Attached files

file filename
EX-99.B - EX-99.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20150930ex99b2ae46b.htm
EX-31.A - EX-31.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20150930ex31ac14926.htm
EX-32.B - EX-32.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20150930ex32b7af747.htm
EX-31.B - EX-31.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20150930ex31be1e952.htm
EX-32.A - EX-32.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20150930ex32a4b0e79.htm

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

____________________

 

FORM 10-Q

 

 

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

 

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

 

― OR ―

 

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

 

____________________

 

 

Commission File Number 333-100240

 

 

Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware

75-2967830

(State of Organization)

(I.R.S. Employer Identification No.)

 

 

1616 Woodall Rodgers Fwy., Dallas, TX  75202

(214) 486-2000

(Address of Principal Executive Offices)

(Registrant’s Telephone Number)

 

____________________

 

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 October 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.

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

Page

GLOSSARY 

2

PART I.   FINANCIAL INFORMATION 

5

Item 1.   Financial Statements (Unaudited) 

5

Condensed Statements of Consolidated Income —
Three and Nine Months Ended September 30, 2015 and 2014
 

5

Condensed Statements of Consolidated Comprehensive Income —
Three and Nine Months Ended September 30, 2015 and 2014
 

5

Condensed Statements of Consolidated Cash Flows —
Nine Months Ended September 30, 2015 and 2014
 

6

Condensed Consolidated Balance Sheets —
September 30, 2015 and December 31, 2014
 

7

Notes to Condensed Consolidated Financial Statements 

8

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 

26

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

39

Item 4.     Controls and Procedures 

41

PART II.    OTHER INFORMATION 

42

Item 1.     Legal Proceedings 

42

Item 1A   Risk Factors 

42

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds 

42

Item 3.     Defaults Upon Senior Securities 

42

Item 4.    MINE SAFETY DISCLOSURES 

42

Item 5.     Other Information 

42

Item 6.     Exhibits 

43

SIGNATURE 

45

 

 

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-QThe 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.

1

 


 

GLOSSARY

 

 

 

 

 

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

 

2014 Form 10-K

Oncor’s Annual Report on Form 10-K for the year ended December 31, 2014

AMS

advanced metering system

Bondco

Refers to Oncor Electric Delivery Transition Bond Company LLC, a wholly-owned consolidated bankruptcy-remote financing subsidiary of Oncor that has issued securitization (transition) bonds to recover certain regulatory assets and other costs.

Deed of Trust

Deed of Trust, Security Agreement and Fixture Filing, dated as of May 15, 2008, made by Oncor to and for the benefit of The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York Mellon, formerly The Bank of New York), as collateral agent, as amended

EECRF

energy efficiency cost recovery factor

EFCH

Refers to Energy Future Competitive Holdings Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context.

EFH Bankruptcy Proceedings

Refers to voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code filed in US Bankruptcy Court for the District of Delaware on April 29, 2014 (EFH Petition Date) by EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.

EFH Corp.

Refers to Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context.  Its major subsidiaries include Oncor and TCEH.

EFH OPEB Plan

Refers to an EFH Corp. sponsored plan (in which Oncor participated prior to July 1, 2014) that offers certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees from the company.

EFH Petition Date

April 29, 2014.  See EFH Bankruptcy Proceedings above.

EFH Retirement Plan

Refers to a defined benefit pension plan sponsored by EFH Corp., in which Oncor participates.  See Oncor Retirement Plan below.

EFIH

Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings.

ERCOT

Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas

ERISA

Employee Retirement Income Security Act of 1974, as amended

Fitch

Fitch Ratings, Ltd. (a credit rating agency)

GAAP

generally accepted accounting principles

Investment LLC

Refers to Oncor Management Investment LLC, a limited liability company and minority membership interest owner (approximately 0.22%) of Oncor, whose managing member is Oncor and whose Class B Interests are owned by certain members of the management team and independent directors of Oncor.

IRS

US Internal Revenue Service

LIBOR

London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market

Luminant

Refers to subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas.

Moody’s

Moody’s Investors Services, Inc. (a credit rating agency)

2

 


 

Oncor

Refers to Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings, and/or its wholly-owned consolidated bankruptcy-remote financing subsidiary, Bondco, depending on context.

Oncor Holdings

Refers to Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of EFIH and the direct majority owner (approximately 80.03%) of Oncor, and/or its subsidiaries, depending on context.

Oncor OPEB Plan

Refers to a plan sponsored by Oncor (effective July 1, 2014) that offers certain postretirement health care and life insurance benefits to eligible Oncor retirees, certain eligible EFH Corp. retirees, and their eligible dependents.

Oncor Retirement Plan

Refers to the defined benefit pension plan sponsored by Oncor (effective January 1, 2013).

Oncor Ring-Fenced Entities

Refers to Oncor Holdings and its direct and indirect subsidiaries, including Oncor.

OPEB

other postretirement employee benefits

PUCT

Public Utility Commission of Texas

PURA

Texas Public Utility Regulatory Act

purchase accounting

The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or “purchase price” of a business combination, including the amount paid for the equity and direct transaction costs, are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values.  The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill.

REP

retail electric provider

S&P

Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc. (a credit rating agency)

SEC

US Securities and Exchange Commission

Sponsor Group

Refers collectively to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (KKR), TPG Global, LLC (together with its affiliates, TPG) and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Holdings.

TCEH

Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context.  Its major subsidiaries include Luminant and TXU Energy.

TCOS

transmission cost of service

TCRF

transmission cost recovery factor

Texas Holdings

Refers to Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group that owns substantially all of the common stock of EFH Corp.

Texas Holdings Group

Refers to Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring-Fenced Entities.

Texas margin tax

A privilege tax imposed on taxable entities chartered/organized or doing business in the State of Texas that, for accounting purposes, is reported as an income tax.  Also referred to as “Texas franchise tax” and/or “Texas gross margin tax.”

 

 

3

 


 

Texas Transmission

Refers to Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor.  Texas Transmission is an entity indirectly owned by a private investment group led by OMERS Administration Corporation, acting through its infrastructure investment entity, Borealis Infrastructure Management Inc., and the Government of Singapore Investment Corporation, acting through its private equity and infrastructure arm, GIC Special Investments Pte Ltd.  Texas Transmission is not affiliated with EFH Corp., any of EFH Corp.’s subsidiaries or any member of the Sponsor Group.

TXU Energy

Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of TCEH engaged in the retail sale of electricity to residential and business customers.  TXU Energy is a REP in competitive areas of ERCOT.

US

United States of America

 

 

 

4

 


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Nonaffiliates

 

$

793 

 

$

773 

 

$

2,218 

 

$

2,137 

Affiliates

 

 

279 

 

 

281 

 

 

739 

 

 

746 

Total operating revenues

 

 

1,072 

 

 

1,054 

 

 

2,957 

 

 

2,883 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale transmission service

 

 

201 

 

 

193 

 

 

595 

 

 

557 

Operation and maintenance

 

 

186 

 

 

183 

 

 

539 

 

 

517 

Depreciation and amortization

 

 

217 

 

 

218 

 

 

653 

 

 

638 

Provision in lieu of income taxes (Note 10)

 

 

99 

 

 

98 

 

 

214 

 

 

221 

Taxes other than amounts related to income taxes

 

 

116 

 

 

115 

 

 

336 

 

 

330 

Total operating expenses

 

 

819 

 

 

807 

 

 

2,337 

 

 

2,263 

Operating income

 

 

253 

 

 

247 

 

 

620 

 

 

620 

Other income and deductions:

 

 

 

 

 

 

 

 

 

 

 

 

Other income (Note 11)

 

 

 

 

 

 

 

 

10 

Other deductions (Note 11)

 

 

 

 

 

 

21 

 

 

11 

Nonoperating provision in lieu of income taxes

 

 

(3)

 

 

 -

 

 

(6)

 

 

Interest income (Note 11)

 

 

(1)

 

 

 

 

(1)

 

 

Interest expense and related charges (Note 11)

 

 

84 

 

 

89 

 

 

250 

 

 

266 

Net income

 

$

163 

 

$

158 

 

$

359 

 

$

355 

 

See Notes to Financial Statements.

 

 

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

163 

 

$

158 

 

$

359 

 

$

355 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges – derivative value net loss recognized in net income (net of tax expense of $–, $–, $– and $1) (Note 1)

 

 

 

 

 

 

 

 

Defined benefit pension plans (net of tax benefit of $–, $–, $– and $–) (Note 9)

 

 

 -

 

 

(1)

 

 

 

 

(1)

Total other comprehensive income (loss)

 

 

 

 

 -

 

 

 

 

Comprehensive income

 

$

164 

 

$

158 

 

$

361 

 

$

356 

 

See Notes to Financial Statements.

5


 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

 

(millions of dollars)

 

 

 

 

 

 

 

Cash flows — operating activities:

 

 

 

 

 

 

Net income

 

$

359 

 

$

355 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

686 

 

 

669 

Provision in lieu of deferred income taxes – net

 

 

(65)

 

 

(36)

Other – net 

 

 

(2)

 

 

(2)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Regulatory accounts related to reconcilable tariffs (Note 4)

 

 

41 

 

 

(20)

Other operating assets and liabilities

 

 

34 

 

 

(101)

Cash provided by operating activities

 

 

1,053 

 

 

865 

Cash flows — financing activities:

 

 

 

 

 

 

Issuances of long-term debt (Note 6)

 

 

725 

 

 

250 

Repayments of long-term debt (Note 6)

 

 

(594)

 

 

(89)

Net increase in short-term borrowings (Note 5)

 

 

(3)

 

 

(25)

Distributions to members (Note 8)

 

 

(283)

 

 

(181)

Debt discount, premium, financing and reacquisition expenses – net

 

 

(11)

 

 

(4)

Cash used in financing activities

 

 

(166)

 

 

(49)

Cash flows — investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(893)

 

 

(822)

Other – net 

 

 

20 

 

 

(4)

Cash used in investing activities

 

 

(873)

 

 

(826)

Net change in cash and cash equivalents

 

 

14 

 

 

(10)

Cash and cash equivalents — beginning balance

 

 

 

 

27 

Cash and cash equivalents — ending balance

 

$

18 

 

$

17 

 

 

See Notes to Financial Statements.

6


 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

At September 30,

 

At December 31,

 

 

2015

 

2014

 

 

(millions of dollars)

 

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

18 

 

$

Restricted cash — Bondco (Note 11)

 

 

62 

 

 

56 

Trade accounts receivable from nonaffiliates – net (Note 11)

 

 

444 

 

 

407 

Trade accounts and other receivables from affiliates – net (Note 10)

 

 

156 

 

 

118 

Amounts receivable from members related to income taxes (Note 10)

 

 

 -

 

 

180 

Materials and supplies inventories — at average cost

 

 

80 

 

 

73 

Prepayments and other current assets

 

 

90 

 

 

88 

Total current assets

 

 

850 

 

 

926 

Restricted cash — Bondco (Note 11)

 

 

 -

 

 

16 

Investments and other property (Note 11)

 

 

95 

 

 

97 

Property, plant and equipment – net (Note 11)

 

 

12,908 

 

 

12,463 

Goodwill (Note 11) 

 

 

4,064 

 

 

4,064 

Regulatory assets – net ― Oncor (Note 4)

 

 

1,148 

 

 

1,321 

Regulatory assets – net ― Bondco (Note 4)

 

 

29 

 

 

108 

Other noncurrent assets 

 

 

71 

 

 

67 

Total assets

 

$

19,165 

 

$

19,062 

LIABILITIES AND MEMBERSHIP INTERESTS

Current liabilities:

 

 

 

 

 

 

Short-term borrowings (Note 5)

 

$

708 

 

$

711 

Long-term debt due currently ― Oncor (Note 6)

 

 

 -

 

 

500 

Long-term debt due currently ― Bondco (Note 6)

 

 

86 

 

 

139 

Trade accounts payable to nonaffiliates

 

 

164 

 

 

202 

Amounts payable to members related to income taxes (Note 10)

 

 

32 

 

 

24 

Accrued taxes other than amounts related to income taxes

 

 

150 

 

 

174 

Accrued interest

 

 

67 

 

 

93 

Other current liabilities

 

 

149 

 

 

156 

Total current liabilities

 

 

1,356 

 

 

1,999 

Long-term debt, less amounts due currently ― Oncor (Note 6)

 

 

5,681 

 

 

4,956 

Long-term debt, less amounts due currently ― Bondco (Note 6)

 

 

 -

 

 

41 

Liability in lieu of deferred income taxes (Note 10)

 

 

2,510 

 

 

2,559 

Other noncurrent liabilities and deferred credits (Note 11)

 

 

2,022 

 

 

1,989 

Total liabilities

 

 

11,569 

 

 

11,544 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Membership interests (Note 8):

 

 

 

 

 

 

Capital account ― number of interests outstanding 2015 and 2014 – 635,000,000 

 

 

7,701 

 

 

7,625 

Accumulated other comprehensive loss

 

 

(105)

 

 

(107)

Total membership interests

 

 

7,596 

 

 

7,518 

Total liabilities and membership interests

 

$

19,165 

 

$

19,062 

 

See Notes to Financial Statements.

7


 

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 25% and 26% of our total operating revenues for the nine months ended September 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 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 therein.  All intercompany items and transactions have been eliminated in consolidation.  Certain information and

8


 

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.

 

 

 

9


 

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 (collectively, the EFH Debtors),  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 feesAs 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 immaterialA provision for uncollectible accounts from affiliates has not been established  as of September 30, 2015.

 

 

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

 

As part of the EFH Bankruptcy Proceedings, on September 21, 2015, the EFH Debtors filed their fifth amended plan of reorganization (as such may be amended from time to time, Plan of Reorganization) and related amended disclosure statement (the Disclosure Statement).  Also on September 21, 2015, the bankruptcy court approved the Disclosure Statement and the EFH Debtors’ related Plan of Reorganization solicitation procedures.  The EFH Debtors are in the process of soliciting votes on the Plan of Reorganization, and a hearing on confirmation of the Plan of Reorganization is scheduled to begin on November 3, 2015.  We cannot predict the outcome of the creditor vote on the Plan of Reorganization or the confirmation hearing.

 

In general, the Plan of Reorganization proposes a merger and investment structure that involves a tax-free deconsolidation of TCEH from EFH Corp., immediately followed by the acquisition of reorganized EFH Corp. financed by existing TCEH creditors and third party investors.  In this regard, the Plan of Reorganization provides for a series of transactions that would lead to a significant change in the indirect equity ownership of Oncor.  Subject to the approval of the bankruptcy court, acquisition entities (Purchasers) controlled by an investor group (collectively, the Investor Group) consisting of certain unsecured creditors of TCEH and an affiliate of Hunt Consolidated, Inc. (Hunt), as well as certain other investors designated by Hunt to acquire (EFH Acquisition) reorganized EFH Corp. (Reorganized EFH), would acquire pursuant to a merger and purchase agreement direct or indirect equity interests in Reorganized EFH and EFIH that indirectly represent all of the outstanding equity interests in Oncor Holdings and at least 80.03% of the outstanding equity interests in Oncor.  As part of the transactions contemplated by the merger and purchase agreement, among other things, the Investor Group intends to raise up to $12.6 billion of equity and debt financing to invest in Reorganized EFH, and a successor to Reorganized EFH will be converted to a real estate investment trust (REIT) under the Internal Revenue Code.

 

In addition, and in connection with the merger and purchase agreement referred to above, at the request of and with the consent of EFIH, we and Oncor Holdings entered into a letter agreement with the Purchasers.  The letter agreement sets forth certain rights and obligations of the Oncor entities and the Purchasers to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the EFH Acquisition and the other transactions described in the merger and purchase agreement.

 

The letter agreement is not intended to give the Purchasers, directly or indirectly, the right to control or direct the operations of any Oncor entity prior to the receipt of all approvals required by the bankruptcy court, the PUCT and other governmental entities and the consummation of the EFH Acquisition and related transactions (if and when such transactions are consummated).  In addition, Oncor Holdings and Oncor have not endorsed or approved any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by the Purchasers involving Oncor Holdings or Oncor, and the parties acknowledge that further action will be required by Oncor Holdings and Oncor in order for any such restructuring or other transaction to be completed. 

10


 

 

In connection with the proposed EFH Acquisition, EFH Corp. has taken the position that, unless the Purchasers have otherwise acquired, or entered into a definitive agreement with Texas Transmission for the acquisition of the equity interest in Oncor held by Texas Transmission at the consummation of the EFH Acquisition, certain of EFH Corp.’s  rights contained in the Investor Rights Agreement (Investor Rights Agreement), dated November 2008 among Oncor and certain of its direct and indirect equity holders, including EFH Corp. and Texas Transmission, would require Texas Transmission to sell its equity interest in Oncor to the Purchasers in connection with the EFH Acquisition. In this regard, on October 19, 2015, EFH filed a complaint against Texas Transmission alleging breach of Texas Transmission’s obligations under the Investor Rights Agreement for failing to agree to sell its equity interest in Oncor in connection with the proposed EFH Acquisition.  We cannot predict the outcome of this pending litigation between EFH Corp. and Texas Transmission relating to the Investor Rights Agreement and the impact of such litigation on the EFH Acquisition and related transactions.

 

As a general matter, we cannot predict the outcome of the EFH Bankruptcy Proceedings and the related creditor vote and other stakeholder negotiations, including whether the bankruptcy court will approve the EFH Acquisition and the other transactions contemplated by the Plan of Reorganization or whether any such transactions will (or when they will) ultimately close. Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict.  In addition to the requirements of the US Bankruptcy Code or the bankruptcy court, any such transactions would be the subject of customary closing conditions, including receipt of all applicable regulatory approvals.  In this regard, on September 29, 2015, Oncor and the Purchasers filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Plan of Reorganization.  Regulatory approvals with respect to those transactions also are the subject of a pending application filed with the Federal Energy Regulatory Commission.  As indicated above, such approvals remain pending, and there can be no assurance if or when the required regulatory approvals will be obtained or if the conditions to any such approvals will be acceptable to the Purchasers.

 

The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on Oncor remains unknown.  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 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

11


 

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 and replies in June and July 2015, respectively.   The Texas Supreme Court subsequently requested full briefing on the merits, with the briefing period ending on December 9, 2015. 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.

 

Change in Control Review

 

In connection with the EFH Acquisition contemplated by the Plan of Reorganization filed in the EFH Bankruptcy Proceedings, on September 29, 2015, Oncor and the Purchasers in the proposed EFH Acquisition filed a joint report and application for regulatory approvals pursuant to PURA. For additional information on the EFH Acquisition and application for regulatory approval, see Note 2 to Financial Statements.

 

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

12


 

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.

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Rate Recovery/Amortization Period at

 

Carrying Amount At

 

 

September 30, 2015

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Regulatory assets:

 

 

 

 

 

 

 

 

Generation-related regulatory assets securitized
  by transition bonds (a)(e)

 

1 year

 

$

53 

 

$

148 

Employee retirement costs 

 

4 years

 

 

43 

 

 

55 

Employee retirement costs to be reviewed (b)(c)

 

To be determined

 

 

279 

 

 

246 

Employee retirement liability (a)(c)(d)

 

To be determined

 

 

810 

 

 

865 

Self-insurance reserve (primarily storm recovery

  costs) ― net

 

4 years

 

 

103 

 

 

127 

Self-insurance reserve to be reviewed ― net (b)(c)

 

To be determined

 

 

321 

 

 

242 

Securities reacquisition costs

  (pre-industry restructure)

 

2 years

 

 

16 

 

 

23 

Securities reacquisition costs

  (post-industry restructure) ― net

 

Terms of related debt

 

 

 

 

Recoverable amounts in lieu of deferred

  income taxes ― net

 

Life of related asset or liability

 

 

11 

 

 

14 

Deferred conventional meter and metering

  facilities depreciation

 

Largely 5 years

 

 

106 

 

 

123 

Deferred AMS costs

 

To be determined

 

 

152 

 

 

113 

Energy efficiency performance bonus (a)

 

1 year

 

 

15 

 

 

22 

Under-recovered wholesale transmission
  service expense ― net (a)

 

1 year

 

 

 -

 

 

26 

Other regulatory assets

 

Various

 

 

 

 

12 

Total regulatory assets

 

 

 

 

1,926 

 

 

2,023 

Regulatory liabilities:

 

 

 

 

 

 

 

 

Estimated net removal costs

 

Life of utility plant

 

 

646 

 

 

531 

Investment tax credit and protected excess

  deferred taxes

 

Various

 

 

14 

 

 

18 

Over-collection of transition bond revenues (a)(e)

 

1 year

 

 

30 

 

 

32 

Energy efficiency programs (a)

 

Not applicable

 

 

20 

 

 

13 

Over-recovered wholesale transmission

  service expense ― net (a)

 

1 year

 

 

39 

 

 

 -

Total regulatory liabilities

 

 

 

 

749 

 

 

594 

Net regulatory asset

 

 

 

$

1,177 

 

$

1,429 

____________

(a)

Not earning a return in the regulatory rate-setting process.

(b)

Costs incurred since the period covered under the last rate review.

(c)

Recovery is specifically authorized by statute or by the PUCT, subject to reasonableness review.

(d)

Represents unfunded liabilities recorded in accordance with pension and OPEB accounting standards.

(e)

Bondco net regulatory assets of $29 million at September 30, 2015 consisted of $51 million included in generation-related regulatory assets net of the regulatory liability for over-collection of transition bond revenues of $22 million (excludes $8 million of over-collections related to Series 2003-1 transition bonds assumed by Oncor for final settlement).  Bondco net regulatory assets of $108 million at December 31, 2014 consisted of $140 million included in generation-related regulatory assets net of the regulatory liability for over-collection of transition bond revenues of $32 million.

13


 

 

5.    BORROWINGS UNDER CREDIT FACILITIES    

 

At September 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.  In October 2015, we exercised one of the two one-year extensions available to us and extended the term of the revolving credit facility to October 2017.  In addition, we exercised our option to permanently reduce the revolving loan commitment available under the revolving credit facility. As a result of this reduction, the revolving loan commitment available under the revolving credit facility was reduced to $2.0 billion on October 9, 2015.    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 September 30, 2015, we had outstanding borrowings under the revolving credit facility totaling $708 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 September 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 September 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 September 30, 2015 and December 31, 2014 was $1.685 billion and $1.682 billion, respectively.  As discussed above, in October 2015 we reduced the revolving loan commitment under the revolving credit facility by $400 million.  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 September 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 September 30, 2015, we were in compliance with this covenant and with all other covenants.

14


 

 

6.    LONG-TERM DEBT

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014

 

 

 

 

 

 

 

Oncor (a):

 

 

 

 

 

 

6.375% Fixed Senior Notes due January 15, 2015

 

$

 -

 

$

500 

5.000% Fixed Senior Notes due September 30, 2017

 

 

324 

 

 

324 

6.800% Fixed Senior Notes due September 1, 2018

 

 

550 

 

 

550 

2.150% Fixed Senior Notes due June 1, 2019

 

 

250 

 

 

250 

5.750% Fixed Senior Notes due September 30, 2020

 

 

126 

 

 

126 

4.100% Fixed Senior Notes due June 1, 2022

 

 

400 

 

 

400 

7.000% Fixed Debentures due September 1, 2022

 

 

800 

 

 

800 

2.950% Fixed Senior Notes due April 1, 2025

 

 

350 

 

 

 -

7.000% Fixed Senior Notes due May 1, 2032

 

 

500 

 

 

500 

7.250% Fixed Senior Notes due January 15, 2033

 

 

350 

 

 

350 

7.500% Fixed Senior Notes due September 1, 2038

 

 

300 

 

 

300 

5.250% Fixed Senior Notes due September 30, 2040

 

 

475 

 

 

475 

4.550% Fixed Senior Notes due December 1, 2041

 

 

400 

 

 

400 

5.300% Fixed Senior Notes due June 1, 2042

 

 

500 

 

 

500 

3.750% Fixed Senior Notes due April 1, 2045

 

 

375 

 

 

 -

Unamortized discount

 

 

(19)

 

 

(19)

Less amount due currently

 

 

 -

 

 

(500)

       Long-term debt, less amounts due currently — Oncor

 

 

5,681 

 

 

4,956 

Bondco (b):

 

 

 

 

 

 

5.420% Fixed Series 2003 Bonds due in semiannual installments through August 15, 2015 

 

 

 -

 

 

54 

5.290% Fixed Series 2004 Bonds due in semiannual installments through May 15, 2016 

 

 

86 

 

 

126 

Less amount due currently

 

 

(86)

 

 

(139)

Long-term debt, less amounts due currently — Bondco

 

 

 -

 

 

41 

Total long-term debt, less amounts due currently

 

$

5,681 

 

$

4,997 

__________

(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 nine months ended September 30, 2015 totaled $594 million representing $500 million aggregate principal amount of 6.375% senior secured notes paid at the scheduled maturity date of January 15, 2015 and $94 million of transition bond principal payments at scheduled maturity dates.

15


 

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.   In October 2015 we completed an offering with the holders of the Notes to exchange their respective Notes for notes that have terms identical in all material respects to the Notes (Exchange Notes), except that the Exchange Notes do not contain terms with respect to transfer restrictions, registration rights and payment of additional interest for failure to observe certain obligations in a certain registration rights agreement.  The Exchange Notes were registered on a Form S-4, which was declared effective in September 2015.

 

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 September 30, 2015, the amount of available bond credits was approximately $2.709 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 $1.130 billion.

 

Fair Value of Long-Term Debt

 

At September 30, 2015 and December 31, 2014, the estimated fair value of our long-term debt (including current maturities) totaled $6.539 billion and $6.844 billion, respectively, and the carrying amount totaled $5.767 billion and $5.636 billion, respectively.  The fair value is estimated using 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.

16


 

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 September 30, 2015, $111 million was available for distribution to our members as our regulatory capitalization ratio was 59.3% debt and 40.7% 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 October 27, 2015, our board of directors declared a cash distribution of an amount up to and including $140 million to be paid to our members in November 2015, with the exact amount to be determined by management using earnings through October 31, 2015.  During the nine months ended September 30, 2015, our board of directors declared, and we paid the following cash distributions to our members:

 

 

 

 

 

 

 

 

Declaration Date

 

Payment Date

 

Amount

July 29, 2015

 

August 10, 2015

 

$

118 

April 29, 2015

 

May 15, 2015

 

$

65 

February 25, 2015

 

February 26, 2015

 

$

100 

 

17


 

Membership Interests

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Capital Accounts

 

Accumulated Other Comprehensive Income (Loss)

 

Total Membership Interests

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

$

7,625 

 

$

(107)

 

$

7,518 

Net income

 

359 

 

 

 -

 

 

359 

Distributions

 

(283)

 

 

 -

 

 

(283)

Net effects of cash flow hedges (net of tax)

 

-

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Balance at September 30, 2015

$

7,701 

 

$

(105)

 

$

7,596 

 

 

 

 

 

 

 

 

 

 

Capital Accounts

 

Accumulated Other Comprehensive Income (Loss)

 

Total Membership Interests

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

7,457 

 

$

(48)

 

$

7,409 

Net income

 

355 

 

 

 -

 

 

355 

Distributions

 

(181)

 

 

 -

 

 

(181)

Net effects of cash flow hedges (net of tax)

 

 -

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

(1)

 

 

(1)

Balance at September 30, 2014

$

7,631 

 

$

(47)

 

$

7,584 

 

Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges – Interest Rate Swap

 

Defined Benefit Pension and OPEB Plans

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

$

(24)

 

$

(83)

 

$

(107)

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges

 

 

 

 -

 

 

Balance at September 30, 2015

$

(23)

 

$

(82)

 

$

(105)

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges – Interest Rate Swap

 

Defined Benefit Pension and OPEB Plans

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

(26)

 

$

(22)

 

$

(48)

Defined benefit pension plans (net of tax)

 

 -

 

 

 -

 

 

 -

Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges

 

 

 

(1)

 

 

Balance at September 30, 2014

$

(24)

 

$

(23)

 

$

(47)

 

 

 

18


 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net allocated pension costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

18 

 

$

18 

Interest cost

 

 

33 

 

 

33 

 

 

99 

 

 

99 

Expected return on assets

 

 

(29)

 

 

(34)

 

 

(87)

 

 

(102)

Amortization of net loss

 

 

16 

 

 

 

 

48 

 

 

29 

Net pension costs

 

 

26 

 

 

14 

 

 

78 

 

 

44 

Components of net OPEB costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

 

 

 

 

 

 

Interest cost

 

 

11 

 

 

11 

 

 

33 

 

 

33 

Expected return on assets

 

 

(3)

 

 

(3)

 

 

(9)

 

 

(9)

Amortization of prior service cost

 

 

(5)

 

 

(5)

 

 

(15)

 

 

(15)

Amortization of net loss

 

 

 

 

 

 

24 

 

 

20 

Net OPEB costs

 

 

13 

 

 

13 

 

 

39 

 

 

34 

Total net pension and OPEB costs

 

 

39 

 

 

27 

 

 

117 

 

 

78 

Less amounts deferred principally as property or a regulatory asset

 

 

(28)

 

 

(18)

 

 

(84)

 

 

(51)

Net amounts recognized as expense

 

$

11 

 

$

 

$

33 

 

$

27 

 

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.

 

19


 

We made cash contributions to the pension plans and OPEB plans of $3 million and $19 million, respectively, during the nine months ended September 30, 2015. We expect to make additional cash contributions to the pension plans and OPEB plans of $48 million and $6 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.

 

·

We record revenue from TCEH, principally for electricity delivery fees, which totaled $279 million and $281 million for the three months ended September 30, 2015 and 2014, respectively, and $739 million and $746 million for the nine months ended September 30, 2015 and 2014, respectively.  The fees are based on rates regulated by the PUCT that apply to all REPs.  These revenues included less than $1 million for each of the three- and nine-month periods ended September 30, 2015 and 2014 pursuant to a transformer maintenance agreement with TCEH.   

 

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:

 

 

 

 

 

 

 

 

 

 

At September 30,

 

At December 31,

 

 

2015

 

2014

 

 

 

 

 

 

 

Trade accounts and other receivables from affiliates - billed

 

$

100 

 

$

71 

Trade accounts and other receivables from affiliates - unbilled

 

 

60 

 

 

52 

Trade accounts and other payables to affiliates

 

 

(4)

 

 

(5)

Trade accounts and other receivables from affiliates – net

 

$

156 

 

$

118 

 

·

EFH Corp. subsidiaries charge us for certain administrative services at cost.  Our payments to EFH Corp. subsidiaries for administrative services, which are primarily reported in operation and maintenance expenses, totaled $5 million and $7 million for the three months ended September 30, 2015 and 2014, respectively, and $14 million and $22 million for the nine months ended September 30, 2015 and 2014, respectively.  We also charge each other for shared facilities at cost.  Our payments to EFH Corp. for shared facilities totaled $1 million for the each of the three-month periods ended September 30, 2015 and 2014 and $3 million for each of the nine-month periods ended September 30, 2015 and 2014. Payments we received from EFH Corp. subsidiaries related to shared facilities totaled less than $1 million for the each of the three months  ended September 30, 2015 and 2014 and $1 million and $2 million for the nine months ended September 30, 2015 and 2014, respectively.  

 

·

Through June 30, 2014, we participated in the Energy Future Holdings Health and Welfare Benefit Program, which provided employee benefits to our workforce.  In October 2013, we notified EFH Corp. of our intention to withdraw from the benefit program effective June 30, 2014 and entered into an agreement with EFH Corp. pursuant to which, we agreed to pay EFH Corp. $1 million to reimburse EFH Corp. for its increased costs under the program as a result of our withdrawal from the program and the additional administrative work required to effectuate our withdrawal from the benefit program and transition to the new benefit program. This one-time payment was paid to EFH Corp. in June 2014.  In April 2014, we entered into a welfare benefit administration agreement with EFH Corp., pursuant to which EFH Corp. provided us with welfare benefit administration services under our new benefit plans from July 1, 2014 until December 31, 2014. 

 

·

We are not a member of EFH Corp.’s consolidated tax group, but EFH Corp.’s consolidated federal income tax return includes EFH Corp.’s portion of our results due to EFH Corp.’s equity ownership in us.  Under the terms of a tax sharing agreement among us, Oncor Holdings, Texas Transmission, Investment LLC and EFH Corp., we are generally obligated to make payments to Texas Transmission, Investment LLC and EFH Corp., pro rata in accordance with their respective membership interests, in an aggregate

20


 

amount that is substantially equal to the amount of federal income taxes that we would have been required to pay if we were filing our own corporate income tax return.  For periods prior to the tax sharing agreement (entered into in October 2007 and amended and restated in November 2008), we are responsible for our share, if any, of redetermined tax liability for the EFH Corp. consolidated tax group.  EFH Corp. also includes our results in its consolidated Texas margin tax payments, which are accounted for as income taxes and calculated as if we were filing our own return.  See discussion in Note 1 to Financial Statements in our 2014 Form 10-K under “Income Taxes.”  Under the “in lieu of” tax concept, all in lieu of tax assets and tax liabilities represent amounts that will eventually be settled with our members.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2015

 

At December 31, 2014

 

EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes receivable

$

 -

 

$

 -

 

$

 -

 

$

(144)

 

$

(36)

 

$

(180)

Federal income taxes payable

 

15 

 

 

 

 

18 

 

 

 -

 

 

 -

 

 

 -

Texas margin taxes payable

 

14 

 

 

 -

 

 

14 

 

 

24 

 

 

 -

 

 

24 

Net payable (receivable)

$

29 

 

$

 

$

32 

 

$

(120)

 

$

(36)

 

$

(156)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

September 30, 2015

 

Nine Months Ended

September 30, 2014

 

EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes

$

39 

 

$

10 

 

$

49 

 

$

140 

 

$

35 

 

$

175 

Texas margin taxes

 

24 

 

 

 -

 

 

24 

 

 

23 

 

 

 -

 

 

23 

Total payments

$

63 

 

$

10 

 

$

73 

 

$

163 

 

$

35 

 

$

198 

 

·

In September 2014, EFH Corp. signed the final agreed Revenue Agent Report and associated documentation (RAR) for the 2007 tax year and filed a motion seeking approval of the bankruptcy court in the EFH Bankruptcy Proceedings of its signing of the RAR.   The cash income tax impact related to the conclusion of the 2007 audit is a refund from our members of approximately $45 million that is recorded in liability in lieu of deferred income taxes.  In the fourth quarter of 2014, the Department of Justice filed a claim with the bankruptcy court for open tax years through 2013 that was consistent with the settlement EFH Corp. reached with the IRS for tax years 2003 through 2006.   The cash income tax impact related to the conclusion of the 2003 through 2006 audit is expected to be a refund of approximately $11 million and is recorded in liability in lieu of deferred income taxes.  In the second quarter of 2015, EFH Corp.  received the final RAR and associated documentation for the 2008 tax year which includes the results of Oncor.  In addition, we received the final RAR and associated documentation for tax years 2008 and 2009 in which we filed a partnership tax return.  The RARs reflect additional deductions for Oncor resulting in approximately $8 million in tax refunds from our members.  Of the expected refunds, $4 million is related to pre-partnership formation and is recorded in liability in lieu of deferred income taxes and $4 million is related to post-partnership formation and was collected during the third quarter of 2015.

 

·

Our PUCT-approved tariffs include requirements to assure adequate credit worthiness of any REP to support the REP’s obligation to collect transition bond-related charges on behalf of Bondco.  Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated transition charges over specified time periods.  Accordingly, at both September 30, 2015 and December 31, 2014, TCEH had posted security in the amount of $9 million for our benefit.

21


 

 

·

Under Texas regulatory provisions, the trust fund for decommissioning TCEH’s Comanche Peak nuclear generation facility is funded by a delivery fee surcharge we collect from REPs and remit monthly to TCEH.  Delivery fee surcharges totaled $5 million for each of the three-month periods ended September 30, 2015 and 2014 and $13 million for each of the nine-month periods ended September 30, 2015 and 2014.  Our sole obligation with regard to nuclear decommissioning is as the collection agent of funds charged to ratepayers for nuclear decommissioning activities.  If, at the time of decommissioning, actual decommissioning costs exceed available trust funds, we would not be obligated to pay any shortfalls but would be required to collect any rates approved by the PUCT to recover any additional decommissioning costs.  Further, if there were to be a surplus when decommissioning is complete, such surplus would be returned to ratepayers under terms prescribed by the PUCT.

 

·

Affiliates of the Sponsor Group have (1) sold, acquired or participated in the offerings of our debt or debt securities in open market transactions or through loan syndications, and (2) performed various financial advisory, dealer, commercial banking and investment banking services for us and certain of our affiliates for which they have received or will receive customary fees and expenses, and may from time to time in the future participate in any of the items in (1) and (2) above.

 

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 26% and 27% of our total operating revenues for the three months ended September 30, 2015 and 2014, respectively, and 25% and 26% for the nine months ended September 30, 2015 and 2014, respectively.  Revenues from REP subsidiaries of NRG Energy, Inc., a nonaffiliated entity, collectively represented 18% and 17% of our total operating revenues for the three months ended September 30, 2015 and 2014, respectively, and 17% and 16% of our total operating revenues for the nine months ended September 30, 2015 and 2014, respectively.    No other customer represented 10% or more of our total operating revenues.

 

Other Income and Deductions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

Accretion of fair value adjustment (discount) to regulatory assets due to purchase accounting

 

$

 

$

 

$

 

$

Other

 

 

 -

 

 

 -

 

 

 -

 

 

Total other income

 

$

 

$

 

$

 

$

10 

Other deductions:

 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

 

$

 

$

 

$

14 

 

$

10 

Other

 

 

 

 

 

 

 

 

Total other deductions

 

$

 

$

 

$

21 

 

$

11 

 

22


 

Interest Expense and Related Charges