Oncor Electric Delivery 10-Q 2017 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

____________________

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

― OR ―

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

____________________

Commission File Number 333-100240

Oncor Electric Delivery Company LLC

(Exact Name of Registrant as Specified in its Charter)

Delaware	75-2967830
(State of Organization)	(I.R.S. Employer Identification No.)
1616 Woodall Rodgers Fwy., Dallas, TX  75202	(214) 486-2000
(Address of Principal Executive Offices)	(Registrant’s Telephone Number)

____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YesNo    √   

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

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

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

Smaller reporting company___ Emerging growth company ___

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

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

As of July 27, 2017,  80.03% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Energy Future Holdings Corp., 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC and 0.22% of the outstanding membership interests were indirectly held by certain members of Oncor’s management and board of directors.  None of the membership interests are publicly traded.

TABLE OF CONTENTS

	Page
GLOSSARY	2
PART I.   FINANCIAL INFORMATION	5
Item 1.   Financial Statements (Unaudited)	5
Condensed Statements of Consolidated Income — Three and Six Months Ended June 30, 2017 and 2016	5
Condensed Statements of Consolidated Comprehensive Income — Three and Six Months Ended June 30, 2017 and 2016	5
Condensed Statements of Consolidated Cash Flows — Three and Six Months Ended June 30, 2017 and 2016	6
Condensed Consolidated Balance Sheets — June 30, 2017 and December 31, 2016	7
Notes to Condensed Consolidated Financial Statements	8
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.    Controls and Procedures	41
PART II.    OTHER INFORMATION	42
Item 1.    Legal Proceedings	42
Item 1A.   Risk Factors	42
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.    Defaults Upon Senior Securities	42
Item 4.    MINE SAFETY DISCLOSURES	42
Item 5.    Other Information	42
Item 6.    Exhibits	43
SIGNATURE	44

Oncor Electric Delivery Company LLC’s (Oncor) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public, free of charge, on the Oncor website at http://www.oncor.com as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission.  The information on Oncor’s website or available by hyperlink from the website shall not be deemed a part of, or incorporated by reference into, this quarterly report on Form 10-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

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated. below.
2016 Form 10-K	Oncor’s Annual Report on Form 10-K for the year ended December 31, 2016
AMS	advanced metering system
Bondco	Refers to Oncor Electric Delivery Transition Bond Company LLC, a former wholly-owned consolidated bankruptcy-remote financing subsidiary of Oncor that had issued securitization (transition) bonds to recover certain regulatory assets and other costs. Bondco was dissolved effective December 29, 2016.
Contributed EFH Debtors	Certain EFH Debtors that became subsidiaries of Vistra and emerged from Chapter 11 at the time of the Vistra Spin-Off.
Debtors	EFH Corp. and the majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH but excluding the Oncor Ring-Fenced Entities.  Prior to the Vistra Spin-Off, also included the TCEH Debtors.
Deed of Trust	Deed of Trust, Security Agreement and Fixture Filing, dated as of May 15, 2008, made by Oncor to and for the benefit of The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York Mellon, formerly The Bank of New York), as collateral agent, as amended
EECRF	energy efficiency cost recovery factor
EFCH	Refers to Energy Future Competitive Holdings Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and prior to the Vistra Spin-Off, the parent of TCEH, and/or its subsidiaries, depending on context.
EFH Bankruptcy Proceedings	Refers to voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code filed in U.S. Bankruptcy Court for the District of Delaware on April 29, 2014 (EFH Petition Date) by EFH Corp. and the substantial majority of its direct and indirect subsidiaries, including EFIH, EFCH and TCEH.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.
EFH Corp.	Refers to Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context.  Its major subsidiaries include Oncor and TCEH.
EFH Debtors	EFH Corp. and its subsidiaries that are Debtors in the EFH Bankruptcy Proceedings, excluding the TCEH Debtors
EFH Petition Date	April 29, 2014.  See EFH Bankruptcy Proceedings above.
EFIH	Refers to Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings.
ERCOT	Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas
ERISA		Employee Retirement Income Security Act of 1974, as amended
Fitch	Fitch Ratings, Ltd. (a credit rating agency)
GAAP	generally accepted accounting principles of the U.S.
Investment LLC	Refers to Oncor Management Investment LLC, a limited liability company and minority membership interest owner (approximately 0.22%) of Oncor, whose managing member is Oncor and whose Class B Interests are owned by certain members of the management team and independent directors of Oncor.
IRS	U.S. Internal Revenue Service
LIBOR	London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market

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Luminant	Refers to subsidiaries of Vistra (which, prior to the Vistra Spin-Off were subsidiaries of TCEH) engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas.
Moody’s	Moody’s Investors Services, Inc. (a credit rating agency)
Oncor	Refers to Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings, and/or its former wholly-owned consolidated bankruptcy-remote financing subsidiary, Bondco, depending on context.
Oncor Holdings	Refers to Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of EFIH and the direct majority owner (approximately 80.03%) of Oncor, and/or its subsidiaries, depending on context.
Oncor OPEB Plan	Refers to a plan sponsored by Oncor that offers certain postretirement health care and life insurance benefits to eligible current and former Oncor employees, certain eligible current and former EFH Corp. employees, and their eligible dependents.
Oncor Retirement Plan	Refers to a defined benefit pension plan sponsored by Oncor.
Oncor Ring-Fenced Entities	Refers to Oncor Holdings and its direct and indirect subsidiaries, including Oncor.
OPEB	other postretirement employee benefits
PUCT	Public Utility Commission of Texas
PURA	Texas Public Utility Regulatory Act
REP	retail electric provider
S&P	Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc. (a credit rating agency)
SEC	U.S. Securities and Exchange Commission
Sponsor Group	Refers collectively to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (KKR), TPG Global, LLC (together with its affiliates, TPG) and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Holdings.
TCEH	Refers to Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and, prior to the Vistra Spin-Off, the parent company of the TCEH Debtors (other than the Contributed EFH Debtors), depending on the context, that were engaged in electricity generation and wholesale and retail energy market activities, and whose  major subsidiaries included Luminant and TXU Energy.  Subsequent to the Vistra Spin-Off, Vistra continued substantially the same operations as TCEH.
TCEH Debtors	Refers to the subsidiaries of TCEH that were Debtors in the EFH Bankruptcy Proceedings (including Luminant and TXU Energy) and the Contributed EFH Debtors
TCOS	transmission cost of service
TCRF	transmission cost recovery factor
Texas Holdings	Refers to Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group that owns substantially all of the common stock of EFH Corp.
Texas Holdings Group	Refers to Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring-Fenced Entities.

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Texas margin tax	A privilege tax imposed on taxable entities chartered/organized or doing business in the State of Texas that, for accounting purposes, is reported as an income tax.
Texas Transmission	Refers to Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor.  Texas Transmission is an entity indirectly owned by a private investment group led by OMERS Administration Corporation, acting through its infrastructure investment entity, Borealis Infrastructure Management Inc., and the Government of Singapore Investment Corporation, acting through its private equity and infrastructure arm, GIC Special Investments Pte Ltd.  Texas Transmission is not affiliated with EFH Corp., any of EFH Corp.’s subsidiaries or any member of the Sponsor Group.
TXU Energy	Refers to TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of Vistra (and, prior to the Vistra Spin-Off, a direct subsidiary of TCEH) engaged in the retail sale of electricity to residential and business customers.  TXU Energy is a REP in competitive areas of ERCOT.
U.S.	United States of America
Vistra	Refers to Vistra Energy Corp. (formerly TCEH Corp.), and/or its subsidiaries, depending on context.  On October 3, 2016, the TCEH Debtors emerged from bankruptcy and became subsidiaries of TCEH Corp.  Subsequent to the Vistra Spin-Off, Vistra continued substantially the same operations as TCEH.
Vistra Retirement Plan	Refers to the Vistra Energy Retirement Plan (formerly EFH Retirement Plan), a defined benefit pension plan sponsored by Vistra, in which Oncor participates.  See Oncor Retirement Plan above.
Vistra Spin-Off	Refers to the completion of the TCEH Debtors’ reorganization under the Bankruptcy Code and emergence from the EFH Bankruptcy Proceedings effective October 3, 2016

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PART I.  FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(millions of dollars)
Operating revenues:
Nonaffiliates	$	964	$	732	$	1,899	$	1,455
Affiliates		-		216		-		436
Total operating revenues		964		948		1,899		1,891
Operating expenses:
Wholesale transmission service		229		220		460		440
Operation and maintenance (Note 10)		174		169		369		351
Depreciation and amortization		193		193		387		403
Provision in lieu of income taxes (Note 10)		64		63		106		112
Taxes other than amounts related to income taxes		107		107		220		220
Total operating expenses		767		752		1,542		1,526
Operating income		197		196		357		365
Other income and (deductions) - net (Note 11)		(3)		(3)		(7)		(8)
Nonoperating provision in lieu of income taxes		(3)		(1)		(5)		(2)
Interest expense and related charges (Note 11)		85		84		170		168
Net income	$	112	$	110	$	185	$	191

See Notes to Financial Statements.

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(millions of dollars)
Net income	$	112	$	110	$	185	$	191
Other comprehensive income (loss):
Cash flow hedges – derivative value net loss recognized in net income (net of tax expense of $–, $–, $– and $–)		-		1		1		1
Defined benefit pension plans (net of tax benefit of $–, $–, $– and $–)		1		-		1		-
Total other comprehensive income		1		1		2		1
Comprehensive income	$	113	$	111	$	187	$	192

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2017		2016
	(millions of dollars)
Cash flows — operating activities:
Net income	$	185	$	191
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		412		427
Provision in lieu of deferred income taxes – net		158		83
Other – net		(1)		(2)
Changes in operating assets and liabilities:
Regulatory accounts related to reconcilable tariffs (Note 4)		(27)		(103)
Other operating assets and liabilities		(89)		(124)
Cash provided by operating activities		638		472
Cash flows — financing activities:
Repayments of long-term debt (Note 6)		-		(41)
Net increase in short-term borrowings (Note 5)		367		293
Distributions to members (Note 8)		(172)		(121)
Cash provided by financing activities		195		131
Cash flows — investing activities:
Capital expenditures (Note 10)		(856)		(671)
Other – net		8		44
Cash used in investing activities		(848)		(627)
Net change in cash and cash equivalents		(15)		(24)
Cash and cash equivalents — beginning balance		16		25
Cash and cash equivalents — ending balance	$	1	$	1

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	At June 30,		At December 31,
	2017		2016
	(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents	$	1	$	16
Trade accounts receivable – net (Note 11)		590		545
Amounts receivable from members related to income taxes (Note 10)		32		80
Materials and supplies inventories — at average cost		88		89
Prepayments and other current assets		100		100
Total current assets		811		830
Investments and other property (Note 11)		106		100
Property, plant and equipment – net (Note 11)		14,391		13,829
Goodwill (Note 11)		4,064		4,064
Regulatory assets (Note 4)		1,982		1,974
Other noncurrent assets		9		14
Total assets	$	21,363	$	20,811
LIABILITIES AND MEMBERSHIP INTERESTS
Current liabilities:
Short-term borrowings (Note 5)	$	1,156	$	789
Long-term debt due currently (Note 6)		324		324
Trade accounts payable (Note 10)		248		231
Amounts payable to members related to income taxes (Note 10)		12		20
Accrued taxes other than amounts related to income		107		182
Accrued interest		83		83
Other current liabilities		154		144
Total current liabilities		2,084		1,773
Long-term debt, less amounts due currently (Note 6)		5,519		5,515
Liability in lieu of deferred income taxes (Note 10)		2,949		2,788
Regulatory liabilities - (Note 4)		925		856
Employee benefit obligations and other (Note 10 and 11)		2,160		2,168
Total liabilities		13,637		13,100
Commitments and contingencies (Note 7)
Membership interests (Note 8):
Capital account ― number of interests outstanding 2017 and 2016 – 635,000,000		7,835		7,822
Accumulated other comprehensive loss		(109)		(111)
Total membership interests		7,726		7,711
Total liabilities and membership interests	$	21,363	$	20,811

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas.  Revenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 21%  and 23% of our total operating revenues for each of the six-month periods ended June 30, 2017 and 2016.    We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group.  Oncor Holdings owns 80.03% of our membership interests, Texas Transmission owns 19.75% of our membership interests and certain members of our management team and board of directors indirectly own the remaining membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

Our consolidated financial statements include our former wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a  variable interest entity through December 29, 2016, at which time it was dissolved.  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.   

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

EFH Corp. Bankruptcy Proceedings

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

Basis of Presentation

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the 2016 Form 10-K.  In the opinion of Oncor management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been made.  All intercompany items and transactions have been eliminated in consolidation.    The results of operations for an interim period may not give a true indication of results for a full year due to seasonality. 

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All dollar amounts in the financial statements and tables in the notes are stated in millions of U.S. dollars unless otherwise indicated.

Use of Estimates

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

Revenue Recognition

General

Oncor’s revenue is billed under tariffs approved by the PUCT and the majority of revenues are related to providing electric delivery service to consumers.  Tariff rates are designed to recover the cost of providing electric delivery service including a reasonable rate of return on invested capital.   Revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff. 

Reconcilable Tariffs

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

Contingencies

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

Changes in Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-2 which created FASB Topic 842, Leases (Topic 842).  Topic 842 amends previous GAAP to require the balance sheet recognition of lease assets and liabilities for operating leases.  We will be required to adopt Topic 842 by January 1, 2019 and do not expect to early adopt.  Retrospective application to the 2017 and 2018 comparative periods presented will be required in the year of adoption.  The recognition of any lease obligation on the balance sheet would be classified as long-term debt for GAAP purposes and would be defined as debt for our regulatory capital structure purposes (see Note 8 for details).  Adoption of Topic 842 will affect our balance sheet, debt covenant calculations and capitalization ratios, as leased buildings and vehicles are recognized on the balance sheet.  We continue to evaluate the impact of Topic 842 on our financial statements.

Since May 2014, the FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers along with other supplemental guidance (together, Topic 606).  Topic 606 introduces new, increased requirements for disclosure of revenue in financial statements and guidance that are intended to eliminate inconsistencies in the recognition of revenue.  We are required to adopt Topic 606 by January 1, 2018 and expect to adopt at that time using the modified retrospective approach. Our revenues from customers are tariff-based and are designed to recover the cost of providing electric delivery service to customers including a reasonable rate of return on invested capital.  Revenues are generally recognized when the underlying service has been provided in an amount prescribed

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by the related tariff.  At this time, we do not expect the new guidance to change this pattern of recognition and therefore it is not expected to have a material effect on our reported results of operations, financial position or cash flows.  We continue to evaluate the application of the new guidance.

In March 2017, the FASB issued ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, an amendment to Topic 715, Compensation – Retirement Benefits (Topic 715).  Topic 715, as amended, will require the non-service cost components of net retirement benefit plan costs be presented as non-operating in the income statement.  In addition, only the service cost component of net retirement benefit plan cost will be eligible for capitalization as part of inventory or property, plant and equipment.  We are required to adopt the amendment effective January 1, 2018.   The income statement presentation requirement must be applied on a retrospective basis while the capitalization eligibility requirement is applied on a prospective basis.  At this time, we do not expect the new guidance to have a material effect on our results of operations, financial position or cash flows but continue to evaluate for potential impacts. 

2.   EFH BANKRUPTCY PROCEEDINGS

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries at the time, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code. The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings. We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 1 and below for further information regarding the EFH Bankruptcy Proceedings and the proposed change in control of our indirect majority owner in connection with such proceedings.

The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date. Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations. Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees. As of June 30, 2017, we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million.  As discussed below, the Plan of Reorganization (defined below) provided for a spin-off of the TCEH Debtors from EFH Corp. As a result of this spin-off (Vistra Spin-Off), Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be affiliates of ours as of October 3, 2016.

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

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

Potential Change in Indirect Ownership of Oncor

Below is a summary of certain matters relating to the potential change in indirect ownership of Oncor that may arise as a result of the EFH Bankruptcy Proceedings. See Note 2 to Financial Statements in our 2016 Form 10-K for additional information regarding these matters.

In May 2016, the Debtors filed a joint Plan of Reorganization (Plan of Reorganization) pursuant to Chapter 11 of the U.S. Bankruptcy Code and a related disclosure statement with the bankruptcy court.

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

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In July 2016, (i) the EFH Debtors entered into a Plan Support Agreement (NEE Plan Support Agreement) with NextEra Energy, Inc. (NEE) to effect an agreed upon restructuring of the EFH Debtors pursuant to an amendment (NEE Amendment) to the Plan of Reorganization (as amended by the NEE Amendment and as subsequently amended,  NEE Plan) and (ii) EFH Corp. and EFIH entered into an Agreement and Plan of Merger (NEE Merger Agreement) with NEE and EFH Merger Co., LLC (NEE Merger Sub), a wholly-owned subsidiary of NEE.  Pursuant to the NEE Merger Agreement, at the effective time of the NEE Plan with respect to the EFH Debtors, EFH Corp. would merge with and into NEE Merger Sub (NEE Merger), with NEE Merger Sub surviving as a wholly owned subsidiary of NEE.  The NEE Merger Agreement included various conditions precedent to consummation of the transactions contemplated thereby, including, among others, a condition that certain approvals and rulings be obtained, including from, among others, the PUCT and the IRS.  The bankruptcy court approved EFH Corp. and EFIH’s entry into the NEE Merger Agreement, the related termination fee, and the NEE Plan Support Agreement in September 2016 and confirmed the NEE Plan in February 2017.

In October 2016, we entered into an Interest Purchase Agreement (OMI Agreement) with T & D Equity Acquisition, LLC, a wholly-owned subsidiary of NEE (T&D Equity Acquisition) and Investment LLC pursuant to which T&D Equity Acquisition would purchase the 1,396,008 limited liability company interests of Oncor (representing approximately 0.22% of the outstanding equity of Oncor) that Investment LLC owns in exchange for a purchase price of approximately $27 million. The OMI Agreement contained various conditions precedent to consummation of the transactions contemplated thereby, including the consummation of the transactions contemplated by the NEE Merger Agreement.

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

Following the execution and delivery of the NEE Merger Agreement, EFIH requested, pursuant to the NEE Merger Agreement, that Oncor Holdings and Oncor enter into a letter agreement (NEE Letter Agreement) with NEE and NEE Merger Sub. The NEE Letter Agreement was executed in August 2016 and set forth certain rights and obligations of the Oncor Ring-Fenced Entities, NEE and NEE Merger Sub to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the proposed acquisition of Reorganized EFH and the other transactions described in the NEE Merger Agreement. The NEE Letter Agreement did not give NEE or NEE Merger Sub, directly or indirectly, the right to control or direct the operations of any of the Oncor Ring-Fenced Entities prior to the receipt of all approvals required by the bankruptcy court, the PUCT and other governmental entities and the consummation of the transactions contemplated by the NEE Merger Agreement. In addition, Oncor Holdings and Oncor did not act to approve any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by NEE or NEE Merger Sub involving Oncor Holdings or Oncor.

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

As discussed under “Regulatory Matters Related to the EFH Bankruptcy Proceedings” below, on April 13, 2017, the PUCT denied the joint application in PUCT Docket No. 46238 (April 13 Order), which sought certain regulatory approvals with respect to the transactions contemplated by the NEE Plan. Following the PUCT’s denial of the joint application, the parties to the NEE Letter Agreement agreed as of April 17, 2017 to abate the parties’ obligations under the NEE Letter Agreement.

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

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

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

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

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

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

We cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the BHE Plan, including the BHE Merger, will (or when they will) close. Even if the BHE  Plan is confirmed by the bankruptcy court, there remain conditions and uncertainties relating to the BHE Plan becoming effective and the consummation of the BHE Merger, including, without limitation, the ability to obtain required regulatory approvals from the PUCT, as described below under  “–Regulatory Matters Related to EFH Bankruptcy Proceedings.”

As a result, we remain unable to predict how any reorganization of the EFH Debtors ultimately will impact Oncor or what form any change in indirect ownership of Oncor may take.

Regulatory Matters Related to EFH Bankruptcy Proceedings

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

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In connection with PUCT Docket No. 45188, certain cities that have retained original jurisdiction over electric utility rates passed resolutions directing Oncor to file rate review proceedings.  In connection with those resolutions, counsel for those cities notified Oncor that they expected Oncor to make a rate filing to comply with their resolutions on or before March 17, 2017. That filing was made with the PUCT and original jurisdiction cities on March 17, 2017. For more information, see Note 3 – “2017 Rate Review (PUCT Docket No. 46957).”

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

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

Settlement Agreement

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

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

3.    REGULATORY MATTERS

Change in Control Reviews

See “Regulatory Matters Related to EFH Bankruptcy Proceedings” in Note 2 to Financials Statements.

2017 Rate Review (PUCT Docket No. 46957)

In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory on March 17, 2017 based on a January 1, 2016 to December 31, 2016 test year.  If our proposed tariffs are adopted as filed, our annual revenue would increase by approximately $320 million. A procedural schedule was agreed to by the parties to the case, which would result in PUCT hearings being held July 31, 2017 to August 9, 2017.  Oncor agreed to extend the requested effective date of the rate case increase such that the jurisdictional deadline for the PUCT to act has been extended to November 30, 2017.  On June 2, 2017, Oncor filed an Unopposed Motion to Abate the Procedural Schedule.  The Motion indicated that the parties in the proceeding are engaged in settlement

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

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

We are involved in various other regulatory proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.

See Note 3 to Financial Statements in our 2016 Form 10-K for additional information regarding regulatory matters.

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4.    REGULATORY ASSETS AND LIABILITIES

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

	Remaining Rate Recovery/Amortization Period at	Carrying Amount At
	June 30, 2017	June 30, 2017		December 31, 2016
Regulatory assets:
Employee retirement costs being amortized	3 years	$	15	$	23
Unrecovered employee retirement costs incurred since the last rate review period (b)	To be determined		343		327
Employee retirement liability (a)(b)(c)	To be determined		818		849
Self-insurance reserve (primarily storm recovery costs) being amortized	3 years		48		64
Unrecovered self-insurance reserve incurred since the last rate review period (b)	To be determined		405		367
Securities reacquisition costs (post-industry restructure)	Lives of related debt		13		13
Deferred conventional meter and metering facilities depreciation	Largely 4 years		68		78
Under-recovered AMS costs	To be determined		212		205
Under-recovered wholesale transmission service expense (a)	1 year or less		21		-
Energy efficiency performance bonus (a)	1 year or less		5		10
Other regulatory assets	Various		34		38
Total regulatory assets			1,982		1,974
Regulatory liabilities:
Estimated net removal costs	Lives of related assets		895		819
Investment tax credit and protected excess deferred taxes	Various		9		10
Over-recovered wholesale transmission service expense (a)	1 year or less		-		10
Other regulatory liabilities	Various		21		17
Total regulatory liabilities			925		856
Net regulatory asset		$	1,057	$	1,118

____________

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

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

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

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5.BORROWINGS UNDER CREDIT FACILITIES 

At June 30, 2017, we had a $2.0 billion secured revolving credit facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances.  In October 2016, we exercised the second of two one-year extensions available to us and extended the term of the revolving credit facility to October 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 June 30, 2017, we had outstanding borrowings under the revolving credit facility totaling $1.156  billion with an interest rate of 2.18% and outstanding letters of credit totaling $9 million.  At December 31, 2016, we had outstanding borrowings under the revolving credit facility totaling $789 million with an interest rate of 1.72% and outstanding letters of credit totaling $7 million.

Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  At June 30, 2017,  substantially all outstanding borrowings bore interest at LIBOR plus 1.00%.  Amounts borrowed under the revolving credit facility, once repaid, can be borrowed again from time to time.

An unused commitment fee is payable quarterly in arrears and upon termination or commitment reduction at a rate equal to 0.100% to 0.275% (such spread depending on certain credit ratings assigned to our senior secured debt) of the daily unused commitments under the revolving credit facility.  Letter of credit fees on the stated amount of letters of credit issued under the revolving credit facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to the spread over adjusted LIBOR.  Customary fronting and administrative fees are also payable to letter of credit fronting banks.  At June 30, 2017, letters of credit bore interest at 1.20%, and a commitment fee (at a rate of 0.10% per annum) was payable on the unfunded commitments under the revolving credit facility, each based on our current credit ratings.

Subject to the limitations described below, borrowing capacity available under the revolving credit facility at June 30, 2017 and December 31, 2016 was $835 million and $1.204 billion, respectively.  Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions.  As described further in Note 6, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust.  At June 30, 2017, the available borrowing capacity of the revolving credit facility could be fully drawn.

The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets.  In addition, the revolving credit facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants.  For purposes of the ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with GAAP).  Capitalization is calculated as membership interests determined in accordance with GAAP plus indebtedness described above.  At June 30, 2017, we were in compliance with this covenant and with all other covenants.

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6.    LONG-TERM DEBT

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

	June 30,		December 31,
	2017		2016
5.000% Fixed Senior Notes due September 30, 2017	$	324	$	324
6.800% Fixed Senior Notes due September 1, 2018		550		550
2.150% Fixed Senior Notes due June 1, 2019		250		250
5.750% Fixed Senior Notes due September 30, 2020		126		126
4.100% Fixed Senior Notes due June 1, 2022		400		400
7.000% Fixed Debentures due September 1, 2022		800		800
2.950% Fixed Senior Notes due April 1, 2025		350		350
7.000% Fixed Senior Notes due May 1, 2032		500		500
7.250% Fixed Senior Notes due January 15, 2033		350		350
7.500% Fixed Senior Notes due September 1, 2038		300		300
5.250% Fixed Senior Notes due September 30, 2040		475		475
4.550% Fixed Senior Notes due December 1, 2041		400		400
5.300% Fixed Senior Notes due June 1, 2042		500		500
3.750% Fixed Senior Notes due April 1, 2045		550		550
Unamortized discount and debt issuance costs		(32)		(36)
Less amount due currently		(324)		(324)
Long-term debt, less amounts due currently		5,519		5,515

Deed of Trust

Our secured indebtedness, including the revolving credit facility described in Note 5, is secured equally and ratably by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.  The Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At June 30, 2017, the amount of available bond credits was $2.257 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $2.060 billion.

Fair Value of Long-Term Debt

At June 30, 2017 and December 31, 2016, the estimated fair value of our long-term debt (including current maturities, if any) totaled $6.792 billion and $6.751 billion, respectively, and the carrying amount totaled $5.843 billion and $5.839 billion, respectively.  The fair value is estimated using observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.

7.    COMMITMENTS AND CONTINGENCIES

EFH Bankruptcy Proceedings

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

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Legal/Regulatory Proceedings

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 3 in this report and Note 8 to Financial Statements in our 2016 Form 10-K for additional information regarding our legal and regulatory proceedings.

8.    MEMBERSHIP INTERESTS

Cash Distributions

Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At June 30, 2017, $114 million was available for distribution to our members as our regulatory capitalization ratio was 59.3% debt to 40.7% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  Equity is calculated as membership interests determined in accordance with GAAP, excluding the effects of acquisition accounting (which included recording the initial goodwill and fair value adjustments and subsequent related impairments and amortization).

On July 26, 2017, our board of directors declared a cash distribution of $65 million, to be paid to our members on August 1, 2017.  During the six months ended June 30, 2017, our board of directors declared, and we paid, the following cash distributions to our members.

Declaration Date	Payment Date	Amount
April 26, 2017	April 27, 2017	$	86
March 22, 2017	March 24, 2017	$	86

Membership Interests

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

	Capital Accounts		Accumulated Other Comprehensive Income (Loss)		Total Membership Interests
Balance at December 31, 2016	$	7,822	$	(111)	$	7,711
Net income		185		-		185
Distributions		(172)		-		(172)
Net effects of cash flow hedges (net of tax)		-		1		1
Defined benefit pension plans (net of tax)		-		1		1
Balance at June 30, 2017	$	7,835	$	(109)	$	7,726
Balance at December 31, 2015	$	7,621	$	(113)	$	7,508
Net income		191		-		191
Distributions		(121)		-		(121)
Net effects of cash flow hedges (net of tax)		-		1		1
Balance at June 30, 2016	$	7,691	$	(112)	$	7,579

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Accumulated Other Comprehensive Income (Loss)

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

	Cash Flow Hedges – Interest Rate Swap		Defined Benefit Pension and OPEB Plans		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2016	$	(20)	$	(91)	$	(111)
Defined benefit pension plans (net of tax)		-		1		1
Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges		1		-		1
Balance at June 30, 2017	$	(19)	$	(90)	$	(109)
Balance at December 31, 2015	$	(22)	$	(91)	$	(113)
Defined benefit pension plans (net of tax)		-		-		-
Amounts reclassified from accumulated other comprehensive income (loss) and reported in interest expense and related charges		1		-		1
Balance at June 30, 2016	$	(21)	$	(91)	$	(112)

9.    PENSION AND OPEB PLANS

Pension Plans

We sponsor the Oncor Retirement Plan and also have liabilities under the Vistra Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended, and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  We also have a supplemental pension plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plans.  See Note 10 to Financial Statements in our 2016 Form 10-K for additional information regarding pension plans.

Oncor OPEB Plan

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

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Pension and OPEB Costs

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Components of net allocated pension costs:
Service cost	$	6	$	6	$	12	$	12
Interest cost		33		34		66		68
Expected return on assets		(29)		(31)		(58)		(62)
Amortization of net loss		11		10		22		20
Net pension costs		21		19		42		38
Components of net OPEB costs:
Service cost		2		2		4		4
Interest cost		12		12		24		24
Expected return on assets		(2)		(2)		(4)		(4)
Amortization of prior service cost		(5)		(5)		(10)		(10)
Amortization of net loss		8		8		16		17
Net OPEB costs		15		15		30		31
Total net pension and OPEB costs		36		34		72		69
Less amounts deferred principally as property or a regulatory asset		(25)		(25)		(51)		(50)
Net amounts recognized as expense	$	11	$	9	$	21	$	19

The discount rates reflected in net pension and OPEB costs in 2017 are 4.04%,  4.28% and 4.35% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plan, respectively.  The expected return on pension and OPEB plan assets reflected in the 2017 cost amounts are 5.17%,  5.13% and 6.10% for the Oncor Retirement Plan, the Vistra Retirement Plan and the Oncor OPEB Plan, respectively.

Pension and OPEB Plans Cash Contributions

We made cash contributions to the pension plans and Oncor OPEB Plan of $22 million and $16 million, respectively, during the six months ended June 30, 2017.   We expect to make additional cash contributions to the pension plans and Oncor OPEB Plan of $127 million and $15 million, respectively, during the remainder of 2017.   Our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $564 million and $153 million, respectively, in the 2017 to 2021 period based on the latest actuarial projections.

10.   RELATED-PARTY TRANSACTIONS

The following represent our significant related-party transactions at June 30, 2017.  See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings and information regarding the Vistra Spin-Off.  As a result of the Vistra Spin-Off, Vistra and its subsidiaries, including Luminant and TXU Energy, ceased to be related parties as of October 3, 2016.

· We recorded revenue from TCEH, principally for electricity delivery fees, which totaled $216 million and $436 million for the three and six months ended June 30,  2016, respectively.  The fees are based on rates regulated by the PUCT that apply to all REPs.  

· EFH Corp. subsidiaries charged us for certain administrative services at cost.  Our payments to EFH Corp. subsidiaries for administrative services, which are primarily reported in operation and maintenance 20

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

· We are not a member of EFH Corp.’s consolidated tax group, but EFH Corp.’s consolidated federal income tax return includes EFH Corp.’s portion of our results due to EFH Corp.’s equity ownership in us.  Under the terms of a tax sharing agreement among us, Oncor Holdings, Texas Transmission, Investment LLC and EFH Corp., we are generally obligated to make payments to Texas Transmission, Investment LLC and EFH Corp., pro rata in accordance with their respective membership interests, in an aggregate amount that is substantially equal to the amount of federal income taxes that we would have been required to pay if we were filing our own corporate income tax return.  For periods prior to the tax sharing agreement (entered into in October 2007 and amended and restated in November 2008), we are responsible for our share, if any, of redetermined tax liability for the EFH Corp. consolidated tax group.  EFH Corp. also includes our results in its consolidated Texas margin tax payments, which are accounted for as income taxes and calculated as if we were filing our own return.  See discussion in Note 1 to Financial Statements in our 2016 Form 10-K under “Income Taxes.”  Under the “in lieu of” tax concept, all in lieu of tax assets and tax liabilities represent amounts that will eventually be settled with our members. In the unlikely event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes.

Amounts payable to (receivable from) members related to income taxes under the tax sharing agreement and reported on our balance sheet consisted of the following:

	At June 30, 2017						At December 31, 2016
	EFH Corp.		Texas Transmission		Total		EFH Corp.		Texas Transmission		Total
Federal income taxes receivable	$	(26)	$	(6)	$	(32)	$	(62)	$	(18)	$	(80)
Texas margin taxes payable		12		-		12		20		-		20
Net payable (receivable)	$	(14)	$	(6)	$	(20)	$	(42)	$	(18)	$	(60)

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

	Six Months Ended June 30, 2017						Six Months Ended June 30, 2016
	EFH Corp.		Texas Transmission		Total		EFH Corp.		Texas Transmission		Total
Federal income taxes	$	(102)	$	(12)	$	(114)	$	-	$	-	$	-
Texas margin taxes		18		-		18		18		-		18
Total payments (receipts)	$	(84)	$	(12)	$	(96)	$	18	$	-	$	18

· Related parties of the Sponsor Group have (1) sold, acquired or participated in the offerings of our debt or debt securities in open market transactions or through loan syndications, and (2) performed various financial advisory, dealer, commercial banking and investment banking services for us and certain of our affiliates for which they have received or will receive customary fees and expenses, and may from time to time in the future participate in any of the items in (1) and (2) above.  Also, as of June 30, 2017,  approximately 16% of the equity in an existing vendor of the company was held by a member of the Sponsor Group.  During 2017 and 2016, this vendor performed transmission and distribution system construction and maintenance services for us.  Cash payments were made for such services to this vendor totaling $113 million dollars for the six months ended June 30, 2017, of which approximately $107  21

million was capitalized and $6 million was recorded as an operation and maintenance expense.  At June 30, 2017, we had outstanding trade payables to this vendor of $8 million.

See Note 8 for information regarding distributions to members and Note 9 for information regarding our participation in the EFH Corp. pension plan and transactions with EFH Corp. involving employee benefit matters.

11.   SUPPLEMENTARY FINANCIAL INFORMATION

Major Customers

Revenues from subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 20% and 23% of our total operating revenues for the three-month periods ended June 30, 2017 and 2016, respectively, and 21% and 23% of our total operating revenues for the six months ended June 30, 2017 and 2016, respectively.  Revenues from REP subsidiaries of another nonaffiliated entity, collectively represented 16% and 14% of total operating revenues for the three months ended June 30, 2017 and 2016, respectively, and 17% and 15% of our total operating revenues for the six months ended June 30, 2017 and 2016, respectively.  No other customer represented 10% or more of our total operating revenues.

Other Income and (Deductions)

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Professional fees	$	(3)	$	(4)	$	(8)	$	(8)
Non-recoverable pension and OPEB (Note 9)		(1)		-		(3)		(1)
Interest income and other		1		1		4		1
Total other income and (deductions) - net	$	(3)	$	(3)	$	(7)	$	(8)

Interest Expense and Related Charges

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Interest	$	88	$	85	$	174	$	170
Amortization of debt issuance costs and discounts		-		1		1		1
Less allowance for funds used during construction – capitalized interest portion		(3)		(2)		(5)		(3)
Total interest expense and related charges	$	85	$	84	$	170	$	168

Trade Accounts and Other Receivables

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

	At June 30,		At December 31,
	2017		2016
Gross trade accounts and other receivables	$	593	$	548
Allowance for uncollectible accounts		(3)		(3)
Trade accounts receivable – net	$	590	$	545

22

At June 30, 2017 and December 31, 2016, REP subsidiaries of a nonaffiliated entity collectively represented approximately 15% of the trade accounts receivable amount.  At June 30, 2017 and December 31, 2016, REP subsidiaries of another nonaffiliated entity collectively represented approximately 11% and 12% of the trade accounts receivable amount, respectively.

Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by nonaffiliated REPs are deferred as a regulatory asset. 

Investments and Other Property

Investments and other property reported on our balance sheet consisted of the following:

	At June 30,		At December 31,
	2017		2016
Assets related to employee benefit plans, including employee savings   programs	$	104	$	98
Land and other investments		2		2
Total investments and other property	$	106	$	100

Property, Plant and Equipment

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

	At June 30,		At December 31,
	2017		2016
Total assets in service	$	20,784	$	20,234
Less accumulated depreciation		7,031		6,836
Net of accumulated depreciation		13,753		13,398
Construction work in progress		623		416
Held for future use		15		15
Property, plant and equipment – net	$	14,391	$	13,829

Intangible Assets

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

	At June 30, 2017						At December 31, 2016
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
Identifiable intangible assets subject to amortization:
Land easements	$	499	$	96	$	403	$	491	$	94	$	397
Capitalized software		485		353		132		470		326		144
Total	$	984	$	449	$	535	$	961	$	420	$	541

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Aggregate amortization expense for intangible assets totaled $15 million and $16 million for the three months ended June 30, 2017 and 2016, respectively, and $29 million and $32 million for the six months ended June 30, 2017 and 2016, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows: 

Year	Amortization Expense
2017	$	57
2018		52
2019		50
2020		48
2021		48

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

Employee Benefit Obligations and Other

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

	At June 30,		At December 31,
	2017		2016
Retirement plans and other employee benefits	$	2,083	$	2,092
Uncertain tax positions (including accrued interest)		-		3
Investment tax credits		11		12
Other		66		61
Total employee benefit obligations and other	$	2,160	$	2,168

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

Supplemental Cash Flow Information

	Six Months Ended June 30,
	2017		2016
Cash payments (receipts) related to:
Interest	$	170	$	167
Less capitalized interest		(5)		(3)
Interest payments (net of amounts capitalized)	$	165	$	164
Amount in lieu of income taxes (a):
Federal		(114)		-
State		18		18
Total amount in lieu of income taxes	$	(96)	$	18
Noncash construction expenditures (b)	$	132	$	99

_____________

(a) See Note 10 for income tax related detail.

(b) Represents end-of-period accruals.

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12.   SUBSEQUENT EVENT

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

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

The actual assets exchanged and cash received pursuant to the Sharyland Mergers is expected to change based on the difference between the current net book value of the Oncor Merger Assets and/or the  actual net book value of the Sharyland Distribution Business as of closing, as provided in the Sharyland Merger Agreement.  To the extent of any such difference, (i) we may reduce transmission lines and/or contribute different assets, and/or (ii) a party allocated a higher net book value of assets will settle the difference with cash.  The current net book value of the Oncor Merger Assets is approximately $380 million and of the SDTS Merger Assets is approximately  $401 million (each after taking into account working capital adjustments based on amounts as of the date of the Sharyland Merger Agreement). Based on current net book values, we would owe SDTS approximately $21 million in cash and SU approximately $4 million in cash.  While these amounts are expected to change, Oncor does not expect its cash obligations to be material to it.

The closing of the transactions contemplated by the Sharyland Merger Agreement is subject to the satisfaction of customary conditions, including SDTS’s receipt of consent from the holders of certain of its indebtedness and the satisfaction of certain regulatory conditions set forth in the Sharyland Merger Agreement (Regulatory Merger Conditions). One of the Regulatory Merger Conditions is approval by the PUCT of the material terms of the stipulation relating to the settlement of our rate review (as described in Note 3).  In addition, closing is subject to the entry by the court in the EFH Bankruptcy Proceedings of an order approving the consent by EFIH to our entry into the Sharyland Merger Agreement. EFH Corp. and EFIH have consented to our entry into the Sharyland Merger Agreement subject to such court approval.  The closing of the transactions contemplated by the Sharyland Merger Agreement is also subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Among other customary termination rights, the Sharyland Merger Agreement may be terminated by SDTS, SU or Oncor, if the closing does not occur within 240 days after the date of the Sharyland Merger Agreement; provided, however, that if the Regulatory Merger Conditions have not been satisfied by such date, SDTS, SU or Oncor may extend such date by no more than the lesser of (i) 90 days or (ii) 45 days following receipt of the necessary approval of the Regulatory Merger Conditions by the PUCT.

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

25

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 six months ended June 30, 2017 and 2016 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements as well as the Risk Factors contained in our 2016 Form 10-K.

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

BUSINESS

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs that sell power in the north-central, eastern and western parts of Texas.   Revenues from REP subsidiaries of Vistra (subsidiaries of TCEH until October 3, 2016) represented 20% and 23% of our total operating revenues for the three months ended June 30, 2017 and 2016, respectively, and 21% and 23% of our total operating revenues for the six months ended June 30, 2017 and 2016, respectively.  We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

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

Significant Activities and Events

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

The U.S. Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of December 31, 2016,  we had collected our prepetition receivables from the Texas Holdings Group of approximately $129 million. 

26

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

Sharyland Merger Agreement —On July 21, 2017, Oncor entered into the Sharyland Merger Agreement (as defined in Note 12 to Financial Statements), which provides for Oncor to exchange certain transmission-related assets and liabilities (currently contemplated to consist of approximately 258 miles of transmission lines and their related assets) and cash for certain electricity distribution-related assets and liabilities constituting substantially all of the electricity distribution business of SDTS and SU (each as defined in Note 12). For more information on the Sharyland Merger Agreement, see Note 12 to Financial Statements.

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

27

RESULTS OF OPERATIONS

Operating Data

	Three Months Ended June 30,				%		Six Months Ended June 30,				%
	2017		2016		Change		2017		2016		Change
Operating statistics:
Electric energy volumes (gigawatt-hours):
Residential	9,998		9,564		4.5		18,487		18,214		1.5
Other (a)	19,091		18,998		0.5		35,980		35,881		0.3
Total electric energy volumes	29,089		28,562		1.8		54,467		54,095		0.7
Reliability statistics (b):
System Average Interruption Duration Index (SAIDI) (nonstorm)								97.3		96.2		1.1
System Average Interruption Frequency Index (SAIFI) (nonstorm)								1.5		1.4		7.1
Customer Average Interruption Duration Index (CAIDI) (nonstorm)								64.2		69.1		(7.1)
Electricity points of delivery (end of period and in thousands):
Electricity distribution points of delivery (based on number of active meters)								3,468		3,407		1.8
	Three Months Ended June 30,				$		Six Months Ended June 30,				$
		2017		2016	Change			2017		2016	Change
Operating revenues:
Distribution base revenues	$	448	$	441	$	7	$	862	$	856	$	6
Transmission base revenues (c)		237		226		11		473		453		20
Reconcilable rates:
TCRF (c)		313		302		11		627		603		24
Transition charges		-		2		(2)		-		22		(22)
AMS surcharges		26		33		(7)		53		67		(14)
EECRF		9		11		(2)		21		24		(3)
Other miscellaneous revenues		15		15		-		30		29		1
Intercompany eliminations (c)		(84)		(82)		(2)		(167)		(163)		(4)
Total operating revenues	$	964	$	948	$	16	$	1,899	$	1,891	$	8

________________

(a) Includes small business, large commercial and industrial and all other non-residential distribution points of delivery.

(b) SAIDI is the average number of minutes electric service is interrupted per consumer in a year.  SAIFI is the average number of electric service interruptions per consumer in a year.  CAIDI is the average duration in minutes per electric service interruption in a year.  The statistics presented are based on twelve months ended June 30, 2017 and 2016 data.

(c) A portion of transmission base revenues (TCOS) is recovered from Oncor’s distribution customers through the TCRF rate. 28

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

Total operating revenues increased $16 million to $964 million in 2017.  Revenue is billed under tariffs approved by the PUCT.  The change reflected:

· An Increase in Distribution Base Revenues — Distribution base rates are set periodically in a rate review docket initiated by either us or the PUCT.  The present distribution base rates became effective on January 1, 2012.  The $7 million increase in distribution base rate revenues is primarily due to growth in points of delivery.    

· An Increase in Transmission Base Revenues — Transmission base revenues (or TCOS revenues) are collected from load serving entities benefitting from our transmission system.  REPs serving customers in our service territory are billed through the TCRF mechanism discussed below, while other load serving entities are billed directly.  In order to reflect changes in our invested transmission capital, PUCT rules allow us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year.  The $11 million increase in transmission base revenues primarily reflects interim rate increases to recover ongoing investment, including a return component, in the transmission system.  See TCOS Filings Table below for a listing of Transmission Interim Rate Update Applications impacting revenues for the three months ended June 30, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017.

TCOS Filings Table

Docket No.	Filed	Effective	Annual Revenue Impact		Third-Party Wholesale Transmission		Included in TCRF
46825	February 2017	March 2017	$	7	$	4	$	3
46210	July 2016	September 2016	$	14	$	9	$	5
44968	July 2015	September 2015	$	21	$	14	$	7

· No Change in Reconcilable Rates — The PUCT has designated certain tariffs (TCRF, EECRF surcharge, AMS surcharge and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs, including a return component where allowed, are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future applicable tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.  While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income, except for the AMS return component.  See Note 1 to Financial Statements for a discussion of the accounting treatment of reconcilable tariffs.

- An Increase in TCRF — TCRF is a distribution rate charged to REPs to recover fees we pay to other transmission service providers under their TCOS rates and the retail portion of our own TCOS rate.  PUCT rules allow us to update the TCRF component of our retail delivery rates on March 1 and September 1 each year.  The $11 million increase in TCRF revenue reflects the pass through of a  $9 million increase in third-party wholesale transmission expense described below and a $2 million increase in our own TCOS rate to recover ongoing investment in our transmission system including a return component.  At June 30, 2017, $21 million was deferred as under-recovered wholesale transmission service expense (see Note 4 to Financial Statements).  See TCRF Filings Table below for a listing of TCRF filings impacting cash flows for the three months ended June 30, 2017 and 2016, as well as filings that will impact cash flows for the year ended December 31, 2017.

29

TCRF Filings Table

			Semi-Annual
			Billing Impact
Docket No.	Filed	Effective	Increase (Decrease)
47234	June 2017	September 2017 - February 2018	$	79
46616	November 2016	March 2017 – August 2017	$	(86)
46012	May 2016	September 2016 – February 2017	$	163
45406	December 2015	March 2016 – August 2016	$	(64)
44771	May 2015	September 2015 – February 2016	$	47

- A Decrease in Transition Charges — Transition charge revenue was dedicated to paying the principal and interest of transition bonds.  We account for the difference between transition charge revenue recognized and cost related to the transition bonds as a regulatory asset or liability.  The $2 million decrease in charges related to transition bonds corresponds with an offsetting decrease in amortization and interest expense and reflects the maturity of the 2004 Series transition bonds in May 2016.  Final true-up proceedings for the transition bonds were conducted by Oncor and the PUCT during 2016 and had no material net income impact.

- A  Decrease in AMS Surcharges — The PUCT has authorized monthly per customer advanced meter cost recovery factors designed to recover the cost of our initial AMS deployment over an eleven-year period ending in 2019.  We recognize revenues equal to reconcilable expenses incurred including depreciation net of calculated savings plus a return component on our investment.  The $7 million decrease in recognized AMS revenues is primarily due to lower reconcilable depreciation expense.

- A Decrease in EECRF —  The EECRF is a reconcilable rate designed to recover current energy efficiency program costs and performance bonuses earned by exceeding PUCT targets in prior years and recover or refund any over/under recovery of our costs in prior years.  We recognize the performance bonuses in other miscellaneous revenues upon approval by the PUCT.  PUCT rules require us to file an annual EECRF tariff update by the first business day in June of each year for implementation on March 1 of the next calendar year.  The $2 million decrease in EECRF surcharges is offset in operation and maintenance expense.  See EECRF Filings Table below for a listing of EECRF filings impacting revenues for the three months ended June 30, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017.

EECRF Filings Table

Docket No.	Filed	Effective	Average Monthly Charge per Residential Customer		Program Costs		Performance Bonus		Under-/  (Over)- Recovery
47235	June 2017*	March 2018	$	0.92	$	49	$	12	$	(5)
46013	June 2016	March 2017	$	0.94	$	49	$	10	$	(4)
44784	June 2015	March 2016	$	1.19	$	61	$	10	$	(4)

______________

*Application pending

· No Change in Other Miscellaneous Revenues — Miscellaneous revenues include disconnect/reconnect fees and other discretionary revenues for services requested by REPs, services provided on a time and materials basis, rents, energy efficiency performance bonuses approved by the PUCT and other miscellaneous revenues.    

30

Wholesale transmission service expense increased $9 million, or 4%, to $229 million in 2017 due to higher fees paid to other transmission entities.

Operation and maintenance expense increased $5 million, or 3%, to $174 million in 2017.    Operation and maintenance expense increased primarily due to higher contractor costs of $5 million,  higher labor related costs of $3 million, partially offset by lower vegetation management costs of $2 million and lower energy efficiency costs of $2 million.    Amortization of regulatory assets reported in operation and maintenance expense totaled $12 million for each of the three-month periods ended June 30, 2017 and 2016.

Depreciation and amortization was $193 million for both 2017 and 2016.  The current period reflects a $10 million increase attributed to ongoing investments in property, plant and equipment, largely offset by lower reconcilable AMS depreciation of $7 million and lower amortization of regulatory assets of $3 million primarily related to the maturity of the transition bonds (with an offsetting decrease in revenues). 

Provision in lieu of income taxes totaled $61 million (including a $3 million benefit related to nonoperating income) in 2017 compared to $62 million (including a $1 million benefit related to nonoperating income) in 2016.  The effective income tax rate on pretax income was 35.3% and 36.0%  for the years 2017 and 2016, respectively.  The effective income tax rate on pretax income differs from the U.S. federal statutory rate of 35% primarily due to the effect of the Texas margin tax, mostly offset by the release of taxes and interest on uncertain tax positions.

Net income was $2 million higher than the prior period.  Net income increased primarily due to increases in revenues for the current period as discussed above, including increases due to growth in points of delivery and increases in transmission investment,  partially offset by higher operation and maintenance expense and higher non-reconcilable depreciation expense.

31

Financial Results — Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Total operating revenues increased $8 million to $1,899 million in 2017.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:

· An Increase in Distribution Base Revenues — Distribution base rates are set periodically in a rate review docket initiated by either us or the PUCT.  The present distribution base rates became effective on January 1, 2012.  The $6 million increase in distribution base rate revenues consisted of a $14 million increase due to growth in points of delivery, partially offset by an estimated $8 million impact due to lower average consumption primarily driven by milder weather.

· An Increase in Transmission Base Revenues — Transmission base revenues (or TCOS revenues) are collected from load serving entities benefitting from our transmission system.  REPs serving customers in our service territory are billed through the TCRF mechanism discussed below while other load serving entities are billed directly.  In order to reflect changes in our invested transmission capital, PUCT rules allow us to update our TCOS rates by filing up to two interim TCOS rate adjustments in a calendar year.  The $20 million increase in transmission base revenues primarily reflects interim rate increases to recover ongoing investment, including a return component, in the transmission system.  See TCOS Filings Table above for a listing of Transmission Interim Rate Update Applications impacting revenues for the six months ended June 30, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017.

· A  Decrease in Reconcilable Rates — The PUCT has designated certain tariffs (TCRF, EECRF surcharge, AMS surcharge and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs, including a return component where allowed, are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future applicable tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.  While changes in these tariffs affect revenues and the timing of cash flows, they do not impact operating income, except for the AMS return component.  See Note 1 to Financial Statements for accounting treatment of reconcilable tariffs.

- An Increase in TCRF — TCRF is a distribution rate charged to REPs to recover fees we pay to other transmission service providers under their TCOS rates and the retail portion of our own TCOS rate.  PUCT rules allow us to update the TCRF component of our retail delivery rates on March 1 and September 1 each year.  The $24 million increase in TCRF revenue reflects the pass through of a $20 million increase in third-party wholesale transmission expense described below and a $4 million increase in our own TCOS rate to recover ongoing investment in our transmission system including a return component.  At June 30, 2017, $21 million was deferred as under-recovered wholesale transmission service expense (see Note 4 to Financial Statements).  See TCRF Filings Table above for a listing of TCRF filings impacting cash flows for the six months ended June 30, 2017 and 2016, as well as filings that will impact cash flows for the year ended December 31, 2017.

- A Decrease in Transition Charges — Transition charge revenue is dedicated to paying the principal and interest of transition bonds.  We account for the difference between transition charge revenue recognized and cost related to the transition bonds as a regulatory assets or liability.  The $22 million decrease in charges related to transition bonds corresponds with an offsetting decrease in amortization and interest expense and reflects the maturity of the 2004 Series transition bonds in May 2016.  Final true-up proceedings for the transition bonds were conducted by Oncor and the PUCT during 2016 and had no material net income impact. 

- A Decrease in AMS Surcharges — The PUCT has authorized monthly per customer advanced meter cost recovery factors designed to recover the cost of our initial AMS deployment over an eleven-year period ending in 2019.  We recognize revenues equal to reconcilable expenses incurred including depreciation net of calculated savings plus a return component on our investment.  AMS revenues 32

decreased $14 million primarily due to lower reconcilable depreciation expense of $12 million resulting from a declining AMS investment balance.

- A  Decrease in EECRF Surcharges — The EECRF is a reconcilable rate designed to recover current energy efficiency program costs and performance bonuses earned by exceeding PUCT targets in prior years and recover or refund any over/under recovery of our costs in prior years.  We recognize the performance bonuses in other miscellaneous revenues upon approval by the PUCT.  PUCT rules require us to file an annual EECRF tariff update by the first business day in June of each year for implementation on March 1 of the next calendar year.  The $3 million decrease in EECRF surcharges is offset in operation and maintenance expense.  See EECRF Filings Table above for a listing of EECRF filings impacting revenues for the six months ended June 30, 2017 and 2016, as well as filings that will impact revenues for the year ended December 31, 2017.

· An Increase in Other Miscellaneous Revenues — Miscellaneous revenues include disconnect/reconnect fees and other discretionary revenues for services requested by REPs, services provided on a time and materials basis, rents, energy efficiency performance bonuses approved by the PUCT and other miscellaneous revenues. The $1 million increase reflects an increase in requested services.

Wholesale transmission serviceexpense increased $20 million, or 5%, to $460 million in 2017 due to higher fees paid to other transmission entities.

Operation and maintenance expense increased $18 million, or 5%, to $369 million in 2017.  The change primarily included $11 million in higher contractor costs and $8 million in higher labor related costs.  Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including a $3 million decrease related to the energy efficiency program.  Amortization of regulatory assets reported in operation and maintenance expense totaled $25 million for both of the six-month periods ended June 30, 2017 and 2016, respectively.

Depreciation and amortization decreased $16 million, or 4%, to $387 million in 2017.  The decrease reflects $24 million in lower amortization of regulatory assets primarily associated with transition bonds (with an offsetting decrease in revenues) and lower reconcilable AMS depreciation of $12 million, partially offset by a  $20 million increase attributed to ongoing investments in property, plant and equipment.

Provision in lieu of income taxes totaled $101 million (including a $5 million benefit related to nonoperating income) in 2017 compared to $110 million (including a $2 million benefit related to nonoperating income) in 2016.  The effective income tax rate on pretax income was 35.3 % and 36.5% for the years 2017 and 2016, respectively.  The 2017 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to the effect of the Texas margin tax, mostly offset by the release of taxes and interest on uncertain tax positions and by non-taxable gains on employee benefit plans.

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

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FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows — Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Cash provided by operating activities totaled $638 million and $472 million in 2017 and 2016, respectively. The $166 million increase is primarily the result of a  net tax refund from members under the tax sharing agreement of $114 million and a  $87 million increase in transmission and distribution receipts, partially offset by increased employee benefit plan funding of $21 million less prepayments.  The tax refund is primarily related to estimated tax payments made in a  prior period before the enactment of bonus depreciation on a retroactive basis. 

Cash provided by financing activities totaled $195 million and $131 million in 2017 and 2016, respectively.  The $64 million change reflects  a decrease in repayments of long-term debt of $41 million and an increase in short-term borrowings of $74 million, partially offset by an increase in distributions to our members of $51 million.  See Note 8 to Financial Statements for additional information regarding distributions to our members.

Cash used in investing activities, which consists primarily of capital expenditures, totaled $848 million and $627 million in 2017 and 2016, respectively.  The 2017 activity primarily reflected increases in capital expenditures for transmission and distribution facilities to serve new customers and infrastructure capital maintenance spending.  The prior period reflects a $38 million release of Bondco restricted cash due to the maturity of the final transition bonds in that period.  This is reflected in the Other caption under investing activities.  

Depreciation and amortization expense reported in the statements of consolidated cash flows was $25 million and $24 million more than the amounts reported in the statements of consolidated income in the six months ended June 30, 2017 and 2016, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense) and the amortization of debt fair value discount (reported in interest expense and related charges).

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 June 30, 2017, we had a $2.0 billion secured revolving credit facility. In October 2016, we exercised the second of two one-year extensions available to us and extended the term of the revolving credit facility to October 2018. Subject to the limitations described below, available borrowing capacity under our revolving credit facility totaled $835 million and $1.204 billion at June 30, 2017 and December 31, 2016, respectively.  We may request an increase in our borrowing capacity of $100 million in the aggregate provided certain conditions are met, including lender approval.

The revolving credit facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At June 30, 2017, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that have been certified to the Deed of Trust collateral agent.  Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings.    To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent.  At June 30, 2017, the available bond credits totaled $2.257 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $2.060 billion.  At June 30, 2017, the available borrowing capacity of the revolving credit facility could be fully drawn.

Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an

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amount up to the aggregate amount of such lender’s commitments under the facility.  See Note 5 to Financial Statements for additional information regarding the revolving credit facility.

Cash and cash equivalents totaled $1 million and $16 million at June 30, 2017 and December 31, 2016, respectively.  Available liquidity (cash and available revolving credit facility capacity) at June 30, 2017 totaled $836 million, reflecting a  decrease of $384 million from December 31, 2016.  The decrease primarily 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 June 30, 2017 and December 31, 2016, our regulatory capitalization ratios were 59.3% debt to 40.7% equity and 59.4% debt to  40.6% equity, respectively.  See Note 8 to Financial Statements for discussion of the regulatory capitalization ratio.

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

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

Distributions — On July 26, 2017, our board of directors declared a cash distribution of $65 million, to be  paid to our members on August 1, 2017.  During the six months ended June 30, 2017, our board of directors declared, and we paid, the following cash distributions to our members.

Declaration Date	Payment Date	Amount
April 26, 2017	April 27, 2017	$	86
March 22, 2017	March 24, 2017	$	86

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

Pension and OPEB Plan Funding — Our funding for the pension plans and the Oncor OPEB Plan in the calendar year 2017 is expected to total $149 million and $31 million, respectively.  In the six months ended June 30, 2017, we made cash contributions to the pension plans and the Oncor OPEB Plan of $22 million and $16 million, respectively.

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

Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any

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adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In particular, a decline in credit ratings would increase the cost of our revolving credit facility (as discussed below).  In the event any adverse action with respect to our credit ratings takes place and causes borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.

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

Presented below are the credit ratings assigned for our debt securities at July 27, 2017.  On July 7, 2017, S&P affirmed our rating and changed our outlook to “positive” from “developing” and Fitch changed our outlook to “rating watch positive” from “stable”, each based on the announcement that BHE and EFH Corp. had entered into the BHE Merger Agreement (see Note 2 to Financial Statements for more information regarding the BHE Merger Agreement and the EFH Bankruptcy Proceedings).  Oncor remains on “stable” outlook with Moody’s.

	Senior Secured
S&P	A
Moody’s	A3
Fitch	BBB+

As described in Note 7 to Financial Statements in our 2016 Form 10-K, our long-term debt is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.

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

Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the current ratings assigned to our debt securities at July 27, 2017,  our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.00%.  A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.

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

Under our revolving credit facility, a default by us in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($1.156 billion in short-term borrowings and $9 million in letters of credit at June 30, 2017) under that facility to be accelerated.  Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.

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

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OFF-BALANCE SHEET ARRANGEMENTS

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

COMMITMENTS AND CONTINGENCIES

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

CHANGES IN ACCOUNTING STANDARDS

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

REGULATION AND RATES

State Legislation

During the 2017 regular legislative session, no legislation passed that is expected to have a material impact on our financial position, results of operations or cash flows.  Although the regular session concluded, the Governor called a special session that began July 18th, which can last up to 30 days. During the special session bills may be introduced that, if adopted, could materially and adversely affect our business and our business prospects, however, we cannot predict whether any introduced to date are likely to have a substantial impact on our financial position, results of operations or cash flows.

Matters with the PUCT

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

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

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

2017 Rate Review (PUCT Docket No. 46957) -  In response to resolutions passed by numerous cities with original jurisdiction over electric utility rates in 2016, we filed rate review proceedings with the PUCT and original jurisdiction cities in our service territory on March 17, 2017 based on a January 1, 2016 to December 31, 2016 test year.  If our proposed tariffs are adopted as filed, our annual revenue would increase by approximately $320 million. A procedural schedule was agreed to by the parties to the case, which would result in PUCT hearings being held

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July 31, 2017 to August 9, 2017.  Oncor agreed to extend the requested effective date of the rate case increase such that the jurisdictional deadline for the PUCT to act has been extended to November 30, 2017.  On June 2, 2017, Oncor filed an Unopposed Motion to Abate the Procedural Schedule.  The Motion indicated that the parties in the proceeding are engaged in settlement negotiations.  To facilitate those negotiations, the parties agreed to abate the schedule.  On July 7, 2017, Oncor filed a Status Report, indicating that the parties are in the final stages of completing the settlement stipulation to be filed in the rate case proceeding.

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

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

Summary

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

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Market risk is the risk that we may experience a loss in value as a result of changes in market conditions such as interest rates that may be experienced in the ordinary course of business.  We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place.  All of our long-term debt at June 30, 2017 and December 31, 2016 carried fixed interest rates.

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

Credit Risk

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

Our exposure to credit risk associated with trade accounts receivable totaled $593 million at June 30, 2017.  The receivable amount is before the allowance for uncollectible accounts, which totaled $3 million at June 30, 2017.  The exposure includes trade accounts receivable from REPs totaling $460 million, which are almost entirely noninvestment grade.  At June 30, 2017, there were two nonaffiliated entities whose REP subsidiaries represented approximately 15% and 11% of the trade receivable amount, respectively.  No other parties represented 10% or more of the total trade accounts receivable amount.  We view our exposure to these customers to be within an acceptable level of risk tolerance considering PUCT rules and regulations; however, this concentration increases the risk that a default could have a material effect on cash flows.

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FORWARD-LOOKING STATEMENTS

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

· prevailing governmental policies and regulatory actions, including those of the U.S. Congress, the President of the U.S., the Texas Legislature, the Governor of Texas, the U.S. Federal Energy Regulatory Commission, the PUCT, the North American Energy Regulatory Corporation, the Texas Reliability Entity, Inc., the Environmental Protection Agency, and the Texas Commission on Environmental Quality, with respect to:

- allowed rate of return;

- permitted capital structure;

- industry, market and rate structure;

- recovery of investments;

- acquisition and disposal of assets and facilities;

- operation and construction of facilities;

- changes in tax laws and policies, and

- changes in and compliance with environmental, reliability and safety laws and policies;

· legal and administrative proceedings and settlements, including the exercise of equitable powers by courts;

· any impacts on us as a result of the EFH Bankruptcy Proceedings and the change in indirect ownership of Oncor proposed in such proceedings;

· weather conditions and other natural phenomena;

· acts of sabotage, wars or terrorist or cyber security threats or activities;

· economic conditions, including the impact of a recessionary environment;

· unanticipated population growth or decline, or changes in market demand and demographic patterns, particularly in ERCOT;

· changes in business strategy, development plans or vendor relationships;

· unanticipated changes in interest rates or rates of inflation;

· unanticipated changes in operating expenses, liquidity needs and capital expenditures;

· inability of various counterparties to meet their financial obligations to us, including failure of counterparties to perform under agreements;

· general industry trends;

· hazards customary to the industry and the possibility that we may not have adequate insurance to cover losses resulting from such hazards;

· changes in technology used by and services offered by us;

· significant changes in our relationship with our employees, including the availability of qualified personnel, and the potential adverse effects if labor disputes or grievances were to occur;

· changes in assumptions used to estimate costs of providing employee benefits, including pension and OPEB, and future funding requirements related thereto;

· significant changes in critical accounting policies material to us;

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· commercial bank and financial market conditions, access to capital, the cost of such capital, and the results of financing and refinancing efforts, including availability of funds in the capital markets and the potential impact of disruptions in U.S. credit markets;

· circumstances which may contribute to future impairment of goodwill, intangible or other long-lived assets;

· financial restrictions under our revolving credit facility and indentures governing our debt instruments;

· our ability to generate sufficient cash flow to make interest payments on our debt instruments;

· actions by credit rating agencies, and

· our ability to effectively execute our operational strategy.

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

ITEM 4.   CONTROLS AND PROCEDURES

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

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PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

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

ITEM 1A.   RISK FACTORS

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

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

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

None.

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ITEM 6.   EXHIBITS

(a)   Exhibits provided as part of Part II are:
Exhibits	Previously Filed*	As
	With File Number	Exhibit
(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession.
2	333-100240 Form 8-K (filed July 24, 2017)	2.1	—	Agreement and Plan of Merger, dated July 21, 2017, among Sharyland Distribution & Transmission Services, L.L.C., Sharyland Utilities, L.P., SU AssetCo, L.L.C., Oncor Electric Delivery Company LLC and Oncor AssetCo LLC.
(31)	Rule 13a – 14(a)/15d – 14(a) Certifications.
31(a)			—	Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)			—	Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)	Section 1350 Certifications.
32(a)			—	Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)			—	Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99)	Additional Exhibits.
99(a)	333-100240 Form 8-K (filed July 10, 2017)	99.2	—	Letter Agreement, dated July 7, 2017, by and among Berkshire Hathaway Energy Company, O.E. Merger Sub Inc., O.E. Merger Sub II, LLC, O.E. Merger Sub III, LLC, Oncor Electric Delivery Holdings Company LLC and Oncor Electric Delivery Company LLC.
99(b)			—	Condensed Statement of Consolidated Income – Twelve Months Ended June 30, 2017.

	XBRL Data Files.
101.INS		—	XBRL Instance Document
101.SCH		—	XBRL Taxonomy Extension Schema Document
101.CAL		—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		—	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		—	XBRL Taxonomy Extension Presentation Linkbase Document

__________________

*   Incorporated herein by reference.

43

SIGNATURE

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

ONCOR ELECTRIC DELIVERY COMPANY LLC

!!
By:	/s/ David M. Davis
	David M. Davis
	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

Date:  July 27, 2017

44

EXHIBIT INDEX

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

Exhibits	Previously Filed*	As
	With File Number	Exhibit
(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession.
2	333-100240 Form 8-K (filed July 24, 2017)	2.1	—	Agreement and Plan of Merger, dated July 21, 2017, among Sharyland Distribution & Transmission Services, L.L.C., Sharyland Utilities, L.P., SU AssetCo, L.L.C., Oncor Electric Delivery Company LLC and Oncor AssetCo LLC.
(31)	Rule 13a – 14(a)/15d – 14(a) Certifications.
31(a)			—	Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)			—	Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)	Section 1350 Certifications.
32(a)			—	Certification of Robert S. Shapard, chief executive of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)			—	Certification of David M. Davis, senior vice president and chief financial officer of Oncor Electric Delivery Company LLC, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99)	Additional Exhibits.
99(a)	333-100240 Form 8-K (filed July 10, 2017)	99.2	—	Letter Agreement, dated July 7, 2017, by and among Berkshire Hathaway Energy Company, O.E. Merger Sub Inc., O.E. Merger Sub II, LLC, O.E. Merger Sub III, LLC, Oncor Electric Delivery Holdings Company LLC and Oncor Electric Delivery Company LLC.
99(b)			—	Condensed Statement of Consolidated Income – Twelve Months Ended June 30, 2017.

	XBRL Data Files.
101.INS		—	XBRL Instance Document
101.SCH		—	XBRL Taxonomy Extension Schema Document
101.CAL		—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		—	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		—	XBRL Taxonomy Extension Presentation Linkbase Document

__________________

*   Incorporated herein by reference. 

45