondco.  Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization).

 

On July 29, 2015, our board of directors declared a cash distribution between $110 million and $120 million, to be paid to our members in  August 2015 with the exact amount to be determined by management using estimated earnings through July 31, 2015.  During the six months ended June 30, 2015, our board of directors declared, and we paid the following cash distributions to our members:

 

 

 

Membership Interests

 

The following tables present the changes to membership interests during the six months ended June 30, 2015 and 2014:

 

 

 

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Accumulated Other Comprehensive Income (Loss)

 

The following tables present the changes to accumulated other comprehensive income (loss) for the six months ended June 30, 2015 and 2014:

 

 

 

 

 

9.    PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS PLANS

 

We participate in and have liabilities under the Oncor Retirement Plan and the EFH Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  These pension plans provide 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 a combination of their age and years of service, plus monthly interest credits or (ii) a Traditional Retirement Plan Formula based on years of service and the average earnings of the three years of highest earnings.  The interest component of the Cash Balance Formula is variable and is determined using the yield on 30-year Treasury bonds.  Under the Cash Balance Formula, future increases in earnings will not apply to prior service costs. See Note 10 to Financial Statements in our 2014 Form 10-K for additional information regarding our pension plans and the EFH OPEB Plan.

 

In April 2014, we entered into an agreement with EFH Corp. in which we agreed to transfer to the Oncor OPEB Plan effective July 1, 2014, the assets and liabilities related to our eligible current and future retirees as well as certain eligible retirees of EFH Corp. whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp.  Pursuant to the agreement, EFH Corp. will retain its portion of the liability for retiree benefits related to those retirees.  Since the Oncor OPEB Plan offers identical coverages as the EFH OPEB Plan and we and EFH Corp. retain the same responsibility for participants as before, there was no financial impact as a result of the transfer other than from a remeasurement of the Oncor OPEB Plan’s asset values and obligations.  As we are not responsible for EFH Corp.’s portion of the Oncor OPEB Plan’s unfunded liability, that amount is not reported on our balance sheet.

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Our net costs related to pension and OPEB plans for the three and six months ended June 30, 2015 and 2014 were comprised of the following:

 

The discount rates reflected in net pension and OPEB costs in 2015 are 3.95%, 4.19% and 4.23% for the Oncor Retirement Plan, the EFH Retirement Plan and the OPEB plans, respectively.  The expected return on pension and OPEB plan assets reflected in the 2015 cost amounts are 5.25%, 5.38% and 6.65% for the Oncor Retirement Plan, the EFH Retirement Plan and the OPEB plans, respectively.

 

We made cash contributions to the pension plans and OPEB plans of $2 million and $13 million, respectively, during the six months ended June 30, 2015. We expect to make additional cash contributions to the pension plans and OPEB plans of $49 million and $12 million, respectively, during the remainder of 2015 and approximately $373 million and $147 million, respectively, in the 2015 to 2019 period.

 

10.   RELATED-PARTY TRANSACTIONS

 

The following represent our significant related-party transactions.  See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings.

 

 

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Trade accounts and other receivables from EFH Corp. affiliates – net reported on our balance sheet, primarily consisting of trade receivables from TCEH related to these electricity delivery fees, are as follows:

 

 

 

 

 

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Amounts payable to (receivable from) members related to income taxes under the tax sharing agreement and reported on our balance sheet consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments made to members related to income taxes consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Note 8 for information regarding distributions to members and Note 9 for information regarding our participation in EFH Corp. pension and OPEB plans and transactions with EFH Corp. involving employee benefit matters.

 

11.   SUPPLEMENTARY FINANCIAL INFORMATION

 

Major Customers

 

Revenues from TCEH represented 24% and 25% of our total operating revenues for the three months ended June 30, 2015 and 2014, respectively, and 24% and 25% for the six months ended June 30, 2015 and 2014, respectively. Revenues from REP subsidiaries of NRG Energy, Inc., a nonaffiliated entity, collectively represented 15% and 16% of our total operating revenues for the three months ended June 30, 2015 and 2014, respectively, and 16% of our total operating revenues for each of the six-month periods ended June 30, 2015 and 2014. No other customer represented 10% or more of our total operating revenues.

 

Other Income and Deductions

 

 

Interest Expense and Related Charges

 

Restricted Cash

 

All restricted cash amounts reported on our balance sheet at June 30, 2015 and December 31, 2014 relate to the transition bonds.

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Trade Accounts and Other Receivables

 

Trade accounts and other receivables reported on our balance sheet consisted of the following:

 

 

Gross trade accounts receivable at June 30, 2015 and December 31, 2014 included unbilled revenues of $192 million and $182 million, respectively.  At June 30, 2015 and December 31, 2014, REP subsidiaries of NRG Energy, Inc., a nonaffiliated entity, collectively represented approximately 13% and 12% of the nonaffiliated trade accounts receivable amount, respectively.

 

Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by REPs are deferred as a regulatory asset.  Due to commitments made to the PUCT in 2007, we are not allowed to recover bad debt expense, or certain other costs and expenses, from ratepayers in the event of a default or bankruptcy by an affiliate REP.

 

Investments and Other Property

 

Investments and other property reported on our balance sheet consisted of the following:

 

 

Property, Plant and Equipment

 

Property, plant and equipment reported on our balance sheet consisted of the following:

 

 

 

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Intangible Assets

 

Intangible assets (other than goodwill) reported on our balance sheet consisted of the following:

 

 

 

Aggregate amortization expense for intangible assets totaled $16 million and $14 million for the three months ended June 30, 2015 and 2014, respectively, and $32 million and $28 million for the six months ended June 30, 2015 and 2014, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows:

 

 

 

At both June 30, 2015 and December 31, 2014, goodwill totaling $4.1 billion was reported on our balance sheet.  None of this goodwill is being deducted for tax purposes.

 

Other Noncurrent Liabilities and Deferred Credits

 

Other noncurrent liabilities and deferred credits reported on our balance sheet consisted of the following:

 

 

 

 

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Supplemental Cash Flow Information

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2015 and 2014 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements as well as the Risk Factors contained in our 2014 Form 10-K.

 

All dollar amounts in the tables in the following discussion and analysis are stated in millions of US dollars unless otherwise indicated.

 

BUSINESS

 

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas.  Revenues from TCEH represented 24%  and 25% of our reported total operating revenues for the three months ended June 30, 2015 and 2014, respectively, and 24%  and 25% of our reported total operating revenues for the six months ended June 30, 2015 and 2014, respectively.  We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

 

Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.

 

Significant Activities and Events

 

EFH Bankruptcy Proceedings — On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements and a discussion of the proposed change in control of Oncor’s indirect majority owner in connection with such proceedings.

 

The US Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  Since that time, we have collected $127 million of the prepetition amount.  We estimate any potential pre-tax loss

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resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates had not been established as of June 30, 2015.

 

The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential exposure at this time is unknown.  The Plan of Reorganization contemplates potential transactions that would result in a change in control of Oncor or otherwise implicate a regulatory review.  We have made some preliminary preparations for potential change in control filings, including discussions with EFH Corp. and others, in light of the proposals in the EFH Bankruptcy Proceedings and the filing of the Plan of Reorganization and the Disclosure Statement, but cannot predict the result of any transaction or review.  In addition, we will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows. See Notes 2, 7 and 10 to Financial Statements and “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information.

 

For information regarding matters with the PUCT, see discussion below under “Regulation and Rates.”

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RESULTS OF OPERATIONS

 

Operating Data

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(a)Includes small business, large commercial and industrial and all other non-residential distribution points of delivery.

(b)SAIDI is the average number of minutes electric service is interrupted per consumer in a year.  SAIFI is the average number of electric service interruptions per consumer in a year.  CAIDI is the average duration in minutes per electric service interruption in a year.  The statistics presented are based on twelve months ended June 30, 2015 and 2014 data.

(c)A portion of transmission base revenues (TCOS) is recovered from Oncor’s distribution customers through the TCRF rate.

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Financial Results — Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014   

 

Total operating revenues increased $26 million, or 3%, to $938 million in 2015.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:

 

 

 

TCOS Filings Table

 

 

 

* Application pending

 

 

 

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TCRF Filings Table

 

 

 

 

 

 

EECRF Filings Table

 

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*  Application pending

(a)  As of March 2014, average monthly charges are for a residential customer using 1,200 kWh, as the energy efficiency substantive rules require rates to be on a volumetric basis rather than a fixed monthly charge.

 

 

 

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Wholesale transmission service expense increased $14 million, or 8%, to $199 million in 2015 due to higher fees paid to other transmission entities.

 

Operation and maintenance expense was $168 million for both 2015 and 2014. Operation and maintenance expense reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including a $5 million decrease related to the energy efficiency program, which is offset by higher vegetation management costs and higher labor related expenses. The $5 million decrease related to the energy efficiency program resulted in a corresponding $5 million decrease in EECRF surcharges, as described above. Amortization of regulatory assets reported in operation and maintenance expense totaled $13 million for each of the three months ended June 30, 2015 and 2014, respectively.

 

Depreciation and amortization increased $10 million, or 5%, to $220 million in 2015.  The increase reflects $9 million attributed to ongoing investments in property, plant and equipment and $1 million in higher amortization of regulatory assets associated with transition bonds (with an offsetting increase in revenues). 

 

Taxes other than amounts related to income taxes increased $2 million, or 2%, to $108 million in 2015.  The change includes a $1 million increase in property taxes and a $1 million increase in local franchise fees.

 

Other income totaled $1 million in 2015 and $3 million in 2014, and for both periods, consisted primarily of the accretion of an adjustment (discount) to regulatory assets resulting from purchase accounting.  See Note 11 to Financial Statements.

 

Other deductions totaled $7 million in 2015 and $4 million in 2014.  See Note 11 to Financial Statements.

 

Provision in lieu of income taxes totaled $55 million (including a $2 million benefit related to nonoperating income) in 2015 compared to $60 million (all of which related to operating income) in 2014.  The effective income tax rate on pretax income was 35.9% in 2015 and 39.0% in 2014.  The 2015 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to the effect of the 2015 Texas margin tax.

 

Interest expense and related charges decreased $5 million, or 6%, to $84 million in 2015.  The change is attributable to lower average interest rates.

 

Net income increased $4 million, or 4%, to $98 million in 2015.  The change primarily reflects increased revenue from higher distribution base revenues driven by growth in points of delivery, increased revenue from higher transmission rates and lower interest expense partially offset by higher depreciation.  

 

 

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Financial Results — Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014   

 

Total operating revenues increased $55 million, or 3%, to $1,884 million in 2015.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:

 

 

 

 

 

 

 

 

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Wholesale transmission service expense increased $29 million, or 8%, to $393 million in 2015 due to higher fees paid to other transmission entities.

 

Operation and maintenance expense increased $19 million, or 6%, to $353 million in 2015.  The change included $15 million in higher vegetation management costs, $8 million higher labor related costs and the impact of recognizing a PUCT order in the prior period allowing recovery of $3 million of rate case expenses previously written off.  Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including an $8 million decrease related to the energy efficiency program and a $2 million increase related to advanced meters.  Amortization of regulatory assets reported in operation and maintenance expense totaled $26 million for each of the six months ended June 30, 2015 and 2014, respectively.

 

Depreciation and amortization increased $17 million, or 4%, to $437 million in 2015.  The increase reflects  $18 million attributed to ongoing investments in property, plant and equipment, partially offset by $1 million in lower amortization of regulatory assets associated with transition bonds (with an offsetting decrease in revenues).

 

Taxes other than amounts related to income taxes increased $5 million, or 2%, to $220 million in 2015.  The change includes a $3 million increase in property taxes and a $2 million increase in local franchise fees.

 

Other income totaled $4 million in 2015 and $7 million in 2014, and for both periods, consisted primarily of the accretion of an adjustment (discount) to regulatory assets resulting from purchase accounting.  See Note 11 to Financial Statements.

 

Other deductions totaled $12 million in 2015 and $7 million in 2014.  See Note 11 to Financial Statements.

 

Provision in lieu of income taxes totaled $113 million (including a $2 million benefit related to nonoperating income) in 2015 compared to $124 million (including $1 million related to nonoperating income) in 2014.  The effective income tax rate on pretax income was 36.6% in 2015 and 38.5% in 2014.  The 2015 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to the effect of the 2015 Texas margin tax.

 

Interest expense and related charges decreased $12 million, or 7%, to $165 million in 2015.  The change was driven by a $14 million decrease attributable to lower average interest rates partially offset by a $2 million increase due to higher average borrowings reflecting ongoing capital investments.

 

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Net income decreased $1 million, or 1%, to $196 million in 2015.  The change primarily reflects higher operation and maintenance expense and depreciation expense partially offset by increased revenue from higher transmission rates, lower interest expense and lower income taxes.

 

FINANCIAL CONDITION

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows — Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Cash provided by operating activities totaled $574 million and $391 million in 2015 and 2014, respectively. The $183 million increase is the result of a  $144 million decrease in federal income tax payments and a  $58 million decrease in pension and OPEB contributions partially offset by a $20 million increase in storm related repairs.  The decrease in tax payments is the result of the December 2014 enactment of the Tax Increase Prevention Act of 2014 which retroactively reinstated 50% bonus depreciation on certain assets placed into service in 2014 resulting in receivables from our members. We are settling the receivables as the 2015 estimated tax payments are due under the Tax Sharing Agreement.

 

Cash provided by financing activities totaled $48 million and $148 million in 2015 and 2014, respectively.  The $100 million decrease reflected a  $504 million increase in long-term debt repayments and a $55 million increase in distributions to our members, partially offset by a $475 million increase in long-term debt issuances. See Notes 6 and 8 to Financial Statements for additional information regarding long-term debt activity and distributions to our members, respectively.

 

Cash used in investing activities, which consists primarily of capital expenditures, totaled $610 million and $561 million in 2015 and 2014, respectively.  The 2015 activity reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending, partially offset by a $121 million decrease in capital expenditures for Competitive Renewable Energy Zone transmission. 

 

Depreciation and amortization expense reported in the statements of consolidated cash flows was $22 million and $20 million more than the amounts reported in the statements of consolidated income in the six months ended June 30, 2015 and 2014, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense), the accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).

 

Long-Term Debt Activity  — Repayments of long-term debt in the six months ended June 30, 2015 totaled $569 million representing $500 million aggregate principal amount of 6.375% senior secured notes paid at the scheduled maturity date of January 15, 2015 and $69 million representing transition bond principal payments  at scheduled maturity dates.    

 

In March 2015, we issued $350 million aggregate principal amount of 2.950% senior secured notes maturing in April 2025  (2025 Notes) and $375 million aggregate principal amount of 3.750% senior secured notes maturing in April 2045  (2045 Notes, together with the 2025 Notes, the Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $714 million from the sale of the Notes to repay borrowings under our revolving credit facility and for other general corporate purposes.  The Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.

 

See Note 6 to Financial Statements for additional information regarding long-term debt activity.

 

Available Liquidity/Credit Facility — Our primary source of liquidity, aside from operating cash flows, is our ability to borrow under our revolving credit facility.  At June 30, 2015, we had a $2.4 billion secured revolving credit facility.  The revolving credit facility expires in October 2016.  Subject to the limitations described below, available borrowing capacity under our revolving credit facility totaled $1.613 billion and $1.682 billion at June 30,  

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2015 and December 31, 2014, respectively.  We may request an increase in our borrowing capacity of $100 million in the aggregate and up to two one-year extensions, provided certain conditions are met, including lender approval.

 

The revolving credit facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At June 30, 2015, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.  The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that have been certified to the Deed of Trust collateral agent.  Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings.    To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent.  At June 30, 2015, the available bond credits totaled $2.637 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $1.103 billion.  At June 30, 2015, the available borrowing capacity of the revolving credit facility could be fully drawn.

 

Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility.  See Note 5 to Financial Statements for additional information regarding the revolving credit facility.

 

Cash and cash equivalents totaled $16 million and $4 million at June 30, 2015 and December 31, 2014, respectively.  Available liquidity (cash and available revolving credit facility capacity) at June 30, 2015 totaled $1.629 billion reflecting a decrease of $57 million from December 31, 2014.  The decrease reflects our ongoing capital investment in transmission and distribution infrastructure. 

 

We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At June 30, 2015 and December 31, 2014, our regulatory capitalization ratios were 59.6% debt and 40.4% equity and 58.8% debt and 41.2% equity, respectively.  See Note 8 to Financial Statements for discussion of the regulatory capitalization ratio.

 

Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.1 billion in 2015.  Management currently expects to recommend to our board of directors capital expenditures of approximately $1.4 billion in 2016 and approximately $1.5 billion in each of the years 2017 through 2020.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure.

 

We expect cash flows from operations, combined with availability under the revolving credit facility, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.  We do not anticipate the EFH Bankruptcy Proceedings to have a material impact on our liquidity.  Should additional liquidity or capital requirements arise, we may need to access capital markets, generate equity capital or preserve equity through reductions or suspension of distributions to members.  In addition, we may also consider new debt issuances, repurchases, exchange offers and other transactions in order to refinance or manage our long-term debt.  The inability to raise capital on favorable terms or failure of counterparties to perform under credit or other financial agreements, particularly during any uncertainty in the financial markets, could impact our ability to sustain and grow the business and would likely increase capital costs that may not be recoverable through rates.

 

Distributions — On July 29, 2015, our board of directors declared a cash distribution between $110 million and $120 million, to be paid to our members in August 2015 with the exact amount to be determined by management using estimated earnings through July 31, 2015.  During the six months ended June 30, 2015, our board of directors declared and we paid the following cash distributions to our members: 

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See Note 8 to Financial Statements for discussion of the distribution restriction.

 

Pension and OPEB Plan Funding — Our funding for the pension plans and the OPEB plans in the calendar year 2015 is expected to total $51 million and $25 million, respectively, and approximately $373 million and $147 million, respectively, in the 2015 to 2019 period.  In the six months ended June 30, 2015, we made cash contributions to the pension plans and the OPEB plans of $2 million and $13 million, respectively.

 

Financial Covenants, Credit Rating Provisions and Cross Default Provisions — Our revolving credit facility contains a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with US GAAP).  The debt calculation excludes transition bonds issued by Bondco, but includes the unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with US GAAP plus indebtedness described above.  At June 30, 2015, we were in compliance with this covenant.

 

Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In particular, a decline in credit ratings would increase the cost of our revolving credit facility (as discussed below).  In the event any adverse action with respect to our credit ratings takes place and causes borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.

 

Most of our large suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with us.  If our credit ratings decline, the costs to operate our business could increase because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with us.

 

Presented below are the credit ratings assigned for our debt securities at July 30, 2015.

 

 

 

 

As described in Note 7 to Financial Statements in our 2014 Form 10-K, our long-term debt, excluding Bondco’s non-recourse debt, is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.

 

A rating reflects only the view of a rating agency, and is not a recommendation to buy, sell or hold securities.  Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.

 

Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt

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or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the current ratings assigned to our debt securities at July 30, 2015, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.125%.  A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.

 

Material Cross Default Provisions — Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms or to observe other covenants that could result in an acceleration of payments due.  Such provisions are referred to as “cross default” provisions.

 

Under our revolving credit facility, a default by us or our subsidiary in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($780 million in short-term borrowings and $7 million in letters of credit at June 30, 2015) under that facility to be accelerated.  Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.

 

Guarantees — At June 30, 2015, we did not have any material guarantees.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

At June 30, 2015, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.

 

COMMITMENTS AND CONTINGENCIES

 

See Note 7 to Financial Statements for discussion of commitments and contingencies.

 

CHANGES IN ACCOUNTING STANDARDS

 

See Note 1 to Financial Statements for discussion of changes in accounting standards.

 

REGULATION AND RATES

 

State Legislation

 

During the 2015 legislative session, the Texas Legislature passed Senate Bill 774 which provides a two-year extension of the provisions of the 2011 periodic rate adjustment (or Distribution Cost Recovery Factor) bill, and requires the PUCT to provide a study of alternative ratemaking mechanisms prior to the next regular legislative session in 2017.  The Legislature also passed The Franchise Tax Reduction Act of 2015 that reduces the Texas margin tax rate from 1% to 0.75%. The estimated impact to Oncor for 2015 is a tax reduction of approximately $4 million (after federal tax). No other legislation passed during the 2015 legislative session is expected to have a material impact on our financial position, results of operations or cash flows.

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Matters with the PUCT

2008 Rate Review (PUCT Docket No. 35717) — In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (PUCT Docket No. 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011

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with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015.  At the request of the court the parties filed responses to the petitions for review in June 2015.   We filed a reply brief on July 30, 2015, the deadline for all parties to file replies.  There is no deadline for the court to act.  If our appeals efforts are unsuccessful and the proposed consolidated tax savings adjustment is implemented, we estimate that on remand, the impact on earnings of the consolidated tax savings adjustment’s value could range from zero, as originally determined by the PUCT in Docket 35717, to a $130 million loss (after tax).  We do not believe that any of the other issues ruled upon by the Austin Court of Appeals would result in a material impact to our results of operations or financial condition.

 

Summary

 

We cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions.  Such actions or changes could significantly alter our basic financial position, results of operations or cash flows.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk that we may experience a loss in value as a result of changes in market conditions such as interest rates that may be experienced in the ordinary course of business.  We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place.  All of our long-term debt at June 30, 2015 and December 31, 2014 carried fixed interest rates.

 

Except as discussed below, the information required hereunder is not significantly different from the information set forth in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2014 Form 10-K and is therefore not presented herein.

 

Credit Risk

 

Credit risk relates to the risk of loss associated with nonperformance by counterparties.  Our customers consist primarily of REPs.  As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the PUCT.  Meeting these standards does not guarantee that a REP will be able to perform its obligations.  REP certificates granted by the PUCT are subject to suspension and revocation for significant violation of PURA and PUCT rules.  Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the PUCT.  We believe PUCT rules that allow for the recovery of uncollectible amounts due from nonaffiliated REPs through rates significantly reduce our credit risk.

 

Our net exposure to credit risk associated with trade accounts and other receivables from affiliates totaled $134 million at June 30, 2015, consisting of $84 million of billed receivables and $57 million of unbilled receivables, of which $7 million is secured by letters of credit posted by TCEH for our benefit. Under PUCT rules, unbilled amounts are billed within the following month and amounts are due in 35 days of billing.  Due to commitments made to the PUCT, this concentration of accounts receivable from affiliates increases the risk that a default could have a material effect on earnings and cash flows.  See Notes 2, 7 and 10 to Financial Statements for additional information regarding the potential impacts of the EFH Bankruptcy Proceedings on our transactions with affiliates and for additional information regarding our transactions involving members of the Texas Holdings Group.

 

Our exposure to credit risk associated with trade accounts receivable from nonaffiliates totaled $435 million at June 30, 2015.  The nonaffiliated receivable amount is before the allowance for uncollectible accounts, which totaled $5 million at June 30, 2015.  The nonaffiliated exposure includes trade accounts receivable from REPs totaling $325 million, which are almost entirely noninvestment grade.  At June 30, 2015, REP subsidiaries of a nonaffiliated entity collectively represented approximately 13% of the nonaffiliated trade receivable amount.  No other nonaffiliated parties represented 10% or more of the total trade accounts receivable amount.  We view our exposure to this customer to be within an acceptable level of risk tolerance considering PUCT rules and regulations; however, this concentration increases the risk that a default could have a material effect on cash flows.

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FORWARD-LOOKING STATEMENTS

 

This report and other presentations made by us contain “forward-looking statements.”  All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that we expect or anticipate to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of our business and operations (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “should,” “projection,” “target,” “goal,” “objective” and “outlook”), are forward-looking statements.  Although we believe that in making any such forward-looking statement our expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors under “Item 1A.  Risk Factors” and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2014 Form 10-K, “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report and the following important factors, among others, that could cause actual results to differ materially from those projected in such forward-looking statements:

 

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Any forward-looking statement speaks only at the date on which it is made, and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.  New factors emerge from time to time, and it is not possible for us to predict all of them; nor can we assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.  As such, you should not unduly rely on such forward-looking statements.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of our 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 at the end of the current period included in this quarterly report.  Based on the evaluation performed, our management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective.  During the most recent fiscal quarter covered by this report, no changes in internal controls over financial reporting have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

Reference is made to the discussion in Notes 3 and 7 to Financial Statements regarding legal and regulatory proceedings.

 

 

ITEM 1A.   RISK FACTORS

 

There are numerous factors that affect our business and results of operations, many of which are beyond our control.  In addition to the other information set forth in this report, including “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you should carefully consider the factors discussed in “Part I, Item 1A.  Risk Factors” in our 2014 Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in such reports are not the only risks we face.

 

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.   MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.   OTHER INFORMATION

 

LLC Agreement Amendment

 

On July 27, 2015, Oncor’s members (Oncor Holdings, Texas Transmission and Oncor Management Investment LLC) adopted Amendment No. 2 to the Second Amended and Restated Limited Liability Company Agreement of Oncor Electric Delivery Company LLC (LLC Agreement Amendment). The LLC Agreement Amendment modifies our Second Amended and Restated Limited Liability Company Agreement (as amended, LLC Agreement) to increase the number of required Independent Directors (as defined in the LLC Agreement) on our board of directors (Board) from six to seven, thereby increasing the total size of our board of directors from eleven members to twelve members. Other than as described above, the material terms of the LLC Agreement remain unchanged.  The LLC Agreement Amendment was approved by a majority of Oncor’s Board and all of Oncor’s Independent Directors. The foregoing description of the LLC Agreement Amendment is qualified in its entirety by reference to the complete terms of the LLC Agreement Amendment, which is filed as an exhibit to this Quarterly Report on Form 10-Q and incorporated by reference herein. 

 

Chairman of the Board Appointment

 

Pursuant to Section 10(a)(ii) of the LLC Agreement, Independent Directors on our Board shall be designated by Oncor Holdings at the direction, in writing, of the nominating committee of the Oncor Holdings board of directors. On July 27, 2015, in connection with the adoption of the Amendment by Oncor’s members, the nominating committee of the Oncor Holdings board of directors directed Oncor Holdings to appoint James R. Adams to Oncor’s Board as an Independent Director and Chairman of the Board. Oncor Holdings appointed Mr. Adams to Oncor’s Board as an Independent Director and Chairman of the Board effective July 27, 2015.  There are

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no arrangements or understandings between Mr. Adams and any other person pursuant to which he was appointed a director of Oncor, and there are no family relationships between Mr. Adams and any director, executive officer or any person nominated or chosen by Oncor to become a director or executive officer. Additionally, there are no related person transactions (within the meaning of Item 404(a) of Regulation S-K) between Mr. Adams and Oncor. The nominating committee of Oncor Holdings also appointed Mr. Adams to the Oncor Holdings board of directors as an Independent Director and Chairman of the Board effective July 27, 2015.  As a member of our Board and the board of directors of Oncor Holdings, Mr. Adams will be compensated pursuant to Oncor’s standard compensation program for Independent Directors. He will also receive an additional annual fee of $150,000 for serving as Oncor’s Chairman of the Board.

 

Mr. Adams, 76, has served as a business consultant, business advisor and private investor since 1998. He previously served from 1996-1998 as the Chairman of Texas Instruments Incorporated, a NASDAQ-listed, global Fortune 500 semiconductor company. Prior to 1996, Mr. Adams had an extensive career in the telecommunications industry, serving in various leadership positions with SBC Communications (now AT&T Inc.) and its affiliates and predecessors from 1965 until his retirement in 1995, including serving as Group President of SBC Communications Inc. from 1993-1995, President and CEO of Southwestern Bell Telephone Company from 1989-1993, President of the Texas division of Southwestern Bell from 1984-1989, and Executive Vice President of AT&T Residence Business from 1981-1984. Mr. Adams currently serves as a senior advisor to Texas Next Capital, a private equity partnership that invests in Texas businesses to drive economic growth in Texas. He also serves on the boards of directors of TransPecos Banks, TransPecos Financial Corp. and TransPecos Development Corp. and several non-profit organizations. He previously served as a board member of Texas Instruments Inc. from 1989-2010, and as a board member of Storage Tek Inc., Inet Inc., Prodigy Inc., Telefonos de Mexico, Republic Bank Corporation, and Interfirst Corporation.

 

Executive Change in Control Policy

 

On July 29, 2015, our Board adopted a Third Amended and Restated Executive Change in Control Policy (the Amended CIC Policy) effective as of August 1, 2015 for our executive team, which consists of our executive officers and certain other members of management.  The Amended CIC Policy amends and restates the Second Amended and Restated Executive Change in Control Policy (Original CIC Policy). The Amended CIC Policy expands the definition of good reason to include (i) an executive’s resigning after being asked or required to resign in connection with a change in control, and (ii) an adverse change in the executive’s: (a) reporting level or responsibilities, (b) title and/or scope of responsibility, (c) management authority, or (d) the scope or size of the business or entity for which the executive had responsibility, in each case as in effect immediately prior to a change in control.

 

The Amended CIC Policy also revises the Original CIC Policy’s definition of change in control. Under the Amended CIC Policy, a change in control shall be the occurrence of any of the following events: (i) the Sponsor Group ceases to beneficially own a majority of our outstanding equity interest, (ii) any sale, lease, exchange or other transfer (in one transaction or in a series of related transactions) of all, or substantially all, of our assets, other than to an entity or entities of which the Sponsor Group beneficially owns a majority of the outstanding equity interest; (iii) individuals who as of August 1, 2015, constitute Oncor’s Board (Incumbent Board) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to August 1, 2015 whose election or nomination for election was approved by a vote of at least seventy-five percent (75%) of the directors comprising the Incumbent Board  shall be considered as though such person were a member of the Incumbent Board; or (iv) the consummation of a court-approved plan of reorganization in the EFH Bankruptcy Proceedings.

 

Other than as described herein, the material terms of the Amended CIC Policy remain the same as the Original CIC Policy described in our 2014 Form 10-K.  The foregoing description of the Amended CIC Policy is qualified in its entirety by reference to the complete terms of the Amended CIC Policy, which is filed as an exhibit to this Quarterly Report on Form 10-Q and incorporated by reference herein.

 

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ITEM 6.   EXHIBITS

 

 

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*   Incorporated herein by reference.

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SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

 

 

Date:  July 30, 2015

 

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EXHIBIT INDEX

 

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*   Incorporated herein by reference.

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