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, 2016



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

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

Smaller reporting company___



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



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







 

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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 Bondco, its subsidiary as apparent in the context.  See “Glossary” for definition of terms and abbreviations.



We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas.  The services to REPs included subsidiaries of TCEH through the date of the Reorganized TCEH Spin-Off and subsidiaries of Reorganized TCEH after the date of the Reorganized TCEH Spin-Off.  Revenues from TCEH represented 24% and 25% of our total operating revenues for the nine months ended September 30, 2016 and 2015, respectively.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group.  Oncor Holdings owns 80.03% of our membership interests, Texas Transmission owns 19.75% of our membership interests and certain members of our management team and board of directors indirectly own the remaining membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.



Our consolidated financial statements include our wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a variable interest entity.  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.  Bondco issued an aggregate $1.3 billion principal amount of transition bonds during 2003 and 2004.  The 2003 Series transition bonds matured and were paid in full in 2015 and the 2004 Series transition bonds matured and were paid in full in May 2016.  Final true-up proceedings and refunds of over-collected transition charges for the transition bonds are being conducted by Oncor and the PUCT during 2016 and are expected to have minimal or no net income impact.



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



EFH Corp. Bankruptcy Proceedings



On the EFH Petition Date, the Debtors commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.



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Basis of Presentation



These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the 2015 Form 10-K.  In the opinion of Oncor management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been made.  All intercompany items and transactions have been eliminated in consolidation.    The results of operations for an interim period may not give a true indication of results for a full year due to seasonality.  All dollar amounts in the financial statements and tables in the notes are stated in millions of U.S. dollars unless otherwise indicated.



Use of Estimates



Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements.  In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

 

Reconcilable Tariffs



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



Contingencies



We evaluate and account for contingencies using the best information available.  A loss contingency is accrued and disclosed when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated.  If a range of probable loss is established, the minimum amount in the range is accrued, unless some other amount within the range appears to be a better estimate.  If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency is disclosed to the effect that the probable loss cannot be reasonably estimated.  A loss contingency will be disclosed when it is reasonably possible that an asset has been impaired or a liability incurred.  If the likelihood that an impairment or incurrence is remote, the contingency is neither accrued nor disclosed.  Gain contingencies are recognized upon realization.



Changes in Accounting Standards 



In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-2 (ASU 2016-2), Leases.    ASU 2016-2 amends previous GAAP to require the balance sheet recognition of lease assets and liabilities for operating leases.  Oncor will be required to adopt ASU 2016-2 by January 1, 2019 and does not expect to early adopt.  Retrospective application to the 2017 and 2018 comparative periods presented will be required in the year of adoption.  We continue to evaluate the impact of ASU 2016-2 on our financial statements. 

Since May 2014, the FASB has issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers along with other supplemental guidance (together, Topic 606).  Topic 606 introduces new, increased requirements for disclosure of revenue in financial statements and guidance that are intended to eliminate inconsistencies in the recognition of revenue.  Oncor will be required to adopt Topic 606 by January 1, 2018 and does not expect to early adopt.  We continue to evaluate the impact on our financial statements.  At this time, the adoption is not expected to have a material effect on our reported results of operations, financial condition or cash flows.



2.   EFH BANKRUPTCY PROCEEDINGS



On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing”

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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 US Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  As of September 30, 2016, we had collected $128 million of the prepetition amount.  We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates had not been established as of September 30, 2016.  As discussed below, the New Plan of Reorganization (defined below) provided for a spin-off of the TCEH Debtors from EFH Corp.  As a result of this  spin-off, Reorganized TCEH and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on us remain unknown.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.



See Note 10 for details of Oncor’s related-party transactions with members of the Texas Holdings Group.



Potential Change in Indirect Ownership of Oncor



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



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



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



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



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

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



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



The New Plan of Reorganization provides that the confirmation and effective date of the New Plan of Reorganization with respect to the TCEH Debtors may occur (and on October 3, 2016, it did occur) separate from, and independent of, the confirmation and effective date of the New Plan of Reorganization with respect to the EFH Debtors. The New Plan of Reorganization, subject to certain conditions and required regulatory approvals, provides for, among other things:







Solely as it pertains to the TCEH Debtors, the disclosure statement was approved by the bankruptcy court.  The bankruptcy court confirmed the New Plan of Reorganization with respect to the TCEH Debtors on August 26, 2016, and it became effective by its terms, and the Reorganized TCEH Spin-Off occurred effective October 3, 2016.



On July 29, 2016, (i) the EFH Debtors entered into a Plan Support Agreement (NEE Plan Support Agreement) with NextEra Energy, Inc. (NEE)  to effect an agreed upon restructuring of the EFH Debtors pursuant to an amendment to the  New Plan of Reorganization (Amended New Plan) and (ii) EFH Corp. and EFIH entered into an Agreement and Plan of Merger (NEE Merger Agreement) with NEE and EFH Merger Co., LLC (Merger Sub), a wholly-owned subsidiary of NEE. Pursuant to the NEE Merger Agreement, at the effective time of the Amended New Plan with respect to the EFH Debtors, EFH Corp. will merge with and into Merger Sub (NEE Merger) with Merger Sub surviving as a wholly owned subsidiary of NEE. 



In August 2016, the EFH Debtors filed a motion seeking bankruptcy court approval of entry into the NEE Merger Agreement, a related termination fee and the NEE Plan Support Agreement. The NEE Merger Agreement includes various conditions precedent to consummation of the transactions contemplated thereby, including, among others, a condition that certain approvals and rulings be obtained, including from, among others, the PUCT and the IRS and a condition that the TCEH Transactions have occurred. NEE will not be required to consummate the NEE Merger if, among other items, the PUCT approval is obtained but with conditions, commitments or requirements that impose a Burdensome Condition (as defined in the NEE Merger Agreement). NEE’s and Merger Sub’s obligations under the NEE Merger Agreement are not subject to any financing condition.  The bankruptcy court approved EFH Corp. and EFIH’s entry into the NEE Merger Agreement, the related termination fee, and the NEE Plan Support Agreement by order dated September 19, 2016.



Following approval of the NEE Merger Agreement by the bankruptcy court and until confirmation of the Amended New Plan by the bankruptcy court, EFH and EFIH may continue or have discussions or negotiations with respect to acquisition proposals for Reorganized EFH (x) with persons that were in active negotiation at the time of

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approval of the NEE Merger Agreement by the bankruptcy court and (y) with persons that submit an unsolicited acquisition proposal that is, or is reasonably likely to lead to, a Superior Proposal (as defined in the NEE Merger Agreement). 

 

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

 

 

 

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



Following the execution and delivery of the NEE Merger Agreement, EFIH requested, pursuant to the NEE Merger Agreement, that Oncor Holdings and Oncor enter into a letter agreement (NEE Letter Agreement) with NEE and Merger Sub. The NEE Letter Agreement was executed on August 4, 2016 and sets forth certain rights and obligations of the Oncor Ring-Fenced Entities, NEE and Merger Sub to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the acquisition of Reorganized EFH (EFH Acquisition) and the other transactions described in the NEE Merger Agreement.

 

The NEE Letter Agreement is not intended to give NEE or Merger Sub, directly or indirectly, the right to control or direct the operations of any of the Oncor Ring-Fenced Entities prior to the receipt of all approvals required by the bankruptcy court, the PUCT and other governmental entities and the consummation of the EFH Acquisition and related transactions (if and when such transactions are consummated). In addition, Oncor Holdings and Oncor have not endorsed or approved any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by NEE or Merger Sub involving Oncor Holdings or Oncor.



On October 29, 2016, we entered into an Interest Purchase Agreement (OMI Agreement) with T & D Equity Acquisition, LLC, a wholly-owned subsidiary of NEE (T&D Equity Acquisition) and Investment LLC pursuant to which T&D Equity Acquisition would purchase the 1,396,008 limited liability company interests of Oncor that Investment LLC owns in exchange for a purchase price of approximately $27 million.    The OMI Agreement contains various conditions precedent to consummation of the transactions contemplated thereby, including the consummation of the transactions contemplated by the NEE Merger Agreement.



On October 30, 2016, an affiliate of NEE entered into an Agreement and Plan of Merger (the TTI Merger Agreement) with Texas Transmission Holdings Corporation (the parent of Texas Transmission) and certain of its affiliates to purchase Texas Transmission's 19.75% equity interest in Oncor for approximately $2.4 billion.  The parties have agreed to use their best efforts to have the TTI Merger Agreement close contemporaneously with the NEE Merger. The TTI Merger Agreement also contains various conditions precedent to consummation of the transactions contemplated thereby, including a requirement that EFH Corp., subject to bankruptcy court approval, waive its rights of first refusal under the Investor Rights Agreement to purchase Texas Transmission's 19.75% equity interest in Oncor.



Notwithstanding these pending transactions, we cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by any Plan of Reorganization, including the EFH Acquisition, will (or when they will) close.  In this regard, we cannot predict how any reorganization of EFH Corp. and EFIH ultimately will impact Oncor or what form any change in indirect ownership of Oncor may take.  On September 19, 2016, the bankruptcy court approved the disclosure statement as it relates to the EFH Debtors.  The

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confirmation hearing for the New Plan of Reorganization as it relates to the EFH Debtors is scheduled to commence on December 1, 2016.



Regulatory Matters Related to EFH Bankruptcy Proceedings



In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sixth Amended Plan of Reorganization.  On March 24, 2016, the PUCT issued an order conditionally approving the joint application.  On April 18, 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and on May 19, 2016, the PUCT denied such motions and the order became final.  The Hunt Investor Group filed a petition with the Travis County District Court on June 17, 2016 seeking review of the order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in  light of the termination of the Sixth Amended Plan of Reorganization and the other pending transactions discussed above.    



In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings.  For more information, see Note 3 – “City Rate Reviews”.



The NEE Merger Agreement contemplates that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended New Plan.  On October 31, 2016, Oncor and NEE filed that joint application in PUCT Docket No. 46238.



Settlement Agreement



In connection with the EFH Bankruptcy Proceedings, the EFH Debtors and various creditor parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the EFH Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the EFH Debtors' current and former directors, the Sponsor Group, managers and officers and other related entities. The Settlement Agreement contemplates a release of such claims upon approval of the Settlement Agreement by the bankruptcy court, which approval was obtained in December 2015.



The Settlement Agreement settles substantially all inter-debtor claims through the effective date of the Settlement Agreement.  These settled claims include potentially contentious inter-debtor claims, including various potential avoidance actions and claims arising under numerous debt agreements, tax sharing agreements, and contested property transfers.  The release provisions of the Settlement Agreement took effect immediately upon the entry of the bankruptcy court order approving the Settlement Agreement. In this regard, substantially all of the potential affiliate claims, derivative claims and other types of disputes among affiliates (including claims against Oncor) have been resolved by bankruptcy court order.  Accordingly, we believe the Settlement Agreement resolves all affiliate claims against Oncor and its assets existing as of the effective date of the Settlement Agreement.



3.    REGULATORY MATTERS



Change in Control Reviews



In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sixth Amended Plan of Reorganization.  On March 24, 2016, the PUCT issued an order conditionally approving the joint application.  On April 18, 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and on May 19, 2016, the PUCT denied such motions and the order became final.  The Hunt Investor Group filed a petition with the Travis County District Court on June 17, 2016 seeking review of the order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the Sixth Amended Plan of Reorganization and the other pending transactions discussed

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in Note 2 to Financial Statements.    For additional information regarding the Sixth Amended Plan of Reorganization and application for regulatory approval, see Note 2 to Financial Statements and “City Rate Reviews” below.



The NEE Merger Agreement contemplates that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended New Plan.  On October 31, 2016, Oncor and NEE filed that joint application in PUCT Docket No. 46238. For additional information regarding the Amended New Plan and application for regulatory approval, see Note 2 to Financial Statements.



City Rate Reviews



Oncor has received resolutions passed by approximately 58 cities with original jurisdiction over electric utility rates directing Oncor to file rate review proceedings.  The resolutions passed required Oncor to file a rate review with each city by September 1, 2016 based on a January 1, 2015 to December 31, 2015 test year.  However, Oncor has subsequently been notified by counsel representing these cities that these rate review proceedings have been abated indefinitely, pending resolution of Oncor ownership issues. The notice provides that if and when the cities desire to proceed with a rate inquiry, cities will notify Oncor in writing and inform Oncor of a precise date of the rate case, which will be at least 120 days from receipt of the communication that lifts the abatement.



2008 Rate Review



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



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

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4.    REGULATORY ASSETS AND LIABILITIES



Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT.  Components of the regulatory assets and liabilities are provided in the table below.  Amounts not earning a return through rate regulation are noted.



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5.    BORROWINGS UNDER CREDIT FACILITIES 



At September 30, 2016, we had a $2.0 billion secured revolving credit facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances.  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, 2016, we had outstanding borrowings under the revolving credit facility totaling $880 million with an interest rate of 1.52% and outstanding letters of credit totaling $7 million.  At December 31, 2015, we had outstanding borrowings under the revolving credit facility totaling $840 million with an interest rate of 1.48% and outstanding letters of credit totaling $7 million.



Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  At September 30, 2016, 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, 2016, 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, 2016 and December 31, 2015 was $1.113 billion and $1.153 billion, respectively.  Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions.  As described further in Note 6, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust.  At September 30, 2016, the available borrowing capacity of the revolving credit facility could be fully drawn.



The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets.  In addition, the revolving credit facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants.  For purposes of the ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP).  The debt calculation excludes any outstanding transition bonds issued by Bondco, but includes any unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above.  At September 30, 2016, we were in compliance with this covenant and with all other covenants.



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6.    LONG-TERM DEBT



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

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(a)   Secured by first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness.  See “Deed of Trust” below for additional information.

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



Debt-Related Activity in 2016



Debt Repayments



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



Issuance of Senior Secured Notes



In August 2016, we completed the sale of $175 million aggregate principal amount of 3.75% senior secured notes maturing in April 2045 (Additional 2045 Notes).  The Additional 2045 Notes were an additional issuance of our 3.75% senior secured notes maturing in April 2045, $375 million aggregate principal amount of which were previously issued in March 2015 (2045 Notes).  The Additional 2045 Notes were issued as part of the same series as the 2045 Notes.  We used the net proceeds of approximately $185 million from the sale of the Additional 2045 Notes to repay borrowings under our revolving credit facility and for general corporate purposes.  The Additional

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2045 Notes and 2045 Notes are secured by the first priority lien and are secured equally and ratably with all of our other secured indebtedness as discussed below.



Interest on the Additional 2045 Notes is payable in cash semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2016.  We may at our option redeem the Additional 2045 Notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and, until October 1, 2044, a make-whole premium.  The Additional 2045 Notes also contain customary events of default, including failure to pay principal or interest on the notes when due.



The Additional 2045 Notes were issued in a private placement and were not registered under the Securities Act of 1933, as amended.  We have agreed, subject to certain exceptions, to register with the SEC notes having substantially identical terms as the Additional 2045 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 Additional 2045 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 Additional 2045 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 Additional 2045 Notes or the exchange offer is not completed within 315 days after the issue date of the Additional 2045 Notes (an exchange default), then the annual interest rate on the Additional 2045 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 Additional 2045 Notes.



Deed of Trust



Our secured indebtedness, including the revolving credit facility described in Note 5, is secured equally and ratably by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.  The Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At September 30, 2016, the amount of available bond credits was $2.534 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.586 billion.



Fair Value of Long-Term Debt



At September 30, 2016 and December 31, 2015, the estimated fair value of our long-term debt (including current maturities, if any) totaled $7.112 billion and $6.287 billion, respectively, and the carrying amount totaled $5.837 billion and $5.687 billion, respectively.  The fair value is estimated using observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.



7.    COMMITMENTS AND CONTINGENCIES



EFH Bankruptcy Proceedings



On the EFH Petition Date,  the EFH Debtors commenced the EFH Bankruptcy Proceedings.    The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  See Notes  2 and 10 for  a  discussion of the potential impacts on us as a result of the EFH Bankruptcy Proceedings and our related-party transactions involving members of the Texas Holdings Group, respectively.



Legal/Regulatory Proceedings



We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 3 in this report and Note 8 to Financial Statements in our 2015 Form 10-K for additional information regarding our legal and regulatory proceedings.



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8.    MEMBERSHIP INTERESTS



Cash Distributions





Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At September 30, 2016, $69 million was available for distribution to our members as our regulatory capitalization ratio was 59.6% debt to 40.4% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization).





On October 26, 2016, our board of directors declared a cash distribution of $41 million, which was paid to our members on October 27, 2016.  During the nine months ended September 30, 2016, our board of directors declared, and we paid, the following cash distributions to our members:





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Membership Interests



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





Accumulated Other Comprehensive Income (Loss)



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

















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9.    PENSION AND OPEB PLANS



Pension Plans



We sponsor the Oncor Retirement Plan and also have liabilities under the EFH Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended, and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  We also have a supplemental pension plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plans.  See Note 10 to Financial Statements in our 2015 Form 10-K for additional information regarding pension plans.



Oncor OPEB Plan



The Oncor OPEB Plan covers our eligible current and future retirees as well as certain eligible retirees of EFH Corp. whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp.  At September 30, 2016, EFH Corp. retained its portion of the liability for retiree benefits related to those retirees.   As we are not responsible for EFH Corp.’s portion of the Oncor OPEB Plan’s unfunded liability, that amount is not reported on our balance sheet.  See Note 10 to Financial Statements in our 2015 Form 10-K for additional information.



Pension and OPEB Costs



Our net costs related to pension plans and the Oncor OPEB Plan for the three and nine months ended September 30, 2016 and 2015 were comprised of the following:



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



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Pension and OPEB Plans Cash Contributions



We made cash contributions to the pension plans and Oncor OPEB Plan of $3 million and $22 million, respectively, during the nine months ended September 30, 2016.   We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $1 million and $16 million, respectively, during the remainder of 2016. Our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $479 million and $160 million, respectively, in the 2016 to 2020 period based on the latest actuarial projections.



10.   RELATED-PARTY TRANSACTIONS



The following represent our significant related-party transactions at September 30, 2016.  See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings  and information regarding the Reorganized TCEH Spin-Off. As a result of the Reorganized TCEH Spin-Off, Reorganized TCEH and its subsidiaries, including Luminant and TXU Energy, ceased to be related parties as of October 3, 2016.

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







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 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 TCEH represented  25% and 26% of our total operating revenues for the three months ended September 30, 2016 and 2015, respectively and 24% and 25% for the nine months ended September 30, 2016 and 2015, respectively.  Revenues from REP subsidiaries of a nonaffiliated entity collectively represented 19% and 18% of our total operating revenues for the three months ended September 30, 2016 and 2015, respectively, and 17% of our total operating revenues for each of the nine-month periods ended September 30, 2016 and 2015.  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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Restricted Cash



Restricted cash at September 30, 2016 was zero as a result of the maturity and payment in full of the 2004 Series transition bonds in May 2016.  Restricted cash reported on our balance sheet at December 31, 2015 related to the transition bonds.



Trade Accounts and Other Receivables



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



At September 30, 2016 and December 31, 2015, REP subsidiaries of a nonaffiliated entity, collectively represented approximately 17% and 13% of the nonaffiliated trade accounts receivable amount, respectively.



Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by REPs are deferred as a regulatory asset.  Due to commitments made to the PUCT in 2007, we are not allowed to recover bad debt expense, or certain other costs and expenses, from ratepayers in the event of a default or bankruptcy by an affiliate REP.



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 consisted of the following:



Aggregate amortization expense for intangible assets totaled $14 million and $16 million for the three-month periods ended September 30, 2016 and 2015, respectively, and $46 million and $48 million for the nine-month periods ended September 30, 2016 and 2015, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows: 



At both September 30, 2016 and December 31, 2015, 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:



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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, 2016 and 2015 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 2015 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.  The services to REPs included subsidiaries of TCEH through the date of the Reorganized TCEH Spin-Off and subsidiaries of Reorganized TCEH after the date of the Reorganized TCEH Spin-Off.    Revenues from TCEH represented 25%  and 26%  of our reported total operating revenues for the three months ended September 30, 2016 and 2015, respectively and 24% and 25% of our reported total operating revenues for the nine months ended September 30, 2016 and 2015, 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 US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 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 Reorganized TCEH Spin-Off. As a result of the Reorganized TCEH Spin-Off, Reorganized TCEH and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



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

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Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  As of September 30, 2016, we had collected $128 million of the prepetition amount.  We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates had not been established as of September 30, 2016.  For more information on the EFH Bankruptcy Proceedings, see Note 2 to Financial Statements. 



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 2, 3, 7 and 10 to Financial Statements and “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information.



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

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RESULTS OF OPERATIONS



Operating Data

________________

Financial Results — Three Months Ended September 30, 2016 Compared to Three Months Ended September  30, 2015   



Total operating revenues decreased $1 million to $1,071 million in 2016.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:







TCOS Filings Table













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TCRF Filings Table













EECRF Filings Table



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(a)  As of March 2014, average monthly charges are for a residential customer using 1,200 kWh, as the energy efficiency substantive rules require rates to be on a volumetric basis rather than a fixed monthly charge.



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Wholesale transmission service expense increased $23 million, or 11%, to $224 million in 2016 due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $4 million, or 2%, to $190 million in 2016.    Operation and maintenance expense increased due to higher labor related costs of $4 million, higher energy efficiency expenses of $3 million and higher advanced meters expenses of $2 million,  partially offset by lower contractor costs of $4 million and lower vegetation management costs of $1 million. Operation and maintenance expense reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including the $3 million increase related to the energy efficiency program and the $2 million related to advance meters discussed above.  Amortization of regulatory assets reported in operation and maintenance expense totaled $12 million for each of the three months ended September 30, 2016 and 2015.



Depreciation and amortization decreased $27 million, or 12%, to $190 million in 2016.  The decrease reflects lower amortization of regulatory assets of $29 million primarily related to the maturity of the transition bonds (with an offsetting decrease in revenues),  partially offset by a $2 million increase attributed to ongoing investments in property, plant and equipment.   



Taxes other than amounts related to income taxes increased $2 million, or 2%, to $118 million in 2016.  The increase is primarily due to a  $1 million increase in local franchise fees and a $1 million increase in property taxes.



Other income and (deductions) – net improved $6 million in 2016.  The change primarily reflects a reduction in non-recoverable pension and OPEB costs and lower professional fees.   See Note 11 to Financial Statements for more details.



Provision in lieu of income taxes totaled $98 million (including a $1 million benefit related to nonoperating income) in 2016 compared to $96 million (including a $3 million benefit related to nonoperating income) in 2015.  The effective income tax rate on pretax income was 37.5% and 37.1%  for the years 2016 and 2015, 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 and the filing of the 2015 partnership income tax return.



Interest expense and related charges was $85 million and $84 million for 2016 and 2015, respectively.   The current period includes a  $3 million increase due to higher average borrowings, partially offset by a $2 million decrease due to lower average interest rates.



Net income was $163 million for each of the three months ended September 30, 2016 and 2015.  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 summer weather conditions. Operating expense and interest expense were slightly up but were offset by lower other deductions.



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Financial Results — Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015



Total operating revenues increased $5 million to  $2,962 million in 2016.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:























Wholesale transmission service expense increased $68 million, or 11%, to $663 million in 2016 due to higher fees paid to other transmission entities.



Operation and maintenance expense increased $3 million, or 1%, to $542 million in 2016.  The change included $7 million in higher labor related costs, $5 million in higher energy efficiency program cost and $2 million in higher advanced meter expenses, partially offset by lower contractor costs of $8 million, lower vegetation management costs of $2 million and $1 million lower regulatory amortization expense. Operation and maintenance expense reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including the  $5 million increase related to the energy efficiency program and the $2 million increase related to advanced meters discussed above.  Amortization of regulatory assets reported in operation and maintenance expense totaled $37 million and $38 million for the nine months ended September 30, 2016 and 2015, respectively.



Depreciation and amortization decreased $60 million, or 9%, to $593 million in 2016.  The decrease reflects $75 million in lower amortization of regulatory assets primarily associated with transition bonds (with an offsetting decrease in revenues), partially offset by $15 million increase attributed to ongoing investments in property, plant and equipment. 



Taxes other than amounts related to income taxes increased $2 million, or 1%, to $338 million in 2016.  The change includes a $4 million increase in property taxes and a $1 million increase in payroll taxes, partially offset by a $3 million decrease in local franchise fees.  

Other income and (deductions) – net improved $6 million in 2016.  The change primarily reflects a reduction in non-recoverable pension and OPEB costs and lower professional fees, partially offset by lower accretion of the transition bond fair value adjustment related to purchase accounting.    See Note 11 to Financial Statements for more details.



Provision in lieu of income taxes totaled $208 million (including a $3 million benefit related to nonoperating income) in 2016 compared to $208 million (including a  $6 million benefit related to nonoperating income) in 2015.  The effective income tax rate on pretax income was 36.9% in 2016 and 36.7% in 2015.  The 2016 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 and the filing of the 2015 partnership income tax return.



Interest expense and related charges increased $2 million, or 1% to $252 million in 2016.  The change was  driven by a $8 million increase attributable to higher average borrowings reflecting ongoing capital investments, partially offset by a  $3 million decrease attributable to lower average interest rates and a $3 million decrease attributable to higher capitalized interest.

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Net income decreased $4 million, or 1%, to $355 million in 2016.  Revenues for the current period reflect decreased revenues due to lower consumption, primarily driven by milder winter, spring and summer weather conditions, partially offset by increases due to growth in points of delivery and increases in transmission investment.  Operating expense and interest expense were slightly higher, partially offset by lower other deductions.



FINANCIAL CONDITION



LIQUIDITY AND CAPITAL RESOURCES



Cash Flows — Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015



Cash provided by operating activities totaled $960 million and $1,053 million in 2016 and 2015, respectively. The $93 million decrease is primarily the result of a $139 million decrease in transmission and distribution receipts attributable to under-recovered wholesale transmission service expense, lower transition bond revenue and mild winter, spring and summer weather,  a $25 million increase in prepayments, a $17 million increase in cash purchases of materials and supplies and $13 million of refunds related to over-collected transition bond charges.    These items are partially offset by a $53 million decrease in tax payments, a $34 million decrease in storm related repairs and an $18 million change in customer deposits held.  The decrease in tax payments is related to the recoupment of tax overpayments made in the prior period.   



Cash used in financing activities totaled $4 million and $166 million in 2016 and 2015, respectively.  The $162 million change primarily reflects  a decrease of $553 million of debt repayments, a decrease in distributions to our members of $94 million, an increase in short-term borrowings of $43 million and a decrease in debt issuance costs of $22 million, partially offset by $550 million in lower debt issuances.  See Notes 6 and 8 to Financial Statements for additional information regarding long-term debt activity and distributions to our members, respectively.



Cash used in investing activities, which consists primarily of capital expenditures, totaled $957 million and $873 million in 2016 and 2015, respectively.  The 2016 activity reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending, partially offset by a  $38 million release of Bondco restricted cash due to the maturity of the final transition bonds.  This is reflected in the Other caption under investing activities.



Depreciation and amortization expense reported in the statements of consolidated cash flows was $36 million and $33 million more than the amounts reported in the statements of consolidated income in the nine months ended September 30, 2016 and 2015, 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), the accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).



Long-Term Debt Activity  — Repayments of long-term debt in the nine months ended September 30, 2016 totaled $41 million representing the final transition bond principal payment at the scheduled maturity date.



In August 2016, we completed the sale of $175 million aggregate principal amount of 3.75% senior secured notes maturing in April 2045 (Additional 2045 Notes).  The Additional 2045 Notes were an additional issuance of our 3.75% senior secured notes maturing in April 2045, $375 million aggregate principal amount of which were previously issued in March 2015 (2045 Notes).  The Additional 2045 Notes were issued as part of the same series as the 2045 Notes.  We used the net proceeds of approximately $185 million from the sale of the Additional 2045 Notes to repay borrowings under our revolving credit facility and for general corporate purposes.  The Additional 2045 Notes and 2045 Notes are secured by the first priority lien and are secured equally and ratably with all of our other secured indebtedness as discussed below.



See Note 6 to Financial Statements for additional information regarding long-term debt.



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, 2016, we had a $2.0 billion secured

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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 $1.113 billion and $1.153 billion at September 30, 2016 and December 31, 2015, 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, 2016, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.  The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that have been certified to the Deed of Trust collateral agent.  Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings.    To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent.  At September 30, 2016, the available bond credits totaled $2.534 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $1.586 billion.  At September 30, 2016, 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 $24 million and $25 million at September 30, 2016 and December 31, 2015, respectively.  Available liquidity (cash and available revolving credit facility capacity) at September 30, 2016 totaled $1.137 billion, reflecting a  decrease of $41 million from December 31, 2015.  The decrease reflects the ongoing capital investment in transmission and distribution infrastructure.   



We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At September 30, 2016 and December 31, 2015, our regulatory capitalization ratios were 59.6% debt to 40.4% equity and 59.8% debt to  40.2% equity, respectively.  See Note 8 to Financial Statements for discussion of the regulatory capitalization ratio.



Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.5 billion in 2017.    Management currently expects to recommend to our board of directors capital expenditures of approximately $1.6 billion in each of the years 2018 through 2021.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure.



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

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Distributions — On October 26, 2016, our board of directors declared a cash distribution of $41 million, which was paid to our members on October 27, 2016.  During the nine months ended September 30, 2016, our board of directors declared and we paid the following cash distributions to our members: 





See Note 8 to Financial Statements for discussion of the distribution restriction.



Pension and OPEB Plan Funding — Our funding for the pension plans and the Oncor OPEB Plan in the calendar year 2016 is expected to total $4 million and $38 million, respectively.  In the nine months ended September 30, 2016, we made cash contributions to the pension plans and the Oncor OPEB Plan of $3 million and $22 million, respectively.



Financial Covenants, Credit Rating Provisions and Cross Default Provisions — Our revolving credit facility contains a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP).  The debt calculation excludes any outstanding transition bonds issued by Bondco, but includes any unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above.  At September 30, 2016, we were in compliance with this covenant.



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



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

 

In July 2016, Moody’s upgraded our senior secured rating to A3 from Baa1 and changed our outlook to “rating under review for further upgrade” from “positive”.  In August 2016, Fitch changed our outlook to “rating watch positive” from “stable” and S&P revised its outlook to “positive” from “developing”.  These rating actions follow the July 29, 2016 announcement that NEE and EFH Corp. had entered into the NEE Merger Agreement (see Note 2 to Financial Statements for information regarding the NEE Merger Agreement and the EFH Bankruptcy Proceedings).    



Presented below are the credit ratings assigned for our debt securities at November 1, 2016.    



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As described in Note 7 to Financial Statements in our 2015 Form 10-K, our long-term debt, excluding any Bondco related non-recourse debt, is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.



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



Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the current ratings assigned to our debt securities at November 1, 2016, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.00%.  A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.



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



Under our revolving credit facility, a default by us in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($880 million in short-term borrowings and $7 million in letters of credit at September 30, 2016) under that facility to be accelerated.  Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.



Guarantees — At September 30, 2016, we did not have any material guarantees.



OFF-BALANCE SHEET ARRANGEMENTS



At September 30, 2016, we did not have any material off-balance sheet arrangements with special purpose entities or variable interest entities.



COMMITMENTS AND CONTINGENCIES



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



CHANGES IN ACCOUNTING STANDARDS



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

 

REGULATION AND RATES



Matters with the PUCT



Change in Control Review (PUCT Docket No. 45188) -  In September 2015, Oncor and the Hunt Investor Group filed in PUCT Docket No. 45188 a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Sixth Amended Plan of Reorganization.  On March 24, 2016, the PUCT issued an order conditionally approving the joint application.  On April 18, 2016, the Hunt Investor Group and certain interveners in PUCT Docket No. 45188 filed motions for rehearing and on May 19, 2016, the PUCT denied such motions and the order became final.  The Hunt Investor Group filed a petition with the Travis County

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District Court on June 17, 2016 seeking review of the order.  We cannot predict the results of the review or the ultimate disposition of PUCT Docket No. 45188, particularly in light of the termination of the Sixth Amended Plan of Reorganization and the other pending transactions discussed in Note 2 to Financial Statements.  For additional information regarding the Sixth Amended Plan of Reorganization and application for regulatory approval, see Note 2 to Financial Statements and “City Rate Reviews” below.



Change in Control Review (PUCT Docket No. 46238) -  The NEE Merger Agreement contemplates that Oncor and NEE file a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Amended New Plan.  On October 31, 2016, Oncor and NEE filed that joint application in PUCT Docket No. 46238. For additional information regarding the Amended New Plan and application for regulatory approval, see Note 2 to Financial Statements.



City Rate Reviews  - Oncor has received resolutions passed by approximately 58 cities with original jurisdiction over electric utility rates directing Oncor to file rate review proceedings.  The resolutions passed required Oncor to file a rate review with each city by September 1, 2016 based on a January 1, 2015 to December 31, 2015 test year.   However, Oncor has subsequently been notified by counsel representing these cities that these rate review proceedings have been abated indefinitely, pending resolution of Oncor ownership issues. The notice provides that if and when the cities desire to proceed with a rate inquiry, cities will notify Oncor in writing and inform Oncor of a precise date of the rate case, which will be at least 120 days from receipt of the communication that lifts the abatement.



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



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, 2016 and December 31, 2015 carried fixed interest rates.



Except as discussed below, the information required hereunder is not significantly different from the information set forth in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2015 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 net exposure to credit risk associated with trade accounts and other receivables from affiliates totaled $146 million at September 30, 2016,  of which $3 million has been offset with trade accounts and other payables.  Our credit risk exposure associated with receivables from members related to income taxes totaled $92 million at September 30, 2016.  Due to commitments made to the PUCT, this concentration of accounts receivable from affiliates increases the risk that a default could have a material effect on earnings and cash flows.  See Notes 2, 7 and 10 to Financial Statements for additional information regarding the potential impacts of the EFH Bankruptcy Proceedings on our transactions with affiliates and for additional information regarding our transactions involving members of the Texas Holdings Group and the Reorganized TCEH Spin-Off.  As a result of the Reorganized TCEH Spin-Off, Reorganized TCEH and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.



Our exposure to credit risk associated with trade accounts receivable from nonaffiliates totaled $454 million at September 30, 2016.  The nonaffiliated receivable amount is before the allowance for uncollectible accounts, which totaled $4 million at September 30, 2016.  The nonaffiliated exposure includes trade accounts receivable from REPs totaling $349 million, which are almost entirely noninvestment grade.  At September 30, 2016, REP subsidiaries of NRG Energy, Inc., a nonaffiliated entity collectively represented approximately 17% of the nonaffiliated trade receivable amount.  No single other nonaffiliated party represented 10% or more of the total trade accounts receivable amount.  We view our exposure to this customer 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 2015 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 2015 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:  November 1, 2016



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EXHIBIT INDEX



(a)   Exhibits provided as part of Part II are:





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__________________

*   Incorporated herein by reference. 

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