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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



____________________



FORM 10-Q





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





FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016



― OR ―



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



____________________





Commission File Number 333-100240





Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)





 

Delaware

75-2967830

(State of Organization)

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



 

1616 Woodall Rodgers Fwy., Dallas, TX  75202

(214) 486-2000

(Address of Principal Executive Offices)

(Registrant’s Telephone Number)



____________________



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



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



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

Large accelerated filer ____    Accelerated filer ____    Non-Accelerated filer  √      (Do not check if a smaller reporting company)

Smaller reporting company___



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



As of August 1, 2016,  80.03% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Energy Future Holdings Corp., 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC and 0.22% of the outstanding membership interests were indirectly held by certain members of Oncor’s management and board of directors.  None of the membership interests are publicly traded.







 

 


 



TABLE OF CONTENTS



Page

GLOSSARY

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

Condensed Statements of Consolidated Income —
Three and Six Months Ended June 30, 2016 and 2015

Condensed Statements of Consolidated Comprehensive Income —
Three and Six Months Ended June 30, 2016 and 2015

Condensed Statements of Consolidated Cash Flows —
Six Months Ended June 30, 2016 and 2015

Condensed Consolidated Balance Sheets —
June 30, 2016 and December 31, 2015

Notes to Condensed Consolidated Financial Statements

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

27 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

40 

Item 4.     Controls and Procedures

42 

PART II.    OTHER INFORMATION

43 

Item 1.     Legal Proceedings

43 

Item 1A.   Risk Factors

43 

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

43 

Item 3.     Defaults Upon Senior Securities

43 

Item 4.    MINE SAFETY DISCLOSURES

43 

Item 5.     Other Information

43 

Item 6.     Exhibits

44 

SIGNATURE

45 





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



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

1

 


 

GLOSSARY



 





 

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



2015 Form 10-K

Oncor’s Annual Report on Form 10-K for the year ended December 31, 2015

AMS

advanced metering system

Bondco

Refers to Oncor Electric Delivery Transition Bond Company LLC, a wholly-owned consolidated bankruptcy-remote financing subsidiary of Oncor that issued securitization (transition) bonds to recover certain regulatory assets and other costs.

Deed of Trust

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

Debtors

EFH Corp. and the majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities

EECRF

energy efficiency cost recovery factor

EFCH

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

EFH Bankruptcy Proceedings

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

EFH Corp.

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

EFH Debtors

EFH Corp. and its subsidiaries that are Debtors in the Chapter 11 Cases, excluding the TCEH Debtors

EFH Petition Date

April 29, 2014.  See EFH Bankruptcy Proceedings above.

EFH Retirement Plan

Refers to a defined benefit pension plan sponsored by EFH Corp., in which Oncor participates.  See Oncor Retirement Plan below.

EFIH

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

ERCOT

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

ERISA

Employee Retirement Income Security Act of 1974, as amended

Fitch

Fitch Ratings, Ltd. (a credit rating agency)

GAAP

generally accepted accounting principles

Investment LLC

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

IRS

US Internal Revenue Service

LIBOR

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

Luminant

Refers to subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas.

2

 


 

Moody’s

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

Oncor

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

Oncor Holdings

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

Oncor OPEB Plan

Refers to a plan sponsored by Oncor that offers certain postretirement health care and life insurance benefits to eligible Oncor retirees, certain eligible EFH Corp. retirees, and their eligible dependents.

Oncor Retirement Plan

Refers to the defined benefit pension plan sponsored by Oncor.

Oncor Ring-Fenced Entities

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

OPEB

other postretirement employee benefits

PUCT

Public Utility Commission of Texas

PURA

Texas Public Utility Regulatory Act

purchase accounting

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

REP

retail electric provider

S&P

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

SEC

US Securities and Exchange Commission

Sponsor Group

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

TCEH

Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context.  Its major subsidiaries include Luminant and TXU Energy.

TCEH Debtors

EFCH, TCEH and the subsidiaries of TCEH that are Debtors in the Chapter 11 Cases

TCOS

transmission cost of service

TCRF

transmission cost recovery factor

Texas Holdings

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

Texas Holdings Group

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

3

 


 

Texas margin tax

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

Texas Transmission

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

TXU Energy

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

US

United States of America





 

4

 


 

PART I.  FINANCIAL INFORMATION



ITEM 1.FINANCIAL STATEMENTS



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended

June 30,



 

2016

 

2015

 

2016

 

2015



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Nonaffiliates

 

$

732 

 

$

714 

 

$

1,455 

 

$

1,424 

Affiliates

 

 

216 

 

 

224 

 

 

436 

 

 

460 

Total operating revenues

 

 

948 

 

 

938 

 

 

1,891 

 

 

1,884 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale transmission service

 

 

220 

 

 

199 

 

 

440 

 

 

393 

Operation and maintenance (Note 10)

 

 

169 

 

 

168 

 

 

351 

 

 

353 

Depreciation and amortization

 

 

193 

 

 

220 

 

 

403 

 

 

437 

Provision in lieu of income taxes (Note 10)

 

 

63 

 

 

57 

 

 

112 

 

 

115 

Taxes other than amounts related to income taxes

 

 

107 

 

 

108 

 

 

220 

 

 

220 

Total operating expenses

 

 

752 

 

 

752 

 

 

1,526 

 

 

1,518 

Operating income

 

 

196 

 

 

186 

 

 

365 

 

 

366 

Other income and (deductions) - net (Note 11)

 

 

(3)

 

 

(6)

 

 

(8)

 

 

(7)

Nonoperating provision in lieu of income taxes

 

 

(1)

 

 

(2)

 

 

(2)

 

 

(2)

Interest expense and related charges (Note 11)

 

 

84 

 

 

84 

 

 

168 

 

 

165 

Net income

 

$

110 

 

$

98 

 

$

191 

 

$

196 



See Notes to Financial Statements.



CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended

June 30,



 

2016

 

2015

 

2016

 

2015



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

110 

 

$

98 

 

$

191 

 

$

196 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges – derivative value net loss recognized in net income (net of tax expense of $–, $–, $– and $–) (Note 1)

 

 

 

 

 

 

 

 

Defined benefit pension plans (net of tax benefit of $–, $–, $– and $–) (Note 9)

 

 

-

 

 

 -

 

 

 -

 

 

Total other comprehensive income

 

 

 

 

 

 

 

 

Comprehensive income

 

$

111 

 

$

99 

 

$

192 

 

$

198 



See Notes to Financial Statements.

5


 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)





 

 

 

 

 

 



 

Six Months Ended June 30,



 

2016

 

2015



 

(millions of dollars)



 

 

 

 

 

 

Cash flows — operating activities:

 

 

 

 

 

 

Net income

 

$

191 

 

$

196 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

427 

 

 

459 

Provision in lieu of deferred income taxes – net

 

 

83 

 

 

(46)

Other – net 

 

 

(2)

 

 

(1)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Regulatory accounts related to reconcilable tariffs (Note 4)

 

 

(103)

 

 

(16)

Other operating assets and liabilities

 

 

(124)

 

 

(18)

Cash provided by operating activities

 

 

472 

 

 

574 

Cash flows — financing activities:

 

 

 

 

 

 

Issuances of long-term debt (Note 6)

 

 

-

 

 

725 

Repayments of long-term debt (Note 6)

 

 

(41)

 

 

(569)

Net increase in short-term borrowings (Note 5)

 

 

293 

 

 

69 

Distributions to members (Note 8)

 

 

(121)

 

 

(165)

Debt discount, premium, financing and reacquisition expenses – net

 

 

-

 

 

(12)

Cash provided by financing activities

 

 

131 

 

 

48 

Cash flows — investing activities:

 

 

 

 

 

 

Capital expenditures (Note 10)

 

 

(671)

 

 

(625)

Other – net 

 

 

44 

 

 

15 

Cash used in investing activities

 

 

(627)

 

 

(610)

Net change in cash and cash equivalents

 

 

(24)

 

 

12 

Cash and cash equivalents — beginning balance

 

 

25 

 

 

Cash and cash equivalents — ending balance

 

$

 

$

16 





See Notes to Financial Statements.

6


 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



 

 

 

 

 

 



 

At June 30,

 

At December 31,



 

2016

 

2015



 

(millions of dollars)



 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

25 

Restricted cash — Bondco (Note 11)

 

 

-

 

 

38 

Trade accounts receivable from nonaffiliates – net (Note 11)

 

 

407 

 

 

388 

Trade accounts and other receivables from affiliates – net (Note 10)

 

 

124 

 

 

118 

Amounts receivable from members related to income taxes (Note 10)

 

 

118 

 

 

136 

Materials and supplies inventories — at average cost

 

 

95 

 

 

82 

Prepayments and other current assets

 

 

98 

 

 

89 

Total current assets

 

 

843 

 

 

876 

Investments and other property (Note 11)

 

 

99 

 

 

97 

Property, plant and equipment – net (Note 11)

 

 

13,439 

 

 

13,024 

Goodwill (Note 11) 

 

 

4,064 

 

 

4,064 

Regulatory assets – net (Note 4)

 

 

1,184 

 

 

1,194 

Other noncurrent assets 

 

 

44 

 

 

32 

Total assets

 

$

19,673 

 

$

19,287 



LIABILITIES AND MEMBERSHIP INTERESTS

Current liabilities:

 

 

 

 

 

 

Short-term borrowings (Note 5)

 

$

1,133 

 

$

840 

Long-term debt due currently ― Bondco (Note 6)

 

 

-

 

 

41 

Trade accounts payable (Note 10)

 

 

213 

 

 

150 

Amounts payable to members related to income taxes (Note 10)

 

 

11 

 

 

20 

Accrued taxes other than amounts related to income

 

 

106 

 

 

181 

Accrued interest

 

 

82 

 

 

82 

Other current liabilities

 

 

117 

 

 

144 

Total current liabilities

 

 

1,662 

 

 

1,458 

Long-term debt, less amounts due currently ― Oncor (Note 6)

 

 

5,650 

 

 

5,646 

Liability in lieu of deferred income taxes (Note 10)

 

 

2,693 

 

 

2,612 

Employee benefit obligations and other (Note 10 and 11)

 

 

2,089 

 

 

2,063 

Total liabilities

 

 

12,094 

 

 

11,779 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Membership interests (Note 8):

 

 

 

 

 

 

Capital account ― number of interests outstanding 2016 and 2015 – 635,000,000 

 

 

7,691 

 

 

7,621 

Accumulated other comprehensive loss

 

 

(112)

 

 

(113)

Total membership interests

 

 

7,579 

 

 

7,508 

Total liabilities and membership interests

 

$

19,673 

 

$

19,287 



See Notes to Financial Statements.

7


 

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 Bondco, 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, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas.  Revenues from TCEH represented 23% and 24% of our total operating revenues for the six months ended June 30, 2016 and 2015, respectively.  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 wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a variable interest entity.  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.  Bondco issued an aggregate $1.3 billion principal amount of transition bonds during 2003 and 2004.  The 2003 Series transition bonds matured and were paid in full in 2015 and the 2004 Series transition bonds matured and were paid in full in May 2016.  Final true-up proceedings for the transition bonds are expected to be conducted by Oncor and the PUCT during 2016 and are expected to have minimal or no net income impact.



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, including TXU Energy and Luminant, 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.



EFH Corp. Bankruptcy Proceedings



On the EFH Petition Date, the EFH Debtors commenced proceedings under Chapter 11 of the US 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 2015 Form 10-K.  In the opinion of Oncor management, all adjustments

8


 

(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 US 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.

 

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 2016-2 (ASU 2016-2), Leases.    The ASU amends previous US GAAP to require the balance sheet recognition of lease assets and liabilities for operating leases.  Oncor will be required to adopt the ASU by January 1, 2019 and does not expect to early adopt.  Retrospective application to the 2017 and 2018 comparative periods presented will be required in the year of adoption.  We are currently evaluating the impact of this ASU on our financial statements. 

Since May 2014, the FASB has issued Accounting Standards Update 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.  Oncor will be required to adopt Topic 606 by January 1, 2018 and continues to evaluate the impact on its financial statementsAt this time, the adoption is not expected to have a material effect on our reported results of operations, financial condition or cash flows.



2.   EFH BANKRUPTCY PROCEEDINGS



On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US 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.



9


 

The US 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 the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  Since that time, we collected $128 million of the prepetition amount.  We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates has not been established as of June 30, 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



As part of the EFH Bankruptcy Proceedings, the bankruptcy court confirmed the Debtors’ Sixth Amended Plan of Reorganization by order dated December 9, 2015.  In general, among other things, the Sixth Amended Plan of Reorganization provided for a series of transactions to be effected pursuant to a merger and purchase agreement (Hunt Merger and Purchase Agreement) with an investor group consisting of certain unsecured creditors of TCEH and an affiliate of Hunt Consolidated, Inc. (Hunt), as well as certain other investors designated by Hunt (collectively, the Hunt Investor Group), that would have led to a significant change in the indirect equity ownership of Oncor.



In addition, and in connection with the contemplated transactions referred to above, at the request of and with the consent of EFIH, Oncor and Oncor Holdings entered into a letter agreement with the Hunt Investor Group. The letter agreement set forth certain rights and obligations of the Oncor entities and the Hunt Investor Group to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the contemplated transactions.



The Debtors and certain creditors entered into a Plan Support Agreement (as amended, Plan Support Agreement) that provided for, among other things, their respective obligations to act and/or support Plans of Reorganization. On May 1, 2016, certain first lien creditors of TCEH delivered a written notice (Plan Support Termination Notice) to the Debtors and the other parties to the Plan Support Agreement notifying such parties of the occurrence of a Plan Support Termination Event (as defined in the Plan Support Agreement).  The delivery of the Plan Support Agreement Termination Notice caused the Sixth Amended Plan of Reorganization to become null and void.



On May 1, 2016, following receipt of the Plan Support Termination Notice, EFH Corp. and EFIH delivered a written notice (Merger and Purchase Agreement Termination Notice) to the Hunt Investor Group notifying the Hunt Investor Group that EFH Corp. and EFIH terminated the Merger and Purchase Agreement. The termination of the Hunt Merger and Purchase Agreement also caused the automatic termination (without the necessity of further action) of (i) certain agreements defining the investment obligations of certain Hunt Investor Group members, and (ii) the letter agreement between Oncor and the Hunt Investor Group.



Following the occurrence of the Plan Support Termination Event as described above, the Debtors filed a new joint Plan of Reorganization (New Plan of Reorganization) pursuant to Chapter 11 of the Bankruptcy Code and a related disclosure statement with the bankruptcy court on May 1, 2016.



In connection with the Sixth Amended Plan of Reorganization, EFH Corp. took the position that, unless the Hunt Investor Group had otherwise acquired, or entered into a definitive agreement with Texas Transmission for the acquisition of the equity interest in Oncor held by Texas Transmission at the consummation of the transactions, certain of EFH Corp.’s  rights contained in the Investor Rights Agreement (Investor Rights Agreement), dated

10


 

November 2008 among Oncor and certain of its direct and indirect equity holders, including EFH Corp. and Texas Transmission, would require Texas Transmission to sell its equity interest in Oncor to the Hunt Investor Group. In this regard, in October 2015, EFH Corp. filed a complaint against Texas Transmission alleging breach of Texas Transmission’s obligations under the Investor Rights Agreement for failing to agree to sell its equity interest in Oncor and, if found to be a valid drag right and a valid IPO Conversion (as defined in the Investor Rights Agreement), to cooperate with an IPO Conversion. 



The Hunt Investor Group intervened in the pending litigation.  On May 20, 2016, following the Plan Support Termination Notice, the bankruptcy court issued an order dismissing the action and related motions and retaining jurisdiction related to the interpretation and implementation of such order.  We cannot predict the ultimate outcome of any subsequent litigation relating to the Investor Rights Agreement and the impact of such litigation, particularly in light of the transactions discussed below.  



The New Plan of Reorganization provides that the confirmation and effective date of the New Plan of Reorganization with respect to the TCEH Debtors may occur separate from, and independent of, the confirmation and effective date of the New Plan of Reorganization with respect to the EFH Debtors. The New Plan of Reorganization, subject to certain conditions and required regulatory approvals, provides for, among other things:



·

with respect to the TCEH Debtors, either (a) a tax-free spin-off from EFH Corp. (the Reorganized TCEH Spin-Off), including a transaction that will result in a partial step-up in the tax basis of certain TCEH assets distributed to a newly formed entity wholly owned by TCEH (Reorganized TCEH), or (b) a taxable transaction that results in the assets of the TCEH Debtors being distributed to a Reorganized TCEH (TCEH Transactions), and



·

with respect to the EFH Debtors, 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.



Solely as it pertains to the TCEH Debtors (and certain EFH Debtors that will become subsidiaries of Reorganized TCEH upon emergence of the TCEH Debtors from the Chapter 11 Cases (the Contributed EFH Debtors)), the disclosure statement has been approved by the bankruptcy court, and the confirmation hearing for the New Plan of Reorganization is scheduled to commence on August 17, 2016.  There can be no assurance that the TCEH Debtors’ stakeholders will vote to accept the New Plan of Reorganization or that the bankruptcy court will confirm the New Plan of Reorganization. With respect to the EFH Debtors, no disclosure statement has been approved by the bankruptcy court and no date to confirm the New Plan of Reorganization has been scheduled.



However, on July 29, 2016, (i) the EFH Debtors entered into a Plan Support Agreement (NEE Plan Support Agreement) with NextEra Energy, Inc. (NEE)  to effect an agreed upon restructuring of the EFH Debtors pursuant to an amendment to the  New Plan of Reorganization (Amended New 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 New Plan with respect to the EFH Debtors, EFH Corp. will merge with and into Merger Sub (NEE Merger) with Merger Sub surviving as a wholly owned subsidiary of NEE. 



The TCEH Transactions are not dependent on the consummation of the transactions contemplated by the NEE Plan Support Agreement and the NEE Merger Agreement and may occur separately from those transactions.  We understand that the EFH Debtors will seek bankruptcy court approval of 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 and a condition that the TCEH Transactions have occurred. NEE will not be required to consummate the NEE Merger if, among other items, the PUCT approval is obtained but with conditions, commitments or requirements that impose a Burdensome Condition (as defined in the NEE Merger Agreement). NEE’s and Merger Sub’s obligations under the NEE Merger Agreement are not subject to any financing condition.



11


 

Prior to approval of the NEE Merger Agreement by the bankruptcy court, EFH and EFIH may continue to solicit acquisition proposals with respect to Reorganized EFH. In addition, following approval of the NEE Merger Agreement by the bankruptcy court and until confirmation of the Amended New Plan by the bankruptcy court, EFH and EFIH may continue or have discussions or negotiations with respect to acquisition proposals for Reorganized EFH (x) with persons that were in active negotiation at the time of approval of the NEE Merger Agreement by the bankruptcy court and (y) with persons that submit an unsolicited acquisition proposal that is, or is reasonably likely to lead to, a Superior Proposal (as defined in the NEE Merger Agreement).

 

The NEE Merger Agreement may be terminated upon certain events, including, among other things:

 

  by either party, if the NEE Merger is not consummated by March 26, 2017, subject to a 90 day extension under certain conditions; or

 

  by EFH Corp. or EFIH, until the entry of the confirmation order of the Amended New Plan with respect to the EFH Debtors, if their respective board of directors or managers determines after consultation with its independent financial advisors and outside legal counsel, and based on advice of such counsel, that the failure to terminate the NEE Merger Agreement is inconsistent with its fiduciary duties; provided that a material breach of EFH Corp.’s or EFIH’s obligations under certain provisions of the NEE Merger Agreement has not provided the basis for such determination.

 

Following approval of the NEE Merger Agreement by the bankruptcy court, if the NEE Merger Agreement is terminated for certain reasons set forth therein and an alternative transaction is consummated by EFH or EFIH in which neither NEE nor any of its affiliates obtains direct or indirect ownership of approximately 80% of Oncor, then EFH and EFIH will pay a termination fee of $275,000,000 to NEE.

 

EFH Corp.’s and EFIH’s respective obligations under the NEE Merger Agreement are subject in all respects to the prior approval of the bankruptcy court. Under the terms of the NEE Plan Support Agreement, the EFH Debtors will seek bankruptcy court approval of the NEE Merger Agreement.



The above description of the NEE Merger Agreement is qualified in its entirety by reference to the NEE Merger Agreement, which EFH Corp., EFIH and EFCH filed as Exhibit 10(b) to their Current Report on Form 8-K/A filed with the SEC on July 29, 2016.



On July 28, 2016, 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 would set forth certain rights and obligations of the Oncor 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 would not be intended to give NEE or Merger Sub, directly or indirectly, the right to control or direct the operations of any Oncor Entity 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.



Notwithstanding these pending transactions, we cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by any Plan of Reorganization, including the EFH Acquisition, will (or when they will) close.  In this regard, we cannot 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 the transactions contemplated by the Sixth Amended Plan of Reorganization.  On March 24, 2016, the PUCT issued an order conditionally approving the joint

12


 

application.  On April 18, 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and on May 19, 2016, the PUCT denied such motions and the order became final.  The Hunt Investor Group filed a petition with the Travis County District Court on June 17, 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 the light of the termination of the Sixth Amended Plan of Reorganization and the other pending transactions discussed above.    



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.  For more information, see Note 3 – “City Rate Reviews”.



The NEE Merger Agreement contemplates that Oncor, NEE and Merger Sub will file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended New Plan, but that filing has not been made. 



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 Review



In connection with the transactions contemplated by the Sixth Amended Plan of Reorganization filed in the EFH Bankruptcy Proceedings, in September 2015, Oncor and the Hunt Investor Group filed a joint report and application for regulatory approvals pursuant to PURA, which was conditionally approved on March 24, 2016. For additional information regarding the Sixth Amended Plan of Reorganization and application for regulatory approval, see Note 2 to Financial Statements and “City Rate Reviews” below.



The NEE Merger Agreement contemplates that Oncor, NEE and Merger Sub will file a joint application with the PUCT seeking certain regulatory approvals pursuant to PURA with respect to the transactions contemplated by the Amended New Plan, but that filing has not been made.  For additional information regarding the Amended New Plan and application for regulatory approval, see Note 2 to Financial Statements.



City Rate Reviews



Oncor has received resolutions passed by approximately 58 cities with original jurisdiction over electric utility rates directing Oncor to file rate review proceedings.  The resolutions passed required Oncor to file a rate review

13


 

with each city by September 1, 2016 based on a January 1, 2015 to December 31, 2015 test year, with the cities’ analysis of such rate review filing due on October 13, 2016, Oncor’s rebuttal due on November 10, 2016, and hearings before city councils to be held between November 15 – December 15, 2016.  Final action by each city must be taken within 125 days from the rate review filing date, and Oncor has the right to appeal any city action to the PUCT.  However, Oncor has subsequently been notified by counsel representing these cities that these rate review proceedings have been abated indefinitely, pending resolution of Oncor ownership issues. The notice provides that if and when the cities desire to proceed with a rate inquiry, cities will notify Oncor in writing and inform Oncor of a precise date of the rate case, which will be at least 120 days from receipt of the communication that lifts the abatement.



2008 Rate Review



In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (PUCT Docket No. 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011 with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015The Texas Supreme Court granted the petition for review and the date of oral arguments has been set for September 13, 2016.  There is no deadline for the court to act.  If our appeals efforts are unsuccessful and the proposed consolidated tax savings adjustment is implemented, we estimate that on remand, the impact on earnings of the consolidated tax savings adjustment’s value could range from zero, as originally determined by the PUCT in Docket 35717, to a $135 million loss (after tax) including interest. Interest accrues at the PUCT approved rate for over-collections, which is 0.18% for 2016. We do not believe that any of the other issues ruled upon by the Austin Court of Appeals would result in a material impact to our results of operations or financial condition.



See Note 3 to Financial Statements in our 2015 Form 10-K for additional information regarding regulatory matters.

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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 the 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



 

June 30, 2016

 

June 30, 2016

 

December 31, 2015



 

 

 

 

 

 

 

 

Regulatory assets:

 

 

 

 

 

 

 

 

Generation-related regulatory assets securitized by transition bonds (a)(e)

 

-

 

$

-

 

$

31 

Employee retirement costs 

 

4 years

 

 

31 

 

 

38 

Employee retirement costs to be reviewed (b)(c)

 

To be determined

 

 

308 

 

 

291 

Employee retirement liability (a)(c)(d)

 

To be determined

 

 

826 

 

 

853 

Self-insurance reserve (primarily storm recovery costs) ― net

 

4 years

 

 

80 

 

 

95 

Self-insurance reserve to be reviewed ― net (b)(c)

 

To be determined

 

 

357 

 

 

332 

Securities reacquisition costs (pre-industry restructure)

 

1 year

 

 

 

 

14 

Securities reacquisition costs (post-industry restructure) ― net

 

Lives of related debt

 

 

10 

 

 

Recoverable amounts in lieu of deferred income taxes ― net

 

Life of related asset or liability

 

 

 

 

12 

Deferred conventional meter and metering facilities depreciation

 

Largely 5 years

 

 

89 

 

 

100 

Deferred AMS costs

 

To be determined

 

 

185 

 

 

164 

Energy efficiency performance bonus (a)

 

1 year

 

 

 

 

10 

Under-recovered wholesale transmission service expense (a)

 

1 year

 

 

71 

 

 

 -

Other regulatory assets

 

Various

 

 

 

 

Total regulatory assets

 

 

 

 

1,986 

 

 

1,958 



 

 

 

 

 

 

 

 

Regulatory liabilities:

 

 

 

 

 

 

 

 

Estimated net removal costs

 

Lives of related assets

 

 

760 

 

 

686 

Investment tax credit and protected excess deferred taxes

 

Various

 

 

12 

 

 

14 

Over-collection of transition bond charges (a)(e)

 

< 1 year

 

 

10 

 

 

29 

Over-recovered wholesale transmission service expense (a)

 

1 year

 

 

-

 

 

24 

Energy efficiency programs (a)

 

Not applicable

 

 

20 

 

 

11 

Total regulatory liabilities

 

 

 

 

802 

 

 

764 

Net regulatory asset

 

 

 

$

1,184 

 

$

1,194 

____________

(a)

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

(b)

Costs incurred since the period covered under the last rate review.

(c)

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

(d)

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

(e)

Bondco net regulatory liabilities at June 30, 2016 were zero (excludes $10 million of over-collections related to transition bonds assumed by Oncor for final settlement).  Bondco net regulatory assets of $10 million at December 31, 2015 consisted of $31 million included in generation-related regulatory assets net of the regulatory liability for over-collection of transition bond revenues of $21 million (excludes $8 million of over-collections related to transition bonds assumed by Oncor for final settlement).

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5.    BORROWINGS UNDER CREDIT FACILITIES    



At June 30, 2016, 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.  The revolving credit facility expires in October 2017.  The terms of the revolving credit facility allow us to request an increase in our borrowing capacity of $100 million in the aggregate and/or a one-year extension, 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 June 30, 2016, we had outstanding borrowings under the revolving credit facility totaling $1.133 billion with an interest rate of 1.59% and outstanding letters of credit totaling $7 million.  At December 31, 2015, we had outstanding borrowings under the revolving credit facility totaling $840 million with an interest rate of 1.48% 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 June 30, 2016, all outstanding borrowings bore interest at LIBOR plus 1.125%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 June 30, 2016, letters of credit bore interest at 1.325%, and a commitment fee (at a rate of 0.125% 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 June 30, 2016 and December 31, 2015 was $860 million and $1.153 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 June 30, 2016, 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 US GAAP).  The debt calculation excludes transition bonds issued by Bondco, but includes the unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with US GAAP plus indebtedness described above.  At June 30, 2016, we were in compliance with this covenant and with all other covenants.



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6.    LONG-TERM DEBT



At June 30, 2016 and December 31, 2015, our long-term debt consisted of the following:



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2016

 

2015



 

 

 

 

 

 

Oncor (a):

 

 

 

 

 

 

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 

 

 

375 

 

 

375 

Unamortized discount and debt issuance costs

 

 

(50)

 

 

(54)

Less amount due currently

 

 

 -

 

 

 -

       Long-term debt, less amounts due currently — Oncor

 

 

5,650 

 

 

5,646 



 

 

 

 

 

 

Bondco (b):

 

 

 

 

 

 

5.290% Fixed Series 2004 Bonds due May 15, 2016    

 

 

 -

 

 

41 

Total 

 

 

 -

 

 

41 

Less amount due currently

 

 

 -

 

 

(41)

Long-term debt, less amounts due currently — Bondco

 

 

 -

 

 

 -

Total long-term debt, less amounts due currently

 

$

5,650 

 

$

5,646 

__________

(a)   Secured by 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.

(b)   The transition bonds were nonrecourse to Oncor and were issued to securitize a regulatory asset.



Debt-Related Activity in 2016



Repayments of long-term debt in the six months ended June 30, 2016 totaled $41 million, representing the final transition bond principal payment at the scheduled maturity date.



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 June 30, 2016, the amount of available bond credits was $2.281 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 $1.570 billion.

17


 



Fair Value of Long-Term Debt



At June 30, 2016 and December 31, 2015, the estimated fair value of our long-term debt (including current maturities, if any) totaled $6.923 billion and $6.287 billion, respectively, and the carrying amount totaled $5.650 billion and $5.687 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 EFH 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 2015 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 June 30, 2016, $98 million was available for distribution to our members as our regulatory capitalization ratio was 59.4% debt to 40.6% 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.  The debt calculation excludes transition bonds issued by Bondco.  Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization).





On July 27, 2016, our board of directors declared a cash distribution of an amount up to and including $68 million, to be paid to our members in August 2016, with the exact amount to be determined by management in accordance with the regulatory capital structure limitation described above.  During the six months ended June 30, 2016, our board of directors declared, and we paid, the following cash distributions to our members:



 

 

 

 

 

Declaration Date

 

Payment Date

 

Amount

April 27, 2016

 

May 11, 2016

 

$

65 

February 24, 2016

 

February 25, 2016

 

$

56 



18


 

Membership Interests



The following table presents the changes to membership interests during the six months ended June 30, 2016 and 2015: 





 

 

 

 

 

 

 

 



Capital Accounts

 

Accumulated Other Comprehensive Income (Loss)

 

Total Membership Interests



 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

7,621 

 

$

(113)

 

$

7,508 

Net income

 

191 

 

 

 -

 

 

191 

Distributions

 

(121)

 

 

 -

 

 

(121)

Net effects of cash flow hedges (net of tax)

 

-

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 -

 

 

 -

Balance at June 30, 2016

$

7,691 

 

$

(112)

 

$

7,579 



 

 

 

 

 

 

 

 

Balance at December 31, 2014

$

7,625 

 

$

(107)

 

$

7,518 

Net income

 

196 

 

 

 -

 

 

196 

Distributions

 

(165)

 

 

 -

 

 

(165)

Net effects of cash flow hedges (net of tax)

 

 -

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Balance at June 30, 2015

$

7,656 

 

$

(105)

 

$

7,551 



Accumulated Other Comprehensive Income (Loss)



The following table presents the changes to accumulated other comprehensive income (loss) for the six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 



Cash Flow Hedges – Interest Rate Swap

 

Defined Benefit Pension and OPEB Plans

 

Accumulated Other Comprehensive Income (Loss)



 

 

 

 

 

 

 

 

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 June 30, 2016

$

(21)

 

$

(91)

 

$

(112)



 

 

 

 

 

 

 

 

Balance at December 31, 2014

$

(24)

 

$

(83)

 

$

(107)

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 June 30, 2015

$

(23)

 

$

(82)

 

$

(105)

















19


 

9.    PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS PLANS



Pension Plans



We sponsor the Oncor Retirement Plan and also have liabilities under the EFH 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 2015 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. whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp.  EFH Corp. retains its portion of the liability for retiree benefits related to those retirees.   As we are not responsible for EFH Corp.’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 2015 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 and six months ended June 30, 2016 and 2015 were comprised of the following:



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

June 30,

 

Six Months Ended

June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Components of net allocated pension costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

12 

 

$

12 

Interest cost

 

 

34 

 

 

33 

 

 

68 

 

 

66 

Expected return on assets

 

 

(31)

 

 

(29)

 

 

(62)

 

 

(58)

Amortization of net loss

 

 

10 

 

 

16 

 

 

20 

 

 

32 

Net pension costs

 

 

19 

 

 

26 

 

 

38 

 

 

52 

Components of net OPEB costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

 

 

 

 

 

 

Interest cost

 

 

12 

 

 

11 

 

 

24 

 

 

22 

Expected return on assets

 

 

(2)

 

 

(3)

 

 

(4)

 

 

(6)

Amortization of prior service cost

 

 

(5)

 

 

(5)

 

 

(10)

 

 

(10)

Amortization of net loss

 

 

 

 

 

 

17 

 

 

16 

Net OPEB costs

 

 

15 

 

 

13 

 

 

31 

 

 

26 

Total net pension and OPEB costs

 

 

34 

 

 

39 

 

 

69 

 

 

78 

Less amounts deferred principally as property or a regulatory asset

 

 

(25)

 

 

(28)

 

 

(50)

 

 

(56)

Net amounts recognized as expense

 

$

 

$

11 

 

$

19 

 

$

22 



The discount rates reflected in net pension and OPEB costs in 2016 are 4.28%,  4.57% and 4.60% for the Oncor Retirement Plan, the EFH Retirement Plan and the Oncor OPEB Plan, respectively.  The expected return on pension and OPEB plan assets reflected in the 2016 cost amounts are 5.53%,  5.64% and 6.30% for the Oncor Retirement Plan, the EFH Retirement Plan and the Oncor OPEB Plan, respectively.



20


 

Pension and OPEB Plans Cash Contributions



We made cash contributions to the pension plans and Oncor OPEB Plan of $2 million and $14 million, respectively, during the six months ended June 30, 2016.  We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $2 million and $17 million, respectively, during the remainder of 2016. Our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $479 million and $153 million, respectively, in the 2016 to 2020 period based on the latest actuarial projections.



10.   RELATED-PARTY TRANSACTIONS



The following represent our significant related-party transactions.  See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings.



·

We record revenue from TCEH, principally for electricity delivery fees, which totaled $216 million and $224 million for the three months ended June 30, 2016 and 2015, respectively, and $436 million and $460 million for the six months ended June 30, 2016 and 2015, respectively.  The fees are based on rates regulated by the PUCT that apply to all REPs.  These revenues included less than $1 million for each of the three- and six-month periods ended June 30, 2016 and 2015 pursuant to a transformer maintenance agreement with TCEH.   



Trade accounts and other receivables from EFH Corp. affiliates – net reported on our balance sheet, primarily consisting of trade receivables from TCEH related to these electricity delivery fees, are as follows:



 

 

 

 

 

 



 

At June 30,

 

At December 31,



 

2016

 

2015



 

 

 

 

 

 

Trade accounts and other receivables from affiliates

 

$

126 

 

$

120 

Trade accounts and other payables to affiliates

 

 

(2)

 

 

(2)

Trade accounts and other receivables from affiliates – net

 

$

124 

 

$

118 



·

EFH Corp. subsidiaries charge 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 less than $1 million and $4 million for the three months ended June 30, 2016 and 2015, respectively, and  less than $1 million and $9 million for the six months ended June 30, 2016 and 2015, respectively.  We also charge each other for shared facilities at cost.  Our payments to EFH Corp. for shared facilities totaled $1 million for each of the three-month periods ended June 30, 2016 and 2015 and $2 million for each of the six-month periods ended June 30, 2016 and 2015.    Payments we received from EFH Corp. subsidiaries related to shared facilities totaled less than $1  million for each of the three-month periods ended June 30, 2016 and 2015 and  less than $1 million for each of the six-month periods ended June 30, 2016 and 2015.



·

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 2015 Form 10-K under “Income Taxes.”  Under the “in lieu of” tax concept,

21


 

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 June 30, 2016

 

At December 31, 2015



EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes receivable

$

(95)

 

$

(23)

 

$

(118)

 

$

(109)

 

$

(27)

 

$

(136)

Texas margin taxes payable

 

11 

 

 

-

 

 

11 

 

 

20 

 

 

-

 

 

20 

Net payable (receivable)

$

(84)

 

$

(23)

 

$

(107)

 

$

(89)

 

$

(27)

 

$

(116)



Cash payments made to members related to income taxes consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Six Months Ended June 30, 2016

 

Six Months Ended June 30, 2015



EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

Texas margin taxes

 

18 

 

 

-

 

 

18 

 

 

22 

 

 

-

 

 

22 

Total payments (receipts)

$

18 

 

$

-

 

$

18 

 

$

22 

 

$

-

 

$

22 



·

Our PUCT-approved tariffs include requirements to assure adequate creditworthiness of any REP to support the REP’s obligation to collect transition bond-related charges on behalf of Bondco.  Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated transition charges over specified time periods.  Accordingly, TCEH had posted security in the amount of zero and $6 million for our benefit at June 30, 2016 and December 31, 2015, respectively.  



·

At June 30, 2016, Bondco had over-collected approximately $10 million of transition charges, which will be refunded to REPs upon PUC approval. An estimated $2 million of the over-collection will be refunded to TCEH.



·

Under Texas regulatory provisions, the trust fund for decommissioning TCEH’s Comanche Peak nuclear generation facility is funded by a delivery fee surcharge we collect from REPs and remit monthly to TCEH.  Delivery fee surcharges totaled $4 million for each of the three-month periods ended June 30, 2016 and 2015 and $8 million for each of the six-month periods ended June 30, 2016 and 2015.  Our sole obligation with regard to nuclear decommissioning is as the collection agent of funds charged to ratepayers for nuclear decommissioning activities.  If, at the time of decommissioning, actual decommissioning costs exceed available trust funds, we would not be obligated to pay any shortfalls but would be required to collect any rates approved by the PUCT to recover any additional decommissioning costs.  Further, if there were to be a surplus when decommissioning is complete, such surplus would be returned to ratepayers under terms prescribed by the PUCT.



·

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 June 30, 2016,  16.6% of

22


 

the equity in an existing vendor of the company is held by a member of the Sponsor Group.  During 2016 and 2015, this vendor performed transmission and distribution system construction and maintenance services for us.  Cash payments were made for such services to this vendor totaling $84 million dollars for the six months ended June 30, 2016 of which approximately $79 million was capitalized and $5 million recorded to operation and maintenance expense.  At June 30, 2016 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 TCEH represented  23% and 24% of our total operating revenues for the three months ended June 30, 2016 and 2015, respectively and 23% and 24% for the six months ended June 30, 2016 and 2015, respectively.  Revenues from REP subsidiaries of NRG Energy, Inc., a nonaffiliated entity, collectively represented 14% and 15% of our total operating revenues for the three months ended June 30, 2016 and 2015, respectively, and 15% and 16% of our total operating revenues for the six months ended June 30, 2016 and 2015, respectively.    No other customer represented 10% or more of our total operating revenues.



Other Income and (Deductions)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Accretion of fair value adjustment (discount) to regulatory assets due to purchase accounting

 

$

 -

 

$

 

$

 

$

Professional fees

 

 

(4)

 

 

(5)

 

 

(8)

 

 

(7)

Non-recoverable pension and OPEB (Note 9)

 

 

 -

 

 

(2)

 

 

(1)

 

 

(4)

Other

 

 

 

 

 -

 

 

 -

 

 

 -

Total other income and (deductions) - net

 

$

(3)

 

$

(6)

 

$

(8)

 

$

(7)



Interest Expense and Related Charges



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

Interest expense

 

$

85 

 

$

85 

 

$

170 

 

$

167 

Amortization of debt issuance costs and discounts

 

 

 

 

 

 

 

 

Allowance for funds used during construction – capitalized interest portion

 

 

(2)

 

 

(2)

 

 

(3)

 

 

(3)

Total interest expense and related charges

 

$

84 

 

$

84