Oncor and Sempra Energy enter stipulation with PUCT related to merger

By Caroline Salls

Pittsburgh, Dec. 15 – Oncor Electric Delivery Co. LLC and Sempra Energy entered into a comprehensive stipulation with the staff of the Public Utility Commission of Texas (PUCT), the Office of the Public Utility Counsel, a steering committee of cities served by Oncor and the Texas Industrial Energy Consumers regarding a joint application for approval of a merger of Oncor and Sempra.

According to an 8-K filed with the Securities and Exchange Commission, the parties have agreed that Sempra’s acquisition of Energy Future Holdings Corp., including its indirect 80% stake in Oncor, “is in the public interest and will bring substantial benefits.”

The stipulation requests that the PUCT approve the Sempra acquisition. Sempra and Oncor are also continuing settlement discussions regarding the joint application with the remaining stakeholders in PUCT, the 8-K said.

Ring-fence measures

Oncor said it and Energy Future previously implemented various ring-fencing measures to enhance Oncor’s separateness from its owners and to mitigate the risk that Oncor would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting Energy Future or its subsidiaries or owners.

The company said the stipulation outlines ring-fencing measures, governance mechanisms and restrictions that will apply after the Sempra acquisition.

Under the stipulation, the board of directors of Oncor will consist of 13 members, with seven members to be independent directors under the rules of the New York Stock Exchange, two members to be designated by Sempra, two members to be appointed by Texas Transmission Investment LLC (TTI), which would continue to own 19.75% of the outstanding membership interests of Oncor, and two members who are current or former officers of Oncor.

The board will initially include Robert S. Shapard and E. Allen J. Nye Jr., who will be the chair of the Oncor board and chief executive officer of Oncor, respectively.

Following completion of the Sempra acquisition, Oncor Holdings will have a board of directors comprised of 10 members, six of which will be independent directors, two of which will be current or former officers of Oncor Holdings and two of which shall be designated by Sempra.

The current independent directors for Oncor and Oncor Holdings will continue to serve for three years following the closing of the acquisition, and thereafter two of these independent directors will be replaced every two years. Each subsequent independent director will be elected for a term of four years.

Distribution restrictions

The company said the stipulation also provides a number of circumstances in which Oncor is not permitted to make distributions, though it would continue to make contractual tax payments under any tax sharing or similar agreement.

The respective boards of Oncor and Oncor Holdings will control each respective company’s dividend policy, as well as each respective company’s debt issuances, capital expenditures, operation and maintenance expenditures and management and service fees.

Also under the stipulation, neither Oncor nor Oncor Holdings nor their subsidiaries may enter into any material transactions with third parties outside the ordinary course of business or institute an Oncor bankruptcy filing without the written consent of Sempra.

Other stipulation terms

Additional commitments, governance mechanisms and restrictions provided in the stipulation include the following:

• A majority of the independent directors of Oncor must approve any annual or multi-year budget if the total amount of capital expenditures or operating and maintenance expenditures is more than a 10% increase or decrease from the corresponding amounts in the budget for the preceding fiscal year or multi-year period;

• Oncor will make minimum capital expenditures equal to at least $7.5 billion over the period from Jan. 1, 2018 through Dec. 31, 2022;

• Sempra will make, within 60 days of the acquisition, its proportionate share of an equity investment in Oncor in an amount necessary for Oncor to achieve a capital structure consisting of 57.5% long-term debt and 42.5% equity;

• Oncor may not pay dividends or make other distributions if a majority of its independent directors determines that it is in the best interests of Oncor to retain those amounts;

• Oncor will remain in compliance with the debt-to-equity ratio established by the PUCT for ratemaking purposes, and Oncor will not pay dividends or other distributions if that payment would cause its debt-to-equity ratio to exceed the debt-to-equity ratio approved by the PUCT;

• Sempra will ensure that Oncor’s credit rating by all three major rating agencies will be at or above Oncor’s credit ratings as of June 30;

• If the credit rating on Oncor’s senior secured debt by any of the three major rating agencies falls below BBB or the equivalent, Oncor will suspend dividends and other distributions unless otherwise allowed by the PUCT;

• Without the approval of the PUCT, neither Sempra nor any of its affiliates will incur, guaranty or pledge assets related to any debt that is dependent on the revenues of Oncor in more than a proportionate degree than the other revenues of Sempra or on the stock of Oncor;

• The current debt at Energy Future Intermediate Holdings and Energy Future Holdings will be reduced to zero, and there will be no debt at those entities at any time following the closing of the acquisition;

• Neither Oncor nor Oncor Holdings will include in any of their debt or credit agreements cross-default provisions or financial covenants or rating agency triggers between or related to their securities and the securities of Sempra or any of its affiliates or subsidiaries or any entity with a direct or indirect ownership interest in Oncor or Oncor Holdings;

• Neither Oncor nor Oncor Holdings will lend money to or borrow money from Sempra or any of its affiliates or share credit facilities with Sempra or any of its affiliates;

• Oncor will not seek recovery in rates of any expenses or liabilities related to Energy Future’s bankruptcy, or any tax liabilities resulting from its spinoff of former subsidiary Texas Competitive Electric Holdings Co. LLC, any asbestos claims relating to non-Oncor operations, any make-whole claims by holders of debt securities issued by Energy Future or Energy Future Intermediate or EFIH, and Sempra must file with the PUCT a plan providing for the extinguishment of those liabilities;

• “Separateness measures” must be maintained that reinforce the financial separation of Oncor from Energy Future and its owners;

• No transaction costs or transition costs related to the Sempra acquisition will be borne by Oncor’s customers nor included in Oncor’s rates;

• Sempra will continue to hold indirectly at least 51% of the ownership interests in Oncor and Oncor Holdings for at least five years following the closing of the acquisition, unless otherwise specifically authorized by the PUCT;

• For two years after closing, each current Oncor employee will receive a base salary or wage rate no less favorable than the base salary or wage rate provided immediately before the closing date, incentive compensation opportunities that are comparable to those provided before the closing date and employee benefits that are comparable to those provided immediately prior to the closing date. For two years after closing, Oncor will not implement any involuntary workforce reductions of Oncor employees; and

• Oncor will provide bill credits to customers in an amount equal to 90% of any interest rate savings achieved because of any improvement in its credit ratings or market spreads compared to those as of June 30 until final rates are set in the next Oncor base rate case. One year after the acquisition, Oncor will provide bill credits to its customers equal to 90% of any synergy savings until final rates are set in the next Oncor base rate proceeding, at which time any total synergy savings shall be reflected in Oncor’s rates.

Energy Future is a Dallas-based power generation company and utility operator. The company filed for bankruptcy on April 29, 2014. The Chapter 11 case number is 14-10979.

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