PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ONCOR ELECTRIC DELIVERY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | (millions of dollars) |
| | | | | | |
Operating revenues: | | | | | | |
Nonaffiliates | | $ | 935 | | $ | 723 |
Affiliates | | | - | | | 220 |
Total operating revenues | | | 935 | | | 943 |
Operating expenses: | | | | | | |
Wholesale transmission service | | | 231 | | | 219 |
Operation and maintenance (Note 10) | | | 195 | | | 182 |
Depreciation and amortization | | | 195 | | | 211 |
Provision in lieu of income taxes (Note 10) | | | 42 | | | 49 |
Taxes other than amounts related to income taxes | | | 112 | | | 113 |
Total operating expenses | | | 775 | | | 774 |
Operating income | | | 160 | | | 169 |
Other income and (deductions) - net (Note 11) | | | (4) | | | (5) |
Nonoperating provision in lieu of income taxes | | | (2) | | | (1) |
Interest expense and related charges (Note 11) | | | 85 | | | 84 |
Net income | | $ | 73 | | $ | 81 |
See Notes to Financial Statements.
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | (millions of dollars) |
| | | | | | |
Net income | | $ | 73 | | $ | 81 |
Other comprehensive income: | | | | | | |
Cash flow hedges – derivative value net loss recognized in net income (net of tax expense of $– and $–) (Note 1) | | | 1 | | | - |
Total other comprehensive income | | | 1 | | | - |
Comprehensive income | | $ | 74 | | $ | 81 |
See Notes to Financial Statements.
ONCOR ELECTRIC DELIVERY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | (millions of dollars) |
| | | | | | |
Cash flows — operating activities: | | | | | | |
Net income | | $ | 73 | | $ | 81 |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 207 | | | 223 |
Provision in lieu of deferred income taxes – net | | | 111 | | | 41 |
Other – net | | | (1) | | | (2) |
Changes in operating assets and liabilities: | | | | | | |
Regulatory accounts related to reconcilable tariffs (Note 4) | | | (12) | | | (49) |
Other operating assets and liabilities | | | 23 | | | (105) |
Cash provided by operating activities | | | 401 | | | 189 |
Cash flows — financing activities: | | | | | | |
Net increase in short-term borrowings (Note 5) | | | 91 | | | 214 |
Distributions to members (Note 8) | | | (86) | | | (56) |
Cash provided by financing activities | | | 5 | | | 158 |
Cash flows — investing activities: | | | | | | |
Capital expenditures (Note 10) | | | (426) | | | (335) |
Other – net | | | 5 | | | (17) |
Cash used in investing activities | | | (421) | | | (352) |
Net change in cash and cash equivalents | | | (15) | | | (5) |
Cash and cash equivalents — beginning balance | | | 16 | | | 25 |
Cash and cash equivalents — ending balance | | $ | 1 | | $ | 20 |
See Notes to Financial Statements.
ONCOR ELECTRIC DELIVERY COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | |
| | At March 31, | | At December 31, |
| | 2017 | | 2016 |
| | (millions of dollars) |
| | | | | | |
ASSETS |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 1 | | $ | 16 |
Trade accounts receivable – net (Note 11) | | | 505 | | | 545 |
Amounts receivable from members related to income taxes (Note 10) | | | 6 | | | 80 |
Materials and supplies inventories — at average cost | | | 91 | | | 89 |
Prepayments and other current assets | | | 99 | | | 100 |
Total current assets | | | 702 | | | 830 |
Investments and other property (Note 11) | | | 103 | | | 100 |
Property, plant and equipment – net (Note 11) | | | 14,114 | | | 13,829 |
Goodwill (Note 11) | | | 4,064 | | | 4,064 |
Regulatory assets (Note 4) | | | 1,959 | | | 1,974 |
Other noncurrent assets | | | 6 | | | 14 |
Total assets | | $ | 20,948 | | $ | 20,811 |
LIABILITIES AND MEMBERSHIP INTERESTS |
Current liabilities: | | | | | | |
Short-term borrowings (Note 5) | | $ | 880 | | $ | 789 |
Long-term debt due currently (Note 6) | | | 324 | | | 324 |
Trade accounts payable (Note 10) | | | 262 | | | 231 |
Amounts payable to members related to income taxes (Note 10) | | | 25 | | | 20 |
Accrued taxes other than amounts related to income | | | 71 | | | 182 |
Accrued interest | | | 69 | | | 83 |
Other current liabilities | | | 137 | | | 144 |
Total current liabilities | | | 1,768 | | | 1,773 |
Long-term debt, less amounts due currently (Note 6) | | | 5,517 | | | 5,515 |
Liability in lieu of deferred income taxes (Note 10) | | | 2,899 | | | 2,788 |
Regulatory liabilities (Note 4) | | | 889 | | | 856 |
Employee benefit obligations and other (Note 10 and 11) | | | 2,176 | | | 2,168 |
Total liabilities | | | 13,249 | | | 13,100 |
Commitments and contingencies (Note 7) | | | | | | |
Membership interests (Note 8): | | | | | | |
Capital account ― number of interests outstanding 2017 and 2016 – 635,000,000 | | | 7,809 | | | 7,822 |
Accumulated other comprehensive loss | | | (110) | | | (111) |
Total membership interests | | | 7,699 | | | 7,711 |
Total liabilities and membership interests | | $ | 20,948 | | $ | 20,811 |
See Notes to Financial Statements.
ONCOR ELECTRIC DELIVERY COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
References in this report to “we,” “our,” “us” and “the company” are to Oncor and/or its subsidiary as apparent in the context. See “Glossary” for definition of terms and abbreviations.
We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas. Revenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 23% of our total operating revenues for each of the three-month periods ended March 31, 2017 and 2016. We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp. EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group. Oncor Holdings owns 80.03% of our membership interests, Texas Transmission owns 19.75% of our membership interests and certain members of our management team and board of directors indirectly own the remaining membership interests through Investment LLC. We are managed as an integrated business; consequently, there are no separate reportable business segments.
Our consolidated financial statements include our former wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a variable interest entity through December 29, 2016, at which time it was dissolved. This financing subsidiary was organized for the limited purpose of issuing certain transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.
Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality. These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below. Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group. The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group. None of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group. We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa. Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.
EFH Corp. Bankruptcy Proceedings
On the EFH Petition Date, the Debtors commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings. We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings. See Note 2 for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.
Basis of Presentation
These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the 2016 Form 10-K. In the opinion of Oncor management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been made. All intercompany items and transactions have been eliminated in consolidation. The results of operations for an interim period may not give a true indication of results for a full year due to seasonality.
All dollar amounts in the financial statements and tables in the notes are stated in millions of U.S. dollars unless otherwise indicated.
Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.
Revenue Recognition
General
Oncor’s revenue is billed under tariffs approved by the PUCT and the majority of revenues are related to providing electric delivery service to consumers. Tariff rates are designed to recover the cost of providing electric delivery service including a reasonable rate of return on invested capital. Revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff.
Reconcilable Tariffs
The PUCT has designated certain tariffs (TCRF, EECRF surcharges, AMS surcharges and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs are deferred as either regulatory assets or regulatory liabilities. Accordingly, at prescribed intervals, future tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.
Contingencies
We evaluate and account for contingencies using the best information available. A loss contingency is accrued and disclosed when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated. If a range of probable loss is established, the minimum amount in the range is accrued, unless some other amount within the range appears to be a better estimate. If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency is disclosed to the effect that the probable loss cannot be reasonably estimated. A loss contingency will be disclosed when it is reasonably possible that an asset has been impaired or a liability incurred. If the likelihood that an impairment or incurrence is remote, the contingency is neither accrued nor disclosed. Gain contingencies are recognized upon realization.
Changes in Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-2 which created FASB Topic 842, Leases (Topic 842). Topic 842 amends previous GAAP to require the balance sheet recognition of lease assets and liabilities for operating leases. We will be required to adopt Topic 842 by January 1, 2019 and do not expect to early adopt. Retrospective application to the 2017 and 2018 comparative periods presented will be required in the year of adoption. The recognition of any lease obligation on the balance sheet would be classified as long-term debt for GAAP purposes and would be defined as debt for our regulatory capital structure purposes (see Note 8 for details). Although adoption of Topic 842 will affect our balance sheet and capitalization ratios, the impact is not expected to be material. We continue to evaluate the impact of Topic 842 on our financial statements.
Since May 2014, the FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers along with other supplemental guidance (together, Topic 606). Topic 606 introduces new, increased requirements for disclosure of revenue in financial statements and guidance that are intended to eliminate inconsistencies in the recognition of revenue. We will be required to adopt Topic 606 by January 1, 2018 and do not expect to early adopt. Our revenues from customers are tariff-based and are designed to recover the cost of providing electric delivery service to customers including a reasonable rate of return on invested capital. Revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff. At this time, we do not
expect the new guidance to change this pattern of recognition and therefore it is not expected to have a material effect on our reported results of operations, financial condition or cash flows. We continue to evaluate the application of the new guidance.
In March 2017, the FASB issued ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). The new guidance will change how defined benefit plan costs are presented in the income statement. In addition, only the service cost component of net benefit cost will be eligible for capitalization as part of inventory or property, plant and equipment. We are required to adopt ASU 2017-07 effective January 1, 2018 and are currently evaluating the potential impact on our financial statements.
2. EFH BANKRUPTCY PROCEEDINGS
On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings. We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings. See Note 1 and below for further information regarding the EFH Bankruptcy Proceedings and the proposed change in control of our indirect majority owner in connection with such proceedings.
The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date. Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations. Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees. As of March 31, 2017, we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million. As discussed below, the Plan of Reorganization (defined below) provided for a spin-off of the TCEH Debtors from EFH Corp. As a result of this spin-off (Vistra Spin-Off), Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.
The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on us remain unknown. We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.
See Note 10 for details of Oncor’s related-party transactions with members of the Texas Holdings Group.
Potential Change in Indirect Ownership of Oncor
Below is a summary of certain matters relating to the potential change in indirect ownership of Oncor that may arise as a result of the EFH Bankruptcy Proceedings. See Note 2 to Financial Statements in our 2016 Form 10-K for additional information regarding these matters.
In May 2016, the Debtors filed a joint Plan of Reorganization (Plan of Reorganization) pursuant to Chapter 11 of the U.S. Bankruptcy Code and a related disclosure statement with the bankruptcy court. With respect to the EFH Debtors, the Plan of Reorganization, subject to certain conditions and required regulatory approvals, provides for, among other things, the reorganization of EFH Corp. and EFIH (Reorganized EFH) either pursuant to (a) an equity investment (which may be from existing creditors or third-party investors) or (b) pursuant to a standalone plan of reorganization, in which creditors receive shares of common stock of Reorganized EFH.
The Plan of Reorganization also provides that the confirmation and effective date of the Plan of Reorganization with respect to the TCEH Debtors may occur separate from, and independent of, the confirmation and effective date of the Plan of Reorganization with respect to the EFH Debtors. In this regard, the bankruptcy court confirmed the Plan of Reorganization with respect to the TCEH Debtors in August 2016, and it became effective by its terms, and the Vistra Spin-Off occurred, effective October 3, 2016.
In July 2016, (i) the EFH Debtors entered into a Plan Support Agreement (NEE Plan Support Agreement) with NEE to effect an agreed upon restructuring of the EFH Debtors pursuant to an amendment (NEE Amendment) to the Plan of Reorganization (as amended by the NEE Amendment and as subsequently amended, Amended EFH Debtor Plan) and (ii) EFH Corp. and EFIH entered into an Agreement and Plan of Merger (NEE Merger Agreement) with NEE and EFH Merger Co., LLC (Merger Sub), a wholly-owned subsidiary of NEE. Pursuant to the NEE Merger Agreement, at the effective time of the Amended EFH Debtor Plan with respect to the EFH Debtors, EFH Corp. would merge with and into Merger Sub (NEE Merger), with Merger Sub surviving as a wholly owned subsidiary of NEE. In August 2016, the EFH Debtors filed a motion seeking bankruptcy court approval of entry into the NEE Merger Agreement, a related termination fee and the NEE Plan Support Agreement. The NEE Merger Agreement includes various conditions precedent to consummation of the transactions contemplated thereby, including, among others, a condition that certain approvals and rulings be obtained, including from, among others, the PUCT and the IRS. The bankruptcy court approved EFH Corp. and EFIH’s entry into the NEE Merger Agreement, the related termination fee, and the NEE Plan Support Agreement in September 2016. The bankruptcy court approved the disclosure statement related to the Amended EFH Debtor Plan in January 2017 and confirmed the Amended EFH Debtor Plan in February 2017.
In October 2016, we entered into an Interest Purchase Agreement (OMI Agreement) with T & D Equity Acquisition, LLC, a wholly-owned subsidiary of NEE (T&D Equity Acquisition) and Investment LLC pursuant to which T&D Equity Acquisition would purchase the 1,396,008 limited liability company interests of Oncor (representing approximately 0.22% of the outstanding equity of Oncor) that Investment LLC owns in exchange for a purchase price of approximately $27 million. The OMI Agreement contains various conditions precedent to consummation of the transactions contemplated thereby, including the consummation of the transactions contemplated by the NEE Merger Agreement.
Also in October 2016, an affiliate of NEE entered into an Agreement and Plan of Merger (the TTI Merger Agreement) with Texas Transmission Holdings Corporation (the parent of Texas Transmission) and certain of its affiliates to purchase Texas Transmission’s 19.75% equity interest in Oncor for approximately $2.4 billion. The parties have agreed to use their best efforts to have the TTI Merger Agreement close contemporaneously with the NEE Merger. The TTI Merger Agreement also contains various conditions precedent to consummation of the transactions contemplated thereby, including a requirement that EFH Corp., subject to bankruptcy court approval, waive its rights of first refusal under the Investor Rights Agreement to purchase Texas Transmission’s 19.75% equity interest in Oncor.
Following the execution and delivery of the NEE Merger Agreement, EFIH requested, pursuant to the NEE Merger Agreement, that Oncor Holdings and Oncor enter into a letter agreement (NEE Letter Agreement) with NEE and Merger Sub. The NEE Letter Agreement was executed in August 2016 and sets forth certain rights and obligations of the Oncor Ring-Fenced Entities, NEE and Merger Sub to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the acquisition of Reorganized EFH (EFH Acquisition) and the other transactions described in the NEE Merger Agreement. The NEE Letter Agreement is not intended to give NEE or Merger Sub, directly or indirectly, the right to control or direct the operations of any of the Oncor Ring-Fenced Entities prior to the receipt of all approvals required by the bankruptcy court, the PUCT and other governmental entities and the consummation of the EFH Acquisition and related transactions (if and when such transactions are consummated). In addition, Oncor Holdings and Oncor have not endorsed or approved any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by NEE or Merger Sub involving Oncor Holdings or Oncor.
As discussed under “Regulatory Matters Related to the EFH Bankruptcy Proceedings” below, on April 13, 2017, the PUCT denied the joint application in PUCT Docket No. 46238, which sought certain regulatory approvals with respect to the transactions contemplated by the Amended EFH Debtor Plan. Following the PUCT’s denial of the joint application, the parties to the NEE Letter Agreement agreed as of April 17, 2017 to abate the parties’ obligations under the NEE Letter Agreement for 60 days. The abatement does not apply to the provisions of Section 17 of the NEE Letter Agreement, including Oncor Holdings and Oncor’s rights to terminate the NEE Letter Agreement, which shall remain operative and in effect during the abatement period.
We cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Amended EFH Debtor Plan, including the EFH Acquisition, will (or when they
will) close. Although the Amended EFH Debtor Plan has been confirmed by the bankruptcy court, there remain conditions and uncertainties relating to the Amended EFH Debtor Plan becoming effective and the consummation of the EFH Acquisition, including, without limitation, the ability to obtain required regulatory approvals from the PUCT, as described below under “–Regulatory Matters Related to EFH Bankruptcy Proceedings.”
As a result, we remain unable to predict how any reorganization of EFH Corp. and EFIH ultimately will impact Oncor or what form any change in indirect ownership of Oncor may take.
Regulatory Matters Related to EFH Bankruptcy Proceedings
In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to transactions contemplated by a plan of reorganization in the EFH Bankruptcy Proceedings. In March 2016, the PUCT issued an order conditionally approving the joint application. In April 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and in May 2016, the PUCT denied such motions and the order became final. In May 2016, the plan of reorganization and related merger and purchase agreement that contemplated the transactions in PUCT Docket No. 45188 were terminated. The Hunt Investor Group filed a petition with the Travis County District Court in June 2016 seeking review of the order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the plan of reorganization related to the application filed in such docket.
In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings. In connection with those resolutions, counsel for those cities notified Oncor that they expected Oncor to make a rate filing to comply with their resolutions on or before March 17, 2017. That filing was made with the PUCT and original jurisdiction cities on March 17, 2017. For more information, see Note 3 – “2017 Rate Review (PUCT Docket No. 46957).”
The NEE Merger Agreement contemplated that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended EFH Debtor Plan. Oncor and NEE filed that joint application in PUCT Docket No. 46238 in October 2016. The PUCT denied the application on April 13, 2017. The parties have until May 8, 2017 to file a motion for rehearing with the PUCT. We cannot predict the result of PUCT Docket No. 46238 or the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Amended EFH Debtor Plan, including the EFH Acquisition, will (or when they will) close.
Settlement Agreement
In connection with the EFH Bankruptcy Proceedings, the EFH Debtors and various creditor parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the EFH Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the EFH Debtors’ current and former directors, the Sponsor Group, managers and officers and other related entities. The Settlement Agreement contemplates a release of such claims upon approval of the Settlement Agreement by the bankruptcy court, which approval was obtained in December 2015.
The Settlement Agreement settles substantially all inter-debtor claims through the effective date of the Settlement Agreement. These settled claims include potentially contentious inter-debtor claims, including various potential avoidance actions and claims arising under numerous debt agreements, tax sharing agreements, and contested property transfers. The release provisions of the Settlement Agreement took effect immediately upon the entry of the bankruptcy court order approving the Settlement Agreement. In this regard, substantially all of the potential affiliate claims, derivative claims and other types of disputes among affiliates (including claims against Oncor) have been resolved by bankruptcy court order. Accordingly, we believe the Settlement Agreement resolves all affiliate claims against Oncor and its assets existing as of the effective date of the Settlement Agreement.
3. REGULATORY MATTERS
Change in Control Reviews
See “Regulatory Matters Related to EFH Bankruptcy Proceedings” in Note 2 to Financials Statements.
2017 Rate Review (PUCT Docket No. 46957)
In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory on March 17, 2017 based on a January 1, 2016 to December 31, 2016 test year. If our proposed tariffs are adopted as filed, our annual revenue would increase by approximately $320 million. A procedural schedule has been agreed to by the parties to the case, which would result in PUCT hearings being held July 31, 2017 to August 9, 2017. Oncor has agreed to extend the requested effective date of the rate case increase such that the jurisdictional deadline for the PUCT to act has been extended to November 30, 2017.
We are involved in various other regulatory proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.
See Note 3 to Financial Statements in our 2016 Form 10-K for additional information regarding regulatory matters.
4. REGULATORY ASSETS AND LIABILITIES
Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT. Components of our regulatory assets and liabilities are provided in the table below. Amounts not earning a return through rate regulation are noted.
| | | | | | | | |
| | Remaining Rate Recovery/Amortization Period at | | Carrying Amount At |
| | March 31, 2017 | | March 31, 2017 | | December 31, 2016 |
| | | | | | | | |
Regulatory assets: | | | | | | | | |
Employee retirement costs being amortized | | 3 years | | $ | 19 | | $ | 23 |
Unrecovered employee retirement costs incurred since the last rate review period (b) | | To be determined | | | 335 | | | 327 |
Employee retirement liability (a)(b)(c) | | To be determined | | | 835 | | | 849 |
Self-insurance reserve (primarily storm recovery costs) being amortized | | 3 years | | | 56 | | | 64 |
Unrecovered self-insurance reserve incurred since the last rate review period (b) | | To be determined | | | 369 | | | 367 |
Securities reacquisition costs (post-industry restructure) | | Lives of related debt | | | 13 | | | 13 |
Deferred conventional meter and metering facilities depreciation | | Largely 4 years | | | 73 | | | 78 |
Under-recovered AMS costs | | To be determined | | | 209 | | | 205 |
Under-recovered wholesale transmission service expense (a) | | 1 year or less | | | 6 | | | - |
Energy efficiency performance bonus (a) | | 1 year or less | | | 7 | | | 10 |
Other regulatory assets | | Various | | | 37 | | | 38 |
Total regulatory assets | | | | | 1,959 | | | 1,974 |
| | | | | | | | |
Regulatory liabilities: | | | | | | | | |
Estimated net removal costs | | Lives of related assets | | | 857 | | | 819 |
Investment tax credit and protected excess deferred taxes | | Various | | | 9 | | | 10 |
Over-recovered wholesale transmission service expense (a) | | 1 year or less | | | - | | | 10 |
Other regulatory liabilities | | Various | | | 23 | | | 17 |
Total regulatory liabilities | | | | | 889 | | | 856 |
Net regulatory asset | | | | $ | 1,070 | | $ | 1,118 |
____________
| (a) | | Not earning a return in the regulatory rate-setting process. |
| (b) | | Recovery is specifically authorized by statute or by the PUCT, subject to reasonableness review. |
| (c) | | Represents unfunded liabilities recorded in accordance with pension and OPEB accounting standards. |
5. BORROWINGS UNDER CREDIT FACILITIES
At March 31, 2017, we had a $2.0 billion secured revolving credit facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances. In October 2016, we exercised the second of two one-year extensions available to us and extended the term of the revolving credit facility to October 2018. The terms of the revolving credit facility allow us to request an increase in our borrowing capacity of $100 million in the aggregate provided certain conditions are met, including lender approval.
Borrowings under the revolving credit facility are classified as short-term on the balance sheet and are secured equally and ratably with all of our other secured indebtedness by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity. The property is mortgaged under the Deed of Trust.
At March 31, 2017, we had outstanding borrowings under the revolving credit facility totaling $880 million with an interest rate of 1.94% and outstanding letters of credit totaling $9 million. At December 31, 2016, we had outstanding borrowings under the revolving credit facility totaling $789 million with an interest rate of 1.72% and outstanding letters of credit totaling $7 million.
Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt. At March 31, 2017, all outstanding borrowings bore interest at LIBOR plus 1.00%. Amounts borrowed under the revolving credit facility, once repaid, can be borrowed again from time to time.
An unused commitment fee is payable quarterly in arrears and upon termination or commitment reduction at a rate equal to 0.100% to 0.275% (such spread depending on certain credit ratings assigned to our senior secured debt) of the daily unused commitments under the revolving credit facility. Letter of credit fees on the stated amount of letters of credit issued under the revolving credit facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to the spread over adjusted LIBOR. Customary fronting and administrative fees are also payable to letter of credit fronting banks. At March 31, 2017, letters of credit bore interest at 1.20%, and a commitment fee (at a rate of 0.10% per annum) was payable on the unfunded commitments under the revolving credit facility, each based on our current credit ratings.
Subject to the limitations described below, borrowing capacity available under the revolving credit facility at March 31, 2017 and December 31, 2016 was $1.111 billion and $1.204 billion, respectively. Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions. As described further in Note 6, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust. At March 31, 2017, the available borrowing capacity of the revolving credit facility could be fully drawn.
The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets. In addition, the revolving credit facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants. For purposes of the ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP). Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above. At March 31, 2017, we were in compliance with this covenant and with all other covenants.
6. LONG-TERM DEBT
Our long-term debt is 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 March 31, 2017 and December 31, 2016, our long-term debt consisted of the following:
| | | | | | |
| | March 31, | | December 31, |
| | 2017 | | 2016 |
| | | | | | |
5.000% Fixed Senior Notes due September 30, 2017 | | $ | 324 | | $ | 324 |
6.800% Fixed Senior Notes due September 1, 2018 | | | 550 | | | 550 |
2.150% Fixed Senior Notes due June 1, 2019 | | | 250 | | | 250 |
5.750% Fixed Senior Notes due September 30, 2020 | | | 126 | | | 126 |
4.100% Fixed Senior Notes due June 1, 2022 | | | 400 | | | 400 |
7.000% Fixed Debentures due September 1, 2022 | | | 800 | | | 800 |
2.950% Fixed Senior Notes due April 1, 2025 | | | 350 | | | 350 |
7.000% Fixed Senior Notes due May 1, 2032 | | | 500 | | | 500 |
7.250% Fixed Senior Notes due January 15, 2033 | | | 350 | | | 350 |
7.500% Fixed Senior Notes due September 1, 2038 | | | 300 | | | 300 |
5.250% Fixed Senior Notes due September 30, 2040 | | | 475 | | | 475 |
4.550% Fixed Senior Notes due December 1, 2041 | | | 400 | | | 400 |
5.300% Fixed Senior Notes due June 1, 2042 | | | 500 | | | 500 |
3.750% Fixed Senior Notes due April 1, 2045 | | | 550 | | | 550 |
Unamortized discount and debt issuance costs | | | (34) | | | (36) |
Less amount due currently | | | (324) | | | (324) |
Long-term debt, less amounts due currently | | | 5,517 | | | 5,515 |
Deed of Trust
Our secured indebtedness, including the revolving credit facility described in Note 5, is secured equally and ratably by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity. The property is mortgaged under the Deed of Trust. The Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent. At March 31, 2017, the amount of available bond credits was $2.532 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.792 billion.
Fair Value of Long-Term Debt
At March 31, 2017 and December 31, 2016, the estimated fair value of our long-term debt (including current maturities, if any) totaled $6.736 billion and $6.751 billion, respectively, and the carrying amount totaled $5.841 billion and $5.839 billion, respectively. The fair value is estimated using observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.
7. COMMITMENTS AND CONTINGENCIES
EFH Bankruptcy Proceedings
On the EFH Petition Date, the Debtors commenced the EFH Bankruptcy Proceedings. The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings. See Notes 2 and 10 for a discussion of the potential impacts on us as a result of the EFH Bankruptcy Proceedings and our related-party transactions involving members of the Texas Holdings Group, respectively.
Legal/Regulatory Proceedings
We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows. See Note 3 in this report and Note 8 to Financial Statements in our 2016 Form 10-K for additional information regarding our legal and regulatory proceedings.
8. MEMBERSHIP INTERESTS
Cash Distributions
Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. At March 31, 2017, $89 million was available for distribution to our members as our regulatory capitalization ratio was 59.5% debt to 40.5% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of acquisition accounting (which included recording the initial goodwill and fair value adjustments and subsequent related impairments and amortization).
On April 26, 2017, our board of directors declared a cash distribution of $86 million, which was paid to our members on April 27, 2017. In March 2017, our board of directors declared, and we paid, a cash distribution of $86 million to our members.
Membership Interests
The following table presents the changes to membership interests during the three months ended March 31, 2017 and 2016:
| | | | | | | | |
| Capital Accounts | | Accumulated Other Comprehensive Income (Loss) | | Total Membership Interests |
| | | | | | | | |
Balance at December 31, 2016 | $ | 7,822 | | $ | (111) | | $ | 7,711 |
Net income | | 73 | | | - | | | 73 |
Distributions | | (86) | | | - | | | (86) |
Net effects of cash flow hedges (net of tax) | | - | | | 1 | | | 1 |
Balance at March 31, 2017 | $ | 7,809 | | $ | (110) | | $ | 7,699 |
| | | | | | | | |
Balance at December 31, 2015 | $ | 7,621 | | $ | (113) | | $ | 7,508 |
Net income | | 81 | | | - | | | 81 |
Distributions | | (56) | | | - | | | (56) |
Net effects of cash flow hedges (net of tax) | | - | | | - | | | - |
Balance at March 31, 2016 | $ | 7,646 | | $ | (113) | | $ | 7,533 |
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes to accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016:
| | | | | | | | |
| Cash Flow Hedges – Interest Rate Swap | | Defined Benefit Pension and OPEB Plans | | Accumulated Other Comprehensive Income (Loss) |
| | | | | | | | |
Balance at December 31, 2016 | $ | (20) | | $ | (91) | | $ | (111) |
Defined benefit pension plans (net of tax) | | - | | | - | | | - |
Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges | | 1 | | | - | | | 1 |
Balance at March 31, 2017 | $ | (19) | | $ | (91) | | $ | (110) |
| | | | | | | | |
Balance at December 31, 2015 | $ | (22) | | $ | (91) | | $ | (113) |
Defined benefit pension plans (net of tax) | | - | | | - | | | - |
Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges | | - | | | - | | | - |
Balance at March 31, 2016 | $ | (22) | | $ | (91) | | $ | (113) |
9. PENSION AND OPEB PLANS
Pension Plans
We sponsor the Oncor Retirement Plan and also have liabilities under the Vistra Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended, and are subject to the provisions of ERISA. Employees do not contribute to either plan. We also have a supplemental pension plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plans. See Note 10 to Financial Statements in our 2016 Form 10-K for additional information regarding pension plans.
Oncor OPEB Plan
The Oncor OPEB Plan covers our eligible current and future retirees as well as certain eligible retirees of EFH Corp./Vistra whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp. Vistra is solely responsible for its portion of the liability for retiree benefits related to those retirees. As we are not responsible for Vistra’s portion of the Oncor OPEB Plan’s unfunded liability, that amount is not reported on our balance sheet. See Note 10 to Financial Statements in our 2016 Form 10-K for additional information.
Pension and OPEB Costs
Our net costs related to pension plans and the Oncor OPEB Plan for the three months ended March 31, 2017 and 2016 were comprised of the following:
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | | |
Components of net allocated pension costs: | | | | | | |
Service cost | | $ | 6 | | $ | 6 |
Interest cost | | | 33 | | | 34 |
Expected return on assets | | | (29) | | | (31) |
Amortization of net loss | | | 11 | | | 10 |
Net pension costs | | | 21 | | | 19 |
Components of net OPEB costs: | | | | | | |
Service cost | | | 2 | | | 2 |
Interest cost | | | 12 | | | 12 |
Expected return on assets | | | (2) | | | (2) |
Amortization of prior service cost | | | (5) | | | (5) |
Amortization of net loss | | | 8 | | | 8 |
Net OPEB costs | | | 15 | | | 15 |
Total net pension and OPEB costs | | | 36 | | | 34 |
Less amounts deferred principally as property or a regulatory asset | | | (25) | | | (25) |
Net amounts recognized as expense | | $ | 11 | | $ | 9 |
The discount rates reflected in net pension and OPEB costs in 2017 are 4.04%, 4.28% and 4.35% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plan, respectively. The expected return on pension and OPEB plan assets reflected in the 2017 cost amounts are 5.17%, 5.13% and 6.10% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plan, respectively.
Pension and OPEB Plans Cash Contributions
We made cash contributions to the pension plans and Oncor OPEB Plan of $1 million and $8 million, respectively, during the three months ended March 31, 2017. We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $148 million and $23 million, respectively, during the remainder of 2017. Our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $586 million and $153 million, respectively, in the 2017 to 2021 period based on the latest actuarial projections.
10. RELATED-PARTY TRANSACTIONS
The following represent our significant related-party transactions at March 31, 2017. See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings and information regarding the Vistra Spin-Off. As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be related parties as of October 3, 2016.
| · | | We recorded revenue from TCEH, principally for electricity delivery fees, which totaled $220 million for the three months ended March 31, 2016. The fees are based on rates regulated by the PUCT that apply to all REPs. |
| · | | EFH Corp. subsidiaries charged us for certain administrative services at cost. Our payments to EFH Corp. subsidiaries for administrative services, which are primarily reported in operation and maintenance expenses, totaled $1 million for the three months ended March 31, 2016. We also charged each other for |
shared facilities at cost. Our payments to EFH Corp. for shared facilities totaled $1 million for the three months ended March 31, 2016. Payments we received from EFH Corp. subsidiaries related to shared facilities totaled less than $1 million for the three months ended March 31, 2016. |
| · | | We are not a member of EFH Corp.’s consolidated tax group, but EFH Corp.’s consolidated federal income tax return includes EFH Corp.’s portion of our results due to EFH Corp.’s equity ownership in us. Under the terms of a tax sharing agreement among us, Oncor Holdings, Texas Transmission, Investment LLC and EFH Corp., we are generally obligated to make payments to Texas Transmission, Investment LLC and EFH Corp., pro rata in accordance with their respective membership interests, in an aggregate amount that is substantially equal to the amount of federal income taxes that we would have been required to pay if we were filing our own corporate income tax return. For periods prior to the tax sharing agreement (entered into in October 2007 and amended and restated in November 2008), we are responsible for our share, if any, of redetermined tax liability for the EFH Corp. consolidated tax group. EFH Corp. also includes our results in its consolidated Texas margin tax payments, which are accounted for as income taxes and calculated as if we were filing our own return. See discussion in Note 1 to Financial Statements in our 2016 Form 10-K under “Income Taxes.” Under the “in lieu of” tax concept, all in lieu of tax assets and tax liabilities represent amounts that will eventually be settled with our members. In the unlikely event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes. |
Amounts payable to (receivable from) members related to income taxes under the tax sharing agreement and reported on our balance sheet consisted of the following:
| | | | | | | | | | | | | | | | | |
| At March 31, 2017 | | At December 31, 2016 |
| EFH Corp. | | Texas Transmission | | Total | | EFH Corp. | | Texas Transmission | | Total |
| | | | | | | | | | | | | | | | | |
Federal income taxes receivable | $ | (1) | | $ | (5) | | $ | (6) | | $ | (62) | | $ | (18) | | $ | (80) |
Texas margin taxes payable | | 25 | | | - | | | 25 | | | 20 | | | - | | | 20 |
Net payable (receivable) | $ | 24 | | $ | (5) | | $ | 19 | | $ | (42) | | $ | (18) | | $ | (60) |
Cash receipts from members related to federal income taxes for the three months ended March 31, 2017 totaled $135 million from EFH Corp. and $15 million from Texas Transmission.
| · | | Related parties of the Sponsor Group have (1) sold, acquired or participated in the offerings of our debt or debt securities in open market transactions or through loan syndications, and (2) performed various financial advisory, dealer, commercial banking and investment banking services for us and certain of our affiliates for which they have received or will receive customary fees and expenses, and may from time to time in the future participate in any of the items in (1) and (2) above. Also, as of March 31, 2017, 16.6% of the equity in an existing vendor of the company was held by a member of the Sponsor Group. During 2017 and 2016, this vendor performed transmission and distribution system construction and maintenance services for us. Cash payments were made for such services to this vendor totaling $45 million dollars for the three months ended March 31, 2017, of which approximately $42 million was capitalized and $3 million was recorded as an operation and maintenance expense. At March 31, 2017, we had outstanding trade payables to this vendor of $9 million. |
See Note 8 for information regarding distributions to members and Note 9 for information regarding our participation in the EFH Corp. pension plan and transactions with EFH Corp. involving employee benefit matters.
11. SUPPLEMENTARY FINANCIAL INFORMATION
Major Customers
Revenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 23% of our total operating revenues for each of the three-month periods ended March 31, 2017 and 2016. Revenues from REP subsidiaries of another nonaffiliated entity, collectively represented 18% and 16% of total operating revenues for each of the three months ended March 31, 2017 and 2016, respectively. No other customer represented 10% or more of our total operating revenues.
Other Income and (Deductions)
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | | |
Professional fees | | $ | (5) | | $ | (4) |
Non-recoverable pension and OPEB (Note 9) | | | (1) | | | (1) |
Other | | | 2 | | | - |
Total other income and (deductions) - net | | $ | (4) | | $ | (5) |
Interest Expense and Related Charges
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | |
Interest | | $ | 86 | | $ | 85 |
Amortization of debt issuance costs and discounts | | | 1 | | | 1 |
Less allowance for funds used during construction – capitalized interest portion | | | (2) | | | (2) |
Total interest expense and related charges | | $ | 85 | | $ | 84 |
Trade Accounts and Other Receivables
Trade accounts and other receivables reported on our balance sheet consisted of the following:
| | | | | | |
| | At March 31, | | At December 31, |
| | 2017 | | 2016 |
| | | | | | |
Gross trade accounts and other receivables | | $ | 508 | | $ | 548 |
Allowance for uncollectible accounts | | | (3) | | | (3) |
Trade accounts receivable – net | | $ | 505 | | $ | 545 |
At March 31, 2017 and December 31, 2016, REP subsidiaries of a nonaffiliated entity collectively represented approximately 14% and 15% of the trade accounts receivable amount, respectively. At March 31, 2017 and December 31, 2016, REP subsidiaries of another nonaffiliated entity collectively represented approximately 11% and 12% of the trade accounts receivable amount, respectively.
Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by nonaffiliated REPs are deferred as a regulatory asset.
Investments and Other Property
Investments and other property reported on our balance sheet consisted of the following:
| | | | | | |
| | At March 31, | | At December 31, |
| | 2017 | | 2016 |
| | | | | | |
Assets related to employee benefit plans, including employee savings programs | | $ | 101 | | $ | 98 |
Land and other investments | | | 2 | | | 2 |
Total investments and other property | | $ | 103 | | $ | 100 |
Property, Plant and Equipment
Property, plant and equipment reported on our balance sheet consisted of the following:
| | | | | | |
| | At March 31, | | At December 31, |
| | 2017 | | 2016 |
| | | | | | |
Total assets in service | | $ | 20,385 | | $ | 20,234 |
Less accumulated depreciation | | | 6,935 | | | 6,836 |
Net of accumulated depreciation | | | 13,450 | | | 13,398 |
Construction work in progress | | | 649 | | | 416 |
Held for future use | | | 15 | | | 15 |
Property, plant and equipment – net | | $ | 14,114 | | $ | 13,829 |
Intangible Assets
Intangible assets (other than goodwill) reported on our balance sheet as part of property, plant and equipment consisted of the following:
| | | | | | | | | | | | | | | | | |
| At March 31, 2017 | | At December 31, 2016 |
| Gross | | | | | | | | Gross | | | | | | |
| Carrying | | Accumulated | | | | | Carrying | | Accumulated | | | |
| Amount | | Amortization | | Net | | Amount | | Amortization | | Net |
| | | | | | | | | | | | | | | | | |
Identifiable intangible assets subject to amortization: | | | | | | | | | | | | | | | | | |
Land easements | $ | 494 | | $ | 96 | | $ | 398 | | $ | 491 | | $ | 94 | | $ | 397 |
Capitalized software | | 476 | | | 339 | | | 137 | | | 470 | | | 326 | | | 144 |
Total | $ | 970 | | $ | 435 | | $ | 535 | | $ | 961 | | $ | 420 | | $ | 541 |
Aggregate amortization expense for intangible assets totaled $15 million and $16 million for the three months ended March 31, 2017 and 2016, respectively. The estimated aggregate amortization expense for each of the next five fiscal years is as follows:
| | | |
Year | | Amortization Expense |
| | | |
2017 | | $ | 57 |
2018 | | | 51 |
2019 | | | 48 |
2020 | | | 47 |
2021 | | | 47 |
At both March 31, 2017 and December 31, 2016, goodwill totaling $4.1 billion was reported on our balance sheet. None of this goodwill is being deducted for tax purposes.
Employee Benefit Obligations and Other
Employee benefit obligations and other reported on our balance sheet consisted of the following:
| | | | | | |
| | At March 31, | | At December 31, |
| | 2017 | | 2016 |
| | | | | | |
Retirement plans and other employee benefits | | $ | 2,091 | | $ | 2,092 |
Uncertain tax positions (including accrued interest) | | | 3 | | | 3 |
Investment tax credits | | | 12 | | | 12 |
Other | | | 70 | | | 61 |
Total employee benefit obligations and other | | $ | 2,176 | | $ | 2,168 |
Supplemental Cash Flow Information
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | | |
Cash payments (receipts) related to: | | | | | | |
Interest | | $ | 99 | | $ | 98 |
Less capitalized interest | | | (2) | | | (2) |
Interest payments (net of amounts capitalized) | | $ | 97 | | $ | 96 |
| | | | | | |
Amount in lieu of income taxes: | | | | | | |
Federal | | $ | (150) | | $ | - |
| | | | | | |
Noncash construction expenditures (a) | | $ | 133 | | $ | 82 |
_____________
| (a) | | Represents end-of-period accruals. |
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 months ended March 31, 2017 and 2016 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements as well as the Risk Factors contained in our 2016 Form 10-K.
All dollar amounts in the tables in the following discussion and analysis are stated in millions of U.S. dollars unless otherwise indicated.
BUSINESS
We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas. Revenues from REP subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 23% of our total operating revenues for each of the three-month periods ended March 31, 2017 and 2016. We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp. Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC. We are managed as an integrated business; consequently, there are no separate reportable business segments.
Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality. These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below. Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group. The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group. We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa. Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.
Significant Activities and Events
EFH Bankruptcy Proceedings — On the EFH Petition Date, the Debtors commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings. We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings. See Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements, a discussion of the proposed change in control of Oncor’s indirect majority owner in connection with such proceedings, and a discussion of the Vistra Spin-Off. As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.
The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date. Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations. Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees. As of March 31, 2017, we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million.
The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential exposure at this time is unknown. We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows. See Notes 10 for details of Oncor’s related-party transactions with member of the Texas Holding Group.
For information regarding matters with the PUCT, see discussion below under “Regulation and Rates.”
RESULTS OF OPERATIONS
Operating Data
| | | | | | | | | |
| | Three Months Ended March 31, | | % |
| | 2017 | | 2016 | | Change |
| | | | | | |
Operating statistics: | | | | | | |
Electric energy volumes (gigawatt-hours): | | | | | | |
Residential | | 8,489 | | 8,649 | | (1.8) |
Other (a) | | 16,889 | | 16,884 | | - |
Total electric energy volumes | | 25,378 | | 25,533 | | (0.6) |
Reliability statistics (b): | | | | | | | | | |
System Average Interruption Duration Index (SAIDI) (nonstorm) | | | 95.8 | | | 96.6 | | | (0.8) |
System Average Interruption Frequency Index (SAIFI) (nonstorm) | | | 1.5 | | | 1.4 | | | 7.1 |
Customer Average Interruption Duration Index (CAIDI) (nonstorm) | | | 65.7 | | | 70.9 | | | (7.3) |
Electricity points of delivery (end of period and in thousands): | | | | | | | | | |
Electricity distribution points of delivery (based on number of active meters) | | | 3,450 | | | 3,393 | | | 1.7 |
| | | | | | | | | |
| | Three Months Ended March 31, | | $ |
| | | 2017 | | | 2016 | | Change |
| | | | | | | | | |
Operating revenues: | | | | | | | | | |
Distribution base revenues | | $ | 414 | | $ | 415 | | $ | (1) |
Transmission base revenues (c) | | | 236 | | | 226 | | | 10 |
Reconcilable rates: | | | | | | | | | |
TCRF (c) | | | 314 | | | 301 | | | 13 |
Transition charges | | | - | | | 21 | | | (21) |
AMS surcharges | | | 28 | | | 35 | | | (7) |
EECRF and rate case expense surcharges | | | 11 | | | 13 | | | (2) |
Other miscellaneous revenues | | | 15 | | | 14 | | | 1 |
Intercompany eliminations (c) | | | (83) | | | (82) | | | (1) |
Total operating revenues | | $ | 935 | | $ | 943 | | $ | (8) |
________________
| (a) | | Includes small business, large commercial and industrial and all other non-residential distribution points of delivery. |
| (b) | | SAIDI is the average number of minutes electric service is interrupted per consumer in a year. SAIFI is the average number of electric service interruptions per consumer in a year. CAIDI is the average duration in minutes per electric service interruption in a year. The statistics presented are based on twelve months ended March 31, 2017 and 2016 data. |
| (c) | | A portion of transmission base revenues (TCOS) is recovered from Oncor’s distribution customers through the TCRF rate. |
Financial Results — Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Total operating revenues decreased $8 million to $935 million in 2017. Revenue is billed under tariffs approved by the PUCT. The change reflected:
| · | | A Decrease in Distribution Base Revenues — Distribution base rates are set periodically in a rate review docket initiated by either us or the PUCT. The present distribution base rates became effective on January 1, 2012. The $1 million decrease in distribution base rate revenues includes a $7 million decrease due to lower consumption primarily driven by milder winter weather conditions, partially offset by a $6 million increase due to growth in points of delivery. |
| · | | An Increase in Transmission Base Revenues — Transmission base revenues (or TCOS revenues) are collected from load serving entities benefitting from our transmission system. REPs serving customers in our service territory are billed through the TCRF mechanism discussed below, while other load serving entities are billed directly. In order to reflect changes in our invested transmission capital, PUCT rules allow us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year. The $10 million increase in transmission base revenues primarily reflects interim rate increases to recover ongoing investment, including a return component, in the transmission system. See TCOS Filings Table below for a listing of Transmission Interim Rate Update Applications impacting revenues for the three months ended March 31, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017. |
TCOS Filings Table
| | | | | | | | | | | | | |
Docket No. | | Filed | | Effective | | Annual Revenue Impact | | Third-Party Wholesale Transmission | | Included in TCRF |
46825 | | February 2017 | | March 2017 | | $ | 7 | | $ | 4 | | $ | 3 |
46210 | | July 2016 | | September 2016 | | $ | 14 | | $ | 9 | | $ | 5 |
44968 | | July 2015 | | September 2015 | | $ | 21 | | $ | 14 | | $ | 7 |
| · | | A Decrease in Reconcilable Rates — The PUCT has designated certain tariffs (TCRF, EECRF surcharge, AMS surcharge and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs, including a return component where allowed, are deferred as either regulatory assets or regulatory liabilities. Accordingly, at prescribed intervals, future applicable tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets. While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income, except for the AMS return component. See Note 1 to Financial Statements for a discussion of the accounting treatment of reconcilable tariffs. |
| - | | An Increase in TCRF — TCRF is a distribution rate charged to REPs to recover fees we pay to other transmission service providers under their TCOS rates and the retail portion of our own TCOS rate. PUCT rules allow us to update the TCRF component of our retail delivery rates on March 1 and September 1 each year. The $13 million increase in TCRF revenue reflects the pass through of a $12 million increase in third-party wholesale transmission expense described below and a $1 million increase in our own TCOS rate to recover ongoing investment in our transmission system including a return component. At March 31, 2017, $6 million was deferred as under-recovered wholesale transmission service expense (see Note 4 to Financial Statements). See TCRF Filings Table below for a listing of TCRF filings impacting cash flows for the three months ended March 31, 2017 and 2016, as well as filings that will impact cash flows for the year ended December 31, 2017. |
TCRF Filings Table
| | | | | | | |
| | | | | | Semi-Annual |
| | | | | | Billing Impact |
Docket No. | | Filed | | Effective | | Increase (Decrease) |
46616 | | November 2016 | | March 2017 – August 2017 | | $ | (86) |
46012 | | May 2016 | | September 2016 – February 2017 | | $ | 163 |
45406 | | December 2015 | | March 2016 – August 2016 | | $ | (64) |
44771 | | May 2015 | | September 2015 – February 2016 | | $ | 47 |
| - | | A Decrease in Transition Charges — Transition charge revenue was dedicated to paying the principal and interest of transition bonds. We account for the difference between transition charge revenue recognized and cost related to the transition bonds as a regulatory asset or liability. The $21 million decrease in charges related to transition bonds corresponds with an offsetting decrease in amortization and interest expense and reflects the maturity of the 2004 Series transition bonds in May 2016. Final true-up proceedings for the transition bonds were conducted by Oncor and the PUCT during 2016 and had no material net income impact. |
| - | | A Decrease in AMS Surcharges — The PUCT has authorized monthly per customer advanced meter cost recovery factors designed to recover the cost of our initial AMS deployment over an eleven-year period ending in 2019. We recognize revenues equal to reconcilable expenses incurred including depreciation net of calculated savings plus a return component on our investment. The $7 million decrease in recognized AMS revenues is primarily due to $6 million lower reconcilable depreciation expense. |
| - | | A Decrease in EECRF and Rate Case Expense Surcharges — The EECRF is a reconcilable rate designed to recover current energy efficiency program costs and performance bonuses earned by exceeding PUCT targets in prior years and recover or refund any over/under recovery of our costs in prior years. We recognize the performance bonuses in other miscellaneous revenues upon approval by the PUCT. PUCT rules require us to file an annual EECRF tariff update by the first business day in June of each year for implementation on March 1 of the next calendar year. The $2 million decrease in EECRF surcharges is offset in operation and maintenance expense. See EECRF Filings Table below for a listing of EECRF filings impacting revenues for the three months ended March 31, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017. |
EECRF Filings Table
| | | | | | | | | | | | | | | | |
Docket No. | | Filed | | Effective | | Average Monthly Charge per Residential Customer | | Program Costs | | Performance Bonus | | Under-/ (Over)- Recovery |
46013 | | June 2016 | | March 2017 | | $ | 0.94 | | $ | 49 | | $ | 10 | | $ | (4) |
44784 | | June 2015 | | March 2016 | | $ | 1.19 | | $ | 61 | | $ | 10 | | $ | (4) |
42559 | | May 2014 | | March 2015 | | $ | 1.23 | | $ | 50 | | $ | 23 | | $ | (5) |
| · | | An Increase in Other Miscellaneous Revenues — Miscellaneous revenues include disconnect/reconnect fees and other discretionary revenues for services requested by REPs, services provided on a time and materials basis, rents, energy efficiency performance bonuses approved by the PUCT and other miscellaneous revenues. The $1 million increase includes an increase in requested services. |
Wholesale transmission service expense increased $12 million, or 5%, to $231 million in 2017 due to higher fees paid to other transmission entities.
Operation and maintenance expense increased $13 million, or 7%, to $195 million in 2017. Operation and maintenance expense increased primarily due to higher contractor costs of $6 million, higher labor related costs of $5 million and higher vegetation management costs of $3 million. Amortization of regulatory assets reported in operation and maintenance expense totaled $12 million for each of the three-month periods ended March 31, 2017 and 2016.
Depreciation and amortization decreased $16 million, or 8%, to $195 million in 2017. The decrease reflects lower amortization of regulatory assets of $21 million primarily related to the maturity of the transition bonds (with an offsetting decrease in revenues), partially offset by a $5 million increase attributed to ongoing investments in property, plant and equipment.
Provision in lieu of income taxes totaled $40 million (including a $2 million benefit related to nonoperating income) in 2017 compared to $48 million (including a $1 million benefit related to nonoperating income) in 2016. The effective income tax rate on pretax income was 35.4% and 37.2% for the years 2017 and 2016, respectively. The effective income tax rate on pretax income differs from the U.S. federal statutory rate of 35% primarily due to the effect of the Texas margin tax. For the current period, the effect of the Texas margin tax is largely offset by non-taxable gains on employee benefit plans.
Net income was $8 million lower than the prior period. Revenues for the current period included increases due to growth in points of delivery and increases in transmission investment, offset by decreased revenues due to lower consumption, primarily driven by milder winter weather conditions. Operation and maintenance expense was up for the current period, partially offset by lower taxes.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows — Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Cash provided by operating activities totaled $401 million and $189 million in 2017 and 2016, respectively. The $212 million increase is primarily the result of a net tax refund from members under the tax sharing agreement of $150 million, a $52 million increase in transmission and distribution receipts and $25 million less prepayments. The tax refund is primarily related to estimated tax payments made in a prior period before the enactment of bonus depreciation on a retroactive basis.
Cash provided by financing activities totaled $5 million and $158 million in 2017 and 2016, respectively. The $153 million change reflects a $123 million decrease in short-term borrowings and an increase in distributions to our members of $30 million. See Note 8 to Financial Statements for additional information regarding distributions to our members.
Cash used in investing activities, which consists primarily of capital expenditures, totaled $421 million and $352 million in 2017 and 2016, respectively. The 2017 activity primarily reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending.
Depreciation and amortization expense reported in the statements of consolidated cash flows was $12 million more than the amounts reported in the statements of consolidated income in each of the three-month periods ended March 31, 2017 and 2016. The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense) and the amortization of debt fair value discount (reported in interest expense and related charges).
Available Liquidity/Credit Facility — Our primary source of liquidity, aside from operating cash flows, is our ability to borrow under our revolving credit facility. At March 31, 2017, we had a $2.0 billion secured revolving credit facility. In October 2016, we exercised the second of two one-year extensions available to us and extended the term of the revolving credit facility to October 2018. Subject to the limitations described below, available borrowing capacity under our revolving credit facility totaled $1.111 billion and $1.204 billion at March 31, 2017 and December 31, 2016, respectively. We may request an increase in our borrowing capacity of $100 million in the aggregate provided certain conditions are met, including lender approval.
The revolving credit facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future. At March 31, 2017, we were in compliance with the covenant. See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio. The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other 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 have been certified to the Deed of Trust collateral agent. Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings. To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent. At March 31, 2017, the available bond credits totaled $2.532 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $1.792 billion. At March 31, 2017, the available borrowing capacity of the revolving credit facility could be fully drawn.
Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint. Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility. See Note 5 to Financial Statements for additional information regarding the revolving credit facility.
Cash and cash equivalents totaled $1 million and $16 million at March 31, 2017 and December 31, 2016, respectively. Available liquidity (cash and available revolving credit facility capacity) at March 31, 2017 totaled $1.112 billion, reflecting a decrease of $108 million from December 31, 2016. The decrease reflects the ongoing capital investment in transmission and distribution infrastructure.
We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. At March 31, 2017 and December 31, 2016, our regulatory capitalization ratios were 59.5% debt to 40.5% equity and 59.4% debt to 40.6% equity, respectively. See Note 8 to Financial Statements for discussion of the regulatory capitalization ratio.
Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.5 billion in 2017. Management currently expects to recommend to our board of directors capital expenditures of approximately $1.6 billion in each of the years 2018 through 2021. These capital expenditures are expected to be used for investment in transmission and distribution infrastructure.
We expect cash flows from operations, combined with availability under the revolving credit facility, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months. We do not anticipate the EFH Bankruptcy Proceedings to have a material impact on our liquidity. Should additional liquidity or capital requirements arise, we may need to access capital markets, generate equity capital or preserve equity through reductions or suspension of distributions to members. In addition, we may also consider new debt issuances, repurchases, exchange offers and other transactions in order to refinance or manage our long-term debt. The inability to raise capital on favorable terms or failure of counterparties to perform under credit or other financial agreements, particularly during any uncertainty in the financial markets, could impact our ability to sustain and grow the business and would likely increase capital costs that may not be recoverable through rates.
Distributions — On April 26, 2017, our board of directors declared a cash distribution of $86 million, which was paid to our members on April 27, 2017. In March 2017, our board of directors declared, and we paid, a cash distribution of $86 million to our members.
See Note 8 to Financial Statements for discussion of the distribution restriction.
Pension and OPEB Plan Funding — Our funding for the pension plans and the Oncor OPEB Plan in the calendar year 2017 is expected to total $149 million and $31 million, respectively. In the three months ended March 31, 2017, we made cash contributions to the pension plans and the Oncor OPEB Plan of $1 million and $8 million, respectively.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions — Our revolving credit facility contains a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00. For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP). Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above. At March 31, 2017, we were in compliance with this covenant.
Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities. Our access to capital markets and cost of debt could be directly affected by our credit ratings. Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease. In particular, a decline in credit ratings would increase the cost of our revolving credit facility (as discussed below). In the event any adverse action with respect to our credit ratings takes place and causes borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.
Most of our large suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with us. If our credit ratings decline, the costs to operate our business could increase
because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with us.
Presented below are the credit ratings assigned for our debt securities at April 27, 2017. On April 6, 2017, Fitch changed our outlook to “stable” from “rating watch positive,” and on April 17, 2017, S&P changed our outlook to “developing” from “positive,” each based on the PUCT’s denial of the joint application in PUCT Docket No. 46238 regarding NEE’s proposed acquisition of Oncor. On April 24, 2017, Moody’s confirmed our A3 senior secured rating and changed our outlook to “stable” from “ratings under review for further upgrade.”
| | |
| | Senior Secured |
S&P | | A |
Moody’s | | A3 |
Fitch | | BBB+ |
| | |
As described in Note 7 to Financial Statements in our 2016 Form 10-K, our long-term debt is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.
A rating reflects only the view of a rating agency, and is not a recommendation to buy, sell or hold securities. Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.
Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings. Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt. Based on the current ratings assigned to our debt securities at April 27, 2017, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.00%. A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.
Material Cross Default Provisions — Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms or to observe other covenants that could result in an acceleration of payments due. Such provisions are referred to as “cross default” provisions.
Under our revolving credit facility, a default by us in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($880 million in short-term borrowings and $9 million in letters of credit at March 31, 2017) under that facility to be accelerated. Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.
Guarantees — At March 31, 2017, we did not have any material guarantees.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2017, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.
COMMITMENTS AND CONTINGENCIES
See Note 7 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.
REGULATION AND RATES
State Legislation
The Texas Legislature meets every two years. The current Legislature is in regular session from January 9, 2017 to May 29, 2017. However, at any time the governor of Texas may convene a special session of the Legislature. During any regular or special session bills may be introduced that, if adopted, could materially and adversely affect our business and our business prospects. Various bills related to our business have been proposed in the current legislative session, however, we cannot predict whether any introduced to date are likely to have a substantial impact on our financial position, results of operations or cash flows.
Matters with the PUCT
Change in Control Reviews - In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to transactions contemplated by a plan of reorganization in the EFH Bankruptcy Proceedings. In March 2016, the PUCT issued an order conditionally approving the joint application. In April 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and in May 2016, the PUCT denied such motions and the order became final. In May 2016, the plan of reorganization and related merger and purchase agreement that contemplated the transactions in PUCT Docket No. 45188 were terminated. The Hunt Investor Group filed a petition with the Travis County District Court in June 2016 seeking review of the order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the plan of reorganization related to the application filed in such docket. For additional information regarding the EFH Bankruptcy Proceedings and plans of reorganization in such proceedings, see Note 2 to Financial Statements.
The NEE Merger Agreement contemplated that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended EFH Debtor Plan. Oncor and NEE filed that joint application in PUCT Docket No. 46238 in October 2016. The PUCT denied the application on April 13, 2017. The parties have until May 8, 2017 to file a motion for rehearing with the PUCT. We cannot predict the result of PUCT Docket No. 46238 or the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Amended EFH Debtor Plan, including the EFH Acquisition, will (or when they will) close. For additional information regarding the NEE Merger Agreement and Amended EFH Debtor Plan, see Note 2 to Financial Statements.
2017 Rate Review (PUCT Docket No. 46957) - In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory on March 17, 2017 based on a January 1, 2016 to December 31, 2016 test year. If our proposed tariffs are adopted as filed, our annual revenue would increase by approximately $320 million. A procedural schedule has been agreed to by the parties to the case, which would result in PUCT hearings being held July 31, 2017 to August 9, 2017. Oncor has agreed to extend the requested effective date of the rate case increase such that the jurisdictional deadline for the PUCT to act has been extended to November 30, 2017.
Wholesale Transmission Service Rule (PUCT Project No. 46393) - In 2016, the PUCT staff initiated a rulemaking proceeding to repeal and replace the existing wholesale transmission service rule. The current PUCT rule allows us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year. In March 2017, PUCT staff filed a proposal for publication to repeal the current substantive rule and replace it with a proposed new rule. The proposed new rule changes the frequency of TCOS rate adjustments to once per calendar year. The proposed new rule would also include new limitations on the filing of TCOS rate adjustment applications and require new information in applications. We cannot predict when the PUCT will consider the proposed rule (with or without changes) for publication and comment, and whether the proposed rule, or any portion of the
proposed rule, is likely to be adopted by the PUCT. If the proposed rule is adopted as proposed, it could have an adverse effect on our revenues and results of operations.
Summary
We cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions. Such actions or changes could significantly alter our basic financial position, results of operations or cash flows.
ITEM 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. We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place. All of our long-term debt at March 31, 2017 and December 31, 2016 carried fixed interest rates.
Except as discussed below, the information required hereunder is not significantly different from the information set forth in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2016 Form 10-K and is therefore not presented herein.
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 nonaffiliated REPs through rates significantly reduce our credit risk.
Our exposure to credit risk associated with trade accounts receivable totaled $508 million at March 31, 2017. The receivable amount is before the allowance for uncollectible accounts, which totaled $3 million at March 31, 2017. The exposure includes trade accounts receivable from REPs totaling $373 million, which are almost entirely noninvestment grade. At March 31, 2017, there were two nonaffiliated entities whose REP subsidiaries represented approximately 14% and 11% of the trade receivable amount, respectively. No other parties represented 10% or more of the total trade accounts receivable amount. 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.
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 2016 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 actual results to differ materially from those projected in such forward-looking statements:
| · | | prevailing governmental policies and regulatory actions, including those of the U.S. Congress, the President of the U.S., the Texas Legislature, the Governor of Texas, the U.S. Federal Energy Regulatory Commission, the PUCT, the North American Energy Regulatory Corporation, the Texas Reliability Entity, Inc., the Environmental Protection Agency, and the Texas Commission on Environmental Quality, with respect to: |
| - | | permitted capital structure; |
| - | | industry, market and rate structure; |
| - | | recovery of investments; |
| - | | acquisition and disposal of assets and facilities; |
| - | | operation and construction of facilities; |
| - | | changes in tax laws and policies, and |
| - | | changes in and compliance with environmental, reliability and safety laws and policies; |
| · | | legal and administrative proceedings and settlements, including the exercise of equitable powers by courts; |
| · | | any impacts on us as a result of the EFH Bankruptcy Proceedings and the change in indirect ownership of Oncor proposed in such proceedings; |
| · | | weather conditions and other natural phenomena; |
| · | | acts of sabotage, wars or terrorist or cyber security threats or activities; |
| · | | economic conditions, including the impact of a recessionary environment; |
| · | | unanticipated population growth or decline, or changes in market demand and demographic patterns, particularly in ERCOT; |
| · | | changes in business strategy, development plans or vendor relationships; |
| · | | unanticipated changes in interest rates or rates of inflation; |
| · | | unanticipated changes in operating expenses, liquidity needs and capital expenditures; |
| · | | inability of various counterparties to meet their financial obligations to us, including failure of counterparties to perform under agreements; |
| · | | general industry trends; |
| · | | hazards customary to the industry and the possibility that we may not have adequate insurance to cover losses resulting from such hazards; |
| · | | changes in technology used by and services offered by us; |
| · | | significant changes in our relationship with our employees, including the availability of qualified personnel, and the potential adverse effects if labor disputes or grievances were to occur; |
| · | | changes in assumptions used to estimate costs of providing employee benefits, including pension and OPEB, and future funding requirements related thereto; |
| · | | significant changes in critical accounting policies material to us; |
| · | | commercial bank and financial market conditions, access to capital, the cost of such capital, and the results of financing and refinancing efforts, including availability of funds in the capital markets and the potential impact of disruptions in U.S. credit markets; |
| · | | circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets; |
| · | | financial restrictions under our revolving credit facility and indentures governing our debt instruments; |
| · | | our ability to generate sufficient cash flow to make interest payments on our debt instruments; |
| · | | actions by credit rating agencies, and |
| · | | our ability to effectively execute our operational strategy. |
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. During the most recent fiscal quarter covered by this report, no changes in internal controls over financial reporting have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the discussion in Notes 3 and 7 to Financial Statements regarding legal and regulatory 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 2016 Form 10-K, 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.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits provided as part of Part II are: |
Exhibits | Previously Filed* | As | | |
With File Number | Exhibit |
| |
(31) | Rule 13a – 14(a)/15d – 14(a) Certifications. |
| |
31(a) | | | — | Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31(b) | | | — | Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(32) | Section 1350 Certifications. |
| |
32(a) | | | — | Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32(b) | | | — | Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(99) | Additional Exhibits. |
| | | | |
99 | | | — | Condensed Statement of Consolidated Income – Twelve Months Ended March 31, 2017. |
| | | | |
| XBRL Data Files. |
101.INS | | | — | XBRL Instance Document |
101.SCH | | | — | XBRL Taxonomy Extension Schema Document |
101.CAL | | | — | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | | — | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | | — | XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE | | | — | XBRL Taxonomy Extension Presentation Linkbase Document |
__________________
* Incorporated herein by reference.
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.
ONCOR ELECTRIC DELIVERY COMPANY LLC
!! | |
| |
By: | /s/ David M. Davis |
| David M. Davis |
| Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
Date: April 27, 2017
EXHIBIT INDEX
(a) Exhibits provided as part of Part II are:
|
Exhibits | Previously Filed* | As | | |
With File Number | Exhibit |
| |
(31) | Rule 13a – 14(a)/15d – 14(a) Certifications. |
| |
31(a) | | | — | Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31(b) | | | — | Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
(32) | Section 1350 Certifications. |
| |
32(a) | | | — | Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32(b) | | | — | Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(99) | Additional Exhibits. |
| | | | |
99 | | | — | Condensed Statement of Consolidated Income – Twelve Months Ended March 31, 2017. |
| XBRL Data Files. |
101.INS | | | — | XBRL Instance Document |
101.SCH | | | — | XBRL Taxonomy Extension Schema Document |
101.CAL | | | — | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | | — | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | | — | XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE | | | — | XBRL Taxonomy Extension Presentation Linkbase Document |
__________________
* Incorporated herein by reference.
