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Hunt investors to seek rehearing on key conditions of Oncor acquisition approval


Essential Energy Insights - February 2021


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Hunt investors to seek rehearing on key conditions of Oncor acquisition approval

Theinvestor consortium led by HuntConsolidated Inc. plans to seek a rehearing on certain keyconditions Texas regulators imposed when they approved the group's acquisitionand restructuring of OncorElectric Delivery Co. LLC.

ThePublic Utility Commission of Texas on March24 conditionally approved a proposal by the Hunt-led group toacquire Oncor and restructure it into a Real Estate Investment Trust, or REIT.The buyers intend to split Oncor into two entities, the Oncor AssetCo, a REITsubsidiary which will own the utility's transmission and distribution assets,and the customer-facing operating company, described as OEDC, that will leasethose assets from the AssetCo and operate them. On April 6, the investor groupfiled for approval of the lease structure between the two entities, which thePUCT intends to regulate as a tariff.

Akey issue in the commission's deliberation over the transaction was whether thesignificant federal income tax savings Oncor's upstream parents would enjoy, asa REIT, should be shared with theutility's customers, because those customers are charged in ratesfor the income tax expense. The PUCT ultimately decided those questions werebetter left for a future rate case, but directed Oncor to set up a regulatoryliability on its books to account for federal income tax expenses the AssetCowould collect from OEDC through lease payments.

Inits April 6 filing, the purchasers said they intend to file a motion forrehearing with respect to the PUCT's regulatory liability requirement on theground that, "recovery of such expense constitutes impermissibleretroactive ratemaking."

RalphGoodlet, an attorney for the purchasers, said in submitted testimony the PUCThas the authority to approve new rates prospectively, but in the case of Oncor'stwo entities, Oncor AssetCo and OEDC, that cannot be done until the next ratecase. "[T]he requirement that Oncor AssetCo and OEDC record theamount of federal income tax expense revenues in separate accounts for possiblerefund at a later time has an immediate adverse effect on the companies,"Goodlet stated. "Oncor AssetCo will reduce its lease revenues by theamount recorded in the regulatory liability account, which would limit itsability to distribute dividends to its owners prior to the time that a decisionis made on whether to require refunds."

Thepurchasers also intend to request a rehearing on the PUCT's decision toregulate the leases within Oncor as tariffs, which Goodlet stated was at oddswith prior decisions by the commission regarding regulation of similarcorporate structures involving internal leases, most notably a REIT structureapproved for Sharyland UtilitiesLP in 2008. Hunt pioneered the utility REIT structure with itslaunch of InfraREIT January 2015.Sharyland operates the assets within InfraREIT.

Theproceeding over the leases is, according to the purchasers, much narrower inscope than a typical base rate proceeding because the decision will allocatethe rate of return between Oncor AssetCo and OEDC based on the utility'sexisting rates, and will not affect the public. A final order approving theproposed leases and rates must be issued by Aug. 5, giving the investor group90 days to raise more than $8 billion in equity to fund the transaction andclose by Nov. 30.

TheMarch approval of the overall transaction was a key step forward in thebankruptcy reorganizationof Energy Future Holdings Corp.,which owns an 80% share of Oncor. The Hunt-led investors agreed to provideapproximately $13 billion in debt and equity to address creditor claims at EFHto acquire Oncor, which was ring-fenced from the bankruptcies of its parentcompanies. (Texas Docket No. 45815)