Oncor, Sempra apply for merger OK with Texas regulators

EFH indirectly owns about 80.03 percent of Oncor

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Oncor Electric Delivery Co. and Sempra Energy on Oct. 5 filed with the Public Utility Commission of Texas an application requesting that the PUC find that Sempra’s proposed acquisition of the about 80.03 percent indirect interest in Oncor, which is held by Energy Future Holdings Corp., is in the public interest and should be approved.

As noted in the application, EFH indirectly owns about 80.03 percent of Oncor, while Texas Transmission Investment holds 19.75 percent of Oncor; the remaining 0.22 percent of Oncor is held by Oncor Management Investment, which is an investment vehicle owned by certain current and former Oncor directors and employees.

EFH and 70 of its affiliates (referred collectively as the debtors), excluding Oncor and Oncor Electric Delivery Holdings Co. and their respective units, in April 2014 filed for Chapter 11 bankruptcy protection in bankruptcy court in Delaware. The application added that Oncor has continued to operate during the pendency of the bankruptcy with ring-fencing protections that have been in place since 2008.

EFH and Energy Future Intermediate Holding Co. in August entered into an agreement and plan of merger with Sempra and its wholly owned affiliate, Sempra Texas Merger Sub I, Inc. The application also noted that the EFH merger agreement provides for Sempra’s acquisition of EFH’s about 80.03 percent indirect interest in Oncor.

The proposed transaction, if approved, would remove Oncor from the overhang of EFH’s bankruptcy and place Oncor on more solid financial footing within a traditional utility holding company structure, the application said. Also, after the proposed transaction closes, Oncor would operate under an enhanced ring-fenced structure that it stronger than the existing ring-fence, which has successfully insulated Oncor from EFH’s bankruptcy proceedings to date, the application noted.

Under the EFH merger agreement, Sempra would acquire EFH and its subsidiaries, including Oncor, in exchange for a cash payment of $9.45 billion subject to adjustments set forth in the merger agreement.

The application added that Sempra plans to finance the purchase price with a final targeted transaction capital structure that uses a combination of about 65 percent equity and 35 percent long-term debt issued at the Sempra level.

Immediately following the closing of the proposed transaction, Sempra would extinguish all debt that resides above Oncor at EFIH and EFH, reducing it to zero immediately following the closing of the proposed transaction and maintain it at zero going forward, the application noted.

The EFH merger agreement was entered into on Aug. 21, and on Aug. 23, EFH filed numerous documents with the U.S. Bankruptcy Court for the District of Delaware, including its “Disclosure statement for the first amended joint plan of reorganization of Energy Future Holdings Corp., Energy Future Intermediate Holding Co., and the EFH/EFIH Debtors pursuant to Chapter 11 of the Bankruptcy Code,” and its “Amended and superseding motion of the E-Side Debtors for an order (A) authorizing entry into merger agreement and approving the termination fee and (B) authorizing entry into and performance under the plan support agreement.”

The application added that a hearing on the motion and disclosure settlement was held on Sept. 6 in the U.S. Bankruptcy Court, which, at that hearing, authorized EFH and EFIH to enter into the EFH merger agreement with Sempra and to begin solicitation of votes with respect to the plan of reorganization.

The application noted that Sempra’s proposed acquisition would ensure that Oncor continues to provide safe, reliable, and affordable electric delivery service to its customers supported by the focus and financial strength of a dedicated public utility holding company.

From the perspective of Oncor’s employees, customers, and regulators, there would be no change in in the way that they interact with Oncor. The application added that Sempra would stay out of Oncor’s way and has proposed 47 regulatory commitments including that:

· Oncor would maintain its separate headquarters and management in Dallas, Texas; local management would remain the primary point of contact on all regulatory and operational matters

· Effective upon the closing of the transaction, current Oncor CEO Robert Shapard would assume the role of executive chairman of the Oncor board, while E. Allen Nye Jr., would assume the role of CEO of Oncor and be a member of the board

In an Oct. 4 statement, Shapard said: "This filing highlights Sempra Energy's support for Oncor customers and supports the Oncor mission: providing safe, reliable and affordable electric service to over 10 million Texans. Sempra Energy's strong ring-fence protections demonstrate how they will be a good long-term partner for Texas. We also are pleased that, with this new financing structure, several of the key stakeholders have expressed interest in entering into constructive regulatory settlement discussions."

Debra Reed, chairman, president and CEO of Sempra Energy, said in the statement: "Since we announced our transaction in August, we have met with many stakeholders to gain their perspectives on how we can best meet the needs of Oncor customers and the state of Texas. Our application responds to their feedback and details our financing plan and regulatory commitments, as well as our approach to resolving the long-running EFH bankruptcy proceeding. Our goal is to keep Oncor strong, independent and well-capitalized for the benefit of Texas customers. Our revised financing structure also will provide long-term value to our shareholders."

Under tangible and quantifiable benefits, the application noted, for instance, that the proposed transaction includes a commitment that Oncor would provide bill credits to electric delivery rates for ultimate credits to customers in an amount equal to 90 percent of any interest rate savings achieved until final rates are set in the next Oncor base rate case after the Oncor base rate case currently filed (Docket No. 46957).

Also, the application said that one year after closing, Oncor would present a merger synergy savings analysis to the PUC and provide bill credits to electric rates for inclusion in customer bills in an amount equal to 90 percent of any actual synergy savings until final rates are set in the next Oncor base rate proceeding, at which point any synergy savings are to be reflected in Oncor’s rates.

Among other things, the application noted that Sempra has made a commitment that Oncor would make minimum capital expenditures equal to a budget of at least $7.5 billion over the five-year period beginning Jan. 1, 2018, and ending Dec. 31, 2022.

In addition, the application noted that Sempra makes a number of regulatory commitments to ensure employee continuity at Oncor. For instance, the application said, for two years after closing the proposed transaction, each current Oncor employee who is employed on the closing date would receive a base salary or wage rate no less favorable than the base salary or wage rate the employee had immediately prior to the closing date, as well as aggregate incentive compensation opportunities that are substantially comparable in the aggregate to those provided immediately prior to the closing date and employee benefits that are substantially comparable in the aggregate.

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