UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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FORM 10-Q





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





FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017



― OR ―



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



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Commission File Number 333-100240



Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)





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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 October 26, 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.







 

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TABLE OF CONTENTS





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



This Form 10-Q and other Securities and Exchange Commission filings of Oncor 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.

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GLOSSARY





 

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PART I.  FINANCIAL INFORMATION



ITEM 1.FINANCIAL STATEMENTS



ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)



See Notes to Financial Statements.



CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)





See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)





















See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES



Description of Business



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



We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas.  Revenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 23% and 24% of our total operating revenues for the nine months ended September 30, 2017 and 2016, 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 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. 

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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.  Operating lease liabilities will not be  classified as debt for GAAP purposes under Topic 842 and will not be treated as debt for regulatory purposes.  At this time, all of Oncor’s existing leases meet the definition of an operating lease liability.   Under the new rules, the recognition of any finance leases (currently known as capital leases) on the balance sheet would be classified as debt for GAAP purposes and are expected to be defined as debt for our regulatory capital structure purposes (see Note 8 for details) similar to the current capital lease treatment.  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 initial adoption of Topic 842 will affect our balance sheet,  as leased buildings and vehicles are recognized as operating lease liabilities. Subsequent to adoption, to the extent Oncor enters into finance leases, its credit facility covenants and capitalization ratios could be impacted.  We continue to evaluate the potential 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

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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 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.  For cash flow purposes on a prospective basis, non-service costs will be reflected as a reduction to operating cash flows, offset by lower cash used in investing activities (lower capital expenditures).  At this time, we do not expect the new guidance to have a material effect on our rate-making process,  our results of operations, financial position or net change in total 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 September 30, 2017, we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million.  As discussed below, the 2016 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.  Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.



See Note 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 (2016 Plan of Reorganization) pursuant to Chapter 11 of the U.S. Bankruptcy Code and a related disclosure statement with the bankruptcy court.  The 2016 Plan of Reorganization provided that the confirmation and effective date of the 2016 Plan of Reorganization with

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respect to the TCEH Debtors may occur separate from, and independent of, the confirmation and effective date of the 2016 Plan of Reorganization with respect to the EFH Debtors. In this regard, the bankruptcy court confirmed the 2016 Plan of Reorganization with respect to the TCEH Debtors in August 2016, and it became effective by its terms, and the Vistra Spin-Off occurred, effective October 3, 2016.



Prior Merger Agreements



The following merger agreements relating to a potential change in indirect ownership of Oncor were entered into in connection with the EFH Bankruptcy Proceedings. Each of these prior merger agreements has been terminated in accordance with their respective terms, except the TTI Merger Agreement (as defined below). 









For additional information regarding the transactions contemplated by the merger and purchase agreement with the Hunt Investor Group, the NEE Plan, the NEE Merger Agreement, the TTI Merger Agreement and the BHE Merger Agreement, see Notes 2 and 8 to Financial Statements in our 2016 Form 10-K and Notes 2 and 7 to  Financial Statements in our Quarterly Reports.



Sempra Merger Agreement



On August 15, 2017, the EFH Debtors received an alternative proposal from Sempra Energy (Sempra) that largely followed the structure of the BHE Plan. Following negotiations, on August 21, 2017, EFH Corp. and EFIH entered into an Agreement and Plan of Merger (Sempra Merger Agreement) with Sempra and one of its wholly-owned subsidiaries (collectively, the Sempra Parties). Similar to the BHE Merger Agreement, the Sempra Merger Agreement does not impose any conditions on the EFH Debtors regarding TTI’s minority interest in Oncor. Accordingly, the Sempra Merger Agreement provides for the acquisition by Sempra of the 80.03% of Oncor’s membership interests owned indirectly by EFH Corp. and EFIH.



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



In connection with the execution of the Sempra Merger Agreement, on September 5, 2017, the EFH Debtors filed an amended joint plan of reorganization (Sempra Plan) and a related disclosure statement (Sempra Disclosure Statement).  On September 6, 2017, the bankruptcy court authorized the EFH Debtors’ entry into the Sempra Merger Agreement, approved the Sempra Disclosure Statement and authorized the EFH Debtors to solicit votes on the Sempra Plan. The Sempra Merger Agreement contemplates that Oncor and the Sempra Parties will file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan, and that filing was made on October 5, 2017 in PUCT Docket No. 47675.  The EFH Debtors have indicated that they will not seek bankruptcy court confirmation of the Sempra Plan unless and until the PUCT approves the transactions contemplated by the Sempra Plan.



We cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Sempra Plan, including the Sempra Merger Agreement, will (or when they will) close. There remain conditions and uncertainties relating to the Sempra Plan becoming effective and the consummation of the transactions contemplated by the Sempra Merger Agreement, 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. In this regard, we are unable to predict the ultimate impact of the termination of the NEE Merger Agreement and matters relating to the PUCT NEE Plan Order or the TTI Merger Agreement, including the ultimate disposition, if any, of Texas Transmission’s 19.75% equity stake in Oncor.



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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 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 Hunt Merger Agreement.



In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings.  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 in PUCT Docket No. 46957.  In July 2017, we and certain parties to our rate review agreed to a settlement of that rate review, and on August 2, 2017 a settlement agreement was filed that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement agreement.  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.



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



Oncor and the Sempra Parties filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan on October 5, 2017 in PUCT Docket No. 47675. 



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 (i) intercompany claims among the EFH Debtors, (ii) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (iii) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (iv) 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

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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.  In July 2017, we and certain parties to our rate review agreed to a settlement of that rate review, and on August 2, 2017 a settlement agreement was filed that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement of the rate review.  The order is expected to become final and non-appealable on November 7, 2017, after the time period for motions for rehearing expires. The order provides for new rates to take effect on November 27, 2017, contingent upon the closing of the transactions discussed below under “Sharyland Transaction.” If such transactions do not close on or before November 27, 2017, the PUCT order will be of no force and effect and Oncor and the parties to the rate review will work together to establish a new procedural schedule for the rate review. The order further provides, among other items, that Oncor’s base rate revenue requirement before intercompany eliminations would be approximately $4.3 billion, Oncor’s authorized return on equity would be 9.8%, and Oncor’s authorized regulatory capital structure would be 57.5% debt and 42.5% equity.  Oncor’s current authorized return on equity is 10.25% and the current authorized regulatory capital structure is 60% debt and 40% equity. The PUCT order provides for the use of a regulatory liability and bill credit mechanism until the new authorized regulatory capital structure is met following the effective date for new rates to reflect our actual capitalization prior to achieving the authorized capital structure.



Sharyland Transaction



On July 21, 2017, we entered into an agreement (Sharyland Agreement) with Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (SDTS), Sharyland Utilities, L.P., a Texas limited partnership (SU), and certain of their subsidiaries.



The Sharyland Agreement provides that pursuant to separate mergers (collectively, Sharyland Mergers), (i) we will receive certain of the electricity distribution-related assets and liabilities of SDTS and SU (constituting substantially all of the electricity distribution business of SDTS and SU) and certain transmission assets (collectively, Sharyland  Distribution Business and the portion held by SDTS, the SDTS Merger Assets), (ii) SDTS will receive portions of certain of our electricity transmission-related assets and liabilities (Oncor Merger Assets) and cash, and (iii) SU will receive cash. The transaction for assets between Oncor and SDTS is structured to qualify, in part, as a simultaneous tax deferred like kind exchange of assets to the extent that the assets exchanged are of “like kind” (within the meaning of Section 1031 of the Internal Revenue Code).



The actual assets exchanged and cash received pursuant to the Sharyland Mergers is based on the difference between the current net book value of the Oncor Merger Assets and/or the actual net book value of the Sharyland Distribution Business as of closing, as provided in the Sharyland Agreement.  The net book value of the Oncor Merger Assets is approximately $380 million and of the SDTS Merger Assets is approximately $401 million (each after taking into account working capital adjustments based on amounts as of the date of the Sharyland Agreement). Based on these net book values, we would owe SDTS approximately $20 million in cash and SU approximately $6.5 million in cash.  While these amounts may change, Oncor does not expect its cash obligations to be material to it.  

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Among other customary termination rights, the Sharyland Agreement may be terminated by SDTS, SU or Oncor, if the closing does not occur within 240 days after the date of the Sharyland Agreement.  



On August 4, 2017, we, SDTS and SU filed a joint application for sale, transfer, or merger in PUCT Docket No. 47469 requesting PUCT approvals of the transactions contemplated by the Sharyland Agreement.  On October 13, 2017, the PUCT issued an order approving the Sharyland Agreement in Docket No. 47469.  All required PUCT approvals for the closing of the transactions contemplated by the Sharyland Agreement have now been received. The parties have also received clearance for the transactions contemplated by the Sharyland Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The court in the EFH Corp. and EFIH bankruptcy proceedings has also issued an order approving the consent by EFIH to Oncor’s entry into the Sharyland Agreement.  Closing is also subject to the satisfaction of other customary closing conditions, including SDTS’s receipt of consent from the holders of certain of its indebtedness.  We expect the transaction to close in the fourth quarter of 2017, before the November 27, 2017 effective date of the rate changes discussed above under “2017 Rate Review (PUCT Docket No. 46957).” 



We do not expect the Sharyland transaction to have a material effect on our results of operations, financial position or cash flows.



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 periods which they are to be recovered or refunded through rate regulation are determined by the PUCT.    Components of our regulatory assets and liabilities and their remaining periods as of September 30, 2017 are provided in the table below.  Amounts not earning a return through rate regulation are noted.





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5.    SHORT-TERM BORROWINGS 



At September 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 2018.  The terms of the revolving credit facility allow us to request an increase in our borrowing capacity of $100 million in the aggregate provided certain conditions are met, including lender approval.



Borrowings under the revolving credit facility are classified as short-term on the balance sheet and are secured equally and ratably with all of our other secured indebtedness by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.



At September 30, 2017, we had outstanding borrowings under the revolving credit facility totaling $917 million with an interest rate of 2.22% 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 September 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 September 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 September 30, 2017 and December 31, 2016 was $1.074 billion and $1.204 billion, respectively.  Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions.  As described further in Note 6, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust.  At September 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 September 30, 2017, we were in compliance with this covenant and with all other covenants.



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6.    LONG-TERM DEBT



Our senior notes are secured by a  first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness.  See “Deed of Trust” below for additional information.  At September 30, 2017 and December 31, 2016, our long-term debt consisted of the following:



Debt-Related Activity in 2017



Debt Repayments



Repayments of long-term debt in the nine months ended September 30, 2017 consisted of $324 million aggregate principal amount of 5.00% senior secured notes due September 30, 2017 (2017 Notes) that we redeemed on September 29, 2017.



Issuance of Senior Secured Notes



In September 2017, we issued $325 million aggregate principal amount of 3.80% senior secured notes due September 30, 2047 (2047 Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of $321 million from the sale of the 2047 Notes for general corporate purposes, including repayment of borrowings under the revolving credit facility and payment of a portion of the redemption price for the 2017 Notes.  The 2047 Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.



Interest on the 2047 Notes is payable in cash semiannually on March 30 and September 30 of each year, beginning on March 30, 2018.  Prior to March 30, 2047, we may at our option at any time redeem all or part of the

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2047 Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a make-whole premium.  On and after March 30, 2047, Oncor may redeem the 2047 Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of such 2047 Notes, plus accrued and unpaid interest. The 2047 Notes also contain customary events of default, including failure to pay principal or interest on the Notes when due.



The 2047 Notes were issued in a private placement and were not registered under the Securities Act.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the 2047 Notes (except for provisions relating to the transfer restriction and payment of additional interest) as part of an offer to exchange freely tradable exchange notes for the 2047 Notes.  We have agreed to use commercially reasonable efforts to cause the exchange offer to be completed within 315 days after the issue date of the 2047 Notes.  If a registration statement for the exchange offer is not declared effective by the SEC within 270 days after the issue date of the 2047 Notes or the exchange offer is not completed within 315 days after the issue date of the 2047 Notes (an exchange default), then the annual interest rate on the 2047 Notes will increase 50 basis points per annum until the earlier of the expiration of the exchange default or the second anniversary of the issue date of the Notes.



Term Loan Credit Agreement



On September 26, 2017, we entered into a term loan credit agreement that provides for a springing-lien term loan credit facility in an aggregate principal amount of $275 million.  On December 31, 2017, if (i) the obligations under the term loan credit agreement are outstanding as of such date and (ii) the obligations under our revolving credit facility (as amended, restated, supplemented, refinanced, replaced or otherwise modified) are secured as of such date, then the obligations under the term loan credit agreement will become secured indebtedness under the lien of our Deed of Trust.



The term loan credit agreement has an 18 month term maturing on March 26, 2019, and contains optional prepayment provisions as well as mandatory prepayment provisions that require prepayment in the event of certain specified debt issuances or certain specified asset dispositions.



At September 30, 2017, we had outstanding borrowings of $275 million under the term loan credit agreement with an interest rate of 2.138%. 



Loans under the term loan credit agreement bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 0.80%-0.90%, depending on whether the loan has become secured, or (ii) an alternate base rate (the highest of (1) the prime rate of Wells Fargo Bank, National Association, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%).



The term loan credit agreement 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 term loan credit agreement 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.



The term loan credit agreement also contains customary events of default for facilities of this type the occurrence of which would allow the lenders to accelerate all outstanding loans and terminate their commitments, including certain changes in control of Oncor that are not permitted transactions under the term loan credit agreement, cross-default provisions in the event Oncor or any of its subsidiaries defaults on indebtedness in a principal amount in excess of $100 million or receives judgments for the payment of money in excess of $50 million that are not discharged within 60 days.



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

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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 September 30, 2017, the amount of available bond credits was $2.495 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 $2.109 billion.



Fair Value of Long-Term Debt



At September 30, 2017 and December 31, 2016, the estimated fair value of our long-term debt (including current maturities, if any) totaled $7.093 billion and $6.751 billion, respectively, and the carrying amount totaled $6.116 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.



Sharyland Agreement



In July 2017, we entered into the Sharyland Agreement that involves the exchange of certain of our electricity transmission-related assets and liabilities for substantially all of Sharyland’s electricity distribution business and certain transmission assets as defined by the agreement.  On October 13, 2017, the PUCT issued an order approving the transactions contemplated by the Sharyland Agreement.  See Note 3 for additional information on and the status of the transaction.  



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 was 60% debt to 40% equity as of September 30, 2017.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt including capital leases plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of acquisition accounting (which included recording the initial goodwill and fair value adjustments and subsequent related impairments and amortization).



At September 30, 2017, $25 million was available for distribution to our members as our regulatory capitalization ratio was 59.9% debt to 40.1% equity.  Our PUCT authorized capital structure will be 57.5% debt and 42.5% equity effective November 27, 2017 contingent upon the PUCT order issued in PUCT Docket No. 46957 becoming final and taking effect (see Note 3 for more details).  To obtain the additional 2.5% equity capitalization, we anticipate that approximately $250 million of equity will be needed.  The PUCT order in PUCT Docket No.

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46957 provides for the use of a regulatory liability and bill credit mechanism until the new authorized regulatory capital structure is met following the effective date for new rates to reflect our actual capitalization prior to achieving the authorized capital structure.     





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



During the nine months ended September 30, 2017, our board of directors declared, and we paid, the following cash distributions to our members.





Membership Interests



The following table presents the changes to membership interests during the nine months ended September 30, 2017 and 2016: 





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Accumulated Other Comprehensive Income (Loss)



The following table presents the changes to accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 and 2016:





















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 service was assigned to 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.



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Pension and OPEB Costs



Our net costs related to pension plans and the Oncor OPEB Plan for the three and nine months ended September 30, 2017 and 2016 were comprised of the following:



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 $128 million and $25 million, respectively, during the nine months ended September 30, 2017.   We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $21 million and $6 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 September 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.









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:



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





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 25% of our total operating revenues for each of the three-month periods ended September 30, 2017 and 2016, respectively, and 23% and 24% of our total operating revenues for the nine months ended September 30, 2017 and 2016, respectively.  Revenues from REP subsidiaries of another nonaffiliated entity, collectively represented 20% and 19% of total operating revenues for the three months ended September 30, 2017 and 2016, respectively, and 18% and 17% of our total operating revenues for the nine months ended September 30, 2017 and 2016, respectively.  No other customer represented 10% or more of our total operating revenues.



Other Income and (Deductions)



Interest Expense and Related Charges



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Trade Accounts and Other Receivables

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



At September 30, 2017 and December 31, 2016, REP subsidiaries of a nonaffiliated entity collectively represented approximately 16% and 15% of the trade accounts receivable amount, respectively.  At both September 30, 2017 and December 31, 2016, REP subsidiaries of another nonaffiliated entity collectively represented approximately 12% of the trade accounts receivable amount.



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:



Property, Plant and Equipment



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



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Intangible Assets



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



Aggregate amortization expense for intangible assets totaled $15 million and $14 million for the three months ended September 30, 2017 and 2016, respectively, and $44 million and $46 million for the nine months ended September 30, 2017 and 2016, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows: 



At both September 30, 2017 and December 31, 2016, goodwill totaling $4.1 billion was reported on our balance sheet.  None of this goodwill is being deducted for tax purposes.



Employee Benefit Obligations and Other



Employee benefit obligations and other reported on our balance sheet consisted of the following:



In the first quarter of 2017, EFH Corp. settled all open tax claims with the IRS.  As a result, we reduced the liability for uncertain tax positions by $3 million.  This reduction is reported as a decrease in provision in lieu of income taxes.



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Supplemental Cash Flow Information

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



The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2017 and 2016 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements as well as the Risk Factors contained in our 2016 Form 10-K.



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



BUSINESS



We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas.   Revenues from REP subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 25%  of our total operating revenues for each of the three-month periods ended September 30, 2017 and 2016, and 23% and 24% of our total operating revenues for the nine months ended September 30, 2017 and 2016, respectively.  We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.



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



Significant Activities and Events



EFH Bankruptcy Proceedings — On the EFH Petition Date, the Debtors commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements,  a discussion of the proposed change in control of Oncor’s indirect majority owner in connection with such proceedings, and a discussion of the Vistra Spin-Off. As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



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

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31, 2016,  we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million. 



The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential exposure at this time is unknown.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.  See Notes 10 for details of Oncor’s related-party transactions with members of the Texas Holding Group.



Debt-Related Activities — See Note 6 to Financial Statements for information regarding our issuance of $325 million aggregate principal amount of our 2047 Notes, our entrance into a $275 million term loan credit agreement, and our redemption of approximately $324 million aggregate principal amount of our 2017 Notes.



2017 Rate Review (PUCT Docket No. 46957) —  In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory in March 2017 based on a January 1, 2016 to December 31, 2016 test year.  In July 2017, we and certain parties to our rate review agreed to a settlement of that rate review, and on August 2, 2017 a settlement agreement was filed that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement of the rate review.  The order is expected to become final and non-appealable on November 7, 2017, after the time period for motions for rehearing expires.  For more information on the rate review settlement and PUCT order, see Note 3 to Financial Statements and the discussion below under “Regulation and Rates – Matters with the PUCT.”



Sharyland Transaction — On October 13, 2017, the PUCT issued an order in PUCT Docket No. 47469 approving the transactions contemplated by the Sharyland Agreement.  The Sharyland Agreement provides for Oncor to exchange certain transmission-related assets and liabilities (currently contemplated to consist of approximately 258 miles of transmission lines and their related assets) and cash for certain electricity distribution-related assets and liabilities, constituting substantially all of the electricity distribution business of SDTS and SU, and certain transmission assets set forth in the Sharyland Agreement. For more information on the Sharyland Agreement and the transactions contemplated thereby, see Note 3 to Financial Statements.



For information regarding related matters with the PUCT, see discussion below under “Regulation and Rates – Matters with the PUCT.”









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RESULTS OF OPERATIONS



Operating Data

________________

Financial Results — Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016   



Total operating revenues decreased $3 million to $1.068 billion in 2017.  Revenue is billed under tariffs approved by the PUCT.  The change reflected:







TCOS Filings Table







TCRF Filings Table











EECRF Filings Table

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



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Wholesale transmission service expense increased $6 million, or 3%, to $230 million in 2017 due to higher fees paid to other transmission entities.



Operation and maintenance expense decreased $6 million, or 3%, to $184 million in 2017.  Operation and maintenance expense decreased primarily due to lower energy efficiency costs of $4 million, lower labor related costs of $3 million, partially offset by higher contractor costs of $1 million and higher legal costs of $1 million.  Amortization of regulatory assets reported in operation and maintenance expense totaled $12 million for each of the three-month periods ended September 30, 2017 and 2016.



Depreciation and amortization increased $3 million to $193 million in 2017.  The current period reflects a $12 million increase attributed to ongoing investments in property, plant and equipment, partially offset by lower reconcilable AMS depreciation of $6 million and lower amortization of regulatory assets of $3 million. 



Provision in lieu of income taxes totaled $92 million (including a $2 million benefit related to nonoperating income) in 2017 compared to $98 million (including a $1 million benefit related to nonoperating income) in 2016.  The effective income tax rate on pretax income was 36.9% and 37.5% for the years 2017 and 2016, respectively.  The effective income tax rate on pretax income differs from the U.S. federal statutory rate of 35% primarily due to the effect of the Texas margin tax.



Interest expense and related charges was $87 million and $85 million for 2017 and 2016, respectively.  The current period includes a $3 million increase due to higher average borrowings, partially offset by a $1 million increase in capitalized interest.



Net income was $6 million lower than the prior period.  Revenues for the current period included increases due to growth in points of delivery and increases in transmission investment, offset by decreased revenues due to lower consumption, primarily driven by milder weather.  Non-reconcilable depreciation expense was higher for the current period, partially offset by lower taxes.

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Financial Results — Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016



Total operating revenues increased $5 million to $2.967 billion in 2017.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:



 



















Wholesale transmission service expense increased $27 million, or 4%, to $690 million in 2017 due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $10 million, or 2%, to $552 million in 2017.  The change reflects an increase in non-reconcilable expenses of $18 million including higher contractor costs ($13 million), higher labor related costs ($3 million) and higher legal costs ($2 million).  Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including an $8 million decrease related to the energy efficiency program.  Amortization of regulatory assets reported in operation and maintenance expense totaled $37 million for both of the nine-month periods ended September 30, 2017 and 2016, respectively.



Depreciation and amortization decreased $12 million, or 2%, to $581 million in 2017.  The decrease reflects $26 million in lower amortization of regulatory assets primarily associated with transition bonds (with an offsetting decrease in revenues) and lower reconcilable AMS depreciation of $18 million, partially offset by a $32 million increase attributed to ongoing investments in property, plant and equipment.



Provision in lieu of income taxes totaled $192 million (including a $8 million benefit related to nonoperating income) in 2017 compared to $208 million (including a $3 million benefit related to nonoperating income) in 2016.  The effective income tax rate on pretax income was 35.9 % and 36.9% for the years 2017 and 2016, respectively.  The 2017 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to the effect of the Texas margin tax, partially offset by the release of taxes and interest on uncertain tax positions and by non-taxable gains on employee benefit plans.



Interest expense and related charges was $257 million and $252 million for 2017 and 2016, respectively.  The current period includes a $7 million increase due to higher average borrowings, partially offset by a $2 million increase in capitalized interest.



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Net income was $12 million lower than the prior period.  Revenues for the current period included increases due to growth in points of delivery and increases in transmission investment, offset by decreased revenues due to lower consumption, primarily driven by milder weather.  Non-reconcilable operation and maintenance expense and non-reconcilable depreciation expense were higher for the current period, partially offset by lower taxes.



FINANCIAL CONDITION



LIQUIDITY AND CAPITAL RESOURCES



Cash Flows — Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016



Cash provided by operating activities totaled $1.050 billion and $960 million in 2017 and 2016, respectively. The $90 million increase is primarily the result of a $116 million increase in transmission and distribution receipts and a net tax refund from members under the tax sharing agreement of $114 million, partially offset by increased employee benefit plan funding of $127 million.  The tax refund is primarily related to estimated tax payments made in a prior period before the enactment of bonus depreciation on a retroactive basis.



Cash provided by financing activities totaled $163 million for 2017. Cash used in financing activities totaled $4 million for 2016.  The $167 million change includes an increase in issuances of long-term debt of $425 million and an increase in short-term borrowings of $88 million, partially offset by an increase in repayments of long-term debt of $283 million and an increase in distributions to our members of $48 million.  See Note 7 to Financial Statements for additional information on long-term debt activity and Note 8 to Financial Statements for additional information regarding distributions to our members.



Cash used in investing activities, which consists primarily of capital expenditures, totaled $1.224 billion and $957 million in 2017 and 2016, respectively.  The 2017 activity primarily reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending.  The prior period reflects a $38 million release of Bondco restricted cash due to the maturity of the final transition bonds in that period.  This is reflected in the Other caption under investing activities.



Depreciation and amortization expense reported in the statements of consolidated cash flows was $37 million and $36 million more than the amounts reported in the statements of consolidated income in the nine months ended September 30, 2017 and 2016, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense) and the amortization of debt fair value discount (reported in interest expense and related charges).



Long-Term Debt Activity — In September 2017 we entered into a $275 million term loan credit agreement that matures no later than March 26, 2019.  At September 30, 2017, borrowings under the term loan credit agreement totaled $275 million.  In September 2017 we also issued $325 million aggregate principal amount of our 2047 Notes.  See Note 6 to Financial Statements for additional information regarding the term loan credit agreement and the senior secured notes issuance.



Available Liquidity/Credit Facility — Our primary source of liquidity, aside from operating cash flows, is our ability to borrow under our revolving credit facility.  At September 30, 2017, we had a $2.0 billion secured revolving credit facility.  In October 2016, we exercised the second of two one-year extensions available to us and extended the term of the revolving credit facility to October 2018. 



Subject to the limitations described below, available borrowing capacity under our revolving credit facility totaled $1.074 billion and $1.204 billion at September 30, 2017 and December 31, 2016, respectively.  We may request an increase in our borrowing capacity of $100 million in the aggregate provided certain conditions are met, including lender approval.



The revolving credit facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At September 30, 2017, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on

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this covenant and the calculation of this ratio.  The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that have been certified to the Deed of Trust collateral agent.  Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings.    To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent.  Our term loan credit agreement also provides for a springing lien that requires us to secure under the Deed of Trust outstanding obligations under the term loan credit agreement if, on December 31, 2017, certain conditions are met. See Note 6 to Financial Statements for information regarding the term loan credit agreement and springing lien.    In the event the term loan credit agreement is secured by the Deed of Trust, available bond credits or property additions would be certified to the Deed of Trust collateral agent supporting the borrowings then outstanding.  At September 30, 2017, the available bond credits totaled $2.495 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $2.109 billion.  At September 30, 2017, the available borrowing capacity of the revolving credit facility could be fully drawn.



Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility.  See Note 5 to Financial Statements for additional information regarding the revolving credit facility.



Cash and cash equivalents totaled $5 million and $16 million at September 30, 2017 and December 31, 2016, respectively.  Available liquidity (cash and available revolving credit facility capacity) at September 30, 2017 totaled $1.079 billion, reflecting a decrease of $141 million from December 31, 2016.  The decrease primarily reflects the ongoing capital investment in transmission and distribution infrastructure, offset by the proceeds of the term loan credit agreement.  



We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which was 60% debt to 40% equity at September 30, 2017. At September 30, 2017 and December 31, 2016, our regulatory capitalization ratios were 59.9% debt to 40.1% equity and 59.4% debt to 40.6% equity, respectively.  Our PUCT authorized capital structure as a result of the order issued in PUCT Docket No. 46957 will be 57.5% debt and 42.5% equity effective November 27, 2017, contingent upon the PUCT order issued in PUCT Docket No. 47469 taking effect (see Note 3 to Financial Statements for more details).  To obtain the additional 2.5% equity capitalization, we anticipate that approximately $250 million of equity will be needed.    The PUCT order provides for the use of a regulatory liability and bill credit mechanism until the new authorized regulatory capital structure is met following the effective date for new rates to reflect our actual capitalization prior to achieving the authorized capital structure.   See Note 8 to Financial Statements for discussion of the regulatory capitalization ratio.



Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.5 billion in 2017.    Management currently expects to recommend to our board of directors capital expenditures of approximately $1.7 billion in each of the years 2018 through 2022.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure.



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

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uncertainty in the financial markets, could impact our ability to sustain and grow the business and would likely increase capital costs that may not be recoverable through rates.



Distributions — During the nine months ended September 30, 2017, our board of directors declared, and we paid, the following cash distributions to our members.





See Note 8 to Financial Statements for discussion of distribution restrictions and actions taken by our board of directors in October 2017 with respect to distributions.





Pension and OPEB Plan Funding — Our funding for the pension plans and the Oncor OPEB Plan in the calendar year 2017 is expected to total $149 million and $31 million, respectively.  In the nine months ended September 30, 2017, we made cash contributions to the pension plans and the Oncor OPEB Plan of $128 million and $25 million, respectively.



Financial Covenants, Credit Rating Provisions and Cross Default Provisions — Our revolving credit facility and term loan credit agreement each contain a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility and term loan credit agreement (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP).  Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above.  At September 30, 2017, we were in compliance with this covenant under the revolving credit facility and the term loan credit agreement.    



Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In particular, a decline in credit ratings would increase the cost of our revolving credit facility (as discussed below).  In the event any adverse action with respect to our credit ratings takes place and causes borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.



Most of our large suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with us.  If our credit ratings decline, the costs to operate our business could increase because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with us.



Presented below are the credit ratings assigned for our debt securities at October 26, 2017.  On July 7, 2017, S&P affirmed our rating and changed our outlook to “positive” from “developing” and Fitch changed our outlook to “rating watch positive” from “stable.”  In August 2017, both S&P and Fitch affirmed our ratings and outlook following the entrance by EFH Corp. and EFIH into the Sempra Merger Agreement. See Note 2 to Financial Statements for information regarding the Sempra Merger Agreement.  Oncor remains on “stable” outlook with Moody’s.    

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As described in Note 6 to Financial Statements, our long-term debt (other than the term loan credit agreement) is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.    The term loan credit agreement provides for a springing lien that requires us to secure under the Deed of Trust outstanding obligations under the term loan credit agreement if, on December 31, 2017, certain conditions are met. See Note 6 to Financial Statements for information regarding the term loan credit agreement and springing lien.



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



Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the current ratings assigned to our debt securities at October 26, 2017, our borrowings under the revolving credit facility are generally LIBOR-based and will bear interest at LIBOR plus 1.00%.  A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.



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



Under our revolving credit facility and our term loan credit agreement, a default by us in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($917 million in short-term borrowings and $9 million in letters of credit at September 30, 2017 under the revolving credit facility and $275 million under the term loan credit agreement) to be accelerated.  Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.



Guarantees — At September 30, 2017, we did not have any material guarantees.



OFF-BALANCE SHEET ARRANGEMENTS



At September 30, 2017, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.



COMMITMENTS AND CONTINGENCIES



See Note 7 to Financial Statements for discussion of commitments and contingencies.



CHANGES IN ACCOUNTING STANDARDS



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

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REGULATION AND RATES



State Legislation



During the 2017 regular and special legislative sessions, no legislation passed that is expected to have a material impact on our financial position, results of operations or cash flows. 



Matters with the PUCT



Change in Control Reviews - In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to transactions contemplated by a plan of reorganization in the EFH Bankruptcy Proceedings. In March 2016, the PUCT issued an order conditionally approving the joint application. In April 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and in May 2016, the PUCT denied such motions and the order became final. In May 2016, the plan of reorganization and related merger and purchase agreement that contemplated the transactions in PUCT Docket No. 45188 were terminated. The Hunt Investor Group filed a petition with the Travis County District Court in June 2016 seeking review of the order. We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the plan of reorganization related to the application filed in such docket.  For additional information regarding the EFH Bankruptcy Proceedings and plans of reorganization in such proceedings, see Note 2 to Financial Statements.



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



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



Oncor and the Sempra Parties filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sempra Plan on October 5, 2017 in PUCT Docket No. 47675.  For additional information regarding the Sempra Merger Agreement and Sempra Plan, see Note 2 to Financial Statements.



2017 Rate Review (PUCT Docket No. 46957) – In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory in March 2017 based on a January 1, 2016 to December 31, 2016 test year. 



In July 2017, we and certain parties to our rate review agreed to a settlement of that rate review, and on August 2, 2017 a settlement agreement was filed that settled all issues in the docket.  On October 13, 2017, the PUCT issued an order approving the settlement of the rate review.  The order is expected to become final and non-appealable on November 7, 2017, after the time period for motions for rehearing expires.  The order provides for new rates to take effect on November 27, 2017, contingent upon the closing of the transactions discussed in Note 3 to Financial Statements under “Sharyland Transaction.”   If such transactions do not close on or before November 27, 2017, the PUCT order will be of no force and effect and Oncor and the parties to the rate review will work together to establish a new procedural schedule for the rate review.  The order further provides, among other items, that Oncor’s

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base rate revenue requirement before intercompany eliminations would be approximately $4.3 billion, Oncor’s authorized return on equity would be 9.8%, and Oncor’s authorized regulatory capital structure would be 57.5% debt and 42.5% equity.  Oncor’s current authorized return on equity is 10.25% and the current authorized regulatory capital structure is 60% debt and 40% equity.  The PUCT order provides for the use of a regulatory liability and bill credit mechanism until the new authorized regulatory capital structure is met following the effective date for new rates to reflect our actual capitalization prior to achieving the authorized capital structure.  



Sharyland Transaction (PUCT Docket No. 47469) –  On August 4, 2017, we, SDTS and SU filed a joint application for sale, transfer, or merger in PUCT Docket No. 47469 requesting PUCT approvals of the transactions contemplated by the Sharyland Agreement.  On October 13, 2017, the PUCT issued an order approving the transactions contemplated by the Sharyland Agreement.  For more information on the Sharyland Agreement and the transactions contemplated thereby, see Note 3 to Financial Statements.



Wholesale Transmission Service Rule (PUCT Project No. 46393)  - In 2016, the PUCT staff initiated a rulemaking proceeding to repeal and replace the existing wholesale transmission service rule. The current PUCT rule allows us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year. In March 2017, PUCT staff filed a proposal for publication to repeal the current substantive rule and replace it with a proposed new rule. The proposed new rule changes the frequency of TCOS rate adjustments to once per calendar year. The proposed new rule would also include new limitations on the filing of TCOS rate adjustment applications and require new information in applications. We cannot predict when the PUCT will consider the proposed rule (with or without changes) for publication and comment, and whether the proposed rule, or any portion of the proposed rule, is likely to be adopted by the PUCT.  If the proposed rule is adopted as proposed, it could have an adverse effect on our revenues and results of operations.



Summary



We cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions.  Such actions or changes could significantly alter our basic financial position, results of operations or cash flows.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest Rate Risk



Market risk is the risk that we may experience a loss in value as a result of changes in market conditions such as interest rates that may be experienced in the ordinary course of business.  We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place.  All of our long-term debt at September 30, 2017 and December 31, 2016 carried fixed interest rates except for the term loan credit agreement (see Note 6 to Financial Statements for term loan credit agreement interest rate information).



Except as discussed below, the information required hereunder is not significantly different from the information set forth in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2016 Form 10-K and is therefore not presented herein.



Credit Risk



Credit risk relates to the risk of loss associated with nonperformance by counterparties.  Our customers consist primarily of REPs.  As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the PUCT.  Meeting these standards does not guarantee that a REP will be able to perform its obligations.  REP certificates granted by the PUCT are subject to suspension and revocation for significant violation of PURA and PUCT rules.  Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the PUCT.  We believe PUCT rules that allow for the recovery of uncollectible amounts due from nonaffiliated REPs through rates significantly reduce our credit risk.



Our exposure to credit risk associated with trade accounts receivable totaled $638 million at September 30, 2017.  The receivable amount is before the allowance for uncollectible accounts, which totaled $4 million at September 30, 2017.  The exposure includes trade accounts receivable from REPs totaling $503 million, which are almost entirely noninvestment grade.  At September 30, 2017, there were two nonaffiliated entities whose REP subsidiaries represented approximately 16% and 12% of the trade receivable amount, respectively.  No other parties represented 10% or more of the total trade accounts receivable amount.  We view our exposure to these customers to be within an acceptable level of risk tolerance considering PUCT rules and regulations; however, this concentration increases the risk that a default could have a material effect on cash flows.





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FORWARD-LOOKING STATEMENTS



This report and other presentations made by us contain “forward-looking statements.”  All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that we expect or anticipate to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of our business and operations (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “should,” “projection,” “target,” “goal,” “objective” and “outlook”), are forward-looking statements.  Although we believe that in making any such forward-looking statement our expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors under “Item 1A.  Risk Factors” and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2016 Form 10-K, “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report and the following important factors, among others, that could cause actual results to differ materially from those projected in such forward-looking statements:



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



ITEM 4.   CONTROLS AND PROCEDURES



An evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures in effect at the end of the current period included in this quarterly report.  Based on the evaluation performed, our management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective.  During the most recent fiscal quarter covered by this report, no changes in internal controls over financial reporting have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II.  OTHER INFORMATION



ITEM 1.   LEGAL PROCEEDINGS



Reference is made to the discussion in Notes 3 and 7 to Financial Statements regarding legal and regulatory proceedings.





ITEM 1A.   RISK FACTORS



There are numerous factors that affect our business and results of operations, many of which are beyond our control.  In addition to the other information set forth in this report, including “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you should carefully consider the factors discussed in “Part I, Item 1A.  Risk Factors” in our 2016 Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in such reports are not the only risks we face.





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



None.





ITEM 3.   DEFAULTS UPON SENIOR SECURITIES



None.





ITEM 4.   MINE SAFETY DISCLOSURES



Not applicable.





ITEM 5.   OTHER INFORMATION



None.

 

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ITEM 6.   EXHIBITS



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*   Incorporated herein by reference.

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SIGNATURE





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







ONCOR ELECTRIC DELIVERY COMPANY LLC

























Date:  October 26, 2017

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