0001193311-18-000027.txt : 20181107 0001193311-18-000027.hdr.sgml : 20181107 20181107161152 ACCESSION NUMBER: 0001193311-18-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONCOR ELECTRIC DELIVERY CO LLC CENTRAL INDEX KEY: 0001193311 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 752967830 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-100240 FILM NUMBER: 181166456 BUSINESS ADDRESS: STREET 1: 1616 WOODALL RODGERS FWY CITY: DALLAS STATE: TX ZIP: 75202 BUSINESS PHONE: 214-486-2000 MAIL ADDRESS: STREET 1: 1616 WOODALL RODGERS FWY CITY: DALLAS STATE: TX ZIP: 75202 FORMER COMPANY: FORMER CONFORMED NAME: ONCOR ELECTRIC DELIVERY CO DATE OF NAME CHANGE: 20070425 FORMER COMPANY: FORMER CONFORMED NAME: TXU ELECTRIC DELIVERY CO DATE OF NAME CHANGE: 20040714 FORMER COMPANY: FORMER CONFORMED NAME: ONCOR ELECTRIC DELIVERY CO DATE OF NAME CHANGE: 20020926 10-Q 1 c311-20180930x10q.htm 10-Q oed-20180930 Q3

 





 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

____________________



FORM 10-Q





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





FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018



― OR ―



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



____________________





Commission File Number 333-100240



Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)





 

Delaware

75-2967830

(State of Organization)

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



 

1616 Woodall Rodgers Fwy., Dallas, TX  75202

(214) 486-2000

(Address of Principal Executive Offices)

(Registrant’s Telephone Number)



____________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes         No        



Indicate by check mark whether the registrant has submitted electronically 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. Yes___ No___



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



As of November 7, 2018, 80.25% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Sempra Energy, and 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC.  None of the membership interests are publicly traded.







 

TABLE OF CONTENTS



Page

GLOSSARY

PART I.      FINANCIAL INFORMATION

Item 1.        Financial Statements (Unaudited)

Condensed Statements of Consolidated Income —
Three and Nine Months Ended September 30, 2018 and 2017

Condensed Statements of Consolidated Comprehensive Income —
Three and Nine Months Ended September 30, 2018 and 2017

Condensed Statements of Consolidated Cash Flows —
Nine Months Ended September 30, 2018 and 2017

Condensed Consolidated Balance Sheets —
September 30, 2018 and December 31, 2017

Notes to Condensed Consolidated Financial Statements

10 

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

33 

Item 3.        Quantitative and Qualitative Disclosures About Market Risk

45 

Item 4.        Controls and Procedures

48 

PART II.    OTHER INFORMATION

49 

Item 1.        Legal Proceedings

49 

Item 1A.     Risk Factors

49 

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

49 

Item 3.        Defaults Upon Senior Securities

49 

Item 4.        MINE SAFETY DISCLOSURES

49 

Item 5.        Other Information

49 

Item 6.        Exhibits

50 

SIGNATURE

51 





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



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

 



GLOSSARY



 





 

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



2017 Form 10-K

Oncor’s Annual Report on Form 10-K for the year ended December 31, 2017

AMS

advanced metering system

Contributed EFH Debtors

Certain EFH Debtors that became subsidiaries of Vistra and emerged from Chapter 11 at the time of the Vistra Spin-Off.

DCRF

distribution cost recovery factor

Debtors

EFH Corp. and the majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities.  Prior to the Vistra Spin-Off, also included the TCEH Debtors.

Deed of Trust

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

EECRF

energy efficiency cost recovery factor

EFCH

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

EFH Bankruptcy Proceedings

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

EFH Corp.

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

EFH Debtors

EFH Corp. and its subsidiaries that are Debtors in the EFH Bankruptcy Proceedings, excluding the TCEH Debtors

EFIH

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

ERCOT

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

ERISA

Employee Retirement Income Security Act of 1974, as amended

Fitch

Fitch Ratings, Ltd. (a credit rating agency)

GAAP

generally accepted accounting principles of the U.S.

InfraREIT

InfraREIT, Inc.

InfraREIT Acquisition

Refers to the transactions contemplated by the InfraREIT Merger Agreement, pursuant to which Oncor would acquire all of the equity interests of InfraREIT and InfraREIT Partners.

InfraREIT Merger Agreement

Refers to the Agreement and Plan of Merger, dated as of October 18, 2018, among Oncor, 1912 Merger Sub LLC (a wholly-owned subsidiary of Oncor), Oncor T&D Partners, LP (a wholly-owned indirect subsidiary of Oncor), InfraREIT and InfraREIT Partners.

InfraREIT Partners

InfraREIT Partners, LP, a subsidiary of InfraREIT

Investment LLC

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

kWh

kilowatt-hours

LIBOR

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

Luminant

Refers to subsidiaries of Vistra (which, prior to the Vistra Spin-Off were subsidiaries of TCEH) engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas.

Moody’s

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

Oncor

Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings

Oncor Holdings

Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of STIH and the direct majority owner (80.25% equity interest) of Oncor

Oncor OPEB Plans

Refers to plans sponsored by Oncor that offer certain postretirement health care and life insurance benefits to eligible current and former Oncor employees, certain eligible current and former EFH Corp. and Vistra employees, and their eligible dependents.

Oncor Retirement Plan

Refers to a defined benefit pension plan sponsored by Oncor.

Oncor Ring-Fenced Entities

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

OPEB

other postretirement employee benefits

PUCT

Public Utility Commission of Texas

PURA

Texas Public Utility Regulatory Act

REP

retail electric provider

S&P

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

SDTS

Sharyland Distribution & Transmission Services, L.L.C., an indirect subsidiary of InfraREIT

SEC

U.S. Securities and Exchange Commission

Sempra

Sempra Energy

Sempra Acquisition

Refers to the transactions contemplated by that certain Agreement and Plan of Merger, dated as of August 21, 2017, by and between EFH Corp., EFIH, Sempra and one of Sempra’s wholly-owned subsidiaries, pursuant to which Sempra would acquire the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH. The transactions closed March 9, 2018.

Sharyland Asset Exchange

Refers to the asset swap consummated on November 9, 2017 pursuant to which Oncor received substantially all of the distribution assets and certain transmission assets of Sharyland Distribution & Transmission Services, L.L.C. and Sharyland Utilities, L.P. in exchange for certain of Oncor’s transmission assets and cash. The asset swap was completed pursuant to PUCT Docket No. 47469 and that certain Agreement and Plan of Merger, dated as of July 21, 2017, by and among SDTS, SU, SU AssetCo, L.L.C., a wholly-owned subsidiary of SU, and SDTS AssetCo, L.L.C., a wholly-owned subsidiary of SDTS, Oncor and Oncor AssetCo LLC, a wholly-owned subsidiary of Oncor created for the transaction. 

Sponsor Group

Refers collectively to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Global, LLC and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that controlled Texas Holdings.

STH

Sempra Texas Holdings Corp., a Texas corporation (formerly EFH Corp. prior to the closing of the Sempra Acquisition)

STIH

Sempra Texas Intermediate Holding Company LLC., a Delaware limited liability company (formerly EFIH prior to the closing of the Sempra Acquisition)

SU

Sharyland Utilities, L.P.

TCEH

Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and, prior to the Vistra Spin-Off, the parent company of the TCEH Debtors (other than the Contributed EFH Debtors), depending on the context, that were engaged in electricity generation and wholesale and retail energy market activities, and whose major subsidiaries included Luminant and TXU Energy.  Subsequent to the Vistra Spin-Off, Vistra continued substantially the same operations as TCEH.

TCEH Debtors

Refers to the subsidiaries of TCEH that were Debtors in the EFH Bankruptcy Proceedings (including Luminant and TXU Energy) and the Contributed EFH Debtors.

TCJA

“Tax Cuts and Jobs Act,” enacted on December 22, 2017

TCOS

transmission cost of service

TCRF

transmission cost recovery factor

Texas Holdings

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

Texas Holdings Group

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

Texas margin tax

A privilege tax imposed on taxable entities chartered/organized or doing business in the State of Texas that, for accounting purposes, is reported as an income tax. 

Texas RE

Refers to Texas Reliability Entity, Inc., an independent organization that develops reliability standards for the ERCOT region and monitors and enforces compliance with North American Electric Reliability Corporation standards and ERCOT protocols.

Texas Transmission

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

TXU Energy

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

U.S.

United States of America

Vistra

Refers to Vistra Energy Corp. (formerly TCEH Corp.), and/or its subsidiaries, depending on context.  On October 3, 2016, the TCEH Debtors emerged from bankruptcy and became subsidiaries of TCEH Corp.  Subsequent to the Vistra Spin-Off, Vistra continued substantially the same operations as TCEH.

Vistra Retirement Plan

Refers to a defined benefit pension plan sponsored by an affiliate of Vistra, in which Oncor participates (formerly EFH Retirement Plan). 

Vistra Spin-Off

Refers to the completion of the TCEH Debtors’ reorganization under the Bankruptcy Code and emergence from the EFH Bankruptcy Proceedings effective October 3, 2016. Following the Vistra Spin-Off, the TCEH Debtors ceased to be affiliates of Oncor.



1


 

 

PART I.  FINANCIAL INFORMATION



ITEM 1.FINANCIAL STATEMENTS



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017(1)

 

2018

 

2017(1)



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues (Note 4)

 

$

1,095 

 

$

1,068 

 

$

3,106 

 

$

2,967 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale transmission service

 

 

237 

 

 

230 

 

 

719 

 

 

690 

Operation and maintenance (Note 11)

 

 

214 

 

 

176 

 

 

636 

 

 

529 

Depreciation and amortization

 

 

169 

 

 

193 

 

 

503 

 

 

581 

Provision in lieu of income taxes (Note 11)

 

 

54 

 

 

97 

 

 

134 

 

 

209 

Taxes other than amounts related to income taxes

 

 

128 

 

 

120 

 

 

374 

 

 

340 

Total operating expenses

 

 

802 

 

 

816 

 

 

2,366 

 

 

2,349 

Operating income

 

 

293 

 

 

252 

 

 

740 

 

 

618 

Other income and (deductions) - net (Note 12)

 

 

(13)

 

 

(13)

 

 

(63)

 

 

(35)

Nonoperating benefit in lieu of income taxes

 

 

(3)

 

 

(5)

 

 

(13)

 

 

(17)

Interest expense and related charges (Note 12)

 

 

89 

 

 

87 

 

 

264 

 

 

257 

Net income

 

$

194 

 

$

157 

 

$

426 

 

$

343 

________________

(1) As adjusted for the retrospective adoption of ASU 2017-07, as discussed in Note 1.



See Notes to Financial Statements.





CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

194 

 

$

157 

 

$

426 

 

$

343 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges – derivative value net loss recognized in net income (net of tax)

 

 

 -

 

 

 -

 

 

 

 

Defined benefit pension plans (net of tax)

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

 

 

 

 

 

 

Comprehensive income

 

$

195 

 

$

158 

 

$

430 

 

$

346 



See Notes to Financial Statements.

2


 

 



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)





 

 

 

 

 

 



 

Nine Months Ended

September 30,



 

2018

 

2017



 

(millions of dollars)



 

 

 

 

 

 

Cash flows — operating activities:

 

 

 

 

 

 

Net income

 

$

426 

 

$

343 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

589 

 

 

618 

Provision in lieu of deferred income taxes

 

 

37 

 

 

250 

Other – net 

 

 

(1)

 

 

(2)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Regulatory accounts related to reconcilable tariffs (Note 5)

 

 

130 

 

 

30 

Other operating assets and liabilities

 

 

(100)

 

 

(189)

Cash provided by operating activities

 

 

1,081 

 

 

1,050 

Cash flows — financing activities:

 

 

 

 

 

 

Issuances of long-term debt (Note 7)

 

 

800 

 

 

600 

Repayment of long-term debt (Note 7)

 

 

(825)

 

 

(324)

Change in short-term borrowings (Note 6)

 

 

149 

 

 

128 

Capital contributions from members (Note 9)

 

 

144 

 

 

 -

Distributions to members (Note 9)

 

 

(30)

 

 

(237)

Debt discount, premium, financing and reacquisition costs - net

 

 

(9)

 

 

(4)

Cash provided by financing activities

 

 

229 

 

 

163 

Cash flows — investing activities:

 

 

 

 

 

 

Capital expenditures (Note 11)

 

 

(1,345)

 

 

(1,234)

Other – net 

 

 

15 

 

 

10 

Cash used in investing activities

 

 

(1,330)

 

 

(1,224)

Net change in cash and cash equivalents

 

 

(20)

 

 

(11)

Cash and cash equivalents — beginning balance

 

 

21 

 

 

16 

Cash and cash equivalents — ending balance

 

$

 

$







See Notes to Financial Statements.

3


 

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



 

 

 

 

 

 



 

At September 30,

 

At December 31,



 

2018

 

2017



 

(millions of dollars)



 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

21 

Trade accounts receivable – net (Note 12)

 

 

688 

 

 

635 

Amounts receivable from members related to income taxes (Note 11)

 

 

 -

 

 

26 

Materials and supplies inventories — at average cost

 

 

115 

 

 

91 

Prepayments and other current assets

 

 

95 

 

 

88 

Total current assets

 

 

899 

 

 

861 

Investments and other property (Note 12)

 

 

121 

 

 

113 

Property, plant and equipment – net (Note 12)

 

 

15,782 

 

 

14,879 

Goodwill (Note 12) 

 

 

4,064 

 

 

4,064 

Regulatory assets (Note 5)

 

 

1,850 

 

 

2,180 

Other noncurrent assets 

 

 

20 

 

 

23 

Total assets

 

$

22,736 

 

$

22,120 

LIABILITIES AND MEMBERSHIP INTERESTS

Current liabilities:

 

 

 

 

 

 

Short-term borrowings (Note 6)

 

$

1,099 

 

$

950 

Long-term debt due currently (Note 7)

 

 

250 

 

 

550 

Trade accounts payable

 

 

253 

 

 

242 

Amounts payable to members related to income taxes (Note 11)

 

 

32 

 

 

21 

Accrued taxes other than amounts related to income

 

 

168 

 

 

190 

Accrued interest

 

 

92 

 

 

83 

Other current liabilities

 

 

190 

 

 

188 

Total current liabilities

 

 

2,084 

 

 

2,224 

Long-term debt, less amounts due currently (Note 7)

 

 

5,836 

 

 

5,567 

Liability in lieu of deferred income taxes (Note 11)

 

 

1,560 

 

 

1,517 

Regulatory liabilities (Note 5)

 

 

2,763 

 

 

2,807 

Employee benefit obligations and other (Notes 10 and 12)

 

 

2,046 

 

 

2,102 

Total liabilities

 

 

14,289 

 

 

14,217 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Membership interests (Note 9):

 

 

 

 

 

 

Capital account ― number of interests outstanding 2018 and 2017 – 635,000,000

 

 

8,544 

 

 

8,004 

Accumulated other comprehensive loss

 

 

(97)

 

 

(101)

Total membership interests

 

 

8,447 

 

 

7,903 

Total liabilities and membership interests

 

$

22,736 

 

$

22,120 



See Notes to Financial Statements.

4


 

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES



Description of Business



References in this report to “we,” “our,” “us” and “the company” are to Oncor.  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 and western parts of Texas.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of STIH, a direct wholly-owned subsidiary of STH. In connection with the Sempra Acquisition, on March 9, 2018, STH became an indirect wholly- owned subsidiary of 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.



Various “ring-fencing” measures that had been taken to enhance our credit quality and the separateness between the Oncor Ring-Fenced Entities and its majority owner (formerly the Texas Holdings Group and now Sempra) continue to remain in effect after the Sempra Acquisition.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to Sempra and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of Sempra in connection with a bankruptcy of one or more Sempra 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; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to or receiving credit support from Sempra entities.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of Sempra.  None of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of Sempra entities.  We do not bear any liability for debt or contractual obligations of Sempra, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from Sempra.  For more information on ring-fencing measures, see Note 2.



EFH Bankruptcy Proceedings and Change in Indirect Ownership of Oncor



In April 2014, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities were not parties to the EFH Bankruptcy Proceedings.  In connection with the plans of reorganization in 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). See Note 2 for further information. 



Basis of Presentation



These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the 2017 Form 10-K.  In the opinion of Oncor management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been made.  All intercompany items and transactions have been eliminated in consolidation.  The results of operations for an interim period may not give a true indication of results for a full year due to seasonality.  All dollar amounts in the financial statements and tables in the notes are stated in millions of 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 period.



Goodwill



We evaluate goodwill for impairment annually and whenever events or changes in circumstances indicate that an impairment may exist.  Beginning in 2018, we elected to change our annual goodwill assessment date from December 1 to October 1 to correspond with the assessment date of our new majority owner.  We do not believe this change in the assessment date is a material change.



Changes in Accounting Standards  



Since May 2014, the Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, along with other supplemental guidance (together, Topic 606).  Topic 606 introduced new, increased requirements for disclosure of revenue in financial statements and guidance intended to eliminate inconsistencies in the recognition of revenue.   We adopted Topic 606 effective January 1, 2018 using the modified retrospective approach and elected the practical expedient available that allows an entity to recognize revenue in the amount to which the entity has the right to invoice related to performance completed to date.  Our revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff.  The new guidance did not change this pattern of recognition and therefore the adoption did not have a material effect on our reported results of operations, financial position or cash flows.  Topic 606 also requires the separate presentation of “alternative revenue program” revenues on the income statement. We anticipate less than $20 million annually in alternative revenue program revenues related to our energy efficiency program and will disclose such activity in the notes to financial statements.  See Note 4 for additional disclosures about revenues from contracts with customers. 



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 regulatory purposes.  Under current standards, all of Oncor’s existing leases meet the definition of an operating lease.  Under the new rules, the recognition of any finance leases (currently known as capital leases) on the balance sheet would be classified as debt for GAAP purposes and are expected to be defined as debt for our regulatory capital structure purposes (see Note 9 for details) similar to the current capital lease treatment.  We plan to adopt Topic 842 on January 1, 2019 and we expect to use certain practical expedients and policy elections available under the guidance including a practical expedient to not assess whether existing land easements that were not previously accounted for as leases are or contain a lease under Topic 842, an adoption method to not restate comparative periods and a policy election to forego the application of Topic 842 recognition requirements to short-term leases.  The initial adoption of Topic 842 will affect our balance sheet, as our contracts for office space and fleet vehicles are currently classified as operating leases.  Subsequent to adoption, to the extent Oncor enters into finance leases, its credit facility covenants and capitalization ratios could be impacted.  We continue to evaluate our contracts for proper treatment under the new standards and the estimated impact on our financial statements. 



In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, an amendment to Topic 715, Compensation – Retirement Benefits.  ASU 2017-07 requires the non-service cost components of net retirement benefit plan costs be presented as non-operating in the income statement.  In addition, only the service cost component of net retirement benefit plan cost is eligible for capitalization as part of inventory or property, plant and equipment.  We adopted ASU 2017-07 on January 1, 2018.  The presentation of costs is required to be applied on a retrospective basis while the capitalization eligibility requirement is applied on a prospective basis.  The guidance allows a practical expedient that permits use of previously disclosed service costs and non-service costs of the Pension and OPEB Plans in the comparative periods as appropriate estimates when recasting the presentation of these costs in the income statements.  We have elected this practical expedient.  For cash flow purposes on a prospective basis, non-service costs will be reflected as a reduction to operating cash flows, offset by lower cash used in investing activities (lower capital expenditures).  The new guidance did not have a material effect on our results of operations, financial position or net change in total cash flows and we do not expect the guidance to have a material effect on our rate-making process.  For the three- and nine-month periods ended September 30, 2017, the adoption of ASU 2017-07 resulted in a reclassification of $8 million and $23 million from operation and maintenance expense to other income and (deductions), respectively, and a corresponding reclassification of $3 million and $9 million, respectively, from provision in lieu of income taxes to nonoperating provision in lieu of income taxes.  For the years 2015, 2016 and 2017, the reclassification amounts are $28 million, $28 million and $31 million from operation and maintenance expense to other income and (deductions), respectively, and a corresponding reclassification of $10 million, $10 million and $11 million, respectively, from provision in lieu of income taxes to nonoperating provision in lieu of income taxes.



In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02).  ASU 2018-02 allows a reclassification from accumulated other comprehensive income (AOCI) to capital accounts for stranded tax effects resulting from the TCJA which we expect to elect.  Under ASU 2018-02, an entity will be required to provide certain disclosures regarding stranded tax effects, including its accounting policy related to releasing the income tax effects from AOCI.  Our stranded tax effects in AOCI are approximately $4 million and will increase our capital account upon reclassification.  ASU 2018-02 can be applied either as of the beginning of the period of adoption or retrospectively as of the date of enactment of the TCJA and to each period in which the effect of the TCJA is recognized.  ASU 2018-02 is effective for our 2019 annual reporting period, including interim periods therein, with early adoption permitted.  We plan to adopt the standard on a prospective basis, January 1, 2019.



2.   EFH BANKRUPTCY PROCEEDINGS AND CHANGE IN INDIRECT OWNERSHIP OF ONCOR     



In April 2014, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities were not parties to the EFH Bankruptcy Proceedings.  In 2016, pursuant to a plan of reorganization confirmed by the bankruptcy court, the TCEH Debtors exited bankruptcy pursuant to the Vistra Spin-Off.   As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be related parties of ours as of October 3, 2016.  See Note 11 for details of Oncor’s related-party transactions with members of the Texas Holdings Group.  In connection with the plans of reorganization in 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 discussed in further detail below. 



Prior to consummation of the Sempra Acquisition, EFH Corp. entered into various merger agreements, which failed to close, with other parties in connection with the EFH Bankruptcy Proceedings and the potential transfer of its indirect ownership interest in Oncor. For a summary of those merger agreements and related regulatory proceedings, please see Note 2 to Financial Statements in the 2017 Form 10-K.



Sempra Acquisition



In August 2017, EFH Corp. and EFIH entered into an Agreement and Plan of Merger (Sempra Merger Agreement) with Sempra and one of its wholly-owned subsidiaries (collectively, the Sempra Parties) that contemplated the Sempra Parties acquiring the ownership interests in Oncor that were indirectly held by EFH Corp.  The Sempra Acquisition closed on March 9, 2018. 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.  The Sempra Merger Agreement did not impose any conditions on the EFH Debtors regarding Texas Transmission’s minority interest in Oncor. Accordingly, the Sempra Merger Agreement provided for the acquisition by Sempra of the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH.  In accordance with the Sempra Merger Agreement, Sempra paid cash consideration of approximately $9.45 billion to acquire the indirect 80.03% outstanding membership interest in Oncor.  In addition, in a separate transaction, Oncor Holdings acquired 0.22% of the outstanding membership interests in Oncor from Investment LLC.  After the Sempra Acquisition, Texas Transmission continued to own 19.75% of Oncor’s outstanding membership interests.  The Sempra Merger Agreement was consummated on March 9, 2018 after obtaining the approval of the bankruptcy court in the EFH Bankruptcy Proceedings, the Federal Communications Commission and the PUCT. 



Pursuant to the terms of the Sempra Merger Agreement, in October 2017, Oncor and Sempra filed in PUCT Docket No 47675 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the amended joint plan of reorganization filed in September 2017 by the EFH Debtors (Sempra Plan). At its open meeting on March 8, 2018, the PUCT approved a final order adopting a settlement stipulation allowing the Sempra Acquisition to proceed.  For more information regarding the Sempra Settlement Stipulation and the proceedings in PUCT Docket No. 47675, see “Sempra PUCT Proceedings” below.



In connection with the closing of the Sempra Acquisition, Oncor’s Limited Liability Company Agreement was amended and restated in its entirety on March 9, 2018. The Limited Liability Company Agreement, among other things, provides for the management of Oncor by a board of directors consisting of 13 members, including seven “disinterested directors” (as defined in the Limited Liability Company Agreement), two directors designated indirectly by Sempra, two directors designated by Texas Transmission (subject to certain conditions) and two directors that are current or former officers of Oncor.



Management Equity Purchase       



On March 9, 2018, Oncor entered into an Interest Transfer Agreement (OMI Agreement) with Investment LLC, Oncor Holdings and Sempra. Pursuant to the 2008 Equity Interests Plan for Key Employees of Oncor Electric Delivery Company LLC and its affiliates, certain members of Oncor’s management, including Oncor’s executive officers and independent directors on Oncor’s board of directors, were granted the opportunity to purchase Class B equity interests (Class B Interests) in Investment LLC, an entity whose only assets consist of equity interests in Oncor. Investment LLC held 1,396,008 of the outstanding limited liability company interests in Oncor (the OMI Interests), which represented 0.22% of the outstanding membership interests in Oncor. For a description of the amounts of Class B Interests that were beneficially owned by members of Oncor’s board of directors and each of Oncor’s named executive officers, see “Security Ownership of Certain Beneficial Owners and Management and Related Equity Holder Matters – Security Ownership of Equity Interests of Oncor of Certain Beneficial Owners and Management.” in the 2017 Form 10-K.



Pursuant to the OMI Agreement, in connection with the closing of the Sempra Acquisition, Investment LLC transferred to Oncor Holdings all of the OMI Interests in exchange for $26 million in cash, which represents approximately $18.60 for each OMI Interest.



PUCT Matters Related to EFH Bankruptcy Proceedings



Previous Merger Agreement PUCT Proceedings



Prior to consummation of the Sempra Acquisition, EFH Corp. entered into various merger agreements, which failed to close, with other parties in connection with the EFH Bankruptcy Proceedings and the potential transfer of its indirect ownership interest in Oncor. For a summary of those merger agreements and related PUCT proceedings, please see Note 2 to Financial Statements in the 2017 Form 10-K.



Sempra PUCT Proceedings



Pursuant to the terms of the Sempra Merger Agreement, in October 2017 Oncor and Sempra filed in PUCT Docket No. 47675 a joint application with the PUCT seeking certain regulatory approvals with respect to the Sempra Plan.  In December 2017, Oncor and Sempra entered into a stipulation with the Staff of the PUCT, the Office of Public Utility Counsel, the Steering Committee of Cities Served by Oncor and the Texas Industrial Energy Consumers reflecting the parties’ settlement of all issues in the PUCT proceeding regarding the joint application. On January 5, 2018, Oncor, Sempra and the Staff of the PUCT made a joint filing with the PUCT requesting that the PUCT approve the acquisition, consistent with the governance, regulatory and operating commitments in a revised stipulation joined by two additional parties. On January 23, 2018, Oncor and Sempra filed an additional revision to the revised stipulation (Sempra Settlement Stipulation) and announced that two more parties had joined in the Sempra Settlement Stipulation. On February 2, 2018, Oncor and Sempra announced that all of the intervenors in PUCT Docket No. 47675 had signed on to the Sempra Settlement Stipulation. At its February 15, 2018 open meeting, the PUCT directed PUCT Staff to prepare an order based on the Sempra Settlement Stipulation for consideration by the PUCT at its open meeting on March 8, 2018. At the open meeting, the PUCT approved the final order.



The parties to the Sempra Settlement Stipulation agreed that Sempra’s acquisition of EFH Corp. was in the public interest and would bring substantial benefits.  The Sempra Settlement Stipulation requested that the PUCT approve the Sempra Acquisition.  The joint application filed with the PUCT and the Sempra Settlement Stipulation outline certain ring-fencing measures, governance mechanisms and restrictions that apply after the Sempra Acquisition. As a result of these ring-fencing measures, Sempra will 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.



Pursuant to the order issued by the PUCT in PUCT Docket No. 47675 with respect to its approval of the transaction contemplated by the Sempra Plan (Sempra Order), following the consummation of the Sempra Acquisition, the board of directors of Oncor is required to consist of thirteen members and be constituted as follows:

·

seven members, which we refer to as disinterested directors, (i) shall be independent directors in all material respects under the rules of the New York Stock Exchange in relation to Sempra and its subsidiaries and affiliated entities and any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings, and (ii) shall have no material relationship with Sempra or its affiliates or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings at the time of the Sempra Acquisition or within the previous ten years;

·

two members shall be designated by Sempra (through Oncor Holdings);

·

two members shall be appointed by Texas Transmission; and

·

two members shall be current or former officers of Oncor (the Oncor Officer Directors), initially Robert S. Shapard and E. Allen Nye, Jr., who are the chair of the Oncor board and chief executive of Oncor, respectively.



In order for a current or former officer of Oncor to be eligible to serve as an Oncor Officer Director, such 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 such officer being employed by Oncor.  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 to nominate and/or seek the removal of the Oncor Officer Directors, with such nomination or removal subject to approval by a majority of the Oncor board of directors.



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 shall 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 include, among others:



·

A majority of the disinterested directors of Oncor must approve any annual or multi-year budget if the aggregate amount of capital expenditures or operating and maintenance expenditures in such budget is more than a 10% increase or decrease from the corresponding amounts of such expenditures in the budget for the preceding fiscal year or multi-year period, as applicable;



·

Oncor will make minimum aggregate capital expenditures equal to at least $7.5 billion over the period from January 1, 2018 through December 31, 2022 (subject to certain possible adjustments);



·

Sempra was required to make, within 60 days after the Sempra Acquisition, its proportionate share of the aggregate equity investment in Oncor in an amount necessary for Oncor to achieve a capital structure consisting of 57.5% long-term debt to 42.5% equity, as calculated for regulatory purposes;



Sempra contributed $117 million in cash commensurate with its ownership interest to Oncor on April 23, 2018, as discussed in further detail in Note 9.



·

Oncor may not pay any dividends or make any other distributions (except for contractual tax payments) if a majority of its disinterested directors determines that it is in the best interests of Oncor to retain such amounts to meet expected future requirements;



·

At all times, Oncor will remain in compliance with the debt-to-equity ratio established by the PUCT from time to time for ratemaking purposes, and Oncor will not pay dividends or other distributions (except for contractual tax payments), if that payment would cause its debt-to-equity ratio to exceed the debt-to-equity ratio approved by the PUCT;



·

If the credit rating on Oncor’s senior secured debt by any of the three major rating agencies falls below BBB (or the equivalent), Oncor will suspend dividends and other distributions (except for contractual tax payments), unless otherwise allowed by the PUCT;



·

Without the prior approval of the PUCT, neither Sempra nor any of its affiliates (excluding Oncor) will incur, guaranty or pledge assets in respect of any indebtedness that is dependent on the revenues of Oncor in more than a proportionate degree than the other revenues of Sempra or on the stock of Oncor, and there will be no debt at STH or STIH at any time following the closing of the Sempra Acquisition;



·

Neither Oncor nor Oncor Holdings will lend money to or borrow money from Sempra or any of its affiliates (other than Oncor subsidiaries), or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings, and neither Oncor nor Oncor Holdings will share credit facilities with Sempra or any of its affiliates (other than Oncor subsidiaries), or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings;



·

Oncor will not seek recovery in rates of any expenses or liabilities related to EFH Corp.’s bankruptcy, or (1) any tax liabilities resulting from the Vistra Spin-Off, (2) any asbestos claims relating to non-Oncor operations of EFH Corp. or (3) any make-whole claims by holders of debt securities issued by EFH Corp. or EFIH, and Sempra was required to file with the PUCT a plan providing for the extinguishment of the liabilities described in items (1) through (3) above, which protects Oncor from any harm (which plan was filed with the PUCT on April 6, 2018 in PUCT Docket No. 48119);



·

There must be maintained certain “separateness measures” that reinforce the financial separation of Oncor from STH and STH’s owners, including a requirement that dealings between Oncor, Oncor Holdings and their subsidiaries with Sempra, any of Sempra’s other affiliates or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings, must be on an arm’s-length basis, limitations on affiliate transactions, separate recordkeeping requirements and a prohibition on pledging Oncor assets or stock for any entity other than Oncor;



·

No transaction costs or transition costs related to the Sempra Acquisition (excluding Oncor employee time) will be borne by Oncor’s customers nor included in Oncor’s rates;



·

Sempra will continue to hold indirectly at least 51% of the ownership interests in Oncor and Oncor Holdings for at least five years following the closing of the Sempra Acquisition, unless otherwise specifically authorized by the PUCT; and



·

Oncor will provide bill credits to electric delivery rates for ultimate credits to customers in an amount equal to 90% of any interest rate savings achieved due to any improvement in its credit ratings or market spreads compared to those as of June 30, 2017 until final rates are set in the next Oncor base rate case filed after PUCT Docket No. 46957 (except that savings will not be included in credits if already realized in rates); and one year after the Sempra Acquisition, Oncor will provide bill credits to electric delivery rates for inclusion in customer bills equal to 90% of any synergy savings until final rates are set in the next Oncor base rate proceeding after the 2017 rate review (PUCT Docket No. 46957), at which time any total synergy savings shall be reflected in Oncor’s rates.  On September 7, 2018, Oncor filed its first semi-annual interest rate savings compliance report with the PUCT and began accruing a bill credit upon the issuance of its new debt in August 2018.



3.    REGULATORY MATTERS



DCRF (PUCT Docket No. 48231)



On April 5, 2018, we filed with the PUCT, as well as cities with original jurisdiction over Oncor’s rates, an application for approval of a distribution cost recovery factor (DCRF).  The DCRF will allow Oncor to recover, primarily through its tariff for retail delivery service, certain costs related to its 2017 distribution investments.  We requested a $19 million increase in annual distribution revenues in our DCRF application.   On June 13, 2018, we filed an unopposed stipulation that reduced the annual distribution revenue increase from $19 million to $15 million.   The PUCT approved the stipulation on August 30, 2018, and the distribution tariffs became effective September 1, 2018. 



Application to Decrease Rates Based on the TCJA of 2017 (PUCT Docket No. 48325)



In 2018, we made filings to incorporate the impacts of the TCJA into our tariffs, including the reduced corporate income tax rate from 35% to 21% and amortization of excess deferred federal income taxes. In the filings, we proposed a total net decrease in the revenue requirement used to set transmission and distribution rates of approximately $181 million annually as compared to the revenue requirement approved in Oncor’s most recent rate review, PUCT Docket No. 46957. The proposal included annual rate reductions of $144 million related to the reduction in income tax expense currently included in rates and $37 million related to the amortization of excess deferred income taxes over the lives of related assets. In September 2018, we reached an unopposed stipulation regarding an overall settlement of the TCJA impacts. The settlement includes, on an annual basis, $144 million related to the reduction of income tax expense currently in rates and $75 million related to amortization of excess deferred federal income taxes. The settlement rates have been implemented as follows on an interim basis as we await final PUCT approval.



·

For transmission customers, our TCOS rate incorporated the tax rate reduction beginning March 27, 2018. On July 1, 2018, a new interim TCOS rate was approved, subject to reconciliation, including a reduction due to amortization of excess deferred federal income taxes. The settlement results in a reduction of about $79 million of annualized transmission base revenue requirement as compared to the revenue requirement approved in PUCT Docket No. 46957.



·

For distribution customers, interim rates implemented October 8, 2018 contain reductions for both the income tax expense currently in rates and the amortization of excess deferred tax expense. The settlement results in a reduction of about $140 million of annualized distribution base revenue requirement as compared to the revenue requirement approved in PUCT Docket No. 46957.



In addition, we agreed to refund the tax rate differential amounts collected and deferred since January 1, 2018, through the date the changed tariffs became effective. For transmission customers, we will refund tax amounts collected and deferred through March 26, 2018.  For distribution customers, we will refund tax amounts collected and deferred through October 7, 2018. We plan to refund the tax rate differential of approximately $75 million as a bill credit in December 2018.



The pass-through of the impacts of the TCJA to ratepayers is not expected to impact net income. Amortization of excess deferred taxes will result in lower cash inflows as a result of reduced rates to end-use customers. 



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 units 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 (Topic 606 revenues) except for alternative revenue program revenues discussed below.



Reconcilable Tariffs



The PUCT has designated certain tariffs (primarily TCRF, EECRF and previously AMS surcharges) 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. 



As a result of the 2017 rate review order effective November 27, 2017, the AMS surcharges ceased and AMS related expenses and return became recoverable through distribution base rates. 



Alternative Revenue Program 



The PUCT has implemented an incentive program allowing us to earn performance bonuses by exceeding PUCT energy efficiency program targets. This incentive program is considered an “alternative revenue program” and the related performance bonus revenues are outside of the scope of Topic 606.  Annual performance bonuses are recognized as revenue when approved by the PUCT, typically in the third or fourth quarter each year. 



5


 

 

Disaggregation of Revenues 



The following table reflects electric delivery revenues disaggregated by tariff for the three and nine months ended September 30, 2018:



 

 

 

 

 

 



 

Three Months Ended

September 30,

 

Nine Months

Ended

September 30,

Operating revenues

 

2018

 

2018

Revenues contributing to earnings:

 

 

 

 

 

 

Distribution base revenues

 

$

604 

 

$

1,640 

Transmission base revenues (TCOS revenues)

 

 

 

 

 

 

Billed to third-party wholesale customers

 

 

137 

 

 

403 

Billed to REPs serving Oncor distribution customers, through TCRF

 

 

77 

 

 

234 

Total transmission base revenues

 

 

214 

 

 

637 

Other miscellaneous revenues

 

 

17 

 

 

48 

Total revenues contributing to earnings

 

 

835 

 

 

2,325 



 

 

 

 

 

 

Revenues collected for pass-through expenses:

 

 

 

 

 

 

TCRF - third-party wholesale transmission service

 

 

237 

 

 

719 

EECRF and other regulatory charges

 

 

23 

 

 

62 

Revenues collected for pass-through expenses

 

 

260 

 

 

781 



 

 

 

 

 

 

Total operating revenues

 

$

1,095 

 

$

3,106 



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 27% and 22% of our total operating revenues for the three months ended September 30, 2018, and 24% and 19% of our total operating revenues for the nine months ended September 30, 2018.  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 nonaffiliated 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 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.    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 are determined by the PUCT.   Components of our regulatory assets and liabilities as of September 30, 2018 and December 31, 2017 are provided in the table below.  Amounts not earning a return through rate regulation are noted.



 

 

 

 

 

 

 

 



 

Remaining Rate Recovery/Amortization Period at

 

Carrying Amount At



 

September 30, 2018

 

September 30, 2018

 

December 31, 2017



 

 

 

 

 

 

 

 

Regulatory assets:

 

 

 

 

 

 

 

 

Employee retirement costs being amortized 

 

10 years

 

$

305 

 

$

331 

Unrecovered employee retirement costs incurred since the last rate review period (a)

 

To be determined

 

 

30 

 

 

30 

Employee retirement liability (a)(b)(c)

 

To be determined

 

 

800 

 

 

854 

Employee retirement plans - non-service costs

 

Lives of related assets

 

 

33 

 

 

 -

Self-insurance reserve (primarily storm recovery costs) being amortized

 

10 years

 

 

362 

 

 

394 

Unrecovered self-insurance reserve incurred since the last rate review period (a)

 

To be determined

 

 

53 

 

 

49 

Securities reacquisition costs

 

Lives of related debt

 

 

10 

 

 

12 

Deferred conventional meter and metering facilities depreciation

 

3 years

 

 

42 

 

 

57 

Under-recovered AMS costs

 

10 years

 

 

190 

 

 

206 

Excess deferred income taxes

 

 

 

 

 -

 

 

197 

Energy efficiency performance bonus (b)

 

1 year or less

 

 

 

 

12 

Other regulatory assets

 

Various

 

 

22 

 

 

38 

Total regulatory assets

 

 

 

 

1,850 

 

 

2,180 



 

 

 

 

 

 

 

 

Regulatory liabilities:

 

 

 

 

 

 

 

 

Estimated net removal costs

 

Lives of related assets

 

 

1,006 

 

 

954 

Excess deferred income taxes

 

Primarily over lives of related assets

 

 

1,587 

 

 

1,789 

Federal income taxes - over-collected due to TCJA rate change

 

1 year or less

 

 

75 

 

 

 -

Over-recovered wholesale transmission service expense (b)

 

1 year or less

 

 

73 

 

 

47 

Other regulatory liabilities

 

Various

 

 

22 

 

 

17 

Total regulatory liabilities

 

 

 

 

2,763 

 

 

2,807 

Net regulatory assets (liabilities)

 

 

 

$

(913)

 

$

(627)



____________

(a)

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

(b)

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

(c)

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

 

 

6


 

 

6.    SHORT-TERM BORROWINGS



At September 30, 2018 and December 31, 2017, outstanding short-term borrowings under our commercial paper program (CP Program) and revolving credit facility (Credit Facility) consisted of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

At September 30,

 

At December 31,



 

2018

 

2017

Total borrowing capacity

 

$

2,000 

 

$

2,000 

Commercial paper outstanding (a)

 

 

(1,099)

 

 

-

Credit facility outstanding (b)

 

 

 -

 

 

(950)

Letters of credit outstanding (c)

 

 

(9)

 

 

(9)

Available unused credit

 

$

892 

 

$

1,041 



____________

a)

The weighted average interest rate for commercial paper at September 30, 2018 was 2.45%.

b)

The weighted average interest rate for the credit facility at December 31, 2017 was 2.62%.

c)

Interest rates on outstanding letters of credit at September 30, 2018 and December 31, 2017 were 1.200% and 1.325%, respectively, based on our credit ratings.

 

Commercial Paper Program



In March 2018, we established the CP Program, under which we may issue unsecured commercial paper notes (Notes) on a private placement basis up to a maximum aggregate face or principal amount outstanding at any time of $2.0 billion. We also entered into commercial paper dealer agreements (Dealer Agreements) with commercial paper dealers (Dealers).  The Dealer Agreements are substantially identical in all material respects except as to the parties thereto.  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.



The proceeds of 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.  If at any time funds are not available on favorable terms under the CP Program, we may utilize the Credit Facility for funding. 



The Dealer Agreements provide the terms under which the Dealers will either purchase from us or arrange for the sale by us of Notes pursuant to an exemption from federal and state securities laws.  The Dealer Agreements contain customary representations, warranties, covenants and indemnification provisions.  The maturities of the Notes will vary, but may not exceed 364 days from the date of issue.  The Notes will be sold at a discount from par or, alternatively, will be sold at par and bear interest.  Interest rates will vary based upon market conditions at the time of issuance of the Notes and may be fixed or floating determined by reference to a base rate and spread.



From time to time, one or more of the Dealers and certain of their respective affiliates have provided, and may in the future provide, commercial banking, investment banking and other financial advisory services to us and our affiliates for which the Dealers have received or will receive customary fees and expenses.  In addition, certain of the Dealers or their affiliates are lenders under the Credit Facility.



Revolving Credit Facility



At September 30, 2018, we had a $2.0 billion unsecured revolving Credit Facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for 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.  Borrowings are classified as short-term on the balance sheet.  At September 30, 2018, we had no outstanding borrowings under the Credit Facility.



Borrowings under the Credit Facility bear interest at per annum rates equal to, at our option, (i) 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.  At September 30, 2018, the applicable interest rate for any outstanding borrowings would have been LIBOR plus 1.00%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 FacilityAt September 30, 2018, a commitment fee (at a rate of 0.100% per annum) was payable on the unfunded commitments under the Credit Facility, based on our current credit ratings.



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 the spread over adjusted LIBOR.  Customary fronting and administrative fees are also payable to letter of credit fronting banks.



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.



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.  In addition, the Credit Facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants.  For purposes of the ratio, debt is calculated as indebtedness defined in the Credit Facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP).  Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above.  At September 30, 2018, we were in compliance with this and all other covenants.



7


 

 

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 September 30, 2018 and December 31, 2017, our long-term debt consisted of the following:



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

 

 

 

 

 

Secured:

 

 

 

 

 

 

6.80% Fixed Senior Notes due September 1, 2018 

 

$

 -

 

$

550 

2.15% Fixed Senior Notes due June 1, 2019 

 

 

250 

 

 

250 

5.75% Fixed Senior Notes due September 30, 2020 

 

 

126 

 

 

126 

4.10% Fixed Senior Notes due June 1, 2022 

 

 

400 

 

 

400 

7.00% Fixed Debentures due September 1, 2022 

 

 

800 

 

 

800 

2.95% Fixed Senior Notes due April 1, 2025 

 

 

350 

 

 

350 

3.70% Fixed Senior Notes due November 15, 2028 

 

 

350 

 

 

 -

7.00% Fixed Senior Notes due May 1, 2032 

 

 

500 

 

 

500 

7.25% Fixed Senior Notes due January 15, 2033 

 

 

350 

 

 

350 

7.50% Fixed Senior Notes due September 1, 2038 

 

 

300 

 

 

300 

5.25% Fixed Senior Notes due September 30, 2040 

 

 

475 

 

 

475 

4.55% Fixed Senior Notes due December 1, 2041 

 

 

400 

 

 

400 

5.30% Fixed Senior Notes due June 1, 2042 

 

 

500 

 

 

500 

3.75% Fixed Senior Notes due April 1, 2045 

 

 

550 

 

 

550 

3.80% Fixed Senior Notes due September 30, 2047 

 

 

325 

 

 

325 

4.10% Fixed Senior Notes due November 15, 2048 

 

 

450 

 

 

 -

Secured long-term debt

 

 

6,126 

 

 

5,876 

Unsecured:

 

 

 

 

 

 

Term loan credit agreement due no later than March 26, 2019

 

 

 -

 

 

275 

Total long-term debt

 

 

6,126 

 

 

6,151 

Unamortized discount and debt issuance costs

 

 

(40)

 

 

(34)

Less amount due currently

 

 

(250)

 

 

(550)

       Long-term debt, less amounts due currently

 

$

5,836 

 

$

5,567 



Debt-Related Activity in 2018



Debt Repayments



Repayments of long-term debt in the nine months ended September 30, 2018 consisted of $275 million aggregate principal amount of the term loan credit agreement due March 26, 2019 and $550 million aggregate principal amount of our 6.80% senior secured notes due September 1, 2018 (2018 Notes).  The term loan agreement was repaid in full, and the 2018 Notes were defeased on August 10, 2018. 

8


 

 

Debt Issuances 



In August 2018, we issued $350 million aggregate principal amount of 3.70% senior secured notes due November 15, 2028 (the 2028 Notes) and $450 million aggregate principal amount of 4.10% senior secured notes due November 15, 2048 (the 2048 Notes and, together with the 2028 Notes, the New Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of $791 million from the sale of the New Notes for general corporate purposes, including to pay the amount required for defeasance of our 2018 Notes, to repay the $131 million outstanding under our term loan credit agreement, and to repay notes due under our CP Program.  The New Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.



Interest on the New Notes is payable in cash semiannually in arrears on May 15 and November 15 of each year, and the first interest payment is due November 15, 2018.  Prior to August 15, 2028, in the case of the 2028 Notes, and May 15, 2048, in the case of the 2048 Notes, we 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 August 15, 2028, in the case of the 2028 Notes, and May 15, 2048, in the case of the 2048 Notes, we may redeem such New Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of such New Notes, plus accrued and unpaid interest. The New Notes also contain customary events of default, including failure to pay principal or interest when due.



The New Notes were issued in a private placement and were not registered under the Securities Act of 1933.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the New Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the New Notes.  We have agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the New Notes.  If a registration statement for the exchange offer is not declared effective by the SEC within 270 days after the issue date of the New Notes or the exchange offer is not completed within 315 days after the issue date of the New Notes (an exchange default), then the annual interest rate on the 2028 Notes will increase 12.5 basis points per annum and the annual interest rate on the 2048 Notes will increase 15 basis points per annum until the earlier of the expiration of the exchange default or the second anniversary of the issue date of the New Notes.



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 (excluding borrowings under the CP Program and the Credit Facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At September 30, 2018, the amount of available bond credits was $3.588 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $2.136 billion.



Fair Value of Long-Term Debt



At September 30, 2018 and December 31, 2017, the estimated fair value of our long-term debt (including current maturities) totaled $6.731 billion and $7.153 billion, respectively, and the carrying amount totaled $6.086 billion and $6.117 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



EFH Bankruptcy Proceedings and Change in Indirect Ownership of Oncor



In April 2014, the Debtors commenced the EFH Bankruptcy Proceedings.  The Oncor Ring-Fenced Entities were not parties to the EFH Bankruptcy Proceedings.  See Note 2 for further information regarding the resolution of the EFH Bankruptcy Proceedings and the change in control of our indirect majority owner in connection with such proceedings and Note 11 for our related-party transactions involving members of the Texas Holdings Group.



Legal/Regulatory Proceedings



We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 3 in this report and Note 8 to Financial Statements in our 2017 Form 10-K for additional information regarding our legal and regulatory proceedings. 



9.    MEMBERSHIP INTERESTS



Cash Distributions





Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is 57.5% debt to 42.5% equity effective November 27, 2017.  At September 30, 2018, $219 million was available for distribution to our members, as our regulatory capitalization ratio was 56.3% debt to 43.7% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt including capital 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 the acquisition accounting resulting from PUCT Docket No. 34077. 



In October 2018, our board of directors declared a cash distribution of $180 million, which was paid to our members on November 6, 2018.  In July 2018, our board of directors declared a cash distribution of $30 million, which was paid to our members on August 1, 2018. 



Cash Contributions





In November 2018, our members made capital contributions of $140 million.  In April 2018, our members made capital contributions of $144 million. 

 

9


 

 

Membership Interests



The following table presents the changes to membership interests during the nine months ended September 30, 2018 and 2017: 



 

 

 

 

 

 

 

 



Capital Accounts

 

Accumulated Other Comprehensive Income (Loss)

 

Total Membership Interests



 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

8,004 

 

$

(101)

 

$

7,903 

Net income

 

426 

 

 

 -

 

 

426 

Distributions

 

(30)

 

 

 -

 

 

(30)

Capital contributions

 

144 

 

 

 -

 

 

144 

Net effects of cash flow hedges (net of tax)

 

 -

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Balance at September 30, 2018

$

8,544 

 

$

(97)

 

$

8,447 



 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

7,822 

 

$

(111)

 

$

7,711 

Net income

 

343 

 

 

 -

 

 

343 

Distributions

 

(237)

 

 

 -

 

 

(237)

Net effects of cash flow hedges (net of tax)

 

 -

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Balance at September 30, 2017

$

7,928 

 

$

(108)

 

$

7,820 



Accumulated Other Comprehensive Income (Loss)



The following table presents the changes to accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017:



 

 

 

 

 

 

 

 



Cash Flow Hedges – Interest Rate Swap

 

Defined Benefit Pension and OPEB Plans

 

Accumulated Other Comprehensive Income (Loss)



 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

(18)

 

$

(83)

 

$

(101)

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

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

 

 

 

 -

 

 

Balance at September 30, 2018

$

(16)

 

$

(81)

 

$

(97)



 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

(20)

 

$

(91)

 

$

(111)

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

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

 

 

 

 -

 

 

Balance at September 30, 2017

$

(19)

 

$

(89)

 

$

(108)













10


 

 

10.    PENSION AND OPEB PLANS



Pension Plans



We sponsor the Oncor Retirement Plan and also have liabilities under the Vistra Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended, and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  We also have a supplemental pension plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plans.  See Note 10 to Financial Statements in our 2017 Form 10-K for additional information regarding pension plans.



OPEB Plans



We currently sponsor the Oncor OPEB Plans. One plan covers our eligible current and future retirees, excluding certain eligible retirees of EFH Corp./Vistra whose employment service was assigned to both Oncor (or a predecessor regulated utility business) and a non-regulated business of EFH Corp./Vistra which are now part of a separate plan discussed below. 



Effective January 1, 2018, we established a second plan to cover retirees whose employment included service that has been assigned to both Oncor (or a predecessor regulated utility business) and non-regulated businesses of EFH Corp./Vistra.  Vistra is solely responsible for its portion of the liability for retiree benefits related to those retirees.  As we are not responsible for Vistra’s portion of the plan’s unfunded liability, that amount is not reported on our balance sheet.  The establishment of the plan is not expected to have an impact on our financial statements. 



See Note 10 to Financial Statements in our 2017 Form 10-K for additional information.



Pension and OPEB Costs



Our net costs related to pension plans and the Oncor OPEB Plans for the three and nine months ended September 30, 2018 and 2017 were comprised of the following:



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended  September 30,

 

Nine Months Ended  September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Components of net allocated pension costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

21 

 

$

18 

Interest cost

 

 

29 

 

 

32 

 

 

89 

 

 

98 

Expected return on assets

 

 

(29)

 

 

(28)

 

 

(89)

 

 

(86)

Amortization of net loss

 

 

12 

 

 

11 

 

 

36 

 

 

33 

Net pension costs

 

 

19 

 

 

21 

 

 

57 

 

 

63 

Components of net OPEB costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

 

 

 

 

 

 

Interest cost

 

 

11 

 

 

12 

 

 

33 

 

 

36 

Expected return on assets

 

 

(2)

 

 

(2)

 

 

(6)

 

 

(6)

Amortization of prior service cost

 

 

(8)

 

 

(5)

 

 

(21)

 

 

(15)

Amortization of net loss

 

 

14 

 

 

 

 

41 

 

 

24 

Net OPEB costs

 

 

17 

 

 

14 

 

 

53 

 

 

44 

Total net pension and OPEB costs

 

 

36 

 

 

35 

 

 

110 

 

 

107 

Less amounts deferred principally as property or a regulatory asset

 

 

(17)

 

 

(25)

 

 

(52)

 

 

(76)

Net amounts recognized as expense

 

$

19 

 

$

10 

 

$

58 

 

$

31 



The discount rates reflected in net pension and OPEB costs in 2018 are 3.53%,  3.72% and 3.73% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plans, respectively.  The expected return on pension and OPEB plan assets reflected in the 2018 cost amounts are 5.13%,  4.78% and 6.20% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plans, respectively.



Pension and OPEB Plans Cash Contributions



We made cash contributions to the pension plans and Oncor OPEB Plans of $62 million and $31 million, respectively, during the nine months ended September 30, 2018.  We expect to make additional cash contributions to the pension plans  and Oncor OPEB Plans of $20 million and $4 million, respectively, during the remainder of 2018.  Our aggregate pension plans and Oncor OPEB Plans funding is expected to total approximately $480 million and $175 million, respectively, in the 2018 to 2022 period based on the latest actuarial projections.



11.   RELATED-PARTY TRANSACTIONS



The following represent our significant related-party transactions at September 30, 2018.  As a result of the Sempra Acquisition, Sempra became a related party and the Sponsor Group ceased to be a related party as of March 9, 2018. See Note 2 for information regarding the Sempra Acquisition.



·

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 and STH (as successor to EFH Corp.), 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 in our 2017 Form 10-K under “Income Taxes.”  Under the “in lieu of” tax concept, all in lieu of tax assets and tax liabilities represent amounts that will eventually be settled with our members.  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.



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



At September 30, 2018

 

At December 31, 2017



STH

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes payable (receivable)

$

13 

 

$

 

$

16 

 

$

(21)

 

$

(5)

 

$

(26)

Texas margin taxes payable

 

16 

 

 

-

 

 

16 

 

 

21 

 

 

-

 

 

21 

Net payable (receivable)

$

29 

 

$

 

$

32 

 

$

 -

 

$

(5)

 

$

(5)



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Nine Months Ended

September 30, 2018

 

Nine Months Ended

September 30, 2017



STH

 

EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes

$

41 

 

$

(19)

 

$

 

$

28 

 

$

(102)

 

$

(12)

 

$

(114)

Texas margin taxes

 

21 

 

 

 -

 

 

 -

 

 

21 

 

 

20 

 

 

 -

 

 

20 

Total payments (receipts)

$

62 

 

$

(19)

 

$

 

$

49 

 

$

(82)

 

$

(12)

 

$

(94)



·

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



As of March 8, 2018, approximately 16% of the equity in an existing vendor of the company was owned by a member of the Sponsor Group.  During 2018 and 2017, this vendor performed transmission and distribution system construction and maintenance services for us.  Cash payments were made for such services to this vendor and/or its subsidiaries totaling $35 million dollars for the year-to-date period ended March 8, 2018, of which approximately $33 million was capitalized and $2 million was recorded as an operation and maintenance expense.

See Note 9 for information regarding distributions to and capital contributions from members.



12.   SUPPLEMENTARY FINANCIAL INFORMATION



Other Income and (Deductions)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended  September 30,

 

Nine Months Ended 

September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

 

$

 -

 

$

(4)

 

 

(4)

 

 

(12)

Sempra Acquisition related costs

 

 

 -

 

 

 -

 

 

(16)

 

 

 -

Recoverable Pension and OPEB - non-service costs (a)

 

 

(13)

 

 

(8)

 

 

(40)

 

 

(23)

Non-recoverable pension and OPEB (Note 10)

 

 

(1)

 

 

(1)

 

 

(4)

 

 

(4)

Other, including interest income

 

 

 

 

 -

 

 

 

 

Total other income and (deductions) - net

 

$

(13)

 

$

(13)

 

$

(63)

 

$

(35)



____________

(a)

The prior periods have been adjusted to present non-service costs as a non-operating cost pursuant to ASU 2017-07.  See Note 1 for additional information.



Interest Expense and Related Charges



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

Interest

 

$

90 

 

$

89 

 

$

268 

 

$

263 

Amortization of debt issuance costs and discounts

 

 

 

 

 

 

 

 

Less allowance for funds used during construction – capitalized interest portion

 

 

(3)

 

 

(3)

 

 

(9)