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Update: Crius Energy Trust To Acquire U.S. Gas & Electric

MVC Says Crius Acquisition of USG&E Determined To Be Superior To Equus Transaction

Crius Energy Trust Announces Acquisition of U.S. Gas & Electric, Inc. and C$110 Million Bought Deal Offering of Subscription Receipts

May 30, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Update, 5/31: MVC Capital, Inc., the parent of U.S. Gas & Electric, Inc., said that the Crius Acquisition (first reported yesterday, see below) was determined to be superior to the Equus transaction announced last month.

As a result of the Crius Transaction, the purchase agreement between Equus Total Return, Inc. and USG&E, announced on April 24, 2017, has been terminated, and USG&E has paid a $2.5 million termination fee to Equus.

Under the terms of the Crius Transaction, MVC said that USG&E stockholders will receive aggregate consideration totaling $172.5 million (including $20.0 million for working capital), plus balance sheet cash at closing of approximately $11.5 million, less the repayment of all indebtedness and transaction costs, and subject to a potential adjustment for working capital, if required. The aggregate of $172.5 million consists of: (i) $95.0 million in cash; (ii) $47.5 million in 9.5% second-lien callable notes due in June 2025; and, (iii) Crius trust units valued at the time of this announcement at approximately $30.0 million, based on a trailing 10-day volume-weighted average price ("VWAP"). The trust units, which currently yield approximately 7.5%, will be subject to a six-month lock-up provision. The closing is subject to certain conditions, including regulatory and USG&E stockholder approvals, but is not conditioned on financing. The transaction is expected to close on or about July 5, 2017.

Based on MVC's ownership stake in USG&E, MVC said that the fair value of the consideration that it will receive in the Crius Transaction is approximately $117.1 million (excluding any illiquidity discount that will be applied), as compared to the fair value of MVC's equity investment in USG&E of $89.4 million, as of January 31, 2017. The $117.1 million is comprised of: (i) estimated cash of approximately $50.1 million; (ii) second-lien notes with an estimated fair value of $41.4 million (taking into account certain potential indemnification adjustments); and, (iii) Crius trust units valued at the time of this announcement at approximately $25.6 million, based on a trailing 10-day VWAP.

MVC said that, at the closing of the Crius Transaction, including the repayment of its two outstanding loans to USG&E, totaling $10.9 million, and the payment of deferred consulting fees, MVC will receive consideration of approximately $128.7 million, a 28.4% premium over the last publicly reported fair value of the Fund's investments in USG&E, as of January 31, 2017.

Earlier: Posted 6:20 pm May 30, 2017

Crius Energy Trust ("Crius" or the "Trust") today announced that it has entered into an agreement to purchase, indirectly through one of its subsidiaries, U.S. Gas & Electric, Inc. ("USGE"), a leading U.S. energy retailer with natural gas and/or electricity customers in 11 States and D.C. (the "Acquisition"), for total consideration of US$152.5 million plus approximately US$20 million in working capital, subject to customary post-closing adjustments, for a total purchase price of approximately US$172.5 million.

The Acquisition is expected to close early in the third quarter of 2017, subject to the receipt of required regulatory approvals and the satisfaction of the other closing conditions described in the acquisition agreement.

Crius Energy said that the acquisition, "is expected to be highly accretive to distributable cash per Unit (as defined herein), and would have represented an approximate 16% increase to distributable cash per Unit on a pro-forma basis for the 12-month period ending March 31, 2017 and is expected to deliver strong accretion in 2017 and 2018, before accounting for planned synergies."

Crius Energy said that the acquisition, "is expected to increase distributable cash and Adjusted EBITDA and reduce payout ratio, and would have represented a 60% increase in distributable cash (from US$36.8 million to US$58.8 million), a 59% increase in Adjusted EBITDA (from US$62.3 million to US$99.3 million) and a 9% reduction in payout ratio (from 62% to 53%) on a pro-forma basis for the 12-month period ending March 31, 2017."

Crius Energy said that the acquisition, "will add approximately 375,000 RCEs (as defined below) to the customer portfolio, representing an increase of 37% to customer portfolio on a pro-forma basis as of March 31, 2017."

Crius Energy said that the acquisition, "is expected to deliver incremental customer growth through the acquisition of USGE's robust direct-to-consumer sales channels."

Crius Energy said that the acquisition, "will increase the proportion of natural gas customers (as defined below) in Crius' total customer portfolio from 6% to 14%."

Crius Energy said that the acquisition, "will provide deeper market penetration in existing electricity and natural gas markets, as well as an expanded geographic footprint into new markets (i.e., natural gas markets in Michigan and Kentucky)."

Crius Energy said that the acquisition, "is expected to deliver a diverse portfolio of electricity and natural gas customers, totaling approximately 375,000 residential customer equivalents ("RCEs") in 11 States - Connecticut, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio and Pennsylvania - and the District of Columbia. In addition to the planned synergies expected to be achieved from the integration of the businesses of USGE and Crius, the Trust expects to benefit from continued operating leverage from the incremental scale added as a result of the Acquisition. The pro-forma company would serve nearly 1.4 million customers, representing a 37% increase, and be positioned among the ten largest independent energy retailers in North America. Crius will also immediately benefit from the robust direct-to-consumer sales channels acquired as part of the transaction."

Crius Energy said that, at March 31, 2017, USGE's customer portfolio consisted of approximately 62% electricity customers and approximately 38% natural gas customers, with approximately 43% of the overall customer portfolio under fixed price customer contracts. "Along with geographic expansion, the Acquisition is expected to diversify Crius' existing customer portfolio by increasing the Company's percentage of commercial customers from 35% to 38% and its natural gas customers from 6% to 14%," Crius Energy said

Crius Energy said, "The consideration payable or deliverable to the selling stockholders of USGE in connection with the Acquisition consists of (i) US$95,000,000 in cash (the "Cash Consideration"), plus (ii) US$47,500,000 in promissory notes (the "Debt Consideration"), (iii) 3,847,870 trust units of the Trust (the "Equity Consideration"), plus (iv) the aggregate amount of all deposits of the USGE companies at the closing date of the Acquisition that are not current assets, minus amounts of indebtedness that are not paid to holders of indebtedness at the closing date of the Acquisition as agreed by the parties and remaining indebtedness as set out in the payment schedule to the acquisition agreement and updated as of the closing of the Acquisition."

Crius Energy said, "The Cash Consideration is expected to be funded from the net proceeds of the Offering (as defined below) and a draw in the amount of US$20 million on the Company's credit facility with Macquarie Energy LLC. The Debt Consideration will consist of non-amortizing promissory notes with an eight-year maturity and bearing interest at the annual rate of 9.5%, redeemable by Crius without penalty at any time prior to maturity. The trust units of the Trust ("Units") to be issued as the Equity Consideration will be subject to either a four-month or six-month lock-up period from the closing date of the Acquisition, with approximately 85% of such Units to be subject to a six-month lock-up period and approximately 15% of such Units to be subject to a four-month lock-up period."

"The acquisition of U.S. Gas & Electric is a significant milestone for Crius as we continue to execute on our organic and acquisitive growth strategy," commented Michael Fallquist, Chief Executive Officer of the Trust. "We believe that adding U.S. Gas & Electric to the Crius platform reinforces our position as a market leader in the retail energy industry, as we will immediately benefit from economies of scale, an expanded service territory and new sales channels. Further, we are excited to welcome such a strong and well-respected team to the Crius Energy family and look forward to what we will achieve together as a blended, world-class organization."

The closing of the Acquisition is subject to the satisfaction or waiver of a number of conditions described in the acquisition agreement, including obtaining approvals from the stockholders of USGE at a duly called meeting, the Federal Energy Regulatory Commission (FERC), under the Hart-Scott-Rodino Antitrust Improvements Act and other regulatory authorities.

Concurrently with the announcement of the Acquisition, Crius entered into an agreement with a syndicate of underwriters pursuant to which the Underwriters have agreed to purchase from Crius, on a "bought deal" basis, and sell to the public 11,224,500 subscription receipts of the Trust ("Subscription Receipts") at a price of C$9.80 per Subscription Receipt (the "Offering Price") for total gross proceeds of C$110,000,100 (the "Offering"). In addition, the Trust has also granted the Underwriters an option (the "Over-Allotment Option") to purchase up to an additional 1,683,675 Subscription Receipts (the "Additional Subscription Receipts") at the Offering Price per Additional Subscription Receipt, exercisable in whole or in part, at any time up to 30 days following the closing of the Offering. If the Over-Allotment Option is exercised in its entirety, the aggregate gross proceeds of the Offering will be C$126,500,115.

Each Subscription Receipt will entitle the holder thereof to receive, without further consideration or action on the part of the holder thereof, one Unit together with an amount per Unit equal to the amount of any distributions for which record dates have occurred during the period from the closing date of the Offering to the date immediately preceding the closing date of the Acquisition, less any applicable withholding taxes, if any. The gross proceeds from the Offering less 50% of the Underwriters' fee payable on the closing date of the Offering will be held in escrow, pending closing of the Acquisition. If the Acquisition closes on or before August 31, 2017, the escrowed proceeds from the Offering will be released to Crius and used by Crius to pay a portion of the purchase price of the Acquisition. If the Acquisition fails to close by August 31, 2017, or the Acquisition is terminated at an earlier time, the gross proceeds and pro-rata entitlement to interest earned on the escrowed proceeds thereon will be paid to holders of the Subscription Receipts.

The Subscription Receipts will be offered by way of a short form prospectus to be filed in each of the Provinces of Canada, other than Québec. The closing of the Offering is expected to occur on or about June 20, 2017, subject to the conditional approval of the Toronto Stock Exchange and other necessary regulatory approvals.

Once the escrow release conditions have been satisfied, the net proceeds of the Offering are expected to be used to partially fund the Cash Consideration, with the remaining funds, if any, to be used by the Trust to pay the expenses of the Offering and for general corporate purposes.

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