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EX-31.A - EX-31.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex31_a.htm
EX-32.B - EX-32.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex32_b.htm
EX-32.A - EX-32.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex32_a.htm
EX-31.B - EX-31.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex31_b.htm
EX-21.A - EX-21.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex21_a.htm
EX-12.A - EX-12.A - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex12_a.htm
EX-10.U - EX-10.U - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex10_u.htm
EX-10.T - EX-10.T - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex10_t.htm
EX-2.B - EX-2.B - ONCOR ELECTRIC DELIVERY CO LLCc311-20171231xex2_b.htm





UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________

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, 2017

— 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)(Zip Code)

(Registrant’s telephone number, including area code)

___________________________________

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

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

________________________________________



Indicate by check mark 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   √     No___



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  √  



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  √  (Do not check if smaller reporting company)

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 membership interests held by non-affiliates: None



As of February 22, 2018,  80.03% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Energy Future Holdings Corp., 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC and 0.22% of the outstanding membership interests were indirectly held by certain members of Oncor’s management and board of directors.  None of the membership interests are publicly traded.

__________________________________________

DOCUMENTS INCORPORATED BY REFERENCE - None




 



 

 

TABLE OF CONTENTS



Page

Glossary

3

PART I

Items 1 and 2.

BUSINESS AND PROPERTIES

7

Item 1A.

RISK FACTORS

19

Item 1B.

UNRESOLVED STAFF COMMENTS

25

Item 3.

LEGAL PROCEEDINGS

25

Item 4.

MINE SAFETY DISCLOSURES

25

PART II

Item 5.

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

26

Item 6.

SELECTED FINANCIAL DATA

26

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

27

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

49

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

53

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

98

Item 9A.

CONTROLS AND PROCEDURES

98

Item 9B.

OTHER INFORMATION

101

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

103

Item 11.

EXECUTIVE COMPENSATION

113

Item 12.

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

161

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

166

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

174

PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

177



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 former significant subsidiary, Oncor Electric Delivery Transition Bond Company LLC, occasionally make references to Oncor (or “we,” “our,” “us” or “the company”) when describing actions, rights or obligations of such subsidiary.  These references reflect the fact that such subsidiary was 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 that subsidiary or that the subsidiary company was undertaking an action or had the rights or obligations of its parent company or of any other affiliate.  Oncor Electric Delivery Transition Bond Company LLC was dissolved effective December 29, 2016. Following the dissolution of Oncor Electric Delivery Transition Bond Company LLC, Oncor has no subsidiaries that meet the definition of “significant subsidiary” under Rule 1-02(w) of Regulation S-X (17 CFR 210.1-02(w)).

2


 

GLOSSARY



 

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

acquisition accounting

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

AMS

advanced metering system

Bondco

Refers to Oncor Electric Delivery Transition Bond Company LLC, a former wholly-owned consolidated bankruptcy-remote financing subsidiary of Oncor that had issued securitization (transition) bonds to recover certain regulatory assets and other costs. Bondco was dissolved effective December 29, 2016.

Code

The Internal Revenue Code of 1986, as amended

Contributed EFH Debtors

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

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 (EFH Petition Date) by EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.

EFH Corp.

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

EFH Debtors

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

EFH Petition Date

April 29, 2014.  See EFH Bankruptcy Proceedings above.

EFIH

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

EPA

U.S. Environmental Protection Agency

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

FERC

U.S. Federal Energy Regulatory Commission

Fitch

Fitch Ratings, Ltd. (a credit rating agency)

3


 

GAAP

generally accepted accounting principles of the U.S.

Investment LLC

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

IRS

U.S. Internal Revenue Service

kV

kilovolts

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

Limited Liability Company Agreement

The Second Amended and Restated Limited Liability Company Agreement of Oncor, dated as of November 5, 2008, by and among Oncor Holdings, Texas Transmission and Investment LLC, as amended

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 Services, Inc. (a credit rating agency)

MW

megawatts

NERC

North American Electric Reliability Corporation

Oncor

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

Oncor Holdings

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

Oncor OPEB Plan

Refers to 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./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)

SARs

Stock Appreciation Rights

SARs Plan

Refers to the Oncor Stock Appreciation Rights Plan.

SEC

U.S. Securities and Exchange Commission

Sempra

Sempra Energy

4


 

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.

Sharyland Agreement

Refers to that certain Agreement and Plan of Merger, dated as of July 21, 2017, by and among the Sharyland Entities,  Oncor, and Oncor AssetCo LLC, a wholly owned subsidiary of Oncor.

Sharyland Asset Exchange

Refers to the asset swap consummated on November 9, 2017 pursuant to the Sharyland Agreement and PUCT Docket No. 47469, pursuant to which Oncor received substantially all of the distribution assets of the Sharyland Entities and certain of their transmission assets in exchange for certain of Oncor’s transmission assets and cash.

Sharyland Entities

Refers to Sharyland Distribution & Transmission Services, L.L.C., (“SDTS”) Sharyland Utilities, L.P. (“SU”), SU AssetCo, L.L.C., a wholly owned subsidiary of SU, and SDTS AssetCo, L.L.C., a wholly owned subsidiary of SDTS, each of which was a party to the Sharyland Agreement.

Sponsor Group

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

SDTS

Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company.

SU

Sharyland Utilities, L.P., a Texas limited partnership.

Supplemental Retirement Plan

Refers to the Oncor Supplemental Retirement Plan.

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.

TCEQ

Texas Commission on Environmental Quality

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 owns substantially all of the common stock of EFH Corp.

Texas Holdings Group

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

Texas margin tax

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

5


 

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 NERC 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. (formerly Borealis Infrastructure Management Inc.), and the Government of Singapore Investment Corporation, acting through its private equity and infrastructure arm, GIC Special Investments Pte Ltd.  Texas Transmission is not affiliated with EFH Corp., any of EFH Corp.’s subsidiaries or any member of the Sponsor Group.

TXU Energy

Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of 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

VIE

variable interest entity

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

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

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.





6


 

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 subsidiary as apparent in the context.  See “Glossary” 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 a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly beneficially own the remaining 0.22% 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 3.5 million homes and businesses and operating more than 134,000 miles of transmission and distribution lines.  We provide:



·

transmission services to electricity distribution companies, cooperatives and municipalities, and



·

distribution services to REPs which sell electricity to retail customers.



Our transmission and distribution rates are regulated by the PUCT, 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 are no reportable segments.



Our transmission and distribution assets are located principally in the north-central, eastern and western parts of Texas.  This territory has an estimated population in excess of ten million representing about forty percent of the population of Texas, and comprises 99 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, 2017, we had approximately 3,965 full-time employees, including approximately 750 employees under collective bargaining agreements.



Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group.   None of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group. In the PUCT proceedings requesting approval of the Sempra Acquisition (PUCT Docket No. 47675), Sempra has committed to certain ring-fencing measures that will be in effect upon closing of the Sempra Acquisition. For more information on the Sempra Acquisition and the related PUCT proceedings, see “—EFH Bankruptcy Proceedings – Potential Change in Indirect Ownership of Oncor – Sempra Merger Agreement” below.  



7


 

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 2017, ERCOT’s hourly demand peaked at 68,368 MW as compared to the peak hourly demand of 71,110 MW in 2016.  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 2% 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 growth strategies are to invest in technology upgrades and to construct transmission and distribution facilities to meet the needs of the growing Texas market and support energy production.  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, distribution and advanced metering investments through our regulated rates.



Oncor’s Operations



Performance  We achieved or exceeded market performance protocols in 13 out of 14 PUCT market metrics in 2017.  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 2017, we invested approximately $1.6 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.



8


 

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 an interconnection to other markets, the FERC.  Network transmission revenues compensate us for delivery of electricity over transmission facilities operating at 60 kV 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 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.



In November 2017, we exchanged certain of our transmission assets, consisting of 517 circuit miles of 345 kV transmission lines, for certain distribution and transmission assets of the Sharyland Entities.   See “Sharyland Asset Exchange” below and Note 14 to Financial Statements for more information regarding that transaction.  At December 31, 2017, our transmission facilities included 5,925 circuit miles of 345kV transmission lines and 9,994 circuit miles of 138kV and 69kV transmission lines.  Seventy-four generation facilities totaling 36,819 MW were directly connected to our transmission system at December 31, 2017, and 301 transmission stations and 730 distribution substations were served from our transmission system.



At December 31, 2017, our transmission facilities had the following connections to other transmission grids in Texas:



 

 

 

 

 

 



 

Number of Interconnected Lines

Grid Connections

 

345kV

 

138kV

 

69kV

Brazos Electric Power Cooperative, Inc.

 

 

114 

 

29 

Rayburn Country Electric Cooperative, Inc. 

 

 -

 

40 

 

Lower Colorado River Authority

 

 

28 

 

Texas New Mexico Power

 

 

10 

 

13 

Tex-La Electric Cooperative of Texas, Inc.

 

 -

 

13 

 

American Electric Power Company, Inc. (a)

 

 

 

Texas Municipal Power Agency

 

 

 

 -

Lone Star Transmission

 

12 

 

 -

 

 -

Centerpoint Energy Inc.

 

 

 -

 

 -

Sharyland Utilities, L.P.

 

14 

 

13 

 

 -

Other small systems operating wholly within Texas

 

 

12 

 

_______________

(a)

One of the 345-kV lines is an asynchronous high-voltage direct current connection with the Southwest Power Pool.



Electricity DistributionOur 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 3,505 distribution feeders.



Our distribution system included over 3.5 million points of delivery at December 31, 2017.  Over the past five years, the number of distribution system points of delivery we serve, excluding lighting sites, grew an average of  1.97% (1.66% excluding the Sharyland Asset Exchange discussed below) per year, adding approximately 115,000 points of delivery in 2017, including about 55,000 distribution points of delivery as a result of the Sharyland Asset Exchange in November 2017.  



9


 

Our distribution system (excluding assets acquired in the Sharyland Asset Exchange)  consists of 57,454 miles of overhead primary conductors, 21,162 miles of overhead secondary and street light conductors, 17,728 miles of underground primary conductors and 10,931 miles of underground secondary and street light conductors.  In addition to the above, the Sharyland Asset Exchange has added approximately 12,000 miles of distribution lines to our distribution system.  The majority of the distribution system operates at 25kV and 12.5kV.



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, under certain circumstances, once per year and up to four rate adjustments between comprehensive base rate proceedings to recover distribution-related investments on an interim basis.    We have not filed any such distribution-related rate adjustments to date.



CustomersOur transmission customers consist of municipalities, electric cooperatives and other distribution companies.  Our distribution customers consist of approximately 85 REPs and certain electric cooperatives in our certificated service area.  Revenues from REP subsidiaries of Vistra (formerly subsidiaries of TCEH) and NRG Energy, Inc. collectively represented 22%  and 18%  of our total operating revenues in 2017, 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.



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 RatesAs 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 reliability standards and periodic audits of our compliance with those 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.



Securitization Bonds —  Our consolidated financial statements include our former wholly-owned, bankruptcy-remote financing subsidiary, Bondco.  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds in 2003 and 2004.  Bondco issued $1.3 billion principal amount of transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.  The 2003 Series transition bonds matured and were paid in full in 2015 and the 2004 Series transition bonds matured and were paid in full in May 2016.  Final true-up proceedings and refunds of over-collected transition charges for the transition bonds were conducted by Oncor and the PUCT during 2016 and had no material net income impact.  Bondco was dissolved effective December 29, 2016.

 

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

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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 $20 million in 2017 and are expected to total approximately $18 million in 2018.



EFH Bankruptcy Proceedings



On the EFH Petition Date, 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 are not parties to the EFH Bankruptcy Proceedings. We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 1  to Financial Statements and below for further information regarding the EFH Bankruptcy Proceedings and the proposed change in control of our indirect majority owner in connection with such proceedings.



The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date. Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations. Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of December 31, 2017, we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million.



In May 2016, the Debtors filed a joint Plan of Reorganization (2016 Plan of Reorganization) pursuant to Chapter 11 of the U.S. Bankruptcy Code and a related disclosure statement with the bankruptcy court.  The 2016 Plan of Reorganization provided that the confirmation and effective date of the 2016 Plan of Reorganization with respect to the TCEH Debtors may occur separate from, and independent of, the confirmation and effective date of the 2016 Plan of Reorganization with respect to the EFH Debtors. In this regard, the bankruptcy court confirmed the 2016 Plan of Reorganization with respect to the TCEH Debtors in August 2016, and it became effective by its terms, and the Vistra Spin-Off occurred, effective October 3, 2016. As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on us remain unknown.  Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.



See Note 12 to Financial Statements for details of Oncor’s related-party transactions with members of the Texas Holdings Group.



 Potential Change in Indirect Ownership of Oncor



During the course of the EFH Bankruptcy Proceedings, certain plans of reorganization have been filed that contemplate the transfer of the ownership interests in Oncor that are indirectly held by EFH Corp. Below is a summary of certain matters relating to the potential change in indirect ownership of Oncor that have been proposed in the EFH Bankruptcy Proceedings. 



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Prior Merger Agreements



The following merger agreements relating to a potential change in indirect ownership of Oncor were entered into in connection with the EFH Bankruptcy Proceedings. Each of these prior merger agreements has been terminated in accordance with its respective terms. 



·

In August 2015, the EFH Debtors entered into a merger and purchase agreement (Hunt Merger Agreement) with an investor group consisting of certain unsecured creditors of TCEH and an affiliate of Hunt Consolidated, Inc., as well as certain other investors designated by Hunt Consolidated, Inc. (collectively, the Hunt Investor Group), that would have led to a significant change in the indirect equity ownership of Oncor. In August 2015,  at the request of and with the consent of EFH Corp. and EFIH, Oncor and Oncor Holdings entered into a letter agreement (Hunt Letter Agreement) with the purchasers party to the Hunt Merger Agreement that described certain corporate actions Oncor and Oncor Holdings would take in connection with the merger contemplated by the Hunt Merger Agreement as well as conditions to Oncor’s and Oncor Holdings’ obligations to take those actions. In September 2015, Oncor and the Hunt Investor Group filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Hunt Merger Agreement. The PUCT issued an order conditionally approving the joint application in March 2016 and in April 2016 the Hunt Investor Group and certain intervenors filed motions for rehearing. As discussed under “PUCT Matters Related to the EFH Bankruptcy Proceedings – Hunt PUCT Proceedings” below, in May 2016, the PUCT denied the motions for rehearing in PUCT Docket No. 45188 and the Hunt Merger Agreement was terminated. The Hunt Letter Agreement was also terminated pursuant to its terms. In June 2016 the Hunt Investor Group filed a petition with the Travis County District Court seeking review of the PUCT order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the Hunt Merger Agreement.



·

Following the termination of the Hunt Merger Agreement, in July 2016 EFH Corp. and EFIH entered into an Agreement and Plan of Merger (NEE Merger Agreement) with NextEra Energy, Inc. (NEE) and EFH Merger Co., LLC, a wholly-owned subsidiary of NEE, that provided for NEE’s acquisition of the equity interests in Oncor indirecty owned by EFH Corp. and EFIH.  In addition, at the request of and with the consent of EFH Corp. and EFIH, on August 4, 2016, Oncor and Oncor Holdings entered into a letter agreement (NEE Letter Agreement) with NEE and EFH Merger Co., LLC that described certain corporate actions Oncor and Oncor Holdings would take in connection with the merger contemplated by the NEE Merger Agreement as well as conditions to Oncor’s and Oncor Holdings’ obligations to take those actions. Additionally, in October 2016, an affiliate of NEE entered into an Agreement and Plan of Merger (the TTI Merger Agreement) with Texas Transmission Holdings Corporation (TTHC), the parent of Texas Transmission, and certain of its affiliates to purchase Texas Transmission’s 19.75% equity interest in Oncor for approximately $2.4 billion. The bankruptcy court approved EFH Corp. and EFIH’s entry into the NEE Merger Agreement and related plan support agreement in September 2016 and confirmed an amended plan of reorganization in February 2017 (NEE Plan).  The consummation of the transactions contemplated by the NEE Merger Agreement and related plan of reorganization and the TTI Merger Agreement was subject to various conditions precedent, including the approval of the PUCT. Oncor and NEE filed a joint application seeking certain regulatory approvals with respect to the NEE Merger Agreement and the TTI Merger Agreement in October 2016. The PUCT denied the application on April 13, 2017, issued an order on rehearing on June 7, 2017 re-affirming its decision that the proposed transaction was not in the public interest and denied NEE’s second motion for rehearing on June 29, 2017. Following these developments, on July 6, 2017, EFH and EFIH delivered a notice terminating the NEE Merger Agreement, which caused the NEE Plan to be null and void. The NEE Letter Agreement also terminated pursuant to its terms. As discussed under “PUCT Matters Related to the EFH Bankruptcy Proceedings” below, on July 13, 2017, NEE filed a petition with the Travis County District Court seeking review of the PUCT order (PUCT NEE Plan Order). We cannot assess the impact of the termination of the NEE Merger Agreement on the results of the review or ultimate disposition of the PUCT NEE Plan Order, or any associated impacts of such termination and matters relating to the PUCT NEE Plan Order on the TTI Merger Agreement and the transactions contemplated thereby. For more information regarding the TTI Merger Agreement and its related regulatory proceedings, see “PUCT Matters Related to the EFH Bankruptcy Proceedings –NEE PUCT Proceedings” below.



·

Following the termination of the NEE Merger Agreement, on July 7, 2017, EFH Corp. and EFIH executed a merger agreement (BHE Merger Agreement) with Berkshire Hathaway Energy Company (BHE) and certain of

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its subsidiaries. The BHE Merger Agreement provided for the acquisition by BHE of the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH.  In connection with the execution of the BHE Merger Agreement, on July 7, 2017, the EFH Debtors filed a joint plan of reorganization (BHE Plan) and a related disclosure statement.  In addition, at the request of and with the consent of EFH Corp. and EFIH, on July 7, 2017, Oncor and Oncor Holdings entered into a letter agreement (BHE Letter Agreement) with BHE and its subsidiaries that were party to the BHE Merger Agreement that described certain corporate actions Oncor and Oncor Holdings would take in connection with the merger contemplated by the BHE Merger Agreement as well as conditions to Oncor’s and Oncor Holdings’ obligations to take those actions. The EFH Debtors terminated the BHE Merger Agreement on August 21, 2017 in connection with their entry into the Sempra Merger Agreement (as defined and discussed below), which caused the BHE Plan to become null and void. The BHE Letter Agreement also terminated pursuant to its terms.  Further, by order dated September 7, 2017, the bankruptcy court ordered that the BHE Merger Agreement was terminated and not approved.   



Sempra Merger Agreement



On August 15, 2017, the EFH Debtors received an alternative proposal from Sempra Energy (Sempra) that largely followed the structure of the BHE Plan. Following negotiations, on August 21, 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). Pursuant to the Sempra Merger Agreement, EFH Corp. will be merged with an indirect subsidiary of Sempra, with EFH Corp. continuing as the surviving company and an indirect, wholly-owned subsidiary of Sempra. The Sempra Merger Agreement does not impose any conditions on the EFH Debtors regarding TTI’s minority interest in Oncor. Accordingly, the Sempra Merger Agreement provides for the acquisition by Sempra of the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH (Sempra Acquisition).



Following the execution and delivery of the Sempra Merger Agreement, EFIH requested, pursuant to the Sempra Merger Agreement, that Oncor Holdings and Oncor enter into a letter agreement (Sempra Letter Agreement) with the Sempra Parties.  The Sempra Letter Agreement was executed on August 25, 2017 and sets forth certain rights and obligations of the Oncor Ring-Fenced Entities and the Sempra Parties to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the acquisition of Reorganized EFH and the other transactions described in the Sempra Merger Agreement.  Pursuant to the terms of the Sempra Letter Agreement, the Oncor Ring-Fenced Entities are to conduct, in all material respects, their businesses in the ordinary course of business and materially consistent with the plan for 2017 and 2018 contained in Oncor’s long-range business plan.  The Sempra Letter Agreement also provides that the Oncor Ring-Fenced Entities will cooperate with the Sempra Parties to prepare and file all necessary applications for governmental approvals of the transactions contemplated by the Sempra Merger Agreement, including PUCT and FERC approvals.  The Sempra Letter Agreement is not intended to give the Sempra Parties, directly or indirectly, the right to control or direct the operations of any of the Oncor Ring-Fenced Entities.



Closing Conditions to the Sempra Merger Agreement



The Sempra Merger Agreement is subject to customary closing conditions, including the approval of the bankruptcy court in the EFH Bankruptcy Proceedings, Federal Communications Commission and the PUCT. Certain conditions, such as approval from FERC, the Vermont Department of Financial Regulation and receipt of a private letter ruling from the IRS have already been satisfied.



In connection with the execution of the Sempra Merger Agreement, on September 5, 2017, the EFH Debtors filed an amended joint plan of reorganization (Sempra Plan) and a related disclosure statement (Sempra Disclosure Statement).  On September 6, 2017, the bankruptcy court authorized the EFH Debtors’ entry into the Sempra Merger Agreement, approved the Sempra Disclosure Statement and authorized the EFH Debtors to solicit votes on the Sempra Plan.  By declaration submitted on November 1, 2017, the EFH Debtors certified that they had received sufficient votes to confirm the Sempra Plan.  The hearing on confirmation of the Sempra Plan is scheduled to begin on February 26, 2018 in the bankruptcy court.



Pursuant to the terms of the Sempra Merger Agreement, Oncor and Sempra filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan on October 5, 2017 in PUCT Docket No. 47675. On December 14, 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

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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. We cannot predict what the form of any final order will be or the ultimate disposition in the PUCT docket.  For more information regarding the Sempra Settlement Stipulation and the proceedings in PUCT Docket No. 47675, see “PUCT Matters Relating to EFH Bankruptcy Proceedings – Sempra PUCT Proceedings” below.



We cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the Sempra Acquisition will (or when it will) close.    There remain conditions and uncertainties relating to the confirmation of the Sempra Plan and it becoming effective and the consummation of the transactions contemplated by the Sempra Merger Agreement, including, without limitation, the ability to obtain required bankruptcy court approvals as well as the required regulatory approvals from the PUCT, as described below under “PUCT Matters Related to EFH Bankruptcy Proceedings.” As a result, we remain unable to predict how any reorganization of the EFH Debtors and the related matters ultimately will impact Oncor or what form any change in indirect ownership of Oncor may take. Assuming that all approvals are received, we currently expect that the Sempra Acquisition will close in the first half of 2018, although there can be no assurance that the Sempra Acquisition will be completed on that timetable, or at all.



PUCT Matters Related to EFH Bankruptcy Proceedings



Hunt Investor Group PUCT Proceedings



In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by a plan of reorganization in the EFH Bankruptcy Proceedings. In March 2016, the PUCT issued an order conditionally approving the joint application. In April 2016, the Hunt Investor Group and certain intervenors in PUCT Docket No. 45188 filed motions for rehearing and in May 2016, the PUCT denied such motions and the order became final. In May 2016, the plan of reorganization and the Hunt Merger Agreement that contemplated the transactions in PUCT Docket No. 45188 were terminated. The Hunt Investor Group filed a petition with the Travis County District Court in June 2016 seeking review of the order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the Hunt Merger Agreement.



In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings.  Oncor made a rate filing with the PUCT and original jurisdiction cities to comply with their resolutions on March 17, 2017 in PUCT Docket No. 46957.  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 that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement agreement, and on November 27, 2017, the new rates took effect.  For more information, see Note 3 to Financial Statements.



NEE PUCT Proceedings



The NEE Merger Agreement contemplated that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the NEE Merger Agreement. Oncor and NEE filed that joint application in PUCT Docket No. 46238 in October 2016. The PUCT denied the application on April 13, 2017.  The PUCT issued an order on rehearing on June 7, 2017 and denied NEE’s second motion for rehearing on June 29, 2017. On July 13, 2017, NEE filed a petition with the Travis County District Court seeking review of the PUCT order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 46238, particularly in light of the termination of the NEE Merger Agreement.



On July 28, 2017, TTHC and NEE filed in PUCT Docket No. 47453 a joint application with the PUCT seeking certain regulatory approvals with respect to NEE’s proposed acquisition of the 19.75% minority interest in Oncor that is indirectly held by TTHC.  The application requested that the PUCT issue an order disclaiming jurisdiction over the transaction or finding that the transaction is in the public interest and approved.  On September 14, 2017, Oncor filed a motion to intervene as a party, but not as an applicant, in PUCT Docket No. 47453.  On October 26, 2017, the PUCT voted to dismiss the application without prejudice on jurisdictional grounds and ordered that any future filing of the application must include the affected utility (in this case Oncor) as an applicant.  The PUCT further ordered that in any such filing

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Oncor is not required to seek approval of the application or any other specific relief.  On October 31, 2017, TTHC notified the PUCT that it had terminated the TTI Merger Agreement with NEE. NEE filed a motion for rehearing on November 20, 2017 which was not granted. On January 9, 2018, NEE filed a petition with the Travis County District Court seeking review of the PUCT order of dismissal. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 47453, particularly in light of TTHC’s termination of the TTI Merger Agreement.



Sempra PUCT Proceedings



Oncor and Sempra filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan on October 5, 2017 in PUCT Docket No. 47675. On December 14, 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. We cannot predict what the form of any final order will be or the ultimate disposition in the PUCT docket.



The parties to the Sempra Settlement Stipulation have agreed that Sempra’s acquisition of EFH Corp. is in the public interest and will bring substantial benefits.  The Sempra Settlement Stipulation requests that the PUCT approve the Sempra Acquisition. Previously, EFH Corp. and Oncor implemented various ring-fencing measures to enhance Oncor’s separateness from its owners and to mitigate the risk that Oncor would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting EFH Corp. or EFH Corp.’s subsidiaries or owners.  The existing ring-fencing measures are designed to create both legal and financial separation between the Oncor Ring-Fenced Entities, on the one hand, and EFH Corp. and its other affiliates and subsidiaries, on the other hand.  The joint application filed with the PUCT and the Sempra Settlement Stipulation outline certain ring-fencing measures, governance mechanisms and restrictions that will 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 Sempra Settlement Stipulation, if the Sempra Acquisition is consummated, the board of directors of Oncor is expected to consist of thirteen members and be constituted as follows:

·

seven members, which we refer to as disinterested directors, will be (i) 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) will 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 will be designated by Sempra;

·

two members will be appointed by Texas Transmission; and

·

two members will be current or former officers of Oncor (the Oncor Officer Directors), initially Robert S. Shapard and E. Allen Nye, Jr., who no later than the closing of the Sempra Acquisition will be the chair of the Oncor board and chief executive officer 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 EFIH (a subsidiary of EFH, which will be a wholly owned indirect subsidiary of, and controlled by, Sempra following the Sempra Acquisition), will have 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.



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In addition, the Sempra Settlement Stipulation 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 Settlement Stipulation 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 Sempra Settlement Agreement provides that 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 Settlement Stipulation 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 has agreed 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 (until recently, Oncor’s regulatory capital structure required 40% equity, with the remaining 60% as debt);



·

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;



·

Sempra will ensure that, as of the closing of the Sempra Acquisition, Oncor’s credit rating by all three major rating agencies will be at or above Oncor’s credit ratings as of June 30, 2017;



·

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 EFH Corp. or EFIH 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

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Sempra must 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;



·

There must be maintained certain “separateness measures” that reinforce the financial separation of Oncor from EFH Corp. and EFH Corp.’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 PUCT Docket No. 46957, at which time any total synergy savings shall be reflected in Oncor’s rates.



If the PUCT does not accept the Sempra Settlement Stipulation as presented, or issues an order inconsistent with the terms of the stipulation, the parties have agreed that any party adversely affected by the alteration has the right to withdraw from the stipulation and to exercise all rights available to such party under the law.



We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 47675.



EFH Bankruptcy Proceedings Settlement Agreement



In connection with the EFH Bankruptcy Proceedings, the EFH Debtors and various creditor parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the EFH Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under TCEH’s senior secured facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the EFH Debtors’ current and former directors, the Sponsor Group, managers and officers and other related entities. The Settlement Agreement contemplates a release of such claims upon approval of the Settlement Agreement by the bankruptcy court, which approval was obtained in December 2015.  The Settlement Agreement settles substantially all inter-debtor claims through the effective date of the Settlement Agreement. These settled claims include potentially contentious inter-debtor claims, including various potential avoidance actions and claims arising under numerous debt agreements, tax sharing agreements, and contested property transfers. The release provisions of the Settlement Agreement took effect immediately upon the entry of the bankruptcy court order approving the Settlement Agreement. In this regard, substantially all of the potential affiliate claims, derivative claims and other types of disputes among affiliates (including claims against Oncor) have been resolved by bankruptcy court order. Accordingly, we believe the Settlement Agreement resolves all affiliate claims against Oncor and its assets existing as of the effective date of the Settlement Agreement.



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 in October 2017 that took effect on November 27, 2017.  As a result of the PUCT order, our annual distribution and transmission base rate revenues, net of eliminations, are expected to increase approximately $65 million excluding the impacts of the Sharyland Asset Exchange and the TCJA.  The order also requires us to record as a regulatory liability instead of revenue the amount that we collect through our approved tariffs for federal income taxes that is above the new corporate federal income rate.  We estimate that incorporating the new corporate federal income tax rate in our approved

17


 

rate settlement agreement would have 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. The PUCT order requires Oncor to record a regulatory liability until the new authorized regulatory capital structure is met to reflect our actual capitalization prior to achieving the authorized capital structure. Once the authorized capital structure is attained, the regulatory liability will be returned to customers through the capital structure refund mechanism approved in the PUCT docket. Oncor implemented the regulatory liability as of November 27, 2017. See Note 3 to Financial Statements for more information on the PUCT rate review order.



Sharyland Asset Exchange



In July 2017, we entered into the Sharyland Agreement with the Sharyland Entities. Pursuant to that agreement, on November 9, 2017, we exchanged approximately $383 million of our transmission assets, consisting of 517 circuit miles of 345 kV 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 of the distribution network.  The transaction for 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 exchanged are of “like kind” (within the meaning of Section 1031 of Internal Revenue Code of 1986 (as amended, the Code)). We do not expect the Sharyland Asset Exchange will have a material effect on our results of operations, financial position or cash flows.  See further discussion of the transaction below under “Regulation and Rates” and in Notes 3 and 14 to Financial Statements.

18


 

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 (including a review of a change in control of Oncor in connection with resolution of the EFH Bankruptcy Proceedings by the PUCT, and also including generally by 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 flow 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 is not scheduled to meet during 2018. However, at any time, the governor of Texas may convene a special session of the 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. During the 2017 regular and special legislative sessions, no legislation passed that is expected to have a material impact on our financial position, results of operations or cash flows. 



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.

19


 

Attacks on our infrastructure or other events that disrupt or breach our cyber/data or physical security measures 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 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.  While we have controls in place designed to protect our information technology infrastructure and have not had any significant breaches to date, any loss of confidential or proprietary data through a breach could adversely affect our reputation, expose us to material legal and regulatory claims, 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.



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 reductions in cost and improvements to service and reliability.  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 upon access to financial markets as a significant source of liquidity for capital requirements not satisfied by cash-on-hand, operating cash flows or our revolving credit facility.  Considering our construction plans to service our growing customer base and ERCOT needs, it is likely we will incur additional debt.  In addition, we may incur additional debt in connection with other investments in infrastructure or technology, such as smart grid systems.  Our ability to access the capital or credit markets may be severely restricted at a 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.

20


 

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 substantially higher than those of EFH Corp., our majority equity investor.  If credit rating agencies were to change their views of our independence from EFH Corp., our credit ratings would likely 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 financing and liability management activities by, or restructuring transactions involving EFH Corp. and other members of the Texas Holdings Group.  Further, it is unclear how the progress of the EFH Bankruptcy Proceedings and the change in indirect ownership of Oncor proposed in such proceedings may affect our credit ratings.  In the event any action in connection with the EFH Bankruptcy Proceedings and change in indirect ownership of Oncor proposed in such proceedings 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 reliability standards and periodic audits of our compliance with those 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 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 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.  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 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 85 REPs (including REPs which were subsidiaries of TCEH through the date of the Vistra Spin-Off and subsidiaries of Vistra after the Vistra Spin-Off) and certain electric cooperatives in our certificated service area, that sell the electricity we distribute to consumers.  Revenues from REP subsidiaries of Vistra (formerly subsidiaries of TCEH) represented 22% and 23% of our total operating revenues for the years ended December 31, 2017 and 2016, respectively.  Revenues from REP subsidiaries of a non-affiliated entity, NRG Energy, Inc., collectively represented 18% and 17% of our total operating revenues for each of the years ended December 31, 2017 and 2016, respectively.  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. 



21


 

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 revolving 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 revolving credit facility, and the pricing and terms we receive in the financial markets, could be adversely impacted by various factors, such as:



·

changes in financial markets that reduce available credit or the ability to obtain or renew liquidity facilities on acceptable terms;

·

economic weakness in the ERCOT market;

·

changes in interest rates;

·

a deterioration of our credit or a reduction in our credit ratings;

·

a deterioration of the credit or insolvency or financial distress of one or more lenders under our revolving credit facility that affects the ability of the lender(s) to make loans to us;

·

any impacts on us as a result of the EFH Bankruptcy Proceedings and change in indirect ownership of Oncor proposed in such proceedings, including impacts that may lead to a deterioration of our credit or a reduction in our credit ratings;

·

a deterioration of the credit of EFH Corp. or its subsidiaries or a reduction in the credit ratings of EFH Corp. or its subsidiaries that is perceived to potentially have an adverse impact on us despite the ring-fencing of the Oncor Ring-Fenced Entities from the Texas Holdings Group;

·

a material breakdown in our risk management procedures, and

·

the occurrence of changes that restrict our ability to access our revolving credit facility.



Our primary source of liquidity aside from operating cash flows is our ability to borrow under our revolving credit facility.  The revolving credit facility contains a debt-to-capital ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2017, we were in compliance with this covenant.  See Note 6 to Financial Statements for further information regarding this covenant and our unsecured revolving credit facility, which was entered into in November 2017 and replaced our previous secured revolving credit facility. 



In 2007, we committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes. Until November 27, 2017, that debt-to-equity ratio was 60% debt to 40% equity. In connection with the PUCT Order issued in PUCT Docket No. 46957, that debt-to-equity ratio changed to 57.5% debt to 42.5% equity effective November 27, 2017. At December 31, 2017, our regulatory capitalization ratio was 59.4% debt to 40.6% equity. The PUCT order requires us to record a regulatory liability until the new authorized regulatory capital structure is met to reflect our actual capitalization prior to achieving the authorized capital structure. Once the authorized capital structure is attained, the regulatory liability will be returned to customers through the capital structure refund mechanism approved in the PUCT docket. We implemented the regulatory liability as of November 27, 2017.  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.  Previously, some of these benefits were provided through participation with EFH Corp. and certain of its subsidiaries in plans sponsored by EFH Corp.



We also have liabilities under the Vistra Retirement Plan, a defined benefit pension plan sponsored by EFH Corp. prior to the Vistra Spin-Off and sponsored by a  Vistra affiliate after the Vistra Spin-Off.  We were previously a member of the same controlled group (within the meaning of ERISA) as EFH Corp. However, following the Vistra Spin-Off, we are no longer a member of the same controlled group as Vistra and its subsidiaries.



22


 

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 Plan” 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.



As discussed above, to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality, various legal, financial and contractual provisions were implemented.  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 any member of the Texas Holdings Group in connection with a bankruptcy case involving one or more members of the Texas Holdings Group.  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 Texas Holdings Group 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.



In the EFH Bankruptcy Proceedings, there can be no assurance that the U.S. bankruptcy court will not order an Oncor Ring-Fenced Entity’s assets and liabilities to be substantively consolidated with the members of the Texas Holdings Group involved in the EFH Bankruptcy Proceedings or that the EFH Bankruptcy Proceedings will not result in a disruption of services we receive from, or jointly with, our affiliates.  See Note 1 to Financial Statements for additional information on our ring fencing measures.



Our rights under certain agreements with the EFH Debtors could be adversely affected in connection with the EFH Bankruptcy Proceedings.



We are party to various contracts with the EFH Debtors, as described in Note 12 to Financial Statements.  The U.S. Bankruptcy Code permits a debtor in bankruptcy to assume (accept) or reject executory contracts.  If the EFH Debtors were to reject some or all of their executory contracts with us in connection with the EFH Bankruptcy Proceedings, our results of operations and financial condition could be adversely affected.



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 goodwill impairment assessment and testing.



23


 

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.  The 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 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.  Furthermore, we may incur increased capital expenditures if we are required to invest in conservation measures.



24


 

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 maintenance, repair and construction, our AMS, 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 the turbulent macroeconomic environment in recent years. 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.



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.

25


 

PART II



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



At December 31, 2017, 80.03% of our outstanding membership interests was held by Oncor Holdings and indirectly held by EFH Corp., 19.75% was held by Texas Transmission and 0.22% was indirectly held by certain members of our management team and board of directors through Investment LLC.  None of the membership interests are publicly traded, and none were issued in 2017.



See Note 9 to Financial Statements for a description of cash distributions we paid to our members and the restrictions on our ability to pay such distributions.



Item 6.SELECTED FINANCIAL DATA



 

 

 

 

 

 

 

 

 

 

 

 

 

 



At December 31,



2017

 

2016

 

2015

 

2014

 

2013



(millions of dollars, except ratios)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (a)

$

22,120 

 

$

20,811 

 

$

19,287 

 

$

19,029 

 

$

18,198 

Property, plant & equipment ─ net

 

14,879 

 

 

13,829 

 

 

13,024 

 

 

12,463 

 

 

11,902 

Goodwill

 

4,064 

 

 

4,064 

 

 

4,064 

 

 

4,064 

 

 

4,064 

Capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less amounts due currently (a)

$

5,567 

 

$

5,515 

 

$

5,646 

 

$

4,964 

 

$

5,345 

Membership interests

 

7,903 

 

 

7,711 

 

 

7,508 

 

 

7,518 

 

 

7,409 

Total

$

13,470 

 

$

13,226 

 

$

13,154 

 

$

12,482 

 

$

12,754 

Capitalization ratios (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less amounts due currently (a)

 

41.3% 

 

 

41.7% 

 

 

42.9% 

 

 

39.8% 

 

 

41.9% 

Membership interests (a)

 

58.7% 

 

 

58.3% 

 

 

57.1% 

 

 

60.2% 

 

 

58.1% 

Total

 

100.0% 

 

 

100.0% 

 

 

100.0% 

 

 

100.0% 

 

 

100.0% 

_______________

(a)

Certain of the financial information at each of December 31, 2014 and 2013 has been restated to reflect the application of Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.

(b)

For purposes of reporting to the PUCT, the regulatory capitalization ratio at December 31, 2017 was 59.4% debt to  40.6% equity.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ― Financial Condition ― Available Liquidity/Credit Facility” and Note 9 to Financial Statements for additional information regarding regulatory capitalization ratios.



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended December 31,



2017

 

2016

 

2015

 

2014

 

2013



(millions of dollars, except ratios)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

3,958 

 

$

3,920 

 

$

3,878 

 

$

3,822 

 

$

3,552 

Net income

$

419 

 

$

431 

 

$

432 

 

$

450 

 

$

432 

Capital expenditures

$

1,631 

 

$

1,352 

 

$

1,154 

 

$

1,107 

 

$

1,079 

Ratio of earnings to fixed charges

 

2.92 

 

 

2.97 

 

 

3.00 

 

 

3.01 

 

 

2.76 

Embedded interest cost on long-term debt ─ end of period (a)

 

5.5% 

 

 

5.6% 

 

 

5.8% 

 

 

6.2% 

 

 

6.4% 

_______________

(a)

Represents the annual interest and amortization of any discounts, premiums, issuance costs (including the effects of interest rate hedges) and any deferred gains/losses on reacquisitions divided by the carrying value of the debt plus or minus the unamortized balance of any discounts, premiums, issuance costs (including the effects of interest rate hedges) and gains/losses on reacquisitions at the end of the year.



26


 



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, 2017, 2016 and 2015 should be read in conjunction with Selected Financial Data and our audited consolidated financial statements and the notes to those statements.



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 and western parts of Texas.  Revenues from REP subsidiaries of Vistra (formerly subsidiaries of TCEH) represented 22%, 23% and 25% of our total operating revenues for the years ended December 31, 2017, 2016 and 2015, respectively.  We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.



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



In the PUCT proceedings requesting approval of the Sempra Acquisition (PUCT Docket No. 47675), Sempra has committed to certain ring-fencing measures that will be in effect upon closing of the Sempra Acquisition. For more information on the Sempra Acquisition and the related PUCT proceedings, see Items 1 and 2. Business and Properties ―  EFH Bankruptcy Proceedings ―  Potential Change in Indirect Ownership of Oncor ―  Sempra Merger Agreement” and “― PUCT Matters Related to EFH Bankruptcy Proceedings.”



Significant Activities and Events



EFH Bankruptcy Proceedings — On the EFH Petition Date, 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 are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See “Items 1 and 2. Business and Properties—EFH Bankruptcy Proceedings” and Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements, a discussion of the proposed change in ownership of Oncor in connection with such proceedings, and a discussion of the Vistra Spin-Off. As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH

27


 

Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations. Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  We have collected our prepetition receivables from the Texas Holdings Group.   



The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential exposure at this time is unknown.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.



See Notes 2 and 8 to Financial Statements and “Item 7. Quantitative and Qualitative Disclosures About Market Risk” for additional information.



Sempra Acquisition —In connection with the EFH Corp. Bankruptcy Proceedings, EFH Corp. and EFIH entered into an agreement with Sempra pursuant to which Sempra would acquire the 80.03% of Oncor’s outstanding equity held indirectly by EFH Corp. and EFIH. The Sempra Acquisition is subject to customary closing conditions, including the approval of the bankruptcy court in the EFH Bankruptcy Proceedings and the PUCT. Certain conditions, such as approval from FERC, the Vermont Department of Financial Regulation and receipt of a private letter ruling from the IRS have already been satisfied. All parties in the PUCT proceeding requesting PUCT approval of the Sempra Acquisition have entered into a settlement agreement, and 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 set forth in the settlement agreement.  The bankruptcy court in the EFH Bankruptcy Proceedings is expected to begin confirmation hearings on February 26, 2018.  Assuming receipt of all required approvals, we currently expect that the Sempra Acquisition will close in the first half of 2018, although there can be no assurance that the Sempra Acquisition will be completed on that timetable, or at all. See Items 1 and 2. Business and Properties ―  EFH Bankruptcy Proceedings ―  Potential Change in Indirect Ownership of Oncor ―  Sempra Merger Agreement” and “― PUCT Matters Related to EFH Bankruptcy Proceedings” for more information.



Debt-Related Activities — See Note 6 to Financial Statements for information regarding the new unsecured $2.0 billion revolving credit facility that we entered into in November 2017, which replaced our previous secured $2.0 billion revolving credit facility.   See Note 7 to Financial Statements for information regarding the repayment of $324 million in long-term debt, the issuance of $325 million aggregate principal amount of senior secured notes and the execution of a $275 million unsecured term loan credit agreement in September 2017.



2017 Rate Review (PUCT Docket No. 46957)  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.  As a result of the PUCT order, our annual distribution and transmission base rate revenues, net of eliminations, are expected to increase approximately $65 million excluding the impacts of the Sharyland Asset Exchange and the TCJA.  For information regarding the impact of the TCJA, see “Tax Cuts and Jobs Act (TCJA)” below.  Other significant findings 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% with an authorized regulatory capital structure of 60% debt to 40% equity. The PUCT order requires us to record a regulatory liability until the new authorized regulatory capital structure is met to reflect our actual capitalization prior to achieving the authorized capital structure. Once the authorized capital structure is attained, the regulatory liability will be returned to customers through the capital structure refund mechanism approved in the PUCT docket. We implemented the regulatory liability as of November 27, 2017.  Also, pursuant to the PUCT order, the AMS reconcilable surcharge ceased on November 27, 2017 and AMS related expenses and returns became recoverable through distribution base rates.  See Note 3 to Financial Statements for more information on the PUCT rate review order.



Tax Cuts and Jobs Act (TCJA) – On December 22, 2017, President Trump signed the TCJA into law.  Substantially all of the provisions of the TCJA are effective for our taxable years beginning January 1, 2018.  The TCJA includes 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.



28


 

Changes in the Code from the TCJA had a material impact on our financial statements in 2017.  Under GAAP, specifically ASC 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.  ASC 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, which have been reflected in our December 31, 2017 financial statements.  The re-measurement of our liability in lieu of deferred income taxes resulted in a $21 million charge to the nonoperating provision in lieu of tax expense for the year ending December 31, 2017 and a $1.6 billion decrease in our liability in lieu of deferred income taxes at December 22, 2017 with a  corresponding increase in our regulatory liabilities.



The increase in regulatory liabilities reflects our obligation, as required by PUCT order in Docket No. 46957, to refund to utility customers any excess liability in lieu of deferred income taxes created by the reduction in the corporate federal income tax rate.  The TCJA includes provisions that stipulate how quickly certain of these excess deferred tax related balances may be refunded to our customers through reductions in our future rates. These adjustments had no impact on our 2017 cash flows. 

 

PUCT Docket No. 46957 requires us to record as a regulatory liability, instead of revenue, the amount that we collect through our approved tariffs for federal income taxes that is above the new corporate federal income tax rate.  We started recording this regulatory liability beginning January 1, 2018. We estimate that incorporating the new corporate federal income tax rate in our approved rate settlement agreement would have reduced our annual revenues and our tax expense by approximately $125 million.



Sharyland Asset Exchange  On November 9, 2017, we consummated a transaction with the Sharyland Entities pursuant to which we exchanged approximately $383 million of our transmission assets, consisting of 517 circuit miles of 345 kV 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. We do not expect the Sharyland Asset Exchange will have a material effect on our results of operations, financial position or cash flows.  See further discussion of the transaction below under “Regulation and Rates” and in Notes 3 and 14 to Financial Statements.



Matters with the PUCT  See discussion of other matters below under “Regulation and Rates.”



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 “Item1A. 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, including a discussion of our 2017 and 2008 rate reviews.



EFH Bankruptcy Proceedings



On the EFH Petition Date, 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

29


 

Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  See Significant Activities and Events” above, Item 1A. Risk Factors” and Notes 2, 8 and 12 to Financial Statements for a discussion of risks relating to, and potential impacts of, the EFH Bankruptcy Proceedings.

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 substantially higher than those of the Texas Holdings Group.  If credit rating agencies were to change their views of our independence from any member of the Texas Holdings Group, our credit ratings would likely decline.  We believe this risk is substantially mitigated by the ring-fencing measures as described in Note 1 to Financial Statements.    It is unclear how the progress of the EFH Bankruptcy Proceedings and the consummation of the EFH Acquisition and change in ownership of Oncor proposed in such proceedings may affect our credit ratings.    See “Item 1A. 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 Initiatives



Risks to our technology initiative programs 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, but there can be no assurance that these technology initiatives 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 could also materially affect our reputation, expose the company to legal claims or impair our ability to execute on business strategies.  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 follow accounting principles generally accepted in the U.S.  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 and EFH Corp. was amended in November 2008 to include Texas Transmission and Investment LLC.  The tax sharing agreement 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). 



We became a partnership for U.S. federal income tax purposes effective with the equity sale to Texas Transmission and Investment LLC in November 2008.  Accordingly, while partnerships are not subject to income taxes, in consideration of the tax sharing agreement and 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

30


 

determined under the tax sharing agreement as “provision in lieu of income taxes” and “liability in lieu of deferred income taxes” for periods subsequent to the equity sale.  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 EFH Corp.’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.  The  $26 million receivable from members related to income taxes at December 31, 2017 is primarily the result of lower taxable income and a true-up of 2016.  The $80 million receivable from members related to income taxes at December 31, 2016 is primarily the result of the enactment of the Protecting Americans from Tax Hikes Act of 2015The bill was enacted late in December 2015 and allows for 50% bonus depreciation on certain assets placed into service in 2017 and 2016.     



See Notes 1 and 4 to Financial Statements.



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 5 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 (at December 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.



31


 

In December 2017,  2016 and 2015, 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 in 2017, 2016 or 2015.



Defined Benefit Pension Plans and OPEB Plan



We offer certain pension, health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees.  Reported costs of providing noncontributory pension and OPEB benefits are dependent upon numerous factors, assumptions and estimates.



PURA provides for our recovery of pension and OPEB costs applicable to services of covered current and former employees, as well as services of other covered current and former employees of EFH Corp./Vistra 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 EFH Corp. whereby we assumed responsibility for applicable pension and OPEB costs related to those personnel’s recoverable service.  We also subsequently entered into an agreement with EFH Corp. which was later, in connection with the Vistra Spin-Off, replaced by an agreement with an affiliate of Vistra, to sponsor an OPEB plan to cover such personnel, with Vistra retaining responsibility for paying the applicable OPEB costs under such plan for those personnel’s non-recoverable service.



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. 



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 is not recoverable through rates. Any retirement costs associated with non-recoverable service are recognized in other deductions or comprehensive income.



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.



At December 31, 2017, the pension plans projected benefit obligation included a net actuarial loss of $201 million for 2017 due primarily to a decrease in the discount rate to 3.54% from 4.05%, partially offset by the adoption of a new mortality assumption that shortens expected life spans.   Actual returns on pension plan assets in 2017 were more than the expected return on assets by $212 million creating an offsetting actuarial gain.  We expect the pension plans estimated amortizations of net actuarial losses to increase by $4 million in 2018 reflecting these changes. 



32


 

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.  Net direct and indirect allocated pension and OPEB costs as determined under applicable accounting rules are summarized in the following table:



 

 

 

 

 

 

 

 

 



Year Ended December 31,



2017

 

2016

 

2015



 

 

 

 

 

 

 

 

Pension costs

$

85 

 

$

76 

 

$

104 

OPEB costs

 

58 

 

 

62 

 

 

53 

Total benefit costs

 

143 

 

 

138 

 

 

157 

Less amounts recognized principally as property or a regulatory asset

 

(98)

 

 

(100)

 

 

(113)

Net amounts recognized as expense

$

45 

 

$

38 

 

$

44 

Pension plans discount rate percentage

 

4.05% 

 

 

4.30% 

 

 

3.96% 

OPEB plan discount rate ‒ percentage

 

4.35% 

 

 

4.60% 

 

 

4.23% 

Funding of the pension and OPEB plans

$

180 

 

$

35 

 

$

79 



Sensitivity of these costs to changes in key assumptions is as follows:





 

 

 

Assumption

 

Increase/(Decrease) in 2018 Pension and OPEB Costs



 

 

 

Discount rate – 1% increase

 

$

(36)

Discount rate – 1% decrease

 

$

43 

 

 

 

 

Expected return on assets – 1% increase

 

$

(25)

Expected return on assets – 1% decrease

 

$

25 



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











33


 



RESULTS OF OPERATIONS



Operating Data









 

 

 

 

 

 

 

 

 



 

 

Year Ended December 31,



 

 

2017

 

 

2016

 

 

2015



 

 

 

 

 

 

 

 

 

Operating statistics:

 

 

 

 

 

 

 

 

 

Electric energy volumes (gigawatt-hours):

 

 

 

 

 

 

 

 

 

Residential

 

 

41,483 

 

 

41,377 

 

 

42,536 

Other (a)

 

 

76,117 

 

 

75,045 

 

 

74,215 

Total electric energy volumes

 

 

117,600 

 

 

116,422 

 

 

116,751 

Reliability statistics (b):

 

 

 

 

 

 

 

 

 

System Average Interruption Duration Index (SAIDI) (nonstorm)

 

 

89.7 

 

 

95.0 

 

 

96.1 

System Average Interruption Frequency Index (SAIFI) (nonstorm)

 

 

1.4 

 

 

1.4 

 

 

1.3 

Customer Average Interruption Duration Index (CAIDI) (nonstorm)

 

 

62.1 

 

 

66.0 

 

 

72.5 

Electricity points of delivery (end of period and in thousands):

 

 

 

 

 

 

 

 

 

Electricity distribution points of delivery (based on number of active meters)

 

 

3,551 

 

 

3,435 

 

 

3,379 

Operating revenues:

 

 

 

 

 

 

 

 

 

Distribution base revenues (c)

 

$

1,877 

 

$

1,832 

 

$

1,849 

Transmission base revenues (d)

 

 

940 

 

 

909 

 

 

850 

Reconcilable rates:

 

 

 

 

 

 

 

 

 

TCRF (d)

 

 

1,260 

 

 

1,221 

 

 

1,104 

Transition charges

 

 

 -

 

 

22 

 

 

120 

AMS surcharges (c)

 

 

93 

 

 

133 

 

 

142 

EECRF and other regulatory surcharges

 

 

47 

 

 

56 

 

 

48 

Other miscellaneous revenues

 

 

73 

 

 

75 

 

 

68 

Intercompany eliminations (d)

 

 

(332)

 

 

(328)

 

 

(303)

Total operating revenues

 

$

3,958 

 

$

3,920 

 

$

3,878 

________________

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

(b)      SAIDI is the average number of minutes electric service is interrupted per consumer in a year.  SAIFI is the average number of electric service interruptions per consumer in a year.  CAIDI is the average duration in minutes per electric service interruption in a year.

(c)         The separate reconcilable AMS surcharge ceased on November 27, 2017 and AMS-related expenses and returns became recoverable through distribution base revenues.

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





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Financial Results ─ Year Ended December 31, 2017 Compared to Year Ended December 31, 2016



Total operating revenues increased $38 million, or 1%, to $3.958 billion in 2017Revenue is billed under tariffs approved by the PUCT.  The change reflected:



·

An Increase in Distribution Base Revenues — Base rates are set periodically in a rate review docket initiated

by either us or the PUCT.  The present distribution base rates became effective on November 27, 2017 as a result of PUCT Docket No. 46957.  The PUCT allows utilities to file, under certain circumstances, once per year and up to four rate adjustments between comprehensive base rate proceedings to recover distribution investments and certain other related costs on an interim basis.  We have not filed any such distribution-related rate adjustments to date.  The $45 million increase in distribution base rate revenues primarily consisted of an effect of growth in points of delivery of $45 million including $12 million as a result of the Sharyland transaction, and an estimated increase of $26 million due to the rate increase  that resulted from the 2017 rate review proceeding, including approximately $12 million for AMS related expenses and returns that previously would have been collected in AMS surcharge, partially offset by a  $25 million decrease due to lower consumption driven primarily by milder weather.  For more information regarding the 2017 rate review proceeding in PUCT Docket No. 46957, see Note 3 to Financial Statements.



·

An Increase in Transmission Base Revenues — Transmission base revenues (or TCOS revenues) are collected from load serving entities benefitting from our transmission system.  REPs serving customers in our service territory are billed through the TCRF mechanism discussed below while other load serving entities are billed directly.  In order to reflect changes in our invested transmission capital and certain other related costs, PUCT rules allow us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year.  The $31 million increase in transmission base revenues reflects interim rate increases to recover ongoing investment, including a return component, in the transmission system, partially offset by a decrease in rates primarily due to the Sharyland Asset Exchange.  See TCOS Filings Table below for a listing of Transmission Interim Rate Update Applications impacting revenues for the years ended December 31, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2018.  For more information regarding the Sharyland Asset Exchange, see Note 14 to Financial Statements.





TCOS Filings Table



 

 

 

 

 

 

 

 

 

 

 

 

 

Docket No.

 

Filed

 

Effective

 

Annual Revenue Impact

 

Third-Party Wholesale Transmission

 

Included in TCRF

47988*

 

January 2018

 

March 2018

 

$

14 

 

$

 

$

46957

 

March 2017

 

November 2017

 

$

(76)

 

$

(54)

 

$

(22)

46825

 

February 2017

 

March 2017

 

$

 

$

 

$

46210

 

July 2016

 

September 2016

 

$

14 

 

$

 

$

44968

 

July 2015

 

September 2015

 

$

21 

 

$

14 

 

$

44363

 

January 2015

 

March 2015

 

$

35 

 

$

23 

 

$

12 

______________

*  This application is pending and includes a $52 million revenue reduction to reflect the TCJA reduction in the corporate federal income tax rate to 21%. 



·

A  Decrease in Reconcilable Rates — The PUCT has designated certain tariffs (TCRF, EECRF surcharge, AMS surcharge and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs, including a return component where allowed, are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future applicable tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.  While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income, except for the AMS return component.  See Note 1 to Financial Statements for accounting treatment of reconcilable tariffs.



-

An Increase in TCRF — TCRF is a distribution rate charged to REPs to recover fees we pay to other transmission service providers under their TCOS rates and the retail portion of our own TCOS rate.  PUCT

35


 

rules allow us to update the TCRF component of our retail delivery rates on March 1 and September 1 each year.  The $39 million increase in TCRF revenue reflects the pass through of a $35 million increase in third-party wholesale transmission expense described below and a $4 million increase in our own TCOS rate to recover ongoing investment in our transmission system including a return component.  At December 31, 2017, $47 million was deferred as over-recovered wholesale transmission service expense (see Note 5 to Financial Statements).  See TCRF Filings Table below for a listing of TCRF filings impacting cash flows for the years ended December 31, 2017 and 2016, as well as filings that will impact cash flows for the year ended December 31, 2018.



TCRF Filings Table



 

 

 

 

 

 

 

Docket No.

 

Filed

 

Effective

 

Billing Impact for Period Effective Increase (Decrease)

47824

 

December 2017

 

March 2018 - August 2018

 

$

(52)

46957

 

March 2017

 

December 2017 - February 2018

 

$

(28)

47234

 

June 2017

 

September 2017 - November 2017

 

$

39 

46616

 

November 2016

 

March 2017 – August 2017

 

$

(86)

46012

 

May 2016

 

September 2016 – February 2017

 

$

163 

45406

 

December 2015

 

March 2016 – August 2016

 

$

(64)

44771

 

May 2015

 

September 2015 – February 2016

 

$

47 

43858

 

December 2014

 

March 2015 – August 2015

 

$

(27)

42558

 

May 2014

 

September 2014 – February 2015

 

$

71 



-

A Decrease in Transition Charges — Transition charge revenue was dedicated to paying the principal and interest of transition bonds.  We accounted for the difference between transition charge revenue recognized and cost related to the transition bonds as a regulatory asset or liability.  The $22 million decrease in revenues related to transition bonds is due to the maturity of the 2004 Series transition bonds in May 2016.  



-

A Decrease in AMS Surcharges — The PUCT previously authorized monthly per customer advanced meter cost recovery factors designed to recover the cost of our initial AMS deployment over an eleven-year period ending in 2019.  The AMS reconcilable surcharge ceased on November 26, 2017 and AMS related expenses and return became recoverable through distribution base rates.  Through November 26, 2017, we recognized revenues equal to reconcilable expenses incurred including depreciation net of calculated savings plus a return component on our investment.  The $40 million decrease in recognized AMS surcharge revenues reflects $12 million shifted to base revenues due to the 2017 rate review proceeding and $28 million due to lower reconcilable expenses through November 26, 2017 associated with the initial deployment.



-

A Decrease in EECRF and Other Regulatory Surcharges — The EECRF is a reconcilable rate designed to recover current energy efficiency program costs and performance bonuses earned by exceeding PUCT targets in prior years and recover or refund any over/under recovery of our costs in prior years.  We recognize the performance bonuses in other miscellaneous revenues upon approval by the PUCT.  PUCT rules require us to file an annual EECRF tariff update by the first business day in June of each year for implementation on March 1 of the next calendar year.  Other regulatory surcharges include the recovery of municipal franchise fees related to Docket No. 46884 and rate case expensesThe $9 million net decrease consists of an $11 million decrease in the EECRF, which is offset in operation and maintenance expense,  and a $2 million increase in recovery of municipal franchise fees which are offset in taxes other than income taxes.  See EECRF Filings Table below for a listing of EECRF filings impacting revenues for the years ended December 31, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2018.



36


 

EECRF Filings Table



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Docket No.

 

Filed

 

Effective

 

Monthly Charge per Residential Customer (a)

 

Program Costs

 

Performance Bonus

 

Under-/  (Over)- Recovery

47235

 

June 2017

 

March 2018

 

$

0.92 

 

$

50 

 

$

12 

 

$

(6)

46013

 

June 2016

 

March 2017

 

$

0.94 

 

$

49 

 

$

10 

 

$

(4)

44784

 

June 2015

 

March 2016

 

$

1.19 

 

$

61 

 

$

10 

 

$

(4)

42559

 

May 2014

 

March 2015

 

$

1.23 

 

$

50 

 

$

23 

 

$

(5)

41544

 

May 2013

 

March 2014

 

$

1.22 

 

$

62 

 

$

12 

 

$

(1)

__________

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



·

A Decrease  in Other Miscellaneous Revenues — Miscellaneous revenues includes disconnect/reconnect fees and other discretionary revenues for services requested by REPs, services provided on a time and materials basis, rents, energy efficiency performance bonuses approved by the PUCT and other miscellaneous revenues.  The $2 million decrease in other miscellaneous revenues was primarily driven by the effects of a favorable court ruling in the prior period, partially offset by a higher energy efficiency performance bonus in the current period. See Note 3 to Financial Statements for more details.



Wholesale transmission service expense increased $35 million, or 4%, to $929 million in 2017 primarily due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $8 million, or 1%, to $762 million in 2017.  The change included $16 million higher contractor costs and $10 million higher labor related costs, partially offset by $11 million lower energy efficiency costs and $9 million lower advanced meter costs.  The decreases in energy efficiency and advanced meter costs were largely offset by corresponding reconcilable rate revenuesAmortization of regulatory assets reported in operation and maintenance expense totaled $53 million and $49 million for the years ended December 31, 2017 and 2016, respectively. The increase in regulatory asset amortization is the result of the 2017 rate review order approving a higher level of amortization related to employee benefit plans and the self-insurance reserve.



Depreciation and amortization decreased $23 million, or 3%, to $762 million in 2017The decrease reflects $22 million in lower amortization of regulatory assets associated with transition bonds (with an offsetting decrease in revenues),  $29 million lower reconcilable AMS depreciation and $10 million in lower depreciation as a result of the 2017 rate order, partially offset by an estimated $36 million increase attributed to ongoing investments in property, plant and equipment.



Taxes other than income taxes increased $11 million, or 2%, to $462 million in 2017.  The change was primarily due to a $9 million increase in property taxes and a $2 million increase in local franchise taxes.  The increase in local franchise fees is the result of the 2017 rate review order granting recovery of certain municipal franchise fees consistent with the Texas Supreme Court mandate regarding our 2008 rate review and is offset in revenues. See Note 3 to Financial Statements for more details.  Amortization of regulatory assets reported in taxes other than income taxes totaled $2 million and zero for the years ended December 31, 2017 and 2016, respectively.



Other income and (deductions) – net was unchanged in 2017 compared to 2016.  Primary variances included higher earning on employee benefit plan assets, offset by higher non-recoverable pension and OPEB costs. See Note 13 to Financial Statements for more details.



Provision in lieu of income taxes totaled $267 million (including  $12 million expense related to nonoperating income) in 2017 compared to $254 million (including a $5 million benefit related to nonoperating income) in 2016.  The effective income tax rate on pretax income was 38.9% in 2017 and 37.1% in 2016.  The 2017 effective income tax rate on pretax income differs from the U.S. federal statutory rate of 35% primarily due to the effect of a $21 million write-down of deferred tax related assets resulting from the TCJA and the effect of the 2017 Texas margin tax.  See Note 4 to Financial Statements for additional information.  



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Interest expense and related charges increased $6 million, or 2%, to $342 million in 2017.  The change was driven by an  $12 million increase attributable to higher average borrowings reflecting ongoing capital investments, partially offset by a $4 million decrease attributable to higher capitalized interest and a $2 million decrease attributable to lower average interest rates. 



Net income was lower in 2017 compared to 2016.  Revenues reflect increases due to growth in points of delivery,  increases in transmission investment for a significant portion of the year and an increase due to the PUCT rate review order,  partially offset by lower consumption primarily driven by milder weather conditions.   Lower net income reflects the higher base revenues offset by the one-time $21 million in write-down of deferred tax related assets, higher non-reconcilable operation and maintenance expense and higher property taxes. 

38


 

Financial Results ─ Year Ended December 31, 2016 Compared to Year Ended December 31, 2015



Total operating revenues increased $42 million, or 1%, to $3.920 billion in 2016Revenue is billed under tariffs approved by the PUCT.  The change reflected:



·

A  Decrease in Distribution Base Revenues — Base rates are set periodically in a rate review docket initiated by either us or the PUCT.  The present distribution base rates became effective on January 1, 2012.  The $17 million decrease in distribution base rate revenues primarily consisted of an estimated $42 million decrease due to lower consumption driven primarily by milder winter, spring and summer weather, partially offset by an effect of growth in points of delivery of $25 million.



·

An Increase in Transmission Base Revenues — Transmission base revenues (or TCOS revenues) are collected from load serving entities benefitting from our transmission system.  REPs serving customers in our service territory are billed through the TCRF mechanism discussed below while other load serving entities are billed directly.  In order to reflect changes in our invested transmission capital, PUCT rules allow us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year.  The $59 million increase in transmission base revenues reflects interim rate increases to recover ongoing investment, including a return component, in the transmission system.  See TCOS Filings Table above for a listing of Transmission Interim Rate Update Applications impacting revenues for the years ended December 31, 2016 and 2015.



·

An Increase in Reconcilable Rates — The PUCT has designated certain tariffs (TCRF, EECRF surcharge, AMS surcharge and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs, including a return component where allowed, are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future applicable tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.  While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income, except for the AMS return component.  See Note 1 to Financial Statements for accounting treatment of reconcilable tariffs.



-

An Increase in TCRF — TCRF is a distribution rate charged to REPs to recover fees we pay to other transmission service providers under their TCOS rates and the retail portion of our own TCOS rate.  PUCT rules allow us to update the TCRF component of our retail delivery rates on March 1 and September 1 each year.  The $117 million increase in TCRF revenue reflects the pass through of a $92 million increase in third-party wholesale transmission expense described below and a $25 million increase in our own TCOS rate to recover ongoing investment in our transmission system including a return component.  At December 31, 2016, $10 million was deferred as over-recovered wholesale transmission service expense (see Note 5 to Financial Statements).  See TCRF Filings Table above for a listing of TCRF filings impacting cash flows for the years ended December 31, 2016 and 2015.



-

A Decrease in Transition Charges — Transition charge revenue is dedicated to paying the principal and interest of transition bonds.  We account for the difference between transition charge revenue recognized and cost related to the transition bonds as a regulatory asset or liability.  The $98 million decrease in charges related to transition bonds corresponds with an offsetting decrease in amortization and interest expense and primarily reflects the maturity of the 2003 Series transition bonds during 2015 and the 2004 Series transition bonds in May 2016.  As such, our 2016 transition charge revenue declined to a level sufficient to service the remaining 2004 Bonds and ceased upon recovery of the debt service costs in mid-2016.  Final true-up proceedings for the 2004 Bonds were conducted by Oncor and the PUCT during 2016 and had no material net income impact.



-

A Decrease in AMS Surcharges — The PUCT has authorized monthly per customer advanced meter cost recovery factors designed to recover the cost of our initial AMS deployment over an eleven-year period ending in 2019.  We recognize revenues equal to reconcilable expenses incurred including depreciation net of calculated savings plus a return component on our investment.  The $9 million decrease in recognized AMS revenues is primarily due to a $16 million decrease attributable to lower reconcilable depreciation expense, taxes and interest and a lower return due to the declining initial AMS investment balance, partially offset by $6 million in higher reconcilable operation and maintenance expense.  See “Regulation and Rates” below.



39


 

-

An Increase in EECRF and Other Regulatory Surcharges — The EECRF is a reconcilable rate designed to recover current energy efficiency program costs and performance bonuses earned by exceeding PUCT targets in prior years and recover or refund any over/under recovery of our costs in prior years.  We recognize the performance bonuses in other miscellaneous revenues upon approval by the PUCT.  PUCT rules require us to file an annual EECRF tariff update by the first business day in June of each year for implementation on March 1 of the next calendar year.  The $8 million increase in EECRF and other regulatory surcharges is offset in operation and maintenance expense.  See EECRF Filings Table above for a listing of EECRF filings impacting revenues for the years ended December 31, 2016 and 2015.



·

An Increase in Other Miscellaneous Revenues — Miscellaneous revenues includes disconnect/reconnect fees and other discretionary revenues for services requested by REPs, services provided on a time and materials basis, rents, energy efficiency performance bonuses approved by the PUCT and other miscellaneous revenues.  The $7  million increase in other miscellaneous revenues was primarily driven by $4 million higher discretionary services revenues and $3 million from the effects of a favorable court ruling related to Docket 35717 (See Note 3 for details).



Wholesale transmission service expense increased $92 million, or 11%, to $894 million in 2016 primarily due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $30 million, or 4%, to $754 million in 2016.  The change included $12 million higher labor related costs and $4 million higher vegetation management costs.   Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including an  $8 million increase related to the energy efficiency program and a $6 million increase related to advanced meters.  Amortization of regulatory assets reported in operation and maintenance expense totaled $49 million and $51 million for the years ended December 31, 2016 and 2015, respectively.



Depreciation and amortization decreased $78 million, or 9%, to $785 million in 2016The decrease reflects $95 million in lower amortization of regulatory assets primarily associated with transition bonds (with an offsetting decrease in revenues), partially offset by $17 million increase attributed to ongoing investments in property, plant and equipment.



Taxes other than income taxes increased $1 million to $451 million in 2016.  The change was primarily due to an increase in property taxes.



Other income and (deductions) – net improved $7 million in 2016.  The change primarily reflects a reduction in non-recoverable pension and OPEB costs and lower professional fees.  See Note 13 to Financial Statements for more details.



Provision in lieu of income taxes totaled $254 million (including a $5 million benefit related to nonoperating income) in 2016 compared to $252 million (including a $8 million benefit related to nonoperating income) in 2015.  The effective income tax rate on pretax income was 37.1% in 2016 and 36.8% in 2015.  The 2016 effective income tax rate on pretax income differs from the U.S. federal statutory rate of 35% primarily due to the effect of the 2016 Texas margin tax.  See Note 4 to Financial Statements.



Interest expense and related charges increased $3 million, or 1%, to $336 million in 2016.  The change was driven by a $10 million increase attributable to higher average borrowings reflecting ongoing capital investments, partially offset by a $4 million decrease attributable to lower average interest rates and a $3 million decrease attributable to higher capitalized interest.    



Net income declined slightly in 2016 compared to 2015 as increased revenues due to growth in points of delivery and increases in transmission investment were partially offset by lower consumption primarily driven by milder winter, spring and summer weather conditions and increased operation and maintenance expenses.





40


 

FINANCIAL CONDITION



Liquidity and Capital Resources



Cash Flows —  Year Ended December 31, 2017 Compared to Year Ended December 31, 2016



Cash provided by operating activities totaled $1.459 billion and $1.429 billion in 2017 and 2016, respectively.  The $30 million increase is primarily the result of a net tax refund from members under the tax sharing agreement of $114 million and a $113 million increase in transmission and distribution receipts, partially offset by increased employee benefit plan funding of $149 million, a $26 million increase in storm related costs, an $11 million increase in purchases of materials and supplies and a $9 million increase in interest payments.  The tax refund is primarily related to estimated tax payments made in a prior period before the enactment of bonus depreciation on a retroactive basis.



Cash provided by financing activities totaled $190 million in 2017 while cash used in financing activities totaled $137 million in 2016.  The $327 million change includes an increase in issuances of long-term debt of $425 million and an increase in short-term borrowings of $212 million, partially offset by $283 million in higher long-term debt repayments and a $20 million increase in debt issuance costs.  See Notes 6 and 7 to Financial Statements for additional information regarding short-term borrowings and long-term debt activity, respectively.



Cash used in investing activities, which consists primarily of capital expenditures, totaled $1.644 billion and $1.301 billion in 2017 and 2016, respectively.  The 2017 activity primarily reflected increases in capital expenditures for transmission and distribution facilities to serve new customers, infrastructure capital maintenance spending and also includes the Sharyland Asset ExchangeThe Other caption reflects a $38 million release of Bondco restricted cash due to the maturity of the final transition bonds in the prior period. 



Depreciation and amortization expense reported in the statements of consolidated cash flows was $53 million and $48 million more than the amounts reported in the statements of consolidated income for the years ended December 31, 2017 and 2016, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense), the accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).



Cash Flows —  Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 



Cash provided by operating activities totaled $1.429 billion and $1.361 billion in 2016 and 2015, respectively.  The $68 million increase is primarily the result of a $158 million decrease in tax payments, a $44 million decrease in pension funding and a $41 million decrease in storm related repairs, partially offset by a $127 million decrease in transmission and distribution receipts attributable to lower transition bond revenue and mild winter, spring and summer weather, a $25 million increase in prepayments and a $23 million increase in cash purchases of materials and supplies.  The decrease in tax payments results from the recoupment of tax overpayments made in the prior period.



Cash used in financing activities totaled $137 million and $233 million in 2016 and 2015, respectively.  The $96 million change primarily reflects a decrease of $598 million of debt repayments, a decrease in distributions to our members of $206 million and a decrease in debt issuance costs of $22 million, partially offset by $550 million in lower debt issuances and a decrease in short-term borrowings of $180 million.  See Notes 6, 7 and 9 to Financial Statements for additional information regarding short-term borrowings, long-term debt activity and distributions to our members, respectively.



Cash used in investing activities, which consists primarily of capital expenditures increased $194 million, or 18% in 2016 compared to 2015.  The 2016 activity reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending, partially offset by a $38 million release of Bondco restricted cash due to the maturity of the final transition bonds. 



Depreciation and amortization expense reported in the statements of consolidated cash flows was $48 million and $45 million more than the amounts reported in the statements of consolidated income for the years ended December 31, 2016 and 2015, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense), the

41


 

accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).



Long-Term Debt Activity  In September 2017, we issued $325 million aggregate principal amount of 3.80% senior secured notes due September 30, 2047 (2047 Notes) and executed a $275 million term loan credit agreement. The term loan credit agreement has an 18-month term maturing on March 26, 2019, and contains optional prepayment provisions as well as mandatory prepayment provisions that require prepayment in the event of certain specified debt issuances or certain specified asset dispositions.  At December 31, 2017, we had outstanding borrowings of $275 million under the term loan credit agreement bearing interest at a rate per annum of 2.452%.  See Note 7 to Financial Statements for additional information regarding the term loan credit agreement.



We used the net proceeds from the sale of the 2047 Notes and term loan credit agreement for general corporate purposes, including repayment of borrowings under our revolving credit facility and payment of the redemption price of $324 million aggregate principal amount of 5.00% senior secured notes due September 30, 2017 that were redeemed September 29, 2017.   See Note 7 to Financial Statements for additional information regarding repayments, redemptions and issuances of long-term debt.



Available Liquidity/Credit Facility — Our primary source of liquidity, aside from operating cash flows, is our ability to borrow under our revolving credit facility.  At December 31, 2017, we had a $2.0 billion unsecured revolving credit facility that we entered into on November 17, 2017 (2017 Credit Facility) 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.



In connection with our entrance into the 2017 Credit Facility, on November 17, 2017 we terminated our prior secured $2.0 billion secured revolving credit facility.  Borrowings under our previous credit facility were secured with the lien of the Deed of Trust until the facility’s termination.



Subject to the limitations described below, available borrowing capacity under the 2017 Credit Facility totaled $1.041 billion at December 31, 2017 and under our previous secured revolving credit facility totaled $1.204 billion at December 31, 2016. 



The 2017 Credit Facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2017, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.  At both December 31, 2017 and February 22, 2018, the available borrowing capacity of the 2017 Credit Facility could be fully drawn.    



Under the terms of the 2017 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 2017 Credit Facility.



Cash and cash equivalents totaled $21 million and $16 million at December 31, 2017 and 2016, respectively.  Available liquidity (cash and available revolving credit facility capacity) at December 31, 2017 totaled $1.062 billion reflecting a decrease of $158 million from December 31, 2016 primarily due to increased capital spending.     



We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is 57.5% debt to 42.5% equity and 60% debt to 40% equity as of December 31, 2017 and 2016, respectively.  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. The PUCT order requires Oncor to record a regulatory liability until the new authorized regulatory capital structure is met to reflect our actual capitalization prior to achieving the authorized capital structure. Once the authorized capital structure is attained, the regulatory liability will be returned to customers through the capital structure refund mechanism approved in the PUCT docket. Oncor implemented the regulatory liability as of November 27, 2017.  Our regulatory capitalization ratio was 59.4% debt to 40.6% equity at December 31, 2017 and December 31, 2016.   See Note 9 to Financial Statements for discussion of the regulatory capitalization ratio and Note 3 to Financial Statements for a

42


 

discussion of our 2017 rate review (PUCT Docket No. 46957).    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.



Liquidity Needs, Including Capital Expenditures  Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.8 billion in 2018.  Management currently expects to recommend to our board of directors capital expenditures of approximately $1.7 billion in each of the years 2019 through 2022.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure. 



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



Distributions —  On October 25, 2017, our board of directors declared a contingent cash distribution of $32 million to be paid to our members as of October 25, 2017 within one business day after an additional equity contribution is made to Oncor from members totaling approximately $250 million.  In the event the additional equity contribution is not made on or before the date of the closing of the Sempra Merger Agreement, no distribution shall be payable.  As of February 22, 2018, the distribution had not been made.  For more information on the Sempra Merger Agreement, see Note 2 to Financial Statements. 



During 2017, our board of directors declared, and we paid, the following cash distributions to our members:



 

 

 

 

 

Declaration Date

 

Payment Date

 

Amount

July 26, 2017

 

August 1, 2017

 

$

65 

April 26, 2017

 

April 27, 2017

 

$

86 

March 22, 2017

 

March 24, 2017

 

$

86 



Pension and OPEB Plans FundingOur funding for the pension and Oncor OPEB plans for the calendar year 2018 is expected to total $82 million and $35 million, respectively.  Based on the funded status of the pension plans at December 31, 2017, our aggregate pension and Oncor OPEB plans funding is expected to total approximately $734 million in the period 2018 to 2022.  In 2017, we made cash contributions to the pension and OPEB plans of  $149 million and $31 million, respectively.  See Note 10 to Financial Statements for additional information regarding pension and OPEB plans.



Capitalization — Our capitalization ratios were 41.3% and 41.7% long-term debt, less amounts due currently, to 58.7% and 58.3% membership interests at December 31, 2017 and 2016, respectively.    See Note 9 to Financial Statements for discussion of the regulatory capitalization ratio.



Financial Covenants, Credit Rating Provisions and Cross Default Provisions  Our revolving credit facility and term loan credit agreement each contain a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility and term loan agreement (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 December 31, 2017, we were in compliance with this covenant and all other covenants under the 2017 Credit Facility and the term loan credit agreement. 



Impact on Liquidity of Credit Ratings  The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In particular, a decline in credit ratings would increase the cost of our revolving credit facility

43


 

(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 22, 2018.  On December 20, 2017, Moody’s changed our outlook to “positive” from stable as a settlement agreement related to the Sempra Merger Agreement was reached with the staff of the PUCT and three key intervenors.  In July 2017, S&P affirmed our rating and changed our outlook to “positive” from “developing” and Fitch changed our outlook to “rating watch positive” from “stable” and both again affirmed these ratings and outlooks in August 2017 following the entrance by EFH Corp. and EFIH into the Sempra Merger Agreement.   See Note 2 to Financial Statements for information regarding the Sempra Merger Agreement.



 

 



 

Senior Secured



 

 

S&P

 

A

Moody’s

 

A3

Fitch

 

BBB+



As described in Note 7 to Financial Statements, our long-term debt (other than the $275 million unsecured term loan credit agreement we entered into in September 2017) 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 CovenantsThe 2017 Credit Facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the 2017 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.  Based on the ratings assigned to our senior secured debt securities at February 22, 2018, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.125%.  A decline in credit ratings would increase the cost of the 2017 Credit Facility and likely increase the cost of any debt issuances and additional credit facilities.



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



Under the 2017 Credit Facility, 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 ($950 million in short-term borrowings and $9 million in letters of credit at December 31, 2017) under that facility to be accelerated.  Under our term loan agreement, 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 $50 million for the term loan credit agreement that are not discharged within 60 days may cause the maturity of outstanding balances ($275 million at December 31, 2017) under that agreement to be accelerated. 



Under the Deed of Trust, an event of default under either of our indentures would permit the holders of our senior secured notes to exercise their remedies under the Deed of Trust.



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Long-Term Contractual Obligations and Commitments  The following table summarizes our contractual cash obligations at December 31, 2017.  See Notes 7 and 8 to Financial Statements for additional disclosures regarding these long-term debt and non-cancelable purchase obligations. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Cash Obligations

 

Less Than One Year

 

One to Three Years

 

Three to Five Years

 

More than Five Years

 

Total

Long-term debt (a) – principal

 

$

550 

 

$

651 

 

$

1,200 

 

$

3,750 

 

$

6,151 

Long-term debt (a) – interest

 

 

313 

 

 

553 

 

 

508 

 

 

3,023 

 

 

4,397 

Operating leases (b)

 

 

32 

 

 

46 

 

 

11 

 

 

 -

 

 

89 

Obligations under outsourcing agreements

 

 

55 

 

 

53 

 

 

24 

 

 

11 

 

 

143 

Total contractual cash obligations

 

$

950 

 

$

1,303 

 

$

1,743 

 

$

6,784 

 

$

10,780 

____________

(a)

Includes senior secured notes/debentures and the term loan credit agreement we entered into in September 2017. See Note 7 to Financial Statements for more information regarding our long-term debt.

(b)

Includes short-term noncancelable leases. 



The following are not included in the table above:

·

individual contracts that have an annual cash requirement of less than $1 million (however, multiple contracts with one counterparty that are more than $1 million on an aggregated basis have been included);

·

employment contracts with management, and

·

estimated funding of the pension and OPEB plans totaling $117 million in 2018 and $734 million in the 2018 to 2022 period as discussed above under “Pension and OPEB Plans Funding.”



Guarantees — At December 31, 2017, we did not have any material guarantees.



OFF-BALANCE SHEET ARRANGEMENTS



At December 31, 2017, we did not have any material off-balance sheet arrangements with special purpose entities or VIEs.



COMMITMENTS AND CONTINGENCIES



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



CHANGES IN ACCOUNTING STANDARDS



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



REGULATION AND RATES



State Legislation



The Texas Legislature meets every two years. During the 2017 regular and special legislative sessions, 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



PUCT Matters Related to EFH Bankruptcy Proceedings – For more information regarding the EFH Bankruptcy Proceedings and the matters discussed below, see Note 2 to Financial Statements.



Hunt Investor Group PUCT Proceedings



In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by a plan of reorganization in the

45


 

EFH Bankruptcy Proceedings. In March 2016, the PUCT issued an order conditionally approving the joint application. In April 2016, the Hunt Investor Group and certain intervenors in PUCT Docket No. 45188 filed motions for rehearing and in May 2016, the PUCT denied such motions and the order became final. In May 2016, the plan of reorganization and the Hunt Merger Agreement that contemplated the transactions in PUCT Docket No. 45188 were terminated. The Hunt Investor Group filed a petition with the Travis County District Court in June 2016 seeking review of the order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the Hunt Merger Agreement.



In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings.  Oncor made a rate filing with the PUCT and original jurisdiction cities to comply with their resolutions on March 17, 2017 in PUCT Docket No. 46957.  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 that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement agreement, and on November 26, 2017, the new rates took effect.  For more information, see Note 3 to Financial Statements.



NEE PUCT Proceedings



The NEE Merger Agreement contemplated that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the NEE Merger Agreement. Oncor and NEE filed that joint application in PUCT Docket No. 46238 in October 2016. The PUCT denied the application on April 13, 2017.  The PUCT issued an order on rehearing on June 7, 2017 and denied NEE’s second motion for rehearing on June 29, 2017. On July 13, 2017, NEE filed a petition with the Travis County District Court seeking review of the PUCT order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 46238, particularly in light of the termination of the NEE Merger Agreement.



On July 28, 2017, TTHC and NEE filed in PUCT Docket No. 47453 a joint application with the PUCT seeking certain regulatory approvals with respect to NEE’s proposed acquisition of the 19.75% minority interest in Oncor that is indirectly held by TTHC.  The application requested that the PUCT issue an order disclaiming jurisdiction over the transaction or finding that the transaction is in the public interest and approved.  On September 14, 2017, Oncor filed a motion to intervene as a party, but not as an applicant, in PUCT Docket No. 47453.  On October 26, 2017, the PUCT voted to dismiss the application without prejudice on jurisdictional grounds and ordered that any future filing of the application must include the affected utility (in this case Oncor) as an applicant.  The PUCT further ordered that in any such filing Oncor is not required to seek approval of the application or any other specific relief.  On October 31, 2017, TTHC notified the PUCT that it had terminated the TTI Merger Agreement with NEE. NEE filed a motion for rehearing on November 20, 2017,which was not granted. On January 9, 2018, NEE filed a petition with the Travis County District Court seeking review of the PUCT order of dismissal. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 47453, particularly in light of TTHC’s termination of the TTI Merger Agreement.



Sempra PUCT Proceedings



Oncor and Sempra filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan on October 5, 2017 in PUCT Docket No. 47675. On December 14, 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. We cannot predict what the form of any final order will be or the ultimate disposition in the PUCT docket.  



The parties to the Sempra Settlement Stipulation have agreed that Sempra’s acquisition of EFH Corp. is in the public interest and will bring substantial benefits.  The Sempra Settlement Stipulation requests that the PUCT approve the Sempra Acquisition. Previously, EFH Corp. and Oncor implemented various ring-fencing measures to enhance Oncor’s

46


 

separateness from its owners and to mitigate the risk that Oncor would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting EFH Corp. or EFH Corp.’s subsidiaries or owners.  The existing ring-fencing measures are designed to create both legal and financial separation between the Oncor Ring-Fenced Entities, on the one hand, and EFH Corp. and its other affiliates and subsidiaries, on the other hand.  The joint application filed with the PUCT and the Sempra Settlement Stipulation outline certain ring-fencing measures, governance mechanisms and restrictions that will 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.



If the PUCT does not accept the Sempra Settlement Stipulation as presented, or issues an order inconsistent with the terms of the stipulation, the parties have agreed that any party adversely affected by the alteration has the right to withdraw from the stipulation and to exercise all rights available to such party under the law.



We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 47675.



2017 Rate Review (PUCT Docket No. 46957) – In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, 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. The Sharyland Asset Exchange closed on November 9, 2017 satisfying the contingency in the PUCT order in Docket No. 46957 and our new rates as set forth in that order took effect on November 27, 2017.  As a result of the PUCT order, our annual distribution and transmission base rate revenues, net of eliminations, are expected to increase approximately $65 million excluding the impacts of the Sharyland Asset Exchange and the TCJA.  The order also requires us to record as a regulatory liability instead of revenue the amount that we collect through our approved tariffs for federal income taxes that is above the new corporate federal income rate.  We estimate that incorporating the new corporate federal income tax rate in our approved rate settlement agreement would have 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 9.80%, 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 requires us to record a regulatory liability until the new authorized regulatory capital structure is met to reflect our actual capitalization prior to achieving the authorized capital structure. Once the authorized capital structure is attained, the regulatory liability will be returned to customers through the capital structure refund mechanism approved in the PUCT docket. We implemented the regulatory liability as of November 27, 2017.



Sharyland Asset Exchange (PUCT Docket No. 47469) – On July 21, 2017, we entered into the Sharyland Agreement with the Sharyland Entities.  The Sharyland Agreement provided that we would 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.   The transaction for assets between Oncor and SDTS 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).



On August 4, 2017, we, SDTS and SU filed a joint application for sale, transfer, or merger in PUCT Docket No. 47469 requesting PUCT approvals of the Sharyland Asset Exchange, and on October 13, 2017, the PUCT issued an order approving the transactions. On November 9, 2017, the parties consummated the transactions.  We exchanged approximately $383 million of our transmission assets, consisting of 517 circuit miles of 345 kV 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. We do not expect the Sharyland transaction will have a material effect on our results of operations, financial position or cash flows.  For more information on the Sharyland Agreement and the Sharyland Asset Exchange, see Note 14 to Financial Statements.  



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Wholesale Transmission Service Rule (PUCT Project No. 46393) - In 2016, the PUCT staff initiated a rulemaking proceeding to repeal and replace the existing wholesale transmission service rule. The current PUCT rule allows us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year.  In March 2017, PUCT staff filed a proposal for publication to repeal the current substantive rule and replace it with a proposed new rule. In February 2018, PUCT staff filed an updated proposal for publication that is substantially similar to the March 2017 version.  The proposed new rule changes the frequency of TCOS rate adjustments to once per calendar year. The proposed new rule would also include new limitations on the filing of TCOS rate adjustment applications and require new information in applications. The PUCT considered the proposal for publication at its February 15, 2018 open meeting and decided not to publish the proposal.     



2008 Rate Review (PUCT Docket No. 35717) - In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (PUCT Docket No. 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011 with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015.  The Texas Supreme Court granted the petition for review and heard oral arguments in September 2016.  On January 6, 2017, the Texas Supreme Court issued its opinion, unanimously ruling as follows on the three issues before it: 



·

Consolidated tax savings adjustment - The Supreme Court reversed the Court of Appeals and upheld the PUCT’s decision not to make a consolidated tax savings adjustment, concluding that the PUCT had properly applied PURA Section 36.060 and that we no longer met the statutory criteria for imposition of such an adjustment. 



·

State colleges and universities rate discount - The Supreme Court upheld the Court of Appeals’ and the PUCT’s decisions that no such discount was proper, concluding that PURA Section 36.351 requires a discount only for the provision of electric service and that, upon the start of retail competition, electric service is provided to end-use customers by REPs and not TDUs.



·

Municipal franchise fees - The Supreme Court reversed the Court of Appeals’ and the PUCT’s disallowance of certain franchise fees, ruling that the relevant PURA provision did not limit negotiated franchise fees to a one-time opportunity upon the expiration of a franchise that was in effect on September 1, 1999, but that such renegotiations may take place at any time.



The Texas Supreme Court issued its mandate on February 16, 2017.  On February 17, 2017, we filed a tariff modification with the PUCT to immediately remove the state colleges and universities discount rider, and on February 23, 2017, the PUCT opened Docket No. 46884 to consider the remand from the Texas Supreme Court.  The order in our 2017 rate review (PUCT Docket No. 46957)  granted the recovery of the municipal franchise fees through a surcharge over approximately nine months beginning November 27, 2017.



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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



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, but there are currently no such hedges in place.  All of our long-term debt at December 31, 2016 carried fixed interest rates and at December 31, 2017 all of our long-term debt except for the $275 million term loan credit agreement carried fixed interest rates.    The following table summarizes our long-term debt maturities at December 31, 2017.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Expected Maturity Date

 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2019

 

2020

 

2021

 

2022

 

There-after

 

2017 Total Carrying Amount

 

2017 Total Fair Value

 

2016 Total Carrying Amount

 

2016 Total Fair Value



 

(millions of dollars and percent)

Long-term debt (including current maturities):