UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020



― OR ―



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

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Commission File Number 333-100240



Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)



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



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



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



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

Large accelerated filer ____    Accelerated filer ____    Non-Accelerated filer  √         

Smaller reporting company___ Emerging growth company ___



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



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



As of November 5, 2020,  635,000,000 limited liability company membership interests of Oncor Electric Delivery Company LLC were outstanding, 80.25% of which were directly held by Oncor Electric Delivery Holdings Company LLC and 19.75% of which were held by Texas Transmission Investment LLC.  None of the membership interests are publicly traded.







 

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TABLE OF CONTENTS





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



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





 

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GLOSSARY



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PART I.  FINANCIAL INFORMATION



ITEM 1.FINANCIAL STATEMENTS



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)





See Notes to Financial Statements.





CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)





See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)











See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)





See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES



Description of Business



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



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



Our condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 include the results of our wholly owned indirect subsidiary, NTU, which is a regulated utility that provides electricity transmission delivery service in the north-central, western and panhandle regions of Texas. We acquired NTU as part of the InfraREIT Acquisition that closed on May 16, 2019.



Ring-Fencing Measures



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



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



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



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



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



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



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











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Basis of Presentation



These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in our 2019 Form 10-K.  In the opinion of Oncor management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been made.  We have evaluated all subsequent events through the date the financial statements were issued.  All appropriate intercompany items and transactions have been eliminated in consolidation.  The results of operations for an interim period may not give a true indication of results for a full year due to seasonality (see Note 13 to Financial Statements in our 2019 Form 10-K for additional information regarding quarterly results of operations). 



Our consolidated financial statements have been prepared in accordance with GAAP governing rate-regulated operations.  All dollar amounts in the financial statements and tables in the notes are stated in millions of U.S. dollars unless otherwise indicated.



Use of Estimates



Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements.  In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.  No material adjustments were made to previous estimates or assumptions during the current period.



Interest Rate Derivatives and Hedge Accounting



We are exposed to interest rates primarily as a result of our current and expected use of financing. We may, from time to time, utilize interest rate derivative instruments typically designated as cash flow hedges, to lock in interest rates in anticipation of future financings.  We may designate an interest rate derivative instrument as a cash flow hedge if it effectively converts anticipated cash flows associated with interest payments to a fixed dollar amount.  In accounting for cash flow hedges, derivative assets and liabilities are recorded on the balance sheet at fair value with an offset to other comprehensive income.  Amounts remain in accumulated other comprehensive income and are reclassified into net income as the interest expense on the related debt affects net income.  See Note 5 for information on our interest rate hedging activity.



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. 

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



Changes in Accounting Standards  



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



Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” – In March 2020, the FASB issued ASU No. 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The standard allows entities to account for contract modifications as an event that does not require reassessment or remeasurement (i.e., as a continuation of the existing contract).  Our Credit Facility and term loan agreement use LIBOR as a benchmark for establishing interest rates.  Our term loan agreement currently contains a  maturity date that is prior to the anticipated date that any LIBOR phase out will occur.  Implementation has not had an impact on our consolidated financial statements. In the event we modify our Credit Facility or term loan agreement related to the phase-out of LIBOR, we will evaluate the optional expedients and exceptions under the standard.





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2.    REGULATORY MATTERS



Regulatory Assets and Liabilities  



Recognition of regulatory assets and liabilities and the periods over which they are to be recovered or refunded through rate regulation reflect the decisions of the PUCT.  Components of our regulatory assets and liabilities and their remaining recovery periods as of September 30, 2020 are provided in the table below.  Amounts not currently earning a return through rate regulation are noted.



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PUCT Project No. 50664 Issues Related to the State of Disaster for the Coronavirus Disease 2019  



In March 2020, the PUCT issued an order in PUCT Project No. 50664, Issues Related to the State of Disaster for the Coronavirus Disease 2019, creating the COVID-19 Electricity Relief Program (COVID-19 ERP) to aid certain eligible residential customers unable to pay their electricity bills as a result of the COVID-19 pandemic impacts. Customer enrollment in the COVID-19 ERP closed on August 31, 2020, and financial assistance under the program was available to enrolled residential customers for electricity bills issued on or after March 26, 2020 through September 30, 2020. In connection with the COVID-19 ERP, the PUCT suspended service disconnections

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due to nonpayment for customers enrolled in the program through September 30, 2020.



To fund the COVID-19 ERP, the PUCT authorized a $0.33 per MWh surcharge to be collected by transmission and distribution utilities through rates and directed ERCOT to provide loans to those transmission and distribution utilities for the initial funding of the COVID-19 ERP. As a result, in April 2020 we filed a tariff rider implementing the surcharge and received an unsecured loan from ERCOT in the principal amount of $7 million. Surcharge collections are recorded as a regulatory liability until the funds are used. Surcharge collections may only be used to reimburse transmission and distribution utilities and REPs for eligible unpaid bills from residential customers enrolled in the COVID-19 ERP and to cover costs of a third-party administrator to administer the eligibility process. At September 30, 2020, we had billed $22 million under the rider surcharge. Reimbursements paid by us pursuant to the COVID-19 ERP totaled $32 million through September 30, 2020 (including $17 million of reimbursements to Oncor for electricity delivery charges). We expect to continue to collect amounts under the tariff rider surcharge until we either collect amounts equal to the reimbursements paid by us pursuant to the COVID-19 ERP or are otherwise ordered to stop by the PUCT.  In the event there are reimbursements paid by us pursuant to the COVID-19 ERP in excess of the amounts collected through the tariff rider surcharge, we expect to recover such costs as the PUCT issued an order that authorizes recording a regulatory asset or liability for any under or over recovery in connection with the COVID-19 ERP, and requires that the transmission and distribution utilities include in their next rate proceeding (whether a TCRF proceeding, DCRF proceeding, or base rate review) a tariff rider to extinguish any such regulatory asset/liability.    

   

The PUCT also authorized the transmission and distribution utilities to use a regulatory asset accounting mechanism and a subsequent process to seek future recovery of expenses resulting from the effects of the COVID-19 pandemic. Therefore, we are recording incremental costs incurred by Oncor resulting from the effects of the COVID-19 pandemic, including costs relating to the implementation of our pandemic response plan, as a regulatory asset. At September 30, 2020, we recorded $14 million with respect to this regulatory asset. 



3.   REVENUES



General



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



Reconcilable Tariffs



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



Alternative Revenue Program 



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



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Disaggregation of Revenues 



The following table reflects electric delivery revenues disaggregated by tariff for the three and nine months ended September 30, 2020 and 2019:



Customers



Our distribution customers consist of approximately 90 REPs and certain electric cooperatives in our certificated service area.  The consumers of the electricity we deliver are free to choose their electricity supplier from REPs who compete for their business.  Our transmission base revenues are collected from load serving entities benefiting from our transmission system.  Our transmission customers consist of other distribution companies, municipalities and electric cooperatives.  REP subsidiaries of our two largest counterparties represented 29% and 21% of our total operating revenues for the three months ended September 30, 2020 and 26% and 19% of our total operating revenues for the nine months ended September 30, 2020.  No other customer represented more than 10% of our total operating revenues.



Variability



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



Pass-through Expenses



Revenue equal to expenses that are allowed to be passed-through to customers (primarily third-party wholesale transmission service and energy efficiency program costs) are recognized at the time the expense is recognized. Franchise taxes are assessed by local governmental bodies, based on kWh delivered and are not a “pass-through” item.  The rates we charge customers are intended to recover the franchise taxes, but we are not acting as an agent to collect the taxes from customers; therefore, franchise taxes are reported as a principal component of “taxes other than amounts related to income taxes” instead of a reduction to “revenues” in the income statement.



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 Joint Project with Lubbock Power & Light (LP&L)



Oncor is currently involved in an estimated $400 million joint project with LP&L, with costs and resulting assets to ultimately be split by Oncor and LP&L, that involves the build out of transmission lines to join the City of Lubbock to the ERCOT market. Oncor is completing the construction, with LP&L reimbursing Oncor during the project for its portion of the construction costs.  The LP&L related assets and a corresponding liability will remain on Oncor’s balance sheet until the end of the project when title to the LP&L portion of the assets transfers to LP&L.  As a unique and nonrecurring construction project, the transfer of title will be accounted for as a sale of nonfinancial assets.



4.    SHORT-TERM BORROWINGS



At September 30, 2020 and December 31, 2019, outstanding short-term borrowings under our CP Program and Credit Facility consisted of the following:

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CP Program



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



Credit Facility     



In November 2017, we entered into a $2.0 billion unsecured Credit Facility to be used for working capital and general corporate purposes, issuances of letters of credit and to support our CP Program.  We may request increases in our borrowing capacity in increments of not less than $100 million, not to exceed $400 million in the aggregate provided certain conditions are met, including lender approvals. In November 2020, we entered into an amendment to the Credit Facility that extends its maturity date to November 2023. The Credit Facility also gives us the option of requesting up to two one-year extensions, with such extensions subject to certain conditions and lender approvals.   

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5.    LONG-TERM DEBT



Our senior notes are secured by a first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness.  See “Deed of Trust” below for additional information.  At September 30, 2020 and December 31, 2019, our long-term debt consisted of the following:

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Long-Term Debt-Related Activity in 2020



2025 Notes Issuance



On September 28, 2020, we issued $450 million aggregate principal amount of 0.55% Senior Secured Notes due 2025 (the 2025 Notes). We intend to use the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $443 million from the sale of the 2025 Notes to finance or refinance, in whole or in part, eligible projects consisting of investments in or expenditures with minority- and women-owned business suppliers pursuant to our sustainable bond framework. The net proceeds may be temporarily invested in cash, cash equivalents and/or U.S. government securities in accordance with our cash management policies or used to repay certain other indebtedness, or both. As of September 30, 2020, we had temporarily applied all net proceeds to repay outstanding CP Notes under the CP Program. 



The 2025 Notes were issued pursuant to the provisions of an Indenture, dated as of August 1, 2002, between Oncor and 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 trustee (the Trustee) (as amended and supplemented, the Indenture). The 2025 Notes constitute a separate series of notes under the Indenture, but will be treated together with our other outstanding debt securities issued under the Indenture for amendments and waivers and for taking certain other actions.

 

The 2025 Notes bear interest at a rate of 0.55% per annum and mature on October 1, 2025. Interest on the 2025 Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and the first interest payment is due on April 1, 2021. Prior to September 1, 2025, we may redeem the 2025 Notes at any time, in whole or in part, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. On and after September 1, 2025, we may redeem the 2025 Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2025 Notes, plus accrued and unpaid interest.



The 2025 Notes were issued in a private placement and were not registered under the Securities Act.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the 2025 Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of our offers to exchange freely tradable exchange notes for the 2025 Notes.  We have agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the 2025 Notes.  If a registration statement for the exchange offer is not declared effective by the SEC within 270 days after the issue date of the 2025 Notes or the exchange offer is not completed within 315 days after the issue date of the 2025 Notes (an exchange default), then the annual interest rate of the 2025 Notes will increase 50 basis points per annum until the earlier of the expiration of the exchange default or the second anniversary of the issue date of the 2025 Notes.



Debt Exchange and 2052 Notes Issuance



On September 23, 2020, we issued $300 million aggregate principal amount of 5.35% Senior Secured Notes due 2052 (the 2052 Notes) in exchange for a like aggregate principal amount of certain of our existing senior secured debt, consisting of (i) $35 million aggregate principal amount of our 7.25% Senior Notes, Series B, due December 30, 2029, (ii) $80 million aggregate principal amount of our 6.47% Senior Notes, Series A, due September 30, 2030, (iii) $6 million aggregate principal amount of our 7.00% Senior Secured Notes due May 1, 2032, (iv) $27 million aggregate principal amount of our 7.25% Senior Secured Notes due January 15, 2033, and (v) $152 million aggregate principal amount of our 5.30% Senior Secured Notes due June 1, 2042. We received no proceeds from the exchange.

 

The 2052 Notes were issued pursuant to the provisions of the Indenture. The 2052 Notes constitute a separate series of notes under the Indenture, but will be treated together with our other outstanding debt securities issued under the Indenture for amendments and waivers and for taking certain other actions.



The 2052 Notes bear interest at a rate of 5.35% per annum and mature on October 1, 2052. Interest on the 2052 Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and the first interest payment is due on April 1, 2021. Prior to April 1, 2052, we may redeem the 2052 Notes at any time, in whole or in

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part, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium. On and after April 1, 2052, we may redeem the 2052 Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of such 2052 Notes, plus accrued and unpaid interest.



The 2052 Notes were issued in a private placement and were not registered under the Securities Act.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the 2052 Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of our offers to exchange freely tradable exchange notes for the 2052 Notes.  We have agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the 2052 Notes.  If a registration statement for the exchange offer is not declared effective by the SEC within 270 days after the issue date of the 2052 Notes or the exchange offer is not completed within 315 days after the issue date of the 2052 Notes (an exchange default), then the annual interest rate of the 2052 Notes will increase 50 basis points per annum until the earlier of the expiration of the exchange default or the second anniversary of the issue date of the 2052 Notes.



2030 Notes and 2050 Notes Issuances



On March 20, 2020, we completed a sale of $400 million aggregate principal amount of 2.75% Senior Secured Notes due May 15, 2030 (2030 Notes) and $400 million aggregate principal amount of 3.70% Senior Secured Notes due May 15, 2050 (2050 Notes). We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $790 million from the sale of the 2030 Notes and 2050 Notes for general corporate purposes, including the repayment of short-term and long-term debt.



In August 2020, we completed an offering with the holders of the 2030 Notes and 2050 Notes to exchange their respective notes for notes that have terms identical in all material respects to the 2030 Notes and 2050 Notes (Exchange Notes), except that the Exchange Notes do not contain terms with respect to transfer restrictions, registration rights and payment of additional interest for failure to observe certain obligations in a certain registration rights agreement. The Exchange Notes were registered on a Form S-4, which was declared effective in July 2020.



March 2020 Term Loan Agreement



On March 23, 2020, we entered into an unsecured term loan agreement (March 2020 Term Loan Agreement) with Wells Fargo Bank, National Association (Wells Fargo), the administrative agent and a lender under the agreement with a commitment equal to an aggregate principal amount of $350 million. We entered into an amendment to the agreement in June 2020. As amended, the March 2020 Term Loan Agreement had a maturity date of June 30, 2021 and provided for loans to bear interest at per annum rates equal to, at our option, (i) LIBOR plus 0.95%, or (ii) an alternate base rate (the highest of (1) the prime rate of Wells Fargo, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%). We borrowed $15 million and $95 million under the agreement on June 30, 2020 and July 31, 2020, respectively. The proceeds from each borrowing were used for general corporate purposes, including the repayment of notes outstanding under our CP Program. On September 28, 2020, we repaid all outstanding borrowings under the March 2020 Term Loan Agreement, and as a result the March 2020 Term Loan Agreement is no longer in effect.



January 2020 Term Loan Agreement



On January 28, 2020, we executed a $450 million term loan agreement that matures on June 1, 2021 (January 2020 Term Loan Agreement).  The January 2020 Term Loan Agreement provides for borrowing the full amount in up to four borrowings by April 27, 2020.  We borrowed $163 million on January 29, 2020, $55 million on February 28, 2020 and $232 million on March 17, 2020 under the January 2020 Term Loan Agreement. At September 30, 2020, borrowings under the January 2020 Term Loan Agreement totaled $450 million, the full amount available under the agreement.



The proceeds from each borrowing were used for general corporate purposes, including the repayment of notes outstanding under our CP Program. Loans under the January 2020 Term Loan Agreement bear interest at per annum rates equal to, at our option, (i) LIBOR plus 0.50%, or (ii) an alternate base rate (the highest of (1) the prime rate of

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Sumitomo Mitsui Banking Corporation, the administrative agent and a lender under the agreement, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%).



Interest Rate Hedge Transactions



In February and March of 2020, we entered into interest rate hedge transactions hedging the variability of benchmark bond rates used to determine interest rates on anticipated issuances of ten-year and thirty-year senior secured notes.  The hedges were terminated in March 2020 upon our issuance of the 2030 Notes and 2050 Notes.  We recognized a $29 million ($23 million after-tax) loss related to the fair value of the hedge transactions in accumulated other comprehensive loss.  We expect approximately $4 million of the amount reported in accumulated other comprehensive loss at September 30, 2020 related to interest rate hedges to be reclassified into net income as an increase to interest expense within the next 12 months, including $2 million from the current year transactions.



Debt Repayments



Repayments of long-term debt during the nine months ended September 30, 2020 included $126 million aggregate principal amount of our 5.75% Senior Secured Notes due September 30, 2020, $110 million principal amount borrowed under the March 2020 Term Loan Agreement, $460 million principal amount borrowed under a term loan agreement entered into in 2019 that was to mature in October 2020 (2019 Term Loan Agreement) and $5 million principal amount of the quarterly amortizing debt for senior secured notes issued under one of our Note Purchase Agreements. The $460 million principal amount repaid under the 2019 Term Loan Agreement and the $110 million principal amount repaid under the March 2020 Term Loan Agreement constituted all amounts outstanding under those respective agreements, and as a result of those repayments, the 2019 Term Loan Agreement and March 2020 Term Loan Agreement are no longer in effect.



Deed of Trust



Our secured indebtedness is secured equally and ratably by a first priority lien on property Oncor acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.  The Deed of Trust permits us to secure indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At September 30, 2020, the amount of available bond credits was $2.102 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $2.821 billion.

 

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



Maturities



Long-term maturities (including current maturities) at September 30, 2020, are as follows:





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Fair Value of Long-Term Debt



At September 30, 2020 and December 31, 2019, the estimated fair value of our long-term debt (including current maturities) totaled $11.962 billion and $10.003 billion, respectively, and the carrying amount totaled $9.691 billion and $8.625 billion, respectively.  The fair value is estimated using observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.



6.    COMMITMENTS AND CONTINGENCIES



Legal/Regulatory Proceedings



We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 2 above and Note 8 to Financial Statements in our 2019 Form 10-K for additional information regarding our regulatory and legal proceedings, respectively. 



Leases



As lessee, our leased assets primarily consist of our vehicle fleet and real estate leased for company offices and service centers.  Our leases are accounted for as operating leases for both GAAP and rate-making purposes. We generally recognize operating lease costs on a straight-line basis over the lease term in operating expenses.  We are not a lessor to any material lease contracts.



In December 2019, we entered into a 15 year lease agreement for replacement office space. The operating lease was fully commenced as of September 30, 2020 and has increased our lease obligation by $36 million.



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







See Note 8 to Financial Statements in our 2019 Form 10-K for additional information on leases.



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7.    MEMBERSHIP INTERESTS



Cash Contributions





On October 27, 2020, we received cash capital contributions from our members in the amount of $77 million. In the nine months ended September 30, 2020, we received the following capital cash contributions from our members.





Cash Distributions





The PUCT order issued in the Sempra Acquisition and our Limited Liability Company Agreement set forth various restrictions on distributions to our members. Among those restrictions is the commitment that we will make no distributions that would cause us to be out of compliance with the PUCT’s approved debt-to-equity ratio, which is currently 57.5% debt to 42.5% equity. The distribution restrictions also include the ability of our board, a majority of the Disinterested Directors, or either of the two member directors designated by Texas Transmission to limit distributions to the extent each determines it is necessary to meet expected future requirements of Oncor (including continuing compliance with the PUCT debt-to-equity ratio commitment).  At September 30, 2020, we had $492 million available to distribute to our members as our regulatory capitalization ratio was 55.9% debt to 44.1% equity.



The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt including any finance leases plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding accumulated other comprehensive loss and the effects of acquisition accounting from a 2007 transaction.



On October 28, 2020, our board of directors declared a cash distribution of $82 million, which was paid to our members on October 29, 2020. In the nine months ended September 30, 2020, our board of directors declared, and we paid, the following cash distributions to our members:







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Membership Interests



The following tables present the changes to membership interests during the three and nine months ended September 30, 2020 and 2019, net of tax: 













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Accumulated Other Comprehensive Income (Loss) (AOCI)



The following table presents the changes to AOCI for the nine months ended September 30, 2020 and 2019, net of tax:









8.    PENSION AND OPEB PLANS



Pension Plans



We sponsor the Oncor Retirement Plan and also have liabilities under the Vistra Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended, and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  We also have a supplemental retirement plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plans.  See Note 10 to Financial Statements in our 2019 Form 10-K for additional information regarding pension plans.



OPEB Plans



We currently sponsor two OPEB plans. One plan covers our eligible current and future retirees whose services are 100% attributed to the regulated business.  Effective January 1, 2018, we established a second plan to cover EFH Corp./Vistra retirees and eligible current and future retirees whose employment services were assigned to both Oncor (or a predecessor regulated utility business) and the non-regulated business of EFH Corp./Vistra.  Vistra is solely responsible for its portion of the liability for retiree benefits related to those retirees.  See Note 10 to Financial Statements in our 2019 Form 10-K for additional information.



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Pension and OPEB Costs



Our net costs related to pension plans and the Oncor OPEB Plans for the three and nine months ended September 30, 2020 and 2019 were comprised of the following:



The discount rates reflected in net pension and OPEB costs in 2020 are 3.12%, 3.26% and 3.29% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plans, respectively.  The expected return on pension and OPEB plan assets reflected in the 2020 cost amounts are 4.94%, 4.89% and 5.90% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plans, respectively.



Pension and OPEB Plans Cash Contributions



We made cash contributions to the pension plans and Oncor OPEB Plans of $115 million and $26 million, respectively, during the nine months ended September 30, 2020.  We expect to make additional cash contributions to the pension plans and Oncor OPEB Plans of $26 million and $9 million, respectively, during the remainder of 2020.  Our pension plans and Oncor OPEB Plans funding is expected to total approximately $560 million and $176 million, respectively, in the five-year period from 2020 to 2024 based on the latest actuarial projections. 



9.   RELATED-PARTY TRANSACTIONS



The following represent our significant related-party transactions.





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



Cash payments made to (received from) members related to income taxes for the nine months ended September 30, 2020 and 2019 consisted of the following:



See Note 7 for information regarding distributions to and capital contributions from members.





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10.   SUPPLEMENTARY FINANCIAL INFORMATION



Other Deductions and (Income)



Interest Expense and Related Charges



Trade Accounts and Other Receivables



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



At September 30, 2020, REP subsidiaries of our two largest customers represented 17% and 13% of the trade accounts receivable balance. At December 31, 2019, REP subsidiaries of our two largest customers represented 15% and 11% of the trade accounts receivable balance.



Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by REPs are deferred as a regulatory asset. 



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Investments and Other Property



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



Property, Plant and Equipment



Property, plant and equipment - net reported on our balance sheets consisted of the following.



Intangible Assets



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



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Aggregate amortization expenses for intangible assets totaled $15 million and $13 million for the three months ended September 30, 2020 and 2019, respectively and $46 million and $39 million for the nine months ended September 30, 2020 and 2019, respectively.  The estimated annual amortization expense for the five-year period from 2020 to 2024 is as follows:



Operating Lease, Third-Party Joint Project and Other Obligations



Operating lease, third-party joint project and other obligations reported on our balance sheets consisted of the following:

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Supplemental Cash Flow Information     

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11.   INFRAREIT ACQUISITION



On May 16, 2019, we completed the InfraREIT Acquisition, pursuant to which we acquired all of the equity interests of InfraREIT and its subsidiary, InfraREIT Partners.  In connection with and immediately following the closing of the InfraREIT Acquisition, on May 16, 2019, we extinguished all outstanding debt of InfraREIT and its subsidiaries through repaying $602 million principal amount of InfraREIT subsidiary debt and exchanging new Oncor senior secured debt for $351 million principal amount of InfraREIT subsidiary debt.



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



Business Combination Accounting



We accounted for the InfraREIT Acquisition as a business acquisition with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the closing date. The combined results of operations are reported in our condensed consolidated financial statements beginning as of the closing date.



The following table sets forth the final purchase price paid. The final purchase price allocation was completed as of March 31, 2020. 



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Unaudited Pro Forma Financial Information



The following unaudited pro forma financial information for the nine months ended September 30, 2019 assumes that the InfraREIT Acquisition occurred on January 1, 2019. The unaudited pro forma financial information is provided for information purposes only and is not necessarily indicative of the results of operations that would have occurred had the InfraREIT Acquisition been completed on January 1, 2019, nor is the unaudited pro forma financial information indicative of future results of operations, which may differ materially from the pro forma financial information presented here.



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





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



The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2020 and 2019 should be read in conjunction with the condensed consolidated financial statements (Financial Statements) and the notes to those statements herein as well as the consolidated financial statements and the notes to those statements and “Risk Factors” contained in our 2019 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.



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



BUSINESS



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



Our condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 include the results of our wholly owned indirect subsidiary, NTU, which is a regulated utility that provides electricity transmission delivery service in the north-central, western and panhandle regions of Texas. We acquired NTU as part of the InfraREIT Acquisition that closed on May 16, 2019.



Ring-Fencing Measures



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



Significant Activities and Events   



COVID-19 Pandemic — In March 2020, the World Health Organization declared COVID-19 a pandemic, the President of the United States declared a national state of emergency, and the Governor of Texas issued a disaster proclamation for all counties in the state. The COVID-19 pandemic has significantly impacted the global economy, communities, and supply chains around the world. As a critical infrastructure provider of electricity transmission and distribution services, our operations have continued throughout the pandemic. We have implemented our pandemic response plan and taken various precautionary and preemptive actions under that plan to protect our workforce and critical operations, including requiring employees to work remotely where possible, restricting non-

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essential business travel, increased sanitation measures and temperature screenings at Oncor facilities, and actively monitoring our supply chain and key vendors and suppliers.  



To date, the COVID-19 pandemic has not had a material adverse impact on our business, financial condition, or results of operations. Usage from commercial and industrial customers decreased modestly for the three and nine months ended September 30, 2020 as compared to the same periods in 2019, which we believe is largely due to the effects of the pandemic. We expect this trend to continue in the near term. For the three and nine months ended September 30, 2020 as compared to the same period in 2019, we believe residential usage was greater than it otherwise would have been due to increases in the number of residential customers staying at home during the pandemic. The revenue from the increase in residential usage has offset the revenue decline from the commercial and industrial usage decrease for the three and nine months ended September 30, 2020. However, we cannot predict whether, or to what extent, residential usage due to the effects of the pandemic would continue to offset any commercial and industrial decreased usage in the future.  For a discussion of the factors contributing to overall distribution base revenues, see “—Results of Operations—Financial Results – Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019” and “—Results of Operations—Financial Results – Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019.”



While the pandemic-related impacts on usage have not materially adversely affected us to date, we cannot predict whether, or to what extent they will affect us in the future, particularly if circumstances related to the pandemic worsen or continue for an extended period of time.  We also face other risks and uncertainties related to the COVID-19 pandemic and cannot predict whether, or to what extent, the pandemic will have a material adverse impact on our business, financial condition, or results of operations in the future. The extent to which the COVID-19 pandemic does impact our results will ultimately depend on future developments, which are highly uncertain, including the duration of the pandemic and governmental actions to address the pandemic. 



In March 2020, the PUCT took action to address the impact of the COVID-19 pandemic on residential customers in the areas of Texas open to electricity customer choice, creating the COVID-19 Electricity Relief Program (COVID-19 ERP) to aid certain residential customers unable to pay their electricity bills. Customer enrollment in the COVID-19 ERP closed on August 31, 2020, and financial assistance under the program was available to enrolled residential customers for electricity bills issued on or after March 26, 2020 through September 30, 2020. In connection with the COVID-19 ERP, the PUCT suspended service disconnections due to nonpayment for customers enrolled in the program through September 30, 2020. At September 30, 2020, approximately 2.2% of residential premises in our service territory were enrolled in the program.



To fund the program, the PUCT provided for a surcharge to be collected by transmission and distribution utilities through rates and directed ERCOT to provide loans to those transmission and distribution utilities for the initial funding of the COVID-19 ERP. As a result, in April 2020 we filed a tariff rider implementing the surcharge and received an unsecured loan from ERCOT in the principal amount of $7 million. At September 30, 2020, we had billed  $22 million under the rider surcharge. Reimbursements paid by us pursuant to the COVID-19 ERP totaled $32 million through September 30, 2020 (including $17 million of reimbursements to Oncor for electricity delivery charges). REP reimbursement requests must be received by November 30, 2020. Based on billing activity through September 30, 2020, the last eligible billing day under the COVID-19 ERP, we expect our reimbursements under the COVID-19 ERP to total $38 million (including $18 million of reimbursements to Oncor for electricity delivery charges).  We expect to continue to collect amounts under the tariff rider surcharge until we either collect amounts equal to the reimbursements paid by us pursuant to the COVID-19 ERP or are otherwise ordered to stop by the PUCT.  In the event there are reimbursements paid by us pursuant to the COVID-19 ERP in excess of the amounts collected through the tariff rider surcharge, we expect to recover such costs as the PUCT issued an order that authorizes recording a regulatory asset or liability for any under or over recovery in connection with the COVID-19 ERP. The transmission and distribution utilities are required to include in their next rate proceeding (whether a TCRF proceeding, DCRF proceeding, or base rate review) a tariff rider to extinguish any such regulatory asset/liability. 



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REPs were permitted to resume residential customer service disconnections beginning October 1, 2020. As the COVID-19 pandemic continues to impact customers and the economy in our service territory, customer inability to pay their electric bills could potentially impact the ability of REPs to pay electricity delivery charges owed to us. A significant amount of uncollectible amounts due from REPs could have an adverse effect on our cash flows. However, we believe that PUCT rules that allow for the recovery of uncollectible amounts due from REPs through rates significantly reduces the risk of a material adverse impact on our financial condition or results of operations.



The PUCT also authorized the transmission and distribution utilities to use a regulatory asset accounting mechanism and a subsequent process to seek future recovery of expenses resulting from the effects of the COVID-19 pandemic. Therefore, we are recording incremental costs incurred by Oncor resulting from the effects of the COVID-19 pandemic, including costs relating to the implementation of our pandemic response plan, as a regulatory asset. At September 30, 2020, we recorded $14 million with respect to this regulatory asset. We expect COVID-19 pandemic related costs, including costs related to our pandemic response plan, to continue throughout the pandemic, and depending on the duration of the pandemic total expenditures could become material.



Rate regulation is premised on the full recovery of prudently incurred costs. The regulatory assets we have established with respect to the COVID-19 pandemic costs are subject to PUCT review for reasonableness and possible disallowance in our next base rate review, which is required to be filed on or before October 1, 2021.  Any failure to recover such costs could have an adverse effect on our cash flows, financial condition, or results of operations. For more information on the COVID-19 ERP and PUCT matters relating to the COVID-19 pandemic that impact Oncor, see Note 2 to Financial Statements.



Debt-Related Activities — On September 28, 2020, we completed a sale of $450 million aggregate principal amount of 0.55% Senior Secured Notes due 2025 (2025 Notes). We intend to use the proceeds from the sale of the 2025 Notes to finance or refinance, in whole or in part, eligible projects consisting of investments in or expenditures with minority- and women-owned business suppliers pursuant to our sustainable bond framework. The net proceeds may be temporarily invested in cash, cash equivalents and/or U.S. government securities in accordance with our cash management policies or used to repay certain other indebtedness, or both.



On September 23, 2020, we issued $300 million aggregate principal amount of 5.35% Senior Secured Notes due 2052 (2052 Notes) in exchange for a like aggregate principal amount of notes consisting of all of our outstanding 7.25% Senior Notes, Series B, due December 30, 2029 and 6.47% Senior Notes, Series A, due September 30, 2030, and certain of our outstanding 7.000% Senior Secured Notes due 2032, 7.250% Senior Secured Notes due 2033, and 5.30% Senior Secured Notes due 2042.



In March 2020, we completed a sale of $400 million aggregate principal amount of 2.75% Senior Secured Notes due May 15, 2030 and $400 million aggregate principal amount of 3.70% Senior Secured Notes due May 15, 2050. In the nine months ended September 30, 2020, we also entered into two term loan agreements consisting of the $450 million January 2020 Term Loan Agreement and the $350 million March 2020 Term Loan Agreement. As of September 30, 2020, $450 million of principal amount was outstanding under the January 2020 Term Loan Agreement and no amounts were outstanding under the March 2020 Term Loan Agreement.



Repayments of long-term debt during the nine months ended September 30, 2020 included repayment of $126 million aggregate principal amount of our 5.75% Senior Secured Notes due September 30, 2020, $110 million principal amount borrowed under the March 2020 Term Loan Agreement, $460 million principal amount borrowed under the 2019 Term Loan Agreement and $5 million of principal amount of the quarterly amortizing debt for senior secured notes issued under one of our Note Purchase Agreements. The amounts repaid under each of the March 2020 Term Loan Agreement and 2019 Term Loan Agreement constituted all amounts outstanding under each respective agreement, and as a result of such repayments, those term loan agreements are no longer in effect. See Note 5 to Financial Statements for a discussion of long-term debt-related activity in the nine months ended September 30, 2020.



Joint Project with Lubbock Power & Light (LP&L) —  Oncor is currently involved in an estimated $400 million joint project with Lubbock Power & Light (LP&L), with costs to ultimately be split by Oncor and LP&L that involves the build out of transmission lines and associated station work to join the City of Lubbock to the

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ERCOT market. Oncor is completing the construction, with LP&L reimbursing Oncor for its portion of the construction costs. Once construction is complete, the resulting transmission assets will be split between LP&L and Oncor. Oncor’s expenditures as of September 30, 2020 with respect to the project (minus amounts subject to reimbursement by LP&L) totaled $89 million.  To support its funding of reimbursements to Oncor, LP&L is required to maintain an escrow account with minimum monthly balances.  The balance of the escrow account at September 30, 2020 was $37 million.  Each of Oncor and LP&L is expected to make total expenditures of approximately $142 million and $108 million, respectively, in 2020, with the remainder of the estimated $400 million in costs to be incurred in 2021.  This joint project consists of approximately 175 miles of transmission lines in the Lubbock and surrounding Texas panhandle areas.



Matters with the PUCT —  See Note 2 to Financial Statements for a discussion of significant PUCT matters. 





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RESULTS OF OPERATIONS      



Operating Data

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Financial Results — Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019   



Total operating revenues increased $21 million, or 2%, to $1,232 million in 2020.  Revenue is billed under tariffs approved by the PUCT.  Our next general rate review is required to be filed with the PUCT on or before October 1, 2021.



Revenues contributing to earnings increased $22 million during the three months ended September 30, 2020.  The change reflected the following components:







See the DCRF Filings Table below for a listing of annual filings impacting revenues for 2020 and 2019.



DCRF Filings Table







See TCOS Filings Table below for a listing of transmission interim rate update applications and anticipated impacts on revenues for 2020 and 2019.



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TCOS Filings Table







Revenues collected for pass-through expenses decreased $1 million during the three months ended September 30, 2020.  While changes in these pass-through tariffs affect revenues and the timing of cash flows, they do not impact operating income and do not contribute to earnings.  The net change reflected the following components: 





See TCRF Filings Table below for a listing of TCRF filings impacting cash flows for the three months ended September 30, 2020 and 2019, as well as filings and the anticipated impacts to cash flows for the year ended December 31, 2020.



TCRF Filings Table







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See EECRF Filings Table below for a listing of EECRF filings impacting revenues for the three months ended September 30, 2020 and 2019, as well as filings that will impact revenues for the year ended December 31, 2020.



EECRF Filings Table



Wholesale transmission service expense was $245 million for both periods and represents fees paid to third-party transmission entities. Wholesale transmission service expense is a reconcilable expense that is offset with TCRF Third-Party revenues as discuss above.



Operation and maintenance expense increased $10 million to $232 million in 2020. The increase includes $20 million in higher labor and contractor related costs, partially offset by a $4 million decrease in vegetation management costs and a $4 million decrease in materials and transportation costs.



Depreciation and amortization increased $14 million to $200 million in 2020.  The increase is attributable to ongoing investments in property, plant and equipment.



Provision in lieu of income taxes totaled $48 million (including a $3 million benefit related to nonoperating income) in 2020 compared to $50 million (including a $5 million benefit related to nonoperating income) in 2019. 



The effective income tax rate was 15.7% and 16.0% for the 2020 and 2019 periods, respectively. The effective tax rate on pretax income differs from the U.S. federal statutory rate of 21% primarily due to the amortization of the regulatory liability for excess deferred taxes as a result of the TCJA, partially offset by the effects of the Texas margin tax.



Taxes other than amounts related to income taxes increased $8 million and includes a $10 million increase in property taxes, partially offset by $2 million in lower local franchise fees.



Other deductions and (income) - net was $9 million favorable in 2020 compared to 2019.  The variance is primarily due to $7 million of allowance for funds used during construction (AFUDC) equity income in the current period.  See Note 10 to Financial Statements for more information.



Interest expense and related charges increased $5 million to $102 million in 2020.  The variance is primarily driven by a $7 million increase due to higher average borrowings, partially offset by a $1 million decrease due to lower average interest rates.



Net income was $5 million lower than the prior period, primarily due to increases in operation and maintenance expense, depreciation and amortization, property taxes and interest expense, partially offset by increases in revenues contributing to earnings and favorable changes in other income and deductions.

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Financial Results — Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019   



Total operating revenues increased $126 million, or 4%, to $3,394 million in 2020. 



Revenues contributing to earnings increased $166 million during the nine months ended September 30, 2020.  The change reflected the following components:















Revenues collected for pass-through expenses decreased $40 million during the nine months ended September 30, 2020.  The net change reflected the following components: 









Wholesale transmission service expense decreased $36 million to $723 million in 2020 due to lower fees paid to third-party transmission entities. Wholesale transmission service expense is a reconcilable expense that is offset with TCRF Third-Party revenues as discussed above.



Operation and maintenance expense increased $29 million to $676 million in 2020. The increase includes $35 million in higher labor and contractor related costs, partially offset by $4 million lower energy efficiency program costs.   



Depreciation and amortization increased $53 million to $589 million in 2020.  The increase is attributable to ongoing investments in property, plant and equipment including the InfraREIT Acquisition.



Provision in lieu of income taxes totaled $109 million (including a $9 million benefit related to nonoperating income) in 2020 compared to $99 million (including a $12 million benefit related to nonoperating income) in 2019. 



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The effective income tax rate was 16.2% and 16.0% for the 2020 and 2019 periods, respectively. The effective tax rate on pretax income differs from the U.S. federal statutory rate of 21% primarily due to the amortization of the regulatory liability for excess deferred taxes as a result of the TCJA, partially offset by the effects of the Texas margin tax.



Taxes other than amounts related to income taxes increased $22 million primarily due to a $24 million increase in property taxes attributable to ongoing investments in property, plant and equipment including the InfraREIT Acquisition, partially offset by $3 million lower local franchise fees.



Other deduction and (income) - net was $28 million favorable in 2020 compared to 2019.  The variance is primarily due to $19 million of AFUDC equity income in the current period and $9 million of acquisition costs reflected in the prior period.  See Note 10 to Financial Statements for more information.



Interest expense and related charges increased $29 million to $305 million in 2020.  The current period includes a $38 million increase due to higher average borrowings, partially offset by an $8 million decrease due to lower average interest rates.



Net income was $47 million higher than the prior period, driven by increases in revenues contributing to earnings primarily from increases in base transmission and distribution rates, customer growth, from NTU, which we acquired in the InfraREIT Acquisition, and favorable changes in other income and deductions, partially offset by increases in depreciation and amortization, operation and maintenance expense, property taxes and interest expense.



OTHER COMPREHENSIVE INCOME



In February and March 2020, we entered into interest rate hedge transactions hedging the variability of benchmark bond rates used to determine the interest rates on anticipated issuances of ten-year and thirty-year senior secured notes.  The hedges were terminated in March 2020 upon the issuance of the 2030 Notes and 2050 Notes, and a $29 million ($23 million after-tax) loss was reported in other comprehensive income.  We expect approximately $4 million of the amount reported in accumulated other comprehensive loss at September 30, 2020 related to interest rate hedges to be reclassified into net income as an increase to interest expense within the next 12 months, including $2 million from the current year transactions.

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FINANCIAL CONDITION



LIQUIDITY AND CAPITAL RESOURCES



Cash Flows — Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019



Cash provided by operating activities totaled $1.073 billion and $774 million in 2020 and 2019, respectively. The $299 million net increase is primarily the result of a $256 million increase in transmission and distribution receipts, a $159 million decrease in network transmission service net payments, a $78 million decrease in storm costs and a $23 million decrease in interest payments related to short-term borrowings, partially offset by a $89 million increase in employee benefit plan funding, a $55 million increase in interest payments related to long-term debt, a $30 million increase in property tax payments, a net $25 million increase in federal income tax payments and  $24 million net payments related to the COVID-19 pandemic (related to our pandemic response plan and the COVID-19 ERP).



Cash provided by financing activities totaled $1.009 billion and $2.077 billion in 2020 and 2019, respectively.  The $1.068 billion net decrease is primarily due to debt refinancing activity in connection with the InfraREIT Acquisition in the prior period (see Note 11 to Financial Statements for more information), partially offset by debt management activities to support our capital expenditure program.  For more information, see Notes 4 and 5 to the Financial Statements regarding short-term borrowings and long-term debt activity, respectively, and Note 7 to Financial Statements for additional information regarding capital contributions from and cash distributions to our members. 



Cash used in investing activities totaled $1.941 billion and $2.844 billion in 2020 and 2019, respectively.  The $903 million net decrease is primarily due to the InfraREIT Acquisition in the prior period (see Note 11 to Financial Statements for more information), partially offset by an increase in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending in the current period.



Depreciation and amortization expense reported in the statements of consolidated cash flows was $60 million and $63 million more than the amounts reported in the statements of consolidated income in the nine months ended September 30, 2020 and 2019, respectively.  The differences result from certain regulatory asset amortization reported in operation and maintenance expense.



Long-Term Debt Activity



 Debt Exchange — On September 23, 2020, we issued $300 million aggregate principal amount of 2052 Notes in exchange for a like aggregate principal amount of notes consisting of all of our outstanding 7.25% Senior Notes, Series B, due December 30, 2029 and 6.47% Senior Notes, Series A, due September 30, 2030, and certain of our outstanding 7.00% Senior Secured Notes due 2032, 7.25% Senior Secured Notes due 2033, and 5.30% Senior Secured Notes due 2042. We received no proceeds from the exchange. For more information on the exchange, see Note 5 to Financial Statements.

 

Senior Secured Notes Issuances — In September 2020, we issued $450 million aggregate principal amount of 2025 Notes. In March 2020, we issued $400 million aggregate principal amount of 2030 Notes and $400 million aggregate principal amount of 2050 Notes. For more information on the Notes issuances, see Note 5 to Financial Statements.

 

 Long-Term Unsecured Term Loan Agreements — In January 2020, we executed the January 2020 Term Loan Agreement, which is a $450 million term loan agreement that matures on June 1, 2021.  At September 30, 2020, we had borrowed the full $450 million available under the agreement, through borrowings of $163 million on January 29, 2020, $55 million on February 28, 2020 and $232 million on March 17, 2020. The proceeds from each borrowing were used for general corporate purposes, including the repayment of notes outstanding under our CP Program. Loans under the January 2020 Term Loan Agreement bear interest at per annum rates equal to, at our option, (i) LIBOR plus 0.50% until June 1, 2021, or (ii) an alternate base rate (the highest of (1) the prime rate of Sumitomo Mitsui Banking Corporation, the administrative agent and a lender under the agreement, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%).

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In March 2020, we executed the March 2020 Term Loan Agreement with a commitment equal to an aggregate principal amount of $350 million. We entered into an amendment to the March 2020 Term Loan Agreement in June 2020. As amended, the March 2020 Term Loan Agreement had a maturity date of June 30, 2021 and provided for loans to bear interest at per annum rates equal to, at our option, (i) LIBOR plus 0.95%, or (ii) an alternate base rate (the highest of (1) the prime rate of Wells Fargo, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1%).We borrowed $15 million and $95 million under the agreement on June 30, 2020 and July 31, 2020, respectively. The proceeds from each borrowing were used for general corporate purposes, including the repayment of notes outstanding under our CP Program. On September 28, 2020, we repaid the entire $110 principal amount borrowed under the March 2020 Term Loan Agreement and as a result of such repayment the March 2020 Term Loan Agreement is no longer in effect.



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



Long-Term Debt Repayments — Repayments of long-term debt during the nine months ended September 30, 2020 included repayment of $126 million aggregate principal amount of our 5.75% Senior Secured Notes due September 30, 2020, $110 million principal amount borrowed under the March 2020 Term Loan Agreement, $460 million principal amount borrowed under the 2019 Term Loan Agreement and $5 million principal amount of the quarterly amortizing debt for senior secured notes issued under one of our Note Purchase Agreements.



See Note 5 to Financial Statements for more information regarding the new long-term debt issuances and long-term debt repayments.



Short-Term Debt Activity  



CP Program — As discussed in Note 4 to Financial Statements, in March 2018 we established the CP Program, under which we may issue CP Notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2.0 billion.  A national bank acts as the issuing and paying agent under the CP Program pursuant to the terms of an issuing and paying agent agreement.  Under the CP Program, we issue CP Notes from time to time, and the proceeds of the CP Notes are used for short-term financing of our business operations.  At September 30, 2020, we had no CP Notes outstanding.



The CP Program obtains liquidity support from our Credit Facility discussed below.  If at any time funds are not available on favorable terms under the CP Program, we may utilize the Credit Facility for funding. 



 The maturities of the CP Notes will vary, but may not exceed 364 days from the date of issue.  Interest rates will vary based upon market conditions at the time of issuance of the CP Notes and may be fixed or floating determined by reference to a base rate and spread.



Credit Facility — At September 30, 2020, we had a $2.0 billion unsecured Credit Facility that may be used for working capital and general corporate purposes, issuances of letters of credit and support for our CP Program.  In November 2020, we entered into an amendment to the Credit Facility that extended its maturity date for one year to November 2023.  We also have the option of requesting up to two one-year extensions and an option to request an increase in our borrowing capacity of $400 million, in increments of not less than $100 million, provided certain conditions are met, including lender approvals.  Borrowings under the Credit Facility are classified as short term on the balance sheet.  At September 30, 2020, we had no outstanding borrowings under the Credit Facility and $9 million of letters of credit outstanding.



Because the CP Program is supported by the Credit Facility, any CP Notes outstanding reduces the available borrowing capacity.  Considering the letters of credit and the CP Notes outstanding and the limitations described

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below, available borrowing capacity under the Credit Facility totaled $1.991 billion and $1.944 billion at September 30, 2020 and December 31, 2019, respectively. 



The Credit Facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring certain additional liens (not including liens relating to obligations secured pursuant to our Deed of Trust, which are permitted); entering into mergers and consolidations; sales of substantial assets and acquisitions and investments in subsidiaries. The Credit Facility also contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future. At September 30, 2020, we were in compliance with this covenant and all other covenants in the Credit Facility. See “Credit Rating Provisions, Covenants and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.



Under the terms of the Credit Facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility.



Regulatory Capital Structure — We have committed to the PUCT to maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently 57.5% debt to 42.5% equity.  Our actual regulatory capitalization ratio was 55.9% debt to 44.1% equity at September 30, 2020. See Note 7 to Financial Statements for discussion of the regulatory capitalization ratio.  Our ability to incur additional long-term debt is limited by our regulatory capital structure, as we are able to issue future long-term debt only to the extent that we are in compliance therewith.



Available Liquidity and Liquidity Needs, Including Capital Expenditures



Capital Expenditures —  Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $2.5 billion in 2020 and $2.4 billion in 2021. Management currently expects to recommend to our board of directors capital expenditures of $2.4 billion to $2.5 billion in each of the years 2022 through 2025, for a total of $12.2 billion for the years 2021 through 2025, based on the long-term plan presented to our board of directors.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure, including investments to support system expansion, system maintenance, and technology and innovation.



Available Liquidity — Our primary source of liquidity, aside from operating cash flows, has been our ability to borrow under our Credit Facility, which also supports our CP Program.  Because the CP Program is supported by the Credit Facility, commercial paper outstanding is a reduction to the available borrowing capacity. Cash and cash equivalents totaled $145 million and $4 million at September 30, 2020 and December 31, 2019, respectively. Considering cash and available borrowing capacity under the Credit Facility, available liquidity totaled $2.136 billion at September 30, 2020, reflecting an increase of $188 million from December 31, 2019. 



We expect cash flows from operations, as well as availability under our Credit Facility and CP Program, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.  Should additional liquidity or capital requirements arise, we may need to access the credit and capital markets, seek member capital contributions or preserve equity through reductions or suspension of distributions to members.  In addition, we may also consider additional new debt issuances, repurchases, exchange offers and other transactions in order to refinance or manage our long-term debt.  The inability to raise capital on favorable terms or failure of counterparties to perform under credit or other financial agreements, particularly during any uncertainty in the financial markets (including any uncertainty due to the COVID-19 pandemic), could impact our ability to sustain and grow the business and would likely increase capital costs that may not be recoverable through rates.



The COVID-19 pandemic has not had a material adverse impact on our liquidity to date. However, we do face risks and uncertainties related to the pandemic, including as a result of its impact on capital and credit markets, and cannot predict whether, or to what extent, the pandemic will have a material adverse impact on our liquidity in the future. The COVID-19 pandemic has negatively impacted capital markets, the commercial paper market, and the

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availability of financing from commercial banks. As a result, our ability to access the capital markets or obtain new credit commitments from commercial banks could become materially constrained.   



Various federal and state actions implemented in connection with the COVID-19 pandemic have and could continue to impact our liquidity. For example, see Note 2 to Financial Statements for information on the COVID-19 ERP and its funding. In addition, we elected to utilize certain provisions under the CARES Act to adjust our pension plan funding contributions, resulting in a decrease of $26 million to our expected pension funding obligations for the five-year period from 2020 to 2024. For more information on pension funding obligations, see Note 8 to Financial Statements. We have also elected to take advantage of payroll tax and income tax deferrals available under the CARES Act.



Member Contributions and Distributions



Contributions — We received cash capital contributions from our members on February 18, 2020, April 27, 2020 and July 28, 2020 each in the amount of $87 million. We also received cash capital contribution from our members on October 27, 2020 in the amount of $77 million.



Distributions  — The PUCT order issued in the Sempra Acquisition and our Limited Liability Company Agreement set forth various restrictions on distributions to our members. Among those restrictions is the commitment that we will make no distributions that would cause us to be out of compliance with the PUCT’s approved debt-to-equity ratio, which is currently 57.5% debt to 42.5% equity. The distribution restrictions also include the ability of our board, a majority of the Disinterested Directors, or either of the two member directors designated by Texas Transmission to limit distributions to the extent each determines it is necessary to meet expected future requirements of Oncor (including continuing compliance with the PUCT debt-to-equity ratio commitment).  At September 30, 2020, we had $492 million available to distribute to our members as our regulatory capitalization ratio was 55.9% debt to 44.1% equity.



The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt including finance leases plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding accumulated other comprehensive loss and the effects of acquisition accounting from a 2007 transaction.



On October 28, 2020, our board of directors declared a cash distribution of $82 million, which was paid to our members on October 29, 2020. In the nine months ended September 30, 2020, our board of directors declared, and we paid, the following cash distributions to our members:







Pension and OPEB Plan Funding



 Our funding for pension plans and Oncor OPEB Plans is expected to total approximately $560 million and $176 million, respectively, in the five-year period from 2020 to 2024 based on the latest actuarial projections after taking into account certain pension funding adjustments we made as permitted by the CARES Act. Our funding for the pension plans and Oncor OPEB Plans is expected to total $141 million and $35 million, respectively, in the calendar year 2020. In the nine months ended September 30, 2020, we made cash contributions of $115 million to the pension plans and $26 million to the Oncor OPEB Plans. 



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Credit Rating Provisions, Covenants and Cross Default Provisions



Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In 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 November 5, 2020.   



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



Material Credit Rating Covenants — The Credit Facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  In November 2020, we entered into an amendment to the Credit Facility. As amended, borrowings under the Credit Facility bear interest at per annum rates equal to, at our option, (i) adjusted LIBOR plus a spread ranging from 1.125% to 1.750% 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 Bank, N.A., (2) the greater of the federal funds effective rate or the overnight banking rate, plus 0.50%, and (3) adjusted LIBOR plus 1.00%) plus a spread ranging from 0.125% to 0.750% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Our borrowings are generally LIBOR-based, and based on the ratings assigned to our senior secured debt securities at November 5, 2020, will bear interest at LIBOR plus 1.250%.  A decline in credit ratings would increase the cost of borrowings under the Credit Facility and likely increase the cost of our CP Program and any other debt issuances and additional credit facilities.  The CP Program requires prompt notice to the dealer of any notice of intended or potential downgrade of our credit ratings.



Material Financial Covenants — Our Credit Facility, the Note Purchase Agreements, and January 2020 Term Loan Agreement contain a financial covenant that requires maintenance of a consolidated debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the applicable agreement (principally, the sum of long-term debt, any capital leases (referred to as finance leases under current accounting literature), short-term debt and debt due currently in accordance with GAAP).  Capitalization for our Credit Facility and term loan agreement is calculated as membership interests determined in accordance with GAAP plus debt described above. The ratio under our Note Purchase Agreements is calculated as total debt (all debt of Oncor and its subsidiaries on a consolidated basis) divided by the sum of total debt plus capitalization. Capitalization under the Note Purchase Agreements is calculated as membership interests plus liabilities for indebtedness maturing more than 12 months from the date of determination, with capitalization determined in accordance with GAAP and practices applicable to our type of business.  At September 30, 2020, we were in compliance with this covenant and all other covenants under the Credit Facility, term loan agreement and Note Purchase Agreements.



Material Cross Default Provisions — Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms or to observe other

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covenants that could result in an acceleration of payments due.  Such provisions are referred to as “cross default” provisions.



Under the Credit Facility, our term loan agreement and the Note Purchase Agreements, a default by us or any subsidiary in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $100 million that are not discharged within 60 days may cause the maturity of outstanding balances under those facilities to be accelerated.



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



Long-Term Contractual Obligations and Commitments 



The following table summarizes our contractual cash obligations at September 30, 2020.  See Notes 5 and 6 to Financial Statements for additional disclosures regarding long-term debt and operating lease obligations, respectively.





The following are not included in the table above:



Guarantees 



At September 30, 2020, we did not have any material guarantees.



OFF-BALANCE SHEET ARRANGEMENTS



At September 30, 2020, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.



COMMITMENTS AND CONTINGENCIES



See Note 6 to Financial Statements for discussion of commitments and contingencies.



CHANGES IN ACCOUNTING STANDARDS



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



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REGULATION AND RATES



Matters with the PUCT  



DCRF (PUCT Docket No. 50734) — PUCT rules provide that DCRF applications may only be filed from April 1 to April 8 of each year. Accordingly, on April 3, 2020, we filed with the PUCT, as well as with cities with original jurisdiction over our rates, an application for approval of an updated DCRF.  The DCRF allows us to recover, primarily through our tariff for retail delivery service, certain costs related to our distribution investments.  In our DCRF application, we requested a $76 million increase in annual distribution revenues primarily related to 2019 distribution investments. On June 24, 2020, we filed an unopposed stipulation and settlement agreement that included a $70 million increase in annual distribution revenues and on July 31, 2020, the PUCT issued a final order implementing the settlement agreement. The approved rates began  on September 1, 2020.



See Note 2 to Financial Statements for a discussion of other significant PUCT matters for the nine months ended September 30, 2020.



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 financial position, results of operations or cash flows.

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ITEM 3.   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.  From time to time we transact in financial instruments to hedge interest rate risk related to our forecasted issuances of debt.  All of our long-term debt at September 30, 2020 (except for the January 2020 Term Loan Agreement) and at December 31, 2019 (except for the 2019 Term Loan Agreement) carried fixed interest rates. The January 2020 Term Loan Agreement contains, and while they were in effect the 2019 Term Loan Agreement and March 2020 Term Loan Agreement each contained, terms pursuant to which the interest rate charged could vary, at our option, depending on the selected interest period.



The Credit Facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the CP Program may bear interest on a fixed rate or floating rate basis and will vary based on market conditions at the time of borrowings. For information on our interest rates charged under the CP Program and Credit Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Liquidity and Capital Resources - Credit Rating Provisions, Covenants and Cross Default Provisions - Material Credit Rating Covenants,” Note 4 to Financial Statements and Note 6 to Financial Statements in our 2019 Form 10-K.



Credit Risk



Credit risk relates to the risk of loss associated with nonperformance by counterparties.  Our customers consist primarily of REPs.  As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the PUCT.  Meeting these standards does not guarantee that a REP will be able to perform its obligations.  REP certificates granted by the PUCT are subject to suspension and revocation for significant violation of PURA and PUCT rules.  Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the PUCT.  We believe PUCT rules that allow for the recovery of uncollectible amounts due from REPs through rates significantly reduce our credit risk. In addition, we believe the COVID-19 ERP significantly reduced risk related to REP non-payment to us for electricity delivery charges billed between March 26, 2020 and September 30, 2020, as a result of residential customers’  inability to pay REPs due to the impacts of the COVID-19 pandemic.



Our exposure to credit risk associated with trade accounts receivable totaled $795 million at September 30, 2020.  The receivable balance is before the allowance for uncollectible accounts, which totaled $6 million at September 30, 2020.  The exposure includes trade accounts receivable from REPs totaling $566 million, which are almost entirely noninvestment grade and from transmission customers totaling $58 million, which include investment grade distribution companies and cooperatives and municipalities, which are generally considered low credit risk.  At September 30, 2020, REP subsidiaries of our two largest customers represented 17% and 13% of the trade receivable balance, respectively.  No other parties represented 10% or more of the total trade accounts receivable balance.  We view our exposure to these customers to be within an acceptable level of risk tolerance considering PUCT rules and regulations; however, this concentration increases the risk that a default could have a material effect on cash flows.



Our net exposure to credit risk associated with trade accounts and other receivables from affiliates was zero at both September 30, 2020 and December 31, 2019. 



Except as discussed herein, the information required in this Item 3 is not significantly different from the information set forth in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2019 Form 10-K and is therefore not presented herein.

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FORWARD-LOOKING STATEMENTS



This report and other presentations made by us contain “forward-looking statements.”  All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that we expect or anticipate to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of our business and operations (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “should,” “projection,” “target,” “goal,” “objective” and “outlook”), are forward-looking statements.  Although we believe that in making any such forward-looking statement our expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors under “Item 1A.  Risk Factors” and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Form 10-K, “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report and the following important factors, among others, that could cause our actual results to differ materially from those projected in such forward-looking statements:



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



ITEM 4.   CONTROLS AND PROCEDURES



An evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures in effect at the end of the current period included in this quarterly report.  Based on the evaluation performed, our management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective. 



PART II.  OTHER INFORMATION



ITEM 1.   LEGAL PROCEEDINGS



Reference is made to the discussion in Notes 2 and 6 to Financial Statements regarding regulatory and legal proceedings.



ITEM 1A.   RISK FACTORS



There are numerous factors that affect our business and results of operations, many of which are beyond our control.  In addition to the other information set forth in this report, including “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you should carefully consider the factors discussed in “Part I, Item 1A.  Risk Factors” in our 2019 Form 10-K and “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, which could materially affect our business, financial condition or future results.  The risks described in such reports are not the only risks we face. 



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



None.



ITEM 3.   DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4.   MINE SAFETY DISCLOSURES



Not applicable.



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ITEM 5.   OTHER INFORMATION



None.

 

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ITEM 6.   EXHIBITS







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*   Incorporated herein by reference.

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SIGNATURE





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





























Date:  November 5, 2020

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