UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K



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



For the Fiscal Year Ended December 31, 2019

— 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)



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Securities registered pursuant to Section 12(b) of the Act: 





Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes___ No    √   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes    √    No      



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 every Interactive Data File required to be submitted 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 such files).  Yes    √     No___



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

Large accelerated filer ___   Accelerated filer ___   Non-Accelerated filer     √             

Smaller reporting company ___   Emerging growth company ___



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___



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



Aggregate market value of Oncor Electric Delivery Company LLC common limited liability company membership interests held by non-affiliates: N/A



As of February 27, 2020, 635,000,000 limited liability company membership interests of Oncor Electric Delivery Company LLC were outstanding, 80.25% of which were directly held by Oncor Electric Delivery Holdings Company LLC and 19.75% of which were held by Texas Transmission Investment LLC.  None of the membership interests are publicly traded.

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DOCUMENTS INCORPORATED BY REFERENCE - None

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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 annual report on Form 10-K.  The representations and warranties contained in any agreement that we have filed as an exhibit to this annual report on Form 10-K 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 annual report on Form 10-K and other Securities and Exchange Commission filings of Oncor and its subsidiaries, occasionally make references to Oncor (or “we,” “our,” “us” or “the company”) when describing actions, rights or obligations of its subsidiaries.  These references reflect the fact that such subsidiaries were consolidated with Oncor for financial reporting purposes.  However, these references should not be interpreted to imply that Oncor was actually undertaking the action or has the rights or obligations of any such subsidiary or that any such subsidiary company was undertaking an action or had the rights or obligations of its parent company or of any other affiliate.

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GLOSSARY







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PART I



Items 1. and 2.  BUSINESS AND PROPERTIES



References in this report to “we,” “our,” “us” and “the company” are to Oncor and or/its subsidiaries as apparent in the context.  See “Glossary” starting on page 3 for definition of terms and abbreviations.



Overview of Oncor 



We are a regulated electricity transmission and distribution company that provides the essential service of delivering electricity safely, reliably and economically to end-use consumers through our electrical systems, as well as providing transmission grid connections to merchant generation facilities and interconnections to other transmission grids in Texas.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is indirectly and wholly owned by Sempra.  Oncor Holdings owns 80.25% of our outstanding membership interests and Texas Transmission owns 19.75% of our outstanding membership interests.  We are a limited liability company organized under the laws of the State of Delaware, formed in 2007 as the successor entity to Oncor Electric Delivery Company, a corporation formed under the laws of the State of Texas in 2001.



We operate the largest transmission and distribution system in Texas, delivering electricity to more than 3.6 million homes and businesses and operating more than 139,000 miles of transmission and distribution lines.  We provide:





Our transmission and distribution rates are regulated by the PUCT and certain cities, and in certain instances, by the FERC.  We are not a seller of electricity, nor do we purchase electricity for resale.  The company is managed as an integrated business; consequently, there is only one reportable segment.



Our transmission and distribution assets are located principally in the north-central, eastern, western and panhandle regions of Texas.  This territory has an estimated population in excess of ten million and comprises over 120 counties and more than 400 incorporated municipalities, including Dallas/Fort Worth and surrounding suburbs, as well as Waco, Wichita Falls, Odessa, Midland, Tyler and Killeen.  Most of our power lines have been constructed over lands of others pursuant to easements or along public highways, streets and rights-of-way as permitted by law.  At December 31, 2019, we had approximately 4,165 full-time employees, including approximately 745 employees under collective bargaining agreements.



Ring-Fencing Measures



Since 2007, various ring-fencing measures have been taken to enhance our credit quality and the separateness between the Oncor Ring-Fenced Entities and entities with ownership interests in Oncor or Oncor Holdings. These ring-fencing measures serve to mitigate the Oncor Ring-Fenced Entities’ credit exposure to owners of Oncor and Oncor Holdings, and to reduce the risk that the assets and liabilities of Oncor Ring-Fenced Entities would be substantively consolidated with the assets and liabilities of any direct or indirect owners of Oncor and Oncor Holdings in connection with a bankruptcy of any such entities. These measures include the November 2008 sale of 19.75% of Oncor’s equity interests to Texas Transmission.



In March 2018, Sempra indirectly acquired Oncor Holdings pursuant to the Sempra Acquisition. The Sempra Order issued by the PUCT approving the Sempra Acquisition outlines certain ring-fencing measures, governance mechanisms and restrictions that apply after the Sempra Acquisition. As a result of these ring-fencing measures, Sempra does not control Oncor, and the ring-fencing measures limit Sempra’s ability to direct the management, policies and operations of Oncor, including the deployment or disposition of Oncor’s assets, declarations of dividends, strategic planning and other important corporate issues and actions.



None of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or obligations of any Sempra entity or any other direct or indirect owner of Oncor or Oncor Holdings.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of any Sempra entities and any other direct or indirect owner of Oncor

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or Oncor Holdings.  We do not bear any liability for debt or contractual obligations of Sempra and its affiliates or any other direct or indirect owner of Oncor or Oncor Holdings, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from Sempra and its affiliates and any other direct or indirect owner of Oncor or Oncor Holdings.



Oncor is a limited liability company governed by a board of directors, not its members. The Sempra Order and our Limited Liability Company Agreement require that the board of directors of Oncor consist of thirteen members, constituted as follows:



In order for a current or former officer of Oncor to be eligible to serve as an Oncor Officer Director, the officer cannot have worked for Sempra or any of its affiliates (excluding Oncor Holdings and Oncor) or any other entity with a direct or indirect ownership interest in Oncor or Oncor Holdings in the ten-year period prior to the officer being employed by Oncor.  Oncor Holdings, at the direction of STIH, has the right to nominate and/or seek the removal of the Oncor Officer Directors, subject to approval by a majority of the Oncor board of directors.  STIH is a wholly owned, indirect subsidiary of, and controlled by, Sempra following the Sempra Acquisition.



In addition, the Sempra Order provides that Oncor’s board cannot be overruled by the board of Sempra or any of its subsidiaries on dividend policy, the issuance of dividends or other distributions (except for contractual tax payments), debt issuance, capital expenditures, operation and maintenance expenditures, management and service fees, and appointment or removal of board members, provided that certain actions may also require the additional approval of the Oncor Holdings board of directors. The Sempra Order also provides that any changes to the size, composition, structure or rights of the board must first be approved by the PUCT. In addition, if Sempra acquires Texas Transmission’s interest in Oncor, the two board positions on Oncor’s board of directors that Texas Transmission is entitled to appoint will be eliminated and the size of Oncor’s board of directors will be reduced by two.



Additional regulatory commitments, governance mechanisms and restrictions provided in the Sempra Order and our Limited Liability Company Agreement to ring-fence Oncor from its owners include, among others:











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Oncor’s Market (ERCOT statistics below were derived from information published by ERCOT)



We operate within the ERCOT market.  This market represents approximately 90% of the electricity consumption in Texas.  ERCOT is the regional reliability coordinating organization for member electricity systems in Texas and the Independent System Operator (ISO) of the interconnected transmission grid for those systems.  ERCOT is responsible for ensuring reliability, adequacy and security of the electric systems, as well as nondiscriminatory access to transmission service by all wholesale market participants in the ERCOT region.  ERCOT’s membership consists of corporate and associate members, including electric cooperatives, municipal power agencies, independent generators, independent power marketers, transmission service providers, distribution services providers, independent REPs and consumers.



In 2019, ERCOT’s hourly demand peaked at 74,820 MW as compared to the peak hourly demand of 73,473 MW in 2018.  The ERCOT market has limited interconnections to other markets in the U.S. and Mexico, which currently limits potential imports into and exports out of the ERCOT market to 1,106 MW of generation capacity (or approximately 1.5% of peak demand).  In addition, wholesale transactions within the ERCOT market are generally not subject to regulation by the FERC.



The ERCOT market operates under reliability standards set by NERC.  The PUCT has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of power supply across Texas’ main interconnected transmission grid.  We, along with other owners of transmission and distribution facilities in Texas, assist the ERCOT ISO in its operations.  We have planning, design, construction, operation and maintenance responsibility for the portion of the transmission grid and for the load-serving substations we own, primarily within our certificated distribution service area.  We participate with the ERCOT ISO and other ERCOT utilities in obtaining regulatory approvals and planning, designing, constructing and upgrading transmission lines in order to remove existing constraints and interconnect generation on the ERCOT transmission grid.  The transmission line projects are necessary to meet reliability needs, support energy production and increase bulk power transfer capability.



Oncor’s Strategies



We focus on delivering electricity in a safe and reliable manner, minimizing service interruptions and investing in our transmission and distribution infrastructure to maintain our system, serve our growing customer base with a modernized grid and support energy production.



We believe that building and leveraging upon opportunities to scale our operating advantage and technology programs enables us to create value by eliminating duplicative costs, efficiently managing supply costs, and building and standardizing distinctive process expertise over a larger grid.  Scale also allows us to take part in large capital investments in our transmission and distribution system, with a smaller fraction of overall capital at risk and with an enhanced ability to streamline costs.  Our organic growth strategies are to invest in technology upgrades and to construct transmission and

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distribution facilities to meet the needs of our customers, the state of Texas, and the ERCOT market. We regularly evaluate opportunities to make selective strategic acquisitions involving regulated assets.  We and other transmission and distribution businesses in ERCOT benefit from regulatory capital recovery mechanisms known as “capital trackers” that we believe enable adequate and more timely recovery of transmission and distribution investments through our regulated rates.



InfraREIT Acquisition



InfraREIT Mergers



On May 16, 2019, we completed our acquisition of InfraREIT and InfraREIT Partners pursuant to the InfraREIT Merger Agreement. Pursuant to the InfraREIT Merger Agreement, (i) InfraREIT merged with and into a wholly owned subsidiary of Oncor, with the Oncor subsidiary continuing as the surviving company, and (ii) a wholly owned subsidiary of Oncor merged with and into InfraREIT Partners (renamed Oncor NTU Partnership LP), with InfraREIT Partners continuing as the surviving entity (together, the Mergers).  



In connection with the Mergers, (i) each share of common stock, par value $0.01 per share, of InfraREIT issued and outstanding was converted into the right to receive $21.00 per share in cash from us and (ii) each limited partnership unit of InfraREIT Partners issued and outstanding was converted into the right to receive $21.00 per unit in cash from us (except units held, directly or indirectly, by Oncor or its subsidiaries, which remain outstanding).



In connection with our entrance into the InfraREIT Merger Agreement, we received an equity commitment letter from Sempra and certain indirect equity holders of Texas Transmission (the Equity Commitment Parties). Pursuant to the equity commitment letter, the Equity Commitment Parties provided their pro rata share of capital contributions to us in an aggregate principal amount of $1,330 million to fund the cash consideration payable in the Mergers and the payment of related fees and expenses. Total purchase price (including cash consideration and transaction costs incurred by InfraREIT and paid by Oncor) paid by us in connection with the Mergers totaled approximately $1,324 million (including approximately $1,275 million representing the cash consideration, a $40 million management termination fee InfraREIT agreed to pay Hunt Consolidated, Inc. at closing and certain other transaction costs incurred by InfraREIT and its subsidiaries and paid by us on their behalf), and we funded such amounts with the capital contributions received from the Equity Commitment Parties and proceeds received through the issuance of CP Notes.



In connection with the Mergers, we also extinguished all of InfraREIT’s outstanding debt (which was owed by certain of InfraREIT’s subsidiaries) totaling an aggregate principal amount of approximately $953 million as of May 16, 2019. We repaid $602 million principal amount of InfraREIT’s outstanding debt using proceeds from borrowings under a short-term unsecured term loan credit agreement that we entered into on May 9, 2019 (Bridge Loan), which Bridge Loan was subsequently repaid, and the issuance of CP Notes. We also exchanged $351 million of InfraREIT’s outstanding debt for senior secured notes issued by us. As a result of these repayments and exchanges, all debt owed by InfraREIT’s subsidiaries was extinguished in connection with the closing of the Mergers.



The assets we acquired through the acquisition of InfraREIT’s subsidiaries included approximately 1,575 miles of transmission lines, including approximately 1,235 circuit miles of 345kV transmission lines and approximately 340 circuit miles of 138kV transmission lines. The central, north and west Texas transmission system we acquired in the transaction is directly connected to approximately 20 operational generation facilities totaling approximately 3,900 MW and serves over 50 transmission stations and substations. 



The InfraREIT Acquisition expanded Oncor’s existing footprint in Texas by adding various electricity transmission and distribution assets and projects in the north, central, west and panhandle regions of Texas.  Among those projects is an  approximately $400 million joint project with Lubbock Power & Light (LP&L), with costs and investment to ultimately be split equally by Oncor and LP&L, which involves the build out of transmission lines and associated station work to join most of the City of Lubbock’s electric facilities to the ERCOT market.  Oncor is responsible for construction of the project and invoices LP&L on a monthly basis for LP&L’s portion of the costs.  Oncor ultimately funded approximately $3 million and LP&L ultimately funded $3 million through reimbursement to Oncor of the project in 2019, with the remainder to be spent in 2020 and 2021.  The project requires approval of four Certificates of Convenience and Necessity by the PUCT, three of which have received final approval (PUCT Docket Nos. 48625, 48668 and 48909) and one of which is pending (PUCT Docket No. 49151).  This joint project consists of approximately 175 miles of transmission lines in Lubbock and surrounding areas.



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Asset Exchange



On May 16, 2019, immediately prior to the Mergers, the SDTS-SU Asset Exchange was completed. Additionally, immediately prior to the closing of the SDTS-SU Asset Exchange, the equity interests and related economic interests in SDTS held by SU were cancelled. SDTS became our wholly owned, indirect subsidiary in connection with the SDTS-SU Asset Exchange and the Mergers and was renamed “Oncor Electric Delivery Company NTU LLC”.



In connection with the SDTS-SU Asset Exchange, pursuant to the joint survivor merger of SU and SDTS, (i) SDTS assumed certain real property and other assets owned by SU and used in the electric transmission and distribution business in the central, north and west and panhandle regions of Texas, as well as equity interests in GS Project Entity, L.L.C., a Texas limited liability company, that was merged with and into SDTS and (ii) SU assumed certain real property and other assets owned by SDTS and used in the electric transmission and distribution business in the vicinity of the Texas-Mexico border, including certain real property and other assets that SDTS owned and leased to SU.



The SDTS-SU Asset Exchange was structured to qualify, in part, as a simultaneous tax deferred like kind exchange of assets to the extent that the assets exchanged are of “like kind” (within the meaning of Section 1031 of the Code). SDTS paid approximately $13.18 million to SU at closing to settle the difference between the sums of the estimated net book value of the assets and liabilities exchanged and the estimated net working capital amounts associated with the SDTS-SU Asset Exchange. In August 2019, SU paid $8 million to NTU pursuant to the SDTS-SU Asset Exchange agreement as a post-closing true-up to settle the difference between the final net book value of the assets and liabilities exchanged and the final net working capital amounts associated with the SDTS-SU Asset Exchange.



In addition, as a condition to the closing of the SDTS-SU Asset Exchange, the Sempra-Sharyland Transaction was completed. As a result of the Sempra-Sharyland Transaction, Sharyland is now our affiliate for purposes of PUCT rules. Pursuant to the agreement governing the SDTS-SU Asset Exchange and the PUCT order in Docket No. 48929 approving the InfraREIT Acquisition, upon closing of the InfraREIT Acquisition we entered into an operation agreement pursuant to which we will provide certain operations services to Sharyland at cost with no markup or profit. We provided approximately $300,000 in services to Sharyland in 2019 pursuant to this agreement.



EFH Bankruptcy Proceedings and Sempra Acquisition



In April 2014, EFH Corp. (at the time the indirect owner of 80.03% of Oncor’s outstanding equity) and the substantial majority of its direct and indirect subsidiaries at the time commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities were not parties to the EFH Bankruptcy Proceedings.  On March 9, 2018, pursuant to the Sempra Acquisition, EFH Corp. merged with an indirect subsidiary of Sempra, with EFH Corp. (renamed STH) continuing as the surviving company and an indirect, wholly owned subsidiary of Sempra.  Sempra paid cash consideration of approximately $9.45 billion to acquire the indirect 80.03% outstanding membership interest in Oncor held by Oncor Holdings and other EFH Corp. assets and liabilities unrelated to Oncor.  In addition, in a separate transaction, Oncor Holdings acquired 0.22% of the outstanding membership interests in Oncor from Investment LLC for $26 million in cash, which represents approximately $18.60 per membership interest.  As a result, after the Sempra Acquisition, Oncor Holdings owns 80.25% of our outstanding membership interests and Texas Transmission owns 19.75% of our outstanding membership interests.  In February 2020, Sempra acquired (through STIH) an indirect 1% ownership interest in Texas Transmission.



The Sempra Acquisition was consummated after obtaining the approval of the bankruptcy court in the EFH Bankruptcy Proceedings, the Federal Communications Commission and the PUCT. The Sempra Order issued by the PUCT and our Limited Liability Company Agreement outline certain ring-fencing measures, governance mechanisms and restrictions that apply after the Sempra Acquisition. As a result of these ring-fencing measures, Sempra does not control Oncor, and the ring-fencing measures limit Sempra’s ability to direct the management, policies and operations of Oncor, including the deployment or disposition of Oncor’s assets, declarations of dividends, strategic planning and other important corporate issues and actions. These limitations include limited representation on the board of directors of Oncor. For more information on the ring-fencing measures applicable after the Sempra Acquisition, see “– Ring-Fencing Measures” above.



The Sempra Order also contains certain operational and financial commitments, including that Oncor will make minimum capital expenditures equal to at least $7.5 billion over the period from January 1, 2018 until December 31, 2022 (subject to certain adjustments).  Our capital expenditures totaled $2.1 billion and $1.8 billion in 2019 and 2018, respectively. For a discussion of our projected capital expenditures for the five year period 2020 through 2024, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition –

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Liquidity and Capital Resources – Available Liquidity/CP Program/Credit Facility/Short-Term Borrowings – Liquidity Needs, Including Capital Expenditures.”



Oncor’s Operations



Performance Indicators —  We achieved or exceeded market performance protocols in 12 out of 14 PUCT market metrics in 2019.  These metrics measure the success of transmission and distribution companies in facilitating customer transactions in the competitive Texas electricity market.



Investing in Infrastructure and Technology — In 2019, we invested approximately $2.1 billion in our network to upgrade the transmission system and associated facilities, to extend the distribution infrastructure and to pursue certain initiatives in infrastructure maintenance and information technology.



Electricity Transmission — Our electricity transmission business is responsible for the safe and reliable operations of our transmission network and substations.  These responsibilities consist of the construction and maintenance of transmission facilities and substations and the monitoring, controlling and dispatching of high-voltage electricity over our transmission facilities in coordination with ERCOT.



We are a member of ERCOT, and our transmission business actively assists the operations of ERCOT and market participants.  Through our transmission business, we participate with ERCOT and other member utilities to plan, design, construct and operate new transmission lines, with regulatory approval, necessary to maintain reliability, interconnect to merchant generation facilities, increase bulk power transfer capability and minimize limitations and constraints on the ERCOT transmission grid.



Transmission revenues are provided under tariffs approved by either the PUCT or, to a small degree related to limited interconnections to other markets, the FERC.  Network transmission revenues compensate us for delivery of electricity over transmission facilities operating at 60kV and above.  Other services we offer through our transmission business include system impact studies, facilities studies, transformation service and maintenance of transformer equipment, substations and transmission lines owned by other parties.



PURA allows us to update our transmission rates periodically on an interim basis to reflect changes in invested capital.  This “capital tracker” provision encourages investment in the transmission system to help ensure reliability and efficiency by allowing for timely recovery of and return on new transmission investments.



At December 31, 2019, our transmission system included:



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At December 31, 2019, our transmission facilities had the following connections to other transmission grids in Texas:

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Electricity Distribution — Our electricity distribution business is responsible for the overall safe and efficient operation of distribution facilities, including electricity delivery, power quality and system reliability.  These responsibilities consist of the ownership, management, construction, maintenance and operation of the distribution system within our certificated service area.  Our distribution system receives electricity from the transmission system through substations and distributes electricity to end-users and wholesale customers through 3,594 distribution feeders.



At December 31, 2019, our distribution system included:





Distribution revenues from residential and small business users are based on actual monthly consumption (kWh), and, depending on size and annual load factor, revenues from large commercial and industrial users are based either on actual monthly demand (kilowatts) or the greater of actual monthly demand (kilowatts) or 80% of peak monthly demand during the prior eleven months.



The PUCT allows utilities to file DCRF applications, under certain circumstances, once per year to recover distribution-related investments on an interim basis. 



Customers — Our transmission customers consist of municipalities, electric cooperatives and other distribution companies.  Our distribution customers consist of approximately 90 REPs and certain electric cooperatives in our certificated service area.  Revenues from REP subsidiaries of Vistra and NRG Energy, Inc. collectively represented 23% and 18% of our total operating revenues in 2019, respectively.  No other customer represented more than 10% of our total operating revenues.  The consumers of the electricity we deliver are free to choose their electricity supplier from REPs who compete for their business.



Competition — Oncor operates in certificated areas designated by the PUCT. The majority of Oncor’s service territory is single certificated, with Oncor as the only certificated transmission and distribution provider. However, in multi-certificated areas of Texas, Oncor competes with certain utilities and rural electric cooperatives for the right to serve end-use customers.



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Seasonality —  Our revenues and results of operations are subject to seasonality, weather conditions and other electricity usage drivers, with revenues being highest in the summer.



Regulation and Rates — As our operations are wholly within Texas, we believe we are not a public utility as defined in the Federal Power Act and, as a result, we are not subject to general regulation under this act.  However, we are subject to reliability standards adopted and enforced by the Texas RE and the NERC (including critical infrastructure protection) under the Federal Power Act.  See “Item 1A. Risk Factors – We are subject to mandatory service quality and reliability standards.  Efforts to comply with those standards could subject us to higher operating costs and/or increased capital expenditures, and non-compliance with applicable standards could subject us to penalties that could have a material effect on our business.”



The PUCT has original jurisdiction over transmission and distribution rates and services in unincorporated areas and in those municipalities that have ceded original jurisdiction to the PUCT and has exclusive appellate jurisdiction to review the rate and service orders and ordinances of municipalities.  Generally, PURA prohibits the collection of any rates or charges by a public utility (as defined by PURA) that does not have the prior approval of the appropriate regulatory authority (i.e., the PUCT or the municipality with original jurisdiction).



At the state level, PURA requires owners or operators of transmission facilities to provide open-access wholesale transmission services to third parties at rates and terms that are nondiscriminatory and comparable to the rates and terms of the utility’s own use of its system.  The PUCT has adopted rules implementing the state open-access requirements for all utilities that are subject to the PUCT’s jurisdiction over transmission services, including us.



Environmental Regulations and Related Considerations —  The TCEQ and the EPA have jurisdiction over water discharges (including storm water) from facilities in Texas.  We believe our facilities are presently in material compliance with applicable state and federal requirements relating to discharge of pollutants into the water.  We believe we hold all required waste water discharge permits from the TCEQ for facilities in operation and have applied for or obtained necessary permits for facilities under construction.  We also believe we can satisfy the requirements necessary to obtain any required permits or renewals.  There are also federal rules pertaining to Spill Prevention, Control and Countermeasure (SPCC) plans for oil-filled electrical equipment and bulk storage facilities for oil that affect certain of our facilities.  We have implemented SPCC plans as required for those substations, work centers and distribution systems, and believe we are currently in material compliance with these rules.



Treatment, storage and disposal of solid waste and hazardous waste are regulated at the state level under the Texas Solid Waste Disposal Act and at the federal level under the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act.  The EPA has issued regulations under the Resource Conservation and Recovery Act of 1976 and the Toxic Substances Control Act, and the TCEQ has issued regulations under the Texas Solid Waste Disposal Act applicable to our facilities.  We are in material compliance with applicable solid and hazardous waste regulations.



Our capital expenditures for environmental matters totaled $37 million in 2019 and are expected to total approximately $51 million in 2020.



2017 Rate Review —  We filed a rate review in PUCT Docket No. 46957 in March 2017, and the PUCT issued an order in that docket that took effect on November 27, 2017.  Incorporating the new corporate federal income tax rate in our approved rate settlement agreement reduced our annual revenues and our tax expense by approximately $125 million. Other significant findings include a change in our authorized return on equity to 9.8% and a change in our authorized regulatory capital structure to 57.5% debt to 42.5% equity. Our previous authorized return on equity was 10.25% with an authorized regulatory capital structure of 60% debt to 40% equity.  See Note 3 to Financial Statements for more information on the PUCT order.



Sharyland 2017 Asset Exchange —  In July 2017, we entered into the Sharyland 2017 Agreement.  Pursuant to that agreement, on November 9, 2017, we exchanged approximately $383 million of our transmission assets, consisting of 517 circuit miles of 345kV transmission lines, and approximately $25 million in cash for approximately $408 million of the Sharyland Entities’ distribution assets (constituting substantially all of their electricity distribution business) and certain of their transmission assets.  The transaction expanded our customer base in west Texas and provides some potential growth opportunities for the distribution network.  The exchange of assets between Oncor and the Sharyland Entities was structured to qualify, in part, as a simultaneous tax deferred like kind exchange of assets to the extent that the assets

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exchanged are of “like kind” (within the meaning of Section 1031 of the Code). The Sharyland 2017 Asset Exchange did not have a material effect on our results of operations, financial position or cash flows.  See further discussion of the transaction in Note 2 to Financial Statements.



 



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Item 1A.   RISK FACTORS



Some important factors in addition to others specifically addressed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that could have a material negative impact on our operations, financial results and financial condition, or could cause our actual results or outcomes to differ materially from any projected outcome contained in any forward-looking statement in this report, include:



Our business is subject to ongoing complex governmental regulations and legislation that have impacted, and will continue in the future to impact, our business and/or results of operations.



Our business operates in a changing market environment influenced by various state and federal legislative and regulatory initiatives regarding the restructuring of the energy industry.  We will need to continually adapt to these changes.



Our business is subject to changes in state and federal laws (including PURA, the Federal Power Act, the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 2005), changing governmental policy, and regulatory actions by the PUCT, and other governmental authorities (including the NERC, the Texas RE, the TCEQ, the FERC and the EPA), and the rules, guidelines and protocols of ERCOT with respect to matters including, but not limited to, market structure and design, construction and operation of transmission and distribution facilities, acquisition, disposal, depreciation and amortization of regulated assets and facilities, recovery of costs and investments, return on invested capital and environmental matters.  Changes in, revisions to, or reinterpretations of existing laws and regulations and other regulatory actions may have an adverse effect on our business and/or results of operations and we could be exposed to increased costs to comply with the more stringent requirements or new interpretations and to potential liability for customer refunds, penalties or other amounts.  



In addition, if it is determined that we did not comply with applicable statutes, regulations, rules, tariffs or orders and we are ordered to pay a material amount in customer refunds, penalties or other amounts, our financial condition, results of operations and cash flows would be materially adversely affected. For example, under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches. In addition, the PUCT may impose penalties on us if it finds that we violated any law, regulation, PUCT order or other rule or requirement.  The PUCT has the authority to impose penalties of up to $25,000 per day per violation.



The Texas Legislature meets every two years.  The Texas Legislature was in session from January 8, 2019 to May 27, 2019.  During the 2019 regular legislative session, no legislation passed that is expected to have a material impact on our financial position, results of operations or cash flows.  However, at any time, the governor may convene a special session of the Texas Legislature.  During any regular or special session, bills may be introduced that if adopted could materially and adversely affect our business and our business prospects.  



The rates of our electricity delivery business are subject to regulatory review and may be reduced below current levels, which could adversely impact our financial condition and results of operations.



The rates we charge are regulated by the PUCT and certain cities and are subject to cost-of-service regulation and annual earnings oversight.  This regulatory treatment does not provide any assurance as to achievement of earnings levels.  Our rates are regulated based on an analysis of our costs and capital structure, as reviewed and approved in a regulatory proceeding.  While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCT will judge all of our costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that our rates are based upon, or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of our costs, including regulatory assets reported in the balance sheet, and the return on invested capital allowed by the PUCT.

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Attacks on our infrastructure or other events that disrupt or breach our cyber/data or physical security measures, as well as attacks on our third-party vendors, could have an adverse impact on our reputation, disrupt business operations and expose us to significant liabilities including penalties for failure to comply with federal, state or local statutes and regulations, which could have a material effect on our results of operations, liquidity and financial condition.



A breach of cyber/data security measures that impairs our information technology infrastructure or other loss of key technology platforms could disrupt normal business operations and affect our ability to control our transmission and distribution assets, access customer information and limit communication with third parties.  In the ordinary course of business, we collect and retain sensitive information, including customer information and personal information about employees. We face various cyber and data risks, including malware, computer viruses, unauthorized access attempts, cyber or phishing attacks. While we have controls in place designed to protect our information technology infrastructure and are not aware of any significant breaches to date, any loss of confidential or proprietary data through a breach, including a breach involving one of our third-party vendors, could adversely affect our reputation, expose us to material legal and regulatory claims and fines, require compliance with notification and monitoring regulations, impair our ability to execute on business strategies and/or materially affect our results of operations, liquidity and financial condition.



A physical attack on our transmission and distribution infrastructure could also interfere with normal business operations and affect our ability to control our transmission and distribution assets. While we have security measures in place designed to protect our transmission and distribution system and have not had any significant security breaches, a physical security breach could adversely affect our reputation, expose us to material regulatory penalties and/or materially affect our results of operations, liquidity and financial condition.



We rely on third parties for various services. If these third parties experience cyber attacks, the services they provide us could be disrupted. This disruption could interfere with our ability to perform our obligations to others, which could negatively affect our financial condition and reputation. In addition, the theft, damage, or improper disclosure of sensitive data held by these third parties may subject us to further harm.



Under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches.



We participate in industry groups and discussions with regulators to remain current on emerging threats and mitigating techniques.  These groups include, but are not limited to: the U.S. Cyber Emergency Response Team, the National Electric Sector Cyber Security Organization, the Department of Homeland Security, the U.S. Nuclear Regulatory Commission and NERC.  We also apply the knowledge gained by continuing to invest in technology, processes, security measures and services to detect, mitigate and protect our assets, both physical and cyber.  These investments include upgrades to network architecture and physical security measures, regular intrusion detection monitoring and compliance with emerging industry regulation.



Our capital deployment program may not be executed as planned, which could adversely impact our financial condition and results of operations.



There can be no guarantee that the execution of our capital deployment program for our electricity delivery facilities will be successful, and there can be no assurance that the capital investments we intend to make in connection with our electricity delivery business will produce the desired improvements to service and reliability or cost management.  Furthermore, there can be no guarantee that our capital investments will ultimately be recoverable through rates or, if recovered, that they will be recovered on a timely basis.  For more information regarding the limitation on recovering the value of investments using rates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Risks and Challenges” and “– Regulation and Rates.”



Market volatility may impact our business and financial condition in ways that we currently cannot predict.



Because our operations are capital intensive, we expect to rely over the long term on access to financial markets, as a significant source of liquidity for capital requirements not satisfied by cash-on-hand, operating cash flows or our Credit Facility and CP Program.  It is likely we will incur additional debt in connection with our large capital expenditure plan, which calls for construction projects to service our growing customer base and ERCOT needs, maintenance projects, and investments in information technology. Our ability to access the capital or credit markets may be severely restricted at a

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time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions.  In addition, the cost of debt financing may be materially and adversely impacted by these market conditions.  Even if we are able to obtain debt financing, we may be unable to recover in rates some or all of the costs of such debt financing if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.  Accordingly, there can be no assurance that the capital and credit markets will continue to be a reliable or acceptable source of short-term or long-term financing for us.  Additionally, disruptions in the capital and credit markets could have a broader impact on the economy in general in ways that could lead to reduced electricity usage, which could have a negative impact on our revenues, or have an impact on our customers, counterparties and/or lenders, causing them to fail to meet their obligations to us.



The phase out of LIBOR could affect interest rates under our variable rate debt and the overall interest rate environment.



In July 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.    In addition, other regulators across the globe have suggested reforming or replacing other benchmark rates.  Our Credit Facility and our term loan credit agreements use LIBOR as a benchmark for establishing interest rates. Our Credit Facility and our term loan credit agreements include mechanisms for amending each of them to reflect the establishment of an alternative rate of interest upon the occurrence of certain events related to the phase out of LIBOR. However, we have not yet pursued any technical amendments or other contractual alternatives to address this matter and are currently evaluating the impact of the potential replacement of the LIBOR interest rate.  Our term loan credit agreements currently contain maturity dates that are prior to the anticipated date that any LIBOR phase out will occur.  Any amendment or alternative provisions may not adequately address the actual changes to LIBOR or successor benchmark rates.  A successor benchmark rate could be higher or more volatile than LIBOR prior to its discontinuance, which could negatively impact the cost of our variable rate debt, impact our ability to refinance some or all of our existing variable rate debt, influence the valuation of any derivative contracts or otherwise have a material adverse impact on our business, financial condition and results of operations. Additionally, the discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement could have a significant impact on the overall interest rate environment.



Adverse actions with respect to our credit ratings could negatively affect our ability to access capital.



Our access to capital markets and our 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.  Our credit ratings are currently higher than those of Sempra, our majority indirect equity owner.  If credit rating agencies were to change their views of our independence from Sempra and its affiliates (other than the Oncor Ring-Fenced Entities), our credit ratings could decline.  Despite our ring-fencing measures, rating agencies have in the past taken, and could in the future take, an adverse action with respect to our credit ratings in response to activities involving financing and liability management activities by our indirect majority equity owner. In the event any such adverse action takes place and causes our 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.



We are subject to mandatory service quality and reliability standards.  Efforts to comply with those standards could subject us to higher operating costs and/or increased capital expenditures, and non-compliance with applicable standards could subject us to penalties that could have a material effect on our business.



The PUCT has jurisdiction with respect to ensuring the service quality and reliability of the delivery of electricity to retail customers by electric utilities and has established reliability standards that apply to each utility. The FERC has jurisdiction with respect to ensuring the reliability of electric transmission service, including transmission facilities owned by utilities within ERCOT.  The FERC has designated the NERC to establish and enforce reliability standards, under

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FERC oversight, for all owners, operators and users of the bulk power system.  The FERC has approved the delegation by NERC of compliance and enforcement authority for reliability in the ERCOT region to the Texas RE.    



To maintain compliance with the mandatory reliability standards, we may be subjected to higher operating costs and/or increased capital expenditures.  While we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCT will approve full recovery of such costs or the timing of any such recovery.  In addition, if we were found to be in noncompliance with applicable reliability standards, we could be subject to sanctions, including monetary penalties.  Penalties imposed by the PUCT and NERC would not be recoverable from customers through regulated rates. 



The PUCT is authorized to impose a penalty of up to $25,000 per violation per day if a utility fails to meet reliability standards.  Oncor must report to the PUCT concerning its performance with respect to the applicable reliability standards on an annual basis.  We cannot predict the outcome of any such reports or related potential enforcement actions.



Under the Energy Policy Act of 2005, FERC can impose penalties (up to $1 million per day per violation) for failure to comply with reliability standards, which would not be recoverable from customers through regulated rates.  We have four registrations with NERC – as a transmission planner, a transmission owner, a transmission operator and a  distribution provider.  As a registered entity, we are subject to periodic audits by the Texas RE of our compliance with reliability standards.  These audits will occur as designated by the Texas RE at a minimum of every three years.  We cannot predict the outcome of any such audits.



Our revenues are concentrated in a small number of customers and any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.



Our revenues from the distribution of electricity are collected from approximately 90 REPs and certain electric cooperatives in our certificated service area, that sell the electricity we distribute to consumers.  REP subsidiaries of our two largest counterparties represented 23% and 18% of our total operating revenues for the year ended 2019, and 23% and 19% for the year ended 2018.  Adverse economic conditions, structural problems in the market served by ERCOT or the financial difficulties of one or more other REPs could impair the ability of these REPs to pay for our services or could cause them to delay such payments.  We depend on these REPs to timely remit these revenues to us.  We could experience delays or defaults in payment from these REPs, which could adversely affect our cash flows, financial condition and results of operations. 



In the future, we could have liquidity needs that could be difficult to satisfy under some circumstances, especially in uncertain financial market conditions.



Our operations are capital intensive.  We rely on access to financial markets and our Credit Facility as a significant source of liquidity for capital requirements, including maturities of long-term debt, not satisfied by cash-on-hand or operating cash flows.  The inability to raise capital on favorable terms or access liquidity facilities, particularly during times of uncertainty similar to those experienced in the financial markets in 2008 and 2009, could adversely impact our ability to sustain and grow our business and would likely increase capital costs that may not be recoverable through rates.  Our access to the financial markets and our Credit Facility, and the pricing and terms we receive in the financial markets, could be adversely impacted by various factors, such as:





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Our primary source of liquidity, aside from operating cash flows, has been our ability to borrow under our Credit Facility, which also supports our CP Program.  Because our CP Program is supported by our Credit Facility, CP Notes outstanding is a reduction to the available borrowing capacity.  The Credit Facility, our term loan credit agreements and the Note Purchase Agreements each contain a debt-to-capital ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2019, we were in compliance with these covenants.  See Note 6 to Financial Statements for further information regarding this covenant and our Credit Facility, as well as our CP Program.



We are required to maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes. That debt-to-equity ratio is 57.5% debt to 42.5% equity.  At December 31, 2019, our regulatory capitalization ratio was 54.8% debt to 45.2% equity.  Our ability to incur additional long-term debt will be limited by our regulatory capital structure and we are able to issue future long-term debt only to the extent that we will be in compliance therewith.



The costs of providing pension benefits and OPEB and related funding requirements may have a material adverse effect on our financial condition, results of operations and cash flows.



We offer certain pension and health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees through pension and OPEB plans. 



We also have contractual liabilities related to the Vistra Retirement Plan, a defined benefit pension plan.  Until October 2016, we were a member of the same controlled group (within the meaning of ERISA) as Vistra.  We also maintain an OPEB plan to cover eligible retirees of Oncor and EFH Corp./Vistra whose employment service were assigned to both Oncor (or a predecessor regulated utility bushiness) and the non-regulated business of EFH Corp./Vistra.



Our costs or share of the costs of providing pension and OPEB benefits and related funding requirements are dependent upon numerous factors, assumptions and estimates and are subject to changes in these factors, assumptions and estimates, including the market value of the assets funding the pension and OPEB plans.  Benefits costs and related funding requirements are also subject to changing employee demographics (including but not limited to age, compensation levels and years of accredited service), the level of contributions made to retiree plans, expected and actual earnings on plan assets and the discount rates used in determining the projected benefit obligation.  Changes made to the provisions of the plans may also impact current and future benefit costs.  Fluctuations in actual market returns as well as changes in general interest rates may result in increased or decreased benefit costs in future periods.



See Note 10 to Financial Statements, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Application of Critical Accounting Policies – Defined Benefit Pension Plans and OPEB Plans” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Liquidity and Capital Resources – Pension and OPEB Plans Funding” for further information regarding pension and OPEB funding.



Our ring-fencing measures may not work as planned and a bankruptcy court may nevertheless subject Oncor to the claims of its affiliates’ creditors.



Various ring-fencing measures have been taken to enhance our credit quality and the separateness between the Oncor Ring-Fenced Entities, Sempra and its affiliates (other than the Oncor Ring-Fenced Entities), and any other direct or indirect owners of Oncor or Oncor Holdings.  These enhancements are intended to minimize the risk that a court would order any of the Oncor Ring-Fenced Entities’ assets and liabilities to be substantively consolidated with those of Sempra or any of its affiliates or any other direct or indirect owners of Oncor or Oncor Holdings or their affiliates in connection with a bankruptcy of any such entities.  Substantive consolidation is an equitable remedy in bankruptcy that results in the pooling of the assets and liabilities of the debtor and one or more of its affiliates solely for purposes of the bankruptcy case, including for purposes of distributions to creditors and voting on and treatment under a reorganization plan.  Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict. To the extent a bankruptcy court were to determine that substantive consolidation is appropriate under the facts and circumstances, then the assets and liabilities of any Oncor Ring-Fenced Entity that is subject to the substantive consolidation order would be available to help satisfy the debt or contractual obligations of the affiliated entity that is a debtor in bankruptcy and subject to the same substantive consolidation order.  If any Oncor Ring-Fenced Entity were included in such a substantive consolidation order, the secured creditors of Oncor would retain their liens and priority with respect to Oncor’s assets.

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See “Note 1 to Financial Statements”, “Item 1. and 2. Business and Properties – Ring-Fencing Measures” for additional information on our ring-fencing measures.



Goodwill that we have recorded is subject to at least annual impairment evaluations, and as a result, we could be required to write off some or all of this goodwill, which may adversely impact our financial condition and results of operations.



In accordance with accounting standards, recorded goodwill is not amortized but is reviewed annually or more frequently for impairment, if certain conditions exist, and may be impaired.  Any reduction in or impairment of the value of goodwill will result in a charge against earnings, which may adversely impact our reported results of operations and financial condition.  See Note 1 to Financial Statements for more information about our goodwill impairment assessment and testing.



Our results of operations and financial condition could be negatively impacted by any development or event beyond our control that causes economic weakness in the ERCOT market.



We derive substantially all of our revenues from operations in the ERCOT market, which covers approximately 75% of the geographical area in the State of Texas.  As a result, regardless of the state of the economy in areas outside the ERCOT market, economic weakness in the ERCOT market could lead to reduced demand for electricity in the ERCOT market.  Such a reduction could have a material negative impact on our results of operations and financial condition.



Disruptions at power generation facilities owned by third parties could interrupt our sales of transmission and distribution services.



The electricity we transmit and distribute to customers of REPs is obtained by the REPs from electricity generation facilities.  We do not own or operate any generation facilities.  If generation is disrupted or if generation capacity is inadequate, our sales of transmission and distribution services may be diminished or interrupted, and our results of operations, financial condition and cash flows may be adversely affected.



The operation and maintenance of electricity delivery facilities involves significant risks that could adversely affect our results of operations and financial condition.



The operation and maintenance of delivery facilities involves many risks, including equipment breakdown or failure of facilities, lack of sufficient capital to maintain the facilities, impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of efficiency or reliability, the occurrence of any of which could result in lost revenues and/or increased expenses that may not be recoverable through rates.  A significant number of our facilities were constructed many years ago.  In particular, older transmission and distribution equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep operating at peak efficiency or reliability.  A risk of increased maintenance and capital expenditures arises from damage to facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events.  Further, our ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables and subject to substantial risks.  Should any such efforts be unsuccessful, we could be subject to additional costs that may not be recoverable through rates and/or the write-off of our investment in the project or improvement.



Insurance, warranties or performance guarantees may not cover all or any of the lost revenues or increased expenses that could result from the risks discussed above.  Likewise, our ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by events outside our control.



Changes in technology or increased conservation efforts may reduce the value of our electricity delivery facilities and may significantly impact our business in other ways as well.



Research and development activities are ongoing to improve existing and alternative technologies to produce and store electricity, including gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices and batteries.  It is possible that advances in these or other technologies will reduce the costs of electricity production from these technologies to a level that will enable these technologies to compete effectively with traditional generation plants.  Changes in technology could also alter the channels through which retail customers buy electricity.  To

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the extent self-generation or storage facilities become a more cost-effective option for certain customers, our revenues could be materially reduced.



Also, electricity demand could be reduced by increased conservation efforts and advances in technology, which could likewise significantly reduce the value of our electricity delivery facilities.  Certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date.  Effective energy conservation by our customers could result in reduced energy demand, or significantly slow the growth in demand.  Such reduction in demand could materially reduce our revenues.



We are dependent upon a limited number of suppliers and service providers for certain of our operations. If any of these suppliers or service providers failed or became unable to perform on their agreements with us, it could disrupt our business and have an adverse effect on our cash flows, financial condition and results of operations.



We rely on suppliers and service providers to provide us with certain specialized materials and services, including materials and services for power line construction, maintenance and repair, information technology and customer operations.  The financial condition of our suppliers and service providers may be adversely affected by general economic conditions, such as credit risk and turbulent macroeconomic events.  Because many of the tasks of these suppliers and service providers require specialized electric industry knowledge and equipment, if any of these parties fail to perform, go out of business or otherwise become unable to perform, we may not be able to transition to substitute suppliers or service providers in a timely manner. This could delay our construction and improvement projects, increase our costs and disrupt our operations, which could negatively impact our business and reputation. In addition, we could be subject to fines or penalties in the event a delay resulted in a violation of a PUCT or other regulatory order.



Our revenues and results of operations are seasonal.



A significant portion of our revenues is derived from rates that we collect from REPs based on the amount of electricity we distribute on behalf of such REPs.  Sales of electricity to residential and commercial customers are influenced by temperature fluctuations.  Thus, our revenues and results of operations are subject to seasonality, weather conditions and other electricity usage drivers, with revenues being highest in the summer.



The litigation environment in which we operate poses a significant risk to our business.



We are involved in the ordinary course of business in a number of lawsuits involving employment, commercial and environmental issues and other claims for injuries and damages, among other matters.  Judges and juries in the State of Texas have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and business tort cases.  We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in the State of Texas poses a significant business risk.



The loss of the services of our key management and personnel could adversely affect our ability to operate our business.



Our future success will depend on our ability to continue to attract and retain highly qualified personnel. We compete for such personnel with many other companies, in and outside our industry, government entities and other organizations.  We may not be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future.  Our failure to attract new personnel or retain our existing personnel could have a material adverse effect on our business.



We regularly evaluate opportunities to make selective strategic acquisitions involving regulated assets, such as the InfraREIT Acquisition that we completed in May 2019. Acquisitions involve various risks, and we may not be able to realize the anticipated benefits of any such acquisitions.



We regularly evaluate opportunities to make selective strategic acquisitions involving regulated assets. Additional equity or debt capital may be required to complete any acquisition.  In addition, any acquisition may be structured in such a manner that could result in the assumption of secured or unsecured debt and other liabilities. Any such transaction may require PUCT and other regulatory approvals.  An acquisition may involve risks relating to the combination of assets and facilities, the diversion of management’s attention and the impact on our credit ratings.



The InfraREIT Acquisition involved the acquisition of a business that owned primarily regulated electric transmission and distribution assets and was previously operated as an independent company.  Any potential cost savings,

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synergies or other benefits from the transaction may not be fully realized or may take longer to realize than expected. In addition, some of the assets that we acquired have yet to undergo prudence review by the PUCT. There can be no assurance that the PUCT will judge all of the costs related to those assets to have been prudently incurred.



Item 1B.UNRESOLVED STAFF COMMENTS



None.



Item 3.LEGAL 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 on our financial position, results of operations or cash flows.   See Notes 3 and 8 to Financial Statements for additional information concerning our legal and regulatory proceedings.



Item 4.MINE SAFETY DISCLOSURES



Not applicable

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PART II



Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED EQUITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



At December 31, 2019, 80.25% of our outstanding membership interests were held by Oncor Holdings and 19.75% were held by Texas Transmission.  For information on beneficial ownership of our membership interests, see “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Equity Holder Matters.”  None of the membership interests are publicly traded, and none were issued by Oncor in 2019.  



See Note 9 to Financial Statements for a description of cash distributions and contributions between us and members.



Item 6.SELECTED FINANCIAL DATA



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Item 7.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 fiscal years ended December 31, 2019 and 2018 should be read in conjunction with Selected Financial Data and our audited consolidated financial statements and the notes to those statements.



Our 2018 Form 10-K includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2017 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



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



BUSINESS



We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern, western and panhandle regions of Texas.  We are a majority-owned subsidiary of Oncor Holdings, which is indirectly and wholly owned by Sempra.  Oncor Holdings owns 80.25% of our outstanding membership interests and Texas Transmission owns 19.75% of our outstanding membership interests.  We are managed as an integrated business; consequently, there is only one reportable segment.



Our consolidated financial statements for the fiscal year ended December 31, 2019, include the results of our wholly owned, indirect subsidiary, NTU, which is a regulated utility that provides electricity transmission delivery service in the north-central, western and panhandle regions of Texas. We acquired NTU as part of the InfraREIT Acquisition that closed on May 16, 2019.



Ring-Fencing Measures



Various ring-fencing measures have been taken to enhance our credit quality and the separateness between the Oncor Ring-Fenced Entities, Sempra and its affiliates (other than the Oncor Ring-Fenced Entities), and any other entities with a direct or indirect ownership interest in Oncor or Oncor Holdings.  These measures serve to mitigate the Oncor Ring-Fenced Entities’ credit exposure to Sempra and its affiliates and any other direct or indirect owners of Oncor and Oncor Holdings, and to reduce the risk that the assets and liabilities of Oncor Ring-Fenced Entities would be substantively consolidated with the assets and liabilities of any Sempra entity or any other direct or indirect owners of Oncor and Oncor Holdings in connection with a bankruptcy of any such entities. Such measures include, among other things: the 19.75% equity interest held by Texas Transmission; maintenance of separate books and records for the Oncor Ring-Fenced Entities; and our board of directors being comprised of a majority of directors who meet certain disinterested director standards.  As a result, none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or obligations of any Sempra entity or any other direct or indirect owner of Oncor or Oncor Holdings.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of any Sempra entities and any other direct or indirect owner of Oncor or Oncor Holdings.  We do not bear any liability for debt or contractual obligations of Sempra and its affiliates or any other direct or indirect owner of Oncor or Oncor Holdings, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from Sempra and its affiliates and any other direct or indirect owner of Oncor or Oncor Holdings. For more information on the ring-fencing measures, see “Items 1 and 2. Business and Properties – Ring-Fencing Measures.”



Significant Activities and Events



InfraREIT Acquisition —  On May 16, 2019, we completed the InfraREIT Acquisition, pursuant to which we acquired all of the equity interests of InfraREIT and its subsidiary, InfraREIT Partners. The cash consideration paid to stockholders of InfraREIT and limited partners of InfraREIT Partners totaled $1,275 million. In addition, we paid certain transaction costs incurred by InfraREIT (including a management agreement termination fee of $40 million that InfraREIT paid an affiliate of Hunt Consolidated, Inc. at closing), with the aggregate cash consideration and payment of certain InfraREIT expenses totaling $1,324 million. In connection with and immediately after the closing of the InfraREIT Acquisition, on May 16, 2019, we also extinguished all $953 million aggregate principal amount of the outstanding debt of

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InfraREIT and its subsidiaries through repayment of $602 million of InfraREIT subsidiary debt and the exchange of $351 million of InfraREIT subsidiary debt for newly issued Oncor senior secured notes. See Notes 2, 6 and 7 to Financial Statements for more information on the exchange of notes and repayment of debt of InfraREIT and its subsidiaries.



The InfraREIT Acquisition expanded Oncor’s existing footprint in Texas by adding various electricity transmission and distribution assets and projects in the north, central, west and panhandle regions of Texas.  Among those projects is an  approximately $400 million joint project with Lubbock Power & Light (LP&L), with costs and investment to ultimately be split equally by Oncor and LP&L, which involves the build out of transmission lines and associated station work to join most of the City of Lubbock electric facilities to the ERCOT market.  Oncor is responsible for construction of the project and invoices LP&L on a monthly basis for LP&L’s portion of the costs.  Oncor ultimately funded approximately $3 million and LP&L ultimately funded $3 million through reimbursement to Oncor of the project in 2019, with the remainder to be spent in 2020 and 2021.  The project requires approval of four Certificates of Convenience and Necessity by the PUCT, three of which have received final approval (PUCT Docket Nos. 48625, 48668 and 48909) and one of which is pending (PUCT Docket No. 49151).  This joint project consists of approximately 175 miles of transmission lines in Lubbock and surrounding areas.



Debt-Related Activity — In May 2019, we issued (i) $351 million of senior secured notes under the Note Purchase Agreements in exchange for a like principal amount of notes issued by InfraREIT subsidiaries, (ii) $500 million aggregate principal amount of 2.75% senior secured notes due 2024 (2024 Notes), (iii) $300 million aggregate principal amount of 3.70% senior secured notes due 2028 (2028 Notes) and (iv) $500 million aggregate principal amount of 3.80% senior secured notes due 2049 (3.80% 2049 Notes).  In September 2019, we (i) issued $700 million aggregate principal amount of 3.10% senior secured notes due 2049 (3.10% 2049 Notes) and (ii) entered in to and borrowed $460 million under a term loan credit agreement that matures on October 6, 2020.  Repayments of long-term debt consisted of $488 million aggregate principal amount of certain InfraREIT-related long-term debt in connection with and immediately following the closing of the InfraREIT Acquisition, $250 million aggregate principal amount of senior secured notes, $350 million aggregate principal amount under a previous term loan credit agreement and $6 million principal amount of the quarterly amortizing debt for our notes issued under the Note Purchase Agreements. See Note 7 to Financial Statements for additional information regarding long-term debt.



In May 2019, we entered into the short-term Bridge Loan, borrowing an aggregate principal amount of $600 million, which was subsequently repaid on May 23, 2019. In connection with the closing of the InfraREIT Acquisition, on May 16, 2019, the short-term credit facilities of InfraREIT and its subsidiaries were terminated and borrowings totaling $114 million aggregate principal amount were repaid in full by Oncor.  See Note 6 to Financial Statements for additional information regarding short-term debt and Note 2 to Financial Statements regarding the InfraREIT Acquisition.

 

Matters with the PUCT — See discussion below under “Regulation and Rates – Matters with the PUCT”.



KEY RISKS AND CHALLENGES



Following is a discussion of key risks and challenges facing management and the initiatives currently underway to manage such challenges.  For additional information concerning risk factors related to our business, see “Item 1A. Risk Factors” in this report.



Rates and Cost Recovery



Our rates are regulated by the PUCT and certain cities and are subject to regulatory rate-setting processes and annual earnings oversight.  This regulatory treatment does not provide any assurance as to achievement of earnings levels.  Our rates are regulated based on an analysis of our costs and capital structure, as reviewed and approved in a regulatory proceeding.  Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital.  However, there is no assurance that the PUCT will judge all of our costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that our rates are based upon, that the regulatory process in which rates are determined will always result in rates that produce full recovery of our costs or that our authorized return on equity will not be reduced.  See “Regulation and Rates” below for further information.



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Capital Availability and Cost



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. Our credit ratings are currently higher than those of Sempra. If credit rating agencies were to change their views of our independence from Sempra and its affiliates (other than the Oncor Ring-Fenced Entities), our credit ratings could decline. We believe this risk is substantially mitigated by the ring-fencing measures as described in Notes 1 and 2 to Financial Statements. See “Risk Factors—Adverse actions with respect to our credit ratings could negatively affect our ability to access capital”, and “In the future, we could have liquidity needs that could be difficult to satisfy under some circumstances, especially in uncertain financial market conditions.” 



Technology Risks



Technology risks include the risk of interrupted and/or degraded business operations due to the loss of key technology platforms.  Risks to our key technology platforms include nonperformance by equipment and service providers, failure of the technology to meet performance expectations and inadequate cost recovery allowances by regulatory authorities.  We continue to implement measures to mitigate these risks, including business continuity and disaster recovery plans, but there can be no assurance that these measures will achieve the operational and financial objectives.



Cyber Security and Infrastructure Protection Risk



A breach of our cyber/data or physical security measures that impairs our information technology infrastructure or transmission and distribution infrastructure could disrupt normal business operations, affect our ability to control our transmission and distribution system, expose us to material regulatory claims and limit communication with third parties.  Any loss of confidential or proprietary data through a cyber/data breach, including a breach involving one of our third-party vendors, could also materially affect our reputation, expose the company to legal claims and fines or impair our ability to execute on business strategies.  If third parties in our supply chain experience cyber attacks, the services they provide us could be disrupted. This disruption could interfere with our ability to perform our obligations to others, which could negatively affect our financial condition and reputation. In addition, the theft, damage, or improper disclosure of sensitive data held by these third parties may subject us to further harm.  We participate in industry groups and with regulators to remain current on emerging threats and mitigating techniques.  While we have not experienced any security breach with a significant operational, reputational or financial impact, we recognize the growing threat within our industry and are proactively taking steps to continuously improve our technology, security measures, processes and services to detect, mitigate and protect our assets, both physical and cyber.



APPLICATION OF CRITICAL ACCOUNTING POLICIES



Our significant accounting policies are discussed in Note 1 to Financial Statements.  We prepare our financial statements in accordance with GAAP governing rate-regulated operations.  Application of these accounting policies in the preparation of our consolidated 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 revenues and expenses during the periods covered.  The following is a summary of certain critical accounting policies that are impacted by judgments and uncertainties and under which different amounts might be reported using different assumptions or estimation methodologies.



Accounting for the Effects of Income Taxes



Our tax sharing agreement with Oncor Holdings, STH (as successor to EFH Corp.) and Texas Transmission provides for the calculation of amounts related to income taxes for each of Oncor Holdings and Oncor substantially as if these entities were taxed as corporations and requires payments to the members determined on that basis (without duplication for any income taxes paid by a subsidiary of Oncor Holdings).



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We are a partnership for U.S. federal income tax purposes. Accordingly, while partnerships are not subject to income taxes, in consideration of the presentation of our financial statements as an entity subject to cost-based regulatory rate-setting processes with such costs historically including income taxes and the tax sharing agreement, the financial statements present amounts determined under the tax sharing agreement as “provision in lieu of income taxes” and “liability in lieu of deferred income taxes”.  Such amounts are determined in accordance with the provisions of the accounting guidance for income taxes and accounting standards that provide interpretive guidance for accounting for uncertain tax positions and thus differences between the book and tax bases of assets and liabilities are accounted for as if we were a stand-alone corporation. In the event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes.



Our expense amounts related to income taxes and related balance sheet amounts are recorded pursuant to our tax sharing agreement, as discussed above. Recording of such amounts involves significant management estimates and judgments, including judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities. In assessing the likelihood of realization of assets related to income taxes, management considers estimates of the amount and character of future taxable income. Actual amounts related to income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, our forecasted financial condition and results of operations in future periods, as well as final review of filed tax returns by taxing authorities. Our and STH’s income tax returns are regularly subject to examination by applicable tax authorities. In management’s opinion, any liability recorded pursuant to income tax accounting guidance related to uncertain tax positions reflects future amounts that may be owed as a result of any examination.



Amounts payable to and receivable from members related to income taxes on our balance sheet reflect our tax provision net of quarterly estimated tax payments required by the tax sharing agreement that are trued up the following year when the annual tax return is filed.



See Notes 1 and 5 to Financial Statements for additional information.



Regulatory Assets and Liabilities



We are subject to rate regulation and our financial statements reflect regulatory assets and liabilities in accordance with GAAP related to the effect of certain types of regulation.  Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process based on PURA and/or the PUCT’s orders, precedents or substantive rules.  Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital subject to PUCT review for reasonableness and prudence and possible disallowance.  Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates.  See Note 3 to Financial Statements for more information regarding regulatory assets and liabilities.



Impairment of Long-Lived Assets and Goodwill



We evaluate long-lived assets (including intangible assets with finite lives) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.



We also evaluate goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate that an impairment may exist.  The determination of the existence of these and other indications of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows.



If at the assessment date our carrying value exceeds our estimated fair value (enterprise value), then the estimated enterprise value is compared to the estimated fair values of our operating assets (including identifiable intangible assets) and liabilities at the assessment date.  The resultant implied goodwill amount is compared to the recorded goodwill amount.  Any excess of the recorded goodwill amount over the implied goodwill amount is written off as an impairment charge.



In each of 2019, 2018 and 2017, we concluded, based on a qualitative assessment, that our estimated enterprise fair value was more likely than not greater than our carrying value.  As a result, no additional testing for impairment was required and no impairments were recognized.

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Defined Benefit Pension Plans and OPEB Plans



We offer certain pension, health care and life insurance benefits to eligible employees (and certain eligible former employees of EFH Corp. and Vistra whose service was partially assigned to Oncor in connection with the deregulation and disaggregation of EFH Corp.’s electric utility business in 2002) and their eligible dependents upon the retirement of such employees as we discuss in Note 10 to Financial Statements.  We are authorized to establish a regulatory asset or liability for the difference between the amounts of pension and OPEB costs reflected in our PUCT-approved billing rates and the actual amounts that would otherwise have been recorded as charges or credits to earnings related to recoverable service.  Accordingly, we recognize (principally as a regulatory asset or property) additional pension and OPEB costs consistent with PURA.  Amounts deferred are ultimately subject to regulatory approval. 



Benefit costs are impacted by actual and actuarial estimates of employee demographics (including but not limited to age, compensation levels and years of accredited service), future health care costs, the level of contributions made to retiree plans, expected and actual earnings on plan assets and the discount rates used in determining the projected benefit obligation.  Actuarial assumptions are reviewed and updated annually based on current economic conditions and trends.  Changes made to the provisions of the plans may also impact current and future benefit costs.  Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased benefit costs in future periods.



In accordance with accounting rules, changes in benefit obligations associated with factors discussed above may be immediately recognized as a regulatory asset if related to recoverable service or in other comprehensive income and reclassified as a current cost in future years.  As such, significant portions of benefit costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants. 



See Note 10 to Financial Statements regarding other disclosures related to pension and OPEB plans obligations.

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RESULTS OF OPERATIONS



Operating Data



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(a)      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.

(b)      Excludes impacts of the Sharyland 2017Asset Exchange.

(c)Prior to November 27, 2017, the AMS surcharge was separately reconcilable and included as a line item with other miscellaneous revenues. On November 27, 2017, AMS-related expenses and returns became recoverable through distribution base revenues.     





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Financial Results ─ Year Ended December 31, 2019 Compared to Year Ended December 31, 2018



Total operating revenues increased $246 million, or 6%, to $4.347 billion in 2019.  Revenue is billed under tariffs approved by the PUCT. 



Revenues that contribute to earnings increased $224 million during 2019.  The change reflected the following components:







See the DCRF Filings Table below for a listing of annual filings impacting revenues for 2019 and 2018.



DCRF Filings Table







See TCOS Filings Table below for a listing of transmission interim rate update applications and anticipated impacts on revenues for the years ended December 31, 2019 and 2018, as well as filings and the anticipated impact to revenues for the year ending December 31, 2020.



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TCOS Filings Table

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Revenues collected for pass-through expenses include the following components. While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income and do not contribute to earnings. These revenues increased $22 million during the year ended December 31, 2019 and the change reflected: 





See TCRF Filings Table below for a listing of TCRF filings impacting cash flows for the year ended December 31, 2019 and 2018, as well as filings and the anticipated impacts to cash flows for the year ended December 31, 2020.



TCRF Filings Table





See EECRF Filings Table below for a listing of EECRF filings impacting revenues for the year ended December 31, 2019 and 2018, as well as filings that will impact revenues for the year ended December 31, 2020.



EECRF Filings Table



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(a) Monthly charges are for a residential customer using an assumed 1,200 kWh.



Wholesale transmission service expense increased $43 million, or 4%, to $1,005 million in 2019 primarily due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $24 million, or 3%, to $899 million in 2019. The increase includes $9 million higher labor and contractor related costs, $8 million in higher materials and transportation costs and $4 million higher energy efficiency program costs.



Depreciation and amortization increased $52 million to $723 million in 2019.  The increase is primarily attributable to ongoing investments in property, plant and equipment and $29 million from property, plant and equipment acquired in the InfraREIT Acquisition.



Provision in lieu of income taxes totaled $123 million (including a $15 million benefit related to nonoperating income) in 2019 compared to $117 million (including a $35 million benefit related to nonoperating income) in 2018. 



The effective income tax rate was 15.9% and 17.7% for the 2019 and 2018 periods, respectively. The effective tax rate on pretax income differs from the U.S. federal statutory rate of 21% primarily due to the amortization of the regulatory liability for excess deferred taxes as a result of the TCJA, partially offset by the effects of the Texas margin tax.



Taxes other than income taxes increased $12 million, or 2%, to $508 million in 2019.  The increase is primarily due to $28 million higher property taxes in the current period including $16 million related to the InfraREIT Acquisition and $4 million higher local franchise fees, partially offset by $20 million expense in the prior period related to recovery of certain municipal franchise fees as part of the 2017 rate review.

 

Other deductions and (income) - net was $21 million favorable in 2019 compared to 2018.  The variance is primarily due to allowance for funds used during construction (AFUDC) equity income recorded in the current period and Sempra Acquisition related costs reflected in the prior period.  See Note 13 to Financial Statements for more information.



Interest expense and related charges were $375 million and $351 million for 2019 and 2018, respectively.  The $24 million increase is primarily driven by a $61 million increase due to higher average borrowings including $27 million related to the InfraREIT Acquisition, partially offset by a $36 million decrease attributable to lower average interest rates.



Net income was $106 million higher than the prior period, primarily driven by an increase in revenues that contribute to earnings, the impacts of the InfraREIT Acquisition and favorable other income including AFUDC equity, partially offset by increases in operation and maintenance expense, property taxes, depreciation and amortization and a TCJA related write-off in the prior period.



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FINANCIAL CONDITION



Liquidity and Capital Resources



Cash Flows —  Year Ended December 31, 2019 Compared to Year Ended December 31, 2018



Cash provided by operating activities totaled $1,275 million and $1,482 million in 2019 and 2018, respectively. The $207 million decrease is primarily the result of a $162 million increase in storm costs, a  $66 million decrease in transmission and distribution receipts, a  $27 million increase in materials and supply purchases, and a  $23 million increase in interest payments. The decreases were partially offset by $47 million of lower employee benefit plan funding and $15 million of higher stock-based compensation related payments in the prior period.



Cash provided by financing activities totaled $2,104 million and $249 million in 2019 and 2018, respectively.  The $1,855 million net increase includes debt restructuring activity in connection with the InfraREIT Acquisition that included new debt issuances and the receipt of capital contributions, partially offset by the extinguishment of certain debt of InfraREIT and its subsidiaries.  The current period activity also includes an increase due to $1,160 million of new debt issuances, the repayment of all short-term debt and the repayment of Oncor senior secured notes that matured during the period.  For more details, see Notes 6 and 7 to Financial Statements for additional information regarding short-term borrowings and long-term debt activity, respectively, and Note 9 to Financial Statements for additional information regarding capital contributions from our members. 



Cash used in investing activities totaled $3,378 million and $1,749 million in 2019 and 2018, respectively.  The $1,629 million increase is primarily due to the $1,324 million purchase price paid for the InfraREIT Acquisition and a $330 million increase in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending in the current period. The “Other” line includes proceeds of $18 million from the sale of certain distribution assets. For more details on the purchase price paid for the InfraREIT Acquisition, see Note 2 to Financial Statements.



Depreciation and amortization expense reported in the statements of consolidated cash flows was $83 million and $106 million more than the amounts reported in the statements of consolidated income for the years ended December 31, 2019 and 2018, respectively.  The differences result from certain regulatory asset amortization reported in operation and maintenance expense and taxes other than income taxes.



Long-Term Debt Activity in 2019



Senior Secured Notes Issuances — In May 2019, we issued (i) $351 million of senior secured notes under the Note Purchase Agreements in exchange for a like principal amount of notes issued by InfraREIT subsidiaries, (ii) $500 million aggregate principal amount of 2024 Notes, (iii) $300 million aggregate principal amount of 2028 Notes and (iv) $500 million aggregate principal amount of 3.80% 2049 Notes.  In September 2019, we issued $700 million aggregate principal amount of 3.10% 2049 Notes (3.10% 2049 Notes and, together with the 2024 Notes, 2028 Notes and the 3.80% 2049 Notes, the New Indenture Notes).



Long-Term Unsecured Term Loan Credit Agreements —  In September 2019, we executed a $460 million term loan credit agreement that matures on October 6, 2020 (2019 Term Loan Agreement). At December 31, 2019, we had outstanding borrowings of $460 million under the 2019 Term Loan Agreement bearing interest at a per annum rate equal to, at Oncor’s option, (i) LIBOR plus 0.50%, or (ii) an alternate base rate (the highest of (1) the prime rate of Wells Fargo Bank National Association, the administrative agent under the agreement, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%). At December 31, 2019, we had outstanding borrowings of $460 million under the 2019 Term Loan Agreement bearing interest at the rate per annum of 2.28%.  See Note 7 to Financial Statements for additional information regarding the 2019 Term Loan Agreement. 



We entered into a $350 million aggregate principal amount term loan credit agreement in December 2018 (2018 Term Loan Agreement) that was repaid in full in November 2019. 



The 2019 Term Loan Agreement contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring certain additional liens (not including liens relating to obligations secured pursuant to our Deed of Trust, which are permitted); entering into mergers and consolidations; sales

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of substantial assets and acquisitions and investments in subsidiaries.  The 2019 Term Loan Agreement also contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2019, we were in compliance with this covenant and all other covenants in the 2019 Term Loan Agreement.  See “Credit Rating Provisions, Covenants and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio. While it was in effect, the 2018 Term Loan Agreement contained similar covenants to the 2019 Term Loan Agreement.



Use of Proceeds —  We used the proceeds (net of the initial purchasers’ discount, fees, expenses and accrued interest) of $2,446 million from the sale of the New Indenture Notes and borrowings on the 2019 Term Loan Agreement for general corporate purposes, including to repay all amounts outstanding under the Bridge Loan, to repay our $250 million aggregate principal amount of 2.15% Senior Secured Notes due June 1, 2019 and to repay CP Notes, when due, under our CP Program. For more information on the Bridge Loan, see Note 6 to Financial Statements. See Note 7 to Financial Statements for additional information regarding repayments, redemptions and issuances of long-term debt.



Long-Term Debt Repayments — Repayments of long-term debt during 2019 consisted of repayment of $488 million aggregate principal amount of certain InfraREIT-related long-term debt on May 16, 2019, in connection with and immediately following the closing of the InfraREIT Acquisition, $250 million aggregate principal amount of our 2.15% senior secured notes due June 1, 2019, $350 million aggregate principal amount under the 2018 Term Loan Agreement, and $6 million principal amount of the quarterly amortizing debt for our 2020 Notes, 2029 Notes and 2030 Notes.



Available Liquidity/CP Program/Credit Facility/Short-Term Borrowings  



Available Liquidity — Our primary source of liquidity, aside from operating cash flows, has been our ability to borrow under our Credit Facility, which also supports our CP Program.  Because the CP Program is supported by the Credit Facility, CP Notes outstanding is a reduction to the available borrowing capacity.  Cash and cash equivalents totaled $4 million and $3 million at December 31, 2019 and 2018, respectively.  Considering CP Notes and letters of credit outstanding, available liquidity (cash and available Credit Facility borrowing capacity) at December 31, 2019 totaled $1,948 million, reflecting an increase of $767 million from December 31, 2018 primarily due to the issuance of new long-term debt and the repayment of CP Notes.



CP Program — As discussed in Note 6 to Financial Statements, in March, 2018 we established the CP Program, under which we may issue unsecured CP Notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2.0 billion.  A national bank acts as the issuing and paying agent under the CP Program pursuant to the terms of an issuing and paying agent agreement.  Under the CP Program, we issue CP Notes from time to time, and the proceeds of the CP Notes are used for short-term financing of our business operations.  At December 31, 2019, we had $46 million of CP Notes outstanding under the CP Program.     



The CP Program obtains liquidity support from our Credit Facility discussed below.  We may utilize either the CP Program or the Credit Facility at our option for funding.  See Note 6 to Financial Statements for additional information regarding the CP Program.



Credit Facility — At December 31, 2019, we had a $2.0 billion unsecured Credit Facility to be used for working capital and general corporate purposes, issuance of letters of credit and to support our CP Program with a five-year term expiring in November 2022.  We have the option of requesting up to two one-year extensions and an option to request an increase in our borrowing capacity of $400 million, in increments of not less than $100 million, provided certain conditions are met, including lender approvals.  Borrowings under the Credit Facility are classified as short-term on our balance sheets.  At December 31, 2019, we had no outstanding borrowings under the Credit Facility.



Because the CP Program is supported by the Credit Facility, CP Notes outstanding reduce the available borrowing capacity.  Considering the CP Notes outstanding and the limitations described below, available borrowing capacity under the Credit Facility totaled $1,944 million and $1,178 million at December 31, 2019 and 2018, respectively. 



The Credit Facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring certain additional liens (not including liens relating to obligations secured pursuant to our Deed of Trust, which are permitted); entering into mergers and consolidations; sales of substantial assets and acquisitions and investments in subsidiaries.  The Credit Facility also contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2019,

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we were in compliance with all covenants in the Credit Facility.  See “Credit Rating Provisions, Covenants and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.



Under the terms of the 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 6 to Financial Statements for additional information regarding the Credit Facility.  



May 2019 Short-Term Bridge Loan — On May 9, 2019, we entered into the Bridge Loan, a short-term, unsecured term loan credit agreement in an aggregate principal amount of up to $600 million in connection with the InfraREIT Acquisition.  The Bridge Loan had a six-month term, maturing on November 9, 2019.  We borrowed $600 million under the Bridge Loan on May 15, 2019 and used the proceeds to repay certain debt of InfraREIT subsidiaries. We repaid all outstanding amounts under the Bridge Loan in full on May 23, 2019, and as a result the Bridge Loan is no longer in effect.  See Note 6 to Financial Statements for more information relating to the Bridge Loan and its repayment. 



January 2020 Term Loan Credit Agreement — On January 28, 2020, we executed a $450 million term loan credit agreement that matures on June 1, 2021 (January 2020 Term Loan Agreement). The January 2020 Term Loan Agreement provides that we can borrow the full amount in up to four borrowings by April 27, 2020.  On January 29, 2020, we borrowed $163 million under the January 2020 Term Loan Agreement and on February 25, 2020, we submitted an irrevocable borrowing notice for a $55 million borrowing, to be made on February 28, 2020. The proceeds from each borrowing are to be used for general corporate purposes. Loans under the January 2020 Term Loan Agreement bear interest at per annum rates equal to, at our option, (i) LIBOR plus 0.50% until June 1, 2021, or (ii) an alternate base rate (the highest of (1) the prime rate of Sumitomo Mitsui Banking Corporation, the administrative agent under the agreement, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%).



The January 2020 Term Loan Agreement contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring certain additional liens (not including liens relating to obligations secured pursuant to our Deed of Trust, which are permitted); entering into mergers and consolidations; sales of substantial assets and acquisitions and investments in subsidiaries.  The January 2020 Term Loan Agreement also contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future. See “Credit Rating Provisions, Covenants and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.



Regulatory Capital Structure —We have committed to the PUCT to maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is 57.5% debt to 42.5% equity as of December 31, 2019 and 2018.  Our current regulatory assumed debt-to-equity ratio went into effect on November 27, 2017 as part of the PUCT order issued in the rate review we filed in PUCT Docket No. 46957.  Our regulatory capitalization ratio was 54.8% debt to 45.2% equity and 57.3% debt to 42.7% equity at December 31, 2019 and December 31, 2018, respectively.  See Note 9 to Financial Statements for discussion of the regulatory capitalization ratio and Note 3 to Financial Statements for a discussion of our 2017 rate review (PUCT Docket No. 46957).  Our ability to incur additional long-term debt is limited by our regulatory capital structure, as we are able to issue future long-term debt only to the extent that we are in compliance therewith.



Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $2.5 billion in 2020.  Management currently expects to recommend to our board of directors capital expenditures of $2.3 billion to $2.4 billion in each of the years 2021 through 2024, for a total of $11.9 billion for the five year period 2020 through 2024, based on the long-term plan presented to our board of directors. These capital expenditures are expected to be used for investment in transmission and distribution infrastructure, including expansion, maintenance and information technology.    In connection with the PUCT approval of the Sempra Acquisition, we committed to making a minimum of $7.5 billion in capital expenditures over the period from January 1, 2018 to December 31, 2022. As a result of our projected capital expenditures and our 2019 and 2018 capital expenditures of $2.1 billion and $1.8 billion, respectively, we expect to exceed that minimum spend.



We expect cash flows from operations combined with long-term debt issuances and term loan credit agreements as well as availability under the CP Program and 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.  Should additional liquidity or capital requirements arise, we may need additional access to capital markets, seek

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member capital contributions or preserve equity through reductions or suspension of distributions to members.  In addition, we may also consider additional 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.





Cash Contributions — On February 18, 2020, we received cash capital contributions from our members totaling $87 million.  During 2019, we received the following capital cash contributions from our members: 





Cash Distributions — The PUCT order issued in the Sempra Acquisition and our Limited Liability Company Agreement set forth various restrictions on distributions to our members. Among those restrictions is the commitment that we will make no distributions that would cause us to be out of compliance with the PUCT’s approved debt-to-equity ratio, which is currently 57.5% debt to 42.5% equity. The distribution restrictions also include the ability of our board, a majority of the Disinterested Directors, or either of the two member directors designated by Texas Transmission to limit distributions to the extent each determines it is necessary to meet expected future requirements of Oncor (including continuing compliance with the PUCT debt-to-equity ratio commitment).  At December 31, 2019, we had $751 million available to distribute to our members as our regulatory capitalization ratio was 54.8% debt to 45.2% 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 including any finance leases plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of acquisition accounting from a 2007 transaction.



On February 19, 2020, our board of directors declared a cash distribution of $91 million, which was paid to our members on February 20, 2020.  During 2019, our board of directors declared, and we paid, the following cash distributions to our members:







Pension and OPEB Plans Funding — Our funding for the pension and Oncor OPEB plans for the calendar year 2020 is expected to total $177 million and $35 million, respectively.  Based on the funded status of the pension plans at December 31, 2019, our aggregate pension and Oncor OPEB plans funding is expected to total approximately $747 million in the five year period 2020 to 2024.  In 2019, we made cash contributions to the pension and OPEB plans of $41 million and $35 million, respectively.  See Note 10 to Financial Statements for additional information regarding pension and OPEB plans.



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Capitalization — Our GAAP capitalization ratios were 42.6% and 40.8% long-term debt, less amounts due currently, to 57.4% and 59.2% membership interests at December 31, 2019 and 2018, respectively.  See Note 9 to Financial Statements for discussion of the regulatory capitalization ratio.





Credit Rating Provisions, Covenants and Cross Default Provisions    



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 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 February 27, 2020.



As described in Note 6 to Financial Statements, we established the CP Program in March 2018. The CP Program obtains liquidity support from our Credit Facility. As described in Note 7 to Financial Statements, our long-term debt (other than the $460 million unsecured term loan credit agreement we entered into in September 2019) 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 — The Credit Facility contains terms pursuant to which interest rates charged under the Credit Facility may be adjusted depending on credit ratings.  Borrowings under the agreement bear interest at per annum rates equal to, at our option, (i) adjusted LIBOR plus a spread ranging from 0.875% to 1.50% 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) adjusted LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.50% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the ratings assigned to our senior secured debt securities at February 27, 2020, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.00%.  A decline in credit ratings would increase the cost of borrowing under the Credit Facility and likely increase the cost of our CP Program and any other debt issuances and additional credit facilities.  The CP Program requires prompt notice to the dealer of any notice of intended or potential downgrade of our credit ratings.

 

Material Financial Covenants — Our Credit Facility, our term loan credit agreements and the Note Purchase Agreements each contain a financial covenant that requires maintenance of a consolidated 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 applicable agreement (principally, the sum of long-term debt, any capital leases (referred to as finance leases under current accounting literature), short-term debt and debt due currently in accordance with GAAP).  Capitalization for our Credit Facility and term loan credit agreements is calculated as membership interests determined in accordance with GAAP plus debt described above. The ratio under our Note Purchase Agreements is calculated as total debt (all debt of the company and subsidiaries on a

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consolidated basis) divided by the sum of total debt plus capitalization. Capitalization under the Note Purchase Agreements is calculated as membership interests plus liabilities for indebtedness maturing more than 12 months from the date of determination, with capitalization determined in accordance with GAAP and practices applicable to our type of business.  At December 31, 2019, we were in compliance with this covenant and all other covenants under the Credit Facility, 2019 Term Loan Agreement and Note Purchase Agreements.



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 the Credit Facility, our term loan credit agreements and the Note Purchase Agreements, a default by us or any 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 $100 million that are not discharged within 60 days may cause the maturity of outstanding balances under those facilities to be accelerated.



Under the Deed of Trust, an event of default under our indentures or, after all applicable notices have been given and all applicable grace periods have expired, under the Note Purchase Agreements, would permit the holders of our senior secured notes to exercise their remedies under the Deed of Trust.



Long-Term Contractual Obligations and Commitments — The following table summarizes our contractual cash obligations at December 31, 2019.  See Notes 7 and 8 to Financial Statements for additional disclosures regarding long-term debt and operating lease obligations.

____________



The following are not included in the table above:



Guarantees — At December 31, 2019, we did not have any material guarantees.



OFF-BALANCE SHEET ARRANGEMENTS



At December 31, 2019, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.



COMMITMENTS AND CONTINGENCIES



See Note 8 to Financial Statements for details of commitments and contingencies.



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CHANGES IN ACCOUNTING STANDARDS



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



REGULATION AND RATES



State Legislation



The Texas Legislature meets every two years.  During the 2019 legislative session, no legislation passed that is expected to have a  material impact on our financial position, results of operations or cash flows.



Matters with the PUCT



On May 9, 2019, the PUCT issued a final order in Docket No. 48929 approving the transactions contemplated by the InfraREIT Acquisition, including the SDTS-SU Asset Exchange, and the Sempra-Sharyland Transaction. For more information on the InfraREIT Acquisition, see Note 2 to Financial Statements. In March 2018, the PUCT issued a final order in Docket No. 47675 regarding the Sempra Acquisition. For more information on the Sempra Acquisition, see Note 14 to Financial Statements.



For information on other regulatory proceedings, see Note 3 to Financial Statements.



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 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 



Interest Rate 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 from time to time, but there were no such hedges in place at December 31, 2019.  At December 31, 2019 and 2018, all of our long-term debt except for the $460 million and $350 million term loan credit agreement balances at December 31, 2019 and 2018, respectively, carried fixed interest rates.  The following table summarizes our long-term debt maturities at December 31, 2019.



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(a)       Excludes unamortized premiums, discounts and debt issuance costs.  See Note 7 to Financial Statements for a discussion of changes in long-term debt obligations.



At December 31, 2019, the potential reduction of annual pretax earnings over the next twelve months due to a one percentage-point (100 basis points) increase in floating interest rates on debt (including short-term borrowings) totaled $5 million.



Our term loan credit agreements contain terms pursuant to which the interest rate charged can vary, at our option, depending on the selected interest period.  Our Credit Facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings. For information on our interest rates charged under: (i) the Credit Facility, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Liquidity and Capital Resources – Credit Rating Provisions, Covenants and Cross Default Provisions – Material Credit Rating Covenants,” (ii) the 2019 Term Loan Credit Agreement, see “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Liquidity and Capital Resources – Long-Term Debt Activity in 2019 – Long-Term Unsecured Term Loan Credit Agreements” and (iii) the January 2020 Term Loan Credit Agreement, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Liquidity and Capital Resources – Available Liquidity/CP Program/Credit Facility/Short-Term Borrowings – January 2020 Term Loan Credit Agreement.”



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 REPs through rates significantly reduce our credit risk. 



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Our exposure to credit risk associated with trade accounts receivable totaled $666 million at December 31, 2019.  The receivable amount is before the allowance for uncollectible accounts, which totaled $5 million at December 31, 2019.  The exposure includes trade accounts receivable from REPs totaling $492 million, which are almost entirely noninvestment grade and from transmission customers totaling $48 million, which include investment grade distribution companies and cooperatives and municipalities, which are generally considered low credit risk.  At December 31, 2019, REP subsidiaries of two entities represented 15% and 11% of the trade receivable balance.  No other parties represented 10% or more of the total trade accounts receivable balance.  We view our exposure to these customers 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.



Our net exposure to credit risk associated with trade accounts and other receivables from affiliates was zero at both December 31, 2019 and 2018. 



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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 this report and the following important factors, among others, that could cause our 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.



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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Members of 

Oncor Electric Delivery Company LLC 

Dallas, Texas



Opinion on the Financial Statements



We have audited the accompanying consolidated balance sheets of Oncor Electric Delivery Company LLC and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and membership interests, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.



Basis for Opinion



These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 



We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.







/s/ Deloitte & Touche LLP



Dallas, Texas



February 27, 2020



We have served as the Company’s auditor since 2002.















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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED INCOME







See Notes to Financial Statements.





ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME









See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED CASH FLOWS





See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONSOLIDATED BALANCE SHEETS





See Notes to Financial Statements.



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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED MEMBERSHIP INTERESTS



























See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    DESCRIPTION OF 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 subsidiaries 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 that sell power in the north-central, eastern, western and panhandle regions of Texas.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is indirectly and wholly owned by Sempra. Oncor Holdings owns 80.25% of our membership interests and Texas Transmission owns 19.75% of our membership interests.  We are managed as an integrated business; consequently, there are no separate reportable business segments.



Our consolidated financial statements for the fiscal year ended December 31, 2019, include the results of our wholly owned indirect subsidiary, NTU, which is a regulated utility that provides electricity transmission delivery service in the north-central, western and panhandle regions of Texas. We acquired NTU as part of the InfraREIT Acquisition that closed on May 16, 2019.



Ring-Fencing Measures



Since 2007, various ring-fencing measures have been taken to enhance our credit quality and the separateness between the Oncor Ring-Fenced Entities and entities with ownership interests in Oncor or Oncor Holdings. These ring-fencing measures serve to mitigate the Oncor Ring-Fenced Entities’ credit exposure to owners of Oncor and Oncor Holdings, and to reduce the risk that the assets and liabilities of Oncor Ring-Fenced Entities would be substantively consolidated with the assets and liabilities of any direct or indirect owners of Oncor and Oncor Holdings in connection with a bankruptcy of any such entities. These measures include the November 2008 sale of 19.75% of Oncor’s equity interests to Texas Transmission.



In March 2018, Sempra indirectly acquired Oncor Holdings through the Sempra Acquisition. The Sempra Acquisition was consummated after obtaining the approval of the bankruptcy court in the EFH Bankruptcy Proceedings and the PUCT. The PUCT approval was obtained in Docket No. 47675, and the final order issued in that docket (Sempra Order) outlines certain ring-fencing measures, governance mechanisms and restrictions that apply after the Sempra Acquisition. As a result of these ring-fencing measures, Sempra does not control Oncor, and the ring-fencing measures limit Sempra’s ability to direct the management, policies and operations of Oncor, including the deployment or disposition of Oncor’s assets, declarations of dividends, strategic planning and other important corporate issues and actions.



None of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or obligations of any Sempra entity or any other direct or indirect owner of Oncor or Oncor Holdings.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of any Sempra entities and any other direct or indirect owner of Oncor or Oncor Holdings.  We do not bear any liability for debt or contractual obligations of Sempra and its affiliates or any other direct or indirect owner of Oncor or Oncor Holdings, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from Sempra and its affiliates and any other direct or indirect owner of Oncor or Oncor Holdings.



Oncor is a limited liability company governed by a board of directors, not its members. The Sempra Order and our Limited Liability Company Agreement require that the board of directors of Oncor consist of thirteen members, constituted as follows:



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In order for a current or former officer of Oncor to be eligible to serve as an Oncor Officer Director, the officer cannot have worked for Sempra or any of its affiliates (excluding Oncor Holdings and Oncor) or any other entity with a direct or indirect ownership interest in Oncor or Oncor Holdings in the ten-year period prior to the officer being employed by Oncor.  Oncor Holdings, at the direction of STIH, has the right to nominate and/or seek the removal of the Oncor Officer Directors, subject to approval by a majority of the Oncor board of directors.  STIH is a wholly owned indirect subsidiary of, and controlled by, Sempra following the Sempra Acquisition.



In addition, the Sempra Order provides that Oncor’s board cannot be overruled by the board of Sempra or any of its subsidiaries on dividend policy, the issuance of dividends or other distributions (except for contractual tax payments), debt issuance, capital expenditures, operation and maintenance expenditures, management and service fees, and appointment or removal of board members, provided that certain actions may also require the additional approval of the Oncor Holdings board of directors. The Sempra Order also provides that any changes to the size, composition, structure or rights of the board must first be approved by the PUCT. In addition, if Sempra acquires Texas Transmission’s interest in Oncor, the two board positions on Oncor’s board of directors that Texas Transmission is entitled to appoint will be eliminated and the size of Oncor’s board of directors will be reduced by two.



Additional regulatory commitments, governance mechanisms and restrictions provided in the Sempra Order and our Limited Liability Company Agreement to ring-fence Oncor from its owners include, among others:



















Basis of Presentation



Our consolidated financial statements have been prepared in accordance with GAAP governing rate-regulated operations.  All dollar amounts in the financial statements and tables in the notes are stated in millions of U.S. 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.  No material adjustments were made to previous estimates or assumptions during the current year.



Revenue Recognition



Oncor’s revenue is billed under tariffs approved by the PUCT and the majority of revenues are related to providing electric delivery service to consumers.  Tariff rates are designed to recover the cost of providing electric delivery service including a reasonable rate of return on invested capital.  Revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff.  See Note 4 for additional information regarding revenues.



Goodwill



The increase in goodwill to $4,740 million at December 31, 2019 from $4,064 million at December 31, 2018 is due to the InfraREIT Acquisition. See Note 2 for more information on the InfraREIT Acquisition.



Impairment of Long-Lived Assets and Goodwill



We evaluate long-lived assets (including intangible assets with finite lives) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  We also evaluate goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate that an impairment may exist. The determination of the existence of these and other indications of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows. 



If at the assessment date our carrying value exceeds our estimated fair value (enterprise value), then the estimated enterprise value is compared to the estimated fair values of our operating assets (including identifiable intangible assets) and liabilities at the assessment date.  The resultant implied goodwill amount is compared to the recorded goodwill amount.  Any excess of the recorded goodwill amount over the implied goodwill amount is written off as an impairment charge.



In each of 2019, 2018 and 2017, we concluded, based on a qualitative assessment, that our estimated enterprise fair value was more likely than not greater than our carrying value.  As a result, no additional testing for impairment was required and no impairments were recognized.



Provision in Lieu of Income Taxes



Our tax sharing agreement with Oncor Holdings, Texas Transmission and STH (as successor to EFH Corp.) provides for the calculation of amounts related to income taxes for each of Oncor Holdings and Oncor substantially as if these entities were taxed as corporations and requires payments to the members determined on that basis (without duplication for any income taxes paid by a subsidiary of Oncor Holdings).



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We are a partnership for U.S. federal income tax purposes. Accordingly, while partnerships are not subject to income taxes, in consideration of the presentation of our financial statements as an entity subject to cost-based regulatory rate-setting processes, with such costs historically including income taxes, the financial statements present amounts determined under the tax sharing agreement as “provision in lieu of income taxes” and “liability in lieu of deferred income taxes”.  Such amounts are determined in accordance with the provisions of the accounting guidance for income taxes and accounting standards that provide interpretive guidance for accounting for uncertain tax positions and thus differences between the book and tax bases of assets and liabilities are accounted for as if we were a stand-alone corporation. In the event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes.



We classify any interest and penalties expense related to uncertain tax positions as current provision in lieu of income taxes as discussed in Note 5.



Defined Benefit Pension Plans and Oncor OPEB Plans



We have liabilities under pension plans that offer benefits based on either a traditional defined benefit formula or a cash balance formula and Oncor OPEB plans that offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees.  Costs of pension and Oncor OPEB plans are dependent upon numerous factors, assumptions and estimates.  See Note 10 for additional information regarding pension and OPEB plans.



System of Accounts



Our accounting records have been maintained in accordance with the FERC Uniform System of Accounts as adopted by the PUCT.



Property, Plant and Equipment



Properties are stated at original cost. The cost of self-constructed property additions includes materials and both direct and indirect labor and applicable overhead and an allowance for funds used during construction.



Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated service lives of the properties based on depreciation rates approved by the PUCT.  As is common in the industry, depreciation expense is recorded using composite depreciation rates that reflect blended estimates of the lives of major asset groups as compared to depreciation expense calculated on a component asset-by-asset basis.  Depreciation rates include plant removal costs as a component of depreciation expense, consistent with regulatory treatment.  Actual removal costs incurred are charged to accumulated depreciation.  Accrued removal costs in excess of incurred removal costs are reclassified as a regulatory liability to retire assets in the future.



Regulatory Assets and Liabilities



We are subject to rate regulation and our financial statements reflect regulatory assets and liabilities in accordance with accounting standards related to the effect of certain types of regulation.  Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process based on PURA and/or the PUCT’s orders, precedents or substantive rules.  Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital subject to PUCT review for reasonableness and prudence and possible disallowance.  Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates.  See Note 3 for more information regarding regulatory assets and liabilities.



Franchise Taxes



Franchise taxes are assessed to us by local governmental bodies, based on kWh delivered and are a principal component of taxes other than amounts related to income taxes as reported in the income statement.  Franchise taxes are not a “pass through” item.  The rates we charge customers are intended to recover the franchise taxes, but we are not acting as an agent to collect the taxes from customers.



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Allowance for Funds Used During Construction (AFUDC)



AFUDC is a regulatory cost accounting procedure whereby both interest charges on borrowed funds and a return on equity capital used to finance construction are included in the recorded cost of utility plant and equipment being constructed.  AFUDC is capitalized on all projects involving construction periods lasting greater than thirty days.  The interest portion of capitalized AFUDC is accounted for as a reduction to interest expense and the equity portion of capitalized AFUDC is accounted for as other income.  See Note 13 for detail of amounts reducing interest expense and increasing other income.



Cash and Cash Equivalents



For purposes of reporting cash and cash equivalents, temporary cash investments purchased with an original maturity of three months or less are considered to be cash equivalents. 



Fair Value of Nonderivative Financial Instruments



The carrying amounts for financial assets classified as current assets and the carrying amounts for financial liabilities classified as current liabilities approximate fair value due to the short maturity of such instruments.  The fair values of other financial instruments, for which carrying amounts and fair values have not been presented, are not materially different than their related carrying amounts.  The following discussion of fair value accounting standards applies primarily to our determination of the fair value of assets in the pension and Oncor OPEB plans’ trusts (see Note 10) and long-term debt (see Note 7).



Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We use a “mid-market” valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities subject to fair value measurement on a recurring basis.  We primarily use the market approach for recurring fair value measurements and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs.



We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:









We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis.



The fair value of certain investments is measured using the net asset value (NAV) per share as a practical expedient.  Such investments measured at NAV are not required to be categorized within the fair value hierarchy.



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Derivative Instruments and Mark-to-Market Accounting



From time-to-time we enter 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 cash flow hedge accounting are met.  This recognition is referred to as “mark-to-market” accounting.



 Changes in Accounting Standards  



Topic 842, “Leases” – In February 2016, the FASB issued ASU 2016-02 which created FASB Topic 842, Leases (Topic 842).  Topic 842 amends previous GAAP to require the balance sheet recognition of substantially all lease assets and liabilities, including operating leases.  Operating lease liabilities are not classified as debt for GAAP purposes under Topic 842 and are not treated as debt for our regulatory purposes.  All of Oncor’s existing leases meet the definition of an operating lease.  Under the new rules, the recognition of any finance leases (previously known as capital leases) on the balance sheet are classified as debt for both GAAP and regulatory capital structure purposes (see Note 8 for details) similar to the previous capital lease treatment. 



We adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance prospectively and not restate comparative periods.  We elected the package of practical expedients that permits us to not reassess (a) whether a contract is or contains a lease, (b) lease classification or (c) determination of initial direct costs, which allows us to carry forward accounting conclusions under previous GAAP on contracts that commenced prior to adoption of the lease standard.  We also elected the land easement practical expedient, which allows us to continue to account for pre-existing land easements under our accounting policy that existed before adoption of the lease standard.  We did not elect the practical expedient to use hindsight in making judgments when determining the lease term.



The adoption of Topic 842 affects our balance sheet, as our contracts for office space, service centers and fleet vehicles are operating leases.  The following table shows the increases on our balance sheet at January 1, 2019 from the initial adoption of Topic 842.







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Topic 220, “Income Statement—Reporting Comprehensive Income” amended by ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” – In February 2018, the FASB issued ASU 2018-02, an amendment to Topic 220.  Under ASU 2018-02, an entity is required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from accumulated other comprehensive income (AOCI).  We elected to reclassify stranded tax effects resulting from the TCJA from AOCI to capital accounts.  Our stranded tax effects in AOCI, which are related to previous interest rate cash flow hedges, were $4 million and increased our capital account upon reclassification.  We adopted the standard on a prospective basis effective January 1, 2019.



Topic 326, “Financial Instruments—Credit Losses” – In June 2016 the FASB issued ASU No. 2016-13, which changes how entities account for credit losses on receivables and certain other assets. The guidance requires use of a current expected credit loss model, which may result in earlier recognition of credit losses than under previous accounting standards.  Topic 326 is required to be adopted in the first quarter of fiscal 2020 with earlier adoption permitted.  We adopted on a prospective basis effective January 1, 2020. The adoption of the new standard did not have a material impact on our consolidated financial statements.



Topic 350, “Intangibles, Goodwill and Other —Internal-Use Software (Subtopic 40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service”  – In August 2018, the FASB issued ASU 2018-15 which clarifies the accounting for implementation costs in cloud computing arrangements.  ASU 2018-15 is required to be adopted in the first quarter of fiscal 2020 with earlier adoption permitted. We have early adopted on a prospective basis effective July 1, 2019.  The early adoption did not have a material effect on our consolidated financial statements.



2.   ACQUISITION ACTIVITY



InfraREIT Acquisition



On May 16, 2019, we completed the InfraREIT Acquisition, pursuant to which we acquired all of the equity interests of InfraREIT and its subsidiary, InfraREIT Partners. The InfraREIT Acquisition occurred through the merger of InfraREIT with and into a newly formed wholly owned subsidiary of Oncor, followed by the merger of another newly formed wholly owned subsidiary of Oncor with and into InfraREIT Partners.  The stockholders of InfraREIT and the limited partners of InfraREIT Partners received $21.00 in cash per share of common stock or limited partnership unit, as applicable, resulting in a total cash consideration of $1,275 million.  In addition, we paid certain transaction costs incurred by InfraREIT (including a management agreement termination fee of $40 million that InfraREIT paid an affiliate of Hunt Consolidated, Inc. at closing), with the aggregate cash consideration and payment of InfraREIT expenses totaling $1,324 million.



In connection with and immediately following the closing of the InfraREIT Acquisition, on May 16, 2019, we extinguished all $953 million outstanding principal amount of debt of InfraREIT and its subsidiaries through repaying $602 million principal amount of InfraREIT subsidiary debt and exchanging $351 million principal amount of InfraREIT subsidiary debt for new Oncor senior secured debt, as discussed in more detail in Notes 6 and 7.



On May 15, 2019, in connection with the InfraREIT Acquisition, we received capital contributions in an aggregate amount of $1,330 million from Sempra and certain indirect equity holders of Texas Transmission to fund the cash consideration and certain transaction expenses.

 

As a condition to the InfraREIT Acquisition, SDTS, and SDTS’s tenant, SU, completed the SDTS-SU Asset Exchange immediately prior to the closing of the InfraREIT Acquisition, pursuant to which SDTS exchanged certain of its south Texas assets for certain north Texas assets owned by SU. The north Texas assets acquired by SDTS consisted of certain real property and other assets owned by SU and used in the electric transmission and distribution business in central, north and west Texas, as well as equity interests in GS Project Entity, L.L.C., a Texas limited liability company that was merged with and into SDTS. The south Texas assets acquired by SU consisted of real property and other assets near the Texas-Mexico border. As a result of the InfraREIT Acquisition closing, we and our subsidiary NTU now own all of the assets and projects in the north, central, west and panhandle regions of Texas held by SDTS and SU immediately prior to the InfraREIT Acquisition, and Sharyland owns the assets that were held by SU and SDTS in south Texas immediately prior to the InfraREIT Acquisition.  The assets we acquired include approximately 1,575 miles of transmission lines, including 1,235 circuit miles of 345kV transmission lines and approximately 340 circuit miles of 138kV transmission lines. The north, central, and west Texas transmission system acquired by us in the transaction is directly

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connected to approximately 20 operational generation facilities totaling approximately 3,900 MW and serves over 50 substations.  We also acquired various projects in the north, central, west and panhandle regions of Texas, including a joint project with Lubbock Power & Light (LP&L) for the build out and associated station work to join most of the City of Lubbock’s electric facilities to the ERCOT market. Costs and investments for this project are ultimately to be split between Oncor and LP&L, with Oncor performing the construction and invoicing LP&L for its portion of the costs on a monthly basis.

 

In addition, as a condition to the closing of the SDTS-SU Asset Exchange, Sempra acquired an indirect 50 percent interest in Sharyland Holdings, the parent of Sharyland, in the Sempra-Sharyland Transaction. As a result of the Sempra-Sharyland Transaction, Sharyland is now our affiliate for purposes of PUCT rules.   Pursuant to the agreement governing the SDTS-SU Asset Exchange and the PUCT order in Docket No. 48929 approving the InfraREIT Acquisition, upon closing of the InfraREIT Acquisition we entered into an operation agreement pursuant to which we will provide certain operations services to Sharyland at cost with no markup or profit.



Business Combination Accounting



We accounted for the InfraREIT Acquisition as a business acquisition with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the closing date. The combined results of operations are reported in our consolidated financial statements beginning as of the closing date. A summary of techniques used to estimate the preliminary fair value of the identifiable assets and liabilities is listed below.





The following tables set forth the purchase price paid and the allocation of the total purchase price paid to the identifiable assets acquired and liabilities assumed. The purchase price allocation is preliminary and the allocation to each identifiable asset acquired and liability assumed may change based upon the receipt of more detailed information and additional analyses related primarily to income tax liabilities.  In the year ended December 31, 2019, we made various purchase price allocation adjustments related primarily to working capital accounts resulting in an $11 million reduction to goodwill.  We currently expect the final purchase price allocation will be completed no later than the second quarter of 2020.





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The goodwill of $676 million arising from the InfraREIT Acquisition is attributable to the assets acquired, which expand our transmission footprint and help us support ERCOT market growth. None of the goodwill is recoverable nor provides a tax benefit in the rate-making process.  We did not assume any employee benefit obligations in the acquisition. 



Acquisition costs incurred in the InfraREIT Acquisition by Oncor and recorded to other deductions totaled $9 million in 2019.  Our statements of consolidated income include revenues and net income of the acquired business totaling $156 million and $58 million, respectively, since the May 16, 2019 acquisition date.



Unaudited Pro Forma Financial Information



The following unaudited pro forma financial information for the year ended December 31, 2019 and 2018 assumes that the InfraREIT Acquisition occurred on January 1, 2018. The unaudited pro forma financial information is provided for information purposes only and is not necessarily indicative of the results of operations that would have occurred had the InfraREIT Acquisition been completed on January 1, 2018, nor is the unaudited pro forma financial information indicative of future results of operations, which may differ materially from the pro forma financial information presented here.







The unaudited pro forma financial information above excludes pro forma earnings due to the impracticability of a calculation.  The acquiree previously operated under a real estate investment trust structure with a unique cost structure and unique federal tax attributes.  An accurate retrospective application cannot be objectively and reliably calculated as the new cost structure and new tax attributes would require a significant amount of estimates and judgments. 





Sharyland 2017 Asset Exchange



In November, 2017, we exchanged approximately $383 million of our transmission assets, consisting of 517 circuit miles of 345kV transmission lines, and approximately $25 million in cash for approximately $408 million of the Sharyland Entities’ distribution assets (constituting substantially all of their electricity distribution business) and certain of their transmission assets pursuant to the Sharyland 2017 Agreement. The Sharyland 2017 Asset Exchange expanded our customer base in west Texas and provides some potential growth opportunities for our distribution network. The exchange of assets between Oncor and the Sharyland Entities was structured to qualify, in part, as a simultaneous tax deferred like kind exchange to the extent that the assets exchanged are of “like kind” (within the meaning of section 1031 of the Code).

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The Sharyland 2017 Asset Exchange did not have a material effect on our results of operations, financial position or cash flows.



3.    REGULATORY MATTERS          



Regulatory Assets and Liabilities    



Recognition of regulatory assets and liabilities and the periods over which they are to be recovered or refunded through rate regulation reflect the decisions of the PUCT.  Components of our regulatory assets and liabilities and their remaining recovery periods as of December 31, 2019 are provided in the table below.  Amounts not earning a return through rate regulation are noted.

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InfraREIT Acquisition Approval (PUCT Docket No. 48929)



On May 9, 2019, the PUCT issued a final order in Docket No. 48929 approving the transactions contemplated by the InfraREIT Acquisition, including the SDTS-SU Asset Exchange, and the Sempra-Sharyland Transaction. For more information on these transactions, see Note 2.



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Regulatory Status of the TCJA



The excess deferred tax related balances above are primarily the result of the TCJA corporate federal income tax rate reduction from 35% to 21%.  These regulatory liabilities reflect our obligation, as required by PUCT order in Docket No. 46957, to refund to utility customers any excess deferred tax related balances created by the reduction in the corporate federal income tax rate through reductions in our tariffs.



In 2018, we made filings to incorporate the impacts of the TCJA into our tariffs, including the reduction in the corporate income tax rate from 35% to 21% and amortization of excess deferred federal income taxes.  In September 2018, we reached an unopposed stipulation regarding an overall settlement of the TCJA impacts. The settlement included, on an annual basis, $144 million decrease in our revenue requirement related to the reduction of income tax expense currently in rates and  a $75 million decrease related to amortization of excess deferred federal income taxes. Unprotected excess deferred federal income taxes are being refunded over a ten-year period and the protected excess deferred federal income taxes are being refunded over the lives of the related assets.  



The settlement rates were implemented on an interim basis during 2018 and were approved by the PUCT on April 4, 2019.  During 2018, interim TCOS rates included refunds of excess deferred federal income taxes that were lower than the amount ultimately approved by the PUCT. Therefore, the PUCT approved in Docket 49160 an additional one time refund of $9 million, which was made in April and May of 2019.



DCRF (PUCT Docket No. 49427) 



On April 8, 2019, we filed with the PUCT, as well as with cities with original jurisdiction over our rates, an application for approval of an updated DCRF.  The DCRF allows us to recover, primarily through our tariff for retail delivery service, certain costs related to our distribution investments.  In our DCRF application, we requested a $29 million increase in annual distribution revenues related to 2018 distribution investments.  On May 30, 2019, a stipulated settlement agreement among the parties to the proceeding was reached that included a $25 million increase in annual distribution revenues, and, on June 10, 2019, interim rates based on the stipulated settlement agreement were authorized to begin on September 1, 2019.  On September 12, 2019, the PUCT issued a final order implementing the settlement agreement and rates.



AMS Final Reconciliation (PUCT Docket No. 49721)



On July 9, 2019, we filed a request with the PUCT for a final reconciliation of our AMS costs.  Effective with the implementation of rates pursuant to the Docket No. 46957 rate review, we ceased recovering AMS charges through a surcharge on November 26, 2017, and AMS costs are now being recovered through base rates.  We made the following requests in our AMS reconciliation filing:



On October 8, 2019, Oncor filed a joint motion to admit evidence and for approval of a joint proposed order that implements the requests detailed above, as agreed to by the PUCT staff and the Steering Committee of Cities. On December 16, 2019, the PUCT signed a Final Order approving Oncor’s requests as listed above.



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2017 Rate Review (PUCT Docket No. 46957)    



In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory in March 2017 based on a January 1, 2016 to December 31, 2016 test year.



In July 2017, we and certain parties to our rate review agreed to a settlement of that rate review, and on August 2, 2017 a settlement agreement was filed with the PUCT that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement of the rate review, subject to closing of the Sharyland Asset Exchange, which closed on November 9, 2017.  As a result of the closing, the contingency in the PUCT Docket No. 46957 order was met and our new rates as set forth in that order took effect on November 27, 2017.  The order also required us to record as a regulatory liability, instead of revenue, the amount that we collected through our approved tariffs for federal income taxes that was above the new corporate federal income rate.  Other significant findings in the order include a change in our authorized return on equity to 9.80% and a change in our authorized regulatory capital structure to 57.5% debt to 42.5% equity.  Our previous authorized return on equity was 10.25% and our previous authorized regulatory capital structure was 60% debt to 40% equity.  The PUCT order required us to record a regulatory liability from November 27, 2017 until the new authorized regulatory capital structure was met to reflect our actual capitalization prior to achieving the authorized capital structure. Our authorized regulatory capital structure was met in May 2018, and therefore we ceased accruing amounts to the capital structure refund regulatory liability as of that time. The regulatory liability of $6 million was approved on September 14, 2018 in PUCT Docket No. 48522, and the liability was subsequently returned to customers in September 2018. 



Also, in accordance with the rate review final order, effective November 27, 2017, the AMS surcharge ceased and ongoing AMS costs are being recovered through base rates which include the recovery of the AMS regulatory asset over a 10-year period.  We continue to recover previously approved retired conventional meters over time as a regulatory asset.



Sharyland 2017 Asset Exchange (PUCT Docket No. 47469)



On July 21, 2017, we entered into the Sharyland 2017 Agreement, which provided for us to exchange certain of our transmission assets and cash for certain of the Sharyland Entities’ distribution assets (constituting substantially all of their electricity distribution business) and certain of their transmission assets.  On October 13, 2017, the PUCT issued an order approving the Sharyland 2017 Asset Exchange and on November 9, 2017, the parties consummated the transaction.  For more information on the Sharyland 2017 Agreement and the Sharyland 2017 Asset Exchange, see Note 2.



We are involved in various other regulatory 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.



4.     REVENUES



General



Our revenue is billed monthly under tariffs approved by the PUCT and the majority of revenues are related to providing electric delivery service to consumers.  Tariff rates are designed to recover the cost of providing electric delivery service to customers including a reasonable rate of return on invested capital.  As the volumes delivered can be directly measured, our revenues are recognized when the underlying service has been provided in an amount prescribed by the related tariff. We recognize revenue in the amount that we have the right to invoice.  Substantially all of our revenues are from contracts with customers except for alternative revenue program revenues discussed below.



Reconcilable Tariffs



The PUCT has designated certain tariffs (primarily TCRF and EECRF) 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. 



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Alternative Revenue Program 



The PUCT has implemented an incentive program allowing us to earn performance bonuses by exceeding PURA-mandated energy efficiency program targets. This incentive program and the related performance bonus revenues are considered an “alternative revenue program” under GAAP.  Annual performance bonuses are recognized as revenue when approved by the PUCT, typically in the third or fourth quarter each year.  In 2019 and 2018, the PUCT approved a $9 million and $7 million bonus that we recognized in revenues in 2019 and 2018, respectively.  



Disaggregation of Revenues 



The following table reflects electric delivery revenues disaggregated by tariff:



Customers



Our distribution customers consist of approximately 90 REPs and certain electric cooperatives in our certificated service area.  The consumers of the electricity we deliver are free to choose their electricity supplier from REPs who compete for their business.  Our transmission base revenues are collected from load serving entities benefitting from our transmission system.  Our transmission customers consist of municipalities, electric cooperatives and other distribution companies.  REP subsidiaries of our two largest counterparties represented 23% and 18% of our total operating revenues for the year ended 2019, 23% and 19% for the year ended 2018 and 22% and 18% for the year ended 2017.  No other customer represented more than 10% of our total operating revenues.



Variability



Our revenues and cash flows are subject to seasonality, timing of customer billings, weather conditions and other electricity usage drivers, with revenues being highest in the summer. Payment is due 35 days after invoicing. Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by REPs are recoverable as a regulatory asset. 



Pass-through Expenses



Expenses which are allowed to be passed-through to customers (primarily, third party wholesale transmission service and energy efficiency program costs) are generally recognized as revenue at the time the costs are incurred.  Franchise taxes are assessed by local governmental bodies, based on kWh delivered and are not a “pass-through” item.  The rates we charge customers are intended to recover the franchise taxes, but we are not acting as an agent to collect the taxes from

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customers; therefore, franchise taxes are reported as a principal component of “taxes other than amounts related to income taxes” instead of a reduction to “revenues” in the income statement.



5.    PROVISION IN LIEU OF INCOME TAXES



Tax Cuts and Jobs Act (TCJA)     



On December 22, 2017, the TCJA was signed into law.  Substantially all of the provisions of the TCJA were effective for our taxable years beginning January 1, 2018.  The TCJA included significant changes to the Code, including amendments which significantly change the taxation of business entities and includes specific provisions related to regulated public utilities such as Oncor.  The most significant TCJA change that impacts us is the reduction in the corporate federal income tax rate from 35% to 21%.  The specific provisions related to regulated public utilities in the TCJA applicable to us include the continued deductibility of interest expense, the elimination of bonus depreciation on certain property acquired after September 27, 2017 and certain rate normalization requirements for accelerated depreciation benefits.



Changes in the Code from the TCJA had a material impact on our financial statements in 2017.  Under GAAP, specifically Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized when the law is enacted, or December 22, 2017 for the TCJA.  Topic 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled.  Based on this, our liability in lieu of deferred income taxes was re-measured at the date of enactment using the new tax rate. 



We have completed the measurement and accounting for the effects of the TCJA.  The re-measurement of our liability in lieu of deferred income taxes related to our non-regulated operations resulted in a $21 million charge to the nonoperating provision in lieu of tax expense for the year ended December 31, 2017.  The re-measurement of our liability in lieu of deferred income taxes related to our regulated operations resulted in a $1.6 billion decrease in our liability in lieu of deferred income taxes at December 22, 2017 and a corresponding increase in our regulatory liabilities.



Components of Liability in Lieu of Deferred Income Taxes



The components of our liability in lieu of deferred income taxes are provided in the table below.





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Provision (Benefit) in Lieu of Income Taxes



The components of our reported provision (benefit) in lieu of income taxes are as follows:



Reconciliation of provision in lieu of income taxes computed at the U.S. federal statutory rate to provision in lieu of income taxes:



The net amounts of $1.821 billion and $1.602 billion reported in the balance sheets at December 31, 2019 and 2018, respectively, as liability in lieu of deferred income taxes include amounts previously recorded as net deferred tax liabilities.  Upon the sale of equity interests to Texas Transmission and Investment LLC in 2008, we became a partnership for U.S. federal income tax purposes, and the temporary differences that gave rise to the deferred taxes will, over time, become taxable to the equity holders.  Under a tax sharing agreement among us and our equity holders (see Note 1), we make payments to the equity holders related to income taxes when amounts would have become due to the IRS if Oncor was taxed as a corporation.  Accordingly, as the temporary differences become taxable, we will pay the equity holders.  In the event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes.



Accounting For Uncertainty in Provision in Lieu of Income Taxes



The statute of limitations is open for our partnership tax returns for the years beginning after December 31, 2009, however, the IRS has declined to review the tax returns for the years ended prior to January 1, 2016.  Texas margin tax

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returns are under examination or still open for examination for tax years beginning after 2014.  We are not a member of any consolidated federal tax group and assess our liability for uncertain tax positions in our partnership returns.



We had no uncertain tax positions in 2019 and 2018.  In the first quarter 2017, EFH Corp. settled all open tax claims with the IRS.  As a result, we reduced the liability for uncertain tax positions by $3 million.  This reduction is reported as a decrease in income taxes in 2017.  Noncurrent liabilities included no accrued interest related to uncertain tax positions at December 31, 2019 and 2018.  There were no amounts recorded related to interest and penalties in the years ended December 31, 2019, 2018 and 2017.  The federal income tax benefit on the interest accrued on uncertain tax positions, if any, is recorded as liability in lieu of deferred income taxes.



6.    SHORT-TERM BORROWINGS   



At December 31, 2019 and 2018, outstanding short-term borrowings under our CP Program and Credit Facility consisted of the following:

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CP Program



In March 2018, we established the CP Program, under which we may issue unsecured commercial paper notes (CP Notes) on a private placement basis up to a maximum aggregate face or principal amount outstanding at any time of $2.0 billion.  The proceeds of CP Notes issued under the CP Program are used for working capital and general corporate purposes. The CP Program obtains liquidity support from our Credit Facility discussed below.  We may utilize either CP Program or the Credit Facility at our option, to meet our funding needs. 



Credit Facility



In November 2017, we entered into a $2.0 billion unsecured Credit Facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances.  We may request increases in our borrowing capacity in increments of not less than $100 million, not to exceed $400 million in the aggregate, provided certain conditions are met, including lender approvals.  The Credit Facility has a five-year term expiring in November 2022 and gives us the option of requesting up to two one-year extensions, with such extensions subject to certain conditions and lender approvals.  The Credit Facility replaced our previous $2.0 billion secured revolving credit facility (previous credit facility), which was terminated in connection with our entrance into the Credit Facility.  Borrowings under our previous credit facility were secured with the lien of the Deed of Trust discussed in Note 7 below. 



Borrowings under the Credit Facility bear interest at per annum rates equal to, at our option, (i) adjusted LIBOR plus a spread ranging from 0.875% to 1.50% 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) adjusted LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.50% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Amounts borrowed under the 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 0.075% to 0.225% (such spread depending on certain credit ratings assigned to our senior secured debt) of the daily unused commitments under the Credit Facility.  Letter of credit fees on the stated amount of letters of credit issued under the Credit Facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to

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the spread over adjusted LIBOR.  Customary fronting and administrative fees are also payable to letter of credit fronting banks.  At December 31, 2019, letters of credit bore interest at 1.20%, and a commitment fee (at a rate of 0.125% per annum) was payable on the unfunded commitments under the Credit Facility, each based on our current credit ratings.



Under the terms of the 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.



May 2019 Short-Term Bridge Loan



On May 9, 2019, we entered into a short-term unsecured term loan credit agreement (Bridge Loan) in an aggregate principal amount of up to $600 million in connection with the InfraREIT Acquisition.  The Bridge Loan had a six-month term. Borrowings under the Bridge Loan could only be used to finance the repayment of indebtedness of InfraREIT or its affiliates and to pay expenses and fees related to the InfraREIT Acquisition. A fee was payable to the lenders under the Bridge Loan in an amount equal to 0.075% per annum on the average daily undrawn amount of the commitments.



The Bridge Loan contained 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.  The Bridge Loan also contained a senior debt-to-capitalization ratio covenant that effectively limited our ability to incur indebtedness in the future.  



On May 15, 2019, we borrowed $600 million under the Bridge Loan to pay, at closing of the InfraREIT Acquisition, all amounts outstanding under SDTS’s term loan, all amounts outstanding under the revolving credit facilities of SDTS and InfraREIT Partners, and amounts owed to discharge certain outstanding notes of InfraREIT’s subsidiaries.  The borrowing under the Bridge Loan bore interest at a per annum rate equal to LIBOR plus 0.65%. The Bridge Loan was repaid in full in May 2019 with the proceeds from our May 23, 2019 senior secured notes issuance (discussed in Note 7 below) and as a result, the agreement is no longer in effect.



InfraREIT Short-Term Debt Repayments in Connection with the InfraREIT Acquisition

In connection with the closing of the InfraREIT Acquisition, on May 16, 2019, the credit facilities of InfraREIT and its subsidiaries were terminated and borrowings totaling $114 million principal amount were repaid in full by Oncor.  For more information on the extinguishment of InfraREIT debt in connection with the InfraREIT Acquisition, see Notes 2 and 7.



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7.    LONG-TERM DEBT



Our senior notes are secured by a 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.  At December 31, 2019 and 2018, our long-term debt consisted of the following:



Long-Term Debt-Related Activity in 2019



Debt Repayments



Repayments of long-term debt in 2019 consisted of $488 million aggregate principal amount of long-term debt of InfraREIT’s subsidiaries that we paid on May 16, 2019 in connection with and immediately following the InfraREIT Acquisition through repayment of $288 million principal amount of outstanding InfraREIT subsidiary senior notes (plus $5 million in accrued interest and $19 million in make-whole fees relating to those notes) and repayment of an outstanding $200 million principal amount InfraREIT subsidiary term loan, $250 million aggregate principal amount of our 2.15% senior secured notes due June 1, 2019, $350 million aggregate principal amount of the term loan credit agreement maturing

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on December 9, 2019 (which was repaid in full and extinguished in November 2019) and $6 million principal amount of the quarterly amortizing debt for senior secured notes issued under the Note Purchase Agreements.  



Debt Issuances 



 Senior Secured Notes



In May 2019 we issued $500 million aggregate principal amount of 2.75% senior secured notes due 2024 (2024 Notes), $300 million aggregate principal amount of 3.70% senior secured notes due 2028 (2028 Notes) and $500 million aggregate principal amount of 3.80% Senior Secured Notes due 2049 (3.80% 2049 Notes).  The 2028 Notes constitute an additional issuance of our 3.70% Senior Secured Notes due 2028, $350 million of which we previously issued on August 10, 2018 and are currently outstanding (Outstanding 2028 Notes). The 2028 Notes were issued as part of the same series as the Outstanding 2028 Notes. Additionally, the 2028 Notes exchanged or sold in connection with the transactions contemplated by a registration rights agreement are expected to become fungible with the Outstanding 2028 Notes. We used the proceeds (net of the initial purchasers’ discount, fees, expenses and accrued interest) of $1,297 million from the sale of the notes for general corporate purposes, including to repay all amounts outstanding under the Bridge Loan, to repay $250 million aggregate principal amount of our 2.15% Senior Secured Notes due June 1, 2019 and to repay CP Notes, when due, under our CP Program. For more information on the Bridge Loan, see Note 6.

Prior to May 1, 2024, in the case of the 2024 Notes, August 15, 2028 in the case of the 2028 Notes and December 1, 2048, in the case of the 2049 Notes, Oncor may redeem such notes at any time, in whole or in part, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. On and after May 1, 2024, in the case of the 2024 Notes, August 15, 2028 in the case of the 2028 Notes and December 1, 2048, in the case of the 2049 Notes, Oncor may redeem such 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.



On September 12, 2019, we issued $700 million aggregate principal amount of 3.10% senior secured notes due September 15, 2049 (3.10% 2049 Notes and, together with the 2024 Notes, 2028 Notes and the 3.80% 2049 Notes, the New Indenture Notes). We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of $689 million from the sale of the 3.10% 2049 Notes for general corporate purposes, including to repay CP Notes, when due, under our CP Program.



Prior to March 15, 2049, Oncor may redeem the 3.10% 2049 Notes at any time, in whole or in part, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. On and after March 15, 2049, Oncor may redeem the 3.10% 2049 Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of the 3.10% 2049 Notes, plus accrued and unpaid interest.



The New Indenture Notes also contain customary events of default, including failure to pay principal or interest when due. The New Indenture Notes were issued in separate private placements.  In November 2019, we completed an offering with the holders of the New Indenture Notes to exchange their respective New Indenture Notes for notes that have terms identical in all material respects to the New Indenture 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 October 2019.



Debt Exchange



In connection with closing the InfraREIT Acquisition on May 16, 2019, we exchanged $351 million principal amount of outstanding InfraREIT subsidiary senior notes for a like principal amount of newly issued Oncor secured senior notes. We received no proceeds from the issuance of the new Oncor notes and the exchanges were accounted for as debt modifications. Following are details of the exchanges:



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The 2030 Notes, 2029 Notes, 2020 Notes, 2025 Notes and 2026 Notes were each issued pursuant to a Note Purchase Agreement.  Closing of the Note Purchase Agreements and issuance of the 2030 Notes, 2029 Notes, 2020 Notes, 2025 Notes and 2026 Notes (collectively, NPA Notes) occurred on May 16, 2019, immediately following consummation of the InfraREIT Acquisition.



The Note Purchase Agreements contain customary covenant restrictions and events of default. The NPA Notes are secured equally and ratably with our other secured indebtedness pursuant to the Deed of Trust. For more information on the Deed of Trust, see “Deed of Trust” below. We received no proceeds from the issuance of the NPA Notes.



Term Loan Credit Agreements



On September 6, 2019, we entered into an unsecured term loan credit agreement (2019 Term Loan Agreement) in an aggregate principal amount of up to $460 million.  The 2019 Term Loan Agreement has a 13-month term, maturing on October 6, 2020. We borrowed the full aggregate principal amount available under the 2019 Term Loan Agreement of $460 million on September 25, 2019. The 2019 Term Loan Agreement bears interest at per annum rates equal to, at Oncor’s option, (i) LIBOR plus 0.50%, or (ii) an alternate base rate (the highest of (1) the prime rate of Wells Fargo Bank National Association, the administrative agent under the agreement, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%). We used the proceeds (net of fees and expenses) for general corporate purposes, including to repay CP Notes, when due, under our CP program.



The 2019 Term Loan Agreement 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.  The 2019 Term Loan Agreement contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2019, we were in compliance with this covenant and all other covenants in the term loan credit agreement.  See “Credit Rating Provisions, Covenants and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.



In November 2019, we repaid $350 million, representing the full principal amount owed, under the term loan credit agreement entered into in 2018 that was scheduled to mature in December 2019. That term loan credit agreement contained covenants similar to the 2019 Term Loan Agreement.    Upon repayment, the 2018 term loan agreement ceased to be in effect.



Deed of Trust



Our secured indebtedness 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 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 December 31, 2019, the amount of available bond credits was $2,771 million 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 $2,410 million.



Borrowings under the CP Program, the Credit Facility and our term loan credit agreements are not secured.

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Maturities



Long-term debt maturities at December 31, 2019, are as follows:



Fair Value of Long-Term Debt



At December 31, 2019 and 2018, the estimated fair value of our long-term debt (including current maturities) totaled $10.003 billion and $7.086 billion, respectively, and the carrying amount totaled $8.625 billion and $6.435 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.



8.COMMITMENTS AND CONTINGENCIES



Leases



General



A lease exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.  As lessee, our leased assets primarily consist of our vehicle fleet and real estate leased for company offices and service centers.  Our leases are accounted for as operating leases for both GAAP and rate-making purposes. We generally recognize operating lease costs on a straight-line basis over the lease term in operating expenses.  We are not a lessor to any material lease contracts.



As of the lease commencement date, we recognize a lease liability for our obligation to make lease payments, which we initially measure at present value using our incremental borrowing rate at the date of lease commencement, unless the rate implicit in the lease is readily determinable. We determine our incremental borrowing rate based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. We also record a ROU asset for our right to use the underlying asset, which is initially equal to the lease liability and adjusted for any lease payments made at or before lease commencement, lease incentives and any initial direct costs.



Some of our lease agreements contain nonlease components, which represent items or activities that transfer a good or service.  We separate lease components from nonlease components, if any, for our fleet vehicle and real estate leases for purposes of calculating the related lease liability and ROU asset.



Certain of our leases include options to extend the lease terms for up to 20 years, while others include options to terminate early. Our lease liabilities and ROU assets are based on lease terms that may include such options to extend or terminate the lease when it is reasonably certain that we will exercise that option.



Short-term Leases



Some of our contracts are short-term leases, which have a lease term of 12 months or less at lease commencement.  As allowed by GAAP, we do not recognize a lease liability or ROU asset arising from short-term leases for all existing classes of underlying assets. We recognize short-term lease costs on a straight-line basis over the lease term.



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Lease Obligations, Lease Costs and Other Supplemental Data



The following tables summarize lease information on the consolidated balance sheet at December 31, 2019. 









The components of lease costs and cash paid for amounts included in the measurement of lease liabilities in 2019 were as follows:



The table below presents the maturity analysis of our lease liabilities and reconciliation to the present value of lease liabilities:









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Leases that Have Not Yet Commenced



In December 2019, we entered into a 15 year lease agreement for replacement office space. The lease will commence in February 2020 and is expected to be accounted for as an operating lease. 



Leases Disclosures Under Previous GAAP



At December 31, 2018, our future minimum lease payments under our operating leases (with initial or remaining noncancelable lease terms in excess of one year) were as follows:





Rent charged to operation and maintenance expense totaled $28 million and $27 million for the years ended December 31, 2018 and 2017, respectively.



Capital Expenditures



As part of the Sempra Acquisition, Oncor has committed to make minimum aggregate capital expenditures equal to at least $7.5 billion over the five year period ending December 31, 2022. 



Energy Efficiency Spending



We are required to annually invest in programs designed to improve customer electricity demand efficiencies to satisfy ongoing regulatory requirements.  The requirement for the year 2020 is $50 million, which is recoverable in rates.



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.



Labor Contracts



At December 31, 2019, approximately 18% of our full time employees were represented by a labor union and covered by a collective bargaining agreement with an expiration date of October 25, 2022.



Environmental Contingencies



We must comply with environmental laws and regulations applicable to the handling and disposal of hazardous waste.  We are in compliance with all current laws and regulations; however, the impact, if any, of changes to existing regulations or the implementation of new regulations is not determinable.  The costs to comply with environmental regulations can be significantly affected by the following external events or conditions:





We have not identified any significant potential environmental liabilities at this time. 



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9.    MEMBERSHIP INTERESTS



Cash Contributions





On February 18, 2020, we received cash capital contributions from our members totaling $87 million.  During 2019, we received the following capital cash contributions from our members. 







Cash Distributions



Distributions are limited by the requirement to maintain our regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes.  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 including any finance leases plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of acquisition accounting from a 2007 transaction (which included recording the initial goodwill and fair value adjustments and subsequent related impairments and amortization).



The PUCT order issued in the Sempra Acquisition and our Limited Liability Company Agreement set forth various restrictions on distributions to our members. Among those restrictions is the commitment that we will make no distributions that would cause us to be out of compliance with the PUCT’s approved debt-to-equity ratio, which is currently 57.5% debt to 42.5% equity. The distribution restrictions also include the ability of our board, a majority of the Disinterested Directors, or either of the two member directors designated by Texas Transmission to limit distributions to the extent each determines it is necessary to meet expected future requirements of Oncor (including continuing compliance with the PUCT debt-to-equity ratio commitment).  At December 31, 2019, we had $751 million available to distribute to our members as our regulatory capitalization ratio was 54.8% debt to 45.2% equity.



On February 19, 2020, our board of directors declared a cash distribution of $91 million, which was paid to our members on February 20, 2020.  During 2019, our board of directors declared, and we paid, the following cash distributions to our members:









During 2018, our board of directors declared, and we paid, the following cash distributions to our members:









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Accumulated Other Comprehensive Income (Loss) (AOCI)



The following table presents the changes to accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 and 2017 net of tax.

















10.    EMPLOYEE BENEFIT PLANS



Regulatory Recovery of Pension and OPEB Costs



PURA provides for our recovery of pension and OPEB costs applicable to services of our active and retired employees, as well as services of certain EFH Corp./Vistra active and retired employees for periods prior to the deregulation and disaggregation of EFH Corp.’s electric utility businesses effective January 1, 2002 (recoverable service).  Accordingly, in 2005, we entered into an agreement with a predecessor of EFH Corp. whereby we assumed responsibility for applicable pension and OPEB costs related to those personnel’s recoverable service.  We subsequently entered into agreements with EFH Corp. and a Vistra affiliate regarding provision of these benefits.  Pursuant to our agreement with the Vistra affiliate, we now sponsor an OPEB plan that provides certain retirement healthcare and life insurance benefits to eligible former Oncor, EFH Corp. and Vistra employees for whom both Oncor and Vistra bear a portion of the benefit responsibility.  See “OPEB Plans” below for more information. 



We are authorized to establish a regulatory asset or liability for the difference between the amounts of pension and OPEB costs approved in current billing rates and the actual amounts that would otherwise have been recorded as charges or credits to earnings related to recoverable service.  Amounts deferred are ultimately subject to regulatory approval.  At December 31, 2019 and 2018, we had recorded regulatory assets totaling $964 million and $1,018 million, respectively, related to pension and OPEB costs, including amounts related to deferred expenses as well as amounts related to unfunded liabilities that otherwise would be recorded as other comprehensive income.



We have also assumed primary responsibility for pension benefits of a closed group of retired and terminated vested plan participants not related to our regulated utility business (non-recoverable service) in a 2012 transaction. Any retirement costs associated with non-recoverable service are not recoverable through rates. 



Pension Plans



We sponsor the Oncor Retirement Plan and also have liabilities under the Vistra Retirement Plan (formerly EFH Retirement Plan), both of which are qualified pension plans under Section 401(a) of the Code, and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  These pension plans provide benefits to participants

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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.



All eligible employees hired after January 1, 2001 participate under the Cash Balance Formula.  Certain employees, who, prior to January 1, 2002, participated under the Traditional Retirement Plan Formula, continue their participation under that formula.  It is Oncor’s policy to fund its plans on a current basis to the extent required under existing federal tax and ERISA regulations.



We also have the Supplemental Retirement Plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plan. Supplemental Retirement Plan amounts are included in the reported pension amounts below.



At December 31, 2019, the pension plans’ projected benefit obligation included a net actuarial loss of $367 million for 2019 due primarily to a decrease in the discount rate.  Actual returns on the plans’ assets in 2019 were more than the expected return on assets by $367 million.  We expect the pension plans’ amortizations of net actuarial losses to be $47 million in 2020.



OPEB Plans



We currently sponsor two OPEB Plans. One plan covers our eligible current and future retirees whose services are 100% attributed to the regulated business.  Effective January 1, 2018, we established a second plan to cover eligible retirees of Oncor and EFH Corp./Vistra whose employment services were assigned to both Oncor (or a predecessor regulated utility business) and the non-regulated business of EFH Corp./Vistra.  Vistra is solely responsible for its portion of the liability for retiree benefits related to those retirees.



Oncor’s contribution policy for the OPEB Plans is to place in irrevocable external trusts dedicated to the payment of OPEB expenses an amount at least equal to the OPEB expense recovered in rates.



At December 31, 2019, the Oncor OPEB Plans’ projected benefit obligation included a net actuarial gain of $5 million for 2019, including $145 million gain associated with mortality assumption changes, and updates to health care claims and trend assumptions, offset by a loss of $126 million due to a decrease in the discount rate and a loss of $14 million associated with census date updates.  Actual returns on Oncor OPEB Plans’ assets in 2019 were more than the expected return on assets by $17 million resulting in a net actuarial gain of $22 million.  We expect the Oncor OPEB Plans’ amortizations of net actuarial losses to decrease by $9 million in 2020 reflecting these changes.



Pension and OPEB Costs Recognized as Expense



Pension and OPEB amounts provided herein include amounts related only to our portion of the various plans based on actuarial computations and reflect our employee and retiree demographics as described above.  Our net costs related to pension and the Oncor OPEB Plans were comprised of the following:









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The calculated value method is used to determine the market-related value of the assets held in the trust for purposes of calculating our pension costs.  Realized and unrealized gains or losses in the market-related value of assets are included over a rolling four-year period.  Each year, 25% of such gains and losses for the current year and for each of the preceding three years is included in the market-related value.  Each year, the market-related value of assets is increased for contributions to the plan and investment income and is decreased for benefit payments and expenses for that year.



The fair value method is used to determine the market-related value of the assets held in the trust for purposes of calculating OPEB cost.

Detailed Information Regarding Pension and OPEB Benefits



The following pension and OPEB information is based on December 31, 2019, 2018 and 2017 measurement dates:









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The following tables provide information regarding the assumed health care cost trend rates.



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The following table provides information regarding pension plans with projected benefit obligations (PBO) and accumulated benefit obligations (ABO) in excess of the fair value of plan assets.





Pension and OPEB Plans Investment Strategy and Asset Allocations



Our investment objective for the retirement plans is to invest in a suitable mix of assets to meet the future benefit obligations at an acceptable level of risk, while minimizing the volatility of contributions.  Equity securities are held to achieve returns in excess of passive indexes by participating in a wide range of investment opportunities.  International equity, real estate securities and credit strategies (high yield bonds, emerging market debt and bank loans) are used to further diversify the equity portfolio.  International equity securities may include investments in both developed and emerging international markets.  Fixed income securities include primarily corporate bonds from a diversified range of companies, U.S. Treasuries and agency securities and money market instruments.  Our investment strategy for fixed income investments is to maintain a high grade portfolio of securities, which assists us in managing the volatility and magnitude of plan contributions and expense while maintaining sufficient cash and short-term investments to pay near-term benefits and expenses.

The Oncor Retirement Plan’s investments are managed in two pools: one pool associated with the recoverable service portion of plan obligations related to Oncor’s regulated utility business, and a second pool associated with the non-recoverable service portion of plan obligations not related to Oncor’s regulated utility business.  Each pool is invested in a broadly diversified portfolio as shown below.  The second pool represents 27% of total investments at December 31, 2019.



The target asset allocation ranges of the pension plan’s investments by asset category are as follows:



Our investment objective for the Oncor OPEB Plans primarily follows the objectives of the pension plans discussed above, while maintaining sufficient cash and short-term investments to pay near-term benefits and expenses.  The actual amounts at December 31, 2019 provided below are consistent with the asset allocation targets.



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Fair Value Measurement of Pension Plans’ Assets



At December 31, 2019 and 2018, pension plans’ assets measured at fair value on a recurring basis consisted of the following:

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(a)Substantially all corporate bonds are rated investment grade by Fitch, Moody’s or S&P.

(b)Other consists primarily of municipal bonds, emerging market debt, bank loans and fixed income derivative instruments.

(c)Fair value was measured using the net asset value (NAV) per share as a practical expedient as the investments did not have a readily determinable fair value and are not required to be classified in the fair value hierarchy.  The NAV fair value amounts presented here are intended to permit a reconciliation to the total fair value of plan assets.







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Fair Value Measurement of Oncor OPEB Plans’ Assets



At December 31, 2019 and 2018, the Oncor OPEB Plans’ assets measured at fair value on a recurring basis consisted of the following:

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(a)Substantially all corporate bonds are rated investment grade by Fitch, Moody’s or S&P.

(b)Other consists primarily of diversified bond mutual funds.

(c)Fair value was measured using the net asset value (NAV) per share as a practical expedient as the investments did not have a readily determinable fair value and are not required to be classified in the fair value hierarchy. The NAV fair value amounts presented here are intended to permit a reconciliation to the total fair value of plan assets.



Expected Long-Term Rate of Return on Assets Assumption



The retirement plans’ strategic asset allocation is determined in conjunction with the plans’ advisors and utilizes a comprehensive Asset-Liability modeling approach to evaluate potential long-term outcomes of various investment strategies.  The modeling incorporates long-term rate of return assumptions for each asset class based on historical and future expected asset class returns, current market conditions, rate of inflation, current prospects for economic growth, and taking into account the diversification benefits of investing in multiple asset classes and potential benefits of employing active investment management.



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(a)The 2020 expected long-term rate of return for the nonregulated portion of the Oncor Retirement Plan is 4.18%, and for Oncor’s portion of the Vistra Retirement Plan is 4.89%. 



Significant Concentrations of Risk



The plans’ investments are exposed to risks such as interest rate, capital market and credit risks.  We seek to optimize return on investment consistent with levels of liquidity and investment risk which are prudent and reasonable, given prevailing capital market conditions and other factors specific to participating employers.  While we recognize the importance of return, investments will be diversified in order to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to do so.  There are also various restrictions and guidelines in place including limitations on types of investments allowed and portfolio weightings for certain investment securities to assist in the mitigation of the risk of large losses.



Assumed Discount Rate



For the Oncor retirement plans at December 31, 2019, we selected the assumed discount rate using the Aon AA-AAA Bond Universe yield curve, which is based on corporate bond yields and at December 31, 2019 consisted of 927 corporate bonds with an average rating of AA and AAA using Moody’s, S&P and Fitch ratings.  For Oncor’s portion of the Vistra Retirement Plan and the Oncor OPEB Plans at December 31, 2019, we selected the assumed discount rate using the Aon AA Above Median yield curve, which is based on corporate bond yields and at December 31, 2019 consisted of 361 corporate bonds with an average rating of AA using Moody’s, S&P and Fitch ratings.



Amortization in 2020



In 2020, amortization of the net actuarial loss for the defined benefit pension plans from regulatory assets and other comprehensive income into net periodic benefit cost is expected to be $43 million and $5 million, respectively.  No amortization of prior service credit is expected in 2020 for the defined benefit pension plans.  Amortization of the net actuarial loss for the OPEB plans from regulatory assets and other comprehensive income into net periodic benefit cost is expected to be $10 million and zero, respectively.  Amortization of prior service credit for the OPEB plans from regulatory assets and other comprehensive income into net periodic benefit cost is expected to be $20 million and zero, respectively.



Pension and Oncor OPEB Plans Cash Contributions



Our contributions to the benefit plans were as follows:



Our funding for the pension plans and the Oncor OPEB Plans is expected to total $177 million and $35 million, respectively in 2020 and approximately $571 million and $176 million, respectively, in the five year period 2020 to 2024.

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Future Benefit Payments



Estimated future benefit payments to participants are as follows:



Thrift Plan



Our employees are eligible to participate in a qualified savings plan, a participant-directed defined contribution plan intended to qualify under Section 401(a) of the Code, and is subject to the provisions of ERISA.  Under the plan, employees may contribute, through pre-tax salary deferrals and/or after-tax applicable payroll deductions, a portion of their regular salary or wages as permitted under law.  Employer matching contributions are made in an amount equal to 100% of the first 6% of employee contributions for employees who are covered under the Cash Balance Formula of the Oncor Retirement Plan, and 75% of the first 6% of employee contributions for employees who are covered under the Traditional Retirement Plan Formula of the Oncor Retirement Plan.  Employer matching contributions are made in cash and may be allocated by participants to any of the plan’s investment options.  Our contributions to the Oncor Thrift Plan totaled $20 million, $19 million and $17 million for the years ended December 31, 2019, 2018 and 2017, respectively.



11.   STOCK-BASED COMPENSATION



We currently do not offer stock-based compensation to our employees or directors.  In 2008 and 2009, we established stock appreciation rights (SARs) plans under which certain of our executive officers, key employees and non-employee members of our board of directors were granted SARs payable in cash, or in some circumstances, Oncor membership interests. 



In November 2012, we accepted the early exercise for cash payments of all outstanding SARs (both vested and unvested) issued to date pursuant to both SARs plans.  As part of the 2012 early exercise of SARs we began accruing interest on dividends declared with respect to the SARs.  Under both SARs plans, dividends that were paid in respect of Oncor membership interests while the SARs were outstanding were credited to the SARs holder’s account as if the SARs were units, payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency, a change in control, or the occurrence of an event triggering SAR exercisability.  As a result of the Sempra Acquisition, the dividend and interest accounts were distributed in 2018, totaling $15 million.   For accounting purposes, the liability was discounted based on an employee’s or director’s expected retirement date. We recognized $4 million and $1 million in accretion and interest with respect to such dividend and interest accounts in years 2018 and 2017, respectively.    No SARs liability remained at December 31, 2019.



12.   RELATED-PARTY TRANSACTIONS



The following represent our significant related-party transactions and related matters. 





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





Cash payments made to (received from) members related to income taxes consisted of the following:









See Notes 1, 5, and 9 for information regarding the tax sharing agreement and distributions to members.



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13.   SUPPLEMENTARY FINANCIAL INFORMATION



Other Deductions and (Income)









Interest Expense and Related Charges



Trade Accounts and Other Receivables



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



At December 31, 2019, REP subsidiaries of two of our largest counterparties represented 15% and 11% of the trade accounts receivable balance and at December 31, 2018, represented 13% and 10% of the trade accounts receivable balance. 



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. 





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Investments and Other Property



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



The majority of these assets represent cash surrender values of life insurance policies that are purchased to fund liabilities under deferred compensation plans.  At December 31, 2019 and 2018, the face amount of these policies totaled $172 million and $157 million, respectively, and the net cash surrender values (determined using a Level 2 valuation technique) totaled $95 million and $87 million at December 31, 2019 and 2018, respectively.  Changes in cash surrender value are netted against premiums paid.  Other investment assets held to satisfy deferred compensation liabilities are recorded at market value.



Property, Plant and Equipment



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





Depreciation expense as a percent of average depreciable property approximated 2.7%,  2.8% and 3.4% for the years ended December 31, 2019, 2018 and 2017, respectively.



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Intangible Assets



Intangible assets (other than goodwill) reported on our balance sheet as part of property, plant and equipment consisted of the following:



Aggregate amortization expense for intangible assets totaled $52 million, $50 million and $57 million for the years ended December 31, 2019, 2018 and 2017, respectively.  At December 31, 2019, the weighted average remaining useful lives of capitalized land easements and software were 83 years and 9 years, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows:



Goodwill totaling $4,740 million and $4,064 million were reported on our balance sheet at December 31, 2019 and 2018, respectively. The increase is due to the InfraREIT Acquisition. None of this goodwill is being deducted for tax purposes.  See Note 1 regarding goodwill impairment assessment and testing.



Employee Benefit, Operating Lease and Other Obligations



Employee benefit, operating lease and other obligations reported on our balance sheet consisted of the following:





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Supplemental Cash Flow Information 

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Quarterly Information (unaudited)



Results of operations by quarter for the years ended December 31, 2019 and 2018 are summarized below.  In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of such amounts have been made.  Quarterly results are not necessarily indicative of a full year’s operations because of seasonal and other factors.







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14.    EFH BANKRUPTCY PROCEEDINGS AND SEMPRA ACQUISITION



In April 2014, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities were not parties to the EFH Bankruptcy Proceedings.  On March 9, 2018, Sempra acquired the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH (Sempra Acquisition). As a result of the Sempra Acquisition, EFH Corp. merged with an indirect subsidiary of Sempra, with EFH Corp. (renamed STH) continuing as the surviving company and an indirect, wholly owned subsidiary of Sempra.  Sempra paid cash consideration of approximately $9.45 billion to acquire the indirect 80.03% outstanding membership interest in Oncor held by Oncor Holdings and other EFH Corp. assets and liabilities unrelated to Oncor.  In addition, in a separate transaction, Oncor Holdings acquired 0.22% of the outstanding membership interests in Oncor from Investment LLC for $26 million in cash, which represents approximately $18.60 per membership interest.  As a result, after the Sempra Acquisition, Oncor Holdings owns 80.25% of our outstanding membership interests and Texas Transmission owns 19.75% of our outstanding membership interests.  In February 2020, Sempra acquired (through STIH) an indirect 1% ownership interest in Texas Transmission.    



The Sempra Acquisition was consummated after obtaining the approval of the bankruptcy court in the EFH Bankruptcy Proceedings, the Federal Communications Commission and the PUCT. The PUCT approval was obtained in Docket No. 47675, and the final order issued in that docket as well as our Limited Liability Company Agreement outline certain ring-fencing measures, governance mechanisms and restrictions that apply after the Sempra Acquisition. As a result of these ring-fencing measures, Sempra does not control Oncor, and the ring-fencing measures limit Sempra’s ability to direct the management, policies and operations of Oncor, including the deployment or disposition of Oncor’s assets, declarations of dividends, strategic planning and other important corporate issues and actions. These limitations include limited representation on the board of directors of Oncor. For more information on the ring-fencing measures applicable after the Sempra Acquisition, see Note 1.



The Sempra Order also contains certain operational and financial commitments, including that Oncor will make minimum capital expenditures equal to at least $7.5 billion over the period from January 1, 2018 until December 31, 2022 (subject to certain adjustments).



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Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



Item 9A.CONTROLS AND PROCEDURES



Evaluation of Disclosure 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 December 31, 2019.  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.  That evaluation excluded the impacts of the InfraREIT Acquisition, which closed May 16, 2019.  SEC interpretive guidance permits management to exclude an assessment of an acquired business’s internal control over financial reporting from management’s assessments of internal control over financial reporting and disclosure controls and procedures for a period not to exceed one year from the date of the acquisition.  While management has begun an evaluation of controls and procedures relating to the impacts of the InfraREIT Acquisition, such evaluation is not complete, and as a result we excluded the impacts of the InfraREIT Acquisition from our evaluation as of December 31, 2019.



We have reported the operating results of the entities acquired in the InfraREIT Acquisition in our statements of consolidated income and statements of consolidated cash flows from the closing date on May 16, 2019 through December 31, 2019. As of December 31, 2019, total assets related to entities acquired in the InfraREIT Acquisition represented approximately 9% of our total assets, recorded on a preliminary basis as the measurement period for the business combination remained open as of December 31, 2019.  Revenues arising from entities acquired in the InfraREIT Acquisition comprised 4% of our consolidated revenues for year ended December 31, 2019.



Other than the InfraREIT Acquisition, there has been no other change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

MANAGEMENT’S ANNUAL REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING



The management of Oncor Electric Delivery Company LLC is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) for the company. Oncor Electric Delivery Company LLC’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition or the deterioration of compliance with procedures or policies.



The management of Oncor Electric Delivery Company LLC performed an evaluation as of December 31, 2019 of the effectiveness of the company’s internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Internal Control - Integrated Framework (2013). Based on the review performed, management believes that as of December 31, 2019 Oncor Electric Delivery Company LLC's internal control over financial reporting was effective. That evaluation excluded the impacts of the InfraREIT Acquisition, which closed May 16, 2019.  SEC interpretive guidance permits management to exclude an assessment of an acquired business’s internal control over financial reporting from management’s assessments of internal control over financial reporting and disclosure controls and procedures for a period not to exceed one year from the date of the acquisition.  While management has begun an evaluation of controls and procedures relating to the impacts of the InfraREIT Acquisition, such evaluation is not complete, and as a result we excluded the impacts of the InfraREIT Acquisition from our evaluation as of December 31, 2019.



We have reported the operating results of the entities acquired in the InfraREIT Acquisition in our statements of consolidated income and statements of consolidated cash flows from the closing date on May 16, 2019 through December 31, 2019. As of December 31, 2019, total assets related to entities acquired in the InfraREIT Acquisition represented approximately 9% of our total assets, recorded on a preliminary basis as the measurement period for the business combination remained open as of December 31, 2019.  Revenues arising from entities acquired in the InfraREIT Acquisition comprised 4% of our consolidated revenues for year ended December 31, 2019.



The independent registered public accounting firm of Deloitte & Touche LLP as auditors of the consolidated financial statements of Oncor Electric Delivery Company LLC has issued an attestation report on Oncor Electric Delivery Company LLC’s internal control over financial reporting.









February 27, 2020



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Members of Oncor Electric Delivery Company LLC 

Dallas, Texas



Opinion on Internal Control over Financial Reporting



We have audited the internal control over financial reporting of Oncor Electric Delivery Company LLC and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. 



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and in accordance with auditing standards generally accepted in the United States of America, the financial statements as of and for the year ended December 31, 2019, of the Company and our report, dated February 27, 2020, expressed an unqualified opinion on those financial statements.



As described in Management's Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the entities formerly known as InfraREIT and InfraREIT Partners, which were acquired on May 16, 2019, and constitute 9% of Oncor’s total assets, recorded on a preliminary basis as management has kept the measurement period for the business combination open as of December 31, 2019, and 4% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at the entities formerly known as InfraREIT and InfraREIT Partners.



Basis for Opinion



The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



Definition and Limitations of Internal Control over Financial Reporting



A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





/s/ Deloitte & Touche LLP



Dallas, Texas



February 27, 2020

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Item 9B.OTHER INFORMATION



None.



PART III



Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Directors



The names of our directors and information about them, as furnished by the directors themselves, are set forth below:

 

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Director Appointments



As of March 9, 2018, pursuant to our Limited Liability Company Agreement (which was amended and restated in connection with the Sempra Acquisition) and the Sempra Order, the board of directors of Oncor is required to consist of thirteen members, constituted as follows:



Mr. Martin and Mr. Bilicic were each designated to serve on our board of directors by Sempra (through Oncor Holdings) and Ms. Newell and Mr. Zucchet were each designated to serve on our board of directors by Texas Transmission. Directors designated by Sempra and Texas Transmission are referred to as member directors.



Our Limited Liability Company Agreement provides that seven of our directors will be Disinterested Directors under the standards set forth in our Limited Liability Company Agreement. See “Certain Relationships and Related Transactions, and Director Independence — Director Independence” for a discussion of the director qualifications. We have determined that Messrs. Adams, Dunning, Estrada, Gary, Hill, Mack and Wortham are Disinterested Directors. Disinterested Directors are appointed by the nominating committee of Oncor Holdings’ board of directors subject to the approval by a majority of the Disinterested Directors of Oncor Holdings’ board of directors. The nominating committee of Oncor Holdings is required to consist solely of Disinterested Directors. The Sempra Order and our Limited Liability Company Agreement provide that the current Disinterested Directors of Oncor will serve, if willing and able, for a term of three years from the closing of the Sempra Acquisition (subject to continuing to meet the disinterested director requirements). Thereafter, two of these directors will roll off of the board every two years, with the nominating committee of Oncor Holdings (subject to approval by a majority of the Disinterested Directors of the Oncor Holdings board of directors) determining the order of

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departure of these directors. Each new Disinterested Director will have a term of four years and the appointment of such directors will be consistent with the mandatory retirement age of 75, with each Disinterested Director’s term being able to be renewed for only one additional term of four years. To the extent any Disinterested Director is removed, retires or is otherwise unable to or unwilling to serve, a replacement new Disinterested Director will be chosen by the nominating committee of Oncor Holdings and subject to approval by a majority vote of the Disinterested Directors of Oncor Holdings’ board of directors. Any change to the size, composition, structure or rights of the boards must first be approved by the PUCT.



Oncor Holdings, at the direction of STIH (a subsidiary of STH, which is a wholly owned, indirect subsidiary of, and controlled by, Sempra following the Sempra Acquisition), has the right, pursuant to the terms of our Limited Liability Company Agreement, to nominate two directors that are current or former officers of Oncor, subject to approval of any such nomination by a majority of the Oncor board of directors. Mr. Shapard and Mr. Nye serve as these directors. Our Limited Liability Company Agreement provides that until March 9, 2028, to be eligible to serve as an Oncor Officer Director, a current and/or former Oncor officer cannot have worked for Sempra or any of its affiliates (other than Oncor or Oncor Holdings) or any such entity’s affiliates, or any other direct or indirect beneficial owner of Oncor in the ten years prior to commencement of such officer’s employment with Oncor.



Audit Committee



The Audit Committee is a separately-designated standing audit committee, established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Our Audit Committee is composed of Messrs. Estrada, Gary and Martin and Ms. Newell.  Our board of directors of Oncor has determined that each of Messrs. Estrada and Gary is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K. Messrs. Estrada and Gary are Disinterested Directors under the standards set forth in our Limited Liability Company Agreement. See “Certain Relationships and Related Transactions, and Director Independence – Director Independence” for a description of the requirements to be deemed disinterested.



Mr. Martin is a member director designated by Sempra (through Oncor Holdings) and Ms. Newell is a member director designated by Texas Transmission.





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Executive Officers



The names of our executive officers and information about them, as furnished by the executive officers themselves, are set forth below:





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There is no family relationship between any of our executive officers, between any of our directors, or between any executive officer and any director.



Code of Conduct



We maintain certain corporate governance documents on our website at www.oncor.com. Our Code of Conduct can be accessed by selecting “Corporate Governance” in the “Investor Relations” portion of the website. Our Code of Conduct applies to all of our employees and officers, including our Chief Executive, Chief Operating Officer, Chief Financial Officer and Controller, and it also applies to our directors, except for provisions pertinent only to employees. Any amendments to our Code of Conduct will be posted on our website promptly. Printed copies of the corporate governance

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documents that are posted on our website are available to any person without charge upon written request to the Corporate Secretary of Oncor Electric Delivery Company LLC at 1616 Woodall Rodgers Freeway, Suite 7E-002, Dallas, Texas 75202-1234.

 

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Item 11.EXECUTIVE COMPENSATION



Compensation Discussion and Analysis



Overview



In this Compensation Discussion and Analysis, we describe our executive compensation philosophy and the elements of our executive compensation program. We also discuss how the executive officers named in the Summary Compensation table (our Named Executive Officers) were compensated in 2019. In 2019, our Named Executive Officers, as well as their current titles, were:

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Role of the Organization and Compensation Committee



Our board of directors has designated an Organization and Compensation Committee of the board of directors (O&C Committee) to establish, administer, and assess our executive compensation policies, which include participation in various employee benefit programs.  The O&C Committee met three times in 2019.



The responsibilities of the O&C Committee include:





The O&C Committee conducts reviews of the level of individual compensation elements as well as total direct compensation for our executive officers, from time to time as it deems appropriate. The O&C Committee conducted such compensation reviews in the fourth quarter of 2019. In determining the total direct compensation of our executive officers, the O&C Committee considers the performance and responsibilities of the executives and a competitive market and peer group analysis of executive compensation provided by compensation consultants engaged by the O&C Committee.  The O&C Committee obtains the input of the CEO on the performance of executive officers other than the CEO.  The CEO assesses the performance of each executive in light of the executive’s business unit and function and presents a performance evaluation and compensation recommendation for each of these individuals to the O&C Committee. The CEO also reviews and considers the competitive market analysis in making his recommendation.  The O&C Committee also evaluates the CEO’s performance.  The O&C Committee determines total compensation, including base salary, annual incentive awards and long-term incentive awards, for each of our executive officers as it deems appropriate.



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In the first quarter of each fiscal year, the O&C Committee (1) approves corporate goals and objectives under our annual and long-term incentive programs for our executive officers for awards for the current fiscal year, and (2) certifies the performance results for incentive payments for performance periods that ended on December 31 of the previous fiscal year.  Following the completion of each fiscal year, in connection with the annual determination of the incentive awards to be paid to our executive officers other than the CEO, the CEO conducts an annual performance review of each executive officer and evaluates each executive’s performance relative to the corporate goals and objectives for the completed fiscal year set by the O&C Committee.  The CEO then makes recommendations to the O&C Committee with respect to other executive officers’ annual incentive compensation.  The O&C Committee also annually evaluates the CEO’s performance in light of the goals and objectives for the previous fiscal year.  After considering this evaluation, as well as the CEO’s recommendations, the O&C Committee determines the annual incentive award payouts for all of our executive officers, as well as goals and objectives under the annual and long-term incentive programs for the current fiscal year. In the first quarter of 2019, the O&C Committee also revised the payout methodologies under the executive annual and long-term incentive programs following a review of those programs that included a peer group analysis.



Compensation Philosophy



Our compensation philosophy, principles and practices are intended to compensate executives appropriately for their contribution to the attainment of key strategic objectives, and to strongly align the interests of executives and equity holders through both short and long-term performance goals.  We believe that:





Objectives of Compensation Philosophy



Our compensation philosophy is designed to meet the following objectives:





Elements of Compensation



In an effort to achieve our compensation objectives, we have established a compensation program for our executives that principally consists of:





For more information about the incentive and other benefit plans available to our executives see “—Compensation Elements” below and the compensation tables and the accompanying narratives immediately following this “Compensation Discussion and Analysis.”



Compensation Consultants



PricewaterhouseCoopers LLP, a compensation consultant, has been engaged by the O&C Committee since 2014 to advise and report to the O&C Committee on executive compensation issues. In February 2019, we engaged PricewaterhouseCoopers to perform a peer group analysis of annual and long-term incentive compensation. In October 2019, the O&C Committee engaged PricewaterhouseCoopers to advise and report on executive and independent director compensation, including a competitive market analysis and peer group study, as discussed in more detail under “-Market Data” below. PricewaterhouseCoopers and its affiliates also provide consulting and related services to Oncor with respect to human resources, tax, internal audit, industry intelligence, strategy formulation and other matters. Oncor purchases compensation surveys (both executive and non-executive) from Willis Towers Watson who, from time to time, provides consulting and other services to Oncor’s human resources department.



Market Data



While we try to ensure that the greater part of an executive officer’s compensation is directly linked to the executive’s individual performance and Oncor’s financial and operational performance, we also seek to set our executive compensation program in a manner that is competitive with that of our peer group and industry compensation survey data in order to promote retention of key personnel and to attract high-performing executives from outside our company.

2018 Survey and Peer Group



In the fourth quarter of 2018, the O&C Committee assessed total compensation of our executives against a number of companies in the transmission/distribution industry and fully integrated utilities using both survey data and peer group comparisons.  For purposes of the 2018 assessment, PricewaterhouseCoopers completed a competitive market analysis of executive compensation for the O&C Committee in October 2018. This analysis involved a review of U.S. energy utility industry compensation survey data using our 2017 annual revenues.  The survey data was compared to our executive compensation elements targeted at both the 50th and 75th percentiles with respect to base salary, target cash annual incentives, and long-term incentives, and the resulting target total cash compensation (base salary and target cash annual incentives) and total direct compensation (base salary, target cash annual incentives and long-term incentives). The survey data was aged from the reporting date to January 1, 2019, using an annual rate of 3.0%, which is the projected increase factor for 2018 for officers and executives based on the World at Work 2018 Salary Budget Survey.



In addition to the market data for utilities in the national marketplace, PricewaterhouseCoopers also provided publicly available data for a subset of these utilities, a peer group of transmission/distribution utility companies as well as fully integrated utility companies. Oncor’s size, based on revenues, is in the 49th percentile of this peer group. PricewaterhouseCoopers provided information on total target direct compensation, base salary, annual incentive targets and long-term incentives with respect to the five highest paid executives at each of those companies, along with comparisons of each such executive to the comparable Oncor executive using regression analysis based on Oncor’s revenue size.  The primary peer group consisted of 16 companies, 12 of which were used in PricewaterhouseCoopers’ 2017 study:



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PricewaterhouseCoopers recommended including four new peer companies in addition to the 12 companies that were considered in the 2017 analysis: Ameren Corp., Avangrid Inc., CMS Energy Corp., and SCANA Corp. The addition of these new peers would more closely align Oncor’s revenue size to the 50th percentile versus its 64th percentile positioning in the 2017 peer group, as well as increase the sample size of the peer group from 12 to 16. Based on PricewaterhouseCoopers’ analysis and recommendation, the O&C Committee agreed to include the additional companies in the 2018 analysis.



The O&C Committee considered both peer group data and the 2018 competitive market survey data, along with individual performance and responsibilities, when determining total direct executive compensation, as well as each element of total direct compensation (base salary, annual incentives and long-term incentives).  The O&C Committee targeted total direct compensation, including target payouts under annual and long-term incentive awards, at approximately the 50th percentile of the 2018 competitive market survey group.  The 2018 competitive market analysis indicated that the aggregate target total direct compensation of our executives was generally below the 50th percentile of the competitive market survey group. As a result of its review of the PricewaterhouseCoopers studies and each executive’s individual performance and responsibilities, the O&C Committee increased the base salaries of all Named Executive Officers, including our CEO, effective November 26, 2018.



February 2019 Incentive Compensation Peer Group Analysis



In February 2019, the O&C Committee assessed the payout methodologies under our annual and long-term incentive plans. In the course of that review, they considered data provided by PricewaterhouseCoopers to management regarding annual and long-term incentive programs of companies in the 2018 peer group discussed above. As a result of this review, the O&C Committee elected to revise the calculation methodology for awards under the Executive Annual Incentive Plan for 2019 (payable in 2020) and grants made in 2019 (payable in 2022) under the Long-Term Incentive Plan. For a discussion of the calculation methodologies for these plans, see “- Compensation Elements” below.



October 2019 Survey and Peer Group



In the fourth quarter of 2019, the O&C Committee assessed total compensation of our executives against a number of companies in the transmission/distribution industry and fully integrated utilities using both survey data and peer group comparisons.  For purposes of the 2019 assessment, PricewaterhouseCoopers completed a competitive market analysis of executive compensation for the O&C Committee in October 2019. This analysis involved a review of U.S. energy utility industry compensation survey data using our 2018 annual revenues.  The survey data was compared to our executive compensation elements targeted at both the 50th and 75th percentiles with respect to base salary, target cash annual incentives, and long-term incentives, and the resulting target total cash compensation (base salary and target cash annual incentives) and total direct compensation (base salary, target cash annual incentives and long-term incentives). The survey data was aged from the reporting date to January 1, 2020, using an annual rate of 3.0%, which is the projected increase factor for 2019 for officers and executives based on the World at Work 2019 Salary Budget Survey.



In addition to the market data for utilities in the national marketplace, PricewaterhouseCoopers also provided publicly available data for a subset of these utilities, a peer group of transmission/distribution utility companies as well as fully integrated utility companies. Oncor’s size, based on revenues, is in the 51st percentile of this peer group. PricewaterhouseCoopers provided information on total target direct compensation, base salary, annual incentive targets and long-term incentives with respect to the five highest paid executives at each of those companies, along with comparisons of each such executive to the comparable Oncor executive using regression analysis based on Oncor’s revenue size.  The primary peer group consisted of 16 companies, 15 of which were used in PricewaterhouseCoopers’ 2018 study:

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PricewaterhouseCoopers recommended using the same peer companies as in 2018 with the exception of substituting Evergy Inc. for SCANA Corp., which discontinued filing executive compensation information with the SEC.  Based on PricewaterhouseCoopers’ analysis and recommendation, the O&C Committee approved this peer group revision in the 2019 compensation analysis.



The O&C Committee considered both peer group data and the 2019 competitive market survey data, along with individual performance and responsibilities, when determining total direct executive compensation, as well as each element of total direct compensation (base salary, annual incentives and long-term incentives).  The O&C Committee targeted total direct compensation, including target payouts under annual and long-term incentive awards, at approximately the 50th percentile of the 2019 competitive market survey group and peer group. With respect to long-term incentives, the O&C Committee also considered the cost of equity differential between Oncor’s long-term incentive program which offers cash awards versus equity-based long-term incentive awards which are more common among the peer group.  PricewaterhouseCoopers provided adjusted market data for long-term incentives to address this issue and better reflect Oncor’s competitive position versus the market. The 2019 competitive market analysis indicated that the aggregate target total direct compensation of certain of our executives was generally below the 50th percentile of the competitive market survey group, and that base salary was below the 50th percentile of the competitive market survey group for most of our executives. As a result of its review of the PricewaterhouseCoopers studies and each executive’s individual performance and responsibilities, the O&C Committee increased the base salaries of all Named Executive Officers, including our CEO, effective November 26, 2019 and increased the long-term incentive target percentages for our CEO, Executive Vice President and Chief Operating Officer and Senior Vice President and Chief Financial Officer effective January 1, 2020, as detailed below under “— Compensation Elements.”



Compensation Elements



A significant portion of each executive officer’s compensation is variable, at-risk and directly linked to achieving company performance objectives set by the O&C Committee and the alignment with equity owner interests in order to achieve long-term success of our company.  Other factors impacting compensation include individual performance, scope of responsibilities, retention risk, and market compensation data.  None of these other factors are assigned individual weights, but are considered together.  The company has no policies or formula for allocating compensation among the various elements.  The following is a description of the principal compensation components provided to our executives.



Base Salary



We believe that base salary should be commensurate with the scope and complexity of each executive’s position, the level of responsibility required, and demonstrated performance.  We also believe that a competitive level of base salary is required to attract and retain qualified talent.



As part of its review of total direct compensation for our executive officers, the O&C Committee reviews and determines executive officers’ base salaries periodically as it deems appropriate.  The periodic review includes the O&C Committee’s review of the most recent analysis of our executive compensation against competitive market data and comparison to our peer group.  Our CEO also reviews this analysis, along with the performance and level of responsibility of each executive officer, and makes recommendations to the O&C Committee regarding any salary changes for those executive officers.  The O&C Committee may also approve salary increases as a result of an executive’s performance, promotion or a significant change in an executive’s responsibilities.



As discussed above, the 2019 competitive market analysis prepared by PricewaterhouseCoopers indicated that the base salary of certain of our executives, including Messrs. Nye, Clevenger, and Greer and Ms. Dennis, was generally below the 50th percentile of the competitive market survey group.  After considering the results of this market analysis and

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individual performance and responsibilities, the O&C Committee increased the base salary of each of our Named Executive Officers, including the CEO, effective November 26, 2019, as described below.



Annual Base Salary for Named Executive Officers



The annual base salaries of Named Executive Officers at December 31, 2019 were as follows:

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Executive Annual Incentive Plan



The O&C Committee and our CEO are responsible for administering the Executive Annual Incentive Plan.  The award targets under the plan are established on a company-wide basis and the O&C Committee seeks to set these targets at performance challenging levels.  The O&C Committee determines annual target award percentages for executives based on executive responsibilities and performance goals, an evaluation of the most recent competitive market analysis conducted by PricewaterhouseCoopers, and, with respect to executives other than our CEO, recommendations from our CEO.  In making his recommendations to the O&C Committee regarding target award percentages, our CEO assesses the performance goals of each executive against the goals of the executive’s business unit and function and reviews the competitive market analysis.  Executive Annual Incentive Plan awards are based on a target payout, which is set as a percentage of a participant’s base salary and is based on the performance of Oncor and individual participant performance.  The annual incentive target payout for each executive is based on a review of the executive’s responsibilities and consideration of the 50th percentile of target direct compensation of executives with similar responsibilities among our competitive market survey group and peer group.  The O&C Committee reviewed target payout opportunities in its October 2019 review of the 2019 competitive market survey information described above and each executive’s performance and responsibilities and did not make any changes to the existing target payout opportunities for our Named Executive Officers.



The awards payable in 2019 were determined based on (1) the target award levels of participants in the Executive Annual Incentive Plan, (2) achievement of a threshold or target funding trigger, and (3) achievement of threshold, target or superior levels of any additional operational or other metrics that the O&C Committee elects to apply in determining the aggregate amount of awards, which we sometimes refer to as the operational funding percentage.  Based on the level of attainment of the funding trigger and the operational funding percentage, the O&C Committee determined an aggregate performance final funding percentage.  This final funding percentage was then multiplied by each target award, and the resulting amount was then multiplied by any performance modifiers to determine a final award amount. The O&C Committee sets operational metrics, performance goals, target awards and individual performance modifiers in its discretion, and also has broad discretion to adjust funding percentages and individual awards. The funding trigger described in (2) above was based on “EBITDA,” which means Oncor’s earnings before interest, taxes, depreciation and amortization, as determined by the O&C Committee. For 2019 awards, the O&C Committee excluded from EBITDA all earnings, expenses and transition costs relating to the InfraREIT Acquisition, long-term incentive compensation, performance bonus compensation, executive change of control policy expenses, certain special project professional fees,

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and non-cash actuarial adjustments. EBITDA was used as the funding trigger because we believe it is an effective measure to assess profitability of the business. 



Funding of incentive awards in 2019 was based first on the achievement of stated EBITDA threshold and target funding trigger levels set by the O&C Committee. Incentives were only payable under the Executive Annual Incentive Plan in the event the threshold EBITDA is achieved. The level of EBITDA achieved was used to calculate a funding trigger percentage, as illustrated in the table below.







Since the EBITDA threshold was met, an operational funding percentage was calculated based on achievement of the operational or other metrics set by the O&C Committee. For 2019, the O&C Committee established operational funding percentage metrics based solely on operational targets because it believes that incentives should be based on achievement of operational goals.  The purpose of these operational targets, which are based on safety, reliability, operational efficiency and infrastructure readiness metrics, is to promote enhancement of our services to customers.  The table below sets forth these operational metrics in further detail.







An operational funding percentage was calculated based on the level of achievement of each operational metric. The O&C Committee determined the weighting of each of those metrics within the operational funding percentage and the threshold, target and superior levels of each metric. For 2019 awards, the O&C Committee excluded from operational efficiency calculations the impacts from the InfraREIT Acquisition, regulatory mandated cost of service expenses, energy efficiency expenses, certain third party network transmission fees that are recovered through tariff adjustments, and long-

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term incentive compensation. As with the EBITDA funding trigger, each operational metric must meet a threshold level in order to provide any funding for that metric. Meeting the threshold amount results in 50% of the available funding for that metric, with target and superior levels resulting in 100% and 150%, respectively, of the available funding for that metric. Once threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved (up to 150% for achievement of the superior performance level). Once an operational funding percentage was calculated, the final funding percentage was determined in accordance with the table below.







For 2019, our EBITDA for purposes of the Executive Annual Incentive Plan exceeded the target EBITDA, resulting in a funding trigger percentage of 100%.  Our operational funding percentage was 99.7%.  As a result, the final funding percentage was calculated using the operational funding percentage, resulting in a final funding percentage of 99.7%.



To calculate an executive officer’s award amount, the final funding percentage is first multiplied by the executive officer’s target award, which is computed as a percentage of actual base salary. Based on the executive officer’s performance, an individual performance modifier is then multiplied by the calculated award to determine the final incentive payment.  An individual performance modifier is based on reviews and evaluations of the executive officer’s performance by the CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) and may adjust an award upward or downward.  Factors used in determining individual performance modifiers may include operational measures (including the safety, reliability, operational efficiency and infrastructure readiness metrics discussed above), company objectives, individual management and other goals, specific job objectives and competencies, the demonstration of team building and support attributes and general demeanor and behavior.  The CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) do not assign these factors individual weights, but consider them together.  Each executive officer’s individual performance modifier is set by the O&C Committee within a range determined in its discretion. In October 2019, in recognition of his oversight of all legal, regulatory and legislative matters throughout the year, including the legal and regulatory complexities involved in the InfraREIT Acquisition and matters relevant to Oncor in the 2019 Texas legislative session, the O&C Committee approved an individual performance modifier for the 2019 plan year of 120% for Mr. Henry. In February 2020, the O&C Committee approved individual modifiers for Messrs. Nye, Clevenger and Greer of 153.7%, 151.9%, and 120.1%, respectively, to bring those executives’ total direct compensation closer to the 50th percentile of the competitive market survey group. 



The following table provides a summary of the 2019 targets and actual awards for each Named Executive Officer.  All awards under the Executive Annual Incentive Plan are made in the form of lump sum cash payments to participants by March 15 of the year following the plan year to which the award relates. 

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2019 Annual Incentives (Payable in 2020) for Named Executive Officers

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For more detailed information on terms of the Executive Annual Incentive Plan, including the calculation of the 2019 EBITDA funding percentage and the operational funding percentage, the 2019 operational funding triggers and the actual performance levels achieved, see the narrative that follows the Grants of Plan-Based Awards – 2019 table.



In February 2020, the Executive Annual Incentive Plan was amended and restated to revise the calculation for awards beginning with the 2020 plan year. Pursuant to these revisions, there will be no funding trigger and awards will be calculated based on achievement of operational metrics established by the O&C Committee for each plan year.



Long-Term Incentives



Our long-term incentive program currently consists of the Long-Term Incentive Plan. The Long-Term Incentive Plan was adopted in 2013.  The purpose of our long-term incentive program is to promote the long-term interests and growth of Oncor by attracting and retaining management and other personnel and key service providers.  Our long-term incentive program was developed to enable us to be competitive in our compensation practices. It was also developed to reflect our belief that the opportunity to benefit from positive long-term performance of the company motivates our management to work towards the long-term success of our business and align management’s interests with those of our equity holders. 



The Long-Term Incentive Plan encourages retention of executive officers and key employees by stipulating performance periods of generally 36 months. We also believe that these multi-year performance periods encourage participants to strive for the long-term, sustained success of the company. The nature of the performance targets also ensures that participants strive towards both financial and operational goals.



Our board of directors delegated administration of the Long-Term Incentive Plan to the O&C Committee. Our executive officers and any other key employees of the company or its subsidiaries designated by the O&C Committee are eligible to participate. The plan provides for cash awards to be paid after completion of a performance period based on achievement of certain stated performance goals. A performance period under the Long-Term Incentive Plan is the 36 month period beginning each January 1, unless otherwise determined by the O&C Committee in its sole discretion.  The participants for each performance period shall be determined by the O&C Committee not later than the 90th day after commencement of the performance period. Performance goals consist of one or more specific performance objectives established by the O&C Committee in its discretion within the first 90 days of the commencement of the applicable performance period. Performance goals may be designated with respect to the company as a whole or one or more operating units, and may also be determined on an absolute basis or relative to internal goals, or relative to levels attained in prior years, or relative to other companies or indices, or as ratios expressing relationships between two or more performance goals. For 2019 grants, the O&C Committee set the performance targets on a company-wide basis and at levels it believes are performance challenging. 



The long-term incentive target payout for each executive is set so that the target total direct compensation is near the 50th percentile (normalized in consideration of the cost of equity) of executives with similar responsibilities among our 2019 competitive market survey group and our peer group (when regressed to Oncor’s revenue size). As a result of this

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study and after considering individual performance and responsibilities, as well as the fact that most companies in our peer group provide equity-based long-term incentives as opposed to cash-based incentives, the O&C Committee increased the long-term incentive target percentages for our CEO, Executive Vice President and Chief Operating Officer and Senior Vice President and Chief Financial Officer effective January 1, 2020.



The O&C Committee determined that the performance goals used for the Long-Term Incentive Plan awards granted in 2017-2019 would consist of a financial trigger and operational metrics.  The funding of these Long-Term Incentive Plan awards is contingent first upon Oncor achieving a cumulative threshold net income level for the three-year performance period. For awards granted in 2017-2019, if Oncor fails to achieve the stated net income level for the performance period, no award is payable. For awards granted in 2019, the funding trigger percentage for the performance period equals 50% if the threshold level is met or 100% if target level is met or exceeded. The applicable percentage for performance between threshold and target performance levels is determined on a straight line interpolation basis.  Once a funding trigger percentage is determined, an operational goal percentage is determined based on Oncor’s satisfaction of four operational metrics. The operational goals used for the Long-Term Incentive Plan awards granted in 2017-2019 mirror the operational metrics used for 2019 awards under the Executive Annual Incentive Plan.  These goals relate to (1) a safety metric based on the number of employee injuries using a Days Away, Restricted or Transfer (DART) system with a modifier for fatalities as a result of a safety violation, (2) a reliability metric as measured by the System Average Interruption Duration Index (SAIDI), (3) an operational efficiency metric based on the achievement of targeted operation and maintenance expense (O&M) and sales, general and administrative expense (SG&A) levels determined on a per customer cost basis (excluding the impacts from the InfraREIT Acquisition, regulatory mandated cost of service expenses, energy efficiency expenses, certain third party network transmission fees that are recovered through tariff adjustments, and long-term incentive compensation) and (4) an infrastructure readiness metric based on the capital expenditure per three year average kW peak, expressed as a cumulative percentage. The purpose of these operational targets, which are based on safety, reliability, operational efficiency and infrastructure readiness metrics, is to promote enhancement of our services to customers.  For additional discussion on the purposes of the operational metrics, see the table and discussion of the Operational Metrics in “Compensation Elements—Executive Annual Incentive Plan.”  



The O&C Committee set the threshold, target and superior levels for each operational metric. The achievement of those levels results in funding for a specific metric of 50%, 100% and 150%, respectively. Once the threshold has been achieved, actual results in between each level result in a funding percentage based on the percentage of the target achieved, determined on a straight line interpolation basis. Based on the weighting for each operational metric, an aggregate weighted average of operational goal percentage is determined.



The final funding percentage for long-term incentive awards granted in 2019 is the product of the funding trigger percentage multiplied by the weighted operational goal percentage. If net income is below the funding trigger threshold, the funding trigger percentage equals zero and no Long-Term Incentive Plan award will be payable. 



The amount of each Long-Term Incentive Plan award granted is then determined based on the product of the final funding percentage, multiplied by the target opportunity dollar amount stated in each individual award letter.



The plan also gives the O&C Committee the discretion to adjust long-term awards to prevent unintended dilution or enlargement as a result of certain extraordinary events. For each operational goal, the O&C Committee may set threshold, target and superior levels of attainment and the manner of calculating the award amounts at each level (such as a specified dollar amount or a percentage or multiple of base salary). However, the Long-Term Incentive Plan provides that the maximum award payable for a performance period shall not exceed 150% of the target award.



In February 2020, the O&C Committee revised the form of award agreement under the Long-Term Incentive Plan for awards involving performance periods beginning on or after January 1, 2020. Under the revised form of agreement awards will not use a funding trigger and will instead be calculated based on achievement of performance metrics set by the O&C Committee.



Long-Term Incentive Awards Granted in 2019 (Payable in 2022)



The following table provides a summary of the target awards granted to each Named Executive Officer in February 2019.  All awards under the Long Term Incentive Plan are to be made in the form of lump sum cash payments to participants on or before April of the year following the last year of the performance period. For target awards granted in 2019, awards are generally payable on or before April 1, 2022.

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2019 Target Long-Term Incentive Award Grants (Payable in 2022) for Named Executive Officers







Long-Term Incentive Awards Granted in 2017 (Payable in 2020)



In February 2020, the O&C Committee certified the level of attainment of performance goals established for long-term incentive awards granted in 2017 with a performance period that ended on December 31, 2019. Awards granted in 2017 and 2018 use the same metrics as described above for awards granted in 2019 with respect to the calculation of the funding trigger percentage, except that for awards granted in 2017 and 2018, superior net income levels were available. Achievement of a superior net income level resulted in a funding trigger percentage of 150%, with performance between superior and target levels determined on a straight-line interpolation basis. Awards granted in 2017 and 2018 are also subject to a slightly different calculation of final funding percentage. The final funding percentage for long-term incentive awards granted in 2017 was calculated using the funding trigger percentage and weighted operational goal percentage, as set forth in the table below.







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The performance goals achieved for the 2017-2019 performance goal period were certified by the O&C Committee as follows:

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 For purposes of the year 2019 in the performance period, the O&C Committee excluded from net income all earnings, expenses and transition costs relating to the InfraREIT Acquisition, long-term incentive compensation, performance bonus compensation, executive change of control policy expenses, certain special project professional fees, and non-cash actuarial adjustments.  For purposes of the years 2017 and 2018 in the performance period, the O&C Committee excluded from net income the impact of long-term incentive compensation, performance bonus compensation, expenses related to the EFH Bankruptcy Proceedings and the Sempra Acquisition, executive change of control policy expenses, and non-cash actuarial adjustments. In addition, the O&C Committee excluded from 2017 and 2018 results the effects of writing off a non-regulated deferred tax asset (resulting from the TCJA). The O&C Committee also excluded from operational efficiency for each year in the performance period the regulatory mandated cost of service expenses, energy efficiency expenses, certain third party network transmission fees that are recovered through tariff adjustments, and long-term incentive compensation, and, for the year 2019 in the performance period, the impacts from the InfraREIT Acquisition.  Pursuant to the terms of the 2017 long-term incentive awards, the amount of each award was determined based on the product of the final funding percentage certified by the O&C Committee in February 2020 and the target opportunity dollar amount stated in each individual award. The O&C Committee certified a funding trigger percentage of 117.2%, an operational goal percentage of 112.5%, and a final funding percentage of 117.2%, resulting in long-term incentive awards as set forth below for the Named Executive Officers.

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2017 - 2019 Performance Period Long-Term Incentive Awards (Payable in 2020) for Named Executive Officers in Office at December 31, 2019







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In accordance with the terms of the plan, these amounts will be paid to the officers prior to April 1, 2020.



For a more detailed description of the Long-Term Incentive Plan, the net income funding trigger, the performance metrics and the actual performance levels achieved for the 2017-2019 performance period, refer to the narrative that follows the Grants of Plan-Based Awards – 2019 table.



Deferred Compensation and Retirement Plans



Our executive compensation package includes the ability to participate in the Salary Deferral Program, Oncor’s thrift plan, the Oncor Retirement Plan and the Supplemental Retirement Plan and for executives hired before January 1, 2002, subsidized retiree health care coverage.  We believe that these programs, which are common among companies in the utility industry, are important to attract and retain qualified executives.



Salary Deferral Program



Oncor executive officers are eligible to participate in a Salary Deferral Program that allows employees to defer a portion of their salary and annual incentive award and to receive a matching award based on their salary deferrals.  Executives can currently defer up to 50% of their base salary and up to 85% of any annual incentive award.  At the executive officer’s option the deferral period can be set for seven years, until retirement or a combination of both.  Oncor generally matches 100% of deferrals up to 8% of base salary deferred under the program.  Oncor does not match deferred annual incentive awards.  Matching contributions vest at the earliest of seven years after the deferral date, retirement, death, disability or termination without cause following a change in control of Oncor (as defined in the Salary Deferral Program). The program encourages employee retention as, generally, participants who terminate their employment with us prior to the seven year vesting period forfeit our matching contribution to the program.



Additionally, Oncor, at the direction of the O&C Committee, can make additional discretionary contributions into a Salary Deferral Program participant’s account.  Discretionary contributions made into a Salary Deferral Program participant’s account by Oncor vest as determined by the O&C Committee.



Refer to the narrative that follows the Nonqualified Deferred Compensation table below for a more detailed description of the Salary Deferral Program.



Thrift Plan



All eligible employees of Oncor may contribute a portion of their regular salary or wages to the thrift plan and Oncor matches a portion of an employee’s contributions.  This matching contribution is 75% of the employee’s contribution up to the first 6% of the employee’s salary for employees covered under the traditional defined benefit component of the Oncor Retirement Plan, and 100% of the employee’s contribution up to 6% of the employee’s salary for employees covered under

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the cash balance component of the Oncor Retirement Plan.  All matching contributions are invested in thrift plan investments as directed by the participant and are immediately vested. 



 Retirement Plan



All Oncor employees are eligible to participate in the Oncor Retirement Plan, which is qualified under applicable provisions of the Code. The Oncor Retirement Plan contains both a traditional defined benefit component and a cash balance component.  Effective January 1, 2002, the defined benefit plan changed from a traditional final average pay design to a cash balance design.  This change was made to better align the retirement program with competitive practices.  All participants were extended an opportunity to remain in the traditional program component or transition to the cash balance component.  Ms. Dennis and Mr. Greer elected to remain in the traditional program. All employees employed after January 1, 2002 who have completed one year of service with the company are eligible to participate only in the cash balance component.  As a result, Messrs. Nye, Clevenger, and Henry are covered only under the cash balance component.  For a more detailed description of the Oncor Retirement Plan, refer to the narrative that follows the Pension Benefits table and Note 10 to Financial Statements.



Supplemental Retirement Plan



Oncor executives participate in the Supplemental Retirement Plan.  The Supplemental Retirement Plan provides for the payment of retirement benefits that:





For a more detailed description of the Supplemental Retirement Plan, please refer to the narrative that follows the Pension Benefits table below.



Retiree Health Care



Employees hired by Oncor (or a predecessor) prior to January 1, 2002 are generally entitled to receive an employer-paid subsidy for retiree health care coverage upon their retirement from Oncor.   As such, Ms. Dennis and Mr. Greer will be entitled to receive a subsidy from Oncor for retiree health care coverage upon their retirement from Oncor.  Messrs. Nye, Clevenger, and Henry were hired after January 1, 2002 and are not eligible for the employer subsidy.



Perquisites and Other Benefits



Perquisites provided to our executive officers are intended to serve as part of a competitive total compensation program and to enhance our executives’ ability to conduct company business.  These benefits include financial planning, a preventive physical health exam, and reimbursements for certain business-related country club and/or luncheon club membership costs. Perquisites do not include personal use of company property or services for which we are reimbursed for the incremental cost to the company of personal use. For a description of the total amount of perquisites for each of our named executive officers, refer to Footnote 4 in the Summary Compensation Table below.



The following is a summary of benefits offered to our executive officers that are not available to all employees:



Executive Financial Planning:  All executive officers are eligible to receive executive financial planning services.  These services are intended to support them in managing their financial affairs, which we consider especially important given the high level of time commitment and performance expectation required of our executives.  Furthermore, these services help ensure greater accuracy and compliance with individual tax regulations.



Executive Physical Health Exam:  All executive officers are also eligible to receive an annual physical examination.  We recognize the importance of the health of our senior management team and the vital leadership role they play in directing and operating the company.  The executive officers are important assets of the company and this benefit is designed to help ensure their health and long-term ability to serve our equity holders.



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Country Club/Luncheon Club Membership:  Certain executive officers are entitled to reimbursement of country club or luncheon club memberships if the company determines that a business need exists for the executive’s memberships, as such clubs provide those officers with a setting for cultivating business relationships and interaction with key community leaders and officials.



Split-Dollar Life Insurance:  Split-dollar life insurance policies were purchased for eligible executives of Oncor. Ms. Dennis was the only Named Executive Officer who participated in the program, and in July 2019, all of her policies matured and were rolled out of the program.  The eligibility provisions of this program were modified in 2003 so that no new participants were added after December 31, 2003.  Individuals who first became eligible to participate in the Split-Dollar Life Insurance Program after October 15, 1996, vested in the insurance policies issued under the Split-Dollar Life Insurance Program over a six-year period.  Oncor pays the premiums for the policies and has received a collateral assignment of the policies equal in value to the sum of all of its insurance premium payments.  Although the Split-Dollar Life Insurance Program is terminable at any time, it is designed so that if it is continued, Oncor will fully recover all of the insurance premium payments covered by the collateral assignments either upon the death of the participant or, if the assumptions made as to policy yield are realized, upon the later of 15 years of participation or the participant’s attainment of age 65.  In 2007, the Split-Dollar Life Insurance Program was amended to freeze the death benefits at the then current level.



Travel & Security:  We may pay travel and security expenses for executives related to service on certain third party boards of directors. These expenses could include personal security and non-commercial aircraft flights when we deem there to be a heightened security risk and/or to enhance an executive’s ability to conduct Oncor business. The incremental cost to Oncor of non-commercial flights consists of actual invoiced incremental costs for each flight pursuant to Oncor’s contracts with non-commercial aircraft providers minus any amounts reimbursed or reimbursable by the executive or a third party. From time to time an executive’s spouse and/or children may accompany the executive on a business trip. We may pay the incremental costs for the executive's spouse to travel with the executive, if their presence contributes to the business purpose. However, any incremental costs incurred by Oncor with respect to expenses for an executive’s children to accompany the executive must be fully reimbursed by the executive.

 

Event Tickets:  We may from time to time provide executives with sporting or other event tickets for personal use. 

 

Additional Benefits: In addition to the benefits described above, Oncor offers its executive officers the ability to participate in benefit plans for medical, dental and vision insurance, group term life insurance and accidental death and disability, which are generally made available to all employees at the company.

 

Individual Named Executive Officer Compensation



Compensatory Agreements



Named Executive Officer Performance Bonus Agreements



On February 22, 2018, we entered into performance bonus agreements with each of Mr. Nye and Mr. Greer that were effective upon closing of the Sempra Acquisition and provide for a performance bonus opportunity to each executive for each of the 2018 and 2019 fiscal years. As each of Mr. Nye and Mr. Greer received promotions upon closing of the Sempra Acquisition, the O&C Committee determined that the performance bonus opportunities were necessary to bring each of their total direct compensation in line with compensation for each of their expanded roles and responsibilities, based on the 2017 peer group compensation analysis and competitive market study. The long-term incentive nature of the performance bonus agreements also provide significant value in retaining the executives and motivating them to help the company achieve certain performance goals. The performance bonus agreements provide that if the executive remains in the continuous employ of Oncor or an affiliate through the last day of each such fiscal year, the executive will be entitled to a performance bonus equal to an award amount multiplied by a performance bonus funding percentage. The performance bonus funding percentage is calculated based on a comparison of Oncor’s achieved net income for such fiscal year to the net income included in Oncor’s annual financial plan for such fiscal year approved by Oncor’s board of directors, subject to any adjustments approved by the O&C Committee. Under the terms of the performance bonus agreements, the performance bonus funding percentage shall equal 50% if the achieved net income is 80% of such fiscal year’s financial plan net income or 150% if the achieved net income is 120% of such fiscal year’s financial plan net income. The performance bonus funding percentage for achieved net income amounts between 80% and 120% of such fiscal year’s financial plan net income will be determined on a straight line interpolation basis. The O&C Committee will certify the

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final performance bonus funding percentage for each fiscal year and shall have the discretion to make any adjustments it deems necessary and advisable. Mr. Nye’s performance bonus agreement provides for a target award amount of $1,575,000 for the 2019 fiscal year. Mr. Greer’s performance bonus agreement provides for a target award amount of $135,000 for the 2019 fiscal year. The O&C Committee certified a final performance bonus funding percentage of 118.4% for the 2019 fiscal year, resulting in awards of $1,864,800 to Mr. Nye and $159,840 to Mr. Greer, which will be paid in March 2020.



Retention Agreement



In January 2018, we entered into a retention agreement with Mr. Henry in connection with our offer of employment to him to serve as Oncor’s Senior Vice President, General Counsel and Secretary upon closing of the Sempra Acquisition. We believe the retention agreement, which was approved by the O&C Committee, was necessary to induce him to join the company and offer him a market competitive compensation package (targeting around the 50th percentile of the 2017 competitive market study) that addresses the fact that as a new hire he would not receive long-term incentive award payments under the Long-Term Incentive Plan until 2021 (for the 2018-2020 performance period) and would not be eligible for an Executive Annual Incentive Plan annual incentive until 2019 (for the 2018 plan year). The retention agreement serves to reinforce and encourage Mr. Henry’s dedication to us as a member of the executive management team and to assure that we will retain his services in the key role of overseeing all of Oncor’s legal, regulatory and legislative efforts. The agreement provides for an initial retention bonus in March 2018 and payments in each of March 2019 and 2020 of retention bonuses equal to $758,080 multiplied by the approved Long-Term Incentive Plan scorecard results for each of the 2016-2018 and 2017-2019 performance periods, respectively, contingent upon Mr. Henry’s continued employment and satisfactory performance of his job duties as directed by Oncor. As a result, Mr. Henry received $801,291 in March 2019 as the second retention bonus (reflecting $758,080 multiplied by 105.7%, the approved Long-Term Incentive Plan funding percentage for the 2016-2018 performance period) and will receive $888,470 in March 2020 as the third retention bonus (reflecting $758,080 multiplied by 117.2%, the approved Long-Term Incentive Plan funding percentage for the 2017-2019 performance period). The retention agreement provides that in the event Mr. Henry’s employment is terminated by Oncor prior to March 1, 2020 for cause, or Mr. Henry terminates without good reason, all unpaid retention bonuses shall be immediately forfeited. In the event of a termination of employment by Oncor without cause, or Mr. Henry’s termination for good reason, any unpaid retention bonuses shall immediately vest and be payable on a pro-rata basis calculated in accordance with the Long-Term Incentive Plan.



CEO Compensation



E. Allen Nye, Jr.



The following is a summary of Mr. Nye’s individual compensation for 2019.



Base Salary:  Mr. Nye’s base salary was increased effective November 26, 2019 from $927,000 to $973,000 as a result of the O&C Committee’s annual review of executive compensation discussed above under “-Market Data – October 2019 Survey and Peer Group.” 



Annual Incentives:  In 2020, the O&C Committee awarded Mr. Nye $1,355,076 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2019 performance, as well as the O&C Committee’s review of Mr. Nye’s overall leadership of the company in 2019, including his leadership in the successful completion of the InfraREIT Acquisition and integration of NTU into our business.  The award also reflects an individual performance modifier applied by the O&C Committee to bring his total direct compensation closer to the 50th percentile of the competitive market survey group. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements – Executive Annual Incentive Plan” above and the Grants of Plan-Based Awards – 2019 table and related narrative.  



Long-Term Incentives:   In 2019, Mr. Nye was granted a Long-Term Incentive Plan target award of $2,551,104 for the performance period of January 1, 2019 through December 31, 2021. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2022. In February 2020, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2017 for the January 1, 2017 – December 31, 2019 performance period. Mr. Nye’s Long-Term Incentive Plan award for the 2017-2019 performance period is $897,096 and will be paid on or before April 1, 2020. See “—Long-Term Incentives” above and the

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Grants of Plan-Based Awards-2019 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.



Performance Bonus Agreement:  In 2020, the O&C Committee awarded Mr. Nye $1,864,800 pursuant to the Performance Bonus Agreement, reflecting the results of Oncor’s 2019 achievement of net income. For more detailed information on the calculation of Performance Bonus Agreement awards, see “—Compensatory Agreements — Named Executive Officer Performance Bonus Agreements” above and related narrative.  



Compensation of Other Named Executive Officers



Don J. Clevenger



The following is a summary of Mr. Clevenger’s individual compensation for 2019.



Base Salary:  Mr. Clevenger’s base salary as Senior Vice President and Chief Financial Officer was increased effective November 26, 2019 from $511,000 to $542,000 as a result of the O&C Committee’s annual review of executive compensation discussed above under “-Market Data – October 2019 Survey and Peer Group.”



Annual Incentive:  In 2020, the O&C Committee awarded Mr. Clevenger $505,563 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2019 performance, as well as Mr. Clevenger’s individual performance in 2019. In evaluating Mr. Clevenger’s performance in 2019 the O&C Committee and the CEO considered his extensive involvement in the successful completion of the InfraREIT Acquisition, particularly his leadership on financial and strategy matters relating to the transaction, and his overall management of Oncor’s financial systems, operations and initiatives (including the maintenance of planning, budgeting accounting, and treasury functions and his management of the liquidity of Oncor’s maintenance and construction programs). The award also reflects an individual performance modifier applied by the O&C Committee to bring his total direct compensation closer to the 50th percentile of the competitive market survey group. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan-Based Awards – 2019 table and related narrative.



Long-Term Incentives:   In 2019, Mr. Clevenger was granted a Long-Term Incentive Plan target award of $752,192 for the performance period of January 1, 2019 through December 31, 2021. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2022. In February 2020, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2017 for the January 1, 2017 – December 31, 2019 performance period. Mr. Clevenger’s Long-Term Incentive Plan award for the 2017-2019 performance period is $798,760 and will be paid on or before April 1, 2020. See “— Long-Term Incentives” above and the Grants of Plan-Based Awards-2019 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.



Deborah L. Dennis



The following is a summary of Ms. Dennis’ individual compensation for 2019. Ms. Dennis is our Senior Vice President, Chief Customer Officer and Chief HR Officer. She assumed the Chief HR Officer title in February 2020. Prior to then she served as our Senior Vice President, Human Resources & Corporate Affairs, and Chief Customer Officer.



Base Salary:  Ms. Dennis’ base salary was increased from $381,000 to $404,000 effective November 26, 2019 as a result of the O&C Committee’s annual review of executive compensation discussed above under “— Market Data — October 2019 Survey and Peer Group.”



Annual Incentive:  In 2020, the O&C Committee awarded Ms. Dennis $248,148 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2019 performance, as well as Ms. Dennis’ individual performance in 2019. The O&C Committee and the CEO evaluated her performance in overseeing employee relations, employee benefit matters, labor matters, corporate and community involvement, and customer related matters, including the successful integration of NTU customer matters into Oncor’s overall customer management sphere. For more detailed information on the calculation of Executive Annual Incentive Awards, see “— Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan-Based Awards – 2019 table and related narrative.



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Long-Term Incentives:  In 2019, Ms. Dennis was granted a Long-Term Incentive Plan target award of $341,376 for the performance period of January 1, 2019 through December 31, 2021. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2022. In February 2020, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2017 for the January 1, 2017 – December 31, 2019 performance period. Ms. Dennis’ Long-Term Incentive Plan award for the 2017-2019 performance period is $348,637 and will be paid on or before April 1, 2020. See “-  Long-Term Incentives” above and the Grants of Plan-Based Awards-2019 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.



James A. Greer



The following is a summary of Mr. Greer’s individual compensation for 2019.



Base Salary:  Mr. Greer’s base salary as Executive Vice President and Chief Operating Officer was increased from $546,000 to $568,000 effective November 26, 2019 as a result of the O&C Committee’s annual review of executive compensation discussed above under “-Market Data – October 2019 Survey and Peer Group”.



Annual Incentive:  In 2020, the O&C Committee awarded Mr. Greer $426,382 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2019 performance, as well as Mr. Greer’s individual performance in 2019 overseeing the complex operations of Oncor’s entire transmission and distribution system, one of the largest such systems in the country, and the successful integration of NTU’s operations and assets into Oncor’s system. The award also reflects an individual performance modifier applied by the O&C Committee to bring his total direct compensation closer to the 50th percentile of the competitive market survey group. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan-Based Awards – 2019 table and related narrative.



Long-Term Incentives:   In 2019, Mr. Greer was granted a Long-Term Incentive Plan target award of $873,600 for the performance period of January 1, 2019 through December 31, 2021. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2022. In February 2020, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2017 for the January 1, 2017 – December 31, 2019 performance period. Mr. Greer’s Long-Term Incentive Plan award for the 2017-2019 performance period is $829,814 and will be paid on or before April 1, 2020. See “—Long-Term Incentives” above and the Grants of Plan-Based Awards-2019 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.



Performance Bonus Agreement: In 2020, the O&C Committee awarded Mr. Greer $159,840 pursuant to the Performance Bonus Agreement, reflecting the results of Oncor’s 2019 achievement of net income. For more detailed information on Mr. Greer’s performance bonus agreement, see “— Compensatory Agreements —Named Executive Officer Performance Bonus Agreements” above and related narrative.



Matthew C. Henry



The following is a summary of Mr. Henry’s individual compensation for 2019.



Base Salary:  Mr. Henry’s base salary as Senior Vice President, General Counsel and Secretary was increased from $536,000 to $557,000 effective November 26, 2019 as a result of the O&C Committee’s annual review of executive compensation discussed above under “-Market Data – October 2019 Survey and Peer Group.”



Annual Incentive:  In 2020, the O&C Committee awarded Mr. Henry $418,186 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2019 performance, as well as Mr. Henry’s individual performance in 2019 overseeing all legal, regulatory and governmental affairs matters affecting Oncor, including his leadership on the significant legal and regulatory matters relating to the InfraREIT Acquisition and matters relevant to Oncor in the 2019 Texas legislative session. Mr. Henry’s award reflects an individual performance modifier of 120% awarded by the O&C Committee in recognition of his individual performance. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan-Based Awards –2019 table and related narrative.



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Long-Term Incentives:   In 2019, Mr. Henry was granted a Long-Term Incentive Plan target award of $788,992 for the performance period of January 1, 2019 through December 31, 2021. Actual awards will be based on Oncor’s achievement of approved performance goals and are payable on or before April 1, 2022. See “—Long-Term Incentives” above and the Grants of Plan-Based Awards-2019 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.



Retention Agreement: In 2019, Mr. Henry was paid a retention bonus of $801,291 pursuant to his retention agreement. See “—Compensatory Agreements – Retention Agreement” above for more information regarding Mr. Henry’s retention agreement.



Contingent Payments



Change in Control Policy



Oncor makes available the Change in Control Policy for its eligible executives.  The purpose of the Change in Control Policy is to provide the payment of transition benefits to eligible executives if:





The terms “change in control,” “without cause” and “good reason” are defined in the Change in Control Policy. 



We believe these payments, to be triggered upon meeting the criteria above, provide incentive for executives to fully consider potential changes that are in the best interest of Oncor and our equity holders, even if those changes would result in the executives’ termination.  We also believe it is important to have a competitive change in control program to attract and retain the caliber of executives that our business requires and to foster an environment of relative security within which we believe our executives will be able to focus on achieving company goals.



Refer to “Potential Payments upon Termination or Change in Control—Change in Control Policy” for detailed information about payments and benefits that our executive officers are eligible to receive under the Change in Control Policy.



Severance Plan



Oncor also makes available a Severance Plan (Severance Plan) to provide certain benefits to eligible executives.  The purpose of the Severance Plan is to provide benefits to eligible executives who are not eligible for severance pursuant to another plan or agreement (including an employment agreement) and whose employment is involuntarily terminated for reasons other than:





We believe it is important to have a severance plan in place to attract and retain the caliber of executives that our business requires and to foster an environment of relative security within which we believe our executives will be able to focus on achieving company goals.  Refer to “Potential Payments upon Termination or Change in Control” for detailed information about payments and benefits that our executive officers are eligible to receive under the Severance Plan.



Tax Considerations



The O&C Committee administers our executive compensation programs with the good faith intention of complying with the Code, including Section 409A, as well as other applicable regulations and accounting rules.



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The information contained herein under the heading “Organization and Compensation Committee Report” is not to be deemed to be “soliciting material” or “filed” with the SEC pursuant to Section 407(e)(5)of SEC Regulation S-K.



Organization and Compensation Committee Report



The Organization and Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Form 10-K.  Based on such review and discussions, the committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Form 10-K.





Organization and Compensation Committee



Richard W. Wortham III, Chair

George W. Bilicic

Thomas M. Dunning

Steven J. Zucchet



Compensation Committee Interlocks and Insider Participation



Two of our O&C Committee members, Mr. Zucchet and Mr. Bilicic, are not classified as disinterested directors under the standards set forth in the Limited Liability Company Agreement. Mr. Zucchet is employed by OMERS Infrastructure Management Inc., a beneficial owner of Texas Transmission, and serves as an officer and director of Texas Transmission’s parent company.  Mr. Zucchet was appointed to the board of directors by Texas Transmission. Mr. Bilicic is the President and Chief Legal Officer of Sempra and was appointed to the board of directors by Sempra (through Oncor Holdings). Mr. Bilicic was appointed to our board of directors and the O&C Committee in August 2019, replacing Tania Ortiz, the Chief Executive Officer of IEnova, an entity indirectly majority owned by Sempra. Ms. Ortiz was appointed to our board of directors by Sempra (through Oncor Holdings) in July 2018 and served on our board of directors and the O&C Committee until August 2019.



No member of the O&C Committee is or has ever been one of our officers or employees.  Mr. Nye, our CEO, was elected to the board of directors of IEnova in January 2019. No other interlocking relationship exists between our executive officers and the board of directors or compensation committee of any other company.

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Summary Compensation Table



The following table provides information regarding the aggregate compensation paid to our Named Executive Officers for the fiscal years ended December 31, 2019, 2018 and 2017 in which they served as a Named Executive Officer.





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2019 All Other Compensation Components for Named Executive Officers







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Grants of Plan-Based Awards – 2019



The following table sets forth information regarding grants of plan-based awards to Named Executive Officers under our Executive Annual Incentive Plan and Long-Term Incentive Plan during the fiscal year ended December 31, 2019.



________________



Executive Annual Incentive Plan 2019 Awards



The Executive Annual Incentive Plan is a cash bonus plan intended to provide a performance-based annual reward for the successful attainment of certain annual performance goals and business objectives that are established by the O&C Committee.  Elected officers of the company having a title of vice president or above and other specified key employees are eligible to participate in the Executive Annual Incentive Plan provided they are employed by us for a period of at least three full months during a January 1 to December 31 plan year.  The O&C Committee and our CEO are responsible for administering the Executive Annual Incentive Plan.  Participants who die, become disabled or retire during a plan year are eligible to receive prorated awards under the plan for that plan year provided they completed at least three full months of employment in such plan year. Any awards to executive officers are in the sole discretion of the O&C Committee, and those awards are prorated for the number of months in which the individual was employed by the company.



Funding for awards payable in 2019 was determined based on a funding trigger based on Oncor’s EBITDA and additional operational metrics that the O&C Committee elected to apply in determining the aggregate amount of awards.  Based on the level of attainment of these EBITDA and operational metrics targets, the O&C Committee determined an aggregate final funding percentage.  This final funding percentage was multiplied by target awards, which amount was then

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multiplied by individual performance modifiers to provide the final Executive Annual Incentive Plan award. Each step in the calculation process for 2019 awards is described in more detail below.



Step 1: EBITDA Achievement



Incentives were only payable under the Executive Annual Incentive Plan for 2019 in the event the threshold EBITDA funding trigger was achieved.  The level of EBITDA achieved was used to calculate a funding trigger percentage as illustrated in the table below.











For 2019, the EBITDA funding triggers (threshold and target), actual results and funding trigger percentage under the Executive Annual Incentive Plan were as follows:









Step 2: Operational Achievement



For 2019 awards, if the threshold EBITDA funding trigger is achieved, then once the EBITDA funding percentage is determined, the operational or other metrics set by the O&C Committee are then applied to determine an operational funding percentage.  For 2019, the O&C Committee only used operational metrics, which are set forth in the table below.











For further information on the operational metrics, see “Compensation Discussion and Analysis—Compensation Elements—Executive Annual Incentive Plan.”



The O&C Committee determined the weighting of each of those metrics within the final operational funding percentage.  As with the EBITDA funding trigger, each operational metric must meet a threshold level in order to provide any funding for that metric.  Meeting the threshold amount results in 50% of the available funding for that specific metric.  The O&C Committee also set target and superior levels for each operational metric, and achievement of those levels results in funding for a specific metric of 100% and 150%, respectively.  Once threshold has been achieved, actual results in between each level result in a funding percentage based on the percentage of the target achieved, determined on a straight line interpolation basis (up to 150%, for achievement of the superior performance level).  For 2019, the weighting, actual

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results and operational funding percentages for the operational metrics under the Executive Annual Incentive Plan were as follows:







__________



For 2019, achievement of operational metrics resulted in an operational funding percentage of 99.7%. The operational funding percentage can decrease the final funding percentage, as described in more detail below. 

 

Step 3: Determining Final Funding Percentage



For 2019 awards, after a funding trigger percentage and operational funding percentage are determined, a final funding percentage is calculated in accordance with the following table. The final funding percentage will be equal to (i) the weighted operational funding percentage if EBITDA is above target level or (ii) the lesser of the funding trigger percentage or the weighted operational funding percentage if EBITDA is at the target level or between the threshold and target levels.  Failure to achieve threshold EBITDA will result in no funding of awards for that plan year.





For 2019, since actual EBITDA was greater than target the final funding percentage was the equal to the operational funding percentage, resulting in a final funding percentage of 99.7%.



Step 4: Final Award Determination 



To calculate an executive officer’s award amount, the final funding percentage is first multiplied by the executive officer’s target award, which is computed as a percentage of actual base salary.  Based on the executive officer’s performance, an individual performance modifier is then applied to the calculated award to determine the final incentive payment.  An individual performance modifier is based on reviews and evaluations of the executive officer’s performance by the CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) and may adjust an award

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upward or downward. The individual performance modifier is determined on a subjective basis.  Factors used in determining individual performance modifiers may include operational measures (including the safety, reliability, operational efficiency metrics and infrastructure readiness discussed above), company objectives, individual management and other goals, specific job objectives and competencies, the demonstration of team building and support attributes and general demeanor and behavior. The CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) do not assign these factors individual weights, but consider them together. Each executive officer’s individual performance modifier is set by the O&C Committee within a range determined in its discretion. In October 2019, in recognition of his oversight of all legal, regulatory and legislative matters throughout the year, including the legal and regulatory complexities involved in the InfraREIT Acquisition and matters relevant to Oncor in the 2019 Texas legislative session, the O&C Committee approved an individual performance modifier for the 2019 plan year of 120% for Mr. Henry. In February 2020, the O&C Committee approved individual modifiers for Messrs. Nye, Clevenger and Greer of 153.7%, 151.9%, and 120.1%, respectively, to bring those executives’ total direct compensation closer to the 50th percentile of the competitive market survey group. 



Plan Revisions Applicable for Plan Years Beginning in 2020

In February 2020, the Executive Annual Incentive Plan was amended and restated to revise the calculation for awards beginning with the 2020 plan year. Pursuant to these revisions, there will be no funding trigger and awards will be calculated based on achievement of operational metrics established by the O&C Committee for each plan year.



Long-Term Incentive Plan



Our board of directors adopted the Long-Term Incentive Plan effective January 1, 2013 and delegated administration of the Long-Term Incentive Plan to the O&C Committee.  Our executive officers and any other key employees of the company or its subsidiaries designated by the O&C Committee are eligible to participate.  The plan provides for cash awards to be paid after completion of a performance period based on achievement of certain stated performance goals.  A performance period under the Long-Term Incentive Plan is the 36-month period beginning each January 1, unless otherwise determined by the O&C Committee in its sole discretion.  The participants for each performance period shall be determined by the O&C Committee not later than the 90th day after commencement of the performance period.  Performance goals consist of one or more specific performance objectives established by the O&C Committee in its discretion within the first 90 days of the commencement of the applicable performance period. Performance goals may be designated with respect to the company as a whole or one or more operating units, and may also be determined on an absolute basis or relative to internal goals, or relative to levels attained in prior years, or relative to other companies or indices, or as ratios expressing relationships between two or more performance goals.



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2019 Grants of Long-Term Incentive Awards



The O&C Committee determined that the performance goals used for the Long-Term Incentive Plan awards granted in 2019 would consist of both a financial trigger and operational metrics, as set forth below.















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For awards granted in 2017, 2018, and 2019, the net income funding trigger and operational efficiency performance goals measured by O&M and SG&A on a cost per customer basis were noted as percentages of the cumulative amounts set forth in the financial plans approved by our board of directors for each year in the 2017-2019, 2018-2020 and 2019-2020 performance periods. In October 2016 our board of directors approved the financial plan for 2017. Based on the approved financial plan, the O&C Committee in March 2017 declared that for purposes of calculating the cumulative performance goals for the 2017-2019 performance period, the 2017 net income funding trigger threshold, target and superior levels would be $390.3 million, $459.2 million and $528.1 million, respectively, and the 2017 operational efficiency metric (measured by O&M and SG&A on a cost per customer basis) threshold, target and superior levels would be $187.82, $175.53 and $163.25. For purposes of calculating the cumulative performance goals for the 2017-2019 and 2018-2020 performance periods, in February 2018, based on the 2018 financial plan approved by our board of directors in February 2018, the O&C Committee certified that the 2018 net income funding trigger threshold, target and superior levels would be at $445.6 million, $524.2 million and $602.8 million, respectively, and the 2018 operational efficiency metric (measured by O&M and SG&A on a cost per customer basis) threshold, target and superior levels would be at $195.72, $182.91 and $170.11. For purposes of calculating the cumulative performance goals for the 2017-2019, 2018-2020 and 2019-2021 performance periods, in February 2019, based on the 2019 financial plan approved by our board of directors in February 2019, the O&C Committee certified the 2019 net income funding trigger target level at $580 million (with the threshold level and, for awards granted in 2017 and 2018, the superior level of the net income funding trigger equal to 85% and 115% of the relevant target amount, respectively), and the 2019 operational efficiency metric (measured by O&M and

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SG&A on a cost per customer basis) target level at $184.42 (with the threshold level and the superior level of such operational efficiency metric equal to 107% and 93% of the relevant target amount, respectively). For purposes of calculating the cumulative performance goals for the 2018-2020 and 2019-2021 performance periods, in February 2020, based on the 2020 financial plan approved by our board of directors in October 2019, the O&C Committee certified the 2020 net income funding trigger target level at $741.5 million (with the threshold level and, for awards granted in 2018, the superior level of the net income funding trigger equal to 85% and 115% of the relevant target amount, respectively), and the 2020 operational efficiency metric (measured by O&M and SG&A on a cost per customer basis) target level at $195.31 (with the threshold level and the superior level of such operational efficiency metric equal to 107% and 93% of the relevant target amount, respectively).



The funding of each Long-Term Incentive Plan award granted in 2017-2019 was contingent first upon Oncor achieving a cumulative threshold net income level for the three-year period. If Oncor fails to achieve the stated net income level for the performance period, no award is payable. For Long-Term Incentive Plan awards granted in 2019, the funding trigger percentage for a performance period equals 50% if the threshold level is met and 100% if target level is met or exceeded. The applicable percentage for performance between threshold and target performance levels is determined on a straight line interpolation basis.



Once a funding trigger percentage is determined, an operational goal percentage is determined based on Oncor’s satisfaction of four operational metrics. The operational goals used for the Long-Term Incentive Plan awards mirror the operational metrics used for awards under the Executive Annual Incentive Plan.  The table below sets forth the operational goals that the O&C Committee applied for 2019 grants.





 For further information on the operational goals, which are identical to the operational metrics in the Executive Annual Incentive Plan, see “Compensation Discussion and Analysis—Compensation Elements—Executive Annual Incentive Plan.”



The O&C Committee sets the threshold, target and superior levels for each operational metric. The achievement of those levels results in funding for a specific metric of 50%, 100% and 150%, respectively. Once the threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved. Based on the weighting for each operational metric, an aggregate weighted average of operational goal percentage is determined.



The final funding percentage for long-term incentive awards granted in 2019 is the product of the funding trigger percentage multiplied by the weighted operational goal percentage. If net income is below the funding trigger threshold, the funding trigger percentage equals zero and no Long-Term Incentive Plan award will be payable.



The amount of each Long-Term Incentive Plan award is then determined based on the product of the final funding percentage, multiplied by the target opportunity dollar amount stated in each individual award.



Certification of Attainment of 2017 Performance Goals



Under the terms of the Long-Term Incentive Plan, the O&C Committee must measure and certify the levels of attainment of performance goals within 90 days following the completion of the performance period.  Any awards for such

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period shall be paid on or about April 1 following the performance period, but in no event later than the end of the calendar year following the end of the applicable performance period. 



In February 2020, the O&C Committee certified the level of attainment of performance goals established for long-term incentive awards granted in 2017 with a performance period that ended on December 31, 2019. The performance goals achieved for the 2017-2019 performance goal period were certified by the O&C Committee as follows:





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Long-term incentive awards granted prior to 2019 were subject to a different calculation of final funding percentage than awards granted in 2019. For a description of how the final funding percentage for awards granted in 2017 and payable in 2020 was calculated, see “Compensation Discussion & Analysis – Compensation Elements – Long-Term Incentives.”



Award Agreement Revisions Applicable for Performance Periods Beginning in 2020

In February 2020, the O&C Committee revised the form of award agreement under the Long-Term Incentive Plan for awards involving performance periods beginning on or after January 1, 2020. Under the revised form of agreement, awards will not use a funding trigger and will instead be calculated based on achievement of performance metrics set by the O&C Committee.



Other Terms of the Long-Term Incentive Plan



The Long-Term Incentive Plan encourages retention of executive officers and key employees by stipulating performance periods of generally 36 months. Participants must be continuously employed by us through the last day of the performance period in order to receive a long-term incentive award for that performance period. If a participant is employed by us on the last day of the performance period but his/her employment terminates for any reason other than by us for cause prior to the payment of the award for that performance period, the participant will be entitled to receive payment of the award. In the event a participant is terminated by us for cause, the participant will forfeit any unpaid Long-Term Incentive Plan award.  For purposes of the Long-Term Incentive Plan, “cause” has the same meaning as defined in any employment agreement or change-in-control agreement of such participant in effect at the time of termination of employment.  If there is no such employment or change-in-control agreement, “cause” means (i) the indictment on or pleading guilty or nolo contendere to, a felony or misdemeanor involving moral turpitude of such participant, or upon the participant, in the carrying out his or her duties to the company, (ii) engaging in conduct that causes a breach of his/her

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fiduciary duties to us, our subsidiaries or our investors, (iii) committing an act of gross negligence, or (iv) committing gross misconduct resulting in material economic harm to us. If a participant’s employment is terminated for reasons other than death, disability, retirement or following a change in control prior to the last day of the performance period, all of such participant’s outstanding and unpaid Long-Term Incentive Plan awards will be cancelled. Upon a termination due to death, disability or retirement, for each outstanding Long-Term Incentive Plan unpaid award, the participant (or his/her beneficiary in the case of death) will be entitled to receive, on the same date as awards are paid for that period to other participants, an award equal to the product of (i) a fraction, the numerator of which is the number of days in the performance period up to and including the date of the separation of service and the denominator of which is the number of days in the entire performance period, and (ii) the Long-Term Incentive Plan award for such performance period based on actual performance of Oncor during the performance period.  In the event of a termination within two years following a change in control, a participant shall be entitled to receive, within 60 days following the separation from service, an award equal to the product of (i) a fraction, the numerator of which is the number of days in the performance period up to and including the date of the separation of service and the denominator of which is the number of days in the entire performance period, and (ii) the Long-Term Incentive Plan award for such performance period based on target performance.



For purposes of the Long-Term Incentive Plan, a “change in control” means, in one or a series of related transactions, (i) the sale of all or substantially all of the consolidated assets or capital stock of EFH Corp., Oncor Holdings, or Oncor to a person (or group of persons acting in concert) who is not an affiliate of any member of the Sponsor Group; (ii) a merger, recapitalization or other sale by EFH Corp., any member of the Sponsor Group or their affiliates, to a person (or group of persons acting in concert) that results in more than 50% of EFH Corp.’s common stock (or any resulting company after a merger) being held by a person (or group of persons acting in concert) that does not include any member of the Sponsor Group or any of their respective affiliates; or (iii) a merger, recapitalization or other sale of common stock by EFH Corp., any member of the Sponsor Group or their affiliates, after which the Sponsor Group owns less than 20% of the common stock of, and has the ability to appoint less than a majority of the directors to the board of directors of, EFH Corp. (or any resulting company after a merger); and with respect to any of the events described in clauses (i) and (ii) above, such event results in any person (or group of persons acting in concert) gaining control of more seats on the board of directors of EFH Corp. than the Sponsor Group. However, the Long-Term Incentive Plan also provides that should a change in control occur under clauses (i) through (iii) above with respect to the assets or capital stock of EFH Corp., a change in control will not be deemed to have occurred unless the change in control would result in the material amendment or interference with the separateness undertakings set forth in our Limited Liability Company Agreement, or would adversely change or modify the definition of an independent director in our Limited Liability Company Agreement.



As the administrator of the Long-Term Incentive Plan, the O&C Committee has the authority to prescribe, amend and rescind rules and regulations relating to the plan, determine the terms and conditions of any awards and make all other determinations deemed necessary or advisable for the administration of the plan. The O&C Committee has broad discretion under the plan and may delegate to one or more officers of the company the authority to grant Long-Term Incentive Plan awards to employees who are not executive officers. Our board of directors may at any time terminate, alter, amend or suspend the Long-Term Incentive Plan and any awards granted pursuant to it, subject to certain limitations. In the event of a change in control, our board of directors may, in its discretion, terminate the plan and cancel all outstanding and unpaid awards, except that in the event of a termination of the plan in connection with a change in control, participants will be entitled to receive the payout as described above.  Payments under the Long-Term Incentive Plan are separate from, and would be in addition to, any payments available under the Change in Control Policy or Severance Plan.



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Pension Benefits



The following table sets forth information regarding Oncor’s participation in the retirement plans that provide for benefits, in connection with, or following, the retirement of Named Executive Officers for the fiscal year ended December 31, 2019:









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The Oncor Retirement Plan contains both a traditional defined benefit component and a cash balance component.  Only employees hired before January 1, 2002 may participate in the traditional defined benefit component.  All new employees hired after January 1, 2002 participate in the cash balance component.  In addition, the cash balance component covers employees previously covered under the traditional defined benefit component who elected to convert the actuarial equivalent of their accrued traditional defined benefit to the cash balance component during a special one-time election opportunity effective in 2002.  The employees that participate in the traditional defined benefit component do not participate in the cash balance component.



Annual retirement benefits under the traditional defined benefit component, which applied during 2019 to Ms. Dennis and Mr. Greer, are computed as follows: for each year of accredited service up to a total of 40 years, 1.3% of the first $7,800, plus 1.5% of the excess over $7,800, of the participant’s average annual earnings (base salary) during his/her three years of highest earnings.  Under the cash balance component, which covers Messrs. Nye, Clevenger, and Henry, a hypothetical account is established for participants and credited with monthly contribution credits equal to a percentage of the participant’s compensation (3.5%, 4.5%, 5.5% or 6.5% depending on the participant’s combined age and years of accredited service), plus interest credits based on the average yield of the 30-year Treasury bond for the 12 months ending November 30 of the prior year.  Benefits paid under the traditional defined benefit component of the Oncor Retirement Plan are not subject to any reduction for Social Security payments but are limited by provisions of the Code.



The Supplemental Retirement Plan provides for the payment of retirement benefits, which would otherwise be limited by the Code or the definition of earnings under the Oncor Retirement Plan, including any retirement compensation required to be paid pursuant to contractual arrangements. Under the Supplemental Retirement Plan, retirement benefits are calculated in accordance with the same formula used under the Oncor Retirement Plan, except that, with respect to calculating the portion of the Supplemental Retirement Plan benefit attributable to service under the traditional defined benefit component of the Oncor Retirement Plan, earnings also include Executive Annual Incentive Plan awards.  The amount of earnings attributable to the Executive Annual Incentive Plan awards is reported under the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.



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The table set forth above illustrates the present value on December 31, 2019 of each Named Executive Officer’s Retirement Plan benefit and benefits payable under the Supplemental Retirement Plan, based on his or her years of service and remuneration through December 31, 2019.  Benefits accrued under the Supplemental Retirement Plan after December 31, 2004 are subject to Section 409A of the Code.  Accordingly, certain provisions of the Supplemental Retirement Plan have been modified in order to comply with the requirements of Section 409A and related guidance.



The present value of accumulated benefits for the traditional benefit component of the Oncor Retirement Plan and the Oncor Supplemental Retirement Plan was calculated based on the executive’s annuity payable at the earliest age that unreduced benefits are available under the Plans (generally age 62). Unmarried executives are assumed to elect a single life annuity. For married executives, it is assumed that 60% will elect a 100% joint and survivor annuity and 40% will elect a single life annuity. Post-retirement mortality was based on the Pri-2012 amount-weighted mortality table published by the Society of Actuaries projected generationally from 2012 with scale MP-2019. A discount rate of 3.12% was applied and no pre-retirement mortality or turnover was reflected.



The present value of accumulated benefits for the cash balance component of the Oncor Retirement Plan and the Oncor Supplemental Retirement Plan was calculated as the value of the executive’s cash balance account projected to age 65 at an assumed growth rate of 3.50% and then discounted back to December 31, 2019, at 3.12%. No mortality or turnover assumptions were applied.



Early retirement benefits under the Oncor Retirement Plan are available to our employees covered in the traditional defined benefit component upon their attainment of age 55 and achievement of 15 years of accredited service.  Early retirement results in a retirement benefit payment reduction of 4% for each full year (and 0.333% for each additional full calendar month) between the date the participant retires and the date the participant would reach age 62.  Participants in the cash balance component of the Oncor Retirement Plan can receive their benefit upon retirement or upon severance of service with the Company. Benefits under the Supplemental Retirement Plan are tied to a participant’s coverage under the Oncor Retirement Plan. For participants in the cash balance program of the Oncor Retirement Plan, Supplemental Retirement Plan benefits are payable upon the later of achievement of 10 years of accredited service or the date the participant would have accumulated 10 years of accredited service but for the participant’s separation from service. For participants in the traditional defined benefit component of the Oncor Retirement Plan, Supplemental Retirement Plan benefits are payable in an annuity on the later of (i) the first day of the second month after a participant’s separation from service or (ii) the earliest date the participant would be eligible to commence benefits under the Oncor Retirement Plan.  For either traditional defined benefit component or cash balance component participants, Supplemental Retirement Plan benefits are payable upon a separation of service if the total benefit amount is less than the limit set under Section 402(g)(1)(B) of the Code ($19,000 in 2019). Benefits under the Supplemental Retirement Plan are only available to our executive officers and certain other key employees.



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Nonqualified Deferred Compensation – 2019



The following table sets forth information regarding the deferral of components of our Named Executive Officers’ compensation on a basis that is not tax-qualified for the fiscal year ended December 31, 2019:







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Salary Deferral Program



Under the Salary Deferral Program, each employee of Oncor, who is in a designated job level and whose annual salary is equal to or greater than an amount established under the Salary Deferral Program ($129,640 for the program year beginning January 1, 2019) may elect to defer up to 50% of annual base salary, and/or up to 85% of any bonus or incentive award.  This deferral (including any vested matching contributions, as described below) may be made for a period of seven years, for a period ending with the retirement of such employee, or for a combination thereof, at the election of the employee.  Oncor makes a matching award, subject to forfeiture under certain circumstances, equal to 100% of up to the first 8% of base salary deferred under the Salary Deferral Program. Oncor does not match deferred annual incentive awards.  Matching contributions vest at the earliest of seven years after the deferral date, retirement, death, disability or termination without cause following a change in control of Oncor (as defined in the Salary Deferral Program).  Deferrals are credited with earnings or losses based on the performance of investment alternatives under the Salary Deferral Program selected by each participant.



Additionally, Oncor, at the direction of the O&C Committee, can make additional discretionary contributions into a Salary Deferral Program participant’s account.  Discretionary contributions made into a Salary Deferral Program participant’s account by Oncor vest as determined by the O&C Committee.



At the end of the applicable account maturity period (seven years or retirement, as elected by the participant or, in the case of company discretionary contributions, as determined by the O&C Committee) the trustee for the Salary Deferral Program distributes the deferrals and the applicable earnings in cash as a lump sum or in annual installments at the participant’s election made at the time of deferral.  Oncor is financing the retirement option of the Salary Deferral Program through the purchase of corporate-owned life insurance on lives of some participants.  The proceeds from such insurance are expected to allow us to fully recover the cost of the retirement option.



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Potential Payments upon Termination or Change in Control



The tables and narrative below provide information for payments to Oncor’s Named Executive Officers (or, as applicable, enhancements to payments or benefits) in the event of termination including retirement, voluntary, for cause, death, disability, without cause or change in control of Oncor.  The amounts shown below for current executive officers assume that such a termination of employment and/or change in control occurred on December 31, 2019.



In 2019, all of our executive officers were eligible to receive benefits under the terms of the Change in Control Policy and the Severance Plan, as more fully described following the tables below.  In addition to the provisions of those plans, the Salary Deferral Program provides that all company-matching awards will become automatically vested in the event of a termination without cause following a change in control, death, disability or retirement.  The amounts listed in the tables below regarding the Salary Deferral Program only represent the immediate vesting of company matching contributions resulting from death, disability, retirement or a termination without cause following the occurrence of a change in control.  Contributions made to such plan by each Named Executive Officer are disclosed in the Nonqualified Deferred Compensation table above.  For a more detailed discussion of the Salary Deferral Program, see the Nonqualified Deferred Compensation table above and the narrative following the Nonqualified Deferred Compensation table.



Retirement benefits under the Oncor Retirement Plan and Supplemental Retirement Plan are available to participants upon their attainment of age 65. Early retirement benefits under the Oncor Retirement Plan are available to our employees covered in the traditional defined benefit component upon their attainment of age 55 and achievement of 15 years of accredited service.  Early retirement results in a retirement benefit payment reduction of 4% for each full year (and 0.333% for each additional full calendar month) between the date the participant retires and the date the participant would reach age 62.  Participants in the cash balance component of the Oncor Retirement Plan can receive their benefit upon retirement or upon severance of service with the Company. Benefits under the Supplemental Retirement Plan are tied to a participant’s coverage under the Oncor Retirement Plan. For participants in the cash balance program of the Oncor Retirement Plan, Supplemental Retirement Plan benefits are payable upon the later of achievement of 10 years of accredited service or the date the participant would have accumulated 10 years of accredited service but for the participant’s separation from service. For participants in the traditional defined benefit component of the Oncor Retirement Plan, Supplemental Retirement Plan benefits are payable in an annuity on the later of (i) the first day of the second month after a participant’s separation from service or (ii) the earliest date the participant would be eligible to commence benefits under the Oncor Retirement Plan.  For either traditional defined benefit component or cash balance component participants, Supplemental Retirement Plan benefits are payable upon a separation of service if the total benefit amount is less than the limit set under Section 402(g)(1)(B) of the Code ($19,000 in 2019). Messrs. Nye, Clevenger and Henry participate in the cash balance component and as a result can elect to receive their Oncor Retirement Plan benefits as a lump sum upon separation of service. In addition, since he has accumulated over 10 years of accredited service, Mr. Clevenger would receive his Supplemental Retirement Plan benefits as a lump sum upon separation of service. As of December 31, 2019, Mr. Henry would have received his Supplemental Retirement Plan benefits as a lump sum if he had experienced a separation of service since he had less than $19,000 in aggregate benefits.  As Mr. Nye has not yet achieved ten years of service and has a Supplemental Retirement Plan benefit that exceeds the limit set forth in Code Section 402(g)(1)(B), upon a separation of service he would receive his Supplemental Retirement Plan benefits upon the later of (i) separation of service or (ii) the date he would have achieved ten years of accredited service absent the separation of service. Ms. Dennis and Mr. Greer participate in the traditional defined benefit component of the retirement plans. Since both Ms. Dennis and Mr. Greer have satisfied the age requirement and 15 years of accredited service, they are eligible to retire early upon termination of employment. No additional potential payments will be triggered by any termination of employment or change in control, and as a result no amounts are reported in the tables below for such retirement plans. For a more detailed discussion of the retirement plans, see the Pension Benefits table above and the narrative following the Pension Benefits table.





All our Named Executive Officers participate in benefit plans for group term life insurance and accidental death and disability.  Any benefits received under these policies are paid to the beneficiary by a third-party provider. 





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1.  Mr. Nye



Potential Payments to Mr. Nye Upon Termination ($)



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2.  Mr. Clevenger



Potential Payments to Mr. Clevenger Upon Termination ($)



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3.  Ms. Dennis



Potential Payments to Ms. Dennis Upon Termination ($)



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4.  Mr. Greer



Potential Payments to Mr. Greer Upon Termination ($)

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5.  Mr. Henry



Potential Payments to Mr. Henry Upon Termination ($)

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Change in Control Policy



We maintain a Change in Control Policy for our executive team, which consists of our executive officers and certain non-executive vice presidents.  The purpose of this Change in Control Policy is to provide the payment of transition benefits to eligible executives if:





The Change in Control Policy provides for the payment of transition benefits to eligible executives if any of the following occur within 24 months following a change in control:





“Change in control” is defined in the Change in Control Policy as the occurrence of the following events: (a) the Sponsor Group ceases to beneficially own (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) a majority of our or our successor’s (by consolidation or merger) outstanding equity interest; (b) 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; (c) individuals who as of August 1, 2015 constitute our board of directors (the Incumbent Board) cease for any reason to constitute at least a majority thereof, 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, for purposes of this clause (c) considered as though such person were a member of the Incumbent Board; or (d) the consummation of a court-approved plan of reorganization in the proceeding styled In re Energy Future Holdings Corp., et al., Case No. 14-10979 (CSS), pending in the United States Bankruptcy Court for the District of Delaware.  For purposes of this definition, the term “Sponsor Group” shall mean investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Capital, L.P. and Goldman Sachs & Co.



Our executive officers are eligible to receive the following under the Change in Control Policy:





The Change in Control Policy contains a one year non-solicitation period and provisions regarding confidentiality and non-disparagement and attaches a form of release agreement that each executive is required to sign prior to receipt of benefits under the policy.  The Change in Control Policy also provides that for a period of one year after a termination contemplated by the plan, a participant may not recruit, solicit, induce or in any way cause any employee, consultant or contractor engaged by Oncor to terminate his/her relationship with Oncor. The Change in Control Policy may be amended by our board of directors or a duly authorized committee of our board of directors at any time, except that any amendments that materially decrease the benefits available to eligible participants cannot be made within 24 months of a change in control or while the company is in the process of negotiating a potential transaction that could constitute a change in control.  



Severance Plan



We maintain the Severance Plan for our executive team, which consists of our executive officers and certain non-executive vice presidents.  The purpose of the Severance Plan is to provide benefits to eligible executives who are not eligible for severance pursuant to another plan or agreement (including an employment agreement) and whose employment is involuntarily terminated for reasons other than:





The Severance Plan provides for severance payments to executives whose employment is involuntarily terminated for reasons other than:





Our executive officers are eligible to receive the following under the Severance Plan:

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In order to receive benefits under the plan, a participant must enter into an agreement and release within 45 days of being notified by us of such participant’s eligibility to receive benefits under the plan. The Severance Plan also provides that for a period of one year after a termination contemplated by the plan, a participant may not recruit, solicit, induce or in any way cause any employee, consultant or contractor engaged by Oncor to terminate his/her relationship with Oncor. The Severance Plan also contains provisions relating to confidentiality and non-disparagement.



Long-Term Incentive Plan



For information concerning change of control and termination payouts for awards granted under the Long-Term Incentive Plan, see the narrative that follows the Grants of Plan-Based Awards – 2019 table.



Performance Bonus Agreements



In February 2018, we entered into performance bonus agreements with each of Mr. Nye and Mr. Greer that were effective upon closing of the Sempra Acquisition and provided for a performance bonus opportunity to each executive for each of the 2018 and 2019 fiscal years. Under the terms of the performance bonus agreements, if the executive was employed by Oncor or an affiliate of Oncor on the last day of the 2018 or 2019 fiscal years, and his employment with Oncor or such affiliate terminated for any reason other than by Oncor or such affiliate for cause (as defined in the applicable performance bonus agreement) prior to the payment of the performance bonus for that fiscal year, the executive would be entitled to receive any earned performance bonus at the same time it would have been paid if the executive had remained an employee. If the executive were terminated for cause, or ceased employment with Oncor or such affiliate for reasons other than death, disability, retirement or a termination following a change in control, all of his outstanding and unpaid performance bonuses would be forfeited. In the event of a separation from service due to death, disability or retirement (other than a retirement that is also a termination following a change in control), the executive would be entitled to, for each outstanding and unpaid performance bonus, payment of an amount equal to the product of (i) a fraction, the numerator of which is the number of days in the fiscal year in which the separation of service occurred, up to and including the date of the executive’s separation from service, and the denominator of which is 365; and (ii) the performance bonus amount that would be payable for that fiscal year based on Oncor’s performance bonus funding percentage for that fiscal year. In the event of a termination following a change in control, the executive would be entitled to, for each outstanding and unpaid performance bonus, payment within 60 days following his separation from service of an amount equal to (i) a fraction, the numerator of which is the number of days in the fiscal year in which the separation of service occurs, up to and including the date of the executive’s separation from service, and the denominator of which is 365; and (ii) the performance bonus amount that would be payable for that fiscal year based on Oncor’s achievement of the financial plan net income for that year. The “Performance Bonus Agreement” row in each of Mr. Nye’s and Mr. Greer’s Potential

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Payment Upon Termination or Change in Control table reflects the payments that would be owed pursuant to these agreements in the event of certain terminations of their employment as of December 31, 2019. These agreements cease to apply after the 2019 fiscal year. For more detailed information on the performance bonus agreements, see “Executive Compensation — Individual Named Executive Officer Compensation — Compensatory Agreements —Named Executive Officer Performance Bonus Agreements.”



CEO Pay Ratio for Fiscal Year 2019



Pay Ratio



Our CEO to median employee pay ratio has been calculated in accordance with the rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act and is calculated in a manner consistent with Item 402(u) of Regulation S-K. Mr. Nye’s annual total compensation for 2019, as shown in the Summary Compensation Table above, was $5,363,749.



The median Oncor employee’s annual total compensation in 2019 (other than Mr. Nye) was $180,100, calculated using the same methodology as used in the calculation of the Summary Compensation Table, consisting of base salary, bonus, non-equity incentive plan compensation, change in pension value and non-qualified deferred compensation earnings, and all other compensation (for the median employee, all other compensation consisted of the Oncor Thrift Plan company match). As a result, the ratio of Mr. Nye’s annual total compensation in 2019 to the median annual total compensation of all Oncor employees (other than Mr. Nye) in 2019 was 30:1, when calculated in a manner consistent with item 402(u) of Regulation S-K.



Identification of Median Employee



We identified a median employee in 2017 who retired in 2019. Because there have been no meaningful changes to our employee population or a change in employee compensation arrangements that we believe would result in a significant modification to the pay ratio disclosure, for 2019 we have used the 2017 data (excluding the previous median employee, who retired) to identify a new median employee. The new median employee’s compensation is substantially similar to that of the retired previous median employee. To identify the median employee, we evaluated all employees, other than the CEO, employed by Oncor as of October 31, 2017 and calculated each such employee’s total cash compensation received through October 31, 2017. Total cash compensation consists of base pay, any incentive compensation, bonuses, and any other cash payments, including, without limitation, any overtime adjustments, overtime meals, taxable reimbursable expenses, holiday pay, and salary deferral program payouts. We did not make any material assumptions, adjustments, or estimates with respect to total cash compensation and we did not annualize the compensation for any full-time employees that were not employed by us for all of 2017. The total compensation of each employee other than the CEO was then ranked lowest to highest to determine the median employee.



Annual Total Compensation



After identifying the median employee based on total cash compensation, as described above, we calculated annual total compensation for such employee using the same methodology we use for our Named Executive Officers as set forth in the Summary Compensation Table above.



Risk Assessment of Compensation Policies and Practices



The O&C Committee reviews the compensation policies and practices applicable to Oncor’s employees (both executive and non-executive) annually during the first quarter of the year in order to determine whether such compensation policies and practices create risks that are reasonably likely to have a material adverse effect on Oncor. In February 2020 the O&C Committee concluded that current compensatory policies and practices do not create risks that are reasonably likely to have a material adverse effect on Oncor.  In arriving at this conclusion, the O&C Committee discussed with management the various compensation policies and practices of the company and the compensation payable pursuant to each, and evaluated whether the compensation payable under each plan or policy could result in (i) incenting employees to take risks that could result in a material adverse effect to Oncor, or (ii) payments by the company significant enough to cause a material adverse effect to Oncor.



We believe that the following factors in our employee compensation program limit risks that could be reasonably likely to have a material adverse effect on the company:

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Director Compensation



The O&C Committee determines compensation for members of our board of directors. Directors who are current officers of Oncor and the member directors designated by each of Sempra (through Oncor Holdings) and Texas Transmission do not receive any fees for service as a director.  See “Item 10. Directors, Executive Officers and Corporate Governance – Director Appointments” for information regarding the designation of member directors. Oncor reimburses all directors for reasonable expenses incurred in connection with their services as directors.



The table below sets forth information regarding the aggregate compensation paid to the members of our board of directors during the fiscal year ended December 31, 2019, other than E. Allen Nye, Jr., whose compensation from Oncor is discussed in “Executive Compensation – Summary Compensation Table.” Mr. Nye did not receive any compensation for service on our board of directors.





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The O&C Committee determines director compensation for the disinterested directors on our board of directors and our non-executive chairman of the board. All director fees are paid quarterly, in arrears. Each disinterested director and our non-executive chairman receives a fee for serving on the board of directors. In addition, the chair of each committee, our lead disinterested director, and our non-executive chairman each receive additional fees for serving in such roles. For the first three quarters of 2019, each disinterested director and our non-executive chairman (Mr. Shapard) received a fee of $56,250 for service on our board of directors (of which amount $3,375 for Messrs. Dunning, Estrada, Gary, Hill, Mack, Shapard and Wortham was attributable to such director’s service as a member of the board of directors of Oncor Holdings and was paid by Oncor but reimbursed to Oncor by Oncor Holdings). In addition, for the first three quarters of 2019, each board committee chair received an additional $3,750 quarterly fee for the extra responsibilities associated with such position, our lead disinterested director (Mr. Dunning) received an additional $12,500 quarterly fee for the additional duties associated with that position, and our chairman (Mr. Shapard) received an additional $68,750 quarterly fee for the additional duties associated with that position (of which amount $4,125 was attributable to his service as chairman of the board of directors of Oncor Holdings and was paid by Oncor but reimbursed to Oncor by Oncor Holdings).



In October 2019, the O&C Committee engaged PricewaterhouseCoopers LLP to conduct competitive market analyses of disinterested directors compensation, using the same peer group and methodology used in the October 2019 analysis of executive compensation. See “Executive Compensation - Compensation Discussion and Analysis – Overview – Market Data” for a description of this peer group and methodology.  As a result of this review, the O&C Committee made the following changes, effective as of the quarter beginning October 1, 2019:



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Our Limited Liability Company Agreement provides that each of Sempra and Texas Transmission has the right to designate two member directors to our board of directors. None of those four director positions (currently held by Messrs. Bilicic, Martin, and Zucchet and Ms. Newell) receives compensation from us for his or her service as a director. Mr. Nye, our Chief Executive, does not receive compensation for his service as a director. For a description of the independence standards applicable to our disinterested directors, see “Certain Relationships and Related Transactions, and Director Independence.”



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Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED EQUITY HOLDER MATTERS



Equity Compensation Plan Information



As of December 31, 2019, Oncor had no compensation plans in place that authorized the issuance of equity securities of Oncor.



Security Ownership of Equity Interests of Oncor by Certain Beneficial Owners and Management



The following table lists the number of limited liability company membership interests (LLC Units) of Oncor beneficially owned at February 25, 2020 by the holders of more than 5% of our LLC Units, our current directors and the Named Executive Officers listed in “Item 11 - Executive Compensation – Summary Compensation Table.” 



The amounts and percentages of LLC Units beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.













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Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our board of directors has adopted a written policy regarding related person transactions as part of our corporate governance guidelines.  Under this policy, a related person transaction shall be consummated or shall continue only if:

For purposes of this policy, the term “related person” means any related person pursuant to Item 404 of Regulation S-K of the Securities Act, except (i) prior to the Sempra Acquisition, transactions with EFH Corp., its subsidiaries and certain entities owning or controlling more than 49% of Oncor’s equity interests, which were subject to restrictions set forth in our Limited Liability Company Agreement in effect at the time, and (ii) following the Sempra Acquisition, transactions with Sempra and its affiliates (other than the Oncor Ring-Fenced Entities), which transactions are subject to restrictions set forth in our current Limited Liability Company Agreement.

A “related person transaction” is a transaction between us and a related person (including any transactions requiring disclosure under Item 404 of Regulation S-K under the Securities Act, if applicable), other than the types of transactions described below, which are deemed to be pre-approved by the Audit Committee:

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Our board of directors has determined that it is appropriate for its Audit Committee to review and approve or ratify related person transactions. In unusual circumstances, we may enter into related person transactions in advance of receiving approval, provided that such related person transactions are reviewed and ratified as soon as reasonably practicable by the Audit Committee of the board of directors. If the Audit Committee determines not to ratify such transactions, we shall make all reasonable efforts to cancel or otherwise terminate such transactions.

The related person transactions policy described above also does not apply to Sempra and its subsidiaries and affiliates (other than the Oncor Ring-Fenced Entities), which are subject to restrictions set forth in our Limited Liability Company Agreement. Our Limited Liability Company Agreement requires that we maintain an arm’s-length relationship with the Sempra and its affiliates (other than the Oncor Ring-Fenced Entities) or any other direct or indirect equity holders of Oncor or Oncor Holdings, consistent with the PUCT’s rules applicable to Oncor, and only enter into transactions with Sempra and its affiliates (other than the Oncor Ring-Fenced Entities) that are both (i) on a commercially reasonable basis, and (ii) if such transaction is material, approved by (a) a majority of the members of our board of directors, and (b) prior to a Trigger Event (as defined in our Limited Liability Company Agreement), the directors appointed by Texas Transmission, at least one of whom must be present and voting in order to approve the transaction.

Related Party Transactions



InfraREIT Acquisition and Operation Agreement With Sharyland



In May 2019, we completed the InfraREIT Acquisition. To fund the cash consideration and certain related fees and expenses we received capital contributions of $1,330 million from Sempra and certain indirect equity holders of Texas Transmission. As a condition to the InfraREIT Acquisition, InfraREIT’s subsidiary, SDTS, and SDTS’s tenant, SU, completed the SDTS-SU Asset Exchange immediately prior to the closing of the InfraREIT Acquisition, pursuant to which SDTS exchanged certain of its south Texas assets for certain assets owned by SU. In addition, as a condition to the closing of the SDTS-SU Asset Exchange, Sempra acquired an indirect 50 percent interest in Sharyland Holdings, the parent of Sharyland. As a result, Sharyland became our affiliate for purposes of PUCT rules. In connection with the SDTS-SU Asset Exchange, we and SU entered into an operation agreement, which provides that we will provide certain operations services with respect to the SU assets in south Texas to SU at cost without a markup or profit. We provided Sharyland with approximately $300,000 worth of services pursuant to this agreement in 2019.



Our Limited Liability Company Agreement requires that any material transactions with Sempra and its subsidiaries and affiliates (other than the Oncor Ring-Fenced Entities) be approved by a majority of our board of directors and the directors appointed by Texas Transmission present and voting, provided that at least one director appointed by Texas Transmission must be present and voting. The InfraREIT Acquisition and the related operation agreement were approved by our board of directors, including the directors appointed by Texas Transmission, who were both present and voting. 



For more information on the InfraREIT Acquisition, see Note 2 to Financial Statements.



Tax-Sharing Arrangements



We are not a member of another entity’s consolidated tax group, but our owners’ federal income tax returns include their portion of our results.  Under the terms of a tax sharing agreement among us, Oncor Holdings, Texas Transmission, STH (as successor to EFH Corp.), and Investment LLC, we are generally obligated to make payments to our owners, pro rata in accordance with their respective membership interests, in an aggregate 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.  STH will file a combined Texas Margin tax return which includes our results and our share of 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 under “Provision in Lieu of 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.  In the unlikely event such amounts are not paid under the tax sharing agreement, it is probable that they would be reimbursed to rate payers. 



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At December 31, 2019, we had total $19 million net payables to members under the agreement. It consists of a current Texas margin tax payable to Sempra totaling $22 million, partially offset by federal income tax receivables totaling $3 million ($2 million due from Sempra and $1 million due from Texas Transmission).



We made a net in lieu of income tax payment of $78 million (including $45 million and $11 million in federal income tax-related payments to Sempra and Texas Transmission, respectively and $22 million in Texas margin tax-related payment to Sempra) in the year ended December 31, 2019.



Third Amended and Restated Limited Liability Company Agreement of Oncor



On March 9, 2018, in connection with the closing of the Sempra Acquisition, Oncor’s Limited Liability Company Agreement was amended and restated in its entirety as set forth in the Limited Liability Company Agreement. The Limited Liability Company Agreement of Oncor among other things, sets out the members’ respective governance rights in respect of their ownership interests in Oncor. Among other things, the Limited Liability Company Agreement provides for the management of Oncor by a board of directors consisting of 13 members, including seven Disinterested Directors, two directors designated by Texas Transmission (subject to certain conditions), two directors designated indirectly by Sempra and two directors that are current or former officers of Oncor. Texas Transmission also has the right to designate one non-voting observer to the board of directors, who is entitled to attend all meetings of the board of directors (subject to certain exceptions) and receive copies of all notices and materials provided to the board of directors.



The Limited Liability Company Agreement prohibits Oncor and its subsidiaries from taking certain material actions outside the ordinary course of business without prior approvals by the members, some or all of the Disinterested Directors and/or the directors designated by one or more of the members.  The Limited Liability Company Agreement also sets forth certain separateness undertakings to ensure Oncor’s separateness from Sempra and its direct and indirect subsidiaries (other than the Oncor Ring-Fenced Entities). Additionally, the Limited Liability Company Agreement contains provisions regulating capital accounts of members, allocations of profits and losses and tax allocation and withholding.



The Limited Liability Company Agreement describes Oncor’s procedures and limitations on declaring and paying distributions to members. Pursuant to the Limited Liability Company Agreement, we cannot make any distributions to members (other than contractual tax payments) that would cause us to be out of compliance with the PUCT’s approved debt-to-equity ratio, which is currently 57.5% debt to 42.5% equity. The distribution restrictions also include the ability of our board, a majority of the Disinterested Directors, or any director designated to serve on our board of directors by Texas Transmission to limit distributions (other than contractual tax payments) to the extent each determines it is necessary to meet expected future requirements of Oncor (including continuing compliance with the PUCT debt-to-equity ratio commitment). In addition, the Limited Liability Company Agreement provides that if Oncor’s senior secured debt credit rating by any one of S&P, Moody’s or Fitch falls below BBB (Baa2) we must suspend distributions (other than contractual tax payments) until otherwise permitted to do so by the PUCT, and requires that Oncor notify the PUCT if either the credit rating of either Sempra or Oncor falls below its then current level. Distributions also cannot be made to the extent they would violate any applicable laws or regulations. Our Limited Liability Company Agreement requires that any changes to such procedures and limitations be approved by Oncor Holdings and Texas Transmission and a majority of our board of directors present and voting, which must include (i) a majority of the Disinterested Directors, (ii) both directors appointed to serve on our board of directors by Sempra (through Oncor Holdings), (iii) both directors that are current or former officers of Oncor, and (iv) the directors designated to serve on our board of directors by Texas Transmission who are present and voting, provided that at least one such director must be present and voting in order to approve such matter. 



In addition, any annual or multi-year budget with an aggregate amount of capital or operating and maintenance expenditures that are greater than or less than 10% of the capital or operating and maintenance expenditures in the annual budget for the immediately prior fiscal year or multi-year period, as applicable, must be approved by (i) a majority of the Disinterested Directors and (ii) the Texas Transmission director(s) present and voting, provided that at least one Texas Transmission director must be present and voting in order to approve such action. Also, any acquisition of or investment in any third party which involves the purchase of or investment in assets located outside the State of Texas for consideration in an amount greater than $1.5 billion must be approved by (a) a majority of the Disinterested Directors and (b) the Texas Transmission director(s) present and voting, provided that at least one Texas Transmission director must be present and voting in order to approve such action.



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Registration Rights Agreement



In November 2008, we entered into a registration rights agreement (Registration Rights Agreement) by and among us, Oncor Holdings, Texas Transmission and STH (formerly EFH Corp.).  The Registration Rights Agreement grants customary registration rights to certain of our members. Subject to certain limitations set forth in the Registration Rights Agreement, these rights include, without limitation, the following: (i) the right of Oncor Holdings at any time, and after ten years from the date of the Registration Rights Agreement, the right of Texas Transmission, to demand that we register a specified amount of membership interests in accordance with the Securities Act; (ii) the right of both Oncor Holdings and Texas Transmission to demand registration of a specified amount of membership interests following an initial public offering; and (iii) the right of all members that are parties to the Registration Rights Agreement to have their membership interests registered if we propose to file a registration statement relating to an offering of membership interests (with certain exceptions).



Subject to certain exceptions, whenever we are required to effect the registration of any membership interests pursuant to the Registration Rights Agreement, we have agreed to use our best efforts to cause the applicable registration statement to become effective, and to keep each such registration statement effective until the earlier of (a) at least 180 days (or two years for a shelf registration statement) or (b) the time at which all securities registered under such registration statement have been sold.



Investor Rights Agreement



The investor rights agreement dated as of November 5, 2008, by and among Oncor, Oncor Holdings, Texas Transmission, STH (formerly EFH Corp.) and any other persons that subsequently become a party thereto (Investor Rights Agreement) governs certain rights of certain members of Oncor and STH arising out of their direct or indirect ownership of Oncor membership interests, including, without limitation, transfers of Oncor membership interests and restrictions thereon.  Texas Transmission may transfer its Oncor membership interests under a registration statement or pursuant to applicable securities laws. The Investor Rights Agreement also grants Texas Transmission certain “tag-along” rights in relation to certain sales of Oncor membership interests by Oncor Holdings. Subject to certain conditions, these “tag-along” rights allow Texas Transmission to sell a pro-rata portion of its Oncor membership interests in the event of a sale of Oncor membership interests by Oncor Holdings on the same terms as Oncor Holdings would receive for its Oncor membership interests. The agreement further provides that under certain offerings of equity securities occurring before an initial public offering of Oncor, Texas Transmission and Oncor Holdings will receive preemptive rights to purchase their pro-rata share of the equity securities to be sold pursuant to such offerings. The Investor Rights Agreement also provides STH and Sempra with a right of first refusal to purchase any Oncor membership interests to be sold in a permitted sale by Texas Transmission or its permitted transferees.



     Additionally, STH, Sempra, certain of Sempra’s subsidiaries and Oncor Holdings have certain “drag-along” rights in relation to offers from third-parties to purchase their directly or indirectly owned membership interests in Oncor, where the resulting sale would constitute a change of control of Oncor. These “drag-along” rights compel Texas Transmission and all other members of Oncor to sell or otherwise transfer their membership interests in Oncor on substantially the same terms as STH, Sempra or Oncor Holdings (as applicable). Pursuant to the Investor Rights Agreement, all members of Oncor that have entered into such agreement must cooperate with Oncor in connection with an initial public offering of Oncor.



Transactions with Affiliates and Portfolio Companies of Certain of our Beneficial Owners



The beneficial owners of Texas Transmission include various entities and funds who make equity investments in various companies (Portfolio Companies) in the ordinary course of their business.  We have in the past entered into, and may continue to enter into, transactions with Portfolio Companies or their affiliates in the ordinary course of business on an arm’s-length basis, which may result in revenues to the beneficial owners of Texas Transmission. 

Director Independence

Our Limited Liability Company Agreement provides that seven members of our board of directors must be Disinterested Directors. For a director to be deemed a Disinterested Director, our board of directors must affirmatively determine that (i) such director has not had within the previous ten years, or currently does not have, a material relationship with Sempra or its subsidiaries or affiliated entities or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings and (ii) that such director meets the independence standards in Section 303A of the New York Stock

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Exchange Manual in all material respects in relation to Sempra or its subsidiaries and affiliated entities or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings.



Our board of directors has determined that Messrs. Adams, Dunning, Estrada, Gary, Hill, Mack and Wortham are Disinterested Directors under the standards in our Limited Liability Company Agreement.



Mr. Shapard is our Chairman of the Board and presides at all meetings of our board of directors. Mr. Shapard was appointed Chairman of the Board effective upon the closing of the Sempra Acquisition in March 2018.  Mr. Shapard served as our Chief Executive until the closing of the Sempra Acquisition and retired from Oncor effective April 1, 2018.  Mr. Dunning is the Lead Disinterested Director of our board of directors and has served in such role since July 2010. The Lead Disinterested Director performs such duties and responsibilities as may be specified by the board. 

   

Our board of directors has designated an Audit Committee, Nominating and Governance Committee and O&C Committee to exercise certain powers and authorities of the board of the directors.  Members of these committees are not required by our Limited Liability Company Agreement or board of directors to meet any independence standards.  Mr. Zucchet, who was designated to serve on our board of directors by Texas Transmission in November 2008, has served on the O&C Committee since May 2010 and was also appointed to the Nominating and Governance Committee effective February 2011.  Mr. Evenden, who was designated to serve on our board of directors by Texas Transmission in October 2014, was appointed to the Audit Committee effective October 2014 and served on our board of directors until July 30, 2019. Ms. Newell, who was designated to serve on our board of directors by Texas Transmission on July 30, 2019, was appointed to the Audit Committee effective on such date.  Mr. Martin, who was designated to serve on our board of directors by Sempra (through Oncor Holdings) on March 9, 2018 upon closing of the Sempra Acquisition, was appointed to the Audit Committee effective April 2018.  Ms. Ortiz, who was designated to serve on our board of directors by Sempra (through Oncor Holdings) in July 2018, was appointed to the O&C Committee effective July 2018.  Ms. Ortiz served on our board of directors until August 26, 2019.  Mr. Bilicic, who was designated to serve on our board of directors by Sempra (through Oncor Holdings) on August 26, 2019, was appointed to the O&C Committee effective September 4, 2019. None of Messrs. Bilicic, Evenden, Martin, or Zucchet or Mses. Newell or Ortiz qualifies as a Disinterested Director for purposes of our Limited Liability Company Agreement.



For information on the structure of our board of directors, see “Item 10. Directors, Executive Officers and Corporate Governance – Director Appointments.”

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Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES



Deloitte & Touche LLP is our independent registered public accounting firm.



In 2008, our Audit Committee adopted a policy governing the engagement of our independent registered public accounting firm.  The policy provides that in addition to the audit of the financial statements, related quarterly reviews and other audit services, and providing services necessary to complete SEC filings, our independent auditor may be engaged to provide non-audit services as described herein.  Prior to engagement, all services to be rendered by the independent auditor must be authorized by our Audit Committee in accordance with pre-approval procedures which are defined in the policy.  The pre-approval procedures require:







Our Audit Committee may also approve certain ongoing non-audit services not previously approved in the limited circumstances provided for in the SEC rules.  All services performed in 2019 by Deloitte & Touche LLP, the member firms of Deloitte & Touche Tohmatsu and their respective affiliates (Deloitte & Touche) were pre-approved by our Audit Committee.



The policy defines those non-audit services which our independent auditor may also be engaged to provide as follows:









The policy prohibits us from engaging our independent auditor to provide:





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In addition, the policy prohibits our independent auditor from providing tax or financial planning advice to any of our officers.



The policy also contains the following standard of conduct for our independent auditor related to staffing and conducting its annual audit:





Compliance with our Audit Committee’s policy relating to the engagement of Deloitte & Touche is monitored on behalf of our Audit Committee by our chief internal audit executive.  Reports from Deloitte & Touche and the chief internal audit executive describing the services provided by Deloitte & Touche and fees for such services are provided to our Audit Committee no less often than quarterly.















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PART IV



Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



The consolidated financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.



(a)Exhibits:





*    Incorporated herein by reference.

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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Oncor Electric Delivery Company LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Oncor Electric Delivery Company LLC and in the capacities and on the date indicated.



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Supplemental Information to be Furnished with Reports Filed

Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered

Securities Pursuant to Section 12 of the Act



No annual report, proxy statement, form of proxy or other proxy soliciting material has been sent to security holders of Oncor Electric Delivery Company LLC during the period covered by this Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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