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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, 2017



― OR ―



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



____________________





Commission File Number 333-100240



Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)





 

Delaware

75-2967830

(State of Organization)

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



 

1616 Woodall Rodgers Fwy., Dallas, TX  75202

(214) 486-2000

(Address of Principal Executive Offices)

(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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”,  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Smaller reporting company___ Emerging growth company ___



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes___ No  _  



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



As of July 27, 2017,  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, 2017 and 2016

Condensed Statements of Consolidated Comprehensive Income —
Three and Six Months Ended June 30, 2017 and 2016

Condensed Statements of Consolidated Cash Flows —
Three and Six Months Ended June 30, 2017 and 2016

Condensed Consolidated Balance Sheets —
June 30, 2017 and December 31, 2016

Notes to Condensed Consolidated Financial Statements

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

26 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

39 

Item 4.     Controls and Procedures

41 

PART II.    OTHER INFORMATION

42 

Item 1.     Legal Proceedings

42 

Item 1A.   Risk Factors

42 

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

42 

Item 3.     Defaults Upon Senior Securities

42 

Item 4.    MINE SAFETY DISCLOSURES

42 

Item 5.     Other Information

42 

Item 6.     Exhibits

43 

SIGNATURE

44 





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.



2016 Form 10-K

Oncor’s Annual Report on Form 10-K for the year ended December 31, 2016

AMS

advanced metering system

Bondco

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

Contributed EFH Debtors

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

Debtors

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

Deed of Trust

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

EECRF

energy efficiency cost recovery factor

EFCH

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

EFH Bankruptcy Proceedings

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

EFH Corp.

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

EFH Debtors

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

EFH Petition Date

April 29, 2014.  See EFH Bankruptcy Proceedings above.

EFIH

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

ERCOT

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

ERISA

Employee Retirement Income Security Act of 1974, as amended

Fitch

Fitch Ratings, Ltd. (a credit rating agency)

GAAP

generally accepted accounting principles of the U.S.

Investment LLC

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

IRS

U.S. Internal Revenue Service

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

2

 


 

Luminant

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

Moody’s

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

Oncor

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

Oncor Holdings

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

Oncor OPEB Plan

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

Oncor Retirement Plan

Refers to a defined benefit pension plan sponsored by Oncor.

Oncor Ring-Fenced Entities

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

OPEB

other postretirement employee benefits

PUCT

Public Utility Commission of Texas

PURA

Texas Public Utility Regulatory Act

REP

retail electric provider

S&P

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

SEC

U.S. 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, prior to the Vistra Spin-Off, the parent company of the TCEH Debtors (other than the Contributed EFH Debtors), depending on the context, that were engaged in electricity generation and wholesale and retail energy market activities, and whose  major subsidiaries included Luminant and TXU Energy.  Subsequent to the Vistra Spin-Off, Vistra continued substantially the same operations as TCEH.   

TCEH Debtors

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

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

U.S.

United States of America

Vistra

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

Vistra Retirement Plan

Refers to the Vistra Energy Retirement Plan (formerly EFH Retirement Plan), a defined benefit pension plan sponsored by Vistra, in which Oncor participates.  See Oncor Retirement Plan above.

Vistra Spin-Off

Refers to the completion of the TCEH Debtors’ reorganization under the Bankruptcy Code and emergence from the EFH Bankruptcy Proceedings effective October 3, 2016





 

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,



 

2017

 

2016

 

2017

 

2016



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Nonaffiliates

 

$

964 

 

$

732 

 

$

1,899 

 

$

1,455 

Affiliates

 

 

 -

 

 

216 

 

 

 -

 

 

436 

Total operating revenues

 

 

964 

 

 

948 

 

 

1,899 

 

 

1,891 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale transmission service

 

 

229 

 

 

220 

 

 

460 

 

 

440 

Operation and maintenance (Note 10)

 

 

174 

 

 

169 

 

 

369 

 

 

351 

Depreciation and amortization

 

 

193 

 

 

193 

 

 

387 

 

 

403 

Provision in lieu of income taxes (Note 10)

 

 

64 

 

 

63 

 

 

106 

 

 

112 

Taxes other than amounts related to income taxes

 

 

107 

 

 

107 

 

 

220 

 

 

220 

Total operating expenses

 

 

767 

 

 

752 

 

 

1,542 

 

 

1,526 

Operating income

 

 

197 

 

 

196 

 

 

357 

 

 

365 

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

 

 

(3)

 

 

(3)

 

 

(7)

 

 

(8)

Nonoperating provision in lieu of income taxes

 

 

(3)

 

 

(1)

 

 

(5)

 

 

(2)

Interest expense and related charges (Note 11)

 

 

85 

 

 

84 

 

 

170 

 

 

168 

Net income

 

$

112 

 

$

110 

 

$

185 

 

$

191 



See Notes to Financial Statements.





CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended

June 30,



 

2017

 

2016

 

2017

 

2016



 

(millions of dollars)



 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

112 

 

$

110 

 

$

185 

 

$

191 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

 

 

 

 

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

 

 

 

 

 -

 

 

 

 

 -

Total other comprehensive income

 

 

 

 

 

 

 

 

Comprehensive income

 

$

113 

 

$

111 

 

$

187 

 

$

192 



See Notes to Financial Statements.

5


 



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)





 

 

 

 

 

 



 

Six Months Ended June 30,



 

2017

 

2016



 

(millions of dollars)



 

 

 

 

 

 

Cash flows — operating activities:

 

 

 

 

 

 

Net income

 

$

185 

 

$

191 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

412 

 

 

427 

Provision in lieu of deferred income taxes – net

 

 

158 

 

 

83 

Other – net 

 

 

(1)

 

 

(2)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Regulatory accounts related to reconcilable tariffs (Note 4)

 

 

(27)

 

 

(103)

Other operating assets and liabilities

 

 

(89)

 

 

(124)

Cash provided by operating activities

 

 

638 

 

 

472 

Cash flows — financing activities:

 

 

 

 

 

 

Repayments of long-term debt (Note 6)

 

 

 -

 

 

(41)

Net increase in short-term borrowings (Note 5)

 

 

367 

 

 

293 

Distributions to members (Note 8)

 

 

(172)

 

 

(121)

Cash provided by financing activities

 

 

195 

 

 

131 

Cash flows — investing activities:

 

 

 

 

 

 

Capital expenditures (Note 10)

 

 

(856)

 

 

(671)

Other – net 

 

 

 

 

44 

Cash used in investing activities

 

 

(848)

 

 

(627)

Net change in cash and cash equivalents

 

 

(15)

 

 

(24)

Cash and cash equivalents — beginning balance

 

 

16 

 

 

25 

Cash and cash equivalents — ending balance

 

$

 

$

















See Notes to Financial Statements.

6


 

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



 

 

 

 

 

 



 

At June 30,

 

At December 31,



 

2017

 

2016



 

(millions of dollars)



 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

16 

Trade accounts receivable – net (Note 11)

 

 

590 

 

 

545 

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

 

 

32 

 

 

80 

Materials and supplies inventories — at average cost

 

 

88 

 

 

89 

Prepayments and other current assets

 

 

100 

 

 

100 

Total current assets

 

 

811 

 

 

830 

Investments and other property (Note 11)

 

 

106 

 

 

100 

Property, plant and equipment – net (Note 11)

 

 

14,391 

 

 

13,829 

Goodwill (Note 11) 

 

 

4,064 

 

 

4,064 

Regulatory assets (Note 4)

 

 

1,982 

 

 

1,974 

Other noncurrent assets 

 

 

 

 

14 

Total assets

 

$

21,363 

 

$

20,811 

LIABILITIES AND MEMBERSHIP INTERESTS

Current liabilities:

 

 

 

 

 

 

Short-term borrowings (Note 5)

 

$

1,156 

 

$

789 

Long-term debt due currently (Note 6)

 

 

324 

 

 

324 

Trade accounts payable (Note 10)

 

 

248 

 

 

231 

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

 

 

12 

 

 

20 

Accrued taxes other than amounts related to income

 

 

107 

 

 

182 

Accrued interest

 

 

83 

 

 

83 

Other current liabilities

 

 

154 

 

 

144 

Total current liabilities

 

 

2,084 

 

 

1,773 

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

 

 

5,519 

 

 

5,515 

Liability in lieu of deferred income taxes (Note 10)

 

 

2,949 

 

 

2,788 

Regulatory liabilities - (Note 4)

 

 

925 

 

 

856 

Employee benefit obligations and other (Note 10 and 11)

 

 

2,160 

 

 

2,168 

Total liabilities

 

 

13,637 

 

 

13,100 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Membership interests (Note 8):

 

 

 

 

 

 

Capital account ― number of interests outstanding 2017 and 2016 – 635,000,000 

 

 

7,835 

 

 

7,822 

Accumulated other comprehensive loss

 

 

(109)

 

 

(111)

Total membership interests

 

 

7,726 

 

 

7,711 

Total liabilities and membership interests

 

$

21,363 

 

$

20,811 



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 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 TexasRevenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 21%  and 23% of our total operating revenues for each of the six-month periods ended June 30, 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. 

8


 

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).  Adoption of Topic 842 will affect our balance sheet, debt covenant calculations and capitalization ratios, as leased buildings and vehicles are recognized on the balance sheet.  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 are required to adopt Topic 606 by January 1, 2018 and expect to adopt at that time using the modified retrospective approach. 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

9


 

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 position 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, an amendment to Topic 715, Compensation – Retirement Benefits (Topic 715)Topic 715, as amended, will require the non-service cost components of net retirement benefit plan costs be presented as non-operating in the income statement.  In addition, only the service cost component of net retirement benefit plan cost will be eligible for capitalization as part of inventory or property, plant and equipment.  We are required to adopt the amendment effective January 1, 2018.   The income statement presentation requirement must be applied on a retrospective basis while the capitalization eligibility requirement is applied on a prospective basis.  At this time, we do not expect the new guidance to have a material effect on our results of operations, financial position or cash flows but continue to evaluate for potential impacts. 



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 June 30, 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.



The Plan of Reorganization provided 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.



10


 

In July 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 (NEE Amendment) to the Plan of Reorganization (as amended by the NEE Amendment and as subsequently amended,  NEE 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 (NEE Merger Sub), a wholly-owned subsidiary of NEE.  Pursuant to the NEE Merger Agreement, at the effective time of the NEE Plan with respect to the EFH Debtors, EFH Corp. would merge with and into NEE Merger Sub (NEE Merger), with NEE Merger Sub surviving as a wholly owned subsidiary of NEE.  The NEE Merger Agreement included 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 and confirmed the NEE 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 contained 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 NEE Merger Sub. The NEE Letter Agreement was executed in August 2016 and set forth certain rights and obligations of the Oncor Ring-Fenced Entities, NEE and NEE Merger Sub to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the proposed acquisition of Reorganized EFH and the other transactions described in the NEE Merger Agreement. The NEE Letter Agreement did not give NEE or NEE 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 transactions contemplated by the NEE Merger Agreement. In addition, Oncor Holdings and Oncor did not act to approve any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by NEE or NEE Merger Sub involving Oncor Holdings or Oncor.



The ability of the NEE Plan and the NEE Merger Agreement to become effective were subject to various conditions precedent to consummation of the contemplated transactions, including a condition that certain approvals and rulings be obtained, including from the PUCT and the IRS.



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 (April 13 Order), which sought certain regulatory approvals with respect to the transactions contemplated by the NEE 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.



On May 8, 2017, NEE filed a motion for rehearing with the PUCT, requesting reconsideration of the April 13 Order. On June 7, 2017, the PUCT re-affirmed its determination that the proposed transaction was not in the public interest. On June 27, 2017, NEE filed a second motion for rehearing, which the PUCT denied on June 29, 2017.



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Following these developments, on July 6, 2017, EFH and EFIH delivered a notice terminating the NEE Merger Agreement, which caused the NEE Plan to be null and void. The NEE Letter Agreement and OMI Agreement terminated by their terms upon the termination of the NEE Merger Agreement. We cannot assess the impact of the foregoing on the TTI Merger Agreement.



In June 2017, the EFH Debtors received a proposal from Berkshire Hathaway Energy Company (BHE) that largely followed the structure of the NEE Plan. Following negotiations, on July 7, 2017, EFH Corp. and EFIH executed a merger agreement (BHE Merger Agreement) with BHE and certain subsidiaries (BHE Merger Subs).



Following the execution and delivery of the BHE Merger Agreement, EFIH requested, pursuant to the BHE Merger Agreement, that Oncor Holdings and Oncor enter into a letter agreement (BHE Letter Agreement) with BHE and  the BHE Merger Subs (collectively, BHE Purchasers).   The BHE Letter Agreement was executed  on July 7, 2017 and sets forth certain rights and obligations of the Oncor Ring-Fenced Entities, BHE and the BHE Merger Subs 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 BHE Merger Agreement. Pursuant to the terms of the BHE Letter Agreement, the Oncor Ring-Fenced Entities are to conduct, in all material respects, their businesses in the ordinary course of business and materially consistent with the plan for 2017 and 2018 contained in Oncor’s long-range business plan.  The BHE Letter Agreement also provides that the Oncor Ring-Fenced entities will cooperate with the BHE Purchasers to prepare and file all necessary applications for governmental approvals of the transactions contemplated by the BHE Merger Agreement, including PUCT and FERC approvals.



As was the case with the NEE Letter Agreement, the BHE Letter Agreement is not intended to give BHE or the BHE Merger Subs, directly or indirectly, the right to control or direct the operations of any of the Oncor Ring-Fenced Entities. In addition, Oncor Holdings and Oncor have not acted to approve any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by BHE or the BHE Merger Subs involving Oncor Holdings or Oncor.



In connection with the execution of the BHE Merger Agreement, also on July 7, 2017, the EFH Debtors filed their joint plan of reorganization (BHE Plan) and a related disclosure statement.  The bankruptcy court has scheduled a hearing to authorize the EFH Debtors’ entry into the BHE Merger Agreement for August 21, 2017 and a hearing on their disclosure statement for August 29, 2017.  Further, the EFH Debtors are currently seeking approval of the bankruptcy court to commence a hearing on confirmation of the BHE Plan on October 24, 2017.



We cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the BHE Plan, including the BHE Merger, will (or when they will) close. Even if the BHE  Plan is confirmed by the bankruptcy court, there remain conditions and uncertainties relating to the BHE Plan becoming effective and the consummation of the BHE Merger, 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 the EFH Debtors 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.

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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 PUCT issued an Order on Rehearing on June 7, 2017 and denied NEE’s Second Motion for Rehearing on June 29, 2017. On July 13, 2017, NEE filed a petition with the Travis County District Court seeking review of the PUCT order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 46238, particularly in light of the termination of the NEE Merger Agreement.



The BHE Merger Agreement contemplates that Oncor and BHE will file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the BHE 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 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 was agreed to by the parties to the case, which would result in PUCT hearings being held July 31, 2017 to August 9, 2017.  Oncor 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.  On June 2, 2017, Oncor filed an Unopposed Motion to Abate the Procedural Schedule.  The Motion indicated that the parties in the proceeding are engaged in settlement

13


 

negotiations.  To facilitate those negotiations, the parties agreed to abate the schedule.  On July 7, 2017, Oncor filed a Status Report, indicating that the parties were in the final stages of completing the settlement stipulation to be filed in the rate case proceeding.



On July 21, 2017, we and certain parties to our rate review agreed to a settlement of that rate review. The stipulation setting forth the terms of that settlement (Rate Settlement) provides, if the Sharyland Mergers (see Note 12) are consummated, for new rates to take effect on November 27, 2017. The Rate Settlement further provides, among other items, that the base rate revenue requirement before intercompany eliminations would be $4.3 billion, our authorized return on equity would be 9.8%, and our authorized regulatory capital structure would be 57.5% debt and 42.5% equity.    Our current authorized regulatory capital structure is 60% debt and 40% equity (see Note 8).  The Rate Settlement also includes an agreement as to findings necessary for the inclusion of certain investments in Oncor’s rate base and depreciation and amortization rates for certain property and regulatory assets.  If the Sharyland Mergers are not consummated, Oncor and the parties will work to establish a new procedural schedule for the rate review.  The PUCT has not yet issued an order incorporating the terms of the Rate Settlement and we cannot predict when or if it will do so.



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.

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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 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



 

June 30, 2017

 

June 30, 2017

 

December 31, 2016



 

 

 

 

 

 

 

 

Regulatory assets:

 

 

 

 

 

 

 

 

Employee retirement costs being amortized 

 

3 years

 

$

15 

 

$

23 

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

 

To be determined

 

 

343 

 

 

327 

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

 

To be determined

 

 

818 

 

 

849 

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

 

3 years

 

 

48 

 

 

64 

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

 

To be determined

 

 

405 

 

 

367 

Securities reacquisition costs (post-industry restructure)

 

Lives of related debt

 

 

13 

 

 

13 

Deferred conventional meter and metering facilities depreciation

 

Largely 4 years

 

 

68 

 

 

78 

Under-recovered AMS costs

 

To be determined

 

 

212 

 

 

205 

Under-recovered wholesale transmission service expense (a)

 

1 year or less

 

 

21 

 

 

 -

Energy efficiency performance bonus (a)

 

1 year or less

 

 

 

 

10 

Other regulatory assets

 

Various

 

 

34 

 

 

38 

Total regulatory assets

 

 

 

 

1,982 

 

 

1,974 



 

 

 

 

 

 

 

 

Regulatory liabilities:

 

 

 

 

 

 

 

 

Estimated net removal costs

 

Lives of related assets

 

 

895 

 

 

819 

Investment tax credit and protected excess deferred taxes

 

Various

 

 

 

 

10 

Over-recovered wholesale transmission service expense (a)

 

1 year or less

 

 

 -

 

 

10 

Other regulatory liabilities

 

Various

 

 

21 

 

 

17 

Total regulatory liabilities

 

 

 

 

925 

 

 

856 

Net regulatory asset

 

 

 

$

1,057 

 

$

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.

 

 



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5.    BORROWINGS UNDER CREDIT FACILITIES 



At June 30, 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 2018The 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 June 30, 2017, we had outstanding borrowings under the revolving credit facility totaling $1.156  billion with an interest rate of 2.18% 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 June 30, 2017,  substantially 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 June 30, 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 June 30, 2017 and December 31, 2016 was $835 million 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 June 30, 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 June 30, 2017, we were in compliance with this covenant and with all other covenants.



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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 June 30, 2017 and December 31, 2016, our long-term debt consisted of the following:



 

 

 

 

 

 



 

June 30,

 

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

 

 

(32)

 

 

(36)

Less amount due currently

 

 

(324)

 

 

(324)

       Long-term debt, less amounts due currently

 

 

5,519 

 

 

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 June 30, 2017, the amount of available bond credits was $2.257 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $2.060 billion.



Fair Value of Long-Term Debt



At June 30, 2017 and December 31, 2016, the estimated fair value of our long-term debt (including current maturities, if any) totaled $6.792 billion and $6.751 billion, respectively, and the carrying amount totaled $5.843 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.

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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 June 30, 2017, $114 million was available for distribution to our members as our regulatory capitalization ratio was 59.3% debt to 40.7% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt 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 July 26, 2017, our board of directors declared a cash distribution of $65 million, to be paid to our members on August 1, 2017During the six months ended June 30, 2017, our board of directors declared, and we paid, the following cash distributions to our members.





 

 

 

 

 

Declaration Date

 

Payment Date

 

Amount

April 26, 2017

 

April 27, 2017

 

$

86 

March 22, 2017

 

March 24, 2017

 

$

86 



Membership Interests



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

 

185 

 

 

 -

 

 

185 

Distributions

 

(172)

 

 

 -

 

 

(172)

Net effects of cash flow hedges (net of tax)

 

-

 

 

 

 

Defined benefit pension plans (net of tax)

 

 -

 

 

 

 

Balance at June 30, 2017

$

7,835 

 

$

(109)

 

$

7,726 



 

 

 

 

 

 

 

 

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)

 

 -

 

 

 

 

Balance at June 30, 2016

$

7,691 

 

$

(112)

 

$

7,579 

18


 

Accumulated Other Comprehensive Income (Loss)



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

 

 

 

 -

 

 

Balance at June 30, 2017

$

(19)

 

$

(90)

 

$

(109)



 

 

 

 

 

 

 

 

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)





















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.



19


 

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, 2017 and 2016 were comprised of the following:



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

June 30,

 

Six Months Ended

June 30,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Components of net allocated pension costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

$

12 

 

$

12 

Interest cost

 

 

33 

 

 

34 

 

 

66 

 

 

68 

Expected return on assets

 

 

(29)

 

 

(31)

 

 

(58)

 

 

(62)

Amortization of net loss

 

 

11 

 

 

10 

 

 

22 

 

 

20 

Net pension costs

 

 

21 

 

 

19 

 

 

42 

 

 

38 

Components of net OPEB costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

 

 

 

 

 

 

Interest cost

 

 

12 

 

 

12 

 

 

24 

 

 

24 

Expected return on assets

 

 

(2)

 

 

(2)

 

 

(4)

 

 

(4)

Amortization of prior service cost

 

 

(5)

 

 

(5)

 

 

(10)

 

 

(10)

Amortization of net loss

 

 

 

 

 

 

16 

 

 

17 

Net OPEB costs

 

 

15 

 

 

15 

 

 

30 

 

 

31 

Total net pension and OPEB costs

 

 

36 

 

 

34 

 

 

72 

 

 

69 

Less amounts deferred principally as property or a regulatory asset

 

 

(25)

 

 

(25)

 

 

(51)

 

 

(50)

Net amounts recognized as expense

 

$

11 

 

$

 

$

21 

 

$

19 



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 $22 million and $16 million, respectively, during the six months ended June 30, 2017.   We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $127 million and $15 million, respectively, during the remainder of 2017.   Our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $564 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 June 30, 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 $216 million and $436 million for the three and six months ended June 30,  2016, respectively.  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

20


 

expenses, totaled less than $1 million for each of the three- and six-month periods ended June 30,  2016.    We also charged each other for shared facilities at cost.  Our payments to EFH Corp. for shared facilities totaled $1  million and $2 million for the three and six months ended June 30,  2016, respectively.    Payments we received from EFH Corp. subsidiaries related to shared facilities totaled less than $1  million for each of the three- and six-month periods ended June 30,  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 June 30, 2017

 

At December 31, 2016



EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes receivable

$

(26)

 

$

(6)

 

$

(32)

 

$

(62)

 

$

(18)

 

$

(80)

Texas margin taxes payable

 

12 

 

 

-

 

 

12 

 

 

20 

 

 

-

 

 

20 

Net payable (receivable)

$

(14)

 

$

(6)

 

$

(20)

 

$

(42)

 

$

(18)

 

$

(60)



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Six Months Ended June 30, 2017

 

Six Months Ended June 30, 2016



EFH Corp.

 

Texas Transmission

 

Total

 

EFH Corp.

 

Texas Transmission

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal income taxes

$

(102)

 

$

(12)

 

$

(114)

 

$

 -

 

$

 -

 

$

 -

Texas margin taxes

 

18 

 

 

 -

 

 

18 

 

 

18 

 

 

 -

 

 

18 

Total payments (receipts)

$

(84)

 

$

(12)

 

$

(96)

 

$

18 

 

$

 -

 

$

18 



·

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, 2017,  approximately 16% 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 $113 million dollars for the six months ended June 30, 2017, of which approximately $107 

21


 

million was capitalized and $6 million was recorded as an operation and maintenance expense.  At June 30, 2017, we had outstanding trade payables to this vendor of $8 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 20% and 23% of our total operating revenues for the three-month periods ended June 30, 2017 and 2016, respectively, and 21% and 23% of our total operating revenues for the six months ended June 30, 2017 and 2016, respectively.  Revenues from REP subsidiaries of another nonaffiliated entity, collectively represented 16% and 14% of total operating revenues for the three months ended June 30, 2017 and 2016, respectively, and 17% and 15% of our total operating revenues for the six months ended June 30, 2017 and 2016, 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,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

 

$

(3)

 

$

(4)

 

$

(8)

 

$

(8)

Non-recoverable pension and OPEB (Note 9)

 

 

(1)

 

 

 -

 

 

(3)

 

 

(1)

Interest income and other

 

 

 

 

 

 

 

 

Total other income and (deductions) - net

 

$

(3)

 

$

(3)

 

$

(7)

 

$

(8)



Interest Expense and Related Charges



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended

June 30,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

Interest

 

$

88 

 

$

85 

 

$

174 

 

$

170 

Amortization of debt issuance costs and discounts

 

 

 -

 

 

 

 

 

 

Less allowance for funds used during construction – capitalized interest portion

 

 

(3)

 

 

(2)

 

 

(5)

 

 

(3)

Total interest expense and related charges

 

$

85 

 

$

84 

 

$

170 

 

$

168 



Trade Accounts and Other Receivables

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



 

 

 

 

 

 



 

At June 30,

 

At December 31,



 

2017

 

2016



 

 

 

 

 

 

Gross trade accounts and other receivables

 

$

593 

 

$

548 

Allowance for uncollectible accounts

 

 

(3)

 

 

(3)

Trade accounts receivable – net

 

$

590 

 

$

545 



22


 

At June 30, 2017 and December 31, 2016, REP subsidiaries of a nonaffiliated entity collectively represented approximately 15% of the trade accounts receivable amount.  At June 30, 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 June 30,

 

At December 31,



 

2017

 

2016



 

 

 

 

 

 

Assets related to employee benefit plans, including employee savings

  programs

 

$

104 

 

$

98 

Land and other investments

 

 

 

 

Total investments and other property

 

$

106 

 

$

100 



Property, Plant and Equipment



Property, plant and equipment reported on our balance sheet consisted of the following:

 

 

 

 

 

 

 



 

At June 30,

 

At December 31,



 

2017

 

2016



 

 

 

 

 

 

Total assets in service

 

$

20,784 

 

$

20,234 

Less accumulated depreciation

 

 

7,031 

 

 

6,836 

Net of accumulated depreciation

 

 

13,753 

 

 

13,398 

Construction work in progress

 

 

623 

 

 

416 

Held for future use

 

 

15 

 

 

15 

Property, plant and equipment – net

 

$

14,391 

 

$

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 June 30, 2017

 

At December 31, 2016