Ad Hoc Group of TCEH Unsecured Noteholders Provides Additional Disclosure on Proposed Restructuring of Energy Future Holdings Corp and Related Companies

Aug 10, 2015, 15:55 ET from Ad Hoc Group of TCEH Unsecured Noteholders

NEW YORK, Aug. 10, 2015 /PRNewswire/ -- Earlier today, Energy Future Holdings Corp. ("EFH"), Energy Future Competitive Holdings Company LLC and Energy Future Intermediate Holding Company LLC filed a Current Report on Form 8-K with the Securities and Exchange Commission (the "EFH 8-K") disclosing certain material agreements in connection with a proposed plan of reorganization for EFH and its debtor subsidiaries, including Texas Competitive Electric Holdings Company LLC ("TCEH"), pursuant to Chapter 11 of the U.S. Bankruptcy Code. 

In connection therewith and as described in the EFH 8-K, the Ad Hoc Group of TCEH Unsecured Noteholders that are part of the Investor Group referenced in the EFH 8-K are providing certain additional information in connection with the terms and conditions of the proposed real estate investment trust ("REIT") reorganization to be implemented through the Merger and Plan described below. This information is set forth in the term sheet below.

Summary of Certain Principal Terms of the REIT Reorganization

Energy Future Holdings Corp. ("EFH"), Energy Future Intermediate Holding Company LLC ("EFIH"), Texas Competitive Electric Holdings Company LLC ("TCEH") and certain of their affiliates (collectively, the "Debtors") have commenced cases under chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Cases") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Oncor Electric Delivery Company LLC ("Oncor"), an indirect approximately 80.03%-owned subsidiary of EFH, is not a Debtor in the Chapter 11 Cases and continues to operate independently within a "ring-fence" put in place to satisfy certain rating agency and regulatory requirements. This term sheet summarizes, in connection with the proposed acquisition of Oncor (the "Oncor Acquisition") by Ovation Acquisition I, L.L.C. ("Parent") and Ovation Acquisition II, L.L.C. ("OV2" and, together with Parent, the "Purchasers") pursuant to a merger (the "Merger") set forth in the Purchase Agreement and Agreement and Plan of Merger (the "Merger Agreement") entered into among EFH, EFIH and the Purchasers and/or in connection with a chapter 11 plan (the "Plan") to be filed by the Debtors, the material terms of the transactions and commercial arrangements necessary to implement a real estate investment trust ("REIT") structure for Parent in connection with the Oncor Acquisition and the Plan (collectively, the "REIT Reorganization"). This term sheet does not describe all the terms of the arrangements described herein and is subject to the final terms of definitive documentation and required regulatory approvals.  

REIT Reorganization

Pursuant to the REIT Reorganization:


(a)  certain of the personal property of Oncor (the "OEDC Assets"), as mutually determined (after consultation with Oncor) by certain TCEH unsecured creditors party to that certain Backstop Agreement (the "Backstop Investors") and Hunt Consolidated, Inc. ("Hunt"), would be allocated by operation of law to and become property of Oncor Electric Delivery Co., a newly formed entity to be owned by Hunt or one or more of its affiliates and equity owners ("OEDC"), pursuant to a joint-survivor merger agreement to be entered into between Oncor (or a newly formed corporate subsidiary of Oncor) and OEDC (the "OEDC Merger Agreement"), in exchange for the OEDC Consideration (as defined below); and


(b)  the transmission and distribution assets of Oncor that produce qualifying REIT rental income for tax purposes  (the "Qualified Assets") would continue to be held by Oncor ("Oncor AssetCo") but would be leased to and operated by OEDC consistent with the terms set forth below.


After the REIT Reorganization, Parent, as the surviving company of the Merger ("NewCo"), and its subsidiaries would be organized as an umbrella partnership REIT, or UPREIT, with (i) NewCo being eligible to elect real estate investment trust status for U.S. federal income tax purposes under Section 856-859 of the Internal Revenue Code, (ii) a partnership that is the successor to reorganized EFIH serving as the operating partnership ("EFIH OP") and (iii) Oncor AssetCo continuing to own Qualified Assets and certain other assets, all in a manner that meets the requirements set forth in Sections 856-859 of the Internal Revenue Code.


After the REIT Reorganization, NewCo would make a "purging" distribution (in some combination of cash and stock) of its earnings and profits remaining after the spin-off contemplated by the Plan.

Acquisition of OEDC Assets

In connection with the closing (the "EFH Exit Closing") of the Oncor Acquisition, the Backstop Investors and Hunt will engage a mutually agreeable independent appraiser to establish a valuation for the OEDC Assets using customary valuation metrics on a going concern basis (such going concern value, "Fair Market Value") which shall take into account, among other things, the variability of cash flows.


The consideration payable by OEDC for the OEDC Assets under the OEDC Merger Agreement (the "OEDC Consideration") will consist of an upfront cash payment in an amount approximating the liquidation value of such assets and a deferred purchase price based on the Fair Market Value, payable by OEDC over a ten-year term.

Governance of OEDC

The business and affairs of OEDC would be governed and controlled by Hunt or one or more of its affiliates and equity owners, subject to compliance with the restrictive covenants described herein.

OEDC Distributions

OEDC would be subject to certain covenants that limit its ability to make distributions to its equityholders. In particular, OEDC would not be permitted to make any cash distributions (other than tax distributions) to its equityholders unless and until it has established a segregated account funded by profits, if any, generated by OEDC that contains (a) a reasonable reserve for working capital based on the historical working capital needs of the business and (b) an additional reserve for contingencies. 

Leases between OEDC and Oncor AssetCo

Oncor AssetCo would lease its Qualified Assets (collectively, the "Leased Assets") to OEDC or one or more of its subsidiaries pursuant to a number of real property leases as agreed between Oncor AssetCo and OEDC. Such leases will be on terms to be mutually agreed between Hunt and certain investors in Parent (collectively, the "Investors"), subject to any required approval of the Public Utility Commission of Texas ("PUCT") and the U.S. Internal Revenue Service.


Each lease would be an absolute net lease that grants OEDC, to the extent required by the PUCT, exclusive rights to and responsibility for the maintenance, operational control and operation of the Qualified Assets and gives OEDC responsibility for regulatory compliance and reporting requirements related to such assets. OEDC would have certain rights and obligations related to maintenance, planning capital expenditures, managing quality of service, handling customer and community relations matters, accounting for operating and maintenance costs, operating in compliance with all environmental, safety and other applicable laws applicable to operating the Leased Assets and for administering all compliance issues and regulatory relationships related to the Leased Assets.


Basic Rent:  Rent would be comprised of (i) a monthly fixed amount plus (ii) a variable amount paid quarterly to be determined in a manner to be agreed upon by the parties.  The economics of the leases would give Oncor AssetCo most of the regulated return on the invested capital while leaving OEDC with a portion of the return that gives it the opportunity to operate prudently, remain financially stable and earn a profit or loss. In particular, it is expected that the rent payable under each lease would be structured in such a way as to allow Oncor AssetCo to receive approximately 97% of the projected regulated return on rate base investment attributable to the assets that are subject thereto, as and when such assets are placed in service and earn such regulated rate of return.


Term:  Initial terms of the leases to be staggered over periods generally ranging from three to five years.


Purchase Option: Upon the earliest of (i) OEDC's surrender, resignation, transfer, assignment or otherwise ceasing to be the operator of specific Leased Assets, (ii) the expiration of the term of a lease for which no renewal term has been mutually agreed by Oncor AssetCo and OEDC, or (iii) the termination of a lease, Oncor AssetCo would have the option to purchase from OEDC, or direct the sale by OEDC to a purchaser designated by Oncor AssetCo of, any equipment or other property, tangible or intangible (including the applicable certificates of convenience and necessity), owned by OEDC and principally used in connection with and necessary for the operation of the Leased Assets, subject to any required regulatory approvals. The purchase price for such property or equipment would be an amount equal to the fair market value thereof at such time.

Certain Restrictive Covenants

OEDC would also be subject to certain other restrictive covenants, including restrictions on: (i) incurring debt, (ii) effecting asset sales, (iii) entering into affiliate transactions, (iv) creating or incurring liens on the properties and assets leased by it, (v) engaging in certain business activities, (vi) undergoing change of control transactions, and (vii) making certain restricted payments. To the extent practicable, these restrictions will be consistent with Oncor's debt arrangements following the EFH Exit Closing.

Management Services

NewCo, EFIH OP and (subject to any applicable ring-fence requirements) Oncor AssetCo (collectively, the "REIT Entities") would be managed by Hunt Utility Services, LLC, a subsidiary of Hunt ("HUS" or the "Manager"), pursuant to a management agreement (the "Management Agreement") which would become effective upon the closing of the REIT Reorganization. The Management Agreement would contain terms and provisions that are to be mutually agreed.


Employees:  HUS would provide the REIT Entities with a management team, including a chief executive officer and chief financial officer, along with appropriate support personnel, to provide management services.


Management Services: Subject to the oversight and control of the board of directors of NewCo, HUS would be responsible for the REIT Entities' day-to-day business and perform (or cause to be performed) such services and activities relating to the REIT Entities' assets and business as are provided for in the Management Agreement. An appropriate management incentive plan would be established by the NewCo board after the EFH Exit Closing.


Fees:  HUS would receive an annual management fee payable in equal quarterly installments. The annual management fee would be established prior to each year by agreement with the Oncor AssetCo board.  Hunt would also receive a $150 million cash fee at the EFH Exit Closing.


The following sets forth the terms and conditions applicable to the exit fee and promote payable to Hunt in connection with the Oncor Acquisition and the other transactions contemplated by the Merger Agreement and the Plan:


NewCo Capital Stock. The capital stock of NewCo will consist of Common Stock, which Parent will use its commercially reasonable efforts to list on the New York Stock Exchange or, if approved by the required number of Investors, the Nasdaq Global Select Market.


EFIH OP Partnership Interests.  Partnership interests in EFIH OP would be divided into two classes, consisting of Common Units and Class A Common Units.  Neither of these classes would be publicly traded, but Common Units would be redeemable for cash or shares of Common Stock in accordance with provisions typically applicable in an UPREIT structure.  Common Units would be held by NewCo and OV2. Class A Common Units would be held exclusively by Hunt.  Class A Common Units would be used as a vehicle for the settlement and payment of the Hunt promote, as described below, but no dividends would be payable on Class A Common Units before the Hunt promote crystallizes.


Promote.  Hunt would receive a 12.5% carried interest after the NewCo Common Stock has achieved an 8% return (the "Promote") payable in certain circumstances but no later than 365 days after the EFH Exit Closing. 

Governance of NewCo

The Investors would enter into a mutually agreeable interest holders agreement (or other appropriate implementation documents) to govern certain matters relating to the governance of the Purchasers, including without limitation, the following:


Board of Directors:  The management of the business of NewCo, EFIH OP and (subject to any applicable ring-fence requirements) their subsidiaries will be conducted by or under the supervision of a board of directors (the "Board").

  •  The Board initially and for the first year following the EFH Exit Closing would be comprised of thirteen (13) directors, which would consist of: (i) two (2) directors appointed by Hunt, one of whom shall be the Chief Executive Officer of NewCo and employed by HUS; (ii) one (1) director appointed by the required number of  investors designated by Hunt; and (iii) ten (10) directors (who are independent of Hunt) initially appointed by the Backstop Investors.
  • Any interested director transactions shall require the approval of a majority of disinterested directors.

Distributions:  NewCo would distribute cash (including distributions received from Oncor AssetCo through EFIH OP, net of any reserves established by the Board) at such times as are determined by the Board and otherwise in accordance with the organizational documents of NewCo and EFIH OP but, at a minimum, such distributions would be made at such times and in such amounts to cause NewCo to satisfy the applicable requirements under the Internal Revenue Code for distributions by a REIT.


Tax Considerations:  NewCo would be treated and classified as a corporation for United States federal income tax purposes. Each of EFIH OP, Oncor AssetCo and their respective subsidiaries would be treated and classified as a partnership or a disregarded entity for United States federal income tax purposes.


Transfer/Ownership Restrictions: Customary REIT ownership restrictions would be included in EFIH OP's organizational documents or the interest holders' agreement, together with such restrictions as may be necessary to ensure that EFIH OP does not inadvertently become required to file public reports with the Securities and Exchange Commission unless and until certain conditions are satisfied.


Registration Rights: At the EFH Exit Closing, Parent would execute and deliver a registration rights agreement among Parent and each of the Investors that would hold equity in providing them with customary registration rights.


SOURCE Ad Hoc Group of TCEH Unsecured Noteholders